[Joint House and Senate Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 111-195
THE ECONOMIC OUTLOOK
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MAY 5, 2009
__________
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
HOUSE OF REPRESENTATIVES SENATE
Carolyn B. Maloney, New York, Chair Charles E. Schumer, New York, Vice
Maurice D. Hinchey, New York Chairman
Baron P. Hill, Indiana Edward M. Kennedy, Massachusetts
Loretta Sanchez, California Jeff Bingaman, New Mexico
Elijah E. Cummings, Maryland Amy Klobuchar, Minnesota
Vic Snyder, Arkansas Robert P. Casey, Jr., Pennsylvania
Kevin Brady, Texas Jim Webb, Virginia
Ron Paul, Texas Sam Brownback, Kansas, Ranking
Michael Burgess, M.D., Texas Minority
John Campbell, California Jim DeMint, South Carolina
James E. Risch, Idaho
Robert F. Bennett, Utah
Nan Gibson, Executive Director
Jeff Schlagenhauf, Minority Staff Director
Christopher Frenze, House Republican Staff Director
C O N T E N T S
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Opening Statements of Members
Hon. Carolyn B. Maloney, Chair, a U.S. Representative from New
York........................................................... 1
Hon. Sam Brownback, Ranking Minority, a U.S. Senator from Kansas. 1
Hon. Kevin Brady, a U.S. Representative from Texas............... 2
Hon. Charles E. Schumer, Vice Chairman, a U.S. Senator from New
York........................................................... 16
Witnesses
Statement of Hon. Ben Bernanke, Chairman, Board of Governors,
Federal Reserve System......................................... 3
Submissions for the Record
Prepared statement of Representative Carolyn B. Maloney.......... 44
Prepared statement of Senator Sam Brownback...................... 44
Prepared statement of Representative Kevin Brady................. 46
Prepared statement of Ben Bernanke............................... 47
Press release titled ``Schumer Demands Answers From Bernanke at
Hearing After Fed Rejects Push to Freeze Rates on Existing
Credit Card Balances''......................................... 50
THE ECONOMIC OUTLOOK
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TUESDAY, MAY 5, 2009
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The committee met at 10:02 a.m., in Room 216, Hart Senate
Office Building, Hon. Carolyn B. Maloney (Chair), presiding.
Senators present: Schumer, Casey, Brownback, and Risch.
Representatives present: Maloney, Hinchey, Sanchez,
Cummings, Snyder, Brady, Paul, Burgess, and Campbell.
Staff present: Gail Cohen, Stacy Ettinger, Nan Gibson,
Colleen Healy, Marc Jarsulic, Linda Jeng, Andrew Wilson, Chris
Frenze, Bob Keleher, Robert O'Quinn, Jim Gilroy, Lydia
Mashburn, Jeff Schlagenhauf, and Jeff Wrase.
OPENING STATEMENT OF HON. CAROLYN B. MALONEY, CHAIR, A U.S.
REPRESENTATIVE FROM NEW YORK
Chair Maloney. The meeting will come to order. I want to
welcome Dr. Ben Bernanke, the Chairman of the Federal Reserve
and thank him very much for his testimony today.
And in appreciation of his time, I would like to put my
opening statement in the record so that we have more time for
questions with the members.
[The prepared statement of Representative Maloney appears
in the Submissions for the Record on page 44.]
Chair Maloney. I recognize the Ranking Minority Member, for
two minutes.
OPENING STATEMENT OF HON. SAM BROWNBACK, RANKING MINORITY, A
U.S. SENATOR FROM KANSAS
Senator Brownback. Thank you very much, Madam Chairman.
Welcome, Chairman Bernanke. We are delighted to have you here,
and very pleased that you could join us in reporting to
Congress.
You have got a lot to report on. As I mentioned to you in
the anteroom, I appreciated very much, your presentation on 60
Minutes recently and the assuring sense that you put in front
of the public. I think the public needs to hear you and needs
to hear you in a reassuring sense.
I do have a quick statement that I wanted to make, and I
will have my full statement put into the record. But there are
two points that I have deep concern about.
One is your thoughts about the projected tax increases into
the economy, and its impact, or the discussion of that and its
impact now, of what that is and its impact overall.
And the second--and this one is one that we talk about
amongst the members, and the public certainly is a great deal
right now, is that the possibility of looking at the bottom of
this recession towards the end of the year, as you and many
other economists are talking about, that we are creating a
government debt bubble that we are going to have to deal with
in a massive way, the way we have had to deal with the housing
debt bubble.
And I have got the numbers here that I have been looking at
and am deeply concerned about. We had the head of the
President's Council of Economic Advisors in last week, and we
were talking about that very issue. And both--well, certainly
in our fiscal policy, but also with the monetary policy, with
the amount of funds that have been put forward, are we creating
a government debt bubble?
And, finally, one other thought that I am going to be
asking you about is: Chairman Hoenig out of Kansas City, has
been putting forward the concept that ``too big has failed,''
the policy of ``too big to fail,'' has failed and that we need
to get in a regularized system for our big banks; that if they
are insufficiently capitalized, if they cannot continue, that
they should be allowed to fail in an orderly fashion. And I
really do and will be seeking your thoughts and comments on
that.
Welcome to the Committee, delighted you're here. Thank you,
Chairman.
[The prepared statement of Senator Brownback appears in the
Submissions for the Record on page 44.]
Chair Maloney. And the Chair recognizes Vice Chairman
Schumer, who is on his way, for two minutes, and Mr. Brady.
OPENING STATEMENT OF HON. KEVIN BRADY, A U.S. REPRESENTATIVE
FROM TEXAS
Representative Brady. Thank you, Madam Chairman. I am
pleased to join in welcoming Chairman Bernanke today.
There are a lot of questions related to the financial
rescue plan, and to America's perilous budget situation.
Recently released minutes of the Federal Open Market
Committee indicates that Fed staff has reduced its projections
for economic growth for the second half of 2009 to 2010. I
think that underscores the concerns that this Committee has
raised that the Administration's optimistic economic
projections may truly hide the deficit and understate its true
cost.
One question: When is the Congress going to acknowledge
that the current fiscal trends are simply unsustainable?
Last week, the Financial Times reported that the IMF now
estimates the U.S. losses on toxic assets will be $1.9 trillion
over the next five years.
The recently adopted Congressional Budget Resolution
ignores these costs entirely in setting budget policy for this
year. How expensive will the bank cleanup be, and will its
costs be hidden from taxpayers?
There is widespread agreement that sustained economic
recovery can't occur without an effective bank cleanup in
place. The Administration has put forward a financial rescue
plan, but many of its components are troubling.
The Special Inspector General, Neil Brofsky, last week,
testified before this Committee that many of the safeguards on
accountability, on protecting the new Public-Private Investment
Program against vulnerabilities and conflicts of interest,
collusion, money laundering, so far have been ignored by
Treasury.
Will the Treasury recognize these problems and move quickly
to correct them?
There are a number of actions that the Fed has taken that
frankly has bewildered many of my constituents and left them
wondering how the policies will affect their economic well
being.
Small businesses in Texas report that many are having a
tough time finding affordable credit because regulators are
pressing banks to avoid risk, in fact creating a downward
spiral. Has the pendulum swung too far in this direction?
Now we are looking at a number of actions, including the
downward debt deflation default spiral. The Federal Reserve has
expanded its balance sheet by 127 percent, from $946 billion
last September to over $2 trillion last week. While this
explosive growth does not pose an immediate inflationary
danger, the Fed will need to begin contracting its balance
sheet when the economy begins to recover.
What is the Federal Reserve's exit strategy to wind down
its emergency credit facilities and reduce excess bank reserves
to prevent higher inflation?
There are a number of questions to be asked and answered
today. I look forward to visiting with the Chairman. These are
important times. Thank you.
Chair Maloney. Thank you very much.
[The prepared statement of Representative Brady appears in
the Submissions for the Record on page 46.]
Chair Maloney. Dr. Ben Bernanke is the Chairman and member
of the Board of Governors of the Federal Reserve. Dr. Bernanke
also serves as Chairman of the Federal Open Market Committee,
the System's principal monetary policymaking body.
Before his appointment as Chairman, Dr. Bernanke was
Chairman of the President's Council of Economic Advisors from
June in 2005 to January in 2006. From 1994 to 1996, Dr.
Bernanke was the Class of 1926 Professor of Economics and
Public Affairs at Princeton University.
He was the Howard Harrison and Gabriele Sneider Beck
Professor of Economics and Public Affairs, and Chair of the
Economics Department at the University from 1996 to 2002.
Dr. Bernanke had been a Professor of Economics and Public
Affairs at Princeton since 1985. He has published many articles
on a variety of economic issues, including monetary policy and
macroeconomics, and he is the author of several books and two
textbooks.
He received a B.A. in Economics in 1975 from Harvard
University, and a Ph.D. in Economics in 1979 from MIT.
Thank you very much, and we recognize you for as much time
as you may consume. Thank you.
STATEMENT OF THE HON. BEN BERNANKE, CHAIRMAN, BOARD OF
GOVERNORS, FEDERAL RESERVE SYSTEM
Chairman Bernanke. Thank you, thank you very much.
Chair Maloney, Vice Chairman Schumer, Ranking Members
Brownback and Brady, and other Members of the Committee, I am
pleased to be here today to offer my views on recent economic
developments, the outlook for the economy, and current
conditions in financial markets.
The U.S. economy has contracted sharply since last autumn,
with real gross domestic product having dropped at an annual
rate of more than six percent in the fourth quarter of 2008,
and in the first quarter of this year.
Among the enormous costs of this downturn is the loss of
some five million payroll jobs over the past 15 months. The
most recent information on the labor market, the number of new
and continuing claims for unemployment insurance, through late
April, suggest that we are likely to see further sizable job
losses and increased unemployment in coming months.
However, the recent data also suggests that the pace of
contraction may be slowing, and they include some tentative
signs that final demand, especially demand by households, may
be stabilizing.
Consumer spending, which dropped sharply in the second half
of last year, grew in the first quarter.
In coming months, household spending power will be boosted
by the fiscal stimulus program, and we have seen some
improvement in consumer sentiment.
Nonetheless, a number of factors are likely to continue to
weigh on consumer spending, among them the weak labor market
and the declines in equity and housing wealth that households
have experienced over the past two years.
In addition, credit conditions for consumers remain tight.
The housing market, which has been in decline for three years,
has also shown some signs of bottoming.
Sales of existing homes have been fairly stable since late
last year, and sales of new homes have firmed a bit recently,
though both remain at depressed levels.
Although some of the boost of sales in the market for
existing homes is likely coming from foreclosure-related
transactions, the increased affordability of homes appears to
be contributing more broadly to the steadying in the demand for
housing.
In particular, the average interest rate on conforming 30-
year fixed rate mortgages has dropped almost one and three-
quarters percentage points since August to about 4.8 percent.
With sales of new homes up a bit and starts of single-
family homes little changed from January through March,
builders are seeing the backlog of unsold new homes decline, a
precondition for any recovery in home building.
In contrast to the somewhat better news in the household
sector, the available indicators of business investment remain
extremely weak.
Spending for equipment and software fell at an annual rate
of about 30 percent in both the fourth and first quarters, and
the level of new orders remains below the level of shipments,
suggesting further near-term softness in business equipment
spending.
Recent business surveys have been a bit more positive, but
surveyed firms are still reporting net declines in new orders
and restrained capital spending plans.
Our recent survey of bank loan officers reported further
weakening of demand for commercial and industrial loans. The
survey also showed that the net fraction of banks that
tightened their business lending policies stayed elevated,
although it has come down in the past two surveys.
Conditions in the commercial real estate sector are poor.
Vacancy rates for existing office, industrial, and retail
properties have been rising. Prices of these properties had
been falling and, consequently, the number of new projects in
the pipeline has been shrinking.
Credit conditions in the commercial real estate sector are
still severely strained, with no commercial mortgage-based
securities having been issued in almost a year.
To try to help restart the CMBS market, the Federal Reserve
announced last Friday that recently issued CMBS, will in June
be eligible collateral for our term asset-backed securities
loan facility or TALF.
An important influence on the near-term economic outlook is
the extent to which businesses have been able to shed the
unwanted inventories that they accumulated as sales turned down
sharply last year.
Some progress has been made. The Bureau of Economic
Analysis estimates that an acceleration in inventory
liquidation accounted for almost one-half of the reported
decline in real GDP in the first quarter.
As stocks move into better alignment with sales, a
reduction in the pace of inventory liquidation should provide
some support to production later this year.
The outlook for economic activity abroad is also an
important consideration. The steep drop in U.S. exports that
began last fall has been a significant drag on domestic
production, and any improvement on that front would be helpful.
A few indicators suggest, again quite tentatively, that the
decline in foreign economic activity may also be moderating
and, as has been the case in the United States, investor
sentiment and the functioning of financial markets abroad have
improved somewhat.
As economic activity weakened during the second half of
2008 and prices of energy and other commodities began to fall
rapidly, inflationary pressures diminished appreciably.
Weakness in demand and reduced cost pressures have continued to
keep inflation low so far this year.
Although energy prices have recently risen some, the
personal consumption expenditure price index for energy goods
and services in March remained more than 20 percent below its
level a year earlier.
Food price inflation has also continued to slow as the
moderation in crop and livestock prices has been passing
through to the retail level.
Core PCE inflation, which excludes food and energy prices,
dropped below an annual rate of one percent in the final
quarter of 2008 when retailers and auto dealers marked down
their prices significantly.
In the first quarter of this year, core consumer price
inflation moved back up but to a still low annual rate of 1.5
percent.
We continue to expect economic activity to bottom out, then
to turn up later this year. Key elements of this forecast are
assessments that the housing market is beginning to stabilize,
and that the sharp inventory liquidation that has been in
progress will slow over the next few quarters. Final demand
should also be supported by fiscal and monetary stimulus.
An important caveat is that our forecast assumes continuing
gradual repair of the financial system. A relapse in financial
conditions would be a significant drag on economic activity and
could cause the incipient recovery to stall. I will provide a
brief update on financial markets in a moment.
Even after a recovery gets underway, the rate of growth of
real economic activity is likely to remain below its longer-run
potential for awhile, implying that the current slack in
resource utilization will increase further.
We expect that the recovery will only gradually gain
momentum and that economic slack will diminish slowly. In
particular businesses are likely to be cautious about hiring,
implying that the unemployment rate could remain high for a
time even after economic growth resumes.
In this environment, we anticipate that inflation will
remain low. Indeed, given the sizable margin of slack in
resource utilization and diminished cost pressures from oil and
other commodities, inflation is likely to move down some over
the next year relative to its pace in 2008.
However inflation expectations, as measured by various
household and business surveys, appeared to have remained
relatively stable which should limit further declines in
inflation.
As I noted, a sustained recovery in economic activity
depends critically on restoring stability to the financial
system. Conditions in a number of financial markets have
improved in recent weeks, reflecting in part the somewhat more
encouraging economic data.
However, financial markets and financial institutions
remain under considerable stress and cumulative declines in
asset prices, tight credit conditions, and high levels of risk
aversion, continue to weigh on the economy.
Among the markets that have recently begun to function a
bit better are the markets for short-term funding, including
the interbank markets and the commercial paper market.
In particular, concerns about credit risk in those markets
appear to have receded somewhat. There is more lending at
longer maturities and interest rates have declined.
The modest improvement in funding conditions has
contributed to diminished use of the Federal Reserve's
liquidity facilities for financial institutions and of our
commercial paper facility.
The volume of foreign central bank liquidity swaps has also
declined as dollar funding conditions have eased. The issuance
of asset-backed securities or ABS, backed by credit card, auto,
and student loans, all picked up in March and April and ABS
funding rates have declined, perhaps reflecting the
availability of the Federal Reserve's TALF facility as a market
backstop.
Some of the recent issuance made use of TALF lending, but
lower rates and spreads have facilitated issuance outside the
TALF, as well.
Mortgage markets have responded to the Federal Reserve's
purchases of agency debt and agency mortgage-backed securities,
with mortgage rates having fallen sharply since last fall as I
noted earlier.
The decline in mortgage rates has spurred a pick up in
refinancing as well as providing some support for housing
demand. However, the supply of mortgage credit is still
relatively tight and mortgage activity remains heavily
dependent on the support of government programs for the
government sponsored enterprises.
The combination of a broad rally in equity prices and a
sizable reduction in risk spreads in corporate debt markets
reflects a somewhat more optimistic view of the corporate
sector on the part of investors and perhaps some decrease in
risk aversion.
Bond issuance by nonfinancial firms has been relatively
strong recently, but still, spreads over Treasury rates, paid
by both investment-grade and speculative-grade corporate
borrowers remain quite elevated.
Investors seemed to adopt a more positive outlook on the
condition of financial institutions, after several large banks
reported profits in the first quarter, but readings from the
credit default swap market and other indicators show that
substantial concerns about the banking industry remain.
As you know, the federal bank regulatory agencies began
conducting the Supervisory Capital Assessment Program in late
February. The program is a forward-looking exercise intended to
help supervisors gauge the potential losses, revenues, and
reserve needs for the 19 largest bank holding companies in a
scenario in which the economy declines more steeply than is
generally anticipated.
The simultaneous comprehensive assessment of the financial
conditions of the 19 companies, over a relatively short period
of time, required an extraordinary coordinated effort among the
agencies.
The purpose of the exercise is to ensure that banks will
have sufficient capital buffer to remain strongly capitalized
and able to lend to creditworthy borrowers, even if economic
conditions are worse than expected.
Following the announcement of the results, bank holding
companies will be required to develop comprehensive capital
plans for establishing the required buffers. They will then
have six months to execute those plans, with the assurance that
equity capital from the Treasury under the Capital Assistance
Program will be available as needed.
I will conclude with just a few comments on Federal Reserve
transparency. The Federal Reserve remains committed to
transparency and openness, and in particular to keeping the
Congress and the public informed about its lending programs and
balance sheet.
As you may know, we have created a separate section of our
website devoted to providing data, explanations, and analyses
bearing on these topics and related issues.
Recent postings include the annual financial statements of
the 12 Federal Reserve Banks, the Board of Governors, and the
limited liability companies created in 2008, in response to
risks to the financial system, as well as the most recent
reports to the Congress on our emergency lending programs.
Earlier this year, I asked Vice Chairman Kohn to lead a
review of our disclosure policies, with the goal of increasing
the range of information that we make available to the public.
The group has been making substantial progress, and I am
pleased to say that we will soon be adding to the website,
material that provides the information requested in the Dodge-
Shelby Amendment to the recent Budget Resolution.
Specifically, we will be adding new tables that provide
information on the number of borrowers under each program, and
more information on the details of the credit extended,
including measures of the concentration of credit among
borrowers.
In addition, we will be providing monthly information on
the collateral that is being taken under our various lending
programs, including breakouts by type of collateral and by
ratings categories, and we will be supplementing information
provided on the valuation of collateral for the Maiden Lane
facilities and the commercial paper credit facility.
Finally, we will be providing additional information on the
extent of our contracting with private firms with respect to
our lending programs, as well as on the terms and natures of
such contracts.
Over time, we expect to continue to expand the range of
information on our website, as our review of disclosure
practices proceeds.
Thank you. I would be pleased to respond to your questions.
[The prepared statement of Hon. Ben S. Bernanke appears in
the Submissions for the Record on page 47.]
Chair Maloney. Thank you very much for your testimony. My
basic question is: Is there any good news? Can you elaborate
more?
You mentioned in some interviews that you were seeing green
shoots for recovery in the economy. And has the recent report
on real GDP for the first quarter of 2009 changed your views on
the economy?
Chairman Bernanke. Chair Maloney, as you know the numbers,
the headline numbers for GDP growth in the fourth and first
quarter, were very negative, both minus-six percent at an
annual rate.
But I think a bit of good news was in the composition of
growth in the first quarter. As I mentioned in my testimony,
about half of the decline in GDP in the first quarter
represented the liquidation of excess inventories.
And as inventories are worked down, firms will be able to
increase their production to meet what looks to be some
stabilization in final demand.
And so we are hopeful that the very sharp decline we saw
beginning last fall through early this year will moderate
considerably in the near term and that we will see positive
growth by the end of the year.
Chair Maloney. Can you explain why the results of the
stress tests were delayed?
Chairman Bernanke. Yes. This was a very comprehensive
exercise, unprecedented in its scale and scope. The three
federal oversight agencies collaborated very closely, working
through the entire portfolios, the reserving practices, and the
earnings of the 19 largest banks in the country, so it was a
very expensive and detailed exercise.
After we completed our first set of data, we took the data
back to the banks and we gave them an opportunity not to
negotiate but to point out where there were misunderstandings,
communications problems, data issues, and so on, which we, as
an appropriate measure, agreed to look at.
We have reviewed those data. We have looked at the numbers.
We have looked at the assumptions. And we have now satisfied
ourselves that the data we have are accurate reflections of the
financial conditions of those banks.
Chair Maloney. The IMF estimates that U.S. banks will
require between $275 billion and $500 billion in additional
capital, depending on the leverage requirements from the
regulators. Do you agree with these IMF estimates?
There are several independent rating organizations,
financial organizations that have come up with large amounts,
$500, $700 billion. Do you agree with these numbers?
Chairman Bernanke. Well, I am not ready to pre-disclose the
results of the tests that will come out on Thursday afternoon,
but I would point out that while banks have certainly sustained
substantial losses both in the last few years and going
forward, they have also taken significant writedowns, they have
reserved, and there is substantial earning capacity, so there
are a number of offsets that will help to make up those losses.
And, finally, of course to the extent that there are banks
that need capital our hope is that many of them will be able to
raise that capital through either private equity offers or
through conversions and exchanges of existing liabilities to
strengthen their capital bases.
So I would say that number overestimates the call on the
government going forward.
Chair Maloney. And do you think the amount of capital will
be available from the private sector to shore up these banks
and to----
Chairman Bernanke. I have looked at many of the banks and I
believe that many of them will be able to meet their capital
needs without further government capital through either
issuance of new capital or through conversions and exchanges,
or through sale of assets and other measures that would raise
capital.
Chair Maloney. Well, as a last resort, the Federal
Government could provide access to capital. We have roughly I
believe $110 billion left from the $700 billion TARP Program.
Do you estimate that we might need more than what is remaining
in the TARP Program, the $110 billion?
Chairman Bernanke. Well, I would leave that to the
Administration. I think they just recently indicated that
they don't think there is a near-term need.
Chair Maloney. That would be terrific. My time has expired.
Senator Brownback. Thank you, Chair. Welcome.
I want to talk about a couple of areas and ask you, in the
fields that we had mentioned, the Administration is likely to
need to borrow around $2 trillion this year just for this
year's operating.
I mentioned to you about a government debt bubble that we
are looking at. I am sure you have concerns about that. Are
there signals that you are looking at and considering as to
whether or not this is occurring or is not occurring on a
government debt bubble?
Chairman Bernanke. Senator, the U.S. Government debt is
bearing yields, which are, I think, indicative of confidence.
The relatively low yields that we see on ten-year and even 30-
year debt suggests that investors in those securities, first of
all, appreciate the liquidity and safety of those securities,
and, secondly, that they are confident that the U.S. will have
low inflation and fiscal stability in the long term.
Having said that, it is imperative on all of us as the
policymakers, particularly the Congress which is responsible
for fiscal policy, to make sure that we do achieve the
necessary stabilization that will allow deficits to come down,
that will allow us to deal with those issues.
So, there is confidence in the market that we will deal
with these problems, and we must fulfill that confidence and
address those issues.
Senator Brownback. Well, maybe--what sort of signals will
you be looking for from the marketplace to start unwinding the
Fed position that you are in, perhaps to guide us a little bit
of what signals we should be looking for from the marketplace,
for us to start unwinding this debt position?
Chairman Bernanke. Certainly. Well, first, many of the
programs, particularly the short-term lending programs that we
have, have been priced in such a way that they are not
particularly attractive when markets are closer to normal.
In fact, we have already seen that a number of our
liquidity programs like the Term Securities Lending Facility,
the Commercial Paper Facility, and others, are just seeing
reductions in demand from the private sector, and so those
short-term facilities are shrinking on their own. And that is a
good sign that demand for that short-term liquidity is either
diminishing or is being replaced by private-sector liquidity.
Otherwise, the task for us is very similar to any recovery,
which is to try to address as best we can where we think the
economy is going over the next few quarters, and to try to
achieve a balance in financial conditions that will be
consistent with our mandate to achieve both price stability and
maximum employment.
So we will have to continue to make our forecasts the best
we can and we will certainly be withdrawing liquidity and
financial accommodation in an appropriate way to make sure that
we both achieve recovery, that we don't snuff our recovery too
early, but on the other hand that we don't deal with inflation
in the longer term.
Senator Brownback. You mentioned on us being responsible to
maintain the market confidence. Do you have a thought on
considering tax increases at the present time by the Congress?
Chairman Bernanke. Well, in the near term we have to worry
about spending power certainly. In the longer term I think it
is very important that Congress make sure that the deficits are
not excessively large.
Different Members of Congress will have different views. I
think the main thing is that you be consistent. If you want to
increase spending, then you have to be willing to accept the
tax increases and the consequences that that may have for
growth and efficiency.
If you want to have low taxes, then you have to be willing
to accept and find program cuts that will match the two. So,
the main thing is that people will understand that they need to
be consistent between their preferences on revenues and
spending.
Senator Brownback. ``Too big to fail,'' has been challenged
by some Fed Chairmen, one in Kansas City and other places. Do
you think we need to amend that, or allow some of the big
financial institutions to go through an orderly restructuring
process?
Chairman Bernanke. Well, Senator, ``too big to fail,'' has
been sometimes called a policy or a doctrine. It is not a
policy; it is a problem. It is a huge problem. It has arisen
because we do not have adequate legal powers to safely wind
down a large financial holding company or a bank holding
company with many divisions, many companies, subsidiaries, many
complex interactions with the financial markets.
There is a very strong contrast between the powers we have
for, say, a small bank--where the FDIC can come in and wind it
down in an orderly way--versus the lack of powers we have for
dealing with non-banks, including holding companies, insurance
companies like AIG, or investment banks like Lehman Brothers.
So, for about a year I have been asking Congress to come up
with a resolution regime that would allow us to address the
safe and sound unwinding of a troubled large financial
institution.
Under current law, to allow one of these companies to go
into a disorderly bankruptcy is enormously disruptive and would
damage not only the company itself of course but also the whole
financial system and the economy.
So I am very much in favor of taking strong steps to end
``too big to fail,'' and I have given a number of speeches on
that subject. But certainly one prerequisite for doing that is
having a resolution regime that will allow us, in a way
analogous to what the FDIC does, to come in and safely wind
down a large company.
Senator Brownback. Thank you very much. Thank you, Chair.
Chair Maloney. Thank you very much. I just want to add that
the Financial Services Committee is working on legislation such
as the Chairman described, for legal powers to wind down large
holding companies.
Representative Cummings is recognized for five minutes.
Representative Cummings. Thank you very much, Madam Chair,
and thank you, Mr. Bernanke, for your testimony and for your
service.
If the Federal Reserve or the Department of the Treasury,
or both, are directing firms to acquire other firms or to take
other specific actions, how can we avoid concluding that the
firms are at least to some degree, nationalized?
What was the involvement of the Federal Reserve with Bank
of America's acquisition of Merrill Lynch? And did you or, to
your knowledge, did Henry Paulson push the Bank of America CEO,
Ken Lewis, not to discuss the details of the merger?
Chairman Bernanke. Let me address your question about Bank
of America and Merrill Lynch because it is very important.
I received a letter from Chairman Kucinich and Chairman
Towns of the House Oversight and Government Reform Committee
asking exactly the question you asked, and I replied to them in
a letter last week where I stated that absolutely not, that I
absolutely did not in any way ask Mr. Lewis to obscure any
disclosures or to fail to report information that he should be
reporting.
In that letter, I offered to that Committee, and I have
subsequently offered both to the House Financial Services
Committee and the Senate Banking Committee, full access to all
papers, documents, notes, related to those meetings and to the
Bank of America-Merrill Lynch transaction that will support my
unconditional assertion that in no way did I ever ask Mr. Lewis
to fail to disclose necessary information.
I would add, finally, on that subject, that the meeting
where we met with Mr. Lewis was attended by quite a few
supervisory and legal staff, including the General Counsel of
the Federal Reserve, and he was, of course, very alert to make
sure that everything that happened in the meeting met all of
the necessary legal requirements.
Representative Cummings. Well as a member of the Oversight
and Government Reform Committee, we will follow up on that, and
I appreciate your answer.
Now can you get to the first part of my question?
Chairman Bernanke. The first part of the question had to do
with nationalization.
Representative Cummings. Yes.
Chairman Bernanke. Yes. So, it is the case that the
government obviously has some ownership of a number of
financial institutions. I don't know, but ``nationalization''
means different things to different people.
I think our view is that we don't want substantial
government ownership to be a long-term situation, and what we
want is the firms to take actions that are necessary so that
they no longer rely on government support.
Now we have a number of tools to do that. One is a
supervisory tool. The supervisors have considerable latitude to
take steps to require changes in management, to require sales
of assets, restructuring of businesses, or other steps as
needed to raise capital and to strengthen their business plans.
Likewise the Treasury, through its ownership rights, can
also establish policies and make requirements.
So we have plenty of tools. We would not have really
substantially greater tools under a different legal regime, I
think. The issue here though is to find ways to get firms out
of a situation where they are dependent on government capital.
And we are hopeful that that can be done over the next few
years.
Representative Cummings. The New York Times Editorial Page
ran two very interesting columns yesterday. First, Paul
Krugman, one of my favorites, argued that defensive actions by
families and businesses, like increased household savings and
wage cuts to prevent job losses, put downward pressure on
consumer spending and keep the economy depressed. Only
continued drastic stimulus actions, he argued, can break this
cycle.
Second, Alan Meltzer wrote that the Federal Reserve had
sacrificed its independence by subordinating concerns over
inflation and engaging in fiscal policy normally left to the
Legislative Branch and becoming, quote, ``the monetary arm of
the Treasury,'' unquote.
Do you agree with Mr. Krugman? And if so, what measures are
most important moving forward?
And as far as Dr. Meltzer is concerned, Dr. Meltzer clearly
evaluates the Federal Reserve from an historical perspective.
How do you respond to his claim about the Fed's independence?
Is there historical precedent for the current level of
outstanding Federal Reserve credit?
Chairman Bernanke. Well, Congressman Cummings, I hope you
appreciate the irony of on the same page two distinguished
economists, one worried about inflation, the other one worried
about deflation.
Representative Cummings. I found that very interesting.
Chairman Bernanke. I think that suggests the difficulty of
the situation we are in, to try to navigate between the Scylla
and Charybdis of these two risks.
We are very committed to price stability. We have recently
provided projections which suggest how we plan to approach
medium-term price stability and give information about what we
think inflation ought to be in the medium term.
We firmly believe that we will be able, after stimulating
the economy, to help it recover from this very difficult
financial and economic situation we are in, to come to a
situation where we emerge with sustainable growth and price
stability. We are spending enormous amounts of time planning
that, thinking about our exit strategy, and so on.
I would also take great exception to the notion that the
Fed has sacrificed its independence. I would make two comments
on that.
The first is that the critical element of Fed independence
is monetary policy. Monetary policy has remained completely
independent of all other government institutions. We have not
sought advice or input on any aspect of monetary policy. It
remains completely independent and it will remain independent.
On other aspects, I think it is important during a period
of crisis for the major parts of the government to work
together. I think the American people would like to see the
Federal Reserve and the Treasury working together.
In past financial crises there has been a good bit of
cooperation. At the same time, the Fed and the Treasury
recently issued a joint statement clarifying that there are
distinct and different roles for the Fed and the Treasury, and
in particular the taking of credit risk.
The making of credit decisions are the Treasury's province,
and importantly we talked also about the need for a resolution
regime once again so that the Fed would not get stuck into
these situations like we are with AIG, which was a really
undesirable outcome, I am the first to admit, but was necessary
because we had no well-structured resolution regime.
So we have tried to put out a clear statement of where we
think the line is, and we continue to maintain our
independence, particularly in the area of monetary policy where
it's particularly important.
Representative Cummings. Thank you, very much.
Chair Maloney. Mr. Brady is recognized for five minutes.
Representative Brady. Thank you, Mr. Chairman. A lot of
private capital is sitting on the sidelines. Neither
Administration has yet successfully removed the toxic assets
from bank balance sheets.
Given that, how do you expect these stress-tested banks to
recapitalize? How much do you think is a fair ratio between
private capital and government sources?
Chairman Bernanke. Well, our approach will be to ask the
banks to go first to private sources. And as I said before, I
think that many of them will be able either to raise new equity
capital to convert existing forms of capital into common
equity, or to sell assets or take other measures that will
allow them to recapitalize themselves without any, or without
substantial, Treasury capital. So that will be our first
priority.
It remains to be seen how receptive the markets will be,
and what they will be able to accomplish. But I do think that
there will be significant opportunities for capital-raising
outside the government's programs.
Representative Brady. Do you think it will be a majority
from private sources?
Chairman Bernanke. I think it will be significant. It is
hard for me really to say at this point, because it depends on
the market's reception of what the banks propose to do.
Representative Brady. Removing those toxic assets is real
key to the economy; as in new proposal for a Public-Private
Investment Program. Last week the Special Inspector General for
TARP and those programs identified a number of vulnerabilities
and recommended both transparency, as you do, in the current
bailout dollars but also putting in place ahead of time some
basic safeguards to deal with collusion, conflict-of-interest,
money laundering, just basically again to build consumer
confidence and also investor confidence in those measures.
Are you aware of the Inspector General's recommendations?
And do you support them?
Chairman Bernanke. Yes, I am quite aware and I think they
are very constructive. The place that they are most relevant to
the Federal Reserve is in the TALF program that I mentioned,
because it uses TARP capital. And the Special Inspector General
for TARP had a number of suggestions.
We have worked with his office. Nothing is perfect; there
is always a possibility of some problem. But we believe that we
have taken substantial steps both to protect the taxpayer from
credit loss, and to protect the system from any kind of abuse
or illegal activity.
We will continue to work with the Special Inspector General
and make sure that we are, in all of our programs, protecting
the taxpayer.
Representative Brady. Treasury has not yet adopted many of
those recommendations. Would you urge them to move quickly on
that?
Chairman Bernanke. I would leave it to them to discuss what
their concerns are. I don't really know what the issues are
that they are raising. But obviously we are all interested in
making sure that the appropriate safeguards are in place.
Representative Brady. With the cost of the deficits running
unprecedently high in this country, there is some concern about
what additional costs would come about because of the whole
financial rescue efforts.
Last week the International Monetary Fund estimated that
those costs to U.S. Taxpayers over the next five years will be
$1.9 trillion. Do you see that estimate as too high, or too
low?
Chairman Bernanke. I don't know what that includes. If it
means to include financial----
Representative Brady. It included all the Fed actions from
the loan guarantees, to the nonstandard capitalization----
Chairman Bernanke. From the Fed, we don't expect to lose
any money. From the Treasury there's some risk in their
investments, but those numbers are--I have no idea what they
refer to.
Representative Brady. Okay. As we move forward, what do you
see as the Federal Reserve's exit strategy to wind down its
emergency credit facilities and reduce the excess bank reserves
to prevent higher inflation?
Chairman Bernanke. Congressman, we have spent a lot of time
on this. I just want to assure you that we made all our
meetings into two-day meetings, and we spend the whole first
day reviewing our balance sheet, our programs, and thinking
very heavily and extensively about exit strategy.
We have a plan in place. We are trying to strengthen and
improve it. Some of the components are, first, that many of the
short-term programs will either wind down naturally or can be
wound down. That is about up to a trillion dollars of balance
sheet that can be wound down through that process.
Secondly, very importantly, Congress gave us last year the
ability to pay interest on reserves. By paying interest on
excess reserves, banks will hold their reserves with the Fed.
That will allow us to raise interest rates, even if excess
reserves remain very substantial in the system. So that tool in
itself will be a very powerful tool.
Third, we are looking at what is called reverse-repurchase
agreements, which essentially would allow us to finance on a
short-term basis some of our asset holdings with nonbank
investors, such as securities dealers or others. That would
drain excess reserves from the system, and also have the same
effect.
Fourth, Treasury deposits at the Fed drain reserves from
the excess reserves from the system, as they have done last
year for example.
And finally, if necessary, we can always sell some of our
assets into the market.
So we have a number of options. The exact timing and
sequencing remains to be seen. We are looking at that. We hope
to release more information about that, but we do believe that
we have all the tools that we need to exit, to help this
economy get back to a sustainable growth path, but also to
ensure that we come out of this with price stability.
Representative Brady. All right. Thank you, Chairman.
Chair Maloney. Thank you. And the Chair recognizes the Vice
Chair for five minutes.
OPENING STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR
FROM NEW YORK
Vice Chair Schumer. Thank you, Madam Chairperson. I want to
thank you for the outstanding way that you have conducted not
only this hearing, but your tenure thus far as Chairman of the
JEC, and I look forward to working together on many more
issues.
Today I want to focus on one of the issues that affect the
economic well being of American families, and an issue I worry
has been overlooked in our focus, understandably, on
persevering the health of global credit markets and large
financial institutions.
I am talking about consumer credit. I am very concerned we
have not done enough to stop some of the same predatory
behaviors that got us into this mess in the first place.
American families should not suddenly find their economic
well being threatened by capricious and indefensible decisions
of their credit card companies.
Originally, as you know Mr. Chairman, even before you were
Chairman, I used to think disclosure was enough. Now even the
Fed agrees that disclosure is no longer enough because the
credit card companies always find ways around it and engage in
awful practices.
I have heard from an increasing number of my constituents
that interest rates on their accounts have doubled or tripled
overnight, without any misconduct on their part. Now is not the
time for credit card companies to arbitrarily turn American
families into a cash spigot.
So two weeks ago Senator Dodd and I wrote to you to urge
you to use your emergency authority to put the Federal
Reserve's new credit card rules into place immediately.
In a letter that you sent me yesterday--right here
[indicating]--you declined to do so. I believe that the Federal
Reserve's failure to protect consumers from these outrageous
rate increases is unconscionable.
And, Mr. Chairman, while I have applauded you for some of
the actions you have taken in this area, I have to tell you
that the decision does a disservice to you and the Federal
Reserve. Consumer protection, in my judgment, long before you
were there, has been a weak point in the Federal Reserve.
You have acted swiftly to use your emergency powers to
steady teetering financial institutions. It is fair to ask why
you won't use the same powers to aid American families who are
at just as great a risk.
So I have three--well, two questions, but just one other
comment. What about the family that has a $10,000 balance--that
is the average balance--and has had its rate go from 7 to 23
percent? We have heard of that. Every one of us has heard of
that kind of jump.
That would mean that a family's monthly payment would go
from $58 a month to $192 a month, not even accounting for
compounding the interest over the course of a year. That is
just outrageous. From a family that would have a rough time
affording it.
So I would ask you how you answer that family.
Two other questions, and then I will finish and let you
conclude. By all accounts, arbitrary credit rate increases are
on the rise. In other words, the companies are doing more of
this now. And the feeling is they are doing more of it because
they know your rules will go into effect in a year-and-a-half.
So that does not seem right. And isn't this the same
problem at the heart of our economic crisis--the regulatory
system putting financial institutions ahead of consumers that
is allowing this to happen for the next year-and-a-half?
And finally, and maybe most importantly, the original
purpose of the Fed's 18-month delay in the effective date of
the new credit card rules was to give the banks time to, quote,
``redesign their systems, make changes to their operations.''
This strikes me as nonsense.
If the banks needed to redesign their systems to make more
profit, it would not take them a year-and-a-half. You know
that, and I know that. They are very capable of moving up their
timetables when they need to.
I have asked a few people, why would it take a year-and-a-
half? And nobody can figure that out. So how do the benefits of
prolonging the suffering of consumers outweigh the costs of
forcing these banks to immediately improve predatory credit
card practices?
Those are my three questions. And I say that as somebody
who respects you and admires you, but is very frustrated about
this issue and was disappointed in your answer to Senator Dodd
and me.
Chairman Bernanke. Well, Senator, I am frustrated as well.
And I do not think our positions are as far apart as you seem
to think.
First of all, we did pass of course very extensive changes
in disclosures and regulation which included among them a
virtual ban on the issue we are talking about, which is
retroactive interest rate increases on existing balances. We
can question the exact amount of time we left for them to
restructure their business plans and so on, but that was the
intention. And I note that Congress is also putting delays into
their proposed credit programs.
I am very concerned----
Vice Chair Schumer. Excuse me, but the Congressional delays
are not close to as long as yours.
Chairman Bernanke. Let me come back to that.
I am very concerned, as you are, about the reports that you
are hearing about increases in rates, on retroactive ones,
particularly when they are not associated with some credit
event, some action taken by the consumer. And we are, I assure
you, looking carefully into that to try to understand how
extensive it is and how important it is.
Now we have here a quandary, though, which is the
following: We could move up the date on which this prohibition
is effective. One question that I think we need to think
through is would that be good for consumers?
If we moved up the date, the obvious response of the
companies would be first to raise the rate preemptively, so
that would happen faster. And secondly--because I do believe
they do need some time to think through how to restructure
their business model so they can put out credit to riskier
consumers in a way that they find profitable--I think that
their short-term response would be just to cut a lot of people
off.
So from the perspective of consumers, my real quandary is
how can we best help consumers in a way that doesn't just
create worse problems in the market? And that is the issue that
I am still grappling with.
Vice Chair Schumer. My time is up, but I think you could
figure out a better way than the one you have chosen.
[Press release titled ``Schumer Demands Answers From
Bernanke at Hearing After Fed Rejects Push to Freeze Rates on
Existing Credit Card Balances'' appears in the Submissions for
the Record on page 50.]
Chair Maloney. Okay, Representative Campbell.
Representative Campbell. Thank you, Madam Chairwoman, and
Mr. Chairman.
If you determine in the stress test that will be released
later this week that a bank needs additional capital, and if
its plan that you describe in your opening statement is either
determined not to be workable or in that six-month period a
bank is unable to execute their plan, unable to raise the
capital they thought from the sources they thought, what then?
Chairman Bernanke. Then they would have to avail themselves
of the Treasury's backstop, terms and conditions have been put
on the Treasury's web site, a so-called Mandatory Convertible
Preferred type of equity, which is initially preferred equity
but can be converted to common as needed to meet common ratios.
Representative Campbell. So they would be required to get
that additional capital through that venue if they were unable
to raise it from----
Chairman Bernanke. Yes. This is a supervisory exercise, and
supervisors have the right to require that banks meet certain
capital standards. If the banks cannot meet those standards in
the private market, which is our strong preference, then they
have to take government capital to meet those standards.
Representative Campbell. Okay. You are doing a stress test
on the 19 largest banks. What about banks 20 through 50, or 20
through 60, or whatever?
Chairman Bernanke. It is not our intention to do stress
tests on additional banks. Those banks, however, will have
access, as I understand it--and of course I have to defer to
the Treasury on all details--but my understanding is that those
banks will have access to all the same capital programs that
are available to the top 19.
Representative Campbell. So it will not necessarily be a
case where bank 22 would fail under a scenario where bank 18
would not, because it would have access to----
Chairman Bernanke. I do not know all the details of the
Treasury's plan. And of course there are issues related to the
smallest banks which are not publicly traded, and so on, which
we already saw with the Capital Purchase Program, the first
round of capital. But the intention of the Treasury, as I
understand it, is to make capital available to all banks.
Representative Campbell. Okay. I want to switch to talking
about the program under which the Federal Reserve is buying
Treasury Bills now, which I believe is $300 billion. I don't
know how much you have bought so far, or what is going on, but
I wanted to ask you about that program which I think is akin to
a company buying back its own stock.
You talked about the interest rates on longer term. Is that
your plan? Is that your objective, to try and keep the longer
term Treasury Bill interest rates down? How would you get out
of this program?
I do not think it has been done since the 1960s, I believe,
so can you talk a little bit about that?
Chairman Bernanke. No, the Federal Reserve and other
Central Banks regularly buy and sell government debt in open
market operations, and we have been doing that for many years.
We announced a plan to purchase $300 billion in order to
try to provide broader liquidity and to help private credit
markets. That is our objective. And we think it has been
beneficial because we have seen improvements in mortgage
markets and corporate bond markets and so on.
We are not trying to target a particular interest rate.
Again, our objective is to provide more liquidity to the system
and to help private credit markets. And I think that it has had
some benefit.
Representative Campbell. It is not something, though, you
have done to this kind of degree for a long time, correct?
Chairman Bernanke. That's true. But again, we routinely
transact in Treasuries. That is our primary asset that we buy
and sell. And we have added to that of course GSE securities,
as well.
Representative Campbell. Is this something you would expect
to continue at a larger volume as was mentioned by some of my
colleagues here, as the government sells more and more debt, as
the deficits increase?
Chairman Bernanke. Well again, our objectives have nothing
to do with the government's debt, per se. Our objectives have
to do with strengthening private credit markets, and those
decisions will have to be made by the FOMC as we look at the
state of the economy and try to judge the efficacy of the
various steps that we have taken.
Representative Campbell. Okay. A quick question about AIG
in my remaining moments. I believe a few months ago there was
about $1.6 trillion of assets left in the Financial Products
Division, which were trying to be wound down. Are you aware of,
or can you report on the process of winding that down?
Chairman Bernanke. I don't have precise numbers for you,
but we understand that it is imperative to wind that Financial
Products Division down as quickly as possible, and we have
looked into a number of alternatives including using outside
consultants and so on to wind that down as quickly as we can.
Representative Campbell. Is AIG going to need more capital
from the government because of losses on that portfolio?
Chairman Bernanke. I do not know. They have not yet, as far
as I understand they have not yet taken up the $30 billion
backstop line that the U.S. Treasury provided in March.
Representative Campbell. Okay, and the final question: In
September-October we, many of us--I believe you and I--believe
that we were near, I will use the term, collapse of the
financial system. Have we dodged that bullet? Are we past that?
Or is there a scenario under which that fear and panic could
return?
Chairman Bernanke. Well one can never predict anything with
certainty, but I think we are in far better shape today than we
were in September and October. And while I know there are many
critics of the TARP, and I understand the criticisms, and there
are many issues, I do believe the availability of that capital
helped us dodge what would have been a truly cataclysmic
collapse of the global banking system, which would have had
terrifically bad effects on the U.S. economy.
So it was very important at that time. I think we have made
a lot of progress. The financial markets are still fragile. We
do not want to take anything for granted, but we have I think
come a long way since last fall.
Representative Campbell. Thank you, Mr. Chairman.
Chair Maloney. Representative Sanchez.
Representative Sanchez. Thank you, Madam Chair, and thank
you Chairman Bernanke for being before us again today.
My questions are intertwined. I was one of those that did
not vote for the TARP for all, the reasons that we have seen
come to bear, but I did vote for the stimulus package. A lot of
us took a deep breath as we voted for $800 billion to be put
into the market so that people would keep their jobs and maybe
we would create some new jobs.
Then we passed the fiscal year 2009 Omnibus bill which was
an increase over the previous year's spending. President
Obama's new budget that has come to the Congress has been
criticized for being such a large number. Part of it of course
was that we put the true war spending into it which increased
it, but the Congress has been looked at like we are spending a
lot of money.
But when I turn around and I look at what the Treasury and
what the Fed has been doing with policy, with I think the 28
programs between the two of you, many of them under your
jurisdiction, I count almost about $3 trillion worth of money
hanging out there being moved around, et cetera.
Some of that I think is sitting in banks as reserves maybe
against a commercial real estate problem that I want to ask you
about, too, but a lot of these banks have been sitting on money
and the criticism has been that money is not getting out, and
the small and medium-sized businesses are having that credit
crunch.
But if that money comes flooding out, we have the problem
of possible inflation shooting up. So there is a lot of money
out there, much of it put out--and I understand why--by you in
trying to manage the situation.
I guess my question comes back to what was alluded to by
two or three of the Members who have already asked questions.
How do we manage that investment? How do we rein that in? How
do we make sure that the banks do not all of a sudden open up
the lending spout, which we have all wanted to happen, and yet
at the same time avoid it having an inflationary impact?
I think it is important for Americans to try to understand
this large chunk of money, or monetary policy out there that is
creating possibly even more money than the Congress
appropriated.
Chairman Bernanke. Thank you for the question. I would
first like to draw a very strong distinction between the fiscal
spending and the Fed's lending programs.
Our lending programs are just that. They are lending
programs. And they are, with the exception of some of the
things involved with AIG and that kind of thing--which is less
than 5 percent of our balance sheet--the whole bulk of all
those programs are very safe. They will be repaid, with
interest. We are making money for the Treasury.
Representative Sanchez. I am not worried about that
repayment, per se.
Chairman Bernanke. Okay, so----
Representative Sanchez. I am more worried about----
Chairman Bernanke. There is a difference between spending
money and then lending it out and getting it back with
interest.
Representative Sanchez. Right. But if it all floods at the
same time----
Chairman Bernanke. That is the question Mr. Campbell asked
me about, I believe, which is how do we make sure that the
monetary base contracts at an appropriate time to make sure
that there is no inflation after the recovery begins.
And as I indicated, we have a whole set of tools that we
will use. Those include winding down short-term lending
programs, which happen automatically to some extent and which
we can do any time we choose; none of them is longer than three
months in duration.
Secondly, we do have this very important power of being
able to pay interest on reserves. If we want to raise the
Federal Funds Rate to say 2 percent, just to make up an
example, and we pay 2 percent on Reserves to banks, why would
they lend it out at less than 2 percent? So that would allow us
basically to raise interest rates to 2 percent.
Beyond that, we have a whole set of other tools that we can
use. And I just want to assure the American people that we are
very focused--like a laser beam, if I may--on this issue of the
exit and making sure that we have price stability in the medium
term. We are working very hard to make sure that, while on the
one hand it is very important for us to provide a lot of
support for this economy right now because it needs support, at
the same time we understand the necessity of winding this down
in an orderly way at the appropriate moment so that we will not
have inflation problems on the other side.
It was also mentioned that The New York Times had one
article about inflation and one about deflation. There are
risks on both sides and we are trying to manage this as well as
we can.
Representative Sanchez. The commercial real estate market,
have you been watching that? And do you see the same impact as
we did in residential real estate? And I will end with that.
Thank you, Madam Chairwoman.
Chairman Bernanke. I don't think the commercial real estate
market got as out of line in terms of prices and so on as the
housing market did, but it is currently weakening. As I
mentioned in my testimony, rents are down. Vacancies are up.
And a lot of commercial real estate owners are having
difficulty refinancing their debt, or obtaining new financing
for new projects.
In particular, one of the main sources of commercial real
estate financing is the CMBS, Commercial Mortgage Backed
Securities Market, where lenders can securitize those loans
into the secondary market.
So among those programs which you mentioned, the Fed is
trying to get the financial system working again. And we have
included just now Commercial Mortgage Backed Securities in our
so-called TALF Program, which we hope will get investors
interested back into this market and get it going again.
I think that is very important to address the fact that
there is a large amount of CRE refinancing coming due in the
next year or two, and we need to have that market functioning
so that that can happen smoothly.
So there is a problem there, both from the bank's
perspective and from the economy's perspective, and we are
doing what we can to try to address it.
Representative Sanchez. Thank you, Madam Chairwoman.
Chair Maloney. Representative Paul.
Representative Paul. Thank you, Madam Chair, and welcome,
Chairman Bernanke.
I have a couple of questions, but first I want to mention
that I find it awfully frustrating at times when we always talk
about inflation and we only talk about prices. We have prices
under control, and there is no inflation.
We have to realize that the monetary base, the liquidity,
was doubled in a few short months. To me there is a lot of
inflation out there. It is already inflated. We are in the
midst of inflation. Because the prices have not gone up does
not mean we do not have the distortion.
It was that system that gave us the financial bubble: the
artificially low interest rates, the malinvestment, and all the
mistakes made. And now we are trying to correct all that by
doing the very same thing.
So I think some day we are going to have to address this
somewhat differently, because I am not very optimistic that we
can solve our problems with more spending and more borrowing
and more inflation in order to solve those problems.
But you answered this question several times and I want to
bring it up again, and that has to do with when will some of
this liquidity be drained?
I do not think the answer you have given is very specific,
and I do not expect that I will get a more specific answer, but
I am going to try. What if we have a situation where prices
are--which is not the best measure of inflation--but let us say
the Consumer Price Index and the PPI is going up 8 to 10
percent, and there is no economic growth. Where are you then?
Because that is not impossible. It has happened. It has
happened in our history; it happens throughout the world; it is
a common thing. It has put you between a rock and a hard place.
If you drain, interest rates go up and the economy further
crashes; if you don't, you have the explosion.
Can you give me an idea what you precisely would do if you
faced the situation where prices were going up 10 percent with
no economic growth?
Chairman Bernanke. Well, I think that is an unlikely
scenario, but we certainly would have to take steps to ensure
price stability. If inflation gets out of control, we know that
has very adverse effects on the economy both in the medium and
long term, and so we would obviously have to address that.
Representative Paul. Which means you would have to raise
interest rates.
Chairman Bernanke. That's exactly the same problem that is
always faced by monetary policy--which is, in a recovery when
the economy is starting to grow but has not yet gotten very
far, perhaps, and unemployment is still above where you would
like it to be--you have to take away the punch bowl, as someone
once said, in order to avoid the inflation risk.
Representative Paul. See, I see this as the real problem.
Because we practice economic planning through manipulation of
money and credit. Socialism always fails because they don't
have a pricing structure.
Interventionism and inflationism fail because we don't have
a free market pricing system of money, the--interest rates.
Therefore it fails. It comes to a conclusion. And inevitably it
leads to a more socialized economy.
Just witness what we are talking about: taking over
companies; taking over insurance companies; taking over banks.
This has been the prediction of the free market economists, and
yet we continue down this path of socializing our entire
economy.
But I do want to address one other subject that has to do
with transparency. You said you have made a commitment to
transparency and openness, which is very good; there's a lot of
us that want that, and I have dealt with that and have
legislation, HR 1207, dealing with that. But in a real sense, I
know what you are doing here, but, you know, the Code really
protects you from telling us some of the things we would like
to know.
For instance, in 1978 when the GAO was given the authority
to audit the Fed, it put exclusions in there, but you can't ask
these questions. Precisely, if I wanted to know about all your
agreements and discussions with foreign central banks, with
foreign governments, with international financial
organizations, you have no obligation, and you haven't
volunteered to do this, so is there a way that you would--since
you are moving in this direction--move and consider supporting
a position where Congress has the right to know these very,
very crucial, vital issues dealing with their money?
I mean, everything you do deals with their value of their
money. Would you ever be open to repeal of some of those
provisions?
Chairman Bernanke. Yes, I would.
Now let me be specific. We have many programs where we lend
money. We take collateral, and we are repaid. I just want to
assure you, first of all, that we have very substantial
oversight and controls.
We have, besides internal divisions which monitor these
programs, we have an independent IG, and we have an external
auditing company, a private company, which provides audits
every year and has given us a clean bill of health on all our
financial controls, all the level of Sarbanes-Oxley
requirements.
That being said, if Congress needs more information about
the operations that we are doing, exactly how we manage our
collateral, how we manage our lending, those sorts of things, I
think we can talk to you about providing more information about
that. And, if necessary, working with the GAO.
Where I would be very careful and would like to be very
clear, there has been some discussion of the GAO, quote,
``auditing monetary policy.'' I don't know what that means, but
I certainly would resist any attempt to dictate to the Federal
Reserve how to make monetary policy.
It is the independence of monetary policy which is crucial
to the maintenance of price stability and economic growth in
this country. And interference would not be acceptable. But if
it is an issue of making sure that we are appropriately
managing our systems and doing what we say we are doing in
terms of our lending, we want to be open. We want you to
understand that we are taking every precaution to protect the
Taxpayer.
Representative Paul. Of course it's the policy that's the
only thing that really counts.
Chair Maloney. The gentleman's time has expired.
Congressman Snyder.
Representative Snyder. Thank you, Madam Chair. Welcome, Mr.
Chairman.
When Senator Schumer brought up his issues about credit
cards, there are probably not too many advantages of the mail
stacking up at home when we are up here this week for a week at
a time, but a couple of weeks ago I went home and I had one of
these announcements from my bank that my credit card percentage
was going up, but delightfully what also arrived a day or two
later was from the same bank, because of my high credit score,
an opportunity to get a credit card, which I thought was kind
of an indication of where these banks were at. But it does not
mean anything except that it enabled me to go down with
righteous indignation to my bank.
Mr. Chairman, in your written statement you say the
following, quote: ``The steep drop in U.S. exports that began
last fall has been a significant drag on domestic production
and any improvement on that front would be helpful.''
I know it is not in your lane of activity, but some of us,
particularly from agricultural states, just do not understand
why the new Administration has not changed the restrictions on
agricultural sales financing to Cuba.
I mean, it is now legal to sell agricultural products to
Cuba. If there was a modernization of the financing transaction
rules which the Bush Administration put in, it would be several
hundred billions--millions a year to American exporters, which
I think is your goal to be helpful right now and a good signal
on trade.
I wanted to ask you, you had mentioned several times in the
discussion about institutions that are too big to fail, they
are only too big to fail if they cannot be in their failure an
orderly--in an orderly fashion taken care of. And you referred
to your suggestions for a Resolution regime.
Have you put out something written? I was with a group of
folks that met with you some weeks ago when we thought you were
going to forward to us some written proposal. Is there a
written proposal that you have put out?
Chairman Bernanke. There is proposed legislation, yes.
Representative Snyder. Proposed legislation that you have
put out, from you? Is there something you have put out?
Chairman Bernanke. Yes.
Representative Snyder. The Chairwoman has made mention of
it.
Chairman Bernanke. Yes. And the Treasury also has put out
proposals that are very similar.
Representative Snyder. I suspect you saw this. As I was
looking through last night your impressive bio, I saw the April
27th Business Week. It says: What good are economists anyway?
And then the answer came out, was brought home in morning's
Washington Post in which it talks about the Fed's $1.17
trillion and what they referred to as unprecedented
intervention.
Continue the discussion you had with Representative Paul.
If you were sitting on this side, looking at you--because none
of us up here understand your business. I mean, that's the
answer to ``what good are economists, anyway?'' I can't talk
about economists in general, but we have put tremendous value
on you and on your skills.
Should we be concerned about this dramatic increase that
has occurred as part of what you refer to as helping us avoid
a, quote, truly cataclysmic collapse? Should we be concerned
that one person has that kind of power?
Chairman Bernanke. Well you certainly should take a strong
interest in it, and I certainly don't blame you for that. After
this testimony I am going to lunch to meet with a group of
Senators to go through our balance sheet and our programs and
try to answer all their questions. So we owe it to you to make
sure you understand what we are doing and why we are doing it
and what the results are.
But our sense is that this is an unusual, extraordinary
time. We have used powers we have not invoked since the 1930s.
We have done that because we thought it was necessary to help
protect the U.S. economy in a time of extraordinary financial
crisis. We have done so in a responsible way using powers that
the Congress gave us in the pursuit of the Congressional
mandate for full employment and price stability.
I am happy to meet with you individually and go through
with you every program, and talk to you about what the purposes
are. I fully understand your interest, and you should be
interested, and I am more than happy to make myself available
to help you understand what we are doing and if you have
concerns to try to address them.
Representative Snyder. I went on your web site this morning
and just looked over one of the descriptions of one of the
agreements you have with a financial institution.
It seems like you apparently have an executive pay
provision with all, or most of these deals? Is that correct? At
least the ones that I looked at did, said it had to be approved
by, apparently by you.
My question is: As you have heard these debates over the
last several months about executive pay--and I have voted
against several of these in the House--do you have any concerns
that, as our populous spirit takes over in terms of sending a
signal we don't like some of these bonuses, that in fact we may
be driving some of these institutions from participating in a
process which in your words we are trying to avoid the truly
cataclysmic collapse?
Chairman Bernanke. I don't think the American People object
to high pay, per se. I think they object to high pay which is
not tied to performance.
Representative Snyder. Right.
Chairman Bernanke. So that is the question. And I think
that is the concern people have about some of the pay that has
been given out on Wall Street recently, obviously given the
many failures that we have seen there.
My perspective, and I think the perspective of the
financial regulatory community towards executive compensation
is that it should be structured in such a way first that it
ties closely remuneration to actual, measurable performance,
number one; and secondly, that it is not structured in a way
that induces unnecessary or excessive risk-taking.
So we are working in the Federal Reserve on supervisory
guidance, or other types of rules, that will tell banks to
structure their compensation not just at the very top level but
down much further in a way that is consistent with safety and
soundness. Which means that payments, bonuses and so on, should
be tied to performance and should not induce excessive risk. I
think that is the important thing.
Now, of course, we are required by Congress to follow
through on certain executive compensation restrictions for 13.3
recipients and for TARP recipients, and we obey those rules.
But my philosophy on this is that we should think about the
structure of compensation and make sure that it is achieving
its appropriate objective.
Representative Snyder. All right, thank you, Mr. Chairman.
Thank you, Madam Chair.
Chair Maloney. Thank you, Mr. Snyder. Congressman Burgess.
Representative Burgess. Thank you, Madam Chair.
Thank you, Chairman, for being here with us this morning.
In your testimony--and I apologize for being late--``As
economic activity weakened during the second half of 2008,
prices of energy and other commodities began to fall rapidly,
inflationary pressures diminished appreciably.''
If indeed the green-shoot theory is correct and we are
beginning to emerge into a period of recovery, what do you see
as the effect of rising prices during that recovery?
Chairman Bernanke. Well, if----
Representative Burgess. What do we do when prices begin to
rise?
Chairman Bernanke. If our forecast is correct, then we will
start to see some economic growth, but it will be slow at first
and there will still be a lot of unemployment and slack in the
economy. We don't expect, therefore, commodity prices to rise
very much and we don't expect to see much inflation.
So our forecast, despite the green shoots theory, is still
for inflation to be quite contained for the next couple of
years.
Representative Burgess. Well you referenced yesterday's New
York Times, and I wasn't going to bring it up, but since you
did----
Chairman Bernanke. Someone on the panel did.
Representative Burgess [continuing]. Let's look at a couple
of the things that were talked about. I mean, you made the
point I think to Representative Snyder, or maybe it was
Representative Paul, that independence--that it is critical to
have the independence of the monetary policy, but the question
was raised in The New York Times yesterday, not doubting the
knowledge or technical ability of the Federal Reserve, the
writer doubted the commitment of the Administration and the
autonomy of the Federal Reserve, thinking that the Fed has
sacrificed its independence to become the monetary arm of the
Treasury.
And then further quoting from the article by Alan Meltzer:
Independent Central Banks do not do what this Fed has done.
They leave such fiscal actions to the Legislative Branch--that
would be us--they leave such fiscal actions to the Legislative
Branch. By that same token--well, let me move on. The Central
Bank was made independent, expressly so. It could refuse to
finance deficits. Is there a political consensus that the much
larger Obama deficits will not pressure the Fed to expand
reserves to buy Treasury Bonds?
How would you respond to Alan's writing?
Chairman Bernanke. Well, I will recap a few points I made
earlier, which is that I think close cooperation of the
authorities, the Fed and the Treasury in particular, in a
situation of extreme financial crisis and risk to the system is
necessary, and that the American People would want to see their
government working collaboratively to try to solve those
problems.
And so we have done that both with the previous
Administration and with this Administration. So there is no
political aspect to it.
That being said, we understand there are important lines of
distinction between what the Fed does and what the Treasury
does, and the Treasury understands that as well. We issued
recently a joint statement which tried to delineate those
lines.
And in particular one of the key principles is that nothing
that we do to support the financial markets or work with the
Treasury must in any way compromise the independence of
monetary policy, which is the critical element and which is
what is going to allow us to make sure we have price stability
and will allow us not to monetize deficits but only to take
policy actions needed to achieve sustainable employment and
price stability, which is our objective.
Representative Burgess. Well the--and I think
Representative Snyder brought up the point from the article
this morning. And then that separation of fiscal policy and
monetary policy, when he says ``Who Needs Economists?'' Well,
we do because we don't understand that distinction. But it does
seem as if we are getting to a point where the Fed is
monetizing the debt.
Let me just move on to another aspect. It came out earlier,
and I think you just reaffirmed that there was activity last
fall, that in your opinion was necessary. In the interest of
full disclosure, I voted against that both times.
I also voted against the stimulus package in February. Now
I had a lot of people back home ask me--they didn't think it
was right what we did in October, but if you want to stipulate
that that was necessary because of an unprecedented occurrence
in our credit markets, why was it not necessary to give that
time to work before then adding a like amount of money to that
in the stimulus package?
Was there a disconnect on the part of Congress with
reality? Were we just spending money to spend money at that
point?
Chairman Bernanke. Well those two packages have very
different purposes. I think to achieve the successful recovery
we have to do two things. One is to get the economy going
again. I am not going to get into the details of the fiscal
policy, and I am sure people can differ on various aspects of
it, but the objective of the fiscal policy was to get economic
activity and jobs going again.
The purpose of the Stabilization Act last fall that you
mentioned was specifically to stabilize the financial system,
which is the other critical element of recovery. So they had
very different purposes and different structures.
Again, the program from last fall is made up of asset
purchases and loans, and I think a very substantial part of
that will be recovered, perhaps even all of it. So they are
very different programs with different objectives.
Chair Maloney. The gentleman's time has expired.
Congressman Hinchey is recognized for five minutes.
Representative Hinchey. Thank you, Madam Chairman, and
thank you, Chairman Bernanke for your statement today and the
very firm answers to the questions that you've received.
I would like to just emphasize something that Senator
Schumer said about the interest rates on credit cards and what
a big problem that is causing and increasing for low- and
middle-income working Americans.
The credit card interest rates are going up for a lot of
people in the range of 30 percent and higher, and in come cases
even 41 percent. But I would like to emphasize in that context
that we have introduced legislation here, myself and others, in
the House and in the Senate which would put a cap on interest
rates on credit cards. I think that is something that is very
important.
If you would like to comment on that, I would appreciate
it. The main problem that we are facing I think in this economy
is the downturn in the gross domestic product. Just from the
recent information we have, the GDP has gone down 6.1 percent
in the first quarter of this year and 6.3 percent in the last
three months of last year. And one of the reasons for that is
because the GDP is driven by low- and middle-income working
Americans, more than 70 percent of it driven by working
Americans and whether they spend and how they spend, but what
we have seen is employee wages in the private sector increase
only two-tenths of one percent in the first quarter of this
year. That is a record low. We have never seen anything like
that before.
At the same time, household debt as a percentage of income
is the highest it has been since the 1930s.
This is just another way in which the economic conditions
we are facing now are so similar to the conditions of that
Depression back then in the 1930s.
One of the things that we did with the stimulus bill, in
addition to putting money back into this economy to generate
jobs and to address the needs that have been so neglected for
decades, one of the other things that we did in that so-called
stimulus bill, that investment program, was to provide tax
relief for 95 percent of Americans by a $400 rebate in the
context of that stimulus bill. And also an adjustment in the
Alternative Minimum Tax.
I wonder if you have any thoughts about what the Federal
Reserve could be doing and what we should be doing here, in
addition to this so-called stimulus bill that we have passed
and which is now having significantly positive effects, which
will increase over time. What else is it that we should be
doing here in this Congress to invigorate this economy, rather?
Chairman Bernanke. Well there are a lot of things you might
consider, but personally I think it would be very important for
the Congress to focus on getting the financial system fixed.
And there are two elements to that.
One is, as I have already mentioned, this resolution regime
that we can find a way to address too-big-to-fail, to deal with
companies that are, on the one hand, in danger of failing but
are so large and interconnected that their failure would
endanger the entire financial system in the economy.
And the second is closely related to that, which is part of
the deal I think, is to look again at financial regulation to
make sure that our financial system is better regulated and we
can avoid problems like this in the future.
On fiscal policy, you have taken some strong actions, and
they are just beginning to kick in. I am eager to see what
effects they will have.
Representative Hinchey. Okay, well let me then ask you just
one other question. One of the things that we are facing is the
significance of the TARP bill, which was very questionable when
it was presented by Secretary Paulson back when it came
through.
Now we have SIGTARP, which is overseeing the way in which
that TARP bill is being handled, which, I think is absolutely
necessary because of the huge amount of money that is being
pushed out there, instead of some of that money being put into
the hands of working Americans, stimulating their economy,
which would drive the gross domestic product up more
effectively.
Nevertheless, this TARP Program is continuing. So I would
wonder if you could answer one or more of these questions:
The requirements:
That we would require the Treasury to account for all
taxpayer funds that are used in the TARP program;
To require recipients of funds under the Capital Assistance
Program to report how they use those funds;
And require strong oversight, accountability, and conflict-
of-interest provisions for the Public-Private Investment
Program.
Chairman Bernanke. First, on the Treasury having to account
for its use of funds, of course they should do that. They do
provide detailed information on all the loans and investments
that they make on their web site, as far as I understand it. If
there are other things they should do, again they should be
providing as much information as possible about how they are
using the money to the American people.
I think in principle it is good to ask banks to account for
how they use the money, but there are some problems in
practice, which of course is that money is fungible. If I may
use an analogy, if a taxpayer called you up and said I don't
want my money being used for, say, defense, how would you say
that all the money goes into one big pot. It is kind of hard to
exactly explain to that person where their money is really
going in some sense.
The purpose of the TARP money is to create capital which is
then supporting other activities, lending and other activities.
On oversight and conflict-of-interest, I could hardly
disagree with you on that. Clearly, we want to make sure there
is no fraud or other problems related to any of these programs.
I would mention that the Federal Reserve has had a lot of
contact with SIGTARP over the TALF, which uses TARP capital,
and we are working hard to make sure that they are comfortable
with all the safeguards that we are taking to avoid any such
conflicts of interest or fraud.
Representative Hinchey. Thank you.
Chair Maloney. Thank you. The gentleman's time has expired.
Senator Casey.
Senator Casey. Madam Chair, thank you very much for this
hearing. And Chairman Bernanke, thank you for your testimony,
your presence here, and your public service.
I wanted to focus on two areas. One is on jobs and the job
picture, meaning the unemployment rate, and the data that we
see and try to, as best we can, make sense of.
And then secondly, a question about the perception that the
American People have as to where our economy is now and where
it will go.
First with regard to the unemployment numbers, we have
heard that more than 5 million jobs have been lost. The rate,
as you know, nationally in February was 8.1, March 8.5, one
projection in April of 8.9.
In Pennsylvania we have been behind, fortunately unlike in
our past where we would run ahead of the national rate, thank
goodness, but it is far too high. We have gone from a rate of
7.5 in February to 7.8 in March, and we do not yet know what
April will bring. The March number in Pennsylvania translates
into just a couple of hundred jobs under 500,000 unemployed. So
even in a state where the rate seems relatively low, it is a
huge number of people unemployed.
There have been a number of projections about the rate for
2009 and 2010. In fact, even for 2010 the blue chip number I
guess is 9.4, and; the CBO projects at 9. I guess all of that
is a predicate for--the question--where do you think the rate
is going? Do you have a sense of where it could go in 2009 and
2010?
Maybe the simplest way to ask is: Will it go to 10 in 2010?
What is your sense of that?
Chairman Bernanke. As I mentioned in my testimony, the loss
of jobs and the deterioration of the labor market is one of the
most distressing aspects of this whole episode. We have already
seen about 5 million jobs lost.
The forecast we have is for the economy in terms of growth
to begin to turn up later this year, but initially not to grow
at the rate of potential. Which means that unemployment and
resource slack will continue to rise into 2010.
We think that the unemployment rate will probably peak
early in 2010 and then come down relatively slowly after that.
Currently we do not think it is going to get to 10 percent. We
are somewhere in the 9s, but clearly that is way too high.
The issue of re-employment is complicated by the fact that
part of what is happening, besides having the recession, of
course, is that our economy is adjusting to the changes in
sectoral composition. We are going to have fewer investment
bankers and fewer construction workers probably in the future
because those sectors got very large, and those people will
find work in new areas.
So there is going to be some reallocation of labor among
different sectors, which is going to affect the rate of re-
employment, as well.
I would just make the comment that several people have
expressed concern about inflation. It is very hard for serious
inflation to take off when you have this kind of slack in the
economy. Rep. Hinchey mentioned wages. Wages are growing even
more slowly, which is also not suggestive of inflation
certainly.
So it is these slack conditions projected for a period
which has allowed us, or I think required us, to take the
aggressive approach that we have to try to get this economy
moving again. But I agree with you--it is a serious problem.
And even when the economy begins to grow, it will take awhile
for unemployment to come back to an acceptable level.
Senator Casey. And I guess that assessment--a lot of your
testimony this morning--is consistent with what I have heard in
Pennsylvania, sometimes directly from employers, but also
people who interact with employers.
For example, on page 4 you say, in the middle of the second
full paragraph, ``We expect that the recovery will only
gradually gain momentum and that economic slack will diminish
slowly.''
In other words, it will not be a spike, nor a turning point
that will lead to a dramatic change. That seems very
consistent. And also the caveat that you note on page 4, where
recovery assumes the continuing gradual repair of the financial
system.
I guess all of it--and I know I am just about out of time--
provides a backdrop for a question--the American People,
whether they are stressed immediately with the loss of a job or
a house, or whether they are simply observing and nervous and
concerned about the future--they have been hit with a torrent,
or an avalanche, of data. I guess in light of all that data,
yes, we see signs of recovery, maybe just flickers here and
there. However, the job numbers and the unemployment rate lag,
so what do you tell people?
In other words, do you say don't get too focused on the
unemployment rate, that that will not tell the whole picture?
Or what else do you say to people who are looking for signs of
hope but do not want to be overly optimistic when the signs of
hope are juxtaposed with high unemployment numbers? I mean, I
know it is a tough question to answer in terms of advice or
guidance for people.
Chairman Bernanke. I have two very different comments. One
has to do with the nature of our labor market, which is
extraordinarily dynamic. So when you see 1000 jobs lost in an
area, it could well be the result of 4000 being created and
5000 being terminated.
So even in a period like this, there are many, many new
jobs being created in new industries, new businesses, and so
on. So there are opportunities for people, and particularly
during periods like this you sometimes see remarkable
innovations in business models and technology and so on.
So it is not the case that there are no opportunities.
There are opportunities.
The second thing I would say is that Americans are very
good at being adaptable. We have in particular, for example, a
very diverse educational system that includes not just K-12 and
college, but also junior colleges, community colleges,
technical schools, adult education, apprenticeship programs,
all kinds of things. So there are lots of opportunities for
people to retool as necessary if they think their job is not
coming back in that particular area.
So building that human capital is something that people
should do and can do, knowing that if they have the skills they
will find opportunities.
Senator Casey. I am out of time. Thank you, very much.
Chair Maloney. The Chairman has indicated he has to leave
at 12:00, so we have time for a few additional questions for
another round.
First of all I want to publicly acknowledge and thank you
for your leadership in coming forward with rules to crack down
on abusive, unfair, deceptive, anti-competitive practices by
the credit card industry.
This was an area I had been working on for years. I had a
bill that cracked down on the most abusive practices, like
retroactive interest rate increases. Going forward, this bill
will give notice so consumers can get out of abusive credit
cards and go to another card, putting competition in the
system. It was not until you came out with similar rules, that
greatly reflected the bill that I had authored, that the
momentum gathered in Congress to pass it last year. The rule
change you put in place in December gave us the additional
momentum to pass a very strong bill last week.
Originally I had an enforcement 30 days after passage. It
went to the committee and the committee voted to keep with the
July 2010 date of the Federal Reserve. That can be changed in
the Senate. We did accept an amendment of mine to put into
effect immediately, or within 30 days after the rules are put
into effect. The 45-day notice allows consumers to move to
another card and get out of an abusive system that is unfairly
jacking the interest rate.
But I truly believe that you played a very brave and
important role in helping this adjustment in our economy. It
was a very, very difficult bill to pass, and your leadership is
greatly appreciated by me, and I am sure the consumers in our
country.
I want to talk to you about one of the options for banks to
convert the TARP shares into common equity, boosting government
ownership in those companies. How much influence will the
government seek in the day-to-day operations of such decisions
as credit allocation management, the governance, board seats,
mergers, acquisitions, asset sales? Do you see government being
dominant, or passive, in this transformation?
Chairman Bernanke. First, it is obviously not our intention
or desire to have long-term government ownership of banks. That
is not desirable. It is not efficient. It is not good for the
economy.
So the top priority will be to get banks on a path where
they can pay back and get out of the situation where they are
partially owned by the government. So whatever actions are
needed to achieve that, the supervisors, with the support of
the Treasury, will work with the banks to raise capital, to
sell assets, to do whatever they need to do. So that is the top
priority.
In that respect, it is not a hands-off policy because we
want to make sure they are taking the steps necessary to emerge
from this situation.
In terms of day-to-day management, I think the Treasury may
well want to set broad policies, for example, on lobbying,
dividend payments, or things of that sort, which is
appropriate. But it is not really a good idea for the
government to try to manage day-to-day business decisions, and
for that purpose we have to have management there that we think
is effective and let them make those decisions.
So again the bottom line is, yes, we have to be active in
the sense of making sure that banks are working towards
strengthening themselves and have appropriate broad policies,
but we certainly do not want to be involved in day-to-day
operations.
Chair Maloney. How concerned should common stockholders be
that the stress test results will require fresh capital
infusions for some of the banks? It has been preliminarily
reported that 10 banks will need cash infusions.
What impact is that going to have on stockholders? How
concerned should they be?
Chairman Bernanke. Well I can't preview the results, which
will come out on Thursday afternoon. Our hope is that this
program will, on the one hand, provide a lot of information to
the markets and will restore confidence in the banks. That is a
very important part of this whole process, just letting people
see what is on the banks' balance sheets. And that will be part
of the healing process that will make these banks able to be
more profitable and more effective in the future.
So I am hopeful that in the medium-term at least that both
investors and borrowers will benefit from this.
Chair Maloney. Well the transparency definitely builds more
confidence, and with confidence comes more capital. What
additional steps do you see the Federal Government taking?
For example, if the IMF numbers are higher than the TARP
money that we have and the access to capital, do you see any
other initiative to raise government money, if it is so needed?
What other steps do you see, if any? Let me say, you have
definitely not been boring during this crisis. You have been
incredibly innovative coming up with many other ideas of how to
approach challenges.
So what's next, if we needed the help?
Chairman Bernanke. I look forward to a long period of
boredom. [Laughter.]
Chair Maloney. I think the country would like a little
boredom, too.
Chairman Bernanke. Yes, we all would.
On the bank situation, it should be very clear that the
assessment is to make sure that banks have not just minimal
capital but more than minimal capital; that they are strongly
capitalized, and that they are strongly capitalized even if the
economy gets worse than we currently think it will.
So our hope and expectation is that this will provide
enough capital for the banks to be healthy and to provide the
important support to the economy they need to provide. So I do
not have at this moment any future plans I can share with you,
or that I know.
Chair Maloney. My time has expired. Ranking Minority Member
Senator Brownback.
Senator Brownback. Thanks, Chairman.
I get from my banks all the time that the regulators are on
them way too much with the capital that they have--and I am
talking here about these are local banks, regional banks really
throughout the state. They really feel like that they are under
the gun, and that it is harming the overall economy, what is
taking place, particularly if they are involved in any sort of
real estate investment, whether it is home loans or commercial
properties, that they are being hammered.
They believe it is unfairly so, and they believe it is also
very harmful on the economy of what's taking place. I know you
have heard this from some other members, but I want to really
drive this point, because what I have seen taking place in
these downturns before is that the regulators, maybe they get
overly blamed for it, but it certainly seems like they have a
big impact on when the recovery happens by what they will allow
on credit standards and by what the banks believe they will
allow on credit standards.
And I think they are harming the length or the viability of
the recovery right now from what I am hearing across the state
from both bankers and from what I'm hearing from anybody
associated with any real estate business.
I don't know if you have a response to that, but I would
really hope you watch that very carefully, because I think it
is going to hurt us from recovering strong.
Chairman Bernanke. Senator, I do have a response, which is
that there is always this tension between making sure the banks
are making safe and sound loans--because we do not want to have
them lose money--versus making sure that credit is sufficient.
We just want to call your attention, the regulators put out
a joint statement in November called ``Lending To Credit Worthy
Borrowers,'' which had a number of components, but the thrust
was that it is very important for examiners when they are in
the bank to, on the one hand, make sure that the loans are safe
and sound and appropriately underwritten and so on, and on the
other hand, that banks make loans to credit-worthy borrowers to
maintain their customer relationships and so on. And excessive
conservatism by the examiners can be destructive, as you
comment.
So we issued that statement, and at least in the Federal
Reserve we have made efforts through training programs and
examination manuals and so on to try to communicate to our
examiners in the field that we really need them to take that
more balanced approach.
Now I hear from bankers exactly what you are saying, so I
am sure we are not always successful, although in some cases
maybe they are underestimating the risk of some of the things
they want to do. But it clearly is an issue and we are very
much attentive to it.
Senator Brownback. They are saying it is particularly
harmful on commercial real estate, and that is the very weak
part that you were noting in the economy now anyway. I don't
know if everybody just didn't quite get the memo across the
country or what the case is.
Another question that I get from a number of people is how
do we get the private capital back out into the market and
working?
It just seems like it has really been scared and it is on
the sidelines, so that you are putting a lot of money into the
system but there is not as much velocity that needs to take
place with the money.
Do you see things that need to be done there? Or do you
have questions about what it is going to take to get the
private capital back working into the marketplace?
Chairman Bernanke. Well we, and the Treasury, and others
have taken steps to try to get these markets going again, and I
think we are seeing some fruits now, as I talked about in my
testimony. We have seen some issuance of asset-backed
securities, which was not there for a long time.
We are seeing a pretty healthy corporate bond market. We
are expecting that with our Banking Assessment Program that we
will see some equity coming into the banking sector. So clearly
we are not normal yet, but we are seeing some improvement in
terms of money coming off the sideline.
Senator Brownback. One of the things I get asked by a
number of people is concern about foreign purchases of our
debt, and that we are very dependent upon that particularly
from the Chinese.
If that something that you are concerned about, about the
level of U.S. Government debt being purchased by foreign
borrowers, particularly by the Chinese, and whether or not they
will back off from purchasing of our foreign debt at some time
here in the near future?
Chairman Bernanke. Well I don't think there is any prospect
of any big shift in the portfolio preferences of foreign
investors. Right now the U.S. debt is very liquid, very safe,
and there is a big demand for it, frankly.
In fact, during the crisis there were a lot of purchases of
debt by foreigners because they thought that was the safest
asset around. I do think there are two issues.
One is that the acquisition of U.S. debt by foreigners does
affect our Current Account Deficit, which I have argued is part
of the reason for this whole crisis, because all the money
flowing in at relatively low interest rates stimulated a lot of
lending, some of which did not turn out to work out so well. So
that is part of the problem.
Then of course we have issues related to the fiscal outlook
where we need to make sure that we keep the confidence of not
just foreign investors but domestic investors as well by
providing a fiscal plan for stabilizing our debt level going
forward.
So I think we will be fine, but we do need to address both
the Current Account and the Fiscal Deficits as part of our
overall macro policies.
Senator Brownback. Thank you.
Chair Maloney. The gentleman's time has expired. The
Chair recognizes herself for 30 seconds.
Following up on the Ranking Member's question, what would
happen if some of our foreign partners failed to buy our debt,
as some have threatened? What would happen to our economy if we
were not able to sell that debt?
Chairman Bernanke. Well it would cause interest rates to go
up, for example. So it would have effects on our economy. But
again, I do not foresee this as being a likely near-term
situation because the demand for our debt remains strong, so
long as people have confidence in the policies of the U.S.
Government, and that is the key issue.
Chair Maloney. The Chair recognizes Mr. Cummings for five
minutes.
Representative Cummings. Mr. Bernanke, Chairman, I have
listened to you, every syllable, and I have sat here and
listened very carefully, and I think about all of my
constituents, many of whom have lost their savings, which they
are never going to get back by the way, their homes, their
health care, their jobs, and I am wondering what can you say to
them?
Because, what is happening--I want to follow up on some of
the things that Senator Casey said--people are feeling like
everybody is running to the rescue of Wall Street with a fire
engine and hoses and making sure that the fire is put out, but
they see themselves being consumed by the fire and people
saying, well, wait a minute, we'll take care of Wall Street and
we'll get to you later on.
And we I think fully understand that there are certain
things that have to be done so that we see the connection
between making sure Wall Street is safe and sound, but at the
same time those folks are looking at you right now saying--I
mean, probably almost on the edge of their seats, saying: Tell
me something so that I can continue to have some hope.
I mean, what do you have to say to them?
Chairman Bernanke. Well an analogy I have used before which
your fire metaphor suggested is:
Suppose you have a neighbor who smokes in bed in the house
next door and sets fire to his house. You could punish him by
not calling the fire department, I suppose, but if your house
is next door you are going to catch fire, too. So you are
better off calling the fire department, putting out the fire,
and then later on fixing the fire code to make sure it doesn't
happen again.
That is what is happening with Wall Street. If Wall Street
burns, it is going to--we have already seen the effect it has
on the economy.
Representative Cummings. Yes. Well you are going right
where I want you to go. [Laughter.]
Chairman Bernanke. Uh-oh. [Laughter.]
Representative Cummings. No. In other words, the American
people want the--I mean many of them want the fire put out. But
they are saying: Hey, we are on fire, too. What about us?
Are you following what I'm saying?
Chairman Bernanke. I do.
Representative Cummings. It is not that they--that is why I
said we all understand that we have got to deal with Wall
Street. But when it came to the issue like with what Mr.
Schumer mentioned, the whole credit card issue and the
Chairwoman mentioned, they are looking at these things and
saying: Well, Mr. Chairman Bernanke, we see you racing over
there, but, hey, hey, what about us?
Chairman Bernanke. Well on credit cards I think we could
have a legitimate discussion about the right tactics. I raised
some issues about the problems it might cause if we moved that
interest rate rule up to the near term.
Representative Cummings. But I am talking about in general
can we do more for them?
Chairman Bernanke. But in general, as you know--and Chair
Maloney was just kind enough to mention it--we have taken very
strong actions on credit cards. We have eliminated a lot of the
worst practices and we hope to make a much better credit market
going forward.
We have taken similar actions on mortgages, as well. So
consumer protection is critically important. We are committed
to it. It makes for better markets.
Problems in consumer protection are part of the reason we
are in this mess in the first place--like in the subprime
market, for example--and going forward we need to pay a lot of
attention to that. So I am a hundred percent with you on that.
Representative Cummings. One of the things that you said,
which I thoroughly agree with, is that there are some instances
where jobs are being eliminated but jobs are being created.
There is a company in my District called Well Doc that I
visited just about two weeks ago basically which has become
very innovative by using cell phones to help people control
their blood pressure medication regimen.
I mean, they are booming with contractual opportunities.
And I am wondering, is there anything that you see that the
Obama Administration might be able to do, or we may be able to
do, to encourage innovation?
Because the President has often talked about innovation and
how that would lead to more jobs, but it sounds like that is
one of the things that we almost have to do. Because, like you
said, we are losing jobs in some areas that will probably never
come back, some of them.
So are you satisfied with all the things that the President
is doing? And I think he is doing his very, very best, but I
mean are you satisfied that he is using all the tools that he
might have available, and do you suggest anything else?
Chairman Bernanke. Well I mean there are a number of ways
to approach this, some of which are addressed. Education is
obviously critical. We want to train more students with science
and math capability. That's obviously very important. There are
reviews and thinking about the patent laws and those sorts of
things that make those more effective.
One issue that comes up--and I know is not a very popular
one, but I'll raise it anyway--which is that I think our
immigration laws discriminate pretty heavily against highly
talented scientists and engineers who want to come to this
country and be part of our technological establishment.
I think that if you allowed more people with high skills,
high technical skills, to come here, you would keep companies
here, you would have more innovation here, and you would have
more growth here. Although I know that is controversial, I
think that is something to think about.
An area which has been hurt somewhat by the financial
crisis is venture capital. That is important. That is still
operating, but I hope as the financial sector recovers we will
see more venture capital money available for new startups and
support technology.
So there are a lot of different things that Congress and
the Administration can do. I know the President has addressed,
certainly, some of these issues.
Representative Cummings. Thank you very much.
Chair Maloney. Mr. Brady, Congressman Brady.
Representative Brady. Thank you, Madam Chairman, thank you
for holding this hearing.
You note in your testimony, there has been an impact from a
decrease in export sales on the U.S. economy. There is I think
a growing knowledge that it is no longer enough just to buy
American; we have to sell American products and services
throughout the world, and that is playing an increasingly
important part of our economy.
Some of our U.S. companies can access those markets from
here. Many find, to be competitive and to meet the consumer
demand, they have to engage in other countries.
When they do, they discover that the U.S. is one of a very
few nations that has a worldwide taxing system versus a
territorial local taxing system, and so we have put in place
over the years a number of elements to try to keep businesses
competitive. For example, allowing them to deduct the foreign
taxes that they pay in that country, or not taxing them until
they repatriate, bring back those dollars or dividends here to
the United States.
Yesterday, the President unveiled an international tax
reform package that severely limits those deductions on double
taxation, and would tax immediately much of that income. It is
under the claim of closing corporate loopholes and tax evasion,
all of which we support, but I believe there are significant
unintended consequences to that type of effort.
There is a distinction between tax evasion and tax
competitiveness. I don't want you to weigh in on tax policy. I
have learned you are not going to anyway, but there are some I
think who want to rush this legislation through. And given the
embarrassment of the AIG bonus legislation and other examples
where Congress has rushed to a judgment, given the complexity
of the international tax code, given the competitiveness
issues, is it important for Congress to thoroughly examine all
of these international tax proposals, to make sure that we
thoroughly understand what the impact could be, both on jobs
here at home, and our ability to compete overseas?
Chairman Bernanke. Well, Congressman, it is hard to
disagree that any complex bill should receive thorough
consideration. The tax law is very complex, certainly, and I
hope that the appropriate Committees will look at this very
carefully.
Representative Brady. Do you see the way we tax
internationally on a global system as a challenge, as we
compete internationally?
Chairman Bernanke. As a general rule, I think we need to
think about international competitiveness as we look at our
corporate tax policies, but I don't have any comment on the
specific proposals from yesterday.
As you say, I don't want to comment on tax policy, anyway,
and I really haven't had a chance to review it, in any case.
Representative Brady. Well, I'm not asking you to but I'm
just trying to get your advice on how Congress ought to look at
a very complicated system, one that probably rivals our
financial system in its complexity, but has huge impacts on our
jobs here at home.
Thank you, Mr. Chairman, thank you, Madam Chairman.
Chairman Bernanke. Certainly.
Chair Maloney. Thank you. Congressman Snyder, for five
minutes.
Representative Snyder. Thank you, Madam Chair. Mr.
Chairman, thank you for staying close to the noon hour here.
I appreciate your comments, by the way, that you said
earlier in response to a question about the fungibility of
money. I think that just because a Special Inspector General
makes a recommendation doesn't necessarily mean that it is the
best way to go about ensuring the success of some of these
institutions.
I would think that we would want all of their products to
be doing well, not just the ones that they would say
specifically to put TARP funds into it. And that is, I think,
the bigger issue, because money is fungible.
I wanted to ask, so much of your activity has been with an
eye to of course the international markets, there was some
apprehension, perhaps not as great now, that protectionism may
rear its head as we are going through this.
What is your view on what you are seeing or hearing from
around the world?
Chairman Bernanke. Well, I am heartened by the
international commitment to avoid protectionism. It was a big
element of the G-20 meetings in London for example, and in the
G-7 meetings and G-20 meetings we just had in Washington.
So it is very, very important to avoid protectionism. It is
important, if possible, to make continued progress on the World
Trade Organization talks, but it is going to be a concern
because people are going to be looking for scapegoats, and
sometimes imports are part of that.
So I think it is very important for all of us. We learn
from history that if we start to block imports, others will do
the same, and we will just all be poorer as a result. And so
maintaining a free and flexible trade system is very important.
Representative Snyder. You have talked about the need for
us to repair our financial system regulation, regulatory
system. You are always very precise in your words, as anyone in
your job would be, but you referred to--you called for the
``gradual repair.'' Why do you use the words, ``gradual
repair'' of the financial system?
Chairman Bernanke. That is referring to the healing taking
place in markets and to our expectation that there won't be an
overnight recovery; it is going to take time for markets to
return to normal. We want to see, perhaps, that there will be
restructuring of securitization instruments and so on; banks to
rebuild their capital; investors to regain confidence, and so
on.
So we expect it to take some time. We hope to see continued
progress. If it is faster, that is great, but we expect it to
be gradual.
Representative Snyder. So your expectation is that there
would not be some grand golden tablets coming from on high that
says this is the regulatory system for the future, let's all
adopt it? It will be more improvements, legislation here,
regulation there, more legislation as months and years go by?
Chairman Bernanke. My use of the word, ``repair,'' was
referring to the conditions in the markets, not so much the
regulation, per se.
Representative Snyder. All right.
Chairman Bernanke. But I do think that good new regulation
will be helpful, but it is so complex and there are so many
issues to be decided, I don't expect that will happen in the
next few months. I am sure it is going to take awhile for the
Congress to come to a satisfactory agreement on this.
Representative Snyder. You, in response to another question
earlier, you talked about your independence and who you get
advice from or don't seek advice from.
There is no legal obstruction, is there, from you seeking
advice from anyone that you want to? I mean, I would assume
that you can pick up the paper and read Federal Reports, and
hear what Secretary Geithner is thinking, and hear what
financial ministers around the world are thinking. There are no
restrictions on who you can pick up the phone and call and say
what do you think about such and such?
Chairman Bernanke. I continually talk to people in
Washington and around the world about how they see the economy
and what their concerns are. Obviously, we want to learn as
much as possible.
But I want to be very clear that we make the decision based
on our own assessment, our own information, and without
recourse or concern about political considerations.
Representative Snyder. Thank you, Mr. Chairman. Thank you,
Madam Chair.
Chair Maloney. Congressman Burgess.
Representative Burgess. Thank you, Mr. Chairman, for
staying with us.
Just one follow up from a hearing we had a couple of weeks
ago with Thomas Hoenig, the president of the Federal Reserve,
who came in and testified and raised some important questions
regarding banks that are Too Big to Fail. He highlighted the
fact that some of the institutions that are Too Big to Fail are
in fact now blocking our path to recovery, and yet we continue
to try to pump funds in to try to turn them around.
In fact, at that hearing we discussed the need to allow the
failure to occur to remove the blockage that is caused by these
institutions.
We are going to have the results of the stress test
revealed at some point, I presume, this week. Just the stress
tests themselves have the potential to adversely affect the
banks involved, and we all recognize that and recognize why you
have been so careful with the release of that information. But
providing an additional six months' time to recapitalize
stressed institutions seems to ignore the points raised by the
president of the Kansas Federal Reserve, President Hoenig, and
potentially we are just moving this problem further down the
road. What if six months is not enough time for them to
recapitalize? Do we then just postpone having to deal with the
problem of having these banks that need to fail still being
propped up?
Chairman Bernanke. Again, the first recourse that they will
have over the six months is private sector capital, and that is
going to be an interesting test to see what they can do with
the government capital as a backstop.
I do not disagree at all with President Hoenig's basic
premise, which is that too-big-to-fail is a big problem, and
that companies that fail should be allowed to go bankrupt. I
agree with that in principle.
The problem is that, as I tried to explain, our current
laws do not allow a safe and sound unwinding of one of these
companies, which is something we have learned to our great
regret and chagrin in this episode. I do not think we have the
tools to do it today, or tomorrow, but I do think that going
forward there are a number of steps we can take. Not just a
resolution regime, but other things we can do to strengthen our
system so that if a firm does fail, the system as a whole will
still remain resilient.
So I agree one hundred percent, we have to solve this
problem. I do not think that means that we can start letting
firms fail tomorrow, but we have to take a number of important
steps so that in the future, whenever you come to this kind of
situation, there will be a safe and sound way to unwind a
failing firm that does not bring down big parts of the
financial system with it.
Representative Burgess. Let me ask you a question. The only
experience that I can draw on is that that I endured back in
the late 1980s in the State of Texas. We lost all the savings
and loans overnight. Our oil prices collapsed overnight. Real
estate prices followed them down. Loans were suddenly
undercapitalized. Loans that our businesses had were
undercapitalized and we either had to come up with a lot of
capital or we failed. Families had to tighten belts and do
without.
I just do not see that occurring to that degree currently.
And I guess my question is: Contractions occur as a part of the
normal course of an economy. And if we have a contraction in
the economy that we do not allow to occur, like these banks
that are Too Big to Fail that we are propping up, and we do not
allow the contraction in the economy to occur, are we in fact
setting ourselves up for buying more pain later down the road
by not allowing the economy the opportunity to right itself?
It was very painful what we went through in Texas, and I
would not minimize that. I would not wish that on anyone. But
we got through it and we had 25 or 30 years of sustained
economic growth in the area, and really we were about a year
behind the rest of the country on the advent of this recession
because of some of what the effect of the energy prices last
summer were.
So just that as a general question to close us out.
Chairman Bernanke. Certainly. I understand your point very
well, but there is a critical difference between the bank or
savings and loans in Texas and a multi-national holding
company, or insurance holding company today. Congress put
together in 1991 the FIDICA Act, with prompt corrective action
and other rules which allow the FDIC, or in the old days, the
Savings & Loan Corporation, to come in and, in a well-designed
way, seize the bank, pay off the depositors, sell the assets,
and do that all in a way which is understood, orderly and does
not create a broader crisis.
And of course I should say that the FDIC is only applied to
relatively smaller firms in most case. The trouble is we do not
have a comparable system for dealing with these very complex,
large, multi-dimensional financial holding companies, and it is
exactly that kind of system that I am asking for.
If we could get a system like that, then we can address the
problem exactly the way you would like us to address it.
Representative Burgess. And again, as you point out, that
is an enormously complex undertaking. I was a little taken
aback in President Obama's speech a week ago when he said we
would have that, he would sign that bill before the end of the
year. To the best of my knowledge, no one is actually working
on that yet. So that is one of those things like you told
Congressman Brady, that requires an enormous amount of thought
and careful evaluation throughout the process.
So I hope with some of the things we will do in this
committee that we can shed some light on that process, as well.
Thank you, Mr. Chairman.
Chair Maloney. Thank you. The gentleman's time has expired.
I would like to thank Chairman Bernanke for testifying
today and giving us a stronger understanding of the economic
outlook. The meeting is adjourned.
Chairman Bernanke. Thank you.
Chair Maloney. Thank you.
[Whereupon, at 12:08 p.m., Tuesday, May 5, 2009, the
hearing was adjourned.]
SUBMISSIONS FOR THE RECORD
Prepared Statement of Representative Carolyn B. Maloney, Chair
I want to welcome Dr. Ben Bernanke, the Chairman of the Federal
Reserve, and thank you for your testimony here today.
I cannot think of a person better able to help us understand what
is happening in the real economy and in the financial sector.
Our hearing today on the economic outlook is timely for many
reasons. It is no secret that the real economy still faces substantial
headwinds.
The recession that began in December 2007 has still not run its
course. Real GDP contracted at a 6.1 percent annual rate in the first
quarter of this year and it is widely expected that the BLS will report
large monthly job losses again this Friday.
In testimony before this committee last week, Dr. Christina Romer,
the Chair of the President's Council of Economic Advisers, said that
she expects GDP to contract during the second quarter.
But there are some indications of potential improvement in the
economy. Consumer confidence is up, and the decline in house prices has
moderated slightly.
Nonetheless, the dismal GDP and job loss numbers underscore the
wisdom of the American Recovery and Reinvestment Act (ARRA) that
Congress passed and President Obama signed into law in his first 30
days in office.
The recovery measures are just starting to work their way into the
economy, and will provide a much needed boost to demand. Without these
measures the depth of the contraction would be much deeper, and the
recovery would take far longer.
We will be very interested to hear the Federal Reserve's view about
the near term prospects for economic growth and job creation.
Developments in the real economy are of course strongly affected by
conditions in the financial sector.
The failure of major financial institutions and the disruption of
credit markets has taken a toll on business and consumer confidence,
and made it difficult for businesses and households to fund everyday
economic activity.
The Federal Reserve--in collaboration with the Treasury and the
FDIC--has taken an extraordinary series of measures to preserve
financial stability and to restore the proper functioning of key credit
markets.
These measures have prevented a financial crisis from becoming
something far worse, and we are grateful for your leadership.
How far we have come in restoring normal functioning to the
financial system, and what remains to be done are key questions.
We all understand that a successful recovery in the real economy
requires healthy banks and credit markets.
Not surprisingly, we are all eagerly awaiting the final results of
the ``stress tests'' on the nation's 19 biggest banks, which have been
postponed until Thursday.
The diagnosis delivered by regulators will provide a road map for
restoring confidence in these institutions. Determining the capital
needs of our largest banks is a critical step toward restoring
financial stability that I hope will bring us closer to turning the
corner on this crisis.
Additionally, Chairman Bernanke, I am grateful for your leadership
in ushering in new rules to prevent unfair or deceptive practices with
respect to credit card accounts. The relevant agencies received a
tremendous response of more than 66,000 comments on the rules,
including written comments from tens of thousands of individual
consumers.
These rules are very similar to the bill we passed in the House
last year and last week. Your support for doing away with these
deceptive practices has provided momentum that I hope will push the
legislation through the Senate and on to the President's desk.
Lastly, I want to commend you for establishing greater transparency
at the Fed. To be sure, there are fewer ``secrets of the temple''
today, but I know you will appreciate that we must continue to work to
strike a better balance between institutional interests and the
public's right to know how their money is being spent.
Chairman Bernanke, we thank you for your testimony and I look
forward to working with you as the committee continues our focus on
fixing the economy, putting people back to work, and helping struggling
families.
__________
Prepared Statement of Senator Sam Brownback, Ranking Minority
Thank you Chairwoman Maloney for arranging today's hearing and
thank you Chairman Bernanke for testifying today about the economic
outlook.
Our economy is in the midst of a serious recession and many
Americans are suffering from job losses, home losses, and uncertainty
about their retirement savings, their jobs, and their children's
future. Unfortunately, in addition, our financial system remains a
problem.
Just last week, we learned that the economy contracted at a 6.1%
annualized rate in the first quarter, on the heels of a 6.3% rate of
decline in the fourth quarter of last year. Since the beginning of the
recession in December 2007, job losses have totaled 5.1 million, with
3.3 million of those losses having occurred in just the past five
months. We are poised for the longest recession in the post-World War
II period, and we are by no means out of the woods yet.
Given the severity of the economic downturn that we face, and
efforts already under way to try to offset the downturn, I believe that
the last things we want to do is raise taxes and add uncertainty to the
economic and financial environments. Unfortunately, that is happening.
Taxes on small business will go up. Taxes on capital income will go
up. Many Americans, including retirees living partly on dividend
income, will see their taxes go up and values of their portfolios hurt.
Under a cap-and-trade scheme to generate higher prices on anything
produced using carbon, taxes will go up for everyone. And we are
learning this week of the administration's plans to limit the ability
of companies to defer tax payments on overseas earnings, which will
limit the ability of U.S. companies to compete and will likely lead to
job losses here in the U.S.
In addition to the prospect of higher taxes, many businesses are in
a precautionary mode, fearful of expanding their operations once the
economy recovers and fearful of adding jobs to their payrolls. Some of
that fear comes because they are uncertain about what will be the cost
of carbon under a cap-and-trade scheme and what will be the cost of
providing health care benefits given the administration's intentions to
move toward greater government control of the health-care system.
With the administration's budget outline, we are adding trillions
of deficit-financed Federal government spending, which adds trillions
to our Nation's debt. The Congressional Budget Office (CBO) estimates
that in the first six months of this fiscal year, the Federal deficit
is running at over $950 billion. For all of 2009, the Administration
will likely need to borrow around $2 trillion. And debt held by the
public is projected by the CBO to rise from 41 percent of the gross
domestic product in 2008 to around 54 percent in 2011. These are
staggering sums and staggering amounts as a share of our total economy;
we have not seen such a run-up in deficits and debt since World War II.
Eventually, of course, the debt has to be paid off, meaning higher
taxes for our children and grandchildren.
I am concerned about overreach by the administration on expanding
the size of government and setting up costly and most likely
inefficient programs that will stay with us forever and be paid for by
hard working Americans. I am concerned about years and years of
trillion dollar deficits and a piling up of our debt, pushing us to a
tipping point where our international creditors lose confidence in
investing in the United States. I am concerned that we are moving from
a housing bubble to a government-debt bubble. And, I am concerned that
we do not have a concrete plan for addressing losses in the financial
system and confronting and resolving the problem of ``too big to
fail.''
Kansas City Fed President Hoenig testified before this committee
that, in his words, too big to fail has failed. He has advocated that
we stare losses in the financial system in the face and take decisive
action on big financial institutions that are in trouble. In his view,
we have the tools to resolve and break up large, overleveraged,
insolvent banks and we should get to work using them. I am interested
in your thoughts on Mr. Hoenig's perspective.
I am also concerned about increasing inter-linkages between the
Federal Reserve and Treasury. I compliment you, Chairman Bernanke, for
your creativity in helping to thaw frozen credit channels by creating a
number of innovative lending and asset-purchase programs to help steer
credit to where it is needed the most. However, I have a concern about
the increasing alliance of the Fed and Treasury.
As examples, I note that: Treasury deposited around $500 billion
into a ``supplementary financing account'' at the Fed; Treasury and the
Fed have combined forces to set up the Term Asset-Backed Securities
Loan Facility, or TALF, to ``leverage'' TARP funds through the Fed; and
the Fed is now purchasing longer-term Treasury securities in attempts
to bring long-term interest rates down.
My concern is that the increasing alliance between the fairly
independent Federal Reserve and the Treasury risks the injection of
politics into decisions about how credit is allocated by the Federal
Reserve and risks political influence in money growth and inflation.
Ultimately, such an alliance risks the independence of the Federal
Reserve. And, historically, we have seen instances in which Fed and
Treasury alliances did not work out well, such as the period beginning
in World War II and until March 1951 when the Treasury compelled the
Fed to essentially peg Treasury security yields. That alliance required
that the Fed and Treasury strike an ``Accord'' to strengthen the Fed's
independence. It is essential that the Fed's lending and asset
acquisitions respect the integrity and isolation of fiscal policy and
minimize risks of political entanglements involving Fed credit
allocations.
__________
Prepared Statement of Representative Kevin Brady, Senior House
Republican
I am pleased to join in welcoming Chairman Bernanke before the
Committee this morning.
The bursting of the credit and housing bubbles has thrown the
economy into a severe recession, destroyed millions of jobs, and wiped
out the savings of many Americans. Government policy mistakes,
excessive leverage, and weak underwriting standards by financial
institutions contributed to the current downturn.
The recently released minutes of the March 17-18 Federal Open
Market Committee (FOMC) indicate that the Fed staff has reduced its
projections for economic growth for the second half of 2009 and for
2010. This underscores the fact that economic reality is inconsistent
with the relatively optimistic economic projections the Administration
used in its budget and that understate its true cost. Deficit spending
and federal debt are out of control. When is the Congress going to
acknowledge that current fiscal trends are unsustainable?
Last week, the Financial Times reported that the IMF now estimates
that U.S. losses on toxic assets will be $1.9 trillion over the next
five years. The recently adopted Congressional budget resolution
ignored these costs entirely in setting budget policy for 2010. How
expensive will the bank cleanup be, and will its costs be hidden from
the taxpayers?
There is widespread agreement that a sustained economic recovery
cannot occur without an effective bank cleanup in place. The
Administration has put forth a financial rescue plan, but many of its
components are very troubling. Serious problems with the Public-Private
Investment Program (PPIP) were identified by Special Inspector General
Neil Barofsky in testimony before this committee on April 23.
According to his quarterly report, ``Many aspects of PPIP could
make it inherently vulnerable to fraud, waste, and abuse.'' The
vulnerabilities identified in his report include conflicts of interest,
collusion, and money laundering. He also noted as problematic the
enormous size of the program and the degree of leverage so ``that the
taxpayer risk is many times that of the private parties, thereby
potentially skewing the economic incentives.'' Will the Treasury
recognize these problems and move quickly to correct them?
The extraordinary actions taken by the Federal Reserve during the
financial crisis have bewildered many of my constituents and left them
wondering how the Federal Reserve's policies will affect their economic
well-being. Small businesses in Texas report that they are having a
tough time finding affordable credit because regulators are pressing
banks to avoid risk. Has the pendulum swung too far in this direction?
To prevent a downward debt-deflation-default spiral, the Federal
Reserve has expanded its balance sheet from $946 billion in September
2008 to $2.1 trillion last week. While this explosive growth does not
pose an immediate inflationary danger, the Federal Reserve will need to
begin contracting its balance sheet when the economy begins to recover.
What is the Federal Reserve's exit strategy to wind down its emergency
credit facilities and reduce excess bank reserves to prevent higher
inflation? And have these extraordinary credit facilities diminished
the Federal Reserve's autonomy in setting monetary policy?
Many experts have suggested that the Federal Reserve should become
the systemic risk regulator for all U.S. financial institutions, not
just banks and their holding companies. Is the Federal Reserve capable
and ready to perform this function?
The decisions made during the current turmoil will affect financial
institutions and markets for decades. Yet, there has been little
discussion among policymakers about how the financial system should
function after the crisis abates. What changes in laws or regulations
should be made to optimize the future performance of our financial
system? Should securitization and the shadow banking system play as
large of a role in financial intermediation as they did prior to the
crisis? What should be the role, if any, for Fannie Mae and Freddie
Mac?
Mr. Chairman, I look forward to your testimony and answers to some
of these important questions.
__________
Prepared Statement of Ben S. Bernanke, Chairman, Board of Governors,
Federal Reserve System
Chair Maloney, Vice Chairman Schumer, Ranking Members Brownback and
Brady, and other members of the Committee, I am pleased to be here
today to offer my views on recent economic developments, the outlook
for the economy, and current conditions in financial markets.
recent economic developments
The U.S. economy has contracted sharply since last autumn, with
real gross domestic product (GDP) having dropped at an annual rate of
more than 6 percent in the fourth quarter of 2008 and the first quarter
of this year. Among the enormous costs of the downturn is the loss of
some 5 million payroll jobs over the past 15 months. The most recent
information on the labor market--the number of new and continuing
claims for unemployment insurance through late April--suggests that we
are likely to see further sizable job losses and increased unemployment
in coming months.
However, the recent data also suggest that the pace of contraction
may be slowing, and they include some tentative signs that final
demand, especially demand by households, may be stabilizing. Consumer
spending, which dropped sharply in the second half of last year, grew
in the first quarter. In coming months, households' spending power will
be boosted by the fiscal stimulus program, and we have seen some
improvement in consumer sentiment. Nonetheless, a number of factors are
likely to continue to weigh on consumer spending, among them the weak
labor market and the declines in equity and housing wealth that
households have experienced over the past two years. In addition,
credit conditions for consumers remain tight.
The housing market, which has been in decline for three years, has
also shown some signs of bottoming. Sales of existing homes have been
fairly stable since late last year, and sales of new homes have firmed
a bit recently, though both remain at depressed levels. Although some
of the boost to sales in the market for existing homes is likely coming
from foreclosure-related transactions, the increased affordability of
homes appears to be contributing more broadly to the steadying in the
demand for housing. In particular, the average interest rate on
conforming 30-year fixed-rate mortgages has dropped almost 1\3/4\
percentage points since August, to about 4.8 percent. With sales of new
homes up a bit and starts of single-family homes little changed from
January through March, builders are seeing the backlog of unsold new
homes decline--a precondition for any recovery in homebuilding.
In contrast to the somewhat better news in the household sector,
the available indicators of business investment remain extremely weak.
Spending for equipment and software fell at an annual rate of about 30
percent in both the fourth and first quarters, and the level of new
orders remains below the level of shipments, suggesting further near-
term softness in business equipment spending. Recent business surveys
have been a bit more positive, but surveyed firms are still reporting
net declines in new orders and restrained capital spending plans. Our
recent survey of bank loan officers reported further weakening of
demand for commercial and industrial loans.\1\ The survey also showed
that the net fraction of banks that tightened their business lending
policies stayed elevated, although it has come down in the past two
surveys.
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\1\ Board of Governors of the Federal Reserve System (2009), The
April 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices
(Washington: Board of Governors, May 4), www.federalreserve.gov/
boarddocs/SnLoanSurvey/200905.
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Conditions in the commercial real estate sector are poor. Vacancy
rates for existing office, industrial, and retail properties have been
rising, prices of these properties have been falling, and,
consequently, the number of new projects in the pipeline has been
shrinking. Credit conditions in the commercial real estate sector are
still severely strained, with no commercial mortgage-backed securities
(CMBS) having been issued in almost a year. To try to help restart the
CMBS market, the Federal Reserve announced last Friday that recently
issued CMBS will in June be eligible collateral for our Term Asset-
Backed Securities Loan Facility (TALF).\2\
---------------------------------------------------------------------------
\2\ Board of Governors of the Federal Reserve System (2009),
``Federal Reserve Announces Expansion of Eligible Collateral under Term
Asset-Backed Securities Loan Facility (TALF),'' press release, May 1,
www.federalreserve.gov/newsevents/press/monetary/20090501a.htm.
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An important influence on the near-term economic outlook is the
extent to which businesses have been able to shed the unwanted
inventories that they accumulated as sales turned down sharply last
year. Some progress has been made; the Bureau of Economic Analysis
estimates that an acceleration in inventory liquidation accounted for
almost one-half of the reported decline in real GDP in the first
quarter. As stocks move into better alignment with sales, a reduction
in the pace of inventory liquidation should provide some support to
production later this year.
The outlook for economic activity abroad is also an important
consideration. The steep drop in U.S. exports that began last fall has
been a significant drag on domestic production, and any improvement on
that front would be helpful. A few indicators suggest, again quite
tentatively, that the decline in foreign economic activity may also be
moderating. And, as has been the case in the United States, investor
sentiment and the functioning of financial markets abroad have improved
somewhat.
As economic activity weakened during the second half of 2008 and
prices of energy and other commodities began to fall rapidly,
inflationary pressures diminished appreciably. Weakness in demand and
reduced cost pressures have continued to keep inflation low so far this
year. Although energy prices have recently risen some, the personal
consumption expenditure (PCE) price index for energy goods and services
in March remained more than 20 percent below its level a year earlier.
Food price inflation has also continued to slow, as the moderation in
crop and livestock prices has been passing through to the retail level.
Core PCE inflation (prices excluding food and energy) dropped below an
annual rate of 1 percent in the final quarter of 2008, when retailers
and auto dealers marked down their prices significantly. In the first
quarter of this year, core consumer price inflation moved back up, but
to a still-low annual rate of 1.5 percent.
the economic outlook
We continue to expect economic activity to bottom out, then to turn
up later this year. Key elements of this forecast are our assessments
that the housing market is beginning to stabilize and that the sharp
inventory liquidation that has been in progress will slow over the next
few quarters. Final demand should also be supported by fiscal and
monetary stimulus. An important caveat is that our forecast assumes
continuing gradual repair of the financial system; a relapse in
financial conditions would be a significant drag on economic activity
and could cause the incipient recovery to stall. I will provide a brief
update on financial markets in a moment.
Even after a recovery gets under way, the rate of growth of real
economic activity is likely to remain below its longer-run potential
for a while, implying that the current slack in resource utilization
will increase further. We expect that the recovery will only gradually
gain momentum and that economic slack will diminish slowly. In
particular, businesses are likely to be cautious about hiring, implying
that the unemployment rate could remain high for a time, even after
economic growth resumes.
In this environment, we anticipate that inflation will remain low.
Indeed, given the sizable margin of slack in resource utilization and
diminished cost pressures from oil and other commodities, inflation is
likely to move down some over the next year relative to its pace in
2008. However, inflation expectations, as measured by various household
and business surveys, appear to have remained relatively stable, which
should limit further declines in inflation.
conditions in financial markets
As I noted, a sustained recovery in economic activity depends
critically on restoring stability to the financial system. Conditions
in a number of financial markets have improved in recent weeks,
reflecting in part the somewhat more encouraging economic data.
However, financial markets and financial institutions remain under
considerable stress, and cumulative declines in asset prices, tight
credit conditions, and high levels of risk aversion continue to weigh
on the economy.
Among the markets that have recently begun to function a bit better
are the markets for short-term funding, including the interbank markets
and the commercial paper market. In particular, concerns about credit
risk in those markets appear to have receded somewhat, there is more
lending at longer maturities, and interest rates have declined. The
modest improvement in funding conditions has contributed to diminished
use of the Federal Reserve's liquidity facilities for financial
institutions and of our commercial paper facility. The volume of
foreign central bank liquidity swaps has also declined as dollar
funding conditions have eased.
The issuance of asset-backed securities (ABS) backed by credit
card, auto, and student loans all picked up in March and April, and ABS
funding rates have declined, perhaps reflecting the availability of the
Federal Reserve's TALF facility as a market backstop. Some of the
recent issuance made use of TALF lending, but lower rates and spreads
have facilitated issuance outside the TALF as well.
Mortgage markets have responded to the Federal Reserve's purchases
of agency debt and agency mortgage-backed securities, with mortgage
rates having fallen sharply since last fall, as I noted earlier. The
decline in mortgage rates has spurred a pickup in refinancing as well
as providing some support for housing demand. However, the supply of
mortgage credit is still relatively tight, and mortgage activity
remains heavily dependent on the support of government programs or the
government-sponsored enterprises.
The combination of a broad rally in equity prices and a sizable
reduction in risk spreads in corporate debt markets reflects a somewhat
more optimistic view of the corporate sector on the part of investors,
and perhaps some decrease in risk aversion. Bond issuance by
nonfinancial firms has been relatively strong recently. Still, spreads
over Treasury rates paid by both investment-grade and speculative-grade
corporate borrowers remain quite elevated. Investors seemed to adopt a
more positive outlook on the condition of financial institutions after
several large banks reported profits in the first quarter, but readings
from the credit default swap market and other indicators show that
substantial concerns about the banking industry remain.
As you know, the federal bank regulatory agencies began conducting
the Supervisory Capital Assessment Program in late February. The
program is a forward-looking exercise intended to help supervisors
gauge the potential losses, revenues, and reserve needs for the 19
largest bank holding companies in a scenario in which the economy
declines more steeply than is generally anticipated. The simultaneous
comprehensive assessment of the financial conditions of the 19
companies over a relatively short period of time required an
extraordinary coordinated effort among the agencies.
The purpose of the exercise is to ensure that banks will have a
sufficient capital buffer to remain strongly capitalized and able to
lend to creditworthy borrowers even if economic conditions are worse
than expected. Following the announcement of the results, bank holding
companies will be required to develop comprehensive capital plans for
establishing the required buffers. They will then have six months to
execute those plans, with the assurance that equity capital from the
Treasury under the Capital Assistance Program will be available as
needed.
federal reserve transparency
I will conclude with a few comments on Federal Reserve
transparency. The Federal Reserve remains committed to transparency and
openness and, in particular, to keeping the Congress and the public
informed about its lending programs and balance sheet. As you may know,
we have created a separate section of our website devoted to providing
data, explanations, and analyses bearing on these topics and related
issues.\3\ Recent postings include the annual financial statements of
the 12 Federal Reserve Banks, the Board of Governors, and the limited
liability companies created in 2008 in response to risks to the
financial system, as well as the most recent reports to the Congress on
our emergency lending programs.
Earlier this year I asked Vice Chairman Kohn to lead a review of
our disclosure policies, with the goal of increasing the range of
information that we make available to the public. The group has been
making substantial progress, and I am pleased to say that we will soon
be adding to the website material that provides the information
requested in the Dodd-Shelby amendment to the recent budget resolution.
Specifically, we will be adding new tables that provide information on
the number of borrowers under each program and more information on the
details of the credit extended, including measures of the
concentrations of credit among borrowers. In addition, we will be
providing monthly information on the collateral that is being taken
under our various lending programs, including breakouts by types of
collateral and by ratings categories. And we will be supplementing
information provided on the valuation of collateral for the Maiden Lane
facilities and the Commercial Paper Credit Facility. Finally, we will
be providing additional information on the extent of our contracting
with private firms with respect to our lending programs as well as on
the terms and nature of such contracts. Over time, we expect to
continue to expand the range of information on our website as our
review of disclosure practices proceeds.
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\3\ ``Credit and Liquidity Programs and the Balance Sheet,'' a
section of the Board's website, is available at www.federalreserve.gov/
monetarypolicy/bst.htm.
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Thank you. I will be pleased to respond to your questions.
__________
FOR IMMEDIATE RELEASE
May 5, 2009
Contact: Brian Fallon (Schumer)
202-224-7433
SCHUMER DEMANDS ANSWERS FROM BERNANKE AT HEARING AFTER FED REJECTS PUSH
TO FREEZE RATES ON EXISTING CREDIT CARD BALANCES
schumer, dodd had written to bernanke last month urging rule banning
retroactive rate hikes to be enacted immediately
senator calls decision ``unconscionable''; calls excuse for not acting
``nonsense''
WASHINGTON, DC--U.S. Senator Charles E. Schumer (D-NY) planned to
fiercely quiz Federal Reserve Chairman Ben Bernanke at a Joint Economic
Committee hearing Tuesday morning after the Fed rejected a proposal by
Schumer and Senate Banking Chairman Christopher Dodd to immediately
stop credit card issuers from slapping customers with rate increases on
existing balances.
``The Federal Reserve's failure to protect consumers from these
outrageous rate increases is unconscionable,'' Schumer said. ``The Fed
has acted swiftly to use its emergency powers to steady teetering
financial institutions. It is fair to ask why they won't use the same
powers to aid American families who are at just as great a risk.''
In a letter to Bernanke and other regulators last month, Schumer
and Dodd proposed that the Fed speed up implementation of a rule that
would ban retroactive rate hikes on existing balances. That rule,
already approved by the Fed, is not slated to take effect until July
2010, giving companies more than a year to raise rates on consumers
preemptively to get under the deadline. Schumer and Dodd said the Fed
should invoke its emergency powers to make the rule effective
immediately. Both Senators said they had heard complaints from
constituents who have seen their rates double or even triple almost
overnight and without explanation.
But in a letter Schumer received late yesterday, the Fed announced
it would not speed up the rule's enactment. The Fed stated it was
unclear if the rate hikes were in anticipation of the upcoming
implementation of these rules or if they were due to bank losses in the
current economy. Schumer blasted that logic on Tuesday, noting ``under
either scenario, the Fed has given the green light to banks to take
advantage of American families.''
The Senate will be considering a major credit card reform bill
later this month. Schumer is a co-sponsor of the legislation.