The Budget Committee will come to order this
morning. Our chairman, Senator Conrad, who unquestionably knows more
about the budget and the fiscal matters than anybody, in my view, in
the Senate, is not able to be here today, Chairman Bernanke, but he
did want me to convey that he's looking forward to talking with you in
detail about the issues that we're going to explore this morning on
Mr. Chairman, we thank you very much for coming. The public
always pays attention to what you have to say. And I think it's right
to begin this morning by asking, what do the American people want to
hear from you at this critical time? I believe the American people
want you to be brutally honest about the true extent of our economic
challenges and confident that the solutions to these challenges are
being put in place.
I think it is fair to say they aren't tuning in for more bad
news. Americans aren't glued to their televisions, hoping to learn
about something else that's gone wrong. CNBC doesn't have record
ratings because anybody wants to see the market continue to go down.
Rather, I suspect they're all watching for the opposite. They're
looking for hope. They want to be confident. They want to believe
that there are solutions being put in place that are going to work.
Americans certainly have confidence in the American dream, the
dream of a land with opportunity for each according to ability and
achievement. But right now, as Warren Buffett said recently, "it is
much better to be a financial cripple with a government guarantee,
than a Gibraltar without one."
Just yesterday, after it was reported that AIG lost $62 billion
last quarter, an estimated $460,000 per minute, the federal government
offered AIG yet another check. How is this rewarding ability and
achievement? Right now, small businesses across the country who've
played by the rules, paid their bills on time, can't get a line of
credit while AIG seems to have an open spigot for taxpayer money.
Now, Mr. Chairman, I share your view that stabilizing the
financial sector is a necessary component of a sustainable recovery,
but so is confidence. And to earn the confidence of the American
people, in my view, there needs to be an injection of openness,
accountability and, most of all, a sense of fairness.
You're in charge of the program that is supposed to get consumer
and small-business lending going again on Main Street. It seems to be
slow getting off the ground, while AIG, as we've just learned in the
last day or so, seems to be getting pledges of money almost overnight.
Nothing's going to increase confidence like rewarding hard work and
know-how on Main Street. Giving those who have earned the opportunity
to get credit to grow again, which is what Main Street is all about,
The federal budget is an opportunity to provide more honesty
about the economic challenges ahead and set in place policies that
will generate confidence needed to get investors back in the
marketplace. We're looking forward to working with you on crafting
just such a budget. Let me now recognize our friend, the ranking
minority member, Senator Gregg.
Thank you, Senator Wyden. And thank
you, Mr. Chairman, for attending this hearing today.
I think the -- Senator Wyden, as acting chairman, has touched at
the core of one of the primary issues I'm interested in, which is the
question of confidence. Whether or not the economy recovers depends
in large part on confidence of the American people in the value of
their homes and in -- fact that they'll keep a job; confidence of
those people who buy our instruments that our debt is solid and sound;
confidence that our currency is strong.
And I'm just -- I think there are questions out there that have
been raised by the budget that's been presented to us by the
administration relative to the ability to build on that confidence.
I'm going to be interested in hearing your reaction to that.
The budget, as it's proposed, essentially nationalizes all income
over $250,000; nationalizes health care; nationalizes student loans.
We're in the process of nationalizing our banks and banking system.
And in addition, it creates a national sales tax on the production of
energy. While having -- creating this massive expansion in the size
of government, it proposes that we have a debt as a percentage of GDP
which will go to almost historic levels during anytime in the post-
World War II period, 67 percent of GDP.
In the short run, one can accept the fact that debt is going to
go up significantly because of the need to address this economy with
the liquidity that only the government can put into it. But in the
long run, one has to ask, how can this country sustain a debt-to-GDP
ratio of 67 percent, deficits of over 3 percent for as far as the eye
can see and expect to maintain the value of the dollar or the ability
of people to come and buy our debt?
There are two core issues here. The first is how we get the
economy out of the hole that it's in. And that means stabilizing the
markets. It means stabilizing the financial industry.
And at the bottom of that is stabilizing real estate and also
stabilizing loan structure around general consumer activity.
You've set up the TALF proposal, which is a prospective attempt
to do that. My question remains for you. How are we going to do it
for the bad debt that's still on the books?
Secondly there is the issue of the long-term debt of the United
States; the fact that we are moving into a period, where the Baby Boom
Generation is retiring and will be close to full retirement at the end
of this -- at the end of this presidency, should this presidency be
There is a tsunami of debt headed at us, $66 trillion of unfunded
liability. It will essentially overwhelm the capacity of our children
to pay it and the ability of this nation to sustain it. And unless we
move forward on addressing it, I suspect it will cause the
international community to question the value of our currency and the
ability of us to sell them our debt. And I'm interested in knowing
your thoughts on that.
So I appreciate you coming here today. We are obviously in a
period of extreme distress, as a nation, from a fiscal standpoint.
And our people are suffering. They're losing jobs, losing homes,
wondering where they're going to be next week, next year, relative to
their financial house. And we really look to the Fed as our rock in
this exercise. And you've done very well so far in very trying times.
But we need your advice and counsel as we go forward.
Thank you, Mr. Chairman.
Thank you, Senator Gregg.
Mr. Chairman, we welcome your statement. We'll make your
prepared statement a part of the record in its entirety. And after
your statement, we're going to have a vote at 11:30. So I think we're
going to have five-minute rounds of questioning from senators.
Mr. Chairman, welcome.
Thank you, Senator Wyden, Senator Gregg and
members of the committee. I am pleased to be here today, to offer my
views on current economic and financial conditions, the federal budget
and related issues.
Over the past 18 months, the global economy has experienced a
period of extraordinary turbulence. The collapse of a global credit
boom, triggered by the end of housing booms, in the United States and
other countries, and the associated problems in mortgage markets, has
led to a deterioration of asset values and credit conditions and taken
a heavy toll on consumer and business confidence.
The financial crisis intensified considerably in the fall. In
the United States, the government-sponsored enterprises, Fannie Mae
and Freddie Mac, were placed into conservatorship. And Lehman
Brothers Holdings and several other large financial institutions
either failed, nearly failed or were acquired by competitors under
Losses at money market mutual funds led to large withdrawals by
their investors. And those outflows undermined both the stability of
short-term funding markets, particularly the commercial paper market,
and confidence in wholesale banking markets.
In early October, the loss of investor confidence, in financial
institutions around the world, raised the prospect of an international
financial collapse, an event that would have been devastating for
global economic prospects.
Using authorities granted by the Emergency Economic Stabilization
Act on October 14th, the Treasury announced a plan to inject $250
billion in capital into U.S. financial institutions. The Treasury's
actions were complemented by the Federal Deposit Insurance
Corporation's expansion of bank liability guarantees and by the
expansive provision of liquidity by the Federal Reserve.
Together with similar measures in other countries, these steps
averted a collapse and restored a degree of stability to the financial
system. Nevertheless, the cumulative effect of the financial stress
was to precipitate a sharp downturn in economic activity around the
The Federal Reserve responded forcefully to the significant
deterioration in financial-market conditions and the substantial
worsening of the economic outlook by continuing to ease monetary
policy aggressively late last year. By December, the Federal Open
Market Committee had brought its target for the federal funds rate to
an historically low range of 0 to 1/4 percent, where it remains today.
The FOMC anticipates that economic conditions are likely to warrant
exceptionally low levels of the federal funds rate for some time.
With the federal funds rate close to 0, the Federal Reserve has
focused on alternative tools to ease conditions in credit markets.
We've established new lending facilities and expanded existing
facilities that aim to enhance the flow of credit to businesses and
households. We increased the size of the term auction facility to
help ensure that banks could obtain the funds they need to provide
credit to their customers. We expanded our network of swap lines with
foreign central banks to help ease conditions in global dollar markets
that were spilling over into our own funding markets. We established
facilities to promote the functioning of money-market mutual funds and
the commercial-paper market. And we introduced -- in fact, today, a
new announcement -- the term asset-backed securities loan facility, or
TALF, which is designed to facilitate the renewed issuance of consumer
and small-business asset-backed securities.
In addition, to improve the functioning of the mortgage market
and to support housing markets and economic activity more broadly, the
Federal Reserve has begun to purchase large amounts of agency debt and
agency mortgage-backed securities.
The measures taken since September by the Federal Reserve, other
U.S. government entities and foreign governments have helped improve
conditions in some financial markets. In particular, strains in
short-term funding markets have eased notably since last fall, and the
London interbank offered rate, or LIBOR, which influences the interest
rates faced by many U.S. households and businesses, has decreased
sharply. Conditions in the commercial-paper market also have
improved, even for lower-rated borrowers, and the sharp outflows from
money-market mutual funds in September have been replaced by modest
In the market for conforming mortgages, interest rates have
fallen nearly 1 percentage point since the announcement of our
intention to purchase agency debt and agency mortgage-backed
securities. Corporate risk spreads have also declined somewhat from
extraordinarily high levels, although bond spreads remain elevated by
Likely spurred by the improvements in pricing and liquidity, issuance
of investment-grade corporate bonds has been strong, and speculative-
grade issuance, which was near zero in the fourth quarter, has picked
up somewhat more recently.
Nevertheless, significant stresses persist in many markets. For
example, most securitization markets remain closed, and some financial
institutions remain under pressure.
As I noted, the ongoing stresses in the financial markets have
been accompanied by a sharp contraction in economic activity. After
edging down during the summer, real GDP is reported by the Commerce
Department to have declined at an annual rate of 6.2 percent in the
fourth quarter of last year, with nearly every major category of final
sales contributing to the drop.
The recent near-term indicators show little sign of improvement.
Businesses shed 600,000 jobs in January, about the same pace of job
loss as in November and December, and the unemployment rate jumped to
7.6 percent. Moreover, the number of claims for unemployment
insurance has moved higher since mid-January, suggesting that labor
market conditions may have worsened further in recent weeks.
In reaction to the deteriorating job market, the sizable losses
of equity and housing wealth, and the tightening of credit conditions,
households have continued to rein in their spending.
Home sales and new construction have continued to decline despite
lower mortgage rates, reflecting the uncertain economic environment
and the expectation of many potential buyers that home prices have
further to fall.
The manufacturing sector has also deteriorated further so far
this year. Manufacturing output fell sharply again in January,
bringing the rate of capacity utilization to its lowest level in the
post-World War II period.
Orders and shipments of durable goods, which dropped in the
fourth quarter, fell markedly further in January, and most survey-
based measures of business conditions are at or near record low
Given the weak economic environment, many businesses have
apparently cut back their plans for capital expenditures
significantly. Moreover, exports, which had provided a welcome offset
to the weakness in domestic demand through the middle of 2008, fell
sharply in the final months of last year, and the incoming news
suggests a widespread contraction in activity abroad.
Despite the considerable decline in final demand in the United
States, businesses have managed to trim their inventories in recent
quarters. Still, with sales anticipated to remain poor for a while
longer, many businesses are carrying more inventories than they desire
and consequently are likely to cut production further in the months
Meanwhile, overall consumer price inflation has slowed
considerably, primarily because of the steep drop in energy prices in
the second half of last year. The PCE price index was up just 0.7
percent in January from its year-earlier level, after having risen 3-
1/2 percent over the preceding 12-month period. Core PCE price
inflation, which excludes the direct effects of food and energy
prices, has also slowed, decreasing to 1-1/2 percent for the 12 months
ending in January from 2-1/4 percent in the year-earlier period.
Wide margins of economic slack and reduced cost pressures suggest
that inflation is likely to remain quite low over the next couple of
Although the near-term outlook for the economy is weak, over time, a
number of factors should promote the return of solid gains in economic
activity, in a context of low and stable inflation. The effectiveness
of the policy actions taken by the Federal Reserve, the Treasury and
other government entities in restoring a reasonable degree of
financial stability will be critical determinants of the timing and
strength of the recovery.
If financial conditions improve, the economy will be increasingly
supported by fiscal and monetary stimulus, the beneficial effects of
the steep decline in energy prices since last summer, and the better
alignment of business inventories and final sales as well as the
increased availability of credit.
As you are well aware, the Congress recently passed a major
fiscal package which is aimed at strengthening near-term economic
activity. The package includes personal tax cuts and increases in
transfer payments intended to stimulate household spending, incentives
for business investment, federal grants for state and local
governments to reduce their need to cut services or cancel building
projects, and increases in federal purchases.
By supporting public and private spending, the fiscal package
should provide a boost to demand and production over the next two
years, as well as mitigate the overall loss of employment and income
that would otherwise occur. That said, the timing and magnitude of
the macro-economic effects of the fiscal program are subject to
considerable uncertainty, reflecting both the state of economic
knowledge and the unusual economic circumstances that we face.
For example, households confronted with declining incomes and
limited access to credit might be expected to spend most of their tax
cuts; but then again, heightened economic uncertainties and the desire
to increase precautionary saving or pay down debt might reduce
households' propensity to spend. Likewise, it is difficult to judge
how quickly funds dedicated to infrastructure needs and other longer-
term projects will be spent, and how large any follow-on effects will
The CBO has constructed a range of estimates of the effects of
the stimulus package on real GDP and employment that appropriately
reflects these uncertainties. According to the CBO's estimates, the
effect of the stimulus package on the level of real GDP at the end of
2010 could range from about 1 percent to a little more than 3 percent,
relative to a baseline forecast that does not include a stimulus.
They estimate that these effects in output relieve the corresponding
unemployment rate between 1-1/2 -- 1/2 percentage point and 2
percentage points lower at the end of next year than in the baseline
The goal of the fiscal package is not just to provide a one-time
boost to the economy, but to lay the groundwork for a self-sustaining,
broad-based recovery. Historical experience strongly suggests that
without a reasonable degree of financial stability, a sustainable
recovery will not occur.
Although progress has been made on the financial front since last
fall, more needs to be done. As you know, in response to ongoing
concerns about the health of financial institutions, the Treasury
recently announced plans for further steps to ensure the strength and
soundness of the financial system and to promote a more smooth flow of
credit to households and businesses. The plan would use the remaining
resources appropriated to the Treasury under the Emergency Economic
Stabilization Act -- approximately $350 billion -- and also involve
additional spending to support the activities of Fannie Mae and
Whether further funds will be needed depends on the results of
the current supervisory assessment of banks, the evolution of the
economy and other factors. The administration has included a place-
holder in its budget for more funding for financial stabilization,
should it be necessary.
Unfortunately, the spending for financial stabilization, the
increases in spending and reductions in taxes associated with the
fiscal package, and the losses in revenues and increases in income
support payments associated with the weak economy will widen the
federal budget deficit substantially this year.
Taking into account these factors, the administration recently
submitted a proposed budget that projects the federal deficit to
increase to about $1.8 trillion this fiscal year and to remain around
$1 trillion in 2010 and 2011. As a consequence of this elevated level
of borrowing, the ratio of federal debt held by the public to nominal
GDP is likely to move up from about 40 percent before the onset of the
financial crisis to more than 60 percent over the next several years
-- its highest level since the early 1950s, in the years following the
massive debt buildup during World War II.
Of course, all else equal, this is a development that all of us
would have preferred to avoid. But our economy and financial markets
face extraordinary challenges, and a failure by policymakers to
address these challenges in a timely way would likely be more costly
in the end. We are better off moving aggressively today to solve our
economic problems; the alternative could be a prolonged episode of
economic stagnation that would not only contribute to further
deterioration in the fiscal situation but would also imply lower
output, employment and incomes for an extended period.
With such large near-term deficits, it may seem too early to be
contemplating the necessary return to fiscal sustainability. To the
contrary: Maintaining the confidence of financial markets requires
that we begin planning now for the restoration of fiscal balance. As
the economy recovers and resources become more fully employed, we will
need to withdraw the temporary components of the fiscal stimulus.
Spending on financial stabilization also must wind down. If all goes
well, the disposition of assets acquired by the Treasury in the
process of stabilization will be a source of added revenue for the
Treasury in the out years.
Determining the pace of fiscal normalization will entail some
difficult judgments. In particular, the Congress will need to weigh
the costs of running large budget deficits for a time against the
possibility of a premature removal of fiscal stimulus. That could
blunt the recovery. We at the Federal Reserve will face similar
difficult judgment calls regarding monetary policy.
As I mentioned earlier, the president has recently submitted a
budget, and it proposes an ambitious agenda, including new initiatives
for energy, health care, education and tax policy. These are all
complex policy issues in which the specific design of each program is
as important as the budgetary amount allocated to it. The Congress
will have considerable work in evaluating how to proceed in each of
these areas. As part of that evaluation, it will be critical to
consider the formidable challenges and tradeoffs needed to
simultaneously achieve an economic and financial recovery, fiscal
responsibility, and program reforms that accomplish their desired
goals effectively and efficiently. In particular, policymakers must
remain prepared to take the actions necessary in the near term to
restore stability to the financial system and to put the economy on a
sustainable path to recovery.
But the near-term imperative of achieving economic recovery and
the longer-run desire to achieve programmatic objectives should not be
allowed to hinder timely consideration of the steps needed to address
fiscal imbalances. Without fiscal sustainability, in the longer term
we will neither have financial stability nor healthy economic growth.
Thank you for your attention. I'm happy to take your questions.
Mr. Chairman, thank you.
Colleagues, if we all stick to five minutes, we'll have a chance
to get everybody's questions in. And we're going to adhere to that.
Mr. Chairman, at what point will the taxpayer no longer be on the
hook for the massive AIG failure? What is the endgame for American
Well, Senator, first of all, the AIG situation is
obviously a very uncomfortable one for me as well as for you. We took
those actions because we felt that, first of all, that the failure of
the world's largest insurance company, with millions of policyholders,
thousands of derivatives and credit insurance counterparties, and a
huge number of other interactions with other financial firms, would be
devastating to the stability of the world financial system. If
there's been any doubt about the power of financial stress to affect
the real economy, I hope that it's been removed at this point. And so
an important consideration in our actions certainly was to try to
preserve financial stability.
Secondly, of course, we now have, of necessity, and regrettably,
a significant public investment in the company. Our belief was that
to allow the company to fail at this juncture, putting aside its huge
adverse affects on the financial system and on the economy, would have
greatly also impaired the ability of the government to recover the
investments that have already been made in the company.
The actions we've taken will help to stabilize the company, will
maintain its credit rating, will allow it to continue the process of
spinning off and selling its constituent non-core companies, will
allow it to continue to strengthen its core companies within the
We don't know for sure what the future will bring. We don't know
how the financial system will evolve or how the economy will evolve.
But I do think that this does give us the best chance both to achieve
financial stability and as well to ultimately recover most or all of
the investments that the public has made in AIG.
AIG has given the counterparties $20 billion. Those
people could be just about anybody in the world. Why won't the Fed
disclose who those are?
Well, first, in terms of disclosures, I think it's
very important that we be as open and transparent as possible. And as
I've indicated last week in my testimony -- Humphrey-Hawkins
testimony, the Fed has set up a committee headed by Vice Chairman Kohn
that's going to review all of our disclosure policies and try and
ascertain what types of information we can disclose without adversely
affecting policy effectiveness, for example.
The fact is, though, that the counterparties of AIG, like life
insurance owners, purchased financial insurance. They made legal,
legitimate financial transactions. They have normally -- under normal
conditions, they would have presumption to privacy about their
commercial decisions. So that is a consideration we have to take into
account. But we understand your concern and we want to make sure that
we provide all the information that's needed to make good public
Mr. Chairman, essentially, taxpayers have been kept
in the dark on this AIG issue. They're looking at this massive
infusion of money.
They can't figure out who's being rescued, who's -- and why they're
being rescued. And there's been virtually no accountability with
respect to where the money's going.
I've asked you what the endgame is. You've said the situation is
I've asked you why we can't disclose the counterparties. It
could be anybody, as far as I can tell, in the world, and you're
saying you're studying it.
I just hope that in the days ahead the Fed is going to come clean
as why this is so essential. I think this is setting a precedent. I
mean, AIG is not an investment company. It's an insurance company.
Insurance companies in Oregon don't take these kinds of risks, and
people want to know how we got into this situation and specifically
what's being done to turn it around.
I'd like to address that. May I, Senator?
I think if there's a single episode in this entire
18 months that has made me more angry, I can't think of one, than AIG.
AIG exploited a huge gap in the regulatory system. There was no
oversight of the financial products division. This was a hedge fund,
basically, that was attached to a large and stable insurance company,
made huge numbers of irresponsibles bets, take -- took huge losses.
There was no regulatory oversight because there was a gap in the
We were then forced -- we had no choice but to try to stabilize
the system because of the implications that the failure would have had
for the broad economic system. We know that failure of major
financial firms in a financial crisis can be disastrous for the
economy. We really had no choice.
But there -- the -- and I share your concern. I share your
anger. It's a terrible situation. But we're not doing this to bail
out AIG or their (shareholders ?), certainly. We're doing this to
protect our financial system and to avoid a much more severe crisis in
our global economy.
My time has expired. I've got more questions on
Thank you, Mr. Chairman.
I accept and I suspect most of my colleagues accept the fact that
we have to significantly expand the size of the government as we try
to get out of this hole that we're in. And that's why some of us have
been tolerant and haven't even in any way expressed any sort of
negative view of the fact that there's going to be a budget deficit
this year which is staggering, because it's an acceptable event -- not
an acceptable event; it's an event which we are going to have to
tolerate due to the fact that we're trying to use the government
liquidity to basically float the economy.
But what really concerns me is that as I look at this budget
proposal, beyond the initiatives which are aimed at trying to get the
economy stabilized -- TARP; your TALF, which is obviously Fed funds,
mostly; the stimulus package, which -- I didn't agree with its
direction, but I agreed with the concept -- there is in this budget a
massive movement of the government to the left -- in other words, a
massive expansion of the size of the government -- along with a
massive expansion of the tax burden of the government.
And after that is all said and done, four years from now, when
one certainly hopes, presumes and expects that we will be beyond these
dire economic situations, we will be looking at a government which is
taking up 22 percent of the gross national product, has a 67 percent
ratio of publicly held debt to the GDP, and no end in sight.
And in fact, it continues to work its way up, with deficits running at
3 to 4 percent minimum, from 2013 to 2019, which is the end of the
window for this budget.
Can we tolerate that size government, in the face of the fact
that we know we still haven't paid for and we still have coming, on
top of that, the cost of the Baby Boom Generation, which will drive
the cost of government up to probably 30 percent of GDP, if it's
allowed to go forward without any restraint?
What is the effect of that type of explosion, in the size of the
government, on the ability of us to sell our debt and the value of our
Well, Senator, first, you're absolutely correct
that the near-term deficit is primarily due to the current emergency.
For the current year, most of it is due to the financial stabilization
cost, the fiscal stimulus package and the losses of revenues, which is
very important, because of the weakness of the economy.
Going forward, the president has proposed a number of ambitious
programs, as I mentioned, in a wide variety of areas. I think it's
going to be up to Congress to figure out if, in terms of the substance
of those programs, whether they are achieving the social and other
objectives that Congress wants to achieve. That's really not my
place, to --
But your place is to protect the value of the dollar
and protect the ability to sell the debt. So it's tied in.
But I was about to go on and say, my concern here,
as I expressed, was that there needs to be fiscal sustainability. If
government spending is higher, it needs to be recognized that that
will involve higher taxes, in order to maintain a close, reasonable
balance between revenues and outlays.
That does have some implications for efficiency of the economy.
And I think those things and trying to restore sustainability, in the
near term, need to be taken into account as part of the number of
issues that you look at, as you consider the whole range of
ramifications of these policies.
I would add that I agree with you that we have to recognize that
coming down the pike here are the implications of the graying
population and increased costs of health care, which in turn will
affect entitlement spending and will lead to a very large longer-term
burden in the budget. And as I said on numerous occasions, I think,
addressing those entitlement issues in an effective way is an
incredibly important issue for this committee.
Well, let me ask it a different way. If we don't
act as a government, on the issue of the long-term fiscal tsunami, as
I and Chairman Conrad have described it, which is the retirement of
the Baby Boom Generation and the massive explosion in cost that they
will put on to this burden of our children, are we going to be able to
say to the international community, who's buying our debt and
financing our house, that our dollar is strong and our debt is salable
at -- with the resilience it has had over the last few, say, over the
last 10 years?
Senator, the CBO for example has done simulations,
which show that in 2030 under current laws, Medicare, Medicaid and
Social Security would take up about -- alone -- would take up about 16
percent of GDP, which is pretty close to non-interest spending.
The -- it's pretty close to the entire federal non-interest budget.
So it's clear that in order to get control of the overall budget
situation, we're going to need to look at entitlements. If we don't
get a sustainable fiscal situation and deficits continue in large
amounts for a long period, then it will become more difficult to sell
our debt, and interest rates will rise, and there will be --
So I think we need to think about what programs we want to
introduce and how we want to go forward, but there is the --
unfortunately -- the necessary corollary that we have to find ways to
pay for what we're spending.
Thank you, Mr. Chairman.
Thank my colleague.
Thank you, Mr. Chairman.
I -- let me go back to the question of AIG, because we were all
very troubled by the announcement of $61 or more billion in losses
last quarter, and yesterday $30 billion in additional assistance.
And the justification for that I'm hearing is that -- this
systemic risk AIG continues to pose, and the fragility of markets
today, and the cost to the taxpayer of government inaction -- and
that's the -- a quote.
I'm really troubled by the manner in which we're dealing with AIG
because of the risk exposure to the taxpayer, which is growing
dramatically, and I wanted to ask you a couple questions. How does
the Federal Reserve work with the Treasury to identify those firms
that do pose a, quote, "systemic risk"? How do we say that? What's
Well, there are several criteria. One is firms
that are very large and interconnected in the system. Secondly, a lot
has to do with the counterparty positions. This is -- this was
something where AIG was, as I said, particularly egregious. They took
all these large bets where they were effectually, quote, "ensuring"
the credit positions of many, many banks and other financial
institutions. Their failure would have caused all those losses to be
transmitted throughout the banking system and would have had very
adverse effects on the banking system as well as on other insurance
So we look at the interactions with other financial firms,
potential for contagion, the size of the company relative to the
overall system. In this case we're dealing with the largest insurance
company in the world. Its failure would have sent shockwaves through
the entire insurance industry.
I'd like to raise yet another deficiency in our system. I
mentioned before the failure to -- the failure of oversight with
respect to the financial products of AIG. Another problem which I've
called attention to on a number of occasions is that unlike the --
say, the FDICIA program, which allows the FDIC to resolve a failing
bank, we have no structure, no legal and regulatory structure that
allows us to resolve in a safe and sound way a large financial
international conglomerate. And it's -- we're much better off,
frankly, trying to resolve it within the context of continued
operation than to allow it to fail and allow all the chaos that would
occur following a bankruptcy.
So you're saying there'd be a real risk to just
everyday average families? How would you define that? What would we
Well, we've already seen -- in the stresses we saw
in September, the -- in September we saw AIG and Lehman and other
financial firms under great pressure. That pressure, together with
the buildup of credit contraction in the previous months, is the main
reason why the last quarter has been one of the worst in many, many
years, and why the recession, which was mostly focused in the United
States, has now become global.
The direct effects on jobs, on income, on asset values, stock values,
are direct and immediate and very, very powerful.
Well, it is -- it's hard to understand for a lot of
families, when they keep seeing things get worse, and we're still
pouring money there. But I appreciate that response.
But let me go to something you mentioned in your testimony, and
that's the TALF. I am hearing from a lot of businesses on a daily
basis in my home state who are really struggling to get credit, and it
is causing, you know, a bigger problem all the way across the board.
You mentioned the TALF. Can you describe for us what -- the current
status of this, and how it's going to help just small businesses in
our home states?
Yes. So although there's been a lot of talk about
banks and their ability to lend, in fact, for many types of credit
non-bank securitization markets are the main source of funding. And
those markets have largely closed down. And so by restoring and
restimulating activity in securitization markets, we hope to get
credit flowing for a number of different critical areas.
So the TALF -- we put out an announcement this morning which
gives the first dates, and there will be money lent under the TALF in
March. The first $200 billion of the program is aimed at consumer,
small-business and student type credit. It will allow money to flow
into those areas, and we hope will be successful not only in directly
providing credit for those crucial areas, but stimulating other
activity and other people to come into the market and to increase
lending in those critical areas.
Going forward, in conjunction with the Treasury's plan, we are
prepared to go up to $1 trillion of new credit, with the next area
we're going to look at being commercial mortgage-backed securities.
We know right now there's a -- there's a looming crisis in commercial
real estate whereby owners of shopping malls, hotels, rental
properties and many other types of buildings are unable to refinance
or to pay for new construction, because the CMBS securitization market
has completely shut down. By allowing -- by using the TALF to provide
credit and to stimulate the reopening of that market, we hope to do a
lot to affect that outcome.
So a lot of businesses or students and financial --
who are getting financial aid begin to see that immediately?
They should begin to see -- in fact, when we
announced the TALF, even before we put out a dollar, the spreads on
the asset-backed securities came in suggesting that interest rates
were already coming down and that liquidity and availability was
already improving. So we should see immediate benefits to students,
to credit cards, to small businesses, to consumer loans.
Within days, right?
I think we've already seen some benefits, and we
will be putting out money this month.
Okay. Thank you.
The time of the gentlelady has expired.
Thank you. I'm going to follow up the
temporary chairman's attack on AIG. Mr. Chairman, AIG is owned --
approximately about 78 percent owned by the federal government
What has changed? What has changed from when we -- did you examine
when you went in all the aspects of what could happen before you put
in the first tranche of money?
And you and the Treasury and the New York Fed and others were
sitting at the table when this decision was made. How could you have
put in the first money knowing full well that you were going to wind
up with approximately a 78 percent equity stake in the company? You
couldn't possibly have put the first penny in if you knew, in fact,
you were going -- it would be over -- almost 200 -- it's not 200
billion (dollars); it's a little less -- but 200 billion (dollars) and
we're not at the end?
So how is the American person -- people going to have any
confidence in the people running the ship?
Well, in terms of the decision to put the money
in, I -- as I said, I'm very angry about the situation and I'm sorry
that there were these gaps in regulation and in the financial
resolution regime. I remain --
But there is a -- excuse me. I'm going to
interrupt you, because I got five minutes. There is an entity that
was in charge of running and overseeing AIG, and that is the New York
state insurance commissioner. Are you telling us that they didn't do
I'm telling you they didn't have the capacity to
deal with a global insurance company whose failure would have
absolutely devastated the financial system.
But they -- is it -- was that -- isn't that the
regulator of AIG?
No. They regulate the insurance companies, not
the conglomerate. There's a difference. They did not have any
authority over the financial products division, as far as I know.
Well, the financial products division is one of
the real problems. That's why we went in in the first place.
Right. That's right.
And so as I said, I -- again, I -- with great
regret and trepidation, we made the decision because we felt there was
no alternative. We have tried -- throughout the restructuring, we
have tried to do everything we can to make sure that the main focus of
the company -- we're not trying to make this company profitable again
for the benefit of shareholders. Our -- every objective we have is to
make the company viable enough that it can sell itself off, sell off
its non-core businesses and repay the taxpayer as soon as possible.
And that's been our objective from --
But when you went in there, you didn't touch their
casualty and property insurance. I mean, that's the only profit
center in AIG presently.
No. We took an 80 percent ownership share, and we
took -- the loan the Fed made was a senior lien on the entire value of
the entire company, including all --
In other words, casualty and property are
Okay. You just, in a reply to Senator Murray's
statement -- in this morning's announcement, you said that TALF would
only accept ratings from three of the largest rating agencies, the
three agencies that you have been -- that have been wrong so many
times during the last decade. Why do you refuse to take ratings from
And why do you keep rewarding failure?
Well, we've -- Senator, we've been very attentive
to the idea here of making sure that the Fed does not take any credit
losses. And so we've taken five or six different steps -- I don't
want to take all your time -- one of them is to work with the credit-
rating agencies. These are relatively simple assets. These are not
complex CDOs or anything like that. And we've worked with them and
looked at their models, and we're comfortable that they can rate these
ABS in an appropriate way. And we have many other protections as well
as -- including haircuts and so on.
We're willing to look at other agencies, but we just want to make
sure that there is wide agreement among the credit raters that these
are safe assets.
(Well/but ?) aren't they the same three rating
agencies that got us in -- that caused problems?
There have certainly been major problems and
failures in the credit-rating agencies, and the regulators and the
industry have been working hard to try and improve that performance.
But you're absolutely right: There was a serious issue.
And continues to be one. And my only final
statement on AIG is that we're no better off now. You may think we
are. Your agencies -- the Fed in New York -- the Federal Reserve Bank
that -- and the Treasury may think we're better off. But the bottom
line is that the Fed and the Treasury will leave the door open for
more bailouts in the future.
(Gavels.) The time of the gentleman --
The time of the gentleman's expired.
Thank you, Mr. Chairman.
Let me first agree with our ranking Republican member about the
concern on the long-term deficits, and where are we when we get out of
this recession? And what type of a burden will this country have?
And what type of investments have we made to prevent a reoccurrence
(sic) of this type of economic disaster?
And where I disagree with the ranking Republican is that the
president's budget deals with two of the major concerns that this
nation should have addressed many years ago: one, energy
independence, and dealing with our energy in a way that we can control
our own economy in energy; and the other, with health care.
With the 40-some million Americans who have no health insurance
and the burden they are to our system, it seems to me it's going to be
very difficult for us to figure out a way to reform the Medicare
system if we don't reform the health-care system. And the president
at least has presented a budget that deals with both energy and health
care, and, unlike the previous administration, has put forward the way
in which it is budget-neutral, so it's not adding to the budget
deficit but in a way helps us deal with the budget in the future.
And yes, I'm sure it's going to be controversial, and a lot of us
will have differences of view as to how we should do this, but our
president at least has put these issues on the table, which I think
would make us a stronger nation economically if we deal with both
energy and health care in -- at this time.
Our ranking Republican then mentions the word "nationalization"
several times, so let me talk a little bit about nationalization.
Some of us are -- I'm against nationalizing our financial
I hope we don't have to do that. I don't think we should do that.
But some believe we de facto have already done that, with the
type of investments that the government has made and major financial
institutions taking basically equity positions, imposing significant
restrictions on their operations.
But the concern is, have we done this in a way that is more
costly to the taxpayer and less effective in getting the results that
we want? So have we really -- how do we explain the fact that there
is so much government involvement and yet the credit markets are still
in many cases frozen?
Has the government really used its leverage appropriately? Or
has it gone too far?
Well, there are many dimensions to the government
involvement. And as I mentioned, in many of the credit markets,
activities by the Fed and others have shown some benefits.
With respect to the banking system, clearly we have not
stabilized that situation. The Treasury has a plan, which it intends
to execute. It is a comprehensive plan, in that it includes
It includes new capital. It includes taking assets, bad assets,
off the balance sheet. It includes foreclosure mitigation and other
steps as well. So it's a more broad-based, comprehensive plan. But
it's not yet been executed.
Our -- we are working, the Federal Reserve is working, closely
with the Treasury to try and get that done. We also don't think that
nationalization is either warranted or necessary.
But we are prepared even as, and I think the American people have
a right to expect that as public money goes into institutions,
particularly where there's a substantial ownership share, that there
will be very close supervisory oversight, to make sure that a) the
banks are not taking excessive risks, b) that they're taking steps
necessary, to restructure themselves and to restore themselves to
viability and health and c) that they make appropriate credit
decisions and are lending, to help support the economy.
And so those are the things that we plan to do.
You've indicated that the current tools may not be
enough. And you referred to the president's budget as having a
placeholder for additional resources, if they become necessary.
Give us your realistic assessment, as to what we should be
planning on. We have not seen the results, I think, that we had
anticipated when the TARP legislation was passed last year.
Should we be planning that we're going to have to infuse
additional federal credit, beyond that which is already authorized?
And do we need to consider additional tax cuts or spending, in order
to stimulate the economy?
Senator, I just don't have a number for that.
It's going to depend on our assessments. It's going to depend on the
evolution of the financial system and the economy. And I think it's
more appropriate for the administration to make their judgment, about
how much more they want to do and in what form. And I'm sure they
will be coming forward with whatever request they might have. But I
can't really give you a number at this juncture.
Well, you know, I respect your caution there. But
you know, we need the best advice. Clearly if we go back and look at
the advice that was given to us, last fall, the results aren't where
we thought we would be. And I think some of us are concerned that the
influx of money, to AIG and elsewhere; will we get the results that we
I think we will eventually get results. I think
that continued attention to these issues, a more comprehensive
approach -- we will eventually stabilize the system.
When we stabilize the financial system, I think we'll see marked
improvement in the economy, and it will illustrate the point I've been
trying to make: that the financial stability issues, which I realize
are remote to many people on Main Street, are really intimately tied
to the overall success of the economy.
Thank my colleague.
Senator Graham is next.
Thank you, Mr. Chairman.
I'm trying to ask Senator Gregg's question a little bit
differently. Is there any outer limit on the federal government's
ability to borrow money?
Certainly there are outer limits --
What are they, and how close are we to them?
Well, it's hard to judge in any kind of explicit
way, since we don't know. I mean, countries have clearly -- for short
periods of time have clearly had very high levels of debt. The United
States had more than a hundred percent debt-to-GDP ratio during World
War II. The Japanese during their financial crisis raised the debt-
to-GDP ratio above a hundred percent. But clearly that's not a
healthy situation. It's one in which interest payments can become a
very important part of the government's outlays.
We had been -- over years have been bringing our debt-to-GDP
ratio down to about 40 percent. Now we're going to see it jump to 60
or 65 percent.
We need to be, I think, looking for a -- what's called a primary
deficit -- that is, the deficit excluding interest payments -- is
somewhere close to balance. That would be sufficient to stabilize our
debt-GDP ratio. I think that we would be a good objective.
It's very hard to know how much higher the debt-GDP ratio could
be before the international financial markets begin to balk. And so I
think the prudent thing to do is to try and maintain stability of the
Has there always been a buffer zone to -- between
reality and this magical place, and is there a buffer zone today?
Well, as I think the recent experience is showing,
confidence and expectations are critical. And I think the markets
will be quite able to absorb, for example, the large amount of
issuance we're seeing the next couple years, if there is a reasonable
expectation and confidence in the same markets that the United States
is serious about getting its budget position under control in the
There are some projections that exist that in 2050
the debt-to-GDP will be 300 percent. What kind of effect would that
have if that became a reality?
Well, I don't think that's going to happen, and it
can't happen, because things would break down before then.
Something has to change for it -- for it not to
Something -- (inaudible) -- that's right.
-- for it not to happen, right? Something has to
change, because --
Something would change, whether it was either
change in policy or a change in the willingness of the lenders to
finance the debt.
What would a zombie institution be, in your
Well, the term "zombie institution" was used
frequently in the context of the Japanese situation, where there were
banks that essentially kept their bankrupt customers on life support
for long periods, didn't insist on repayment or restructuring, were
not making new loans, were not doing anything to make themselves
healthy or to raise new capital or to restructure themselves. That's
what I would call a zombie institution.
I don't think that any major U.S. bank is currently a zombie
They are all lending, they've all active and they're all viable.
Is AIG a zombie institution?
AIG is in a very difficult place. It's lost a lot
of money. And it was a good company, a strong insurance company that
was ambushed by the Financial Products Division and other bad
If AIG is not a zombie institution, who would be?
I don't know of any large zombie institutions in
the U.S. financial system. And our idea with AIG is, in fact, to
allow it to stabilize and to become profitable enough to repay the
obligations it has to the United States.
And the reason we're continuing to stabilize,
because the downside of it failing is so enormous. Is that correct?
Yes, Senator, unfortunately that's the case.
Would it be worth a trillion dollars to avoid
I don't think we're going to come remotely close
to that. But I think that the costs of the financial crisis in
Would it be worth a half a trillion dollars?
In the mid-September crisis, which included AIG,
Lehman and other things, I would put the cost of that to the U.S. and
world economies in the multiple trillions.
So, literally, it would be cheaper to put 2
trillion (dollars) and then let it fail?
No. I think what's happening here is that we are
-- over time, we have been doing what we can to break the company up,
to get it into a saleable position and to try to defang it. We've
done a lot, for example, to take off some of these dangerous
counterparty positions that would create the contagion. So we're
doing all we can to make it, you know, a safer institution as well as
trying to get it to stabilize.
Once we administer the stress test of the major
banks, will we have more information as to whether or not future
capitalization is warranted?
What we'll learn from that, Senator -- what we're
learning from those assessments will be how much, if any, additional
capital is needed --
I've only got 15 seconds. My question basically
is, will we ever know in this country whether or not we're repeating
the Japanese mistake? Do you have any test out there to let us in
Congress know that we're throwing good money after bad when it comes
to certain institutions?
The Japanese mistake was not acting quickly enough
or aggressively enough, and I think that's not our problem.
The time of the gentleman's expired.
Thank you, Mr. Chairman. Welcome,
We have spent a lot of time in Congress talking about the $700
billion TARP bailout, which I voted against, as it happens. Not a
whole lot has been talked about with regard to the $2.2 trillion that
the Fed has lent out.
Now, I find it absolutely extraordinary that -- I wrote you a
letter and I said: Hey, who'd you lend the money to? What were the
terms of those loans? How can my constituents in Vermont get some of
that money? Who makes the decisions? Do you guys sit around in a
room? Do you make it? Are there conflicts of interest?"
So my question to you is, will you tell the American people who
whom you lent 2.2 trillion of their dollars? Will you tell us who got
that money and what the terms are of those agreements?
We explain each of our programs. In terms of the
terms, we explain the terms exactly. We explain what the collateral
requirements re. We explain --
To whom did you explain that?
It's on our website.
So all that information is available in our
commercial paper --
And who got the money?
Hundreds and hundreds of banks. Any bank that has
access to the U.S. Federal Reserve's discount --
Can you tell us who they are?
No, because the reason that it's counterproductive
and will destroy the value of the program is that banks will not come
to the discount window --
Well, isn't that too bad?
In other words, isn't that too bad? They took the
money, but they don't want to be public about the fact that they
received it. We heard a whole lot about AIG. They're on the front
These are very --
Now, I got banks and I have businesses in the
state of Vermont who are in a lot of trouble. Not banks -- our banks,
by the way, are doing pretty well. Now, how do these guys who are
honest business-people get it? Do you have to be a large, greedy,
reckless financial institution to apply for these monies?
There is no subsidy. There is no capital
involved. There is no gift involved. It is a collateralized, short-
term, liquid loan that is both overcollateralized and is recoursed to
the company itself. We have never lost a penny doing it.
And how can other institutions make -- get those
loans as well?
According to the law, we are supposed to be
lending to depository institutions. We --
Well, let me just say this, Mr. Chairman. I have
a hard time understanding how you have put $2.2 trillion at risk
without making those names available, those institutions public. And
we're going to introduce legislation today, by the way, to demand that
you do that. It is unacceptable to me that that goes on.
Mr. Chairman, one of the untold -- one of the issues that bothers
me very much is that for many, many years, some of us were concerned
about deregulation. Some of us were very concerned about where the
economy was going. We didn't hear much coming from the Bush
administration, who told us over and over again that the fundamentals
of the economy were sound. We didn't hear much from the Fed.
Now, looking back, do you think that maybe there was a problem
there that you did not raise some alarms out there and said we've got
a problem when trillions of dollars are being floated around the world
in a deregulated, non-transparent way? When you heard people talking
about the fundamentals of the economy being sound, how come you didn't
raise an alarm?
Well, there was a massive credit crisis, and it's
been true that our regulatory system and our financial supervisory
system did not succeed in preventing those impacts. And I think it's
very important that we --
Did not succeed in preventing them. Let's take it
another way. Do you think that the repeal of Glass-Steagall was a
No, I don't think so. But I do think we need to
have much more effective holding company and oversight supervision.
And I strongly support a strong program of regulatory reform, going
Mr. Chairman, in my state, people ask me how it
could be that you're providing loans at almost zero interest rates to
large financial institutions who are then charging consumers 25 or 30
percent interest rates on their credit cards. Do you think that
that's acceptable or do you think that those institutions that are
receiving help from the Fed should substantially cut those interest
Well, with respect to credit cards, we've been
working actively in that area on a couple dimensions. One is that
credit card credit availability will be enhanced by our TALF program,
which I've just announced.
No, but you're not answering my question.
Should a financial institution that is being bailed out by taxpayers
charge those taxpayers 25 or 30 percent interest rates when they're
Well, you need to address that to the Treasury
because it's the TARP that's providing help to failing or damaged
firms. The Federal Reserve lends to health firms on a collateralized
basis with high liquidity --
Last question. Last question. Many again are my
constituents, I think, people all over this country are wondering why
the CEOs of these large financial institutions who have been extremely
greedy, reckless and maybe have engaged in illegal behavior have not
been fired so that we can work with people who want to really reform
Should the CEOs of the financial institutions that have led us
into this deep, deep recession be fired?
Well, pay and job tenure should depend on
performance and those which have performed poorly should lose their
Are any of them --
Many have lost their jobs.
Most of the major guys are still holding their
Thank you, Mr. Chairman. Thank you
for being here today.
The Federal Reserve Board's balance sheet is something we talk
about, maybe don't understand very well, but the Fed has committed
since October more than $2 trillion as I understand it in its various
enterprises, which is collateralized and you expect to recover the $2
trillion or so and you just said you've never lost a penny doing it.
The fact is that about five percent of it is Bear Stearns or AIG
until yesterday and now it must be a little higher, maybe it's not,
but it was until yesterday and we hear proposals to get bad assets out
of banks with the federal government putting up $100 billion and maybe
the Fed leveraging that to a $1 trillion.
So my question is a little like Senator Graham's question about
debt. What are the outer limits of our ability to use the Federal
Reserve Board's balance sheet for these various activities? And what
are the risks?
Senator, it was a good question. Let me first say
something about the balance sheet. It's a little under $2 trillion
now. About a quarter of it is Treasury's that we hold, so it's not
really lending, it's up to the government. About half of it is short-
term liquid lending to banks that we were discussing with Senator
Sanders, that's done on a collateralized, short-term basis.
There is some money in a commercial paper program that we've had
that's had a good bit of success in reducing commercial paper rates in
that market and there's some money for the GSC purchases we've done,
which have brought down mortgage rates.
So we have been working actively to try to improve general credit
conditions. As you point out, about 5 percent of our balance sheet is
devoted to Bear Stearns and AIG --
But if I may interrupt just a minute to specify.
The first risk is that you don't get your money back and you think you
will. The second risk would be that the more paper, the more money
you print, the more likelihood we have inflation down the road.
Senator, that's absolutely correct. So you're
absolutely right that in order for us to begin to raise interest rates
and begin to stabilize the economy at that time when the economy
begins to grow again, we're going to have to shrink the balance sheet
and we're watching that very, very carefully. It's very important we
spend about half of our time at FOMC meetings looking at the balance
sheet and trying to make that evaluation, but as I mentioned, about
half the balance sheet, about $1 trillion alone is in very short-term
lending and we have several hundred billion dollars of commercial
paper, which is no longer than three months. So a lot of this can be
run off and allow the balance sheet to shrink back down.
You've got some room in terms of -- well, I
guess, as I'm hearing you, you plan to get your money back by heavy
collateralization and you're watching inflation over a long time. The
reason I ask, I was governor in the early 1980s when in Tennessee,
unemployment was 11 percent, inflation was 14 percent, interest rates
reached 20 percent because of different circumstances.
But let me take that in my remaining time to ask you another
question. We had very good testimony here in this committee from a
panel that basically said there might be $2 trillion in toxic assets
that need to be taken off the financial institutions. I sense,
although I don't think the Senator from Vermont is part of this
consensus, that there's a growing consensus that we need to fix the
banks. Eisenhower said I'll go to Korea; I'd like to hear President
Obama say, I will fix the banks.
What does he need to do to fix the banks? And how much are we
going to have to cough up to help him do that? And if takes $2
trillion, how much do we have to capitalize that effort? How much
leverage can the Federal Reserve lend to it? Are we going to have to
-- his testimony was said here, its $2 billion that we need to
capitalize it in their words as much as you can and then they said,
three, four, five, six hundred billion more dollars in order to get
the toxic assets out of the banks?
Senator, the Treasury's plan has, I think, the
three key elements for stabilizing the banks, that's supervisory
review, making sure we know what's there and making sure that the
banks are strong enough. That's capital provision, which is what the
capital assistance program is about and the third is taking bad assets
off the balance sheets and there are various ways of doing that. The
Treasury has talked about some kind of public-private partnership
where the private sector would help determine the prices.
A question is: How do you leverage up the TARP money?
Right. But in my last --
Let me just quickly say that there are different
ways to do that and some of them don't involve the Fed, for example,
the FDIC could guarantee liability.
I understand, Mr. Chairman, but doesn't someone
need to step forward and say I will fix the banks? I will do A, B and
C in the same way President Eisenhower said I will go to Korea to
build the kind of confidence back in our financial system that Senator
Gregg was talking about?
I agree we need to fix the banks and we need to
fix the financial system and if we can do that, we'll get a good
Thank you, Mr. Chairman.
I thank my colleague.
Thank you, Chairman.
Welcome Mr. Bernanke. On the long-term front, we are looking at
$50 (trillion), $60 trillion worth of unfunded liabilities, i.e., we
see the obligation coming; we haven't set aside a nickel to pay for
them. Those seem to be the real -- as the former Comptroller General
said, swamp the ship of state problems.
If we get through this financial problem with $7 trillion spent,
that's one-fifth of the $35 trillion liability we own just for the
Medicare slice of the health care tsunami that is bearing down on us.
You spoke about this at Chairman Baucus' Finance Committee event
earlier and I'd like to sort of reprise those thoughts now.
There are two ways we can go about solving this problem, we can
wait until it's really upon us and then we can apply the traditional
fiscal solutions of throwing people off of their coverage, thinning
out the benefits, paying providers less or raising taxes to bring the
fiscal costs to the system into balance.
First, before I ask you about that. There's a second way, which
is actually intervened in an astonishingly overpriced,
underperforming, complex and wasteful health care system and design
ways to actually bring down the costs, which many studies and
experiments have shown can be done while improving the quality of
health care dramatically, and in this area, there are things like
investing in health information and infrastructure and investing in
quality improvement in ways that save cost and investing in prevention
in ways that save cost and in reforming the payment system so that
it's sending appropriate signals for the kind of system that we want.
I see those as two very distinct choices. My worry is that the
latter series, the more humane series, the reform series of options
take time to implement and if we goof off and fiddle and let this
moment pass, then we're left with that other set, we're left with
throwing people off their coverage, thinning out the benefits, paying
providers still less and raising taxes.
Looking at that second group, what do you think is the actual
long-term viability in terms of solving our problem of resort to that
fiscal toolbox of throwing people off the coverage, thinning out the
benefits, cutting provider payments and raising taxes?
Well, that's both very difficult to do and very,
you know, unattractive way to go, obviously.
Even if we did it, would it last long?
Well, just to give you a sense, you mentioned
these very large, unfunded obligations for Medicare. Those
obligations are calculated assuming that medical costs grow at a rate
1 percent faster than per capita income. In fact, historically that's
been 2 to 2-1/2 percent. So even those projections assume a
considerable improvement in the rate of cost control in the U.S.
So I think it's very important, both in order to get a rational
system and to get one that people can get used to and we can learn how
to -- by experience, how to make it work better, I think it's very
important that we address these issues now. And frankly, in terms of
the long-term entitlement issues, the medical issue, which has
multiple dimensions -- it involves cost but also involves access, it
involves quality -- those are very, very tough problems.
I do think that --
You said "now." Can I ask you to -- in my
remaining minute -- talk a little bit about the -- how urgent that
"now" is, if that's just we should do it now or do you -- is there
real pressure on us to get this going in -- (inaudible) -- way right
Well, I was asked this question in the Senate
Finance Committee, and he asked me when we should start, and I said 10
years ago. So I think it is very urgent that we look at these issues
and make some tough decisions, I mean, the general public policy
decisions about -- choices that have to be made about what kind of
health care system we want to have and how we want to structure it.
Let me make just one observation in closing.
You've -- I know what you're trying to do. I appreciate the efforts
that you make to shore up the institutions that direct our financial
system. You're concerned about the shock waves, as you've said,
through the insurance industry, from the AIG failure. You're
concerned about devastation in the financial services industry, from
the credit collapse.
Just from my own perspective, I submit that the Rhode Island
business community, the small-business community in particular is
suffering shock waves itself, that our neighborhoods are suffering
And the more that what we're doing focuses on these big
institutions, the more it looks as if the masters of the universe who
made this mess aren't truly being held accountable, and the less
people at home see some real difference, the more challenging it is
going to be for us as a democracy to not only solve this problem but
to have the public goodwill necessary to solve the health care
problem, necessary to solve the climate change problem stacked up
If you blow all of the public's good will solving this problem,
we are in serious trouble on the health care and the climate change
and other troubles.
So I'd urge you to bear that in mind.
Thank my colleague.
Yeah. Let me preface my question
before I read it, that sometimes the work of the Federal Reserve comes
up at my town meetings, and I -- you know, you can't go in depth to
what you do, and I probably don't know everything you do. But I try
to explain that you can have irresponsible Republican Congresses, you
can have irresponsible -- or Democratic Congresses. And they -- if
they overspend, eventually it's going to bring about inflation. And I
see the work of the Federal Reserve as a counterweight to Congress --
to explain in a nonpolitical way -- maybe correcting mistakes that
politicians ought to know more to do but don't do.
So my question is this: If Congress would adopt nearly -- the
Obama budget, it would add trillions of dollars to the federal debt.
Because investors covet the relative security of Treasury securities
during times of crisis, the Treasury is able to attract all the money
it needs while paying extremely low interest rates on newly borrowed
However, the day will come when those securities will mature. To
retire that debt, the Treasury will need to float new debt at what is
almost certainly going to be a higher rate of interest.
Question: Is the federal government setting itself up for a long
-- for a new long-term crisis as the cost of maintaining the federal
debt explodes in the years to come?
Well, Senator, I should start off by saying that
it's not my place or my standing to evaluate the specific programs
that Congress is looking at. They're going to have to make a lot of
tough decisions about how you want to go with health care, how you
want to go with global warming, education, all those very big issues
that are very important to the American people.
My position here is simply to talk about the fiscal implications.
And I think it is important. I realize that we have enormous deficits
in the very short term. I am afraid that they're unavoidable, given
the need to get the economy back on a recovery path. But we do have
to look forward as -- even as we make plans to change our health-care
system or make other changes, we have to make sure that in the medium
term we have a fiscal position that will allow -- and I use as a rule
of thumb, say, the debt-to-GDP ratio not to be growing so that we can
assure ourselves that we'll be able to finance those debts at a
reasonable rate and not impose excessive burdens on our children and
Well, do you have a benchmark that you throw out
for percentage of national debt to GDP or annual deficit to GDP?
Well, there's no magic number, but I would hope
that, given that we're going to be above 60 percent, I hope that we
don't go higher than that. I'd like to see us try to come back down
gradually over time.
Okay. Again, back to the budget issues, because
I think what we do, and how you react to what we do, particularly if
the things we do are inflationary -- I ask this question: President
Obama's fiscal year 2010 budget assumes the recession will be
shallower and the recovery will be stronger than most private
They forecast, the administration, 3.2 percent growth for calendar
year 2010. That seems to me to be a little optimistic.
I hope, of course, the optimism matures. Some people say it's
rosy. How likely is it that the administration is right and most
every private economist is wrong, on this issue of what the growth is
going to be next year?
Well, it's true that the administration's forecast
is a little bit more optimistic than, say, the Fed's projections or
the CBO projections. Part of that might be the timing of when that
forecast was made. The recent news has been on the negative side.
But I think it's important to understand that these forecasts are not
precise, that there's a lot of uncertainty.
So I think that their numbers, although they're on the more
optimistic side of the forecasts that have been made, are sort of
within the range of uncertainty that all of us face, in trying to
forecast the economy.
Would you say the same thing about the
unemployment rates peaking in the second quarter at 8.2 percent?
Compared to private economists' forecasts that I've seen, this sounds
surprisingly low. Do you share the administration's optimistic
outlook for unemployment?
Well, we have a projection for 2009 between 8.5
and 8.75 percent. That's our estimate for the fourth quarter. So we
have a somewhat higher estimate. But as I said, these things are hard
to predict with precision.
Thank you, Mr. Chairman.
Thank you, Senator Grassley.
Thank you, Mr. Chairman.
Thank you, Mr. Bernanke. I've got two lines of questioning.
One, I think, you hear obviously lots of concern, from all of us,
about some of the excesses that have come out of the financial
markets. And you know, I start with the premise that over the last
decade, under the guise of financial innovation, the banks and
financial institutions have tried a lot of new products that in theory
were supposed to help us better price risk but in reality have ended
up causing actually more systemic risk.
And you know, a classic case, and I know a number of my
colleagues have raised this point, AIG: pretty good insurance company,
until you suddenly layer on an exotic financial products division, out
of London, selling products into Europe, with slews of credit default
obligations that were not even hedged, that now we are having to pick
up the fallout from.
I guess, on a going-forward basis, obviously we're going to try in
regulatory reform to at least put some regulatory umbrella over all of
But I've got a two-part question. One is, the normal theory --
at least recent theory, I think, around regulation has been, we'll put
some regulations and at least give transparency. But will that be
enough in a market that seems to be overly financially engineered?
And at some point do we actually need to look at the underlying value
of some of these new devices and whether there is an actual societal
value, whether there is -- they accomplish anything other than simply
creating a fee structure for the banks or the financial institutions?
And is oversight and transparency enough, or will we potentially need
bright line prohibitions about some of these products going forward,
And point two -- question two is, even if we get it right, in
this country, back to my colleague from Kentucky's questions about the
commissioner in New York -- well, if the commissioner in New York
didn't have the ability to oversee the activities of AIG that were
taking place in London, can we ever get to enough of a domestic-only
regulatory scheme to get it right, and are we going to need to look at
some type of international regulatory oversight that actually has got
teeth? So transparency and traditional regulation versus bright-line
prohibition around some of these products and how we assess these
products, and then even if we do get it right in this country, how do
we take that on an international stage?
Well, Senator, on new products, I think that there
would be cases where safety and soundness and systemic stability would
say that the regulators should prohibit a product that either is
perhaps excessively difficult or deceptive from a perspective of a
consumer, or it embodies risks that are not, you know, productive in
terms of the overall system. So I think there would be situations in
which you want to prohibit certain products or at least insist on
design changes and other protections for certain products.
And let me just interject there, because my concern
is that even if we get it fixed, we're going to be chasing yesterday's
products while the financial engineering tools are going to continue
to be creating the next generation of problems, and we've got to
somehow find a regulatory framework to get ahead of that.
I think the confidence in financial engineering
has gone down quite a bit, and we need to be very --
Amen. Amen. Amen.
-- very careful and make sure that the products
are -- being created are serving a real purpose and are not simply
some kind of arbitrage for regulation or avoiding oversight.
With respect to international, we are working very hard. There
is an international community involving the Basel Committee, the
Financial Stability Forum, the IMF and many other organizations that
do work to try to harmonize and work together. As you know, the G-20
are meeting in London in about a month. So it is very important to
have coordination among the major regulators.
I haven't heard too much serious discussion of a transnational
regulator, because of the political and sovereignty issues that
raises, but I do think that close cooperation -- which we've had at
the Federal Reserve for some time. We work very frequently with other
national regulators to do simulation exercises and so on.
Cooperation that might extend at some level at
least common standards. I'm not advocating some international --
There's a great deal of interest in common
standards and capital regulation in accounting and a whole variety of
Let me just move from this macro to perhaps a
smaller -- much smaller piece of the problem. And I'm very anxious to
see the implementation of the TALF. I mean, I'm concerned it has
taken this long, and I think it has great potential, but the sooner we
get it rolled out, the better. You've talked about how it will have
benefits to consumers, small businesses, students.
One area that I keep hoping that you folks or folks at Treasury
will press on is the -- not total freezing up of the concerns in the
municipal markets. You know, we see that in school-based systems who
are trying to go out and get their school bonds floated, housing
markets -- housing agencies trying to get their housing bonds floated,
states in terms of transportation bonds. I would hope that you would
continue to look at using TALF to try to free up a little bit and
bring our municipal markets back into some kind of a traditional form
The time of the gentleman's expired. And we're
going to see how many questions we can get in. I think we have Dr.
Bernanke till noon, and the vote may be going a little later. So
we're going to try and see if we can get a few more questions in.
Dr. Bernanke, in the budget and throughout the debate about how
to strengthen our fragile economy, both sides of the aisle are now
proposing to use the tax code to advance various social objectives. I
believe that it's more pro-growth to start cleaning out the tax code,
to go out and clean out some of those loopholes that are being added
at the rate of almost three for every working day, and use that money
to hold down rates and keep progressivity.
We're going into the tax reform debate certainly next year.
Isn't it more pro-growth to start cleaning out the tax loopholes and
using that money to hold down rates?
Senator, I think most tax economists would agree
with what you said. There first of all is the issue of complexity.
People spend something like 20 to 30 hours of their time just filling
out their tax form. But beyond that, the general recommendation from
tax economists is that you should limit deductions and keep the
overall rate as low as possible. It's certainly important that the
government have ways of stimulating certain types of activities, but
often that can be done through an appropriation process rather than
through a tax break.
I'm going to show you my fair, flat tax, because
it's got a one-page 1040 form.
The people at Money Magazine filled out their taxes on it in something
like 40 minutes. And we're going to be asking for your counsel as we
go to this tax reform debate on the Finance Committee, because I think
if you look at this debate, both sides are essentially proposing
adding a whole truckload of additional loopholes, and I personally
think we ought to be going in the opposite direction. So I appreciate
The second area deals with another disclosure question. My sense
is, on the banking issue, a big part of the solution is that you've
got to dimension the problem. In other words, people today can't get
a sense about whether they ought to be sending investment dollars to
the private banking system and the like, because they don't know what
the real troubled assets are on the books.
What is it going to take to flush out the scope of the problem of
these troubled assets on the bank's books? It is a disclosure
question. I want to be clear I'm interested in the disclosure part of
it. What's it going to take to get disclosure on this?
Well, just very quickly, you know that we're doing
the supervisory assessment, which is supposed to try to get a sense of
how much capital these banks would need, how much hole they need to
fill in order to be well-capitalized, even in an adverse environment.
It's a difficult problem, Senator, because many of these assets
are very complex and therefore opaque. But in addition, even simple
assets are hard to value these days, because they depend so much on
the future movements of the economy. I mean, if you don't know what's
going to happen to house prices, how do you value a mortgage? So it's
So we're doing all we can to try and improve disclosure. That's
part of the program that Secretary Geithner talked about, but it's
also one of the reasons why you'd like to, if possible, get some of
these assets off the balance sheets of the banks, because that creates
more transparency for the remaining portion of the bank, and that is
better for attracting investment from the private sector.
I know it's complicated. There's no question about
it. I know it's opaque. And I've sat in the Finance Committee and
I've heard experts say that. But that's why we have you there.
That's what we have you there -- to give us some sense of what the
dimensions of this problem are. And so I hope we're going to see that
quickly, because I don't think we can go on to the other debates --
I've never heard about anybody coming up with a solution for a problem
if they can't dimension the nature of the problem. And we've got to
get that addressed more quickly.
We're working to dimension it. We're using gap
accounting. And it's -- a lot of this is an accounting issue. How do
you account for complex assets which have uncertain cash flows?
I want to -- I want to make my last question one
that I think is a basis for optimism. I've told you I think that we
want brutal honesty from you and we want a reason to be confident.
And I think that the history of dealing with tough times -- you look,
for example, to the fact that Silicon Valley essentially was created
in the middle of a recession, in the 1970s. You had major tech
companies come out of the '80s. So innovators can prosper in tough
And I think I'd like to you close -- at least my question --
Senator Graham and others have questions -- by telling us why you
think that innovators can succeed in these kinds of tough times. I
think there are opportunities for innovators. There have always been
opportunities for innovators. And that's what the American dream has
been all about.
So for purposes of my questions, close this on a positive note
and tell us why innovators ought to feel that they can still go out in
the marketplace and succeed, like they've done again and again in
Well, I think, that's absolutely true. And
confidence in the U.S. economy is one reason why the dollar has
actually done relatively well, compared to some other currencies.
We had recently, at the Federal Reserve, we had an organization
of venture capitalists. And they said, yes, you know, there are some
difficulties now raising money and so on. But they're still very
active in starting new firms, in health sciences and energy and a
number of different areas.
They have a long-term perspective. They believe that
technological opportunities abound everywhere. And they have a lot of
confidence that the U.S. is the place where entrepreneurship and
technical innovation can lead to the profits that stimulate
So I'm -- you know, I believe that technological progress will
continue to be very strong. And I think the American people -- I
realize people have raised a number of the concerns people have
politically and otherwise.
But I do think the American people in the past have shown an
excellent ability to respond to adversity. And I believe it's going
to happen this time and that we're going to see a much stronger
economy, not that far in the future.
Oh, excuse me.
Yeah, that's all right.
My apologies to my colleague.
My colleague that travels with me.
I welcome the senator from Kentucky asking questions
Last week, you told the banking committee that you did not bail
out Lehman Brothers because you did not have the authority. Yet you
found a way to create a commercial paper funding facility, which
requires no real collateral.
So how is it you can make loans from unsecured commercial paper,
to AIG, at the same time it is getting TARP funds, yet you could not
find a way to save Lehman Brothers?
Well, with respect to the commercial paper
facility, after a lot of evaluation, the legal counsel determined that
the charging of a higher interest rate, as well as allowing for the
option of collateralization, satisfied the requirements. We lent only
to AAA credits. And we were -- had no difficulty in terms of credit
in that facility.
With respect to Lehman Brothers, there was just no equivalent
collateral. There was nothing to make a huge loan against that would
allow us to get repaid. And we just didn't have the legal authority
to make that loan.
You mentioned AAA credit. By whose ratings were
Well, by the credit rating agencies.
The same people that have failed miserably in
rating AAA. And we got into the big problem in the housing market,
because the collateralization of those loans were rated AAA by the
You're right, Senator. But --
This is not to be detrimental. But Richmond Fed President Lacker
dissented from the most recent Fed statement because he thought buying
long-term treasuries is a better way to expand the balance sheet than
In particular, he said target programs move credit away from other
worthy borrowers, amount to fiscal policy, increase moral hazard and
might be hard to unwind.
You obviously didn't agree with his views, because you voted the
other way. Why didn't you agree?
Well, I think you have to solve the problem you've
got. And the problem we've got is not lack of liquidity or lack of
purchases of treasuries. The problem we've got is that so many of our
critical credit markets are not functioning properly. The
securitization market is not functioning, the mortgage market. If we
want to help the economy grow again, we've got to get those markets
The programs we've done are not credit allocation, because
they're very broad-based. The TALF is addressing a wide range of
assets, and we're leaving to the private sector the decision to which
assets to bring to the TALF. The mortgage market is a very broad-
based market and it affects the whole economy.
So I think -- and as far as getting out of it is concerned, I
already discussed earlier the unwinding process. I think we'll be
able to do that. So I think you have to solve the problem you've got,
not the problem you haven't got.
Okay. Then the problem we've got is we have a
problem with our banks -- particularly our money market banks, which
you say are not under stress, or if they are under stress, they're
solvent. There are a lot of us who look at the same data that you
look at and say most of those banks, particularly Citigroup and others
-- can you imagine Citigroup selling for $1.50 a share? Now, does
that mean that the market has miscalculated the value of that, or is
really Citigroup under more stress than the Fed realizes?
Citigroup is certainly under stress, but our
belief is that it can -- it has enough capital. It meets the criteria
for being well capitalized. It's got a plan for restructuring. And
we're going to work intensively with Citigroup to make sure that it's
stable going forward.
Not to say it doesn't need strengthening; not to say that other
banks don't need strengthening. I didn't mean to say that banks
weren't under stress. I don't think I said that, but --
No, you said they were -- they were not being
nationalized, is what you said.
They're not being nationalized but they certainly
-- and they certainly need -- they received assistance. And that
assistance I hope will be the start of a process that makes those
banks able to raise private capital.
Last question. When will you accept the money
that they want to give back -- some banks do -- under TARP?
Well, that's a Treasury decision, but as far as I
know, they have no objection to taking money back if the banks want to
give it back. But that's a Treasury determination.
That's a Treasury determination, even though you
were sitting in on the meetings when TARP was created?
Well, I was sitting there, but TARP is a Treasury
program, and the Treasury has authority over those sorts of issues.
But isn't there an agreement that requires the
regulators to agree to take the money back?
Well, if a bank -- sorry -- if a bank needs that
capital to be safe and sound, then the regulators might not let them
give it back. That's right.
But I thought you were thinking about many small banks around the
country that --
No, I was specifically thinking of JPMorgan Chase.
Well, if a bank has taken a lot of capital and
wants to return it, it needs to either replace it with private capital
or show that it meets all the appropriate standards without that
The time of the gentleman's expired.
Thanks again, Chairman.
Mr. Bernanke, during the course of this hearing, we've heard a
number of my colleagues express real dismay about the amount of
additional borrowing that's going to be required to address what I
think all responsible economists concede is a fiscal emergency that
our country is in, or certainly would be in without this.
As I recall, at the end of the Clinton administration we had an
economy -- a budget in surplus, and we were headed, by most estimates,
including CBO's, to be a debt-free nation. And then for six years
before control in Congress changed, you had Republicans controlling
the House, the Senate and the White House.
And during that time, according to our projections, if you take
the difference between the CBO-projected budget on the day they took
office and where things actually went, it's a $7.7 trillion
difference, a $7.7 trillion hole, that I refer to as the Bush debt and
that many of my colleagues supported at the time. We had a vice
president who was at the time saying deficits don't matter.
And now we hear these expressions of dismay about lending to
solve this crisis, from people who didn't seem to mind when $7.7
trillion in debt was being run up to finance tax cuts for the rich, to
finance the war in Iraq and other things.
Tell me, had we not gone that route, had we started, let's say --
let's not even give credit for the projections that would have taken
us into an actual national debt-free position. Let's just say we had
zero national debt when we went into this crisis, instead of the
trillions and trillions of national debt that were run up. What would
our position be in responding to this crisis had we started at zero
instead of -- what is it now, 9 trillion?
Well, I think it's evident that, you start with
lower debt, then you have more debt capacity and it's easier to raise
money from both domestic and foreign lenders. I think one of the
features of the president's budget which I think is interesting and
constructive is that it includes, for example, some -- as I understand
it -- some general provision for disasters and things of that sort.
It recognizes the uncertainties that we do face in a normal budgeting
So I can only agree with you that one of the benefits of keeping a low
debt-to-GDP ratio and maintaining near balanced budgets under normal
circumstances is that you have the flexibility to respond to a Katrina
or to something like this, which is many times larger.
Looking back, do you believe it was prudent as
a nation to have run up, as I calculated, the $7.7 trillion in debt
during those six one-party years?
It's a very complicated calculation, Senator, and
I can't do it all here. But I think the tax revenues in the late '90s
were partly not sustainable. They came from the stock market boom,
and we know now that that was not sustainable. So that was -- I think
the idea that we would be debt-free -- I think that was somewhat
The -- it's true that the revenue-to-GDP ratio did fall in the
early part of the Bush presidency. It did come back up to something
closer to historical averages.
So it's a complicated issue, but I do agree that in thinking
about the future and recognizing that there are unanticipated
emergencies that can occur, whether they be natural disasters or
financial disasters or whatever, it's positive -- it's a good idea to
have some fiscal capacity in reserve.
We've got countries around the world now that really can't do
fiscal policy because they haven't got debt capacity to do it.
I thank the senator.
Thank you. Mr. Chairman, have you read the article
-- I think it was written yesterday -- about James Baker, the former
Treasury secretary, "How Washington can prevent 'zombie banks'"?
What did you think of that?
I understand the idea that going in and
nationalizing the banks and just taking care of them once and for all
is very attractive. I understand that.
I don't think he -- well, let me put it in context.
I think -- here's where I meant -- I want to do what's responsible. I
want outcomes. I part my ideology here. I'm a conservative
Republican, and there's a lot of things that I think we should do that
the administration is not doing, but we -- we're all in this one,
literally, together. So I voted for the TARP funds.
And you're going back to South Carolina to be honored this
weekend, and congratulations, by the way. That is a big honor that
they're bestowing upon you, because you're a native of my state.
And I'm having to explain to people, you know, we're 200 billion
(dollars) into AIG, with no end in sight, and it would be helpful -- I
think I can take away from your testimony that the consequences of
letting AIG just collapse, uncontrolled, would be a lot more to the
country and to the public than $200 billion. Is that a fair
This idea that you're too big to fail -- that
doesn't set well with me. I don't think it sets well with a lot of
people. How do you feel about the term "too big to fail"?
I think it's an enormous problem. I think we've
learned it's a bigger problem than we thought it was. And I would say
that dealing with the "too big to fail" problem should be a top
priority as we go forward and do reforms.
Well, I believe that once we administer the stress
test with these banks, we're going to know more than we know now.
And my concern is, when do we throw good money after bad? I have
supported the capitalization programs, but I at least would like to
keep on the table -- we own 36 percent of Citibank now, is that
Okay. Why did we convert preferred shares to
Well, that decision was made for a variety of
reasons, but among them that the markets seemed to believe that --
with some reason, that common equity is better quality capital than
Well, Citibank's at 1.22 today. It hasn't had much
of an effect, has it?
It certainly hasn't caused the stock price to go
From a South Carolina taxpayer point of view -- and
any other state, Virginia included -- has the taxpayer been
disadvantaged by losing the preferred status, potentially?
I don't think necessarily that's the case, because
it depends on the terms of conversion.
Well, we've given up interest, right?
Right, but it depends on the terms of conversion
between the preferred and the common. May I -- Senator, if I ask your
-- I'd like to challenge the Congress to give us a
framework where we can resolve a multinational, complicated financial
conglomerate like Citigroup, like AIG or others, if that became
We do not have that framework, and therefore we
have to work within the constraints of what we have.
Right. I understand.
Now, when it comes to a big organization like -- we're into this
thing 36 percent, the federal government owns. I don't know where
nationalization, socialism and capitalism begins or ends anymore. I
mean, I think that's -- I mean, obviously we're doing things that no
one likes, whether you be a moderate, conservative Democrat --
whatever you'd like to call yourself, Senator Warner. You seem to be
a good guy -- and a conservative Republican from South Carolina, we
seem to be in uncharted territory. Do you agree with that?
I certainly agree, but I also want to emphasize
that even though we're not formally nationalizing any bank or
institution, we are exerting plenty of control to make sure that they
take the steps necessary to repay us and to become viable.
Right. Yeah, that's my point. You can call it
what you like. And I -- you know, I got a lot of pushback when I
mentioned leaving that option on the table, because when you look at
the amount of money we're putting into the banks and the amount of
control we have over how much you get paid and what decisions you
make, we're pretty much running the damn thing and -- for lack of a
better word. And there may become a time, at least in my mind, where
it would be better to take them over quickly, sell off the good parts
and better manage the bad parts than it would be to continually
capitalize. Does that make sense to you as a limited option in the
future if this continued path doesn't work?
As a possible option in the future, as an abstract
option, but I reiterate that we do not have the tools to do that.
Right. I understand. But the choice that all of
us have is to sit on the sidelines and watch all this money go into
these systems and nothing seems to be changing.
And the one thing I want you to understand, that -- you're so
much brighter than I am about this, but I do have some common sense.
The public has just about had it with this continually -- continuous
capitalization. And I think they would tolerate, if the bank is never
going to perform after hundreds of billions of dollars, just to take
it over, find a way to break it up, sell off the good parts, and
better manage the bad parts like we did with the RTC a long time ago.
So I just want to let you know that, as a conservative
Republican, I'm parking my ideology, but we have a political problem,
both of us, both sides of the aisle. Don't under-estimate how hard
it's going to be for you and others to continue to print money to
solve this problem.
Point well taken, from my judgment.
Thank you, Mr. Chairman. I want to add I think
that Senator Graham has put his finger on a little bit of the problem.
A lot of this is around semantics of what words we use, not the
practical outcome. And I think the senator from South Carolina raises
a very good point.
I want to come back to my two lines, and I know I'm the last on
the line, but back on our AIG situation, you know, I understand why
you all had to act last -- last year. And I understand all the
ramifications, I believe, of a total -- a total failure, and an
unstructured failure, of AIG.
But what still kind of makes me concerned is I believe that a lot
of these counterparties that bought these CDO's and CDS's that were
coming out of the London operation -- in effect, renting AIG's AAA
status, to take their less-than-AAA instruments and elevate them -- at
some point in this process, they have to be -- they should have been
doing some level of credit analysis as well about what AIG was doing
and the fact -- and for example, the fact that they were not even
hedging -- AIG was not even putting any kind of conservative downside
hedges on the sales that they made.
And I guess it just irks me that we, the American taxpayers, are
still basically asked to continue to total bail out all these
counterparties, when at some point I just believe they're -- and I
understand the structural concerns, but there ought to be some haircut
taken by these folks at some point in this process. And I'd just like
to hear your reaction to that.
Well, I think, you know, the ramifications are
just so complex, that there are so many counterparties and so many
different types. We've tried to defang the thing by taking some of
the CDO's and other things off the balance sheet.
But beyond the counterparties, you've got millions of insurance
contracts, you've got millions of stable value wraps on 401(k)s and
all kinds of other financial instruments. So are you going to begin
to -- are you going to haircut everybody who has a life insurance
Well, the insurance policies -- clearly understand.
The insurance policyholder, though, did not make the determination
that they are going to go out and purchase the CDO to try to improve
their credit rating.
And at some point here, some marginal haircut on some of these
counterparties, though --
Here once once again we're back in this legal
question, which is, unless the company's in bankruptcy, we can't
default to counterparties, but we don't have a way of safely putting
the company into bankruptcy.
To answer -- respond to Senator Graham, AIG is effectively under
our control. We are breaking it up. We are doing (it to repay ?).
But we're doing it within the legal context of an ongoing firm because
bankruptcy is just not a good option given how complex and
international this company is.
But in effect what we're saying is, consequently
folks who bought these instruments and that at some point in their
process should have been doing some level of credit analysis of what
AIG was selling, who didn't do that credit analysis, are going to
still come out whole for their lack of appropriate due diligence or
I'm as unhappy as you are about that, Senator. I
just just don't know what to do about it.
Let me just, in my remaining one moment, come back
again. I got my pitch in about the muni markets. My time ran out.
And I've yet to hear, though, from you or Secretary Geithner there's
recognition of the problem and the fact that -- again from a job
creation standpoint and a creditworthiness standpoint, the fact that
these are public entities, they are creditworthy, they are projects
that have been scrubbed, they're ready to go to market, the fact that
the spreads are still at unreasonably high levels, I just would again
encourage you and I'd ask you to make, please, some comment on whether
you think the TALF or any other instrument could be used, either from
a backstop standpoint or from a going into the markets and starting to
purchase some of these muni bonds to jump-start the area.
I couldn't really give you a full assessment
without doing the analysis. Let me tell you why we haven't put that
ahead of CMBS and some of the other private-sector instruments. Part
of it is just that we know that the fiscal program to Congress does
have substantial help for states and localities, and it seems more
natural for the Congress to providing that kind of support. And our
13.3 authority which has been talked about so much in fact excludes
lending to municipalities and states, and therefore it's a bit beyond,
I think, the intent of Congress.
So we are certainly aware of those situations. We think there's
been some improvement in the muni market. It is very important --
Well, do you believe the TALF falls out -- that
your 13.3 does not extend to TALF, since TALF seemed to be a hybrid?
I don't want to say categorically, because there
might be some way to -- particularly since there are certain
categories -- we are allowed, for example, to buy very short-term
municipal debt even without 13.3, as part of our regular open-market
Well, just as I've asked secretary Geithner, I
would ask and would love to hear back, perhaps offline, how you think
-- what tools are available out there to jump-start this market.
Before we lose the senator from Virginia, who does
know something about markets, because he's been successful in them, I
want to note the nature of the exchange you just had with the chairman
on the counterparties, you know, issue. The senator from Virginia has
said, and I'm sure others are going to suggest this as well, that
these counterparties ought to take a haircut; that they ought to, in
effect, have some kind of consequence.
And by the way, we don't even know who these counterparties are. They
could be anybody in the world.
The chairman's response to the senator from Virginia is that,
well, I don't really know what to do about it. Well, I propose
something today. I think we ought to be disclosing, at a minimum, who
these counterparties are.
They are not being disclosed. The American people are in the
dark on this issue. And I think it's time for some sunlight. And I
very much want to work with you on this, Mr. Chairman, because I think
that the public really wants to know.
Why are these people so important? Why are they so important?
Why do they play such a fundamental role in the American economy? And
it is part of this debate.
I mean, the reason that AIG has gotten this money is because they
are, quote, "systemically important." I think the small businesses
that Senator Warner and I represent, we think, they're systemically
These small businesses seem like collateral damage, in all of
this, while AIG and the large, powerful interests seem to get money
very quickly. So I thought that the exchange that you just had, with
the senator from Virginia, certainly highlighted this debate.
He had an idea. He came in with a specific suggestion, with
respect to counterparties. You said you really didn't know what ought
to be done. And I want to leave this hearing with the comment that I
think we know what needs to be done.
I think these interests ought to be exchanged, excuse me, ought
to be disclosed. Well, let's give you the last word. You've been
very patient, by the way, with your time this morning, taken a lot of
questions, a lot of rounds. We'll give you the last word.
Yes. I'd like to say something about the American
public's reaction. And I understand why people are angry. And I, as
I said, I have been very angry in a number of circumstances. I'm
generally a pretty even-tempered kind of person.
It isn't fair that money is going to big corporations. We are in
a situation though where we need to stabilize the financial system.
If we don't stabilize the financial system, we have no hope of getting
the economy back to a normal state.
Once that fire is put out, then we need to think very hard, as a
country, how we're going to make sure this doesn't happen again. And
I will be the first person to work with the Congress, to make sure we
find strong measures to avoid this ever happening again. But right
now if we don't do what's necessary, to stabilize the financial
system, the consequences for people on Main Street will be quite
Mr. Chairman, you have been very generous with your
time. And the Senate Budget Committee is adjourned.