The Federal Budget and the Economy - Mar 3, 2009

Transcript Text

  • SEN. WYDEN

    At 00:03:13
    3 minutes

    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
    another occasion.
    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,
    is critical.
    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.

  • SEN. JUDD GREGG (R-NH)

    At 00:06:46
    3 minutes

    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
    re-elected.
    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.

  • SEN. WYDEN

    At 00:10:26
    15 seconds

    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.

  • MR. BERNANKE

    At 00:10:41
    15 minutes

    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
    distressed circumstances.
    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
    world.
    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
    inflows.
    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
    historical standards.
    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
    levels.
    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
    ahead.
    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
    years.
    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
    be.
    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
    forecast.
    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
    Freddie Mac.
    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.

  • SEN. WYDEN

    At 00:25:45
    20 seconds

    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
    taxpayers?

  • MR. BERNANKE

    At 00:26:05
    1 minute

    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
    United States.
    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.

  • SEN. WYDEN

    At 00:27:50
    6 seconds

    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?

  • MR. BERNANKE

    At 00:27:56
    57 seconds

    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
    policy judgments.

  • SEN. WYDEN

    At 00:28:53
    52 seconds

    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
    evolving.
    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.

  • MR. BERNANKE

    At 00:29:45
    1 second

    I'd like to address that. May I, Senator?

  • SEN. WYDEN

    At 00:29:46
    1 second

    Sure.

  • MR. BERNANKE

    At 00:29:47
    1 minute

    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
    system.
    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.

  • SEN. WYDEN

    At 00:30:47
    3 seconds

    My time has expired. I've got more questions on
    this point.
    Senator Gregg.

  • SEN. GREGG

    At 00:30:50
    2 minutes

    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
    currency?

  • MR. BERNANKE

    At 00:33:09
    31 seconds

    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 --

  • SEN. GREGG

    At 00:33:40
    5 seconds

    But your place is to protect the value of the dollar
    and protect the ability to sell the debt. So it's tied in.

  • MR. BERNANKE

    At 00:33:45
    1 minute

    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.

  • SEN. GREGG

    At 00:34:50
    31 seconds

    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?

  • MR. BERNANKE

    At 00:35:21

    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 --
    counterproductive.
    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.

  • SEN. GREGG

    At 00:35:21

    Thank you, Mr. Chairman.

  • SEN. WYDEN

    At 00:35:21
    51 seconds

    Thank my colleague.
    Senator Murray?

  • SEN. PATTY MURRAY (D-WA)

    At 00:36:12
    48 seconds

    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
    the definition?

  • MR. BERNANKE

    At 00:37:00
    1 minute

    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
    companies.
    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.

  • SEN. MURRAY

    At 00:38:27
    6 seconds

    So you're saying there'd be a real risk to just
    everyday average families? How would you define that? What would we
    see?

  • MR. BERNANKE

    At 00:38:33
    28 seconds

    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.

  • SEN. MURRAY

    At 00:39:01

    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?

  • MR. BERNANKE

    At 00:39:01

    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.

  • SEN. MURRAY

    At 00:39:01
    2 minutes

    So a lot of businesses or students and financial --
    who are getting financial aid begin to see that immediately?

  • MR. BERNANKE

    At 00:41:11

    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.

  • SEN. MURRAY

    At 00:41:11

    Within days, right?

  • MR. BERNANKE

    At 00:41:11

    I think we've already seen some benefits, and we
    will be putting out money this month.

  • SEN. MURRAY

    At 00:41:11

    Okay. Thank you.

  • SEN. WYDEN

    At 00:41:11
    28 seconds

    The time of the gentlelady has expired.
    Senator Bunning?

  • SEN. JIM BUNNING (R-KY)

    At 00:41:39

    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
    presently.
    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?

  • MR. BERNANKE

    At 00:41:39
    1 minute

    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 --

  • SEN. BUNNING

    At 00:43:20

    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
    their job?

  • MR. BERNANKE

    At 00:43:20

    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.

  • SEN. BUNNING

    At 00:43:20

    But they -- is it -- was that -- isn't that the
    regulator of AIG?

  • MR. BERNANKE

    At 00:43:20

    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.

  • SEN. BUNNING

    At 00:43:20

    Well, the financial products division is one of
    the real problems. That's why we went in in the first place.

  • MR. BERNANKE

    At 00:43:20

    Right. That's right.

  • SEN. BUNNING

    At 00:43:20
    43 seconds

    Go ahead.

  • MR. BERNANKE

    At 00:44:03
    28 seconds

    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 --

  • SEN. BUNNING

    At 00:44:31
    14 seconds

    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.

  • MR. BERNANKE

    At 00:44:45

    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 --

  • SEN. BUNNING

    At 00:44:45

    In other words, casualty and property are
    included.

  • MR. BERNANKE

    At 00:44:45

    Yes.

  • SEN. BUNNING

    At 00:44:45
    38 seconds

    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
    other agencies?
    And why do you keep rewarding failure?

  • MR. BERNANKE

    At 00:45:23

    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.

  • SEN. BUNNING

    At 00:45:23

    (Well/but ?) aren't they the same three rating
    agencies that got us in -- that caused problems?

  • MR. BERNANKE

    At 00:45:23
    57 seconds

    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.

  • SEN. BUNNING

    At 00:46:20

    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.

  • SEN. WYDEN

    At 00:46:20

    (Gavels.) The time of the gentleman --

  • SEN. BUNNING

    At 00:46:20

    Thank you.

  • SEN. WYDEN

    At 00:46:20
    40 seconds

    The time of the gentleman's expired.
    Senator Cardin?

  • SEN. BENJAMIN CARDIN (D-MD)

    At 00:47:00
    2 minutes

    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
    institutions.
    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?

  • MR. BERNANKE

    At 00:49:24
    1 minute

    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
    supervisory assessment.
    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.

  • SEN. CARDIN

    At 00:50:41
    39 seconds

    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?

  • MR. BERNANKE

    At 00:51:20
    45 seconds

    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.

  • SEN. CARDIN

    At 00:52:05

    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
    anticipate?

  • MR. BERNANKE

    At 00:52:05

    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.

  • SEN. CARDIN

    At 00:52:05

    Thank you.

  • SEN. WYDEN

    At 00:52:05
    27 seconds

    Thank my colleague.
    Senator Graham is next.

  • SEN. LINDSEY GRAHAM (R-SC)

    At 00:52:32

    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?

  • MR. BERNANKE

    At 00:52:32

    Certainly there are outer limits --

  • SEN. GRAHAM

    At 00:52:32
    13 seconds

    What are they, and how close are we to them?

  • MR. BERNANKE

    At 00:52:45
    1 minute

    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
    debt-GDP ratio.

  • SEN. GRAHAM

    At 00:53:55

    Has there always been a buffer zone to -- between
    reality and this magical place, and is there a buffer zone today?

  • MR. BERNANKE

    At 00:53:55
    29 seconds

    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
    longer term.

  • SEN. GRAHAM

    At 00:54:24
    7 seconds

    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?

  • MR. BERNANKE

    At 00:54:31
    3 seconds

    Well, I don't think that's going to happen, and it
    can't happen, because things would break down before then.

  • SEN. GRAHAM

    At 00:54:34
    3 seconds

    Something has to change for it -- for it not to
    change --

  • MR. BERNANKE

    At 00:54:37

    Something -- (inaudible) -- that's right.

  • SEN. GRAHAM

    At 00:54:37
    4 seconds

    -- for it not to happen, right? Something has to
    change, because --

  • MR. BERNANKE

    At 00:54:41
    7 seconds

    Something would change, whether it was either
    change in policy or a change in the willingness of the lenders to
    finance the debt.

  • SEN. GRAHAM

    At 00:54:48
    6 seconds

    What would a zombie institution be, in your
    definition?

  • MR. BERNANKE

    At 00:54:54
    34 seconds

    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
    institution.
    They are all lending, they've all active and they're all viable.

  • SEN. GRAHAM

    At 00:55:28
    3 seconds

    Is AIG a zombie institution?

  • MR. BERNANKE

    At 00:55:31
    13 seconds

    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
    financial --

  • SEN. GRAHAM

    At 00:55:44
    5 seconds

    If AIG is not a zombie institution, who would be?

  • MR. BERNANKE

    At 00:55:49
    15 seconds

    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.

  • SEN. GRAHAM

    At 00:56:04
    6 seconds

    And the reason we're continuing to stabilize,
    because the downside of it failing is so enormous. Is that correct?

  • MR. BERNANKE

    At 00:56:10
    3 seconds

    Yes, Senator, unfortunately that's the case.

  • SEN. GRAHAM

    At 00:56:13
    3 seconds

    Would it be worth a trillion dollars to avoid
    failure?

  • MR. BERNANKE

    At 00:56:16
    6 seconds

    I don't think we're going to come remotely close
    to that. But I think that the costs of the financial crisis in
    September --

  • SEN. GRAHAM

    At 00:56:22
    2 seconds

    Would it be worth a half a trillion dollars?

  • MR. BERNANKE

    At 00:56:24
    9 seconds

    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.

  • SEN. GRAHAM

    At 00:56:33
    6 seconds

    So, literally, it would be cheaper to put 2
    trillion (dollars) and then let it fail?

  • MR. BERNANKE

    At 00:56:39
    25 seconds

    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.

  • SEN. GRAHAM

    At 00:57:04
    9 seconds

    Once we administer the stress test of the major
    banks, will we have more information as to whether or not future
    capitalization is warranted?

  • MR. BERNANKE

    At 00:57:13
    9 seconds

    What we'll learn from that, Senator -- what we're
    learning from those assessments will be how much, if any, additional
    capital is needed --

  • SEN. GRAHAM

    At 00:57:22
    14 seconds

    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?

  • MR. BERNANKE

    At 00:57:36
    5 seconds

    The Japanese mistake was not acting quickly enough
    or aggressively enough, and I think that's not our problem.

  • SEN. GRAHAM

    At 00:57:41

    Okay.

  • SEN. WYDEN

    At 00:57:41
    3 seconds

    The time of the gentleman's expired.
    Senator Sanders.

  • SEN. BERNIE SANDERS (I-VT)

    At 00:57:44
    54 seconds

    Thank you, Mr. Chairman. Welcome,
    Mr. Chairman.
    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?

  • MR. BERNANKE

    At 00:58:38
    8 seconds

    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 --

  • SEN. SANDERS

    At 00:58:46
    3 seconds

    To whom did you explain that?

  • MR. BERNANKE

    At 00:58:49
    2 seconds

    It's on our website.

  • SEN. SANDERS

    At 00:58:51

    Yeah. Okay.

  • MR. BERNANKE

    At 00:58:51
    2 seconds

    So all that information is available in our
    commercial paper --

  • SEN. SANDERS

    At 00:58:53
    2 seconds

    And who got the money?

  • MR. BERNANKE

    At 00:58:55
    3 seconds

    Hundreds and hundreds of banks. Any bank that has
    access to the U.S. Federal Reserve's discount --

  • SEN. SANDERS

    At 00:58:58
    3 seconds

    Can you tell us who they are?

  • MR. BERNANKE

    At 00:59:01
    7 seconds

    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 --

  • SEN. SANDERS

    At 00:59:08
    3 seconds

    Well, isn't that too bad?

  • MR. BERNANKE

    At 00:59:11

    I'm sorry?

  • SEN. SANDERS

    At 00:59:11
    7 seconds

    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
    pages.

  • MR. BERNANKE

    At 00:59:18

    These are very --

  • SEN. SANDERS

    At 00:59:18
    15 seconds

    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?

  • MR. BERNANKE

    At 00:59:33
    13 seconds

    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.

  • SEN. SANDERS

    At 00:59:46
    4 seconds

    And how can other institutions make -- get those
    loans as well?

  • MR. BERNANKE

    At 00:59:50
    5 seconds

    According to the law, we are supposed to be
    lending to depository institutions. We --

  • SEN. SANDERS

    At 00:59:55
    1 minute

    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?

  • MR. BERNANKE

    At 01:01:15
    10 seconds

    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 --

  • SEN. SANDERS

    At 01:01:25
    7 seconds

    Did not succeed in preventing them. Let's take it
    another way. Do you think that the repeal of Glass-Steagall was a
    tragic mistake?

  • MR. BERNANKE

    At 01:01:32
    12 seconds

    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
    forward.

  • SEN. SANDERS

    At 01:01:44
    26 seconds

    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
    rates?

  • MR. BERNANKE

    At 01:02:10
    9 seconds

    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.

  • SEN. SANDERS

    At 01:02:19
    10 seconds

    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
    receiving --

  • MR. BERNANKE

    At 01:02:29
    10 seconds

    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 --

  • SEN. SANDERS

    At 01:02:39
    28 seconds

    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
    the system.
    Should the CEOs of the financial institutions that have led us
    into this deep, deep recession be fired?

  • MR. BERNANKE

    At 01:03:07
    6 seconds

    Well, pay and job tenure should depend on
    performance and those which have performed poorly should lose their
    jobs.

  • SEN. SANDERS

    At 01:03:13
    2 seconds

    Are any of them --

  • MR. BERNANKE

    At 01:03:15
    2 seconds

    Many have lost their jobs.

  • SEN. SANDERS

    At 01:03:17
    5 seconds

    Most of the major guys are still holding their
    positions.

  • SEN. WYDEN

    At 01:03:22
    2 seconds

    Senator Alexander.

  • SEN. LAMAR ALEXANDER (R-TN)

    At 01:03:24
    1 minute

    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?

  • MR. BERNANKE

    At 01:04:43
    44 seconds

    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 --

  • SEN. ALEXANDER

    At 01:05:27
    14 seconds

    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.

  • MR. BERNANKE

    At 01:05:41
    34 seconds

    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.

  • SEN. ALEXANDER

    At 01:06:15
    1 minute

    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?

  • MR. BERNANKE

    At 01:07:48
    27 seconds

    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?

  • SEN. ALEXANDER

    At 01:08:15

    Right. But in my last --

  • MR. BERNANKE

    At 01:08:15
    8 seconds

    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.

  • SEN. ALEXANDER

    At 01:08:23
    14 seconds

    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?

  • MR. BERNANKE

    At 01:08:37
    3 seconds

    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
    recovery.

  • SEN. ALEXANDER

    At 01:08:40
    4 seconds

    Thank you, Mr. Chairman.

  • SEN. WYDEN

    At 01:08:44
    2 seconds

    I thank my colleague.
    Senator Whitehouse.

  • SEN. SHELDON WHITEHOUSE (D-RI)

    At 01:08:46
    2 minutes

    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?

  • MR. BERNANKE

    At 01:11:24
    9 seconds

    Well, that's both very difficult to do and very,
    you know, unattractive way to go, obviously.

  • SEN. WHITEHOUSE

    At 01:11:33
    2 seconds

    Even if we did it, would it last long?

  • MR. BERNANKE

    At 01:11:35
    52 seconds

    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 --

  • SEN. WHITEHOUSE

    At 01:12:27
    11 seconds

    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
    now?

  • MR. BERNANKE

    At 01:12:38
    18 seconds

    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.

  • SEN. WHITEHOUSE

    At 01:12:56
    1 minute

    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
    devastation themselves.
    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
    behind that.
    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.

  • SEN. WYDEN

    At 01:14:15
    2 seconds

    Thank my colleague.
    Senator Grassley?

  • SEN. CHARLES GRASSLEY (R-IA)

    At 01:14:17
    1 minute

    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
    money.
    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?

  • MR. BERNANKE

    At 01:15:50
    1 minute

    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
    grandchildren.

  • SEN. GRASSLEY

    At 01:16:51
    7 seconds

    Well, do you have a benchmark that you throw out
    for percentage of national debt to GDP or annual deficit to GDP?

  • MR. BERNANKE

    At 01:16:58
    11 seconds

    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.

  • SEN. GRASSLEY

    At 01:17:09
    51 seconds

    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
    economists forecast.
    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?

  • MR. BERNANKE

    At 01:18:00
    33 seconds

    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.

  • SEN. GRASSLEY

    At 01:18:33
    18 seconds

    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?

  • MR. BERNANKE

    At 01:18:51
    17 seconds

    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.

  • SEN. GRASSLEY

    At 01:19:08
    3 seconds

    Thank you, Mr. Chairman.

  • SEN. WYDEN

    At 01:19:11
    2 seconds

    Thank you, Senator Grassley.
    Senator Warner.

  • SENATOR MARK WARNER (D-VA)

    At 01:19:13
    2 minutes

    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
    these actions.
    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,
    point one?
    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?

  • MR. BERNANKE

    At 01:21:56
    31 seconds

    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.

  • SEN. WARNER

    At 01:22:27
    14 seconds

    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.

  • MR. BERNANKE

    At 01:22:41
    4 seconds

    I think the confidence in financial engineering
    has gone down quite a bit, and we need to be very --

  • SEN. WARNER

    At 01:22:45

    Amen. Amen. Amen.

  • MR. BERNANKE

    At 01:22:45
    55 seconds

    -- 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.

  • SEN. WARNER

    At 01:23:40
    7 seconds

    Cooperation that might extend at some level at
    least common standards. I'm not advocating some international --

  • MR. BERNANKE

    At 01:23:47
    4 seconds

    There's a great deal of interest in common
    standards and capital regulation in accounting and a whole variety of
    other areas.

  • SEN. WARNER

    At 01:23:51
    1 minute

    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
    as well.

  • SEN. WYDEN

    At 01:24:52
    1 minute

    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?

  • MR. BERNANKE

    At 01:25:55
    32 seconds

    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.

  • SEN. WYDEN

    At 01:26:27
    1 minute

    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
    your comment.
    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?

  • MR. BERNANKE

    At 01:27:38
    44 seconds

    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
    very difficult.
    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.

  • SEN. WYDEN

    At 01:28:22
    27 seconds

    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.

  • MR. BERNANKE

    At 01:28:49
    8 seconds

    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?

  • SEN. WYDEN

    At 01:28:57
    54 seconds

    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
    times.
    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
    tough times.

  • MR. BERNANKE

    At 01:29:51
    1 minute

    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
    entrepreneurial activity.
    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.

  • SEN. WYDEN

    At 01:30:52

    Senator Graham.

  • SENATOR JIM BUNNING (R-KY)

    At 01:30:52
    1 second

    Oops.

  • SEN. WYDEN

    At 01:30:53

    Oh, excuse me.

  • SEN. BUNNING

    At 01:30:53
    1 second

    Yeah, that's all right.

  • SEN. WYDEN

    At 01:30:54
    2 seconds

    My apologies to my colleague.

  • SEN. BUNNING

    At 01:30:56
    2 seconds

    My colleague that travels with me.

  • SEN. WYDEN

    At 01:30:58
    5 seconds

    I welcome the senator from Kentucky asking questions
    next.

  • SEN. BUNNING

    At 01:31:03
    32 seconds

    Thank you.
    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?

  • MR. BERNANKE

    At 01:31:35
    36 seconds

    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.

  • SEN. BUNNING

    At 01:32:11
    6 seconds

    You mentioned AAA credit. By whose ratings were
    they AAA?

  • MR. BERNANKE

    At 01:32:17
    3 seconds

    Well, by the credit rating agencies.

  • SEN. BUNNING

    At 01:32:20
    15 seconds

    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
    same agencies.

  • MR. BERNANKE

    At 01:32:35

    You're right, Senator. But --

  • SEN. BUNNING

    At 01:32:35
    47 seconds

    Thank you.
    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
    targeted facilities.
    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?

  • MR. BERNANKE

    At 01:33:22
    44 seconds

    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
    working.
    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.

  • SEN. BUNNING

    At 01:34:06
    48 seconds

    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?

  • MR. BERNANKE

    At 01:34:54
    27 seconds

    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 --

  • SEN. BUNNING

    At 01:35:21
    3 seconds

    No, you said they were -- they were not being
    nationalized, is what you said.

  • MR. BERNANKE

    At 01:35:24
    14 seconds

    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.

  • SEN. BUNNING

    At 01:35:38
    8 seconds

    Last question. When will you accept the money
    that they want to give back -- some banks do -- under TARP?

  • MR. BERNANKE

    At 01:35:46
    8 seconds

    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.

  • SEN. BUNNING

    At 01:35:54
    7 seconds

    That's a Treasury determination, even though you
    were sitting in on the meetings when TARP was created?

  • MR. BERNANKE

    At 01:36:01
    6 seconds

    Well, I was sitting there, but TARP is a Treasury
    program, and the Treasury has authority over those sorts of issues.

  • SEN. BUNNING

    At 01:36:07
    9 seconds

    But isn't there an agreement that requires the
    regulators to agree to take the money back?

  • MR. BERNANKE

    At 01:36:16
    12 seconds

    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 --

  • SEN. BUNNING

    At 01:36:28
    4 seconds

    No, I was specifically thinking of JPMorgan Chase.

  • MR. BERNANKE

    At 01:36:32
    11 seconds

    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
    capital.

  • SEN. BUNNING

    At 01:36:43
    2 seconds

    Thank you.

  • SEN. WYDEN

    At 01:36:45
    2 seconds

    The time of the gentleman's expired.
    Senator Whitehouse.

  • SEN. WHITEHOUSE

    At 01:36:47
    2 minutes

    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?

  • MR. BERNANKE

    At 01:39:07
    50 seconds

    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
    process.
    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.

  • SEN. WHITEHOUSE

    At 01:39:57
    14 seconds

    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?

  • MR. BERNANKE

    At 01:40:11
    58 seconds

    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
    exaggerated.
    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.

  • SEN. WHITEHOUSE

    At 01:41:09
    2 seconds

    Thank you.

  • SEN. WYDEN

    At 01:41:11
    2 seconds

    I thank the senator.
    Senator Graham.

  • SEN. GRAHAM

    At 01:41:13
    10 seconds

    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'"?

  • MR. BERNANKE

    At 01:41:23

    Yes, sir.

  • SEN. GRAHAM

    At 01:41:23
    2 seconds

    What did you think of that?

  • MR. BERNANKE

    At 01:41:25
    12 seconds

    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.

  • SEN. GRAHAM

    At 01:41:37
    51 seconds

    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
    statement?

  • MR. BERNANKE

    At 01:42:28

    Absolutely.

  • SEN. GRAHAM

    At 01:42:28
    11 seconds

    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"?

  • MR. BERNANKE

    At 01:42:39
    10 seconds

    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.

  • SEN. GRAHAM

    At 01:42:49
    19 seconds

    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
    correct?

  • MR. BERNANKE

    At 01:43:08

    Yes, sir.

  • SEN. GRAHAM

    At 01:43:08
    5 seconds

    Okay. Why did we convert preferred shares to
    common stock?

  • MR. BERNANKE

    At 01:43:13
    11 seconds

    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
    preferred stock.

  • SEN. GRAHAM

    At 01:43:24
    5 seconds

    Well, Citibank's at 1.22 today. It hasn't had much
    of an effect, has it?

  • MR. BERNANKE

    At 01:43:29
    3 seconds

    It certainly hasn't caused the stock price to go
    up.

  • SEN. GRAHAM

    At 01:43:32
    12 seconds

    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?

  • MR. BERNANKE

    At 01:43:44
    4 seconds

    I don't think necessarily that's the case, because
    it depends on the terms of conversion.

  • SEN. GRAHAM

    At 01:43:48
    3 seconds

    Well, we've given up interest, right?

  • MR. BERNANKE

    At 01:43:51
    5 seconds

    Right, but it depends on the terms of conversion
    between the preferred and the common. May I -- Senator, if I ask your
    indulgence --

  • SEN. GRAHAM

    At 01:43:56

    Sure.

  • MR. BERNANKE

    At 01:43:56
    16 seconds

    -- 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
    necessary.

  • SEN. GRAHAM

    At 01:44:12

    Right. Right.

  • MR. BERNANKE

    At 01:44:12
    3 seconds

    We do not have that framework, and therefore we
    have to work within the constraints of what we have.

  • SEN. GRAHAM

    At 01:44:15
    33 seconds

    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?

  • MR. BERNANKE

    At 01:44:48
    10 seconds

    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.

  • SEN. GRAHAM

    At 01:44:58
    35 seconds

    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?

  • MR. BERNANKE

    At 01:45:33
    6 seconds

    As a possible option in the future, as an abstract
    option, but I reiterate that we do not have the tools to do that.

  • SEN. GRAHAM

    At 01:45:39
    55 seconds

    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.

  • SEN. WYDEN

    At 01:46:34
    3 seconds

    Point well taken, from my judgment.
    Senator Warner.

  • SEN. WARNER

    At 01:46:37
    1 minute

    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.

  • MR. BERNANKE

    At 01:48:33
    28 seconds

    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
    policy --

  • SEN. WARNER

    At 01:49:01
    21 seconds

    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 --

  • MR. BERNANKE

    At 01:49:22
    29 seconds

    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.

  • SEN. WARNER

    At 01:49:51
    21 seconds

    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
    responsible behavior.

  • MR. BERNANKE

    At 01:50:12
    3 seconds

    I'm as unhappy as you are about that, Senator. I
    just just don't know what to do about it.

  • SEN. WARNER

    At 01:50:15
    54 seconds

    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.

  • MR. BERNANKE

    At 01:51:09
    39 seconds

    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 --

  • SEN. WARNER

    At 01:51:48
    5 seconds

    Well, do you believe the TALF falls out -- that
    your 13.3 does not extend to TALF, since TALF seemed to be a hybrid?

  • MR. BERNANKE

    At 01:51:53
    11 seconds

    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
    operations.

  • SEN. WARNER

    At 01:52:04
    10 seconds

    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.

  • MR. BERNANKE

    At 01:52:14

    Okay.

  • SEN. WYDEN

    At 01:52:14
    2 minutes

    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
    important.
    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.

  • MR. BERNANKE

    At 01:54:16
    49 seconds

    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
    adverse.

  • SEN. WYDEN

    At 01:55:05
    1 minute

    Mr. Chairman, you have been very generous with your
    time. And the Senate Budget Committee is adjourned.
    END