U.S. Congress Joint Economic Committee Hearing - The Economic Outlook

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SEN. AMY KLOBUCHAR (D-MN): Thank you very much, Mr. Chairman.

Chairman Bernanke, following Bear Stearns' demise, the papers were filled with post-mortems, all of them having different theories on why it happened. And what is your theory on how one of the top five investment banks in the country -- and why this particular bank -- failed in such a dramatic fashion?

MR. BERNANKE: Well, first let me again repeat that there will be a hearing tomorrow with all my colleagues from the Treasury, the Federal Reserve Bank of New York and the SEC, all of whom have particular expertise on this issue. And I hope we will get fuller and more detailed answers on all these issues going forward.

My own sense of Bear Stearns is -- was that they did have various issues with some of their investments, and that there were concerns about that in the public. And there were, you know, various concerns about some of the holdings they might have at that time, at the time when they -- the week of their potential failure.

What happened, though, was that there was basically a loss of confidence in Bear Stearns, and their funding fell away, which emphasizes the importance of maintaining adequate liquidity and shows why our liquidity provision can be of assistance to firms that are otherwise potentially sound.

SEN. KLOBUCHAR: And then you think it also leads to the conclusion that we should have more oversight responsibility?

MR. BERNANKE: I think that we do need to have good oversight of all systemically important firms to make sure that they have adequate capital and adequate liquidity.

SEN. KLOBUCHAR: Now, in answer to Senator Brownback's questions -- he was asking you about Secretary Paulson's idea about having the Federal Reserve take on more federal -- more responsibilities, and you commented that if you were to do that, you would need more resources and more expertise. Could you expand on that? What type of expertise would you need? How much -- how many resources would you need?

MR. BERNANKE: Well, the concern I would have is the following. As I have talked about in various speeches and other contexts, the Federal Reserve's current authorities to examine banks and to make rules for banks, including capital rules, for example, provides us with an enormous amount of information, as well as the expertise that we need to understand what's happening the financial markets.

So I would be very worried if we were expected to manage the stability of the financial system but were -- lost all of our authority to enter banks, to assure ourselves that they were safe and sound, and if necessary, to make additional rules to preserve their financial stability. So I think we would continue to require the ability to evaluate and in some cases make rules concerning the financial systemic stability of major financial institutions.

We could not successfully carry out this mission if we had to rely entirely on secondhand reports from primary supervisors of these individual institutions.

SEN. KLOBUCHAR: So you would need more information and you wouldn't see this as a conflict with what you're doing now; you would just need a different kind of statutory role?

MR. BERNANKE: I -- no, what we're doing now achieves much of what I'm talking about. We have, of course, regulatory authority and supervisory authority for bank holding companies, which gives us a window into what's happening in the banks and major institutions. We would need something equivalent to that, something that involves our ability to -- not just to receive reports periodically from these prudential supervisors, but the opportunity to actually go into the bank or the other --

SEN. KLOBUCHAR: So more investigative responsibility?

MR. BERNANKE: Well, things that are similar to what we have now. I'm really arguing that we should not lose some of the powers we have now, which involve our ability to go into banks, make our direct assessments of their safety and soundness, and if necessary, make rules that would keep them safe and sound from a systemic point of view.

SEN. KLOBUCHAR: Congressman Brady was asking you about taxes and about tax policy, and you were talking about how that's a responsibility of Congress. But are you concerned at all -- I was thinking back when President Clinton was in and Secretary Rubin and how they were able to get the confidence of Wall Street, really, based on some changes to our fiscal policy. And we have been frustrated, some of us, in the last year as we try to pay for things, whether it's a(n) AMT fix by taxing some of the hedge fund operators, or some of us who believe we need to roll back some of the tax cuts for the wealthiest to be able to actually be more fiscally responsible.

And do you believe that this situation, with our increasing debt and the lack of action by some in Washington, has contributed at all to this financial crisis and the lack of confidence in our country?

MR. BERNANKE: Well, I think that the deficits and those issues are perhaps not the primary causes of the current situation, but they certainly have very important long-term consequences, and I do think they're very important to address. I've said a couple of times that I don't advocate laws here; but I do advocate the law of arithmetic. And the law of arithmetic says that if you have -- if you want to be a low-tax person, if you want to be in favor of low taxes, you also need to, you know, have the associated spending cuts that make that feasible. If you want to be a high-spending person because you think government programs are valuable, then you also have to accept the tax implications.

So my main message, I think, is that -- it's not the only message, but one of the messages is that there does need to be a reconciliation of spending and taxation plans over long periods of time.

SEN. KLOBUCHAR: But do you think when -- I think it's one out of 12 of our federal tax dollars that people pay out go to interest on this debt, that it could be contributing in some way to our volatile situation in our economy?

MR. BERNANKE: Again, I don't think that the current situation is primarily related to those issues, but in the longer term I do think it would have potentially destabilizing financial effects, and I do think it's important for the federal government to get control of its long-term budget position. The Congressional Budget Office has provided us with plenty of scary scenarios where the debt-to-GDP ratio goes over a hundred percent and debt becomes essentially -- you know, debt and entitlement spending becomes the entire government budget. Clearly, we can't get to that position, and I hope that we'll find solutions before it gets so imminent that it becomes very, very difficult --

SEN. KLOBUCHAR: One last thing on the economy. You talk about the futures market and oil prices potentially settling down. But, you know, one of the things we're exploring right now -- Congressman Markey had a hearing yesterday with the oil executives, and one of the things we're looking at is all of these tax incentives when they're having record profits, and how those could probably be put into renewabales and things that will help our own country.

And do you think it's true that tax incentives to oil companies provide little or no significant relief to Americans when the world market seems to respond more to what OPEC is doing than what we're doing here in Washington?

MR. BERNANKE: I think that's outside of my sphere of responsibility.

SEN. KLOBUCHAR: Well, you brought oil prices, so --

MR. BERNANKE: Well, I didn't bring up oil tax policy. (Laughter.)

SEN. KLOBUCHAR: All right. We'll go on for another hearing then.

MR. BERNANKE: Okay.

SEN. KLOBUCHAR: Thank you.

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