[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
STATE OF THE ECONOMY: VIEW FROM THE FEDERAL RESERVE
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, JUNE 9, 2010
__________
Serial No. 111-26
__________
Printed for the use of the Committee on the Budget
Available on the Internet:
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COMMITTEE ON THE BUDGET
JOHN M. SPRATT, Jr., South Carolina, Chairman
ALLYSON Y. SCHWARTZ, Pennsylvania PAUL RYAN, Wisconsin,
MARCY KAPTUR, Ohio Ranking Minority Member
XAVIER BECERRA, California JEB HENSARLING, Texas
LLOYD DOGGETT, Texas SCOTT GARRETT, New Jersey
EARL BLUMENAUER, Oregon MARIO DIAZ-BALART, Florida
MARION BERRY, Arkansas MICHAEL K. SIMPSON, Idaho
ALLEN BOYD, Florida PATRICK T. McHENRY, North Carolina
JAMES P. McGOVERN, Massachusetts CONNIE MACK, Florida
NIKI TSONGAS, Massachusetts JOHN CAMPBELL, California
BOB ETHERIDGE, North Carolina JIM JORDAN, Ohio
BETTY McCOLLUM, Minnesota DEVIN NUNES, California
JOHN A. YARMUTH, Kentucky ROBERT B. ADERHOLT, Alabama
ROBERT E. ANDREWS, New Jersey CYNTHIA M. LUMMIS, Wyoming
ROSA L. DeLAURO, Connecticut, STEVE AUSTRIA, Ohio
CHET EDWARDS, Texas GREGG HARPER, Mississippi
ROBERT C. ``BOBBY'' SCOTT, Virginia CHARLES K. DJOU, Hawaii
JAMES R. LANGEVIN, Rhode Island
RICK LARSEN, Washington
TIMOTHY H. BISHOP, New York
GWEN MOORE, Wisconsin
GERALD E. CONNOLLY, Virginia
KURT SCHRADER, Oregon
DENNIS MOORE, Kansas
Professional Staff
Thomas S. Kahn, Staff Director and Chief Counsel
Austin Smythe, Minority Staff Director
C O N T E N T S
Page
Hearing held in Washington, DC, June 9, 2010..................... 1
Hon. John M. Spratt, Jr., Chairman, Committee on the Budget.. 1
Prepared statement of.................................... 2
Hon. Paul Ryan, Ranking Minority Member, Committee on the
Budget..................................................... 3
Hon. Ben S. Bernanke, Chairman, Board of Governors of the
Federal Reserve System..................................... 5
Prepared statement of.................................... 8
Responses to questions submitted for the record.......... 58
Hon. Marcy Kaptur, a Representative in Congress from the
State of Ohio:
Study, dated April 16, 2010, by the Congressional
Research Service....................................... 36
Pew Financial Reform Project briefing paper: ``The Cost
of the Financial Crisis: The Impact of the September
2008 Economic Collapse''............................... 39
Questions for the record................................. 58
Hon. Robert B. Aderholt, a Representative in Congress from
the State of Alabama, questions for the record............. 57
STATE OF THE ECONOMY: VIEW
FROM THE FEDERAL RESERVE
----------
WEDNESDAY, JUNE 9, 2010
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10:10 a.m. in room
210, Cannon House Office Building, Hon. John Spratt [chairman
of the committee] presiding.
Present: Representatives Spratt, Schwartz, Kaptur, Doggett,
Tsongas, Etheridge, McCollum, Yarmuth, DeLauro, Edwards, Scott,
Langevin, Bishop, Connolly, Schrader, Moore, Ryan, Hensarling,
Garrett, Diaz-Balart, Simpson, Jordan, Aderholt, Lummis,
Austria, and Djou.
Chairman Spratt. We meet today to discuss the progress of
the economic recovery and the challenges that still lie ahead
of us. We are pleased, as I said, to have as our witness today
the Chairman of the Federal Reserve system, Dr. Ben Bernanke.
When the 111th Congress began and the current
administration took office, the economy was shrinking,
contracting at an annualized rate of minus 5.4 percent. One
year and a half later, the economy is experiencing its third
straight quarter of economic growth, including 5.6 percent
growth in the fourth quarter of 2009 and 3 percent growth in
the first quarter of 2010. We have a chart to illustrate that.
A year and a half ago, the economy was losing jobs,
hemorrhaging jobs. In the month of January 2009, we lost
779,000 jobs in one month alone. Now employers have added
nearly a million jobs between January and May of this year. We
have a chart that shows the job growth over the last span of
time.
The ultimate strength of our economy lies in the private
sector of course, but the actions taken by this Congress and by
the administration have also played a significant role. For
example, in the judgment of CBO, the Recovery Act, which we
passed in July and February of 2009, has contributed
significantly to the economic turnaround, raising real GDP by
1.7 to 4.2 percentage points in the fourth quarter of 2010 and
increasing employment by between 1.2 million and 2.8 million
jobs.
Meanwhile, the Treasury Department, the Federal Reserve,
and the FDIC have engaged in unprecedented and coordinated
efforts to stabilize banks and the financial system by
injecting liquidity, capital, securing people's savings and
requiring banks to raise still more capital.
While we as Democrats have been focused on the economic
recovery, we have also been aware of the need to restore fiscal
responsibility. We want to see the economy and the budget
recover ``pari passu,'' step by step.
Unlike the previous administration, which inherited a $5.6
trillion surplus over 10 years and turned it into large
deficits, the current administration was handed a $1.3 trillion
deficit for 2010 alone and an $8 trillion deficit over the next
10 years.
While the recession and recovery efforts have taken an
unavoidable toll on the budget in the short run, we are focused
on bringing the deficit down as the economy recovers. We passed
statutory PAYGO, requiring that new mandatory spending on
revenue reductions be paid for. The President has established a
bipartisan commission now at work to make recommendations to
bring the deficit down to a sustainable level by 2015. The
President has also proposed to freeze nonsecurity discretionary
spending for 3 years.
Last month I introduced a bill to add to our fiscal tool
box, an additional tool called expedited rescission which
allows the President to sign a bill into law but at the same
time recommend to us in the Congress the elimination of some
items in the bill that have a budgetary cost.
We will continue to pursue these and other steps towards
fiscal responsibility so that over the medium and long term we
put the Nation on a fiscal path that will provide a foundation
for a strong economy in the future. At the same time, the key
concern in the short term remains the economic outlook.
As we continue to work on additional legislation to address
the situation, we are fortunate to have Chairman Bernanke here
to present his testimony and respond to our questions. Most
fundamentally at a time when too many Americans continue to
feel the effects of this recession and wonder when relief is
going to come, we would like to hear Dr. Bernanke's view of how
the recovery is progressing and what steps we can take, what
constructive steps the government can take, to maximize the
return of sustained economic strength.
Before we turn to Chairman Bernanke's testimony, I would
like to extend a warm welcome to the newest member of the
Budget Committee, Congressman Charles Djou from Hawaii. Welcome
aboard. We are glad to have you on the committee. You were
sworn in last month as the newest member of the House and we
welcome him to Congress and in particular to the Budget
Committee.
Before Dr. Bernanke's testimony, let me also turn to the
ranking member, Mr. Ryan, for any statement he may care to make
for an opening purpose. Mr. Ryan.
[The statement of Mr. Spratt follows:]
Prepared Statement of Hon. John M. Spratt, Jr., Chairman,
Committee on the Budget
We convene today to discuss the progress of the economic recovery
and the challenges that lie ahead. We are pleased to have as our
witness the Chairman of the Board of Governors of the Federal Reserve
System.
This economic crisis has profoundly affected the lives of so many
Americans, and the task of restoring the strength of our economy and
putting in place a foundation for enduring prosperity has been and
remains at the top of the priority list for Congress and the
Administration.
While everyone agrees that more progress must be made, there
clearly has been some noticeable improvement from where things stood a
year and a half ago. When the 111th Congress began and the current
Administration took office, the economy was shrinking at a 5.4 percent
annualized rate; a year and a half later, the economy has experienced
its third straight quarter of economic growth--including 5.6 percent
growth in the fourth quarter of 2009 and 3.0 percent growth in the
first quarter of 2010. A year and a half ago, the economy was
hemorrhaging jobs--losing 779,000 jobs in January 2009 alone. Now,
employers have added nearly 1 million jobs through between January and
May of this year.
The ultimate strength of our economy lies in the private sector--
our businesses and workers--but the actions taken by this Congress and
this Administration have also played an important role. For example, in
the judgment of the nonpartisan Congressional Budget Office, the
Recovery Act passed in February 2009 has contributed significantly to
the economic turnaround, raising real GDP by 1.7 to 4.2 percentage
points in the first quarter of 2010, and increasing employment by
between 1.2 million and 2.8 million jobs. Meanwhile, the Treasury
Department, the Federal Reserve, and the FDIC have engaged in
unprecedented and coordinated efforts to stabilize banks and the
financial system by injecting liquidity, securing people's savings, and
requiring banks to raise more capital.
While Democrats have been focused on economic recovery, we have
also been cognizant of the need to restore fiscal responsibility.
Unlike the previous Administration, which inherited a $5.6 trillion
ten-year surplus and turned it into large deficits, the current
Administration was handed a $1.3 trillion deficit for 2010 and an $8
trillion ten-year deficit. While the recession and recovery efforts
take an unavoidable toll on the budget in the short run, we are focused
on bringing the deficit down as the economy recovers.
We have passed statutory Pay-As-You-Go rule into law--to require
that new mandatory spending or revenue reductions be paid for. We have
passed a health care reform bill that reduces the deficit. The
President has established a bipartisan commission--which is now hard at
work--to make recommendations to bring the deficit down to a
sustainable level by 2015. The President has proposed to freeze non-
security discretionary spending for three years. Last month I
introduced a bill to add to our fiscal toolbox an additional tool
called ``expedited rescission,'' which allows the President to sign a
bill into law but at the same time recommend that Congress eliminate
some items included in the bill that have a budgetary cost.
We will continue to pursue these and other steps toward fiscal
responsibility so that over the medium and long term, we put the nation
on a fiscal path that will provide the foundation for a strong economy
in the future. At the same time, the key concern in the short term
remains the economic outlook. As we continue to work on additional
legislation to address the economic situation, we are fortunate to have
Chairman Bernanke here to present his testimony and answer our
questions.
Most fundamentally, at a time when too many Americans continue to
feel the lingering effects of the recession, we would like to hear your
view of how the recovery is progressing, and what constructive steps
can be taken to maximize the return of sustained economic strength.
Before we turn to Chairman Bernanke's testimony, I would first like
to extend a warm welcome to the newest member of the Budget Committee,
Congressman Charles Djou from Hawaii. He was sworn in last month as the
newest Member of the House of Representatives, and we welcome him to
the Congress and to our Committee.
Before the witness's testimony, let me also turn to the Ranking
Member, Mr. Ryan, for any statement that he may wish to make.
Mr. Ryan. Thank you, Mr. Chairman. And thank you for
opening this hearing. I too want to start off by welcoming our
newest member, Congressman Charles Djou of Hawaii. We look
forward to working with you to tackle our fiscal and economic
challenges. And it is exciting to see you and your family here
and being sworn into Congress. And we are really looking
forward to working with you. Welcome to the Nation's capital.
And welcome to you, Chairman Bernanke. It is appropriate
you are coming here before our committee today to talk about
the state of the economy because the health of the U.S. and
global economy is increasingly intertwined with the budget and
our fiscal issues that we deal with here in this committee.
Over the past few months we have watched as a sovereign
debt crisis in Europe has boiled into a real troubling problem.
We are seeing that the continent's economic recovery is being
threatened and we see even global financial stability in
general is being threatened. In some ways, we are seeing a
replay of a similar dynamic which impaired global financial
markets in 2008. The fear then was the systemic exposure to bad
mortgage-related assets, but the fear now is driven by exposure
to sovereign credit and the possibility of a debt-induced
economic slump.
Ominously, interbank lending rates, like LIBOR, are on the
rise and credit spreads have widened as investors have become
much more risk averse. Volatility is up and the stock market is
down. What we are watching in real-time is the rough justice of
the marketplace and the severe economic turmoil that can be
inflicted on profligate countries mired in debt. At the moment,
the U.S. is at the periphery of the European debt crisis and
has even reaped some short-term benefits like lower long-term
interest rates as a result of the renewed global flight to
safety.
But Americans are left to wonder. Could we one day find
ourselves at the epicenter of such a crisis? Could a European
style debt crisis one day happen right here in the United
States? The answer is undoubtedly yes. And the sad truth is
that inaction by policymakers to change our fiscal course is
hastening this day of reckoning.
A brief look at the budget numbers shows that our current
fiscal situation and its trajectory going forward is very dire.
The budget deficit this year stands at $1.5 trillion, or just
over 10 percent of GDP. Under the President's budget, the
budget we are living under right now, the CBO tells us that the
level of U.S. debt will triple by the end of the decade,
meaning that in just a few short years, the U.S. is poised to
join that group of troubled countries whose public debt absorbs
a large and growing share of their economic output. A fiscal
crisis in the U.S. is no longer an economic hypothetical but a
clear and present risk to our economy, to society's most
vulnerable citizens, and America's standing in the world.
As the example of Greece has shown, market forces and
investor sentiment do not offer countries the luxury of time
and delayed promises to get their fiscal house in order. Empty
rhetoric is no substitute for results. Foreigners now own
roughly half of the U.S. publicly held debt and their
willingness to fund our borrowing at record low interest rates
will not continue forever. The size of our current and future
funding needs makes us quite vulnerable to a shift in market
sentiment and higher than expected interest rates. The
reemergence of the bond vigilantes and exposure to the rough
justice of the marketplace would certainly make our bad fiscal
situation even worse.
The main point here is the need for policymakers to
reassure credit markets that the U.S. is engaged in charting a
clear course back to sustainable deficit and debt levels soon.
It is clear to me that this means reining in government
spending, not simply ramping up taxes. In particular, we need
to reform our entitlement programs, which threaten to grow
themselves right into extinction, collapse our safety net,
overwhelm the entire Federal budget and sink the economy in the
process. The budding sovereign debt problems in other parts of
the world provide us with a great cautionary tale that it is
always best to take action to shore up budget deficits before
market forces demand it.
So what has this Congress and administration done to
respond? Two new entitlement programs and no budget. The
majority's failure to even offer a budget and its commitment to
continue spending money we don't have, creating brand new
entitlements and plunging our Nation deeper into debt tells me,
and tells the bond markets more importantly, that Washington
still doesn't recognize the severity of our fiscal and economic
challenges.
I look forward to your testimony today, Chairman Bernanke,
and remain hopeful that policymakers will heed your warnings
and chart a sustainable course to avert the next crisis. Thank
you.
Chairman Spratt. Now, before turning to the Chairman for
his comments, let me ask unanimous consent that all members be
allowed to submit an opening statement for the record at this
point. Without objection, so ordered.
Dr. Bernanke, we welcome you before the committee. You have
filed your testimony. We will make it part of the record. You
can summarize it as you see fit. But you are the only witness
today and we encourage you to take your time in responding and
elaborating on the questions presented to you.
Thank you again for coming. The floor is yours.
STATEMENT OF HON. BEN S. BERNANKE, CHAIRMAN,
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Bernanke. Chairman Spratt, Ranking Member Ryan and
other members of the committee, I am pleased to have this
opportunity to offer my views on current economic and financial
conditions and on issues pertaining to the Federal budget.
The recovery and economic activity that began in the second
half of last year has continued at a moderate pace so far this
year. Moreover, the economy, supported by stimulative monetary
policy and a concerted effort of policymakers to stabilize the
financial system, appears to be on track to continue to expand
through this year and next. The latest economic projections of
Federal Reserve Governors and Reserve Bank presidents, which
were made near the end of April, anticipate that real gross
domestic product will grow in the neighborhood of 3-\1/2\
percent over the course of 2010 as a whole and at a somewhat
faster pace next year. If this pace of growth were to be
realized, it would probably be associated with only a slow
reduction in the unemployment rate over time. In this
environment, inflation is likely to remain subdued.
Although the support to economic growth and fiscal policy
is likely to diminish in the coming year, the incoming data
suggests that gains in private final demand will sustain the
recovery in economic activity. Real consumer spending has risen
at an annual rate of nearly 3\1/2\ percent so far this year,
with particular strength in the highly cyclical category or
durable goods. Consumer spending is likely to increase at a
moderate pace going forward, supported by a gradual pickup in
employment and income, greater consumer confidence, and some
improvement in credit conditions.
In the business sector, real outlays for equipment and
software posted another solid gain in the first quarter and the
increases were more broadly based than in late 2009. The
available indicators point to continued strength in the second
quarter. Looking forward, investment in new equipment and
software is expected to be supported by healthy corporate
balance sheets, relatively low cost of financing of new
projects, increased confidence in the durability of the
recovery, and the need of many businesses to replace aging
equipment and expand capacity as sales prospects brighten. More
generally, U.S. manufacturing output, which has benefited from
strong export demand, rose at an annual rate of 9 percent over
the first 4 months of this year.
At the same time, significant restraints on the pace of the
recovery remain. In the housing market, sales and construction
have been temporarily boosted lately by the home buyer tax
credit. But looking through these temporary movements,
underlying housing activity appears to have firmed only a
little since mid-2009, with activity being weighed down in part
by a large inventory of distressed or vacant and existing
houses and by the difficulties of many builders in obtaining
credit. Spending on nonresidential buildings also is being held
back by high vacancy rates, low property prices, and strained
credit conditions. Meanwhile, pressures on State and local
budgets, though tempered somewhat by ongoing Federal support,
have led these governments to make further cuts in employment
and construction spending.
As you know, the labor market was hit particularly hard by
the recession, but we have begun to see some modest improvement
recently in employment, hours of work, and labor income.
Payroll employment rose by 431,000 in May, but that figure
importantly reflected an increase of 411,000 in hiring for the
decennial consensus. Private payroll employment has risen an
average of 140,000 per month for the past 3 months and
expectations of both businesses and households about hiring
prospects have improved since the beginning of the year. In all
likelihood, however, a significant amount of time will be
required to restore the nearly 8\1/2\ million jobs that were
lost over 2008 and 2009.
On the inflation front, recent data continue to show a
subdued rate of increases in consumer prices. For the 3 months
ending in April, the price index for personal consumption
expenditures rose at an annual rate of just \1/2\ percent, as
energy prices declined and the index excluding food and energy
rose at an annual rate of about 1 percent. Over the past 2
years, overall consumer prices have fluctuated in response to
large swings in energy and food prices. But aside from these
volatile components, a moderation in inflation has been clear
and broadly based over this period. To date, long-run inflation
expectations have been stable, with most survey-based measures
remaining within the narrow range that have prevailed for the
past few years. Measures based on nominal index Treasury yields
have decreased somewhat of late, but at least part of these
declines reflect market responses to changes in the financial
situation in Europe, to which I now turn.
Since late last year, market concerns have mounted over the
ability of Greece and a number of other euro-area countries to
manage their sizeable budget deficits and high levels of public
debt. By early May, financial strains had increased
significantly as investors focused on several interrelated
issues, including whether the fiscally stronger euro-area
governments would provide financial support to the weakest
members, the extent to which euro-area growth would be slowed
by efforts of fiscal consolidation, and the extent of exposure
of major European financial institutions to vulnerable
countries.
U.S. financial markets have been roiled in recent weeks by
these developments, which have triggered a reduction in demand
for risky assets. Broad equity market indexes have declined and
implied volatility has risen considerably. Treasury yields have
fallen as much as 50 basis points since late April, primarily
as a result of safe-haven flows that boosted the demand for
Treasury securities. Corporate spreads have widened over the
same period and some issuance of corporate bonds have been
postponed, especially by speculative grade issuers.
In response to these concerns, European leaders have put in
place a number of strong measures. Countries under stress have
committed to address their fiscal problems. A major assistance
package has been established jointly by the European Union and
the International Monetary Fund for Greece. To backstop near-
term financing needs of its members more generally, the EU has
established a European financial stabilization mechanism with
up to 500 billion euros in funding, which could be used in
tandem with significant bilateral support from the IMF. EU
leaders are also discussing proposals to tighten surveillance
of members' fiscal performance and improve the design of the
EU's fiscal support mechanisms.
In addition, to address strains in European financial
markets, the European Central Bank has begun purchasing debt
securities in markets that it sees as malfunctioning. It has
resumed auctions of 3 and 6-month loans of euros in unlimited
quantities to borrowers with appropriate collateral. To help
ease strains in U.S. dollar funding markets, the Federal
Reserve has reestablished temporary U.S. dollar liquidity swap
lines with the ECB and other major central banks. To date,
drawings under these swap lines remain quite limited and far
below their peaks reached at the height of the financial crisis
in late 2008, but they are nevertheless providing an important
backstop for the functioning of dollar funding markets. More
generally, our ongoing international cooperation sends an
important signal to global financial markets that we will take
the actions necessary to ensure stability and continued
economic recovery.
The actions taken by European leaders represent a firm
commitment to resolve the prevailing stresses and restore
market confidence and stability. If markets continue to
stabilize, then the effects of the crisis on economic growth in
the United States seem likely to be modest. Although the recent
fall in equity prices and weaker economic prospects in Europe
will leave some imprint on the U.S. economy, offsetting factors
include declines in interest rates and Treasury bonds and home
mortgages, as well as lower prices for oil and some other
globally traded commodities. The Federal Reserve will remain
highly attentive to developments abroad and to their potential
effects on the U.S. economy.
Ongoing developments in Europe point to the importance of
maintaining sound government finances. In many ways, the United
States enjoys a uniquely favored position. Our economy is
large, diversified, and flexible; our financial markets are
deep and liquid; and as I have mentioned, in the midst of
financial turmoil, global investors have viewed Treasury
securities as a safe haven. Nevertheless, history makes clear
that failure to achieve fiscal sustainability will over time
sap the Nation's economic vitality, reduce our living
standards, and greatly increase the risk of economic and
financial instability.
Our Nation's fiscal position has deteriorated appreciably
since the onset of the financial crisis and the recession. The
exceptional increase in the deficit has in large part reflected
the effects of the weak economy on tax revenues and spending,
along with the necessary policy actions taken to ease the
recession and steady financial markets. As the economy and
financial markets continue to recover and as the actions taken
to provide economic stimulus and promote financial stability
are phased out, the budget deficit should narrow over the next
few years.
Even after economic and financial conditions have returned
to normal, however, in the absence of further policy actions,
the Federal budget appears to be on an unsustainable path. A
variety of projections that extrapolate current policies and
make plausible assumptions about the future evolution of the
economy show a structural budget gap that is both large
relative to the size of the economy and increasing over time.
Among the primary forces putting upward pressure on the
deficit is the aging of the U.S. population, as the number of
people expected to be working and paying taxes into various
programs is rising more slowly than the number of people
projected to receive benefits. Notably this year, about 5
individuals are between the ages of 20 and 64 for each person
age 65 or older. By the time most of the baby boomers have
retired in 2030, this ratio is projected to have declined to
around 3. In addition, government expenditures in health care
for both retirees and non-retirees have continued to rise
rapidly as increases in the cost of care have exceeded
increases in incomes. To avoid sharp disruptive shifts in
spending programs and tax policies in the future and to retain
the confidence of the public in the markets, we should be
planning now how we will be meeting these looming budgetary
challenges.
Achieving long-term fiscal sustainability will be
difficult, but unless we as a nation make a strong commitment
to fiscal responsibility in the longer run, we will have
neither financial stability nor healthy economic growth. Thank
you, Mr. Chairman. I am happy to take your questions.
[The prepared statement of Ben Bernanke follows:]
Prepared Statement of Hon. Ben S. Bernanke, Chairman,
Board of Governors of the Federal Reserve System
Chairman Spratt, Ranking Member Ryan, and other members of the
Committee, I am pleased to have this opportunity to offer my views on
current economic and financial conditions and on issues pertaining to
the federal budget.
the economic outlook
The recovery in economic activity that began in the second half of
last year has continued at a moderate pace so far this year. Moreover,
the economy--supported by stimulative monetary policy and the concerted
efforts of policymakers to stabilize the financial system--appears to
be on track to continue to expand through this year and next. The
latest economic projections of Federal Reserve Governors and Reserve
Bank presidents, which were made near the end of April, anticipate that
real gross domestic product (GDP) will grow in the neighborhood of 3\1/
2\ percent over the course of 2010 as a whole and at a somewhat faster
pace next year.\1\ This pace of growth, were it to be realized, would
probably be associated with only a slow reduction in the unemployment
rate over time. In this environment, inflation is likely to remain
subdued.
---------------------------------------------------------------------------
\1\ See ``Summary of Economic Projections,'' an addendum to the
April Federal Open Market Committee minutes, available at Board of
Governors of the Federal Reserve System (2010), ``Minutes of the
Federal Open Market Committee, April 27-28, 2010,'' press release, May
19, www.federalreserve.gov/newsevents/press/monetary/20100519a.htm.
---------------------------------------------------------------------------
Although the support to economic growth from fiscal policy is
likely to diminish in the coming year, the incoming data suggest that
gains in private final demand will sustain the recovery in economic
activity. Real consumer spending has risen at an annual rate of nearly
3\1/2\ percent so far this year, with particular strength in the highly
cyclical category of durable goods. Consumer spending is likely to
increase at a moderate pace going forward, supported by a gradual
pickup in employment and income, greater consumer confidence, and some
improvement in credit conditions.
In the business sector, real outlays for equipment and software
posted another solid gain in the first quarter, and the increases were
more broadly based than in late 2009; the available indicators point to
continued strength in the second quarter. Looking forward, investment
in new equipment and software is expected to be supported by healthy
corporate balance sheets, relatively low costs of financing of new
projects, increased confidence in the durability of the recovery, and
the need of many businesses to replace aging equipment and expand
capacity as sales prospects brighten. More generally, U.S.
manufacturing output, which has benefited from strong export demand,
rose at an annual rate of 9 percent over the first four months of the
year.
At the same time, significant restraints on the pace of the
recovery remain. In the housing market, sales and construction have
been temporarily boosted lately by the homebuyer tax credit. But
looking through these temporary movements, underlying housing activity
appears to have firmed only a little since mid-2009, with activity
being weighed down, in part, by a large inventory of distressed or
vacant existing houses and by the difficulties of many builders in
obtaining credit. Spending on nonresidential buildings also is being
held back by high vacancy rates, low property prices, and strained
credit conditions. Meanwhile, pressures on state and local budgets,
though tempered somewhat by ongoing federal support, have led these
governments to make further cuts in employment and construction
spending.
As you know, the labor market was hit particularly hard by the
recession, but we have begun to see some modest improvement recently in
employment, hours of work, and labor income. Payroll employment rose by
431,000 in May, but that figure importantly reflected an increase of
411,000 in hiring for the decennial census. Private payroll employment
has risen an average of 140,000 per month for the past three months,
and expectations of both businesses and households about hiring
prospects have improved since the beginning of the year. In all
likelihood, however, a significant amount of time will be required to
restore the nearly 8\1/2\ million jobs that were lost over 2008 and
2009.
On the inflation front, recent data continue to show a subdued rate
of increase in consumer prices. For the three months ended in April,
the price index for personal consumption expenditures rose at an annual
rate of just \1/2\ percent, as energy prices declined and the index
excluding food and energy rose at an annual rate of about 1 percent.
Over the past two years, overall consumer prices have fluctuated in
response to large swings in energy and food prices. But aside from
these volatile components, a moderation in inflation has been clear and
broadly based over this period. To date, long-run inflation
expectations have been stable, with most survey-based measures
remaining within the narrow ranges that have prevailed for the past few
years. Measures based on nominal and indexed Treasury yields have
decreased somewhat of late, but at least part of these declines reflect
market responses to changes in the financial situation in Europe, to
which I now turn.
developments in europe
Since late last year, market concerns have mounted over the ability
of Greece and a number of other euro-area countries to manage their
sizable budget deficits and high levels of public debt. By early May,
financial strains had increased significantly as investors focused on
several interrelated issues, including whether the fiscally stronger
euro-area governments would provide financial support to the weakest
members, the extent to which euro-area growth would be slowed by
efforts at fiscal consolidation, and the extent of exposure of major
European financial institutions to vulnerable countries.
U.S. financial markets have been roiled in recent weeks by these
developments, which have triggered a reduction in demand for risky
assets: Broad equity market indexes have declined, and implied
volatility has risen considerably. Treasury yields have fallen as much
as 50 basis points since late April, primarily as a result of safe-
haven flows that boosted the demand for Treasury securities. Corporate
spreads have widened over the same period, and some issuance of
corporate bonds has been postponed, especially by speculative-grade
issuers.
In response to these concerns, European leaders have put in place a
number of strong measures. Countries under stress have committed to
address their fiscal problems. A major assistance package has been
established jointly by the European Union (EU) and the International
Monetary Fund (IMF) for Greece. To backstop near-term financing needs
of its members more generally, the EU has established a European
Financial Stabilization Mechanism with up to 500 billion euros in
funding, which could be used in tandem with significant bilateral
support from the IMF. EU leaders are also discussing proposals to
tighten surveillance of members' fiscal performance and improve the
design of the EU's fiscal support mechanisms.
In addition, to address strains in European financial markets, the
European Central Bank (ECB) has begun purchasing debt securities in
markets that it sees as malfunctioning, and has resumed auctions of
three- and six-month loans of euros in unlimited quantities to
borrowers with appropriate collateral. To help ease strains in U.S.
dollar funding markets, the Federal Reserve has reestablished temporary
U.S. dollar liquidity swap lines with the ECB and other major central
banks. To date, drawings under these swap lines remain quite limited
and far below their peaks reached at the height of the financial crisis
in late 2008, but they are nevertheless providing an important backstop
for the functioning of dollar funding markets. More generally, our
ongoing international cooperation sends an important signal to global
financial markets that we will take the actions necessary to ensure
stability and continued economic recovery.
The actions taken by European leaders represent a firm commitment
to resolve the prevailing stresses and restore market confidence and
stability. If markets continue to stabilize, then the effects of the
crisis on economic growth in the United States seem likely to be
modest. Although the recent fall in equity prices and weaker economic
prospects in Europe will leave some imprint on the U.S. economy,
offsetting factors include declines in interest rates on Treasury bonds
and home mortgages as well as lower prices for oil and some other
globally traded commodities. The Federal Reserve will remain highly
attentive to developments abroad and to their potential effects on the
U.S. economy.
fiscal sustainability
Ongoing developments in Europe point to the importance of
maintaining sound government finances. In many ways, the United States
enjoys a uniquely favored position. Our economy is large, diversified,
and flexible; our financial markets are deep and liquid; and, as I have
mentioned, in the midst of financial turmoil, global investors have
viewed Treasury securities as a safe haven. Nevertheless, history makes
clear that failure to achieve fiscal sustainability will, over time,
sap the nation's economic vitality, reduce our living standards, and
greatly increase the risk of economic and financial instability.
Our nation's fiscal position has deteriorated appreciably since the
onset of the financial crisis and the recession. The exceptional
increase in the deficit has in large part reflected the effects of the
weak economy on tax revenues and spending, along with the necessary
policy actions taken to ease the recession and steady financial
markets. As the economy and financial markets continue to recover, and
as the actions taken to provide economic stimulus and promote financial
stability are phased out, the budget deficit should narrow over the
next few years.
Even after economic and financial conditions have returned to
normal, however, in the absence of further policy actions, the federal
budget appears to be on an unsustainable path. A variety of projections
that extrapolate current policies and make plausible assumptions about
the future evolution of the economy show a structural budget gap that
is both large relative to the size of the economy and increasing over
time.
Among the primary forces putting upward pressure on the deficit is
the aging of the U.S. population, as the number of persons expected to
be working and paying taxes into various programs is rising more slowly
than the number of persons projected to receive benefits. Notably, this
year about 5 individuals are between the ages of 20 and 64 for each
person aged 65 or older. By the time most of the baby boomers have
retired in 2030, this ratio is projected to have declined to around 3.
In addition, government expenditures on health care for both retirees
and non-retirees have continued to rise rapidly as increases in the
costs of care have exceeded increases in incomes. To avoid sharp,
disruptive shifts in spending programs and tax policies in the future,
and to retain the confidence of the public and the markets, we should
be planning now how we will meet these looming budgetary challenges.
Achieving long-term fiscal sustainability will be difficult. But
unless we as a nation make a strong commitment to fiscal
responsibility, in the longer run, we will have neither financial
stability nor healthy economic growth.
Chairman Spratt. Thank you. We have just come through the
worst recession since the Great Depression, and we seem to have
turned the corner. Looking back, if we had not taken the
extraordinary steps that we took, starting with the TARP
solicitation by the Bush administration, the Recovery Act by
the Obama administration and many other fiscal and monetary
steps in between, where would we be now? Do you think that
those steps have been vindicated by events?
Mr. Bernanke. Yes, Mr. Chairman, I do. We and other
countries around the world took strenuous measures in the fall
of 2008 to avert the collapse of the global financial system
and to restore appropriate functioning to global financial
markets. It took a while for that to work, but currently
financial markets are in much better shape obviously than they
were a year and a half ago. Monetary and fiscal policy have
been quite supportive and also added to growth. So we see at
this point a moderate recovery, not as fast as we would like,
but certainly we have averted what I think would have been,
absent those interventions, an extraordinarily severe downturn
and perhaps a great depression.
Chairman Spratt. Could you have dealt with that problem
with monetary policy alone? With the countercyclical efforts
that we took, would monetary policy by itself have been
sufficient?
Mr. Bernanke. Sufficient depends on your comparison of cost
and benefits. But I think that the fiscal policy, based on what
we know about previous episodes of fiscal policy and the
analysis we have been able to do, that it did increase growth
and add to job creation.
Chairman Spratt. You seem to acknowledge in your testimony
that we have turned the corner. It appears that we have,
pulling out of the recession, back on a path to growth. But you
also will see a need for accommodative monetary policy for some
months to come. Does that indicate that you are concerned about
a double dip, about the possibility of a relapse?
Mr. Bernanke. Mr. Chairman, forecasting is very difficult
and I can make no promises in any particular direction. But it
appears to us that the recovery has made an important
transition from being supported primarily by inventory dynamics
and by fiscal policy toward recovery being led now more by
private final demand, including consumer spending. That is
encouraging in terms of the sustainability. So our current most
likely outlook is that the economy will continue to recover at
a moderate pace. Of course a double dip can never be entirely
ruled out, of course. But right now our expectation is that the
economy will continue to grow at around a 3 to 4 percent pace
this year.
Chairman Spratt. If I open the mics up--and we will before
the hearing is over--to each member, each member here could
give you some anecdotal accounts, some compelling accounts of a
creditworthy constituent who has not been able to find credit.
What have we got to do to get credit moving and flowing in this
country again? Because the growth rate depends critically, I
think, on having adequate capital in the form of borrowable
money.
Mr. Bernanke. Mr. Chairman, that is also a top priority for
the Federal Reserve. Our stabilization, our work with the
financial markets has restored something close to normal
functioning in the public capital markets, the securities
markets. So larger firms who have access to the commercial
paper market, the corporate bond market, the equity market have
been able to raise funding as needed. And in addition, they
have pretty liquid balance sheets. Problems still remain for
smaller firms that are dependent on banks because banks,
although they have stabilized, are continuing to be very
conservative in their lending policies.
The Federal Reserve, I would be happy to talk about this in
quite a bit of detail if time permits. But very briefly, the
Federal Reserve has been working very closely with the banks
and with the examiners and with small business--I was just at a
conference on this last week in Detroit--trying to make sure
that the banks are able to lend to all creditworthy borrowers
and they are not being excessively conservative or denying good
borrowers access to credit.
Chairman Spratt. Are you satisfied that that message is
getting down to the regulators and the examiners in particular?
Mr. Bernanke. I am never satisfied. I am sure that there
are examples that we could point to where that is not
happening. But we have made a very substantial effort in terms
of training, in terms of conference calls, in terms of repeated
exhortation to our examiners that it is very important to work
with the banks to make sure that creditworthy borrowers are not
turned away.
The banks themselves have undertaken a number of steps. For
example, a number of banks have undertaken so-called second-
look programs where loans that have been denied in the first
round application are given a second look to see if perhaps
there might be other circumstances that might justify the loan.
Chairman Spratt. Until recently, the Fed was buying
mortgages in the secondary market, creating a market itself.
You have stopped doing that now. What is the role of Freddie
Mac and Fannie Mae as we go forward with the recovery?
Mr. Bernanke. Mr. Chairman, currently we are kind of in a
transition period. As you know, Freddie and Fannie are in
conservatorship. They are playing a very important role at the
moment in providing a source of securitization for home
mortgages. The private label mortgage backed security market is
pretty much nonfunctional. Going forward, though, we need to
get to a more sustainable situation. And I would be happy to
talk about alternative models of reform. But I think everybody
agrees that the current situation, the status quo, is not a
sustainable one. We are going to need to reform those
institutions going forward.
Chairman Spratt. One final question. As you look back and
bring your view up until recently, we have seen catastrophe
after catastrophe occur that was not really fully appreciated
or fully foreseen at that period in time, the euro is a good
example, the failure of major institutions in 2008 and 2009 is
another good example. Are the Fed and then the other monetary
authorities, financial institution authorities in the Federal
Government, do you think that you need a better distant early
warning system, something that would give you a better lead
time in recognition of events, incipient events that are about
to turn critical?
Mr. Bernanke. There are multiple dimensions about how to
address this, and the financial regulatory reform legislation
attempts to look at all the components. First, we need to have
a better oversight of the system and more macro prudential or
systemic approach to regulation that will allow us to identify
gaps and problems before they lead to a crisis. That is part of
the philosophy underlying the creation of a Systemic Risk
Council and giving the Federal Reserve consolidated supervision
over large, systemically critical firms.
Secondly, we need to make the system more resilient so that
when crises occur it will be more stable. We are doing that
through a wide variety of mechanisms, including increased
capital requirements, increased liquidity requirements, efforts
to make derivatives trading more transparent and the like.
And thirdly, if a crisis does occur, we need the tools to
manage it. And there, very importantly, Congress has been
working on alternative mechanisms for safely winding down,
putting in receivership a large systemically critical firm so
that it can fail without bringing down the rest of the system.
So those are three dimensions of our response I think we
are making progress towards. We will never eliminate financial
crises, but we need to make sure that they are much less
frequent, that they are less virulent and they have less effect
on the economy.
Chairman Spratt. Thank you very much.
Mr. Ryan.
Mr. Ryan. Thank you, Chairman. It is good to have you back.
Sovereign CDS spreads have driven back upwards in recent weeks.
Some countries' bond yields, I think Spain and Italy, reached
fresh highs this week. And the European funding markets are
still pretty tight. In your opinion, is the ECB doing
everything it needs to do from a policy action standpoint to
stem this crisis? How do you gauge the risk of contagion with
this crisis spilling over? And what is the endgame if
conditions get worse?
Mr. Bernanke. This is a joint effort of a number of
European authorities, including the European Union, the
European Commission, and the ECB. It is a complicated problem
because there are a number of countries that have difficult
fiscal situations. The concern is that those countries cannot
manage their fiscal positions on their own and that there might
potentially be contagion to other countries or potentially to
the banking system.
So those are the concerns that are being faced. I am
encouraged by the response of the Europeans. Although they lack
the central fiscal authority that the United States has, they
have understood the importance of cooperation and they have put
together some very substantial programs including, as you know,
a 500 billion euro stabilization mechanism that will stand
behind countries on the periphery that need assistance in
meeting their fiscal obligations, together with the IMF also
providing substantial bilateral assistance. The goals of those
programs--and they are quite substantial--will be to make sure
that these countries are able to meet their obligations and to
achieve fiscal sustainability.
I think the markets remain uncertain about whether these
measures will be successful. That is why you are still seeing a
lot of volatility in the markets. What I can assure you of is
that the European leadership is fully committed to addressing
this problem, preserving the euro zone and preserving the
European Union. And they are working, I think, very
aggressively right now to try to establish some effective
solutions.
Mr. Ryan. Let us go over the monetary policy and global
currency policy. The ECB is essentially engaged in quantitative
easing. I know that they would argue that that is not per se
their policy objective, but their objective is obviously
liquidity for sovereign credit markets. The Federal Reserve has
been engaged in a similar process lately. So we have now two
reserve currencies engaged in a quantitative easing, the spirit
of a quantitative easing policy. Gold hit an all-time high
yesterday, which I think most people would view as a vote of no
confidence against fiat currencies. I am interested in what
does that price signal tell you and what is your view on the
long-term repercussions with respect to weak currency policies?
I suppose one could argue that we don't have a weak dollar
because everybody else is so much weaker. But with this kind of
quantitative easing policy in place, we have sort of removed
one of the firewalls that have separated our monetary and
fiscal policy and that has probably changed investor
impressions looking into the future with respect to the
stability and strength of our currency. What is your view on
that?
Mr. Bernanke. The signal that gold is sending is in some
ways very different from what other asset prices are sending.
For example, the spread between nominal and inflation index
bonds, the breakeven remains quite low, suggests that markets
expect about 2 percent inflation over the next 10 years. Other
commodity prices have fallen quite severely, including oil
prices and food prices. So gold is out there doing something
different from the rest of the commodity group. I don't fully
understand the movements in the gold price, but I do think that
there is a great deal of uncertainty and anxiety in financial
markets right now and some people believe that holding gold
will be a hedge against the fact that they view many other
investments as being risky and hard to predict at this point.
Mr. Ryan. I think most people would agree that we don't
have an inflation problem right now at our doorstep, that you
could actually make an argument for disinflation or deflation
as being potentially a risk. I am curious as to what do you
look at to gauge inflation? It looks like you are really on
this output gap model. You are using tip spreads, you are using
consumer surveys. What leading indicators do you look at to
inform your view on the future possibility of inflation? And
how much do you put stock in those leading indicators?
Mr. Bernanke. Well, you pointed to a number of them.
Certainly we look at resource utilization and price and wage
pressure, which is very low right now. With the increases in
productivity we are seeing, unit labor costs are actually
declining. So firms are finding that their labor costs are
actually falling rather than rising. Inflationary expectations
are very, very important. And we take some comfort from the
fact that as measured through a variety of mechanisms they have
been quite stable. And we look broadly at the economy, at
commodity prices and a variety of other indicators to see what
markets are anticipating. So it is a very eclectic process.
I guess what I would like to say is that even though we
have indeed expanded our balance sheet, as you know and
understand, I have given some testimonies in the last few
months where I have laid out in some detail how we can exit
from those extraordinary policies as needed, when needed
without leaving any monetary or inflationary bias in the
system. So we are comfortable that we have those tools.
Mr. Ryan. And the new tool you have is the ability to pay
interests on reserves. My concern with this tool--and I just
want to get your take on this--is we are talking about a credit
crunch that our constituents are facing right now, especially
if you are talking about rolling over the vintage of commercial
real estate paper and the fact that people can't get their
loans from their community banks. So there is a credit crunch
right now. When you go in and charge interest on reserves to
mop up the money supply once the velocity starts moving, it
seems to me that you are just going to precipitate another
credit crunch on top in order to mop up inflation. What is to
make us think that we are not going to have tighter credit when
the time comes around for your policy actions to be reversed?
Mr. Bernanke. Congressman, it is exactly the same situation
under any monetary policy tightening. When the Federal Reserve
thinks that the economy is growing at more than a sustainable
pace, it begins to raise interest rates precisely to reduce the
demand for credit and to give an alternative to loans. So it is
just the same as in any monetary----
Mr. Ryan. So we are looking at a tight credit period for
quite some time it seems to me.
Mr. Bernanke. Well, except that the pace and degree of our
tightening will depend on what we see is necessary to get the
economy on a sustainable growth path.
Mr. Ryan. Let us get to the growth, and this will be my
last question. If my numbers are correct, the economy needs to
create 250,000 jobs per month every month for 5 years straight
if we want to get back to pre-recession unemployment levels. It
is an incredible amount of job creation that is necessary. We
can't keep taking the census every year. That is once every 10
years. So as the inevitable pullback on the spending occurs,
the government spending occurs, and hopefully the kind of
hiring of government workers does not keep on its pace because
that involves other liabilities. Do you have confidence that
the private sector will pick up the slack in employment to get
unemployment going down fast? Three to 3\1/2\ percent growth
doesn't strike me as sufficient enough to get back to these
kinds of lower unemployment levels that we have enjoyed in this
country. What is your view on that?
Mr. Bernanke. Congressman, as I said in my testimony, I do
think that private final demand, including exports but also
consumer spending and investment, is taking the baton from
fiscal policy and inventory accumulation to provide some source
of growth. So in that respect, as we all would like to see, the
private sector is beginning to take over this recovery. But at
the same time, there is not much evidence at this point that
the recovery will be robust enough, will be V-shaped enough if
you will, to get us back to historically normal levels of
unemployment in a short period of time. So that is the downside
and the disappointment with this recovery.
Mr. Ryan. Is hitting the economy with higher tax rates on
capital and income, especially for small businesses, going to
help us get that growth up to where we need to go next year?
Mr. Bernanke. We certainly want to get small businesses
healthy and hiring as much as possible. We work, for example,
very hard on credit for small businesses and they are an
important source of job creation.
Chairman Spratt. Before going to Ms. Schwartz, we have been
informed by the Chairman's staff that you have a plane to catch
at 12:30. So I am going to ride the 5-minute space pretty
tightly.
Ms. Schwartz.
Ms. Schwartz. Thank you very much. Thank you, Mr. Chairman,
for your--I do want to follow up on, I think, some of the
questions that have been asked and you have elaborated, and
particularly Mr. Ryan's last set of questions about business
growth, small business growth. We do see, many of us, as the
answer, both in the short-term and the long-term, as growing
jobs in the private sector. And particularly we have focused on
the job growth in a small business. And we have taken a number
of actions that we feel are making a difference. If you want to
comment on some of them. And I wanted to ask you specifically
about lending, for you to elaborate a bit more on small
business lending. We have done investment tax credits,
biotherapeutics, we may do them for biofuels as a way to
incentivize small businesses that don't have assets to be able
to take regular tax credits, can do investment tax credits.
We have extended bonus depreciation for small businesses,
making capital investments. We have increased the cashflow for
small business by providing a 5-year operating loss carryback.
We have actually cut capital gains taxes for investments for
small business, stocks would be extended, small business
expensing. We have actually created tax credits for small
businesses to provide health benefits.
And the President has a new initiative on exports, which
you referenced very briefly on the importance--I will say it is
the importance of expanding our export opportunities,
particularly for small business. We tend not to think about the
opportunities for small businesses to increase their outreach
to the markets in the world and to be able to sell their
products around the world. And there is an initiative the
President has directly endorsed to double that export number.
It is actually really quite small, unlike many other countries.
We are looking in the future in two areas to expand these
investment tax credits as one way to help innovative new
businesses, small businesses that have a hard time accessing
capital.
And I wanted to know what you think of that. Because many
of us do believe that the new technology businesses, some of
them in the energy sector, some of them in the health sector,
but more broadly are really a great growth area for the United
States. We have always been on the cutting edge of innovation
and technology.
And so I would ask you to comment on the actions we have
taken, whether you think we should be continuing those, how
much they have made a difference and will make a difference in
expanding growth, small business growth in particular and we
hope jobs. And secondly to expand on small business lending. We
all hear it. We continue to hear it.
Our concern, as you pointed out, was making sure whether
banks, which is where small businesses go for this lending, are
acting too conservatively. They get mixed messages a bit from
the regulators to say--and we agree that they have to make sure
they have enough capital themselves. But they have got to get
some dollars out the door. We are looking this week at small
business lending legislation that would actually encourage
banks through some Federal dollars to get those dollars out the
door to small businesses.
And again I would highlight the interests we have in growth
areas. Manufacturing, but particularly innovative entrepreneurs
who are out there, want to take these steps and have a hard
time accessing small business lending. Do you want to comment?
I know you try not to comment on legislation, but the access to
capital, what the Federal Government can do to encourage banks
to do this. And again, more that we might be doing or that you
might be able to do to encourage small business growth as one
of the ways out of this difficult economy that I believe we
have stabilized but really has a long way to go to create those
jobs that we all want to see happen.
Mr. Bernanke. You just gave a very good description. Small
business is very important for job creation, particularly in a
cyclical upturn. And I would say that in fact as we think about
small business, we should also keep in mind startup businesses
because they also provide a lot of job creation. So this is a
very important part. It is our concern that too slow of a
response on the small business side is one of the reasons why
job creation is not as quick as we would like it to be. And I
think it is important to try to remove the barriers and
impediments for small business to expand.
You talked about tax policy, you and Mr. Ryan. I agree that
we want to make tax policy as small business friendly as
possible, to provide the right incentives, to give them the
opportunities to invest and hire. Beyond that, though, I think
for them to do that, first they need demand, they need sales.
So we need to keep the economy growing, and the Federal Reserve
is doing its part by maintaining a supportive monetary policy.
But we also need to make sure they get credit. And I agree that
that is very important as well. I am glad the Congress is
exploring these different programs for making credit available.
I think it is very useful to do that. Again from our own
perspective, we have put bank lending and bank credit at the
very top of our priority list and we have increased our
information gathering, we have increased our consultation, we
have increased our training of examiners. Basically we would
like to know--if your constituents are telling you I have been
turned down unfairly, we would like to hear about it. We have a
hotline. We have a Website. Banks who have problems should talk
to the directors of supervision at their local reserve bank. So
we do want to know about it, and we will respond to it. But I
certainly agree with your sentiments of what you said and we
want to do everything we can to get small businesses----
Ms. Schwartz. We look forward to--but I would like to
follow up on the issue of startups. I think it is very hard for
them to actually get a bank to lend to a new entrepreneur, a
new company that is just starting up, the kind of dollars they
might need to get through that first year or so, and how you
assess that risk. So we have to follow up with you, and thank
you for your positive comments.
Chairman Spratt. Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman. Good morning,
Chairman Bernanke. As you well know, Chairman Spratt, Ranking
Member Ryan and myself serve on the President's Fiscal
Responsibility Commission. You testified at our first meeting.
At our second meeting, we received testimony from Dr. Carmen
Reinhart at the University of Maryland, who presented, I
believe, the most exhaustive study of debt crises that I am
aware of, covering 44 nations over 200 years. She has come
across with the conclusion to her study that when nations have
a debt-to-GDP ratio of 90 percent that they will actually lose
economic growth. Her study says, I believe the mean was 1
percentage point. So if your economic growth is averaging 3
percent, it would fall by a third to 2 percent. I think her
study also showed that in the U.S., that in our Nation's
history we actually have received negative economic growth at
those points where debt to GDP has reached 90 percent. By a
back of the envelope calculation, gross debt in the U.S. to GDP
is now 89 percent. I know debt held by the public, I believe,
is closer to 60 percent.
My question is are you familiar with the professor's study?
Are you familiar with her conclusions? Do you agree or
disagree?
Mr. Bernanke. I am familiar with her study, and I would say
that her book with Ken Rogoff on debt crisis and financial
crisis is an extraordinary piece of work that includes analyses
of, as you say, dozens of crises. On this particular issue, I
agree with the general point that as debt increases, interest
rates increase. That tends to make investments more costly, tax
rates go up.
Mr. Hensarling. I am sorry, since time is limited.
Specifically gross debt to GDP of 90 percent where essentially
we are at that tipping point now, do you believe that the U.S.
is at a tipping point with respect to its debt?
Mr. Bernanke. I don't think there is anything magic about
90 percent. However, I do think that if we were to go out as,
say, the CBO's alternative scenario projects, then debt and
interest payments are going to get explosive in 10 or 15 years.
So I think we are close to a situation where we need to be
paying very close attention to our fiscal sustainability.
Mr. Hensarling. In your testimony, you speak about the
European leaders, I think in your written testimony. Quote-
unquote, European leaders have put in place a number of strong
measures, countries under stress have committed to address
their fiscal problems. I think it was yesterday, perhaps the
day before, the new Prime Minister of the U.K. said the state
of Britain's finances were, quote, even worse than we thought
and warned of, quote, painful and unavoidable cuts. Germany's
Chancellor Merkel was quoted as saying Germany faces, quote,
serious difficult times. They announced a rather sizeable group
of spending cuts to deal with their spending crisis, which she
said were necessary for the future of our country.
When I look at Germany's deficit-to-GDP ratio, the U.K.'s
deficit-to-GDP ratio, it seems to be comparable to our own.
When I look at their debt-to-GDP ratio, of Germany and the
U.K., again it appears to be comparable to our own in dealing
with gross debt.
I am just curious, do you appear to be complimenting the
European leaders for taking strong stands, yet do you see
similar strong stands being taken by this particular Congress
to rein in the debt?
Mr. Bernanke. Well, countries have different amounts of
fiscal capacity, if you will. Countries like Greece, which are
clearly being shut out from the market because of their debt
and deficit ratios, need immediate and sharp changes in their
position. The United States, as I said in my remarks, is
favored in that we are a safe-haven currency, we are a large
diversified economy, and we have a long record of paying our
debts, paying our interest. So we have a little more breathing
space potentially, but I don't know exactly how much we have.
And what I am just trying to say--I don't think I am
disagreeing with you--is that we need a program for returning
our trajectory of fiscal policy to a sustainable path.
Mr. Hensarling. Chairman Bernanke, my seconds are ticking
away. Real quickly. Hopefully it is a yes or no question. I
thought I have heard you testify before that not only is it
important to the long-term sustainability that we have a
program to deal with our debt, but it is actually important to
economic growth today to send a signal that we have a plan in
place. Did I understand you correctly? Is it important to have
a plan today?
Mr. Bernanke. You did. A plan in place will help keep
interest rates down and help growth be stronger in the near
term.
Mr. Hensarling. Thank you, Mr. Chairman.
Chairman Spratt. Thank you.
Mr. Doggett.
Mr. Doggett. Thank you for your testimony, Mr. Chairman.
There is a report out today, as you know, that the Federal
Reserve, 6 months into a compensation study of the country's 28
largest banks, has found that many of the bonus and incentive
programs that economists say contributed to the worst financial
crisis since the Depression remain in place. If the remainder
of your study confirms that to be true, will the Fed do
anything about it? Will it act this year rather than letting
another year slip by? And what are some of the policy
alternatives you have to deal with these compensation practices
by our largest banks?
Mr. Bernanke. Absolutely we are going to respond. We did a
series of surveys and questionnaires to try to understand what
the pay practices were and whether they were consistent with
safe and sound banking and good incentive structures. As the
report says, we found that many banks have not modified their
practices from what they were before the crisis. We anticipate
an interagency guidance on this matter within the next few
weeks. So we will be putting out a set of criteria and a set of
expectations very shortly, and we will be pushing the banks to
move as quickly as possible to restructure their compensation
packages so that they will not be engendering excessive risk
taking. We will be doing that very quickly. We hope to have a
public report about this near the end of this year or early
next year. But I want to assure you that the actions we will be
taking will not wait for the report. We will be immediately
working with the banks, and we have been working with the banks
already to get them to modify their compensation practices.
Mr. Doggett. You believe we will see real genuine change in
compensation practices from before this downturn to now, that
people will be able to tell the difference?
Mr. Bernanke. The structure of the compensation practices
needs to change so that there is not an incentive to take
excessive risks. Packages where the trader gets all the upside
and none of the downside, that is the kind of thing we are
trying to get rid of.
Mr. Doggett. What do you believe would be the best estimate
of the dollar cost to the taxpayers of TARP?
Mr. Bernanke. Well, the direct cost for financial
institutions, including AIG, I would say at this point it is
not very large. Except for AIG, every other major institution
has repaid with interest and dividends. And AIG I believe will
repay. So the financial institution part, the direct cost is, I
think, really quite small and may in the end be, in fact, a
profit. That doesn't include some of the other uses to which
TARP was put, such as the automakers support and the
foreclosure program. The Treasury has provided numbers on
those. I think they have an overall cost of about $110 billion
for the program.
Mr. Doggett. Mr. Chairman, Ms. Schwartz made reference to
the Small Business Lending Fund Act, which as you know is
pending here in the House. Without getting into all the details
of the legislation, do you believe that we need to take more
action to assure the flow of credit to small businesses? Are
the efforts that you have described that are underway at the
Fed sufficient?
Mr. Bernanke. Well, I think both the Fed and the Congress
and the administration ought to be looking for new ways to get
credit flowing because that--to my mind, that is one of the
dangers to the recovery, that job creation and small business
growth will not be sufficient to sustain the momentum. So I
would ask you to put this on your priority list.
Mr. Doggett. Thank you. One of the areas that we have had
some controversy over in the past is the concept of auditing
the Fed. You made your views clear on that. The Senate narrowed
significantly the audit provision that the House overwhelmingly
passed. If something the same or similar to the Senate measure
is adopted, how do you see that audit working?
Mr. Bernanke. The Senate measure opens up all of our
financial transactions, all of our financial controls, all of
our financially related activities and therefore ensures that
the taxpayers' money is as it is but you will be able to see
that the taxpayers' money is well protected and well used. And
that I have been saying from the very beginning, that we are
absolutely comfortable with that and we are quite satisfied
that we have an agreement to do that. We will cooperate in
every possible way. We are already working with the GAO on AIG,
for example. We will make sure that all this information is
available to the public, that much of it already is. But
whatever isn't will be put out.
The concern I had about the House version of the bill was
that it also included an audit of monetary policy, which
essentially involves Congress asking the GAO to evaluate the
Fed's monetary policy decisions, which in my view is
inconsistent with the independence of the Fed to make monetary
policy decisions and would be disruptive to confidence in the
Fed on the part of the markets and the public.
So I would strongly urge you to retain the 1979 exemption
for monetary policy from GAO audits, which is not a financial
audit, but a policy review. We are perfectly fine with prying
open our books on all dimensions to the Congress to assure you
that we are using the taxpayers' money appropriately.
Mr. Doggett. Thank you.
Chairman Spratt. Mr. Garrett.
Mr. Garrett. Thank you, Mr. Chairman. And I thank the
Chairman. If I can have Chart 3 real quick just to reply to the
chairman's opening remark. I will just speak on the political
side of it. If you look at the grey, at 2004, 2005, 2006, 2007,
memory serves that the President at that time would have been
George Bush and for the first 3 years of that I guess the
Republicans were in charge of the House. In the fourth year,
2007, is when the Democrats took it. But you are an economist.
Can you tell us for year over year for the grey area there, for
the first four bars, which way was the deficit going at that
period of time, up or down?
Mr. Bernanke. Well, of course you understand that the
deficit jumped tremendously in 2009.
Mr. Garrett. No, no, no. I just need to know the period of
time from 2004, 2005, 2006 and 2007, year after year, the trend
was up or down.
Mr. Bernanke. I can see from the figure that you are
showing me that it was down.
Mr. Garrett. Thank you. So what we saw then during the time
that President Bush was in office and the Republicans were in
charge of the deficit, the deficit was going down. In 2007 I
think Chairman Spratt took over the gavel here. In 2008,
President Obama came into the White House. What is the trend
then, speaking as an economist, where the deficits are going;
is that up or down?
Mr. Bernanke. We had a financial crisis and a recession
that led to a big increase in the deficit, no question about
it.
Mr. Garrett. Thank you. Anyway, back to some of the
points--I think that is clear. Back to the points that the
gentleman from Texas made, and you made this also in Financial
Services, that we need a plan now on one of the areas we talked
about over there, the GSEs--and you are nodding your head yes?
Mr. Bernanke. Yes.
Mr. Garrett. We need a plan now to add what, certainty to
the marketplace as far as where we are going to go in that area
for the GSEs, and secondly, I will put it in one question, will
that also mean to add certainty to the marketplace that we need
a plan now as far as a budget as well for the economy going
forward? For both GSEs and the budget, is that something
essential in order to provide certainty to the marketplace?
Mr. Bernanke. I think you want clarity on both those issues
as soon as you practically can. Clearly one of the concerns
that many businesses have is policy uncertainty about what is
happening in Washington. And to the extent that we can provide
clarity, that is certainly a good thing.
Mr. Garrett. And by not providing that clarity in either
one of those areas--because you are familiar with the financial
service bill that is in the Senate right now has not a word
really on the GSEs. And as you are familiar with this committee
right now, we are in a point in time for the first time in
almost 40 years that we haven't seen a budget out of there,
without that certainty what would be your prognostication going
forward if we don't have that certainty?
Mr. Bernanke. I will repeat what I said, that those are
very important issues and I hope Congress will move
expeditiously to provide clarity.
Mr. Garrett. And actually I will just add a little tail to
that. So besides the budget and the GSEs, some of the other
areas--I guess business is telling me they don't see certainty
in basic tax policy and regulation and in also spending as well
as far as--we could put up a chart here on where spending is
going. How did those three factors play into either lack of
certainty in the marketplaces or certainty in the marketplaces?
Taxes, regulation, and spending.
Mr. Bernanke. I hear the same thing that--uncertainty about
the economy and about policy is a deterrent to expansion. My
particular bailiwick is financial regulation, and I think it is
important for us to try to clarify as quickly as possible,
Congress and the regulators, what is going to be expected of
banks, for example, in the future. And we want to do a good
job. We want to turn out good legislation and good regulation,
but we should try to clarify as soon as possible in order to
avoid any retarding effects on investment and expansion.
Mr. Garrett. I appreciate that.
Can you just clarify something for me also just on a side
note here? I assume and I thought I heard a rumor to this
effect--maybe it is out there already--has the Fed done a study
internally or otherwise just to look at itself and to look at
what have you learned over the last year and a half or so with
regard to the whole financial crisis and the way you have
worked and everybody else worked? Are they doing a study? Have
they done a study?
Mr. Bernanke. We have done a series of papers. We have done
one on monetary policy, which was made public. We have done a
number of papers on supervision practice, and they have been
guiding us to a revamping of our supervisory structure. So we
have been doing a number of different----
Mr. Garrett. And as you know, we are about to move ahead on
financial service reform in the next day, week, or something
like that. Are all of those reports and studies that you have
done available? And if so, can we have a copy of those so we
know before we go into this and pass a law what you have
learned?
Mr. Bernanke. I will have to take an inventory of what we
have. But what we have worked on is not so much the regulatory
structure but our own supervisory execution of those rules. So
that would be what we have looked at.
Mr. Garrett. That might be beneficial to us. Could we have
copies of that?
Mr. Bernanke. We will see what we have. We will work with
you.
Mr. Garrett. If you do have something, is it possible to
get a copy of it?
Mr. Bernanke. Yes.
Mr. Garrett. There you go. And I have used up all my time.
Thank you, Mr. Chairman.
Chairman Spratt. Mr. Yarmuth.
Mr. Andrews of New Jersey.
Mr. Bishop of New York.
Mr. Bishop. I am here, Mr. Chairman.
Thank you, Mr. Chairman for being here. Just, Mr. Garrett
raised some questions that suggested that the explosion of the
deficit has to do with Democratic policies. My understanding is
that the CBO has conducted a study in which they have indicated
that they believe that our long-term debt over the next 10
years, we are looking at an $8 trillion debt, and they have
assessed that $5 trillion of that results from essentially two
decisions: The 2001 and the 2003 tax cuts put on the national
credit card, and the massive expansion of the Medicare part D
program, again put on the national credit card. Are you
familiar with that assessment from CBO? And if so, what is your
take on it?
Mr. Bernanke. Well, CBO does these baseline projections
under current policy, and I am sure that the 2001, 2003 tax
cuts and the part D would be important contributors to their
projection of deficits over the next 10 years.
Mr. Bishop. Is there any argument that can be made that the
2001 and the 2003 tax cuts were stimulative, given the meltdown
that we have had in the economy over the last several years?
Mr. Bernanke. Well, I think they were stimulative to some
extent. Remember, we had a recession in 2001, and we had some
recovery from that. The meltdown we had was a financial crisis
which was somewhat unrelated to some of these fiscal issues.
Mr. Bishop. Let me go quickly to the Recovery Act. You
indicated, I think in response to a question from Mr. Spratt,
that government interventions averted a more severe recession,
if not a second-grade depression. Do you include the Recovery
Act in your tabulation of government interventions?
Mr. Bernanke. I believe the Recovery Act did create growth
and jobs. It is very difficult to know exactly how much. But
based on our analysis and past experience, I think it did
contribute to the recovery.
Mr. Bishop. And the Recovery Act was essentially--I am
round-numbering it--$500 billion of spending, $300 billion of
tax cuts. Has there been any assessment that you have put
credence in that assesses which pieces of the Recovery Act were
perhaps more impactful than others?
Mr. Bernanke. I don't know of any studies of this
particular episode. So I guess the answer is, no, I don't.
Mr. Bishop. Let me ask it this way: When we had the
Recovery Act on the floor in the House, the Republican
alternative was a Recovery Act that consisted entirely of tax
cuts; if I remember correctly, about $550 billion worth of tax
cuts. You said before that predictions are difficult.
But what would have been the impact, or can you assess what
the impact would have been, had we had only a Recovery Act that
consisted of tax cuts? What, for example, what implications
would that have had for the States? About $200 billion of our
Recovery Act was direct assistance to States so that States
would be able to maintain a level of services. So can you
assess where we would be relative to the States and relative to
employment if our only response had been tax cuts?
Mr. Bernanke. I think you are asking me something that I
can't do without more analysis. Tax cuts have incentive
effects. They have spending effects. But as you point out, they
would not have covered some of the State and local budgetary
issues that you are referring to. I am sorry, I don't know how
to answer that question.
Mr. Bishop. I understand.
Mr. Chairman, thank you. I yield back.
Chairman Spratt. Mr. Simpson.
Mr. Simpson. Thank you, Mr. Chairman.
And thank you for being here today, Chairman. The economy
seems to react to almost everything you say. Sometimes it
reacts to things Congress does or fails to do. You said earlier
that we need a plan to deal with our--or at least a plan to
deal with our long-term financial debt as important to current
economic conditions. Is that correct?
Mr. Bernanke. Yes.
Mr. Simpson. Does Congress's inability to even be able to
pass a budget for this current year and, therefore, our
inability to do our appropriations bills for this current year
have a negative impact on our economy would you say? And if so,
to what degree?
Mr. Bernanke. Well, it is important for us to persuade the
markets that we have the political will and the ability to
address our long-term debt and deficit problems. So what you
are saying is, you know, inability to pass a budget could be a
negative in that respect.
I have to say, in all honesty, that so far, we are not
seeing it in the markets. The interest rates remain quite low.
But certainly one of the things that the markets will
assess is the political ability of the Congress to work
together to develop a longer-term budget plan that will bring
us back to sustainability.
Mr. Simpson. In terms of tax policy, you said it needs to
be small-business friendly. Obviously, small businesses create
a majority of the new jobs in this country. Does it need to be
consumer-friendly also? And the reason I ask that is, is this a
time to let taxes increase or to increase tax rates on anybody
in our economy? And we have heard a lot about all the tax rates
that we have decreased for small business and investment income
and other types of things. What about increasing tax rates on
consumers?
Mr. Bernanke. I am trying to avoid, as you can see, trying
to avoid getting into the detailed debates on specific
measures.
Mr. Simpson. In general.
Mr. Bernanke. In general, I think right now we have a
broadly stimulative fiscal policy which at the moment is
helping, is needed, that includes lower taxes and probably
higher spending as well.
But I think in order for that to be sustainable, we need to
have a plan in the medium term to bring us back down to a
stable trajectory. And that is what is critical. As long as we
have the confidence of the markets that we will be able to exit
from this situation with a sustainable fiscal program, then I
think we will be okay.
If the markets take the conclusion from our actions that we
are unable to do that, then we face some risk that interest
rates will go up, and markets will be unconvinced.
Mr. Simpson. Do markets care in this long-term fiscal plan
to bring us back into some sort of balance, how much of it is
based on fiscal restraint or spending restraint by Congress and
how much of it would be a tax increase?
Mr. Bernanke. I think it depends on the detailed structure
of exactly what the spending and tax is. Again, I am trying to
avoid taking sides on this because it is really up to Congress
to make those decisions.
Mr. Simpson. Clearly, we need your expertise on it.
Mr. Bernanke. Well, there are plenty of people that have
that kind of expertise, including the Congressional Budget
Office and others. But the point is that we need to find some
combination of reforms, taxes, spending, however you want to
put it together, that is going to assure markets that deficits
will be kept under control over the medium and long term.
Mr. Simpson. One last question. The Chairman mentioned, are
we looking at a double dip in the economy? I continue to hear
concern about the commercial real estate market and that it is
going to hit. It is going to be worse than the home mortgage
market that drove us into the first recession. Are you
concerned about that? And what are we doing about it?
Mr. Bernanke. Well, we are concerned about it. Clearly, it
is a very weak point in the economy. For many banks,
particularly smaller- and medium-sized banks, it is a problem.
We have done a number of things. The Federal Reserve worked
with the Treasury to develop a program to try to restart the
commercial mortgage-backed security market. Beyond that, we
have issued guidance to banks and commercial real estate, and
we are trying to work with them to restructure commercial real
estate loans and to find ways to manage troubled loans. So we
are doing the best we can with the banks and with the markets.
There seems to be, I would say, a few glimmers of hope in
this area. There is some stabilization of price in some
markets, for example, but it does remain a very serious
concern, and we are watching it very carefully.
Mr. Simpson. Thank you.
Thank you, Mr. Chairman.
Chairman Spratt. Mr. Schrader.
Mr. Schrader. Thank you, Mr. Chairman.
Can we go back to Mr. Garrett's graph from earlier? Is that
possible?
Mr. Bernanke, it is my understanding that, during the
Clinton years, we had a $5-plus trillion surplus; and under the
Bush years, we went to a deficit. Is that an accurate
statement?
Mr. Bernanke. In terms of CBO projections, that is right.
Mr. Schrader. On this graph here, as you can see, beyond
2007, we already start to see the uptick of the Bush
administration policies and the deficit. In the 2009 bar, which
is colorfully colored red in this case, how much of that 2009
bar is a result of the economic downturn in the Bush policies?
Mr. Bernanke. A lot of the increase in the last couple of
years and also some of the size of the deficit next year as
well is a function of the financial crisis and the recession,
absolutely.
What this picture doesn't completely capture is that in the
medium term, the dominant factors will be the entitlement
programs, Medicare, Medicaid, Social Security. Those will be
the biggest cost factors in the medium term. This reflects the
short-term movement in terms of the recession mostly.
Mr. Schrader. So of little value for long-term projection?
Mr. Bernanke. Well, the recession component ought to go
away, but we do need to deal with the structural component, the
longer-term component.
Mr. Schrader. You talk in your testimony that GDP is going
to grow about 3.5 percent from 2010. That is a pleasant change
from the 6 percent downturns that we were seeing at the end of
2008 and early 2009 that came out of the Bush administration.
You talk about a faster pace next year. What is that faster
pace you are anticipating?
Mr. Bernanke. There is a lot of uncertainty, but we are
looking at sort of something around 3.5 to 4 percent next year.
Mr. Schrader. You also talk about the fiscal policy effects
are going to diminish, obviously, as we withdraw the fiscal
stimulus money that has been put into the system and kept out
us of the depression. You talked about incoming data suggesting
gains in private final demand. What incoming data are you
looking at to project that?
Mr. Bernanke. There are three areas where private final
demand is relatively strong. The consumer has been pretty
strong, which is a very important component. It is a big
component, obviously. Equipment and software investment by
firms, not construction but equipment, and exports have been
strong. Those are the main components. The others are
relatively weak.
Mr. Schrader. You also talked about manufacturing output,
which has very well skyrocketed to 9 percent over the first 4
months. Is something like that sustainable? Where are we going
to go in the future with U.S. manufacturing?
Mr. Bernanke. Well, it is not sustainable indefinitely but
manufacturing has rebounded very quickly, and was leading the
economy out of the recession, which often happens. But in part,
it is because manufacturing is trade-intensive, and as global
trade has rebounded, manufacturing has taken advantage of that.
Mr. Schrader. Right now, there seems to be an impending
crisis in the States in their budgets. We certainly are very
mindful, as you have heard in the discussion today about our
own fiscal situation here at the national government. But our
States are potentially facing huge budget crises. I don't
care--almost all the States--not all but almost all. What
affect would massive public employee layoffs of teachers,
police officers, and firefighters have on the recovery?
Mr. Bernanke. Well, just in the same way that fiscal
spending affects activity, the decline in those services would
be reflected in slower growth presumably.
Mr. Schrader. So the recovery would be prolonged and
deeper?
Mr. Bernanke. Well, directly we see that those jobs would
be lost and those services would be lost.
Mr. Schrader. Do you see any indication--based on your
testimony, the Treasury yields are still pretty low and it
seems to be a safe haven. Any indication in the near future
that the U.S. Treasuries won't still be the preferred currency
of the world going forward here?
Mr. Bernanke. No. The dollar is still the dominant reserve
currency, and U.S. Treasuries, obviously, are very attractive,
as you can see from the increase in their prices during the
recent turmoil. So the U.S. dollar has been a safe haven
currency where investors have gone when they have been
concerned about other currencies in other economies.
Mr. Schrader. Thank you very much.
I yield back.
Chairman Spratt. Mr. Jordan.
Mr. Jordan. Thank you, Mr. Chairman.
Dr. Bernanke, I appreciate you being with us today. On page
1 of your testimony, you offer a fairly optimistic projection
of what you think is likely to happen in the near term and into
next year.
You talk about expand through this year and next, and you
talk about a 3.5 percent increase over the course of the rest
of this year and a somewhat faster pace next year.
But there was a column earlier this week in the Journal by
Art Laffer, who obviously comes from a particular school of
economic thought, and he talks about the tax increases that are
coming. We know they are going to happen. The top marginal rate
is going to go up. The dividends rate is going to go up. The
capital gains tax rate is going to go up. And the fundamental
principle in economics is that government policies change
people's behavior, and they have an impact.
I think about my home State of Ohio. We have a pretty high
marginal tax rate, income tax rate. People leave because of
that. Think of States like California with their tax rate. And
you also, I think in the very first questions from the
chairman, talked about the potential or the concern that is
still out there about a double-dip recession.
So talk to me about those tax increases that we know are
going to happen--I mean, the administration and this Congress
have been very plain about that; they are going to raise those
taxes--what impact that may have on the growth that you are
expecting to continue through the remainder of this year and
into next year.
Mr. Bernanke. Well the timing is critical. We have a
recovery underway now. So, in the very near term, increased
taxes, cuts in spending that are too large would be a negative,
would be a drag on the recovery.
At the same time, as Mr. Ryan and others have pointed out,
we need to convince markets that in the medium and longer term,
we have a sustainable fiscal path. So the ideal strategy in my
view is to provide soon a plan for balancing our budget or at
least bringing deficits down over the medium and longer term.
Now, again, I am not going to try to adjudicate for
Congress exactly how that should be done. But I would say that,
in the short term, that you should, as you look at fiscal
issues, you should take into account the recovery and the
strength of the recovery.
Mr. Jordan. Well, let me pick up where you were about a
plan in place. I would just point out that--and last year I
offered on behalf of the Republican Study Committee the only
balanced budget in Congress. We introduced it again 2 weeks
ago. And frankly, I would invite you to take a look at that. We
will get you a copy. We will give you the analysis of it, to
look at that, the 10-year plan that actually reaches balance in
the 9th and 10th year, does not impose tax increases. We think
those are the right things. We think it strikes that balance
you were just talking about. So I would ask you to take a look
at that.
Let me just do one last question if I could. On page 5 of
your testimony, you talk about the sustainability and how
important it is and that if we don't get a plan in place or a
path to sustainability, it will sap our Nation's economic
vitality, greatly increase the risk of economic and financial
instability. As the head of the Fed and speaking to this
committee, speaking to the American people, in practical terms,
if we don't get a plan, what does it mean to families across
this country, what does it mean to the small business
community? In real terms, how would you describe where we are
headed if in fact we don't begin to turn this thing around, if
we don't begin to get some common sense and make the tough
decisions you have alluded to earlier in your answers? What it
means in real terms to families and small business owners and
taxpayers across this country, what it means for the Nation.
And I will yield back.
Mr. Bernanke. One of the main channels would be if
confidence was lost in our long-term fiscal stability, we would
see our interest rates go up quite a bit, as we have already
seen in Greece and other countries. And that would affect, of
course, the consumers' ability to buy houses and automobiles,
et cetera. It would slow our economy. By reducing the value of
government bonds, it would put pressure on the balance sheets
of financial institutions. So it would cause a lot of stress on
the economy. And in the worst case, it would cause financial
instability like we are seeing, you know, to some extent in
Greece.
So if you want a strong economy, you need to have capital
investment. You need to have consumers' ability to buy houses
and automobiles and so on. And the high interest rates that
would make it even more difficult to balance the budget--
because interest payments are a part of the deficit.
Mr. Jordan. Interest rates are, I believe, within 2 years,
we are on a path to pay $1 billion a day just in interest on
the debt. That is how out of control it is getting.
Mr. Bernanke. But our interest rates now are very low.
Mr. Jordan. I understand that.
Mr. Bernanke. So the concern would be that they would go
higher, and then it would be much more difficult and disruptive
to make the cuts and to make the changes you would have to make
in the budget to meet the fiscal goals at that point with
interest rates much higher.
Chairman Spratt. Mr. Etheridge.
Mr. Etheridge. Thank you, Mr. Chairman. Thank you for the
hearing.
Mr. Chairman, thank you for being here. Thank you for your
service.
Mr. Bernanke. Thank you.
Mr. Etheridge. I was here and I remember in 2008 when
Congress didn't step up to the plate when we were requested to
do so when the credit markets froze around the world and the
stock market fell over 500 points in just a matter of minutes.
And over the weekend, sounder heads prevailed, listened to good
advice, and at least started back on the road. Not only were we
punished, but a lot of folks in this country had money in
401(k)s and a host of other place. Some saw their life savings
sink, and some lost them totally.
So thank you for your hard work and your efforts. And the
economic collapse that was almost created by 8 years of not
paying attention, squandering the surplus, and we just averted
disaster, and I appreciate all those who did the work.
Your testimony notes and the economists on both sides of
the political spectrums have pretty much agreed, I think, that
thanks to the Recovery Act--and you testified to this earlier--
we are starting to see signs of economic growth. You indicated
earlier, some have indicated some of that growth may have been
directly related, and in some States, depending on where they
are, they say that as much as 2 percent loss in GDP in those
areas.
Last week, I attended a school groundbreaking in Sanford,
North Carolina. It was made possible from the recovery funds.
And I think those are smart investments, not only to put people
to work but lay the groundwork for long-term economic growth.
However, as you have indicated and testified, the recovery
is still not on as sound footing as we would like for it to be.
And my State of North Carolina still faces some tough times.
Teachers, Medicaid funds that aren't funded. And those who take
a pretty tough stance in saying, we ought not to do it. We
shouldn't do it, because if we do it, there are those who will
vote against it, who will go home and campaign against people
who do what they consider the responsible thing and keep this
economy moving forward, just for political purposes.
But my question for you, that we need to keep our eye on
the ball, battling the fear, and my fear is that not only will
children get hurt if we don't do the right thing, but economic
recovery in the long run will pay a healthy price. In your
view, what would be the effect on the recovery if we pull back
too soon and do not provide the kind of aid that States may
need at a very critical moment? And I think we are at that
tender point right now. I would be interested in your thoughts
on that.
Mr. Bernanke. Let me first say that, in terms of any fiscal
package, again, I don't want to adjudicate specific parts of
it. And Congress needs to decide which components they want to
support and which ones they think will be most effective.
But in terms of the time frame, right now I don't think is
the time, this very moment is not the time to radically reduce
our spending or raise our taxes because the economy is still in
a recovery mode and needs that support.
However, the risk, of course, of ongoing deficits is the
potential loss of confidence in the markets, and the way to
reassure the markets is by creating a plausible plan for a
medium-term stability in the fiscal situation. We, obviously,
can't run deficits at 10 percent of GDP forever.
Mr. Etheridge. And we put in PAYGO, as the chairman touched
on earlier, to get that point.
You have outlined some of the Fed's action. And this may
not be something you can deal with, but I think it is important
to say at this meeting, because I have talked to a lot of
community and small bankers, a lot of small business people,
and a lot of developers who are really frustrated. They are
frustrated because they see a need, they can do something; but
because of certain regulations, they are being told that
whatever the value of that real estate they had, if it was
$500,000, it is now $300,000. And in many of them, they are
cashing it in.
And I really fear if we aren't very cautious in what we do,
we are going to wind up with a few large builders in this
country, a few much bigger--more big banks, fewer community
banks and fewer people to get involved in the local Lions Club,
Boy Scouts and Girl Scouts and things that make America what
America is. And as you sit with others, I hope you will remind
them that it is these people. We have to make sure we get
credit to our small business people in America. And that is not
flowing yet, I don't think, in a way it needs to.
Mr. Bernanke. I absolutely agree. I think there are some
signs of progress, but it is still a tough situation. The Fed
is a regulator as well as a monetary policymaker. We are
working with our colleagues to do all we can to make sure that
banks are making good loans.
Mr. Etheridge. Thank you, sir.
Thank you, Mr. Chairman.
Chairman Spratt. Mr. Djou, we welcome you to the committee
again. I am pleased to recognize you for up to 5 minutes.
Mr. Djou. Dr. Bernanke, a few quick questions.
My apologies. A freshman mistake here.
Dr. Bernanke, a few very quick questions here. First off,
you begin in your testimony that the economy is showing modest
signs of economic growth. I think we are all happy about that.
My question to you is, is that, given these signs of modest
economic growth, do you believe that there is a need--is it
wise to do additional fiscal stimulus to help the economy
along? Or do you believe that the economy right now does not
need further fiscal stimulus on the fiscal side?
Mr. Bernanke. I will turn it back to you this way: If you
decided to do more fiscal stimulus, and I know there are some
moderate-sized bills being contemplated, it would be very
helpful to combine that with--again, I am reiterating this
point, but again I think it is very important--with a plan for
the fiscal exit strategy.
The Federal Reserve has a strategy for exiting from our
monetary policy. The United States Government fiscal
authorities have to have a strategy for exiting from your
fiscal policy.
So you will have a more effective set of policies if you
combine any expansions of further fiscal support with other
measures that reassure markets that, in fact, our deficits will
be controlled in the medium term.
Mr. Djou. And do you right now see any exit strategy,
fiscal exit strategy in the United States Congress?
Mr. Bernanke. Well, we have the debt commission that Mr.
Ryan is on and Mr. Spratt, and I hope that they will come up
with some good recommendations. But right now, there is not
anything on the table at this point.
Mr. Djou. The second series of questions, Dr. Bernanke. And
it is, I have been frustrated and disappointed that there have
been a number of free trade agreements languishing in Congress.
Do you believe that were the Congress to pass free trade or an
expansion of free trade, it would help the economy?
Mr. Bernanke. Yes, I do. I think we need to be a part of
the globalized economy. I think trade is an important source of
demand for our goods and also a source of materials and imports
as well. So I think that, generally speaking, we ought to push
forward on the Doha Round and on the free trade agreements that
we are looking at.
Mr. Djou. Finally, Dr. Bernanke, just sort of the last set
of questions. You testified that the Federal budget, quote,
appears to be on an unsustainable path. How will we know when
it is on a sustainable path? What triggers, what earmarks,
benchmarks would you guide the Congress on to know that we are
on a sustainable path? Is there an amount that the budget
deficit you think we should be looking at, a percentage of GDP
to where the deficit should be at?
Mr. Bernanke. One simple rule of thumb is that the primary
deficit, which is the deficit excluding interest payments,
should be about in balance. If that is true or, to put another
way, that the deficit equals interest payments, so in practice,
that might be at a 2 percent of GDP type deficit. If that is
true, then arithmetically, with some other assumptions, it
turns out that the ratio of the debt outstanding to the GDP
remains constant. So I think keeping our debt relative to our
income constant or declining would be a good indicator of
sustainable policy.
Mr. Djou. And to follow up on that, for this coming fiscal
year, what number would that be for the budget deficit?
Mr. Bernanke. Well, I don't think that there is any way
that this deficit in this next year is going to be brought down
to 2 percent, 2 or 3 percent. And, as I have been emphasizing,
this is really a medium-term objective. We still have some
time, but we need to get a plan in place as soon as we can.
Mr. Djou. So what is the dollar amount, if the budget
deficit is 2 percent of GDP?
Mr. Bernanke. Well, right now, that would be about $300
billion.
Mr. Djou. Thank you, Mr. Chairman.
Chairman Spratt. Mr. Edwards.
Mr. Edwards. Dr. Bernanke, given your serious concerns
about long-term structural deficits, critics might say that you
are inconsistent in saying that you supported TARP and that the
stimulus bill had positive effects. What would be your answer
to those critics?
Mr. Bernanke. My answer is that deficits are sometimes
necessary. They are necessary in wartime. They are necessary in
deep recessions, and this was the case where monetary policy
was, you know, pushed very, very far. And I believe that the
TARP--I realize it is very unpopular, but I do believe that it
was very important in stabilizing our financial system. And
indeed, the money has come back for the most part. So for those
emergency purposes, I think the deficits were necessary. That
being said----
Mr. Edwards. And the TARP and the stimulus were necessary
in your opinion?
Mr. Bernanke. I believe they were very helpful, yes. TARP
in particular prevented a breakdown of the global financial
markets, the global financial system. But that being said, you
know, we can't have an emergency every year. We have to
maintain a more stable situation over the longer term.
Mr. Edwards. I understand. But I think, just to clarify,
you just said that without TARP, we could have had a breakdown
in the world financial system, is that correct?
Mr. Bernanke. I think without a doubt we would have.
Mr. Edwards. Okay. So, in effect, you think TARP, the
passage of TARP was consistent with the principle fiscal
responsibility?
Mr. Bernanke. I do because in the absence of TARP, we would
have had a much deeper recession, and the losses of tax revenue
and the other costs would have far outweighed the actual costs
of the TARP.
Mr. Edwards. So what you are saying then is, without TARP,
we could have actually had larger deficits and a greater
national debt than we have today?
Mr. Bernanke. We almost certainly would have.
Mr. Edwards. And there is at least a probability we could
have had a second Great Depression?
Mr. Bernanke. I think so, yes.
Mr. Edwards. Okay. Also before we make decisions about the
future, we need to be sure we understand what happened in the
past.
Could someone bring up Mr. Garrett's chart, please?
Now this chart doesn't talk about 2003, 2002, 2001. Do I
understand, when President Bush came into office, that the gray
deficit areas during his administration were actually projected
to be a total of $4 trillion to $5 trillion in surpluses, is
that correct, when President Bush walked into office?
Mr. Bernanke. The 10-year projections were something like
that.
Mr. Edwards. Okay. And then, when we go to 2009, it looks
like to me about a $1.4 trillion deficit in 2009, the first
year of the Obama administration. Am I not correct in
understanding that $1.3 trillion of that was projected before
President Obama was sworn into office? So about 93 percent of
that first red column for 2009 was projected before President
Obama signed a single bill into law, is that about correct?
Mr. Bernanke. As of when, as of 2009?
Mr. Edwards. As of the--while President Bush was still in
office, weren't there projections for 2009 to be a $1.3
trillion deficit?
Mr. Bernanke. I don't remember the exact number. But
clearly, most of that deficit was the result of the recession
and the financial crisis, which in late 2008, we already knew
about it.
Mr. Edwards. Right. And I think CBO projected a $1.3
trillion deficit before President Obama was sworn into office.
Let me ask you, Dr. Orszag, the director of OMB, has said
that the 2001 and 2003 tax cuts and the Medicare prescription
drug bill, all unpaid for and passed by Republicans on a
virtually partisan basis will, have added $6 trillion to the
national debt over the next decade. Do you have any figures
that would substantially differ from Dr. Orszag's testimony on
how those three bills added to the national debt?
Mr. Bernanke. I don't have any figures, but I know that
they calculate on a baseline basis, but you know those numbers
would be pretty big I think.
Mr. Edwards. Okay. As we go forward, would making permanent
all of the Bush 2001 and 2003 tax cuts reduce the national debt
or increase the national debt?
Mr. Bernanke. If you did absolutely nothing else, it would
increase it because it might make the economy grow faster but
probably not fast enough to make up the revenue loss.
Mr. Edwards. So in and of themselves, extending those tax
cuts and making them permanent would increase the national
debt, is that correct?
Mr. Bernanke. Yes, it would. But there is also the trade-
off. You have to ask yourself whether there are other options
that might be more effective at reducing the deficit at less
cost.
Mr. Edwards. I understand. I understand the timing of the
changes in tax law is important. But in your opinion, do tax
cuts pay for themselves? Some people say you can balance the
budget by just cutting taxes more. In your opinion, do tax cuts
pay for themselves?
Mr. Bernanke. In general, say income tax cuts, the actual
revenue loss is less than the static estimate because there is
some positive response in the economy. But in general, I don't
think most economists would agree that they completely pay for
themselves, no.
Mr. Edwards. Okay. Thank you.
Chairman Spratt. The $1.2 trillion estimate of the surplus
deficit for 2009 was a number supplied by CBO in its outlook of
the budget and the economy for 2009, 2010, 5 years to come.
Mr. Austria of Ohio.
Mr. Austria. Thank you, Mr. Chairman.
And Dr. Bernanke, thank you for being here today and
sharing your thoughts on the economy and the financial markets.
And certainly I appreciate you sharing your thoughts about
needing a system that is more resilient and having a plan in
place for stabilization. And I appreciate the Federal Reserve
being cautious about the U.S. economic outlook.
Although you have also noted that there has been some
recovery and it looks as though there might be modest recovery
over the next couple of years, but I think there is also a
growing risk out there that the economy could be dampened or
even undercut by the ripple effects of the debt crisis in
Europe right now, what is happening in Europe.
And also, when you combine that with the concerns that I am
hearing out there, from our small businesses, the concerns
about getting the necessary financing, the necessary credit to
continue their operations and wanting to expand their
operations and businesses, the concerns about the consistently
high rates of unemployment that we have right now and
underemployment and the lack of private jobs that are being
created right now that I believe are the long-term sustainable
jobs that will turn this economy around.
When you combine that with the massive government spending
and debt, all those being a major threat to sustainable growth,
I wanted to get your views on the spending and debt control, on
the uncertainty that is bringing to our economy right now and
the direction that you think that we are moving and whether or
not--you know, I think there is a fundamental difference here
on the types of jobs that are being created with all this,
government jobs versus the private sector jobs.
Mr. Bernanke. Well, first of all you did a good job of
identifying some of the risks to the recovery: Financial market
risks, small business credit, and unemployment. Those are some
of the things that I have highlighted in speeches and
discussions. As I have indicated, I think, once again, that we
need to think about our fiscal path, our fiscal plan as a
trajectory, not as a single year-by-year deficit. It is not
realistic, I think, to--or even advisable to try to balance the
budget this year because that would be too wrenching a change,
and the economy is still in weak condition, and I don't think
that would be possible or advisable.
However, in order to maintain the confidence of the markets
and to keep interest rates low, which is very useful for the
whole economy and for the recovery, it is also very important
to try to provide reassurance through some mechanism that
Congress is seriously contemplating measures that will bring us
back to sustainability over the medium term. I realize that is
a difficult thing to do and it is difficult to be credible. But
Congress is very creative on these types of matters and I hope
that you will be looking at ways to find the path back to
sustainability over the next few years.
Mr. Austria. And if we can bring up a figure. I am looking
at chart number one. I believe that is the chart on the Tidal
Wave of Debt right there. This chart right here. I wanted to
get your opinion as far as the debt crisis that we are seeing
across Europe right now. You know, how this could occur in the
U.S. if we don't change the way we are going right now. You
know, there are projections right now that payments are
projected to reach 20 percent of the tax revenue or higher by
2020, as far as our payments continue to grow. And when you
look at this chart, I wanted to get your thoughts on that.
Mr. Bernanke. Well, this chart just illustrates graphically
what I have been saying, which is when the red line is sloping
upwards so sharply, that is just a graphical way of saying that
it is not sustainable. You want a situation where that gray-red
line is sort of flat or going down instead of rising.
Mr. Austria. And let me go back now in combining this debt
with what I am hearing from our small businesses out there who
are struggling right now. As far as bringing more certainty to
the markets, as far as creating jobs within the private sector,
do you believe, when we continue to spend the way we are,
continuing to grow government, at that--at some point--at what
point do we start to create the jobs in the private sector? I
guess is my question.
Mr. Bernanke. Well, as I said, I think at this point--I
mean putting aside the Census, I think the private sector is
starting to come back. We are starting to see growth for
consumers for example and that will drive private sector job
creation. We anticipate private sector job creation between
150,000, 250,000 jobs, something like that going forward, not
enough to get back all the jobs that we have lost but is still
significant. So I think you know we are on a path of moderate
recovery, but we want to have as much resolution of uncertainty
as possible to encourage businesses to expand and to hire.
Chairman Spratt. Ms. Kaptur.
Ms. Kaptur. Thank you, Mr. Chairman. Got to get the
equipment to work.
Welcome. Thank you for the work you are doing. Thank you
for the efforts that the Cleveland Fed is making. Ohio is in
more than a recession. When you have 40 to 60 percent of home
loans under water, the future is very, very troubled.
Therefore, I have two requests for data for the record and
two small questions. The first request for data is, can you
please ask the economists on your staff to supply our committee
with an estimate of the total direct and indirect real costs to
our economy through mid-2010 of the financial bailout as well
as tax dollars that may be at risk into the future?
In order to help give them bookends for that effort, we
will provide to the record a study done by the Congressional
Research Service in that regard where a figure is given of
$14.4 trillion, and the Pew Financial Reform Project has
indicated that U.S. households lost on average $5,800 in income
due to reduced economic growth due to the financial crisis
through the end of 2009 and that the cost to the Federal
Government, due to interventions to mitigate the financial
crisis, amounted to over $2,000 on average for each U.S.
household. The Pew study shows that home values have fallen
about $30,300 per household; stock values, about $66,000 on
average. We know what the job loss has been, and that is not
getting much better in my part of the country.
So I wanted to submit these for the record. You know, you
have terrific economists over there, and I think if you could
tell us the cost of this, it would be very helpful to those of
us in the positions that we hold.
[The information follows:]
The Cost of the Financial Crisis:
The Impact of the September 2008 Economic Collapse
By Phillip Swagel\1\
The United States pulled back from a financial market meltdown and
economic collapse in late 2008 and early 2009--but just barely. Not
until we came to the edge of catastrophe were decisive actions taken to
address problems that had been building in financial markets for years.
By then it was too late to avert a severe recession accompanied by
massive job losses, skyrocketing unemployment, lower wages, and a
growing number of American families at risk of foreclosure and poverty.
---------------------------------------------------------------------------
\1\ Phillip L. Swagel is visiting professor at the McDonough School
of Business at Georgetown University, and director of the school's
Center for Financial Institutions, Policy, and Governance. This paper
was prepared for, and initial results were presented at, the March 18,
2010 public event, ``Financial Reform: Too Important to Fail,''
sponsored by the Pew Financial Reform Project.
---------------------------------------------------------------------------
This paper quantifies the economic and budgetary costs resulting
from the acute stage of the financial crisis reached in September 2008.
This is important on its own, but it can be seen as well as giving a
rough indication of the potential value of reforms that would help
avoid a future crisis.
On a budgetary level, the cost of the stage of the crisis reached
in mid-September 2008 is the net cost to taxpayers of the policies used
to stem the crisis. This includes the programs undertaken as part of
the
Troubled Assets Relief Program (TARP), as well as steps taken by
the Federal Reserve and the Federal Deposit Insurance Corporation
(FDIC) to guarantee bank liabilities. Actions to support Bear Stearns
and the two government-sponsored entities, Fannie Mae and Freddie Mac,
were taken before the worst part of the crisis, but their costs
continued past September and are considered by many to be part of the
fiscal costs of the crisis.
The costs of the crisis to society, however, go beyond the direct
fiscal impacts to include the effect on incomes, wages, and job
creation for the U.S. economy as a whole. The crisis reduced U.S.
economic growth and caused a weaker job market and other undesirable
outcomes. A key challenge in quantifying such a macroeconomic view of
the costs of the financial crisis is to identify the particular effects
of the crisis and to separate those impacts from other developments.
The broadest perspective would look at the overall changes in the
economy from the start of the crisis to the end, and perhaps even
include an estimate of the long-run future impacts. Implicit in such a
calculation would be a decision to include both the effects of the
crisis itself and any offsetting impacts from policy responses such as
easier monetary policy or fiscal stimulus. A broad accounting of the
costs of the crisis could also include the decline in government
revenues resulting from the crisis, enactment of policies such as the
2008 and 2009 stimulus packages, as well as the impacts of regulatory
changes that came about in the wake of the crisis. Under such a view,
the financial crisis had large and long-lasting impacts on the U.S.
economy. The Organisation for Economic Co-operation and Development
(OECD), for example, estimates that the financial crisis will lead to a
2.4 percent reduction in long-term U.S. GDP, anticipating that both the
reduction in employment and the increased cost of capital resulting
from the crisis will last far into the future.\2\
---------------------------------------------------------------------------
\2\ OECD, 2010. Going for Growth, Chapter 1, Box 1.1, pp. 18-19,
March.
---------------------------------------------------------------------------
The approach taken in this paper is narrower: to distinguish and
quantify costs incurred so far that are directly related to the crisis
and, in particular, to focus on the impact of events from the collapse
of Lehman Brothers in the middle of September 2008 through the end of
2009. This is the period in which the grinding slowdown associated with
the credit disruption that began in August 2007 turned into a sharp
downturn. This approach produces smaller estimates for the cost of the
crisis than the broad view, because the calculations quantify the costs
of the acute phase of the crisis between September 2008 and the end of
2009, and not the overall impact of events both preceding and following
that time period. Both approaches are valuable, and this paper is best
seen as a complement to the literature on the overall cost of financial
crises. This distinction is revisited in the conclusion.
The results in this paper complement economic research by Reinhart
and Rogoff (2009) that assesses the broad overall costs of banking
crises across countries.\3\ Reinhart and Rogoff find that deep economic
downturns ``invariably'' follow in the wake of crises; they quantify
the average impact across countries on output, asset prices, the labor
market, and government finances. Their results are also discussed
below.
---------------------------------------------------------------------------
\3\ Carmen M. Reinhart and Kenneth S. Rogoff, 2009. ``The Aftermath
of Financial Crises,'' American Economic Review, vol. 99(2), pages 466-
72, May.
---------------------------------------------------------------------------
The cost of the crisis as measured here includes both the fiscal
cost and the effects on economic measures such as output, employment,
wages, and wealth. The difficulty in quantifying these economic impacts
is to isolate the effects of the most acute stage of the crisis--the
severe downturn in consumer and business spending that took place
following the failure of Lehman Brothers in September 2008. The U.S.
economy was already moving sideways in the first half of 2008 and most
forecasters expected slow growth to continue for the balance of the
year and into 2009. But the events of the fall and the plunge in
economic activity that resulted were unexpected.
This paper isolates the impact of the acute phase of the crisis by
comparing the Congressional Budget Office (CBO) economic forecast made
in September 2008, just before the crisis, with actual outcomes. The
approach is to compute the difference between the decline in GDP in
late 2008 and 2009 and the forecast published by CBO in its ``Budget
and Economic Outlook: An Update,'' published on September 9, 2008--the
Tuesday before Lehman filed for bankruptcy on Monday, September 15. The
difference between actual GDP in the five quarters from October 2008 to
December 2009 and the CBO forecast made just on the cusp of the crisis
is taken as the unexpected impact of the crisis on GDP. This GDP impact
is then used to calculate the impact of the crisis on other measures,
including jobs, wages, and the number of foreclosures. The accuracy of
CBO economic forecasts is similar to that of the Blue Chip
consensus.\4\
---------------------------------------------------------------------------
\4\ Congressional Budget Office, 2006. ``CBO's Economic Forecasting
Record,'' November 2006.
---------------------------------------------------------------------------
While this approach works to isolate the impacts of events from
September 2008 forward, it is necessarily imprecise because it is
impossible to know a) how accurate the CBO forecast would have been
absent the crisis; b) whether the relationships between growth and
other economic variables such as employment changed during the crisis;
and c) the impact of other events from September 2008 forward that are
not related to the crisis. Moreover, the calculations in the paper
start with the fourth quarter of 2008 and thus do not attribute to the
crisis any output or jobs that were lost in the two weeks of September
immediately following the collapse of Lehman Brothers (these are still
counted and appear in the charts below, but not as part of the cost of
the post-Lehman crisis). The results in the paper should thus be taken
as providing a rough approximation of the impact of the crisis. This is
hugely meaningful, however, with American families suffering thousands
of dollars of losses in incomes and wages and enormous declines in the
value of their assets, including both financial assets, such as stock
holdings, and real estate properties, such as family homes. These
losses run into the trillions of dollars and on average come to a
decline of nearly $66,000 per household in the value of stock holdings
and a loss of more than $30,000 per household in the value of real
estate wealth (though the inequality in wealth holdings means that the
losses will vary considerably across families). These impacts on
incomes, jobs, and wealth are all very real effects of the crisis.
Finally, the paper looks briefly at broader impacts on society,
notably the effect of the crisis in boosting foreclosures and potential
impacts on human factors such as poverty.
direct costs to taxpayers of financial interventions
A host of government interventions were aimed at stabilizing banks
and other financial sector firms, ranging from loans from the Federal
Reserve to the outright injection of public capital into banks through
the Treasury's Troubled Assets Relief Program (TARP). The direct
budgetary cost of the crisis is taken to equal the expected net losses
of these programs. The fiscal impact of the crisis considered here does
not include the lower revenues and increased government spending that
followed the crisis. Instead, the focus is on the costs of
interventions undertaken in direct response to the acute phase of the
crisis that began in September 2008, notably the cost of the TARP and
related programs to guarantee bank liabilities put into effect by the
Federal Reserve (Fed) and the Federal Deposit Insurance Corporation
(FDIC). These costs are tallied in Tables 1 and 2, below. These cost
estimates are from the January 2010 CBO estimate of TARP commitments
and expected losses, and the February 2010 estimate by the
Congressional Oversight Panel of the Fed's commitment to several
programs run jointly by the Treasury and the Fed (the table provides
references to the sources). The TARP authority was part of the
Emergency Economic Stabilization Act of 2008 (EESA) enacted on October
3, 2008; this was used by the Treasury Department for a variety of
purposes, including capital injections into banks, guarantees for
assets of certain banks, foreclosure relief, support for the AIG
insurance company, and subsidies to prevent foreclosures.
CBO estimates that $500 billion of the $700 billion capacity of the
TARP will end up being used or committed, with programs now in
existence having a $73 billion net cost to taxpayers. As shown in Table
1, the TARP was used to support a range of activities, including the
purchase of stakes in banks under the capital purchase program (CPP);
special assistance to Citigroup, Bank of America, and AIG; support to
automotive industry firms; support for programs to boost securitization
of new lending through the Term Asset-Backed Securities Loan Facility
(TALF) run jointly with the Fed; the Public-Private Investment
Partnerships (PPIP) to deal with illiquid ``legacy'' assets such as
subprime mortgage-backed securities; and the Home Affordable Program
aimed at reducing the number of foreclosures. TARP assistance to banks
on the whole is projected to generate a $7 billion profit for taxpayers
(even though some banks that received TARP funds have failed or stopped
paying dividends to the Treasury). Other programs, notably aid to auto
firms, AIG, and homeowners at risk of foreclosure, are projected to
result in substantial losses of TARP funds, with an overall net cost of
$73 billion. As part of the Congressional budget process, the CBO
estimates as well that there could be future uses and losses involving
TARP resources, but they would not be directly related to the crisis of
September 2008.
In addition, the Federal Reserve lent $248 billion as part of TARP-
related programs to support AIG and to foster securitization through
the TALF. These Fed loans are generally well-secured--indeed, Fed
lending related to AIG is now over-collateralized (the TARP having
replaced the Fed in the risky aspect of the AIG transaction)--but it is
possible in principle that there could be future losses and thus
further costs.
table 1: direct costs of the tarp
($ billions)
Sources: Congressional Budget Office, ``The Budget and Economic
Outlook: Fiscal Years 2010 to 2020,'' January 2010, Box 1-2, pp. 12-13,
and TARP Congressional Oversight Panel ``February Oversight Report,''
February 10, 2010, pp. 176-177. Treasury commitments and costs or
profits are from the Congressional Budget Office; Federal Reserve
commitments as of December 31, 2009 are from the Congressional
Oversight Panel February 2010 report.
The $68 billion reported by the Congressional Oversight
Panel represents the amount of AIG-lending extended by the Federal
Reserve, but not the net cost of this lending. The Federal Reserve Bank
of New York reports that the outstanding balance of Federal Reserve
lending related to AIG as of September 30, 2009 totaled $36.7 billion
with a fair market value of $39.7 billion for the collateral behind the
lending, implying that the lending is overcollateralized on a mark-to-
market basis. In effect, resources from the TARP replaced part of the
initial Fed lending to AIG, leaving the TARP with losses and the Fed's
remaining loans over-collateralized.
Table 2 also shows certain direct budgetary costs related to the
crisis that commenced before September 2008, notably Federal Reserve
lending related to the collapse of Bear Stearns in March 2008, and cost
to the Treasury of support for the two housing-related GSEs, Fannie Mae
and Freddie Mac. These are not directly the result of the September
2008 stage of the crisis, but are shown since they are closely related
to those financial market events. The financial rescue of Fannie Mae
and Freddie Mac cost taxpayers $91 billion in fiscal year 2009 (October
2008 to September 2009), according to the Congressional Budget Office,
and CBO forecasts a total cost to taxpayers of $157 billion through
2015 (these figures are from Table 3-3 in the CBO January 2010 Budget
and Economic Outlook). These costs are related to the broader financial
crisis, since the activities of the two firms underpinned parts of the
housing market that were at the root of the crisis. There is a sense,
however, that these costs were the result of losses that largely
predated the events of September 2008--namely losses on mortgages
guaranteed by the two firms, and losses on subprime mortgage-backed
securities they purchased prior to the failure of Lehman Brothers.
While the costs grew as a result of the September 2008 crisis and the
subsequent economic collapse, it is likely that much of the losses were
built into these firms' balance sheets before September 2008. As shown
in Table 2, Fed lending related to Bear Stearns involves a loss of $3
billion on a mark-to-market basis--this is the net of the $29 billion
in non-recourse lending from the Fed minus the estimated value of the
collateral behind those loans as of September 30, 2009 (the most recent
date for which estimates are available).
table 2: other financial commitments related to the crisis
($ billions)
Sources: FDIC: TARP Congressional Oversight Panel ``February
Oversight Report,'' February 10, 2010, pp. 176-177. FDIC Temporary Loan
Guarantee Program is the amount of senior bank debt covered by FDIC
guarantees. Federal Reserve purchases are from www.federalreserve.gov/
monetarypolicy. These figures are total (gross) amounts of liabilities
guaranteed by the FDIC and assets purchased by the Federal Reserve;
they do not provide the net cost or gain to taxpayers. The FDIC and
Federal Reserve programs are all likely to make positive returns.
Treasury costs for GSEs are from Congressional Budget Office, ``The
Budget and Economic Outlook: Fiscal Years 2010 to 2020,'' January 2010,
Box 3-3, p. 52.
The Federal Reserve Bank of New York reports a fair market
value of $26.1 billion for the collateral behind the $29.2 billion loan
balance related to Bear Stearns as of September 30, 2009, implying a $3
billion loss on a mark-to-market basis.
Other monetary policy actions undertaken by the Federal Reserve in
the fall of 2008, such as programs to support commercial paper markets
and money market mutual funds, are not included in this tally. These
might well have positive budgetary impacts as the Fed collects interest
and fees from users of these liquidity facilities. Similarly, the
stimulus packages enacted in early 2008 and early 2009 were both
arguably brought about because of the impact of the financial crisis on
the economy, but these did not directly address financial sector issues
and are not included here.
In sum, the direct budget costs from efforts to stabilize the
financial system following the events of mid-September 2008 are
meaningful--with net costs of $73 billion and hundreds of billions of
public dollars deployed or otherwise put at risk of loss. These
figures, however, are only a modest part of the cost of the financial
crisis. The larger impacts are those that affected the private sector
as a result of the significant decline in economic activity that
followed the crisis. These are tallied by calculating the impact of the
September 2008 financial crisis on output, employment, wages, and
wealth.
economic costs: lost wages, incomes, jobs, and wealth
The U.S. economy was already slowing in the first half of 2008, as
the slide in housing prices that began in 2006 and the tightening of
credit markets from 2007 both weighed on growth. High oil prices added
another headwind in 2008. The economy entered a recession in December
2007; while this was not yet announced when the crisis became acute in
mid-September 2008, it was clear that growth would remain subdued even
under the best of circumstances while the U.S. economy worked through
the challenges of housing, credit, and energy markets. Even so, the
financial crisis in September 2008 clearly exacerbated the pre-existing
economic slowdown, turning a mild downturn into a deep recession. In
effect, the events of September and October 2008 were a severe negative
shock to American confidence in the economy, and in the ability of our
government and our political system to deal with the crisis. All at
once, families and businesses across the United States looked at the
crisis and stopped spending--even those who had not yet been directly
affected by the mounting credit disruption that started in August 2007
put a hold on their plans. Families stopped spending, while firms
stopped hiring and paused investment projects. As a result, the economy
plunged, with GDP falling by 5.4 percent and 6.4 percent (at annual
rates) in the last quarter of 2008 and the first quarter of 2009--the
worst six months for economic growth since 1958.
Assessing the economic costs associated with the acute phase of the
crisis in September 2008 requires separating the impacts of the events
of fall 2008 from the pre-existing economic weakness. While this is not
possible to do with precision, one practical approach is to take as a
baseline the GDP growth forecast published by the CBO on September 9,
2008--just before the crisis. The difference between actual GDP, and
the CBO forecast for GDP in the balance of 2008 and over all of 2009,
is then taken to reflect the ``surprise'' impact of the crisis. This is
an imperfect measure since there is no reason to expect the CBO
forecast to have been completely accurate had it not been for
subsequent events such as the collapse of Lehman.
With these caveats in mind, the September 2008 CBO forecast remains
plausible as a guide for what would have happened absent the financial
crisis of September 2008. The CBO forecast 1.5 percent real GDP growth
in 2008 as a whole, followed by 1.1 percent growth in 2009. With the
first half of the year already recorded, 1.5 percent growth for the
year as a whole implies that CBO expected GDP to decline at a 0.25
percent annual rate in the second half of 2008.\5\ That is, CBO
expected growth to be weak and even slightly negative in the latter
part of 2008 but then pick up in 2009--indeed, the CBO forecast implies
quite strong growth by the end of 2009.
---------------------------------------------------------------------------
\5\ GDP data for 2008 have been revised since the CBO forecast was
made; the implied negative GDP growth of 0.25 percent at an annual rate
is computed using the GDP data that were available to the CBO in
September 2008.
---------------------------------------------------------------------------
Figure 1 plots actual real GDP against GDP as implied by the CBO
forecast from September 2008 and the CBO's calculation of potential
GDP--the level of GDP that would be consistent with full utilization of
resources.\6\ As shown on the chart, GDP plunged at the end of 2008 and
into early 2009, falling by 5.4 percent and 6.4 percent in the last
quarter of 2008 and the first quarter of 2009, against CBO expectations
of a nearly flat profile for output over this period. The difference
between the CBO forecast and the actual outcome for GDP comes to a
total of $648 billion in 2009 dollars for the five quarters from the
beginning of October 2008 to the end of December 2009, equal to an
average of $5,800 in lost income for each of the roughly 111 million
U.S. households.
---------------------------------------------------------------------------
\6\ The CBO forecast uses the growth rates in the September 2008
CBO forecast, adjusting the past levels of GDP for subsequent revisions
to GDP data that were known prior to September 2008.
---------------------------------------------------------------------------
figure 1: impact of the crisis on economy-wide output
Note: GDP as plotted in the chart is in billions of 2005 (real)
dollars at a seasonally adjusted annual rate. The dollar figures in the
boxes, however, are translated into 2009 dollars.
The hit to GDP was matched as well across the economy, with
declines in jobs, wages, and wealth. The next step is to translate the
unexpected GDP decline into an impact on the labor market. To calculate
the impact on employment, a statistical relationship is estimated
between percent job growth in a quarter and real GDP growth over the
past year. The four-quarter change in output is used to capture the
fact that the job market is typically a lagging indicator, responding
after some delay to an improving or slowing overall economy. The
relationship is estimated as a linear regression for quarterly data
from 2000 to 2007, capturing a complete business cycle. This regression
provides an empirical relationship between GDP growth and job growth--
an analogue of what economists term ``Okun's Law.'' The estimated
regression is not a structural model, but an empirical relationship
that can be used to back out employment under different GDP growth
scenarios. The GDP figures corresponding to the CBO forecast are then
used to simulate the level of employment that would have occurred with
the CBO forecast made before the September 2008 crisis.
Figure 2 shows the impact of the acute stage of the crisis on
employment: 5.5 million jobs were lost in the five quarters through the
end of 2009 as a result of slower GDP growth compared to what would
have been the case under the CBO forecast made in September 2008. Slow
growth in the first three quarters of 2008 had left employment 1.8
million jobs lower than potential, and the CBO forecast for continued
weak growth in the rest of 2008 and 2009 would have meant job losses
until the last quarter of 2009, but at a much more moderate pace than
actually occurred. Under the CBO forecast, employment by the end of
2009 would have been 4.0 million lower than with growth at potential,
but the additional negative shock to GDP from the crisis knocked off
another 5.5 million jobs, leaving employment at the end of 2009 9.5
million jobs lower than the potential of the U.S. economy.
figure 2: impact of the crisis on employment
Note: Employment in thousands.
Figure 3 shows that the GDP hit and job losses correspond to lost
wages for American families--a total of $360 billion of lost wages in
the five quarters from October 2008 through December 2009 as a result
of slower growth following September 2008. This equals $3,250 on
average per U.S. household. Wage losses are calculated by taking actual
wages with the lower growth and adding back both the wages for the jobs
that would have existed with stronger growth and the increased wages
per job for all jobs had growth not plunged in the fall and dragged
down average wages. The additional wage growth per job is calculated
using the trend wage growth before the crisis.
figure 3: impact of the crisis on wages
Note: Wages in billions of 2009 dollars.
The value of families' real estate holdings declined sharply over
the crisis as well, with a loss of $5.9 trillion from mid-2007 to March
2009, or a loss of $3.4 trillion from mid-2008 to March 2009. These
correspond to wealth losses of more than $52,900 per household in the
longer period, or $30,300 per household for the shorter one. The modest
rebound in the housing market in the latter part of 2009 has meant that
the wealth loss from mid-2008 through the end of 2009 is $1.6 trillion,
or $14,200 per household. Unlike the economic variables of output,
employment, and wages, the wealth measures are not adjusted for the
unexpected impact of the events of September 2008. This is because
market-based measures of asset values in principle should already
reflect the expectation of slower growth from the perspective of mid-
2008. The unexpected plunge in the economy in late 2008 and into 2009
would not be reflected in asset values, however, making these valid
measures of the impact of the acute stage of the crisis on household
wealth.
Figure 4 shows that the financial crisis exacted an immense toll on
household wealth. The value of families' equity holdings fell by $10.9
trillion from the middle of 2007 to the end of March 2009--the longest
period of decline in the value of stock holdings. This equals a loss of
$97,000 per household. Looking at the decline in the value of stock
holdings only from the middle of 2008 to the end of March 2009 gives a
loss of $7.4 trillion, or about $66,200 per household. The measure of
stock market wealth includes both stocks owned directly by families and
indirectly through ownership of shares of mutual funds. Data on wealth
holdings are from the Federal Reserve's Flow of Funds database and are
available quarterly. The wealth declines are thus measured starting
from the end of June 2008 since the next quarterly value is for the end
of September of that year and thus after the acute stage of the crisis
had already begun. Stocks have rebounded over 2009, with the value of
household equity holdings at the end of the year back to the same level
as at the end of June 2008.
figure 4: impact of the crisis on household wealth
Note: in billions of dollars.
Table 3 summarizes the economic impacts of the acute stage of the
crisis that began in September 2008. By all measures, the acute phase
of the financial crisis had a severe impact on the U.S. economy, with
massive losses of incomes, jobs, wages, and wealth.
table 3: economic and fiscal impacts of the crisis
the human dimension of the crisis
Beyond dollars and cents, the financial crisis had substantial
negative impacts on American families both at present and, likely, for
decades to come as the hardships faced by children translate into
changed lives into the future. The poverty rate, for example, increased
from 9.8 percent in 2007 to 10.3 percent in 2008, meaning that an
additional 395,000 families fell into poverty. There is not a simple
relationship between economic growth and poverty, and poverty data are
not yet available for 2009, but the weaker growth that resulted
following the events of September 2008 surely sent thousands of
additional families into poverty. And the crisis will have attendant
consequences for other economic outcomes including the future prospects
for employment and wage growth of those facing long spells of
unemployment.
While it is not possible to count all of the ways in which the
crisis affects the United States, a glimpse of the human cost of the
crisis can be seen in the number of additional foreclosures started as
a result of the severe economic downturn that began in September 2008.
Millions of foreclosures were already likely even before the acute part
of the crisis--the legacy of the housing bubble of these years was that
too many American families got into homes that they did not have the
financial wherewithal to afford. For other families, however, a lost
job as a result of the severe recession translated into a foreclosure,
and this can be estimated using a similar methodology as for the
economic variables above.
figure 5: impact of the crisis on foreclosure starts
With the economy projected to remain weak in the second half of
2008 and into early 2009, and with many people deeply underwater with
mortgages far greater than the value of their homes, there would still
have been millions of foreclosure proceedings started. But the weaker
economy following the acute phase of the crisis worsened the problem,
layering the impact of an even weaker economy on top of the already
difficult situations faced by many American families on the downside of
the housing bubble.
conclusion
The financial crisis of 2007 to 2010 has had a massive impact on
the United States. Millions of American families suffered losses of
jobs, incomes, and homes--and the effects of these losses will play out
on society for generations to come. This paper quantifies some of these
impacts, focusing on the aftermath of September 2008 and attempting to
isolate the effects of the crisis from other developments. The result
was hundreds of billions of dollars of lost output and lower wages,
millions of lost jobs, trillions of dollars of lost wealth, and
hundreds of thousands of additional foreclosures.
An alternative perspective would be to look at the overall impacts
of the crisis from start to finish. This would be a broad view but a
less well defined calculation: one could calculate economic impacts,
for example, from the start of the housing bubble or from its peak. Or
one could seek to exclude the offsetting impact of monetary and fiscal
policy measures taken in response to the crisis and attempt to isolate
the impact of the crisis alone.
These are different (and difficult) calculations to make, but some
evidence can be garnered on the broader impacts of the crisis from
start to finish. The International Monetary Fund, for example,
estimates that U.S. banks will take total writedowns of just over $1
trillion on loans and asset losses from 2007 to 2010, including $654
billion of losses on loans and $371 billion of losses on securitized
assets such as mortgage-backed securities.
The policy response to the crisis has involved massive fiscal
costs, with U.S. public debt up substantially due to lower revenues and
higher spending in response to the crisis, and this increase is
forecast to continue under current law over the years to come. The
declines in output and asset values and increases in U.S. public debt
mirror the experience of other countries. As discussed by Reinhart and
Rogoff (2009), banking crises across countries lead to an average
decline in output of 9 percent, a 7 percentage point increase in the
unemployment rate, 50 percent decline in equity prices, 35 percent drop
in real home prices, and an average 86 percent increase in public debt.
Figure 1 of this analysis provides evidence connecting the results
of this paper to this broader literature. One measure of the overall
economic impact of the crisis is the output gap between actual and
potential GDP. In 2008 and 2009 combined, this gap comes to $1.2
trillion, or $10,500 per household. This is a loss of nearly 5 percent
of potential GDP in total over the two years--less than the 9 percent
average loss across countries found by Reinhart and Rogoff, but the
costs of the crisis calculated in this paper cover only part of the
crisis and only through the end of 2009. As shown in Figure 1, GDP
looks to remain below potential for years into the future, implying
higher overall costs of the crisis.
The financial crisis of the past several years has had a massive
economic cost for the United States--trillions of dollars of wealth and
output foregone, millions of jobs lost, and many hundreds of thousands
of families suffering hardship. These costs demonstrate the importance
of taking steps to avoid future crises, and the value of reforms that
help achieve this goal.
Mr. Bernanke. So the cost of the policy response itself is
pretty small, actually, because we are getting paid back the
TARP money.
The cost of the recession and the financial crisis is very
large. And I don't know, we can try to estimate that. But
certainly it would have been much larger if we hadn't taken
actions to prevent the collapse.
Ms. Kaptur. Yes. But I think we need to get the bookends,
how big this thing really is and also what is at risk into the
future.
And that leads me to my second question in terms of the
contracts that the Fed has signed with BlackRock. Could you
provide for the record an update on the value of the contracts
that the Fed has signed with them, the purpose of those
contracts, and the results produced to date? That is just a
request for information.
Mr. Bernanke. Okay.
Ms. Kaptur. Thank you.
Number three, how can you use your power--and this goes to
the housing issue--how can you use your power as the Fed to get
these megabanks and the servicers that they have hired to the
table to do housing workouts to avoid the ghost towns and ghost
neighborhoods that we are getting across this country? There is
a real stop-up in the system, a real blockage. Even though, for
example, home values have lost 30 percent of value, that isn't
booked on the books of the banks. And you can't get a
negotiation at the local level because there is nothing
requiring the servicers to come to the stable. And there is a
contractual relationship due to the subprime bonded nature of
the instrument.
We need the Fed to take a look at this since you deal in
the bond markets, and you deal with these companies anyway. We
need to get people to the table. And with the number of
underwater loans, this isn't going to get any better.
Across the country--I was talking to Dennis Cardoza
yesterday, from California. He and I are in the same boat, and
his boat is actually sinking faster than ours. And we really
need somebody to hold these servicers accountable. Is there
some way you can use your power to do that? That is question
one.
And then, question two, since the crisis began, the
megabanks actually have a larger share of assets in the market
than they did at the beginning, and the big investment banks
that are very important to the Fed and the way you operate
particularly up there in New York. And they had about a third
of the assets of the country prior to the crisis. They now have
nearly two-thirds.
In the meanwhile, institutions in places like I represent
are paying huge FDIC fees, up from maybe $20,000 5 years ago up
to $70,000 last year, this year $700,000. The reason that
lending is constricted at the local level is because these
large institutions are really holding so much of the power, and
we don't have a really balanced financial system. So they are
not making the small business loans. So my question is, what
role can you play as the Fed in restoring prudent lending and
broad competition across our financial system?
So question one relates to getting the servicers to the
table, working with the megabanks. And number two, what can you
do to help restore lending across this country through a
competitive financial marketplace?
Mr. Bernanke. Well, on the first, we have been working hard
to support the Treasury's efforts to do HAMP renegotiations
between borrowers and lenders. And we have made clear to the
banks that they should participate and cooperate in those
programs.
Ms. Kaptur. With all due respect, Mr. Chairman, it is the
servicers who aren't showing up, and it is a voluntary program.
It is not working.
Mr. Bernanke. Well, as supervisors, we can strongly
encourage them to participate, but I think it is up to Congress
to make it mandatory. We don't have the power to make it
mandatory.
But certainly, we think it is good practice, it is good for
the banks to get these things resolved. To have these loans in
limbo is not good for the banks either. They need to get them
resolved and stabilized as quickly as possible. So I think that
there is a common interest here, and we are very interested in
that point.
And the Cleveland Fed and other Feds also are very
interested in neighborhood stabilization, which is a related
issue. When you have a lot of foreclosures in a particular
area, you have a breakdown in public order or in tax revenues
and property values. So that is another issue where we have
been very much involved.
But, again, I think the government's primary tool for this
has been through the Treasury, and we have tried to support
them both analytically and through our supervisory function.
On competition, actually, right now, I agree with you 100
percent that small banks are critical. We work with small banks
all the time, and we were very concerned when the Senate was
contemplating taking us out of the small bank supervision
business because we find that those connections and that input
we get from them and the interaction we have with them very,
very important for our regulatory and monetary policies. So we
are supporting them in every way we can.
I think, actually, what is happening now in many cases is
that the large banks are pulling back because of, you know, a
shortage of capital or because of conservatism, and it is the
small community banks in many cases that are healthy, didn't
have subprime mortgages and are coming forward and making the
loans. So they are providing a very important service right
now, and we certainly encourage that.
Ms. Kaptur. Mr. Chairman, I know my time is up, but these
fees on these smaller institutions are killing lending at the
local level. Maybe you could take a look at that with Sheila
Baird over at the FDIC.
Mr. Moore. Thank you, Mr. Chairman.
Since this economic situation started back in 2008, we have
seen in our country a significant rise in defaults on home
mortgages. At the same time, the absence of the home buyers'
tax credit will, I am afraid and I believe, lead to a decrease
in demand. It would seem these happenings will cause housing
prices to drop even more significantly in the future. What is
the appropriate response of the Fed in such a scenario? What
can the Fed do to address this situation, if anything?
Mr. Bernanke. Well, the main thing we are doing, of course,
is that we have purchased a large amount of mortgage-backed
securities guaranteed by the government-sponsored enterprises.
And right now, the 30-year mortgage rate is about 4.8 percent,
so that is clearly going to make it accessible. Affordability
right now in terms of house prices and interest rates is about
the best it has been for a very long time.
You are right that the large amount of vacant and
foreclosed properties is a major drag, particularly in some
areas of the country. And I agree with Ms. Kaptur on this issue
that we need to work with the Treasury and with the banks to do
what we can to get these resolved as quickly as possible,
whether it is through renegotiation of the mortgage, whether it
is through a short sale or however it is done to get people
situated and allow those houses to be turned over in the
marketplace. So we are working to try to manage that situation.
But that is clearly a big overhang for the housing market.
Mr. Moore. That is my question. I appreciate your answer,
Mr. Chairman. Thank you.
Chairman Spratt. The chair now recognizes Mrs. Lummis. I
beg your pardon for moving ahead of you. You have the floor for
5 minutes.
Mrs. Lummis. Thank you, Mr. Chairman.
Dr. Bernanke, I want to explore our entitlement programs
with you for a little bit. We know, from visiting with Treasury
Secretary Geithner, that Medicare is essentially bankrupt. We
know that Social Security, when we get to the 2030s, will be
taking in enough money only to pay out three-fourths of the
benefits it pays out now if we do nothing.
So to help this committee dispel the persistent and
dangerous myth that our entitlement programs are sustainable as
currently structured, can you describe the fiscal and economic
consequences of doing nothing on entitlements and simply
allowing Social Security and Medicare to run their course?
And could you please put figure one back up? That was the
one on the Tidal Wave of Debt. Because I am concerned about the
effect of doing nothing with our entitlement programs on this
very tidal wave.
Mr. Bernanke. Well, you are correct that the entitlement
programs are not self-funded. They are unfunded liabilities to
a significant extent at this point. They are the biggest single
component of spending going forward.
Now there are various ways to address this. You can
restructure entitlement programs. You can cut other things. But
at some point, you need to address the overall budgetary
situation.
If you don't, you will get a picture like this one where
interest rates are rising, interest payments are rising because
the debt outstanding is growing exponentially. And at that
point, things will come apart.
A famous economist once said, anything that can't go on
forever will eventually stop. And this will stop, but it might
stop in a very unpleasant way in terms of sharp cuts, a
financial crisis, high interest rates that stop growth,
continued borrowing from abroad.
So, clearly, we need to get control of this over the medium
term, and we certainly are going to have to look at
entitlements because that is a very big part of the obligations
of the Federal Government going forward.
Mrs. Lummis. The only plan that I have seen that addresses
entitlements and spending comprehensively is Ranking Member
Ryan's plan that can be read on americanroadmap.org. Are you
aware of any other plan to comprehensively address both
entitlements and nonentitlement spending?
Mr. Bernanke. I think Brookings and a few others have
provided programs, but they are pretty rare. I agree with that.
Mrs. Lummis. You mentioned that we need to be careful in
the short term about upsetting the apple cart. But we need to
address these in the medium and long term. What to you is a
good definition of medium to long term?
Mr. Bernanke. Well, it depends to some extent on the rate
of recovery of the economy. The more quickly it recovers, the
sooner the medium term will come, in some sense.
But right now, the various estimates of the CBO and the OMB
under different scenarios show a structural deficit from say
2013 to 2020 of between 4 and 7 percent of GDP, which is not
sustainable. So I would say medium term is 3 to 5 years out in
the future, and of course, the situation gets much more
difficult beyond, say, 2020 when the entitlement spending
becomes even greater.
Mrs. Lummis. I am aware that Mr. Ryan's plan has been
scored by CBO and that it does not actually balance the budget
until the second half of this century. That is how gentle a
landing it is. And that is based on our current economic
situation. So it would balance the budget earlier if there were
a more robust economic recovery.
Does that number scare you as being too abrupt an effort to
recover our economy and balance the budget?
Mr. Bernanke. I am not familiar with the exact trajectory
there, but I think we need to show that, within a few years, we
are going to go clearly to a path where the debt-to-GDP ratio
remains more or less stable. In other words, that line in that
picture is flat or going down rather than rising, and as long
as that can be persuasively shown to the public and to the
markets, I think that would be a very important step.
Mr. Ryan. Would the gentlelady yield for just a brief
moment?
Mrs. Lummis. Yes.
Mr. Ryan. Are you guys saying this is all about trajectory
and confidence that this trajectory will be put in place?
Mr. Bernanke. That is what I am saying.
Mr. Ryan. That is what we are trying to achieve.
Mr. Bernanke. Yes.
Mrs. Lummis. Thank you, Mr. Chairman. Thank you, Mr.
Bernanke.
Chairman Spratt. Mr. Langevin.
Mr. Langevin. Thank you, Mr. Chairman. Chairman Bernanke,
thank you for being here today and the hard work you are doing.
When you testified in front of this committee a year ago almost
to the day, the economy was still in decline, gross domestic
product decreased by over 6 percent and we were shedding about
500,000 jobs a month. I know we have talked about this again
here this morning several times. Today our economy is growing
at an estimated rate of about 3 percent, adding almost 300,000
jobs in April. That is a significant turnaround. However, in
places like my home State in Rhode Island, which continues to
have one of the highest unemployment rates in the country--a
12.5 percent rate right now--finding jobs really continues to
be a top concern for me, for my constituents. And the other
issue is the Federal deficit. I know these have been constant
themes here this morning. So my question is that to both on
small business job creation--and I do want to adjust the
deficit. Small businesses are a key economic driver,
particularly in Rhode Island, which we have about 97 or 98
percent of our businesses in Rhode Island are small businesses.
Can you give us again an update on the current state of lending
to small businesses? In particular, can you also give us an
updated status report on the term asset backed lending
facility, or TALF, as it relates to small business lending? And
in your estimation, do small businesses now have access to the
credit that they need to begin expanding and adding jobs? And
in really going forward, what do you believe the most effective
ways the Federal Government can spur small business growth and
speed job creation? How do we really jump-start job creation in
small businesses, which is the backbone of our economy,
particularly in Rhode Island?
The other thing I would like you to get to--as I mentioned
before, the deficit and our mounting Federal debt is another
large concern for all of us, especially given the recent
volatility in the European markets. Do you believe that our
economy is stable enough to enact immediate deficit reduction
measures? If not, what are the risks of a double-dip recession?
And then finally, what are the most effective ways to enact
appropriate deficit reduction so that we don't put our economic
recovery at risk?
Mr. Bernanke. So the credit situation for small businesses
remains very tough, very tight. I think there are some
indications of modest improvement. For example, our survey of
loan officers suggests that they are no longer tightening the
terms on which they offer loans to small businesses. And the
rate at which small loans is declining is at least leveling off
to some extent. So things are getting a little better. Another
indicator is that--part of the reason it is getting a little
better is maybe that right now businesses are not coming to the
banks in many cases for loans because they don't have the
demand for their product. If you ask small businesses in the
surveys, most of them point to a lack of demand as the most
important problem and then credit is down the list somewhere.
And I think our concern is that as the economy grows and these
businesses want to grow, that they will run into constraints.
So to answer your question, I think although there seems to
be some signs of improvement--and I heard some of this last
week in Michigan when I was talking to suppliers to the auto
industry--some signs of improvement, it is still obviously very
tight for small business. Our TALF program, I think, was very
helpful in getting the securitization market for small business
loans going again. That program is now over because we are
trying to exit from those extraordinary measures. But the
secondary market has seemed to have revived. In addition, the
Treasury is purchasing SBA loans. But SBA is only one
particular--is only one part of the source of credit for small
business and that is why, as I have emphasized today, the Fed
has been working very aggressively with banks to make sure that
small businesses that are creditworthy are not turned away. I
am sure we are not successful in all cases, but we understand
the importance of this to recovery in this economy.
On the deficits, again as I said to Mr. Ryan, I think it is
really a question of trajectory. A very sharp consolidation of
fiscal policy this year would not be a good idea I think, given
the fragility of the recovery at this point, but maintaining a
strong recovery and keeping interest rates low would be
assisted by a commitment by Congress to bring the deficit to a
sustainable level and the debt to a relatively flat level to
GDP over the medium term.
Chairman Spratt. Ms. DeLauro.
Ms. DeLauro. Thank you very much, Mr. Chairman. Dr.
Bernanke, welcome. Thank you.
As expressed here and in other forums, the concern about
the adverse effect of a growing deficit and debt in the coming
years and its long-term effect on our economy, I worry that
there is a great deal of confusion about what the concerns
imply about policy choices now and over the next few years. For
instance, the concerns about the economic deficits and debt led
some House Members to demand that the fiscal relief for the
States in the form of a temporary extension of the increase in
the Federal matching rate for Medicaid be dropped from the jobs
bill the House passed before the recent break. You commented in
your testimony about the shortfall in State budgets. Additional
layoffs--and you mentioned something a little earlier on this--
additional layoffs, and there appear to be substantial layoffs
coming, particularly in education and that will follow with
health care workers, probably with police and fire. And States
are required to balance these budgets. What that means in terms
of those layoffs if we do not extend additional FMAP funding
for States, will that be a drag on the economy and slow
recovery? I know you shy away from, as you should, talking
about specific programs, but we are at an economic crisis at
the moment here. We have to connect dots between Federal
Government and State government with what is happening. What is
your sense of this policy with regard to assistance with States
at this juncture? At this juncture, not forever. At this
juncture.
Mr. Bernanke. Well, I am going to disappoint you to some
extent because again I don't want to tell Congress which
specific programs to undertake.
Ms. DeLauro. I understand.
Mr. Bernanke. But to the extent that you decide to
undertake short-term spending programs, whether it is to help
the unemployed or to provide training or to help State and
local governments or to provide infrastructure, those are the
kinds of choices that you are looking at. To the extent you do
that, it will be more effective and safer to do that on a twin-
track basis where on the other track you are also thinking
about the longer term. That is my message.
Ms. DeLauro. I understand that. The environment here today,
which is one of concern, that we do not seem to be looking at--
and this leads me to a following question, Dr. Orszag said in
the paper the other day that there was no tradeoff between
deficit reduction and job creation. Given what you have said, I
am assuming that you have the same view on that, we are dealing
with a 2-track program here. But Congress is becoming
increasingly concerned that there is a tradeoff and that
policies such as extending the unemployment benefits, doing
something about an FMAP program are increasingly--we are not
moving in that direction. That the only track is deficit
reduction. So that my point to you is do you agree that there
is no tradeoff, that both are the right goal? Do you think we
can create jobs and show that in the long term we are serious
about deficit reduction?
Mr. Bernanke. Yes, but you have do both. That is my point.
Ms. DeLauro. Right. But we are in an environment in this
institution, Dr. Bernanke, that says that it is one track, it
is deficit reduction, it is not job creation or the measures
one needs to deal with short-term economic recovery. I don't
know if you are fearful--and I would ask you the question--that
the current climate in the Congress, in both the House and the
Senate, is the one track. And my question to you is, is that
the appropriate direction to take? What kind of repercussions
would result with that effort and saying to the States or
saying to this effort on job creation, we can't do that now?
What does that do overall to the recovery?
Mr. Bernanke. I think that in the short term fiscal policy
needs to take into account the fact that the recovery is still
pretty fragile and may need some more assistance. Now, the risk
there is if you do only that short-term type of activity, it
may cause markets to worry that you are not serious and
interest rates could go up and you would have that problem. I
think we are in full agreement here.
Ms. DeLauro. We are in full agreement. What I am making the
point is that we are in a climate, in an environment in the
Congress that is one track. And my view--and I will just
express my view--is that is not where the future economic
recovery lies. I sense in your view it is the same and that we
are on the same track. Deficit reduction clearly is something
that we have to focus on. Thank you.
Chairman Spratt. Ms. DeLauro, take yes for an answer and
let us move on to the next question. Mr. Connolly. And this
will be the last series of questions.
Mr. Connolly. Thank you, Mr. Chairman. Dr. Bernanke,
welcome. And I am sorry I am the last questioner. The stimulus
that was passed by this Congress last year, was it necessary
and did it work?
Mr. Bernanke. I think it was helpful. I think it did create
some jobs, it did create some growth. Whether it could have
been done better, I don't know. But it was helpful. It did
create some jobs. But again it has added--and again I am fine
with the fact that it added to the deficit, but we need to take
into account that long-term implication as we view fiscal
policy going forward.
Mr. Connolly. Let us go back to when we passed the
stimulus. Was it useful or necessary to the economic recovery
or could we have just gotten by without it?
Mr. Bernanke. Sir, I don't want to buy into the entire
package and all the aspects of it, the composition, the size,
all of those things. But I do believe the fiscal policy was
useful, it did help the economy recover and it helped create
jobs.
Mr. Connolly. Useful. Was stimulus necessary or not a
little over a year ago? You will be one of the few economists I
know of who thinks otherwise if the answer isn't yes.
Mr. Bernanke. Again, I don't know what would have happened
in the absence. I think it did add to jobs. It did help growth.
And clearly we needed that help because the economy was in a
very weak condition a year ago.
Mr. Connolly. Thank you. You mentioned the deficit
commission, Dr. Bernanke. I have heard members of this
committee on the other side of the aisle say that they are all
for addressing the deficits so long as it never involves any
new revenue sources.
Can we, in fact, change the trajectory we are on in terms
of deficit growth if we only address the spending side and
don't address the revenue side?
Mr. Bernanke. I think I would urge everybody to approach
this with an open mind and be willing to look at all
alternatives. Now, in the end, people have their own views and
their own decisions to make. But I would think that we don't
want to be carving off all possibilities before we get to----
Mr. Connolly. I guess I am asking you a different question.
I agree with you that everyone should keep an open mind. But I
am telling you they don't have an open mind. They have publicly
expressed that they do not favor--they are all for deficit
reduction, as long as anything having to do with revenue is off
the table.
Can we get to serious deficit reduction, change that
trajectory you talked about, if we eliminate half of the legacy
programs?
Mr. Bernanke. Well, theoretically you could if you cut
enough, but it would be very difficult to do that.
Mr. Connolly. Is there enough spending to be cut?
Mr. Bernanke. Of course.
Mr. Connolly. National defense, homeland security?
Mr. Bernanke. That is your judgment, that is the Congress'
judgment. That is not my judgment.
Mr. Connolly. It must be nice to be an economist. Your
predecessor opined after the inauguration of President Bush
that he did not think that the proposed tax cuts at that time
would necessarily have a deleterious effect on the situation of
the deficit and that it could have a stimulative effect on the
economy. Was he right or wrong in that opinion,
retrospectively?
Mr. Bernanke. I think it probably did strengthen the
economy but it probably also raised the deficit.
Mr. Connolly. You think it strengthened the economy.
Mr. Bernanke. In the sense--remember we were in 2001, we
were in a recession and it was supportive of the recovery, I
believe. However, it did add to the deficit.
Mr. Connolly. But it didn't seem to have a sustained and
positive impact on the economy if you look at what happened in
2007, 6 short years later, did it?
Mr. Bernanke. That is certainly true. But the financial
crisis, I think, was a somewhat separate set of factors that
hit the economy.
Mr. Connolly. You are referring to the economic decline
after 9/11 in 2001?
Mr. Bernanke. There was a recession that began before--it
came after the drop in the tech bubble, the dot-com bubble.
March 2001, the recession began.
Mr. Connolly. My final question, because my time is up and
so is yours. Taxes. There was a study released a few weeks ago
that showed that the cumulative aggregate tax burden, State,
local and Federal, on the average household in America is now
at its lowest point since 1950 when Harry Truman was in the
White House. Is that your understanding as well?
Mr. Bernanke. That may be true, but I think it is at least
in part due to the fact that we are in a deep recession. So
people's incomes are down and so the amount of taxes they pay
are less than usual. I am not sure that is true about each
individual tax in terms of rates and so on.
Mr. Connolly. Were taxes cut as part of the stimulus bill
last year?
Mr. Bernanke. Yes.
Mr. Connolly. Thank you. I yield back, Mr. Chairman. Thank
you, Dr. Bernanke.
Chairman Spratt. The gentleman yields back. Mr. Chairman,
thank you very, very much for finding the time to testify and
for your full and forthright answers.
Those members who did not have an opportunity to submit
questions may submit questions for the record if there is no
objection. There is none. So ordered.
Thank you once again for coming. We very much appreciate
your testimony and your service to our country.
[Questions submitted and their responses follow:]
Questions Submitted for the Record to Chairman Bernanke
Congressman Aderholt
1. On April 1, the Federal Reserve began requiring escrow accounts
to be established for first-lien higher-priced mortgage loans. Many
community banks protested this requirement since they do not have the
resources to create these escrow accounts. Since the rule went into
effect, many community banks, including one in my district, have
stopped offering these mortgages. Is the Federal Reserve reviewing this
policy and how it affects community banks? Do you foresee the Federal
Reserve exempting community banks from this regulation in the near
future?
2. I hear stories from community bankers in my district about
overzealous regulators going so far as to demand changes on individual
$8,000 car loans. Do you believe that some of this over regulation
could hinder our economic recovery more than help it? Will increased
regulations in the financial reform legislation in Congress decrease
the availability of credit to consumers, especially from small banks?
3. During the hearing, you stated that some banks are taking second
looks at loan applications to ensure consumers get the credit they
deserve. In discussion with small bankers in my district, I have
learned that many community banks are taking second, third and fourth
looks. While it is good that they are reviewing these applications, it
is slowing down access to credit. The fact is that many of these banks
are afraid to lend money. What is the Federal Reserve doing to give
community banks more confidence in lending and free up credit for
consumers?
Congresswoman Kaptur
1. Mr. Chairman, what role, if any, should the Federal Reserve
System play in working to solve the housing crisis continues to ravage
our nation's communities?
2. Mr. Chairman, the Treasury is pouring money into Fannie and
Freddie, keeping it afloat to support the current structure of housing
finance. What should be done to stop us from dumping money into Fannie
and Freddie to cover the losses of bad paper dumped into both
institutions by big banks at profits and to return our housing finance
system to a prudent lending, sound system that supports homeownership
and affordable housing?
3. Mr. Chairman, in the House bill on financial regulatory reform,
we created the Consumer Financial Protection Agency. In the Senate
bill, a bureau was created within the Federal Reserve System,
underneath the Board of Governors. The conference is using the Senate
bill as the base bill for discussion. Therefore, Mr. Chairman, do you
feel that the Federal Reserve should have any responsibility for
consumer protection? Do you feel that this fits in with the roles of
the Federal Reserve System, which is to formulate the nation's monetary
policy, supervise and regulate banks, and provide a variety of
financial services to depository financial institutions and the federal
government? Please including any related information to support your
responses.
Responses to Mr. Aderholt's Questions From Chairman Bernanke
1. On April 1, the Federal Reserve began requiring escrow accounts
to be established for first-lien higher-priced mortgage loans. Many
community banks protested this requirement since they do not have the
resources to create these escrow accounts. Since the rule went into
effect, many community banks, including one in my district, have
stopped offering these mortgages. Is the Federal Reserve reviewing this
policy and how it affects community banks? Do you foresee the Federal
Reserve exempting community banks from this regulation in the near
future?
As you note, the Board's rules for higher-priced mortgage loans
require that creditors establish escrow accounts for taxes and
insurance. The Board issued these rules in July 2008 using its
authority under the Home Ownership and Equity Protection Act to
prohibit unfair practices in connection with mortgage loans. Compliance
with the rule did not become mandatory until this year because the
Board recognized that some lenders would need time to develop the
capacity to escrow.
As background, the Board adopted the escrow requirement to address
specific concerns. The Board found that lenders generally did not
establish escrow accounts for consumers with higher-priced loans. The
Board was concerned that when there is no escrow account, lenders might
disclose a monthly payment that includes only principal and interest.
As a result, consumers might mistakenly base their borrowing decision
on an unrealistically low assessment of their total mortgage-related
obligations. The Board was also concerned that consumers not
experienced at handling taxes and insurance on their own might fail to
pay those items on a timely basis.
Nonetheless, we do appreciate the concerns you have raised about
the cost of establishing escrow accounts, and whether the cost may be
prohibitive for lenders that make a small number of loans and hold them
in portfolio. In fact, community banks also have raised these concerns
with the Board directly during the past several months. As a result, we
have been discussing with their representatives the potential impact of
the escrow rule. Please be assured that the Board is monitoring
implementation of the new escrow rule by small lending institutions and
the availability of credit in the communities they serve. If it is
determined that the costs of the rule outweigh the benefits, we will
explore alternatives that do not adversely affect consumer protection.
2. I hear stories from community bankers in my district about
overzealous regulators going so far as to demand changes on individual
$8,000 car loans. Do you believe that some of this over regulation
could hinder our economic recovery more than help it? Will increased
regulations in the financial reform legislation in Congress decrease
the availability of credit to consumers, especially from small banks?
In retrospect, loan underwriting standards became too loose during
the run up to the recent financial crisis. Accordingly, some tightening
of underwriting standards from the practices that prevailed just a few
years ago was needed. However, as your question suggests, there is a
risk that over-correction by banks and supervisors could unnecessarily
constrain credit. To address this risk, the Federal Reserve and the
other banking agencies have repeatedly instructed their examiners to
take a measured and balanced approach to reviews of banking
organizations and to encourage efforts by these institutions to work
constructively with existing borrowers that are experiencing financial
difficulties. Examples of such guidance include the November 12, 2008
Interagency Statement on Meeting the Needs of Creditworthy Borrowers
and an October 30, 2009 interagency statement designed to encourage
prudent workouts of commercial real estate loans and facilitate a
balanced approach by field staff to evaluating commercial real estate
credits (SR 09-7). More recently, on February 5, the Federal Reserve
and other regulatory agencies issued a joint statement on lending to
creditworthy small businesses. This statement is intended to help to
ensure that supervisory policies and actions are not inadvertently
limiting access to credit. If bankers in your district believe that
Federal Reserve examiners have taken an inappropriately strict approach
on a supervisory matter, they should discuss their views with bank
supervision management at their local Reserve Bank or raise their
specific concerns with the Federal Reserve's ombudsman (see details on
the Board's website at http://www.federalreserve.gov/aboutthefed/
ombudsman.htm).
Regulation imposes costs on small banks and can affect their
capacity and willingness to lend. However, on balance, it is likely
that the benefits of implementing reforms to prevent a future financial
crisis outweigh the costs of these changes. Indeed, a repeat of the
recent crisis in all likelihood would be far more costly to community
banks and consumers seeking credit than the costs of the proposed
financial reform package.
3. During the hearing, you stated that some banks are taking second
looks at loan applications to ensure consumers get the credit they
deserve. In discussion with small bankers in my district, I have
learned that many community banks are taking second, third and fourth
looks. While it is good that they are reviewing these applications, it
is slowing down access to credit. The fact is that many of these banks
are afraid to lend money. What is the Federal Reserve doing to give
community banks more confidence in lending and free up credit for
consumers?
As discussed above, the Federal Reserve has developed guidance for
its examiners to ensure that they are taking a measured approach to
evaluating lending activities at small banks. In addition, the Federal
Reserve has supplemented these issuances with training programs for
examiners and outreach to the banking industry to underscore the
importance of the guidance and ensure its full implementation. Also, in
an effort to better understand small business lending trends, the
Federal Reserve System this month is completing a series of more than
40 meetings across the country to gather information that will help the
Federal Reserve and others better respond to the credit needs of small
businesses. As part of this series, the Federal Reserve Bank of Atlanta
hosted five small business roundtable discussions at locations across
its district during the spring and summer. Emerging themes, best
practices, and common challenges identified by the meeting series were
discussed and shared at a conference held at the Federal Reserve Board
in Washington in early July.
Responses to Ms. Kaptur's Questions From Chairman Bernanke
[Whereupon, at 12:20 p.m., the committee was adjourned.]