CHRG-111shrg52966--22 Mr. Cole," I would indeed, and thank you for the opportunity, Senator. First of all, I would say that my understanding is that the report that the GAO has done is really based on review of one institution. Senator Bunning. That is incorrect, but that is fine. " Mr. Cole," OK, and that we received this report with reference to perspectives on risk just in the last couple days. So we would like an opportunity to go over these findings with the GAO, as we typically do in GAO reviews. We have not had that opportunity. But I will say this, that I think that what Ms. Williams quoted from is in the report, but unfortunately, there are other parts that were not quoted, and one in particular is, quote: The effects of a long period of easy liquidity and benign credit conditions have continued to weaken underwriting standards across all major credit portfolios. Finally, we note that investor demands appear to be encouraging large financial institutions to originate more assets and even greater volumes of low-quality assets, and in order to distribute them through the capital markets.In response to that, we took very firm actions, and that---- Senator Bunning. When? " FOMC20060328meeting--131 129,CHAIRMAN BERNANKE.," Thank you. A number of people have talked about tightening monetary conditions. President Yellen did. Of course, long-term rates have not risen, so I guess there is a question here about the issue of how much is the term premium, how much is the change in the equilibrium rate. I just put that question on the table because your views on it should affect whether you think conditions are essentially easy or tightening. First Vice President Stone." CHRG-111hhrg58044--329 Chairman Gutierrez," Excuse me. One of your members is Experian, one of the big three credit bureaus. And it touts ``employment insight'' reports as providing insight into ``an applicant's integrity and responsibility towards his or her financial obligation.'' An applicant's integrity. It's easy to see a potential employer rejecting an applicant with negative credit information in his or her credit report, particularly when it is sold as providing insight into an applicant's integrity. So-- " CHRG-111hhrg58044--242 Mr. Green," I am not there yet. I am talking about the likelihood of having an accident, which I thought was going to be the easy question, by the way. Let me ask again: Will a credit score predict whether a person will have an accident? " CHRG-111shrg56415--5 Mr. Tarullo," Thank you, Mr. Chairman, Senator Crapo, members of the Subcommittee. Let me begin by echoing a few points that my colleagues made in either their written or oral statements. First, compared to the situation of 8 to 12 months ago, the financial system has been significantly stabilized. The largest banking institutions, each of whose financial conditions was evaluated in our stress tests and then announced to markets and the public, have raised $60 billion in capital since last spring. We continue to see a narrowing of spreads in some parts of the market, such as corporate bonds, and in short-term funding markets. Second, however, important segments of our credit system are still not functioning effectively. Many securitization markets have had trouble restarting without Government involvement. Lending by commercial banks has declined through much of 2009. This decline reflects both weaker demand and tighter supply conditions, with particularly severe consequences for small and medium-sized businesses, which are much more dependent on banks than on the public capital markets that can be accessed by larger corporations. Banks will continue to suffer significant losses in coming quarters as residential mortgage markets continue to adjust. Losses on CRE loans, which represent a disproportionate share of the assets of some small and medium-sized banks, are likely to climb. The strains on these banks, when added to the more cautious underwriting typical of recessions, compound the problems of small businesses that rely on community banks for their borrowing. Third, it is important that bank supervisors take an even-handed approach in examining banks during these stressful times. We certainly do not want examiners to exacerbate the problems of declining CRE prices and restricted availability of credit by reflexively criticizing loans solely because, for example, the underlying collateral has declined in value. At the same time, we do not want supervisory forbearance that will put off inevitable losses, which may well increase over time, with attendant implications for the Federal Deposit Insurance Fund. So it is relatively easy to summarize the situation and state the problem. The question on everyone's mind is when and how it can be ameliorated. There are no easy answers, but let me offer a few observations. We as banking regulators should certainly redouble our efforts to ensure that the even-handed guidance we are issuing in Washington will be implemented faithfully by our examiners throughout the country. But we should not fool ourselves that even the best implementation of this policy will come close to solving the problems caused by significantly reduced demand for commercial properties that were in many cases highly leveraged on the assumption of rising asset prices. The problems lie deeper. In a weak economy that has, in turn, weakened many of our banks, supervisory guidance is neither appropriate for, nor effective as, an economic stimulus measure. At the most basic level, the strengthening of CRE markets and a return to a fully healthy banking system depend on growth in the economy as a whole, and particularly on a reduction in unemployment. I believe that the most important Federal Reserve action to promote CRE recovery is through our monetary policy. Our actions to date have helped return the Nation to growth sooner than many have expected. Nonetheless, because economic performance remains relatively weak, the Federal Open Market Committee indicated after our last meeting that conditions are likely to warrant exceptionally low levels of the Federal funds rate for an extended period. The Federal Reserve has also taken a series of steps to increase liquidity for financing capital of interest to consumers and small businesses, including the TALF program, which we recently extended through March, with a longer extension for commercial mortgage-backed securities. I suspect, though, that more direct efforts may be needed to make credit available to some creditworthy small businesses. Congress and the Administration may wish to consider temporary targeted programs while conditions in the banking industry normalize. Thank you very much, Mr. Chairman. Senator Johnson. Thank you. Ms. Matz. STATEMENT OF DEBORAH MATZ, CHAIRMAN, NATIONAL CREDIT UNION CHRG-111hhrg52406--55 Mr. Bachus," Oh, okay. Ms. Warren. What I have suggested is an agency that offers plain vanilla products that provide a safe harbor on regulation. That is, if you will use an off-the-shelf, page-and-a-half credit card agreement or a one-page mortgage agreement, then you have met all regulatory obligations at that point, making it cheap for you and easy for the consumer to understand. " FOMC20070807meeting--172 170,MR. KOHN.," Yes, I do. I see why you want to take out “volatile,” and I agree with that. Unlike President Lacker, I think it is important to keep credit conditions in there because it’s more than just price. So I was a little concerned that saying “risk premiums have increased and credit conditions have become tighter” puts it all on price. Suppose we didn’t have the phrase in red. We just had “owing to developments in financial markets, credit conditions have become tighter,” or “reflecting recent developments in financial markets, credit conditions have become tighter.”" CHRG-111hhrg54873--125 Mr. Manzullo," Okay. Let me ask this question. Perhaps it goes to the heart of the collapse. Many of us find it incomprehensible that, in the rating of these mortgage-backed securities, the people doing the rating simply failed to realize that mortgages that were given to people who could not make the first payment were somehow tainted and could end up poisoning the whole. We are just--I don't know it got missed. When Members of this Congress were saying that credit was too easy and other groups said, no, it is not; and then everything went along--yes, sir. " CHRG-110shrg38109--135 Chairman Bernanke," There is no specific level of employment or unemployment that is a trigger, in some sense, for inflation. The main concern is to make sure that the overall spending in the economy, which is driven in turn by financial conditions, does not exceed the underlying productive capacity for a sustained period. That seems to generate inflation. But as I have mentioned a couple of times, it is not easy to determine exactly where that balance should be struck. And simply looking at the unemployment rate, for example, is not going to tell you. You need to look at a wide variety of indicators, including price indicators, to get a sense of when the economy is overheating and when it is more or less in balance. Senator Tester. That is great. And that is actually what I was hoping to hear. So we should be continuing to strive to make employment complete, full to the best of our ability? " CHRG-111hhrg51698--610 Mr. Kaswell," It is not easy. " CHRG-110shrg50418--97 Mr. Mulally," Yes, Mr. Chairman. I would--I think it is a really good point. I would just add in our case, we were just looking at the data, that I would say we didn't offer easy credit because we always had relatively high FICO scores. But to your point, the relative interest rate was relatively low to the consumer. You combine that with the low fuel prices and I think that, along with the lifestyle, that did incentivize a lot of borrowing. It kind of goes back to the issue we all have of kind of living beyond our means, and with a lower savings rate, it just continued to decline. But as far as fueling that with low credit scores, we have not done that. It has been a good business for us, a good prudent business with our finance company. " CHRG-111shrg54589--113 Mr. Pickel," Senator, yes. In the credit default swap area, we have introduced a very high degree of standardization, to I think your first point about which of these contracts would be most standardized. And I think that in the credit default swaps base, we do have contracts that will be very easy to move into a cleared environment, perhaps more so into an electronically traded or even exchange-traded environment. So those things are in place. And yes, I mean, people look to the Bloomberg screens, but it is the collective view of the marketplace, I mean, that arrives on Wall Street. We have got very active dealers around the world who are expressing views on these contracts and it is that collective reflection of the market judgment that indicates the spread at any particular point in time. " CHRG-110shrg50414--256 Secretary Paulson," I hear your comment that we need to work through this. We put this together. It was bare bones. But again, I will just say to you, this is not a position I wanted to be in. I didn't want to be in this position. I am the Treasury Secretary. We moved very quickly to deal with something and it is very easy to second-guess it and it is very easy for everyone to--everyone has got to do their job here. " CHRG-111hhrg56766--186 Mr. Bernanke," That is not an easy question to answer. " FOMC20050322meeting--193 191,CHAIRMAN GREENSPAN.," Yes, that’s easy enough. [Laughter]" FOMC20070628meeting--159 157,MS. MINEHAN.," Not always easy, I might add. [Laughter]" CHRG-111hhrg48868--453 Mr. Ackerman," No, it's easy. You don't have to be evasive. It's really yes or no. " CHRG-111shrg57923--39 Mr. Mendelowitz," Yes, Senator. This discussion about the housing bubble, I think, gives us an insight into what the need for the NIF is. While Steve said back in 2007 he saw it, those of you--but basically 5 years ago, I started predicting a major credit event in the housing sector that was going to push the economy into the worst recession since the Second World War, and it was really just based upon looking at relatively small data sets that went to what was happening to housing prices, what was happening to household income, and what was happening on the delinquency and default rate on mortgages, all of which was readily available data. So it was easy to predict a major credit event in housing and it was easy to predict, because of the widespread nature of home ownership, that this was going to lead to a recession that was going to be driven by falling consumption. That was the easy piece of it. Now we are saying the fact the Fed didn't see it, because they were using the standard monetarist model, and if you can't see something with the monetarist model, you don't see it. But what I didn't see and couldn't see and couldn't understand was how what was happening in the housing sector was going to lead to the collapse in the financial sector. And it is the kind of data that we are talking about the NIF collecting that would provide that insight, and there is no substitute for that. There is no alternative. There is no shortcut. Because at the end of the day, you have to know where the concentrations of risks are and you have to know what the nature of the intertwined network of financial firms and their obligations are, because it is the combination of concentrations of risk and the exposure of the network that can produce a domino effect of multiple failures that creates a systemic risk. And so it is one thing to see a macroeconomic crisis tied to something like housing. It is something entirely different--the data needs are entirely different when it comes to understanding the systemic risk that flows from those concentrations of risk. Senator Reed. I want to thank you all for excellent testimony, thought provoking, and also for your advancing this issue. I think we leave here with, one, we need better data. We need better analysis. And if we don't achieve it in the next several months, the bubbles that might be out there percolating, if that is the right term, will once again catch us by surprise and we shouldn't let that happen. But thank you all very, very much. Thank you. " FinancialCrisisInquiry--539 MAYO: How you define that is not always easy. I feel like we’ve overdone it, though. CHRG-111hhrg48875--140 Secretary Geithner," Because it's easy with hindsight to go back and say that if only ``X,'' then ``Y.'' " FOMC20060510meeting--210 208,MS. MINEHAN., There are easy ways to modify row 4 to make it do the same thing. FOMC20060510meeting--11 9,MR. HILTON.," No, I think that adapting to that environment would not be a problem for us. It would probably be very easy to do." CHRG-111hhrg54868--105 Mr. Hensarling," I thank you. Clearly, I didn't hear it was inaccurate, but I respect that you wish to keep it confidential. I understand that. But I do think it is important that this committee hear your commitment to independence. Your opinion, and I have disagreed with your opinions on many occasions, and I assume that on future occasions, I will disagree again. But it is a terribly important opinion. It is a terribly relevant opinion. And this committee needs to know it is an independent opinion. And I am not quite sure how one proves a negative, but with articles like this, you can understand a number of us on the committee remain concerned. Perhaps this will be a bit simpler question to answer. The CFPA, as presently constituted in the Administration's White Paper and in Chairman Frank's bill--and I know we have this memo floating around ostensibly from Chairman Frank to members of his committee. I haven't heard the chairman either verify or deny the accuracy of that memo. So, theoretically, the bill may change. But again, I don't know the accuracy of this memo. My question is this: The CFPA as presently constituted, in your professional opinion, could it or would it lead to less credit and more costly credit for families and small businesses in our economy? Again, I suppose going left to right to make it easy, Chairman Bair? Apparently, it wasn't that easy of a question. Ms. Bair. With so many of these issues, it depends on who is the head of the agency and how it is structured, and I think that the structure is in flux: Chairman Frank's observation about placing the focus prohibiting bad practices as opposed to identifying and enforcing good practices may help address that concern. " FOMC20070807meeting--136 134,MR. KROSZNER.," Thank you very much. I also support keeping the fed funds rate unchanged, and I very much agree with the way that Governor Kohn was thinking about what we’re trying to achieve. So let me just describe why I think that alternative B as is largely achieves that. The key to my thinking about the decision on changing the statement is, first, whether something has materially changed so that the markets will realize that, when we change the statement, we do so because something has actually happened and, second, whether it gives us the flexibility going forward to make another change if new information comes in. So, for example, in paragraph 2, acknowledging the volatility and talking about credit conditions, about the housing market, and then about the offsetting factors of employment, growth in income, and global demand—all those things are relevant. The new things—the financial markets and credit conditions—have been there a bit but are now more important than they were before. So we’re acknowledging things that actually have happened in the intermeeting period. I also like that it gives a bit more color about what’s going on and how we’re thinking about things, and each piece is one that we can easily leave, add to, or take back, and that is very valuable. So I like the formulation of paragraph 2 because it both acknowledges new information that has come in and does so not in a way that suggests fear or excess concern but just sort of acknowledges various factors, particularly the financial conditions in the context of others on the upside. The balance is, I think, very nice. On paragraph 3, I agree with President Plosser that it is not clear to me that we had new information so that we would want to change the characterization. I see nothing wrong with the characterization that we have there. I am not as concerned as President Plosser is that it makes more of a value judgment. But my question is just why we have made the change. I am happy with either way, but using my criterion that if no information is new why change, I am not quite sure why we changed it. I think it is fine either way. On paragraph 4, I think it is very important to take a step toward balance without going all the way toward balance because it is much too early to tell, as many people have said. Putting the downside risks there makes a lot of sense because of the tradition of the structure. Again, I don’t see any reason to change the overall formulation or the overall structure at this point, particularly when the markets are jittery. I don’t think we should be going about a sort of structural change in the statement. Even if ultimately we might want to think about it, I do not think this would be the time to do it. Also, I like that it is very easy to put on and take off, so that if growth does come back up, we can easily remove the language. If growth goes down, we can move toward balance of risk very easily there if we want to, and as Governor Warsh said, if we drop “predominant,” we cannot get that back. I feel that we are not at a stage—or at least from the discussion around the table and from where I am—where we should do that. Also, I think you would have a very strong reaction in the markets. If the markets saw that we both acknowledged the downside risk and took out “predominant” or even just took out the word “predominant,” that would indicate a much stronger risk and be a much stronger signal that we are going to move more quickly. I do think that this statement as is will lead to a slight increase in expectations of a cut a little earlier, but that’s perfectly acceptable because I can’t see any better way to get the balance right. Thank you." CHRG-111hhrg58044--367 Mr. Green," Well, okay. I don't see the logic in what you say. I will accept what you say, but I am hoping that you can help me with some logic, as opposed to just a statement. Because it's easy to say things, but where it the logic to support the notion that one's credit score is predictive of whether one will have an accident? I don't see it. And I am asking for empirical evidence. Do you have empirical evidence to support this premise? Let's not go to the claims, because if your bills are behind, if you have poor credit and your bills are behind, you haven't managed your affairs well, you have an accident. There is a good likelihood you will use your insurance. So that means there is a good likelihood that you will file a claim. But does it predict that you will have the accident that causes you to file the claim? That's the question. Ms. Fortney. Well, again, I don't know of any studies on that point. What I said, however, is that the insurance companies are pricing according to the likelihood you will file a claim after having had an accident. That is how credit-- " fcic_final_report_full--471 Even today, there are few references in the media to the number of NTMs that had accumulated in the U.S. financial system before the meltdown began. Yet this is by far the most important fact about the financial crisis. None of the other factors offered by the Commission majority to explain the crisis—lack of regulation, poor regulatory and risk management foresight, Wall Street greed and compensation policies, systemic risk caused by credit default swaps, excessive liquidity and easy credit—do so as plausibly as the failure of a large percentage of the 27 million NTMs that existed in the financial system in 2007. It appears that market participants were unprepared for the destructiveness of this bubble’s collapse because of a chronic lack of information about the composition of the mortgage market. In September 2007, for example, after the deflation of the bubble had begun, and various financial firms were beginning to encounter capital and liquidity diffi culties, two Lehman Brothers analysts issued a highly detailed report entitled “Who Owns Residential Credit Risk?” 34 In the tables associated with the report, they estimated the total unpaid principal balance of subprime and Alt-A mortgages outstanding at $2.4 trillion, about half the actual number at the time. Based on this assessment, when they applied a stress scenario in which housing prices declined about 30 percent, they still found that “[t]he aggregate losses in the residential mortgage market under the ‘stressed’ housing conditions could be about $240 billion, which is manageable, assuming it materializes over a five-to six-year horizon.” In the end, of course, the losses were much larger, and were recognized under mark-to-market accounting almost immediately, rather than over a five to six year period. But the failure of these two analysts to recognize the sheer size of the subprime and Alt-A market, even as late as 2007, is the important point. Along with most other observers, the Lehman analysts were not aware of the true composition of the mortgage market in 2007. Under the “stressed” housing conditions they applied, they projected that the GSEs would suffer aggregate losses of $9.5 billion (net of mortgage insurance coverage) and that their guarantee fee income would be more than suffi cient to cover these losses. Based on known losses and projections recently made by the Federal Housing Finance Agency (FHFA), the GSEs’ credit losses alone could total $350 billion—more than 35 times the Lehman analysts’ September 2007 estimate. The analysts could only make such a colossal error if they did not realize that 37 percent—or $1.65 trillion—of the GSEs’ credit risk portfolio consisted of subprime and Alt-A loans (see Table 1, supra ) or that these weak loans would account for about 75% of the GSEs’ default losses over 2007- 34 Vikas Shilpiekandula and Olga Gorodetski, “Who Owns Resident i al Credit Risk?” Lehman Brothers Fixed Income U.S. Securitized Products Research , September 7, 2007. 2010. 35 It is also instructive to compare the Lehman analysts’ estimate that the 2006 vintage of subprime loans would suffer lifetime losses of 19 percent under “stressed” conditions to other, later, more informed estimates. In early 2010, for example, Moody’s made a similar estimate for the 2006 vintage and projected a 38 percent loss rate after the 30 percent decline in housing prices had actually occurred. 36 The Lehman loss rate projection suggests that the analysts did not have an accurate estimate of the number of NTMs actually outstanding in 2006. Indeed, I have not found any studies in the period before the financial crisis in which anyone— scholar or financial analyst—actually seemed to understand how many NTMs were in the financial system at the time. It was only after the financial crisis, when my AEI colleague, Edward Pinto, began gathering this information from various unrelated and disparate sources that the total number of NTMs in the financial markets became clear. As a result, all loss projections before Pinto’s work were bound to be faulty. FOMC20070807meeting--180 178,CHAIRMAN BERNANKE.," “Have increased, credit conditions have become tighter.” And the housing." CHRG-111shrg50815--89 Mr. Ausubel," Credit cards are extremely useful, but that is not an excuse for completely opaque pricing. I mean, the whole issue--lots of other products, price competition works better because, first of all, it is easier to figure out the true price that the consumer is paying, and second, the price is predictable. Most other consumer products do not have any-time, any-reason clauses. Senator Tester. Thank you. Just very quickly, Mr. Chairman. Thank you very much for holding the hearing. Thank you very much for putting your bill in. I will just tell you that you try to teach the next generation the right thing to do. My parents said, you aren't going to have a credit card, and in the days when I got my first credit card, I paid a fee and the interest rates were pretty clear cut. That has all changed now, I think. I know it has changed. But I can tell you that I have so many examples of young people under the age of 35 that get a credit card. They use it, they go on a vacation, their payment comes in late, and the fees and the interest rates take up all the money that was going to the principal. I have got to tell you, that is flat not right. My time has long since run out, but I will just tell you, it is not fair, it is not right, and it is not the way the program should work. People are getting into people's pockets by making it darn easy to sign up with these things, and then if they make one mistake, they put the boots to them. Thank you, Mr. Chairman. " CHRG-110hhrg46596--209 Mr. Garrett," Thank you. Thank you for your hard work and your dedication to this issue. Let me begin with a question that I hear from my district all the time. You sort of touched on it, and I think the answer is probably an easy ``no.'' When you said to one of the other questions how many foreclosures would have occurred had we not done this, and of course you have heard other people say before the bill came along if you don't do it the credit market will crash, and so on and so forth. We did pass the bill, obviously the market still crashed, and what have you. It seemed things didn't really begin to get a little bit of an uptick until you saw the globalization coordinated effort. So the short question is, is there any way to measure what would have occurred had we not taken the passage of this bill? " CHRG-109hhrg23738--165 Mr. Greenspan," Oh, okay. No, I take the correction. There is a cost in that. In other words, in a more general sense, are there people with whom we feel, for moral reasons, we should not trade? In other words, it is a more fundamental question about: What are the conditions which are necessary, voluntary, people or countries, to engage in trade? And it raises a fascinating question of: Is associating with a certain group of people considered sufficiently morally offensive to your own values that you do not want to do it? The issue of imposing standards--not ours necessarily, but some standards--is a version of that. It is a very difficult question. There is no doubt that if you do it, you will have less trade; but that may be what you want. And it is a judgment that implicitly the Congress, again, makes. In other words, the one thing that I have learned over the years, especially being here 35 times, is that it is you who have to answer all of these extraordinary questions and decide what do you do when confronted with choice. And my only criticism would be that sometimes--like everybody else, ourselves included--when confronted with a choice, you would prefer somebody else to do it. But fortunately our system is such that we have to make these choices, and they are not easy. And the one that you raise, I think, is a very legitimate question, as to where your tradeoff is, basically, in that respect. " CHRG-110hhrg45625--155 Mr. Feeney," I want to thank both of you for being here. I know these are difficult times. I actually liked Mr. Ackerman's analogy. But for all too many Americans, this looks like it turns the play on its head. It is Little Orphan Annie who is being taxed to prop up Big Daddy Warbucks. And the average American out there believes very much that is what they are being forced to participate in as part of this proposal. But I want to look at a bigger picture. We have some huge expertise here, and I am going to mention two dirty words, the Great Depression. Virtually every major market crisis in 100-some years in America has been caused by easy credit, a bubble bursting, and then a credit tightening crisis. That is exactly what we are facing now. There were the Roaring Twenties with easy money. And for the last 6 or 8 years, we have had not only very easy money, there is plenty of blame to go around. It has been the United States Congress that passed the Community Reinvestment Act and browbeat every lender they could into making risky loans and then turned around and accused the lenders of being greedy. It is almost amazing, but that is what we do here, unfortunately, almost all too often. Congress also refused to reform Fannie and Freddie, despite the urging of many of us, and Secretary Paulson, for example, you have huge expertise in what happened after the October 29th stock market crash. In this case, we had a subprime lending bubble that started the crisis. But in 1929, the reaction to that was very real, and it wasn't just a failure to provide liquidity. Credit tightened by some 33 percent. The money supply shrank in America. And I know we are trying to fight that. I don't necessarily agree with your proposal. I know what you are trying to do. But simultaneously, Herbert Hoover raised marginal tax rates from 25 percent to 63 percent. This Congress just passed an impending largest tax increase in history. Hoover signed into law the largest anti-free trade act in history, Smoot-Hawley. This Congress has sat on free trade bills, sending a horrible message to our trading partners. There were huge regulatory increases that started in the aftermath of the 1929 market bubble that, in my view, contributed to taking a short-term, 18-month, 2-year recession, and turned it into a 15-year depression before the stock market fully recovered. I believe that the failure to pass an energy bill here is huge. So I would ask you gentlemen, in addition to dealing with the liquidity crisis, as we turn over these enormous regulatory powers and socialize much of the lending industry, even though we have already socialized Fannie and Freddie for all intents and purposes, how do you intend on these other huge issues, tax increases, huge new spending increases which accompanied the aftermath of the 1929 market crash, how do you in the name of fighting demagoguery explain to the average American that what really needs to be done here? This was not, in my view, a huge failure of the marketplace. This was bad policy by the Fed, easy credit, and Congress browbeating people into making terrible loans. Just like investors speculated with other peoples' money in the 1929 market crash, and bet on margin, it is exactly what happened in our subprime crisis. And so my view is that it was horrible government policy, anti-capitalist policy, that largely led to this crisis. I would like you to address as historians and economists, how we can avoid all of these other things, big tax increases, fighting free trade, huge regulatory burdens, socializing much of the market. Back then, it was utilities and other areas. Today, of course, it is the AIG, it is the banking lenders. And I would like you to address the broader picture. How do we avoid taking an 18-month market recession and turning it into a 15-year Great Depression? " FOMC20070807meeting--153 151,MR. MISHKIN., Could you clarify? Are you saying that you would then get rid of “credit conditions have become tighter”? CHRG-111hhrg48674--180 Mr. Posey," Thank you very much, Mr. Chairman. This is fairly elementary. But when we were on a gold standard, it was pretty easy to tell where we stood. Would you agree with that? " FOMC20080625meeting--218 216,MR. KOHN.," I also had a question, Mr. Chairman, and it's on the PDCF. I find some tension in my own attitudes here. Your leaning all over these people not to borrow helps protect the Board's decision that this is unusual and exigent, credit couldn't otherwise be available, and all of that. So it's supportive of that. On the other hand, it sounds really like what we used to do with commercial banks all the time and thought it created stigma in the process. We don't want you to borrow. If you come in and borrow, given that we don't want you to borrow, you must really be hurting to overcome Art Angulo's or Bill Dudley's frown. So I think the more we do this, the less useful this thing is as a backstop in some sense. I don't know. I don't have an easy answer as to how to resolve this tension. " FinancialCrisisInquiry--166 WALLISON: The buyers, the customers. GM, for example—GM was saved. Were there externalities if GM had failed? MAYO: I’m the one who said I don’t think the prudent should subsidize the imprudent. WALLISON: Right. Exactly. MAYO: How you define that is not always easy. I feel like we’ve overdone it, though. WALLISON: OK. I want to—I’d like to go into some other things. Mr. Bass, you laid a lot of the losses in the financial crisis on the question of derivatives, presumably, credit-default swaps. How then do you explain why the credit-default swap market continued to function throughout the entire financial crisis without any obvious disruption of any kind even after Lehman failed? BASS: There are three parts to the derivatives market—the OTC derivatives market the way I think about it. There’s the CDS marketplace... CHAIRMAN ANGELIDES: Excuse me, Mr. Bass. Yield the gentleman an additional two minutes. WALLISON: OK. FOMC20070807meeting--183 181,MR. MISHKIN.," Well, “credit conditions” is more general because it can encompass both price and nonprice." FOMC20070807meeting--185 183,CHAIRMAN BERNANKE.," Well, think of it as being market-traded assets, and “credit conditions” sounds like mortgages, retail type of credit provision. President Hoenig." FOMC20070807meeting--176 174,CHAIRMAN BERNANKE., I think that is a good idea. Credit conditions are becoming tighter. We saw that in the bank surveys before any of this happened. FOMC20080724confcall--48 46,MS. KRIEGER.," So, yes, what we have proposed is that the additional cushion be taken against all loans more than one business day--primary credit and TAF, not seasonal credit. Clearly one could make a decision about where that point should be, and unless you can do it in a trend line, which our systems don't make operationally easy or comfortable for us, there will be a discrete point. An alternative would be to do it at some particular point in time, and there would be costs and benefits. On the one hand, it would make some more comfortable with the collateralization at very short terms. On the other hand, you also want to be comfortable with the incentives that we will create for DIs, if they are collateral constrained, to take loans of the short term that go just up to that point and continue to roll them. For example, let's say that your point was one week. Banks that are not collateral constrained probably would take the longer-term loan. Banks that are collateral constrained, the ones that you probably want to follow most closely, are likely to take the loan for six or seven days and then roll it and roll it and roll it again. " CHRG-111shrg50815--121 PLUNKETT Q.1. Without access to traditional credit, where do you believe that individuals would turn to finance their consumer needs? A.1. As I mentioned in my testimony before the Committee, it is important to note that the lack of regulation can also lead to detrimental market conditions that ultimately limit access to credit for those with less-than-perfect credit histories. Credit card issuers have recently reduced the amount of credit they offer to both existing and new cardholders, for reasons that have virtually nothing to do with pending regulation of the market. Issuers losses have been increasing sharply, in part because of unsustainable lending practices. (Please see my written testimony for more information.) Had Congress stepped in earlier to require issuers to exercise more responsible lending, they might not be cutting back on available credit as sharply right now. Regarding access to affordable credit for individuals with an impaired or limited credit history, CFA has urged mainstream financial institutions to offer responsible small loan products to their depositors. We applaud FDIC Chairman Sheila Bair's leadership in proposing guidelines for responsible small loans and her call for military banks to develop products that meet the test of the Military Lending Act predatory lending protections. Banks and credit unions should extend their line of credit overdraft protection to more account holders. The FDIC has a pilot project with 31 participating banks making loans under the FDIC guidelines for responsible small-dollar lending. Offering affordable credit products is not the only strategy needed to help households more effectively deal with a financial shortfall. Borrower surveys reveal that many households are not using high-cost credit because of a single financial emergency, but instead have expenses that regularly exceed their income. For these households who may not be able to financially handle additional debt burdens at any interest rate, non-credit strategies may be more appropriate. These may include budget and financial counseling; getting help from friends, family, or an employer; negotiating with a creditor; setting up different bill payment dates that better align with the person's pay cycle; and putting off a purchase for a few days. Toward this end, it is very important that banks and credit unions encourage make emergency savings easy and attractive for their low- and moderate-income customers. Emergency savings are essential to keep low-income consumers out of the clutches of high-cost lenders. CFA's analysis based on Federal Reserve Board and other survey data found that families earning $25,000 per year with no emergency savings were eight times as likely to use payday loans as families in the same income bracket who had more than $500 in emergency savings. We urge banks and credit unions to make emergency savings easy and attractive for their customers. Q.2. Do you agree that prudential regulation and consumer protection should both be rigorously pursued together by regulators? A.2. Absolutely. Credit card issuers must do a better job of ensuring that borrowers truly have the ability to repay the loans they are offered. As I mention in my testimony, card issuers and card holders would not be in as much financial trouble right now if issuers had done a better job of assessing ability to repay. This is why CFA has supported legislation that would require issuers to more carefully assess the repayment capacity of young borrowers and potential cardholders of all ages. Q.3. Do any of the witnesses have concerns that moving away from risk-based pricing could result in the subsidization of credit to wealthy yet riskier borrowers, by poorer but lower-risk borrowers? A.3. Under the Federal Reserve rules, card issuers will certainly have to be more careful about who they extend credit to and how much credit they offer. Given the current levels of indebtedness of many card holders--and the financial problems this indebtedness has caused these borrowers and card issuers--it is hard to argue that this is a bad thing. However, the Federal Reserve rules still preserve the ability of card issuers to price for risk in many circumstances, if they wish. They can set the initial rate a cardholder is offered based on perceived financial risk, reprice on a cardholder's existing balance if the borrower is late in paying a bill by more than 30 days, and change the borrower's prospective interest rate for virtually any reason, including a minor drop in the borrower's credit score or a problem the borrower has in paying off another debt. In addition, issuers can manage credit risk in more responsible ways by reducing borrowers' credit lines and limiting new offers of credit. Q.4. Do you believe that borrowers' rates and fees should be determined based on their own actions and not on those of others? A.4. It is certainly reasonable to base offers of credit on legitimate assessments of borrowers' credit worthiness. As I mention in my testimony, however, many of the pricing methods that card issuers have used to arbitrarily increase borrowers' interest rates and fees do not appear to be based on true credit risk, but rather on the judgment of issuers that they can get away with charging what the market will bear. Q.5. Do you think that credit card offerings from the past, which had high APR's and annual fees for all customers were more consumer friendly than recent offerings that use other tools to determine fees and interest rates. A.5. As I mention in my response above, the Federal Reserve rules leave plenty of room for card issuers to price according to borrower's risk, so I do not think it is likely that we will see a return to the uniform, undifferentiated pricing policies of the past." CHRG-111hhrg52397--181 Mr. Johnson," No, no, they are quite different from each other. I think one thing the market has done though is that the pricing of them is very easy to do in terms of everyone is able to price them and come up based on how LIBOR moves and come up with them. " CHRG-111shrg57322--1059 Mr. Blankfein," Sure. Senator McCaskill. OK. Let me ask you this. And by the way, in May 2006, right about when you did that, Office of Thrift Supervision just did a scoop at Long Beach and found all kinds of problems with their mortgages, almost at the exact time you were putting your instrument out. So that is why I question what kind of due diligence was actually going on and how much due diligence you were actually using in telling the buying public what was in these various transactions. In your testimony, you expressed regret that Goldman missed the signs of a system where credit was too easy, and you have said nobody could know when the housing market would crash or how bad it would crash. Looking back, do you think that you all did enough to look at what were in these instruments and how strong they were on their face? Do you think you exposed the kind of problems that these loans, the vast majority of these loans, represented? " FOMC20070807meeting--169 167,CHAIRMAN BERNANKE.," Well, just to say “have increased” and then have the next phrase say “credit conditions have become tighter” also makes no value judgment on whether they’re appropriate." FOMC20070816confcall--88 86,MR. KOHN.," Thank you, Mr. Chairman. Obviously just for the record, I support both of these actions. I do think that there is concern out there about access to credit over time by the banks and it’s holding them back. So I hope that this is useful in giving them some assurance. As I said, there’s certainly no guarantee. I want to underline a point that President Stern made. If we wait for definitive evidence that tighter credit conditions are affecting the economy, it will be too late. So we need to make judgments, as we always do, in terms of forward-looking monetary policy about what conditions today, tomorrow, next week, or the week after, if maintained, would do to affect the economy, and that’s how we have to make our decision. Thank you, Mr. Chairman." CHRG-111hhrg48868--691 Mr. Liddy," It is important to remember at FP, as I said earlier, it really is easy to paint with one brush and color everyone with the same brush. There are people who worked on one piece of FP called credit default swaps. There were people who worked on another area of FP called regulatory capital. There were people who worked on the derivatives book, the $1.6 trillion. For the most part, those are separate people. I am simplifying, but for the most part they are separate groups of people. It is the credit default swap people who, really, and that was a very small number of folks and a very small number of trades. They are the ones who brought our company to its knees. The folks out here in the derivatives book, you know, they are getting tarred and feathered along with everyone else, and they are the ones that we're asking to please, please, wind this book of business down, orderly, economically, and efficiently, so it doesn't cause problems for us. They are the ones who got the retention bonus. " CHRG-110hhrg44901--194 Mr. Bernanke," I can tell you what the legislation says. Under Section 13.3 of the Federal Reserve Act, we can lend to an individual partnership or corporation if conditions are unusual and exigent, and other credit accommodation is not available. So there are some conditions on that, on 13.3, somewhat less restrictive in that respect, but the collateral can only be treasuries or agencies. " CHRG-111shrg50564--10 Mr. Volcker," Well, that is a complicated question that goes to some of Senator Shelby's concerns about what caused the crisis. If I were analyzing this crisis in a substantial way, you have to go back to the imbalances in the economy, not just in financial markets. But as you know, the United States has been consuming more than it has been producing for some years, and its savings have practically disappeared, and that was made possible by, among other things, a very fluid flow of savings from abroad, low interest rates--very easy market conditions, low interest rates, which in turn incited the great world of financial engineering to develop all kinds of complex instruments to afford a financing for businesses, and particularly in this case for individuals, homebuyers, that went on to exceed basically their capacity to pay. And it was all held up by rising house prices for a while, as you know, and everybody felt better when the house prices were rising, but that could not happen forever. And when house prices stopped rising, the basic fragility in that system was exposed. So you had an underlying economic problem, but on top of that, you had a very fragile, as it turned, highly engineered financial system that collapsed under the pressure. I think of it as we built up kind of a Potemkin Village with very fancy structures, but they were not very solid. " FOMC20070807meeting--154 152,CHAIRMAN BERNANKE.," No. “Investors have demanded greater compensation for risk, credit conditions have become tighter for some households and businesses.” All right. No excitement." CHRG-111hhrg67816--260 Mr. Radanovich," I was looking at the new sample disclosure form by the FTC, which I thought was kind of interesting. Can you tell me your opinion of it? It seems it is easy to read. Have you seen it? " FOMC20080724confcall--116 114,MR. ALVAREZ.," The second resolution on the second page: ""The Board finds that conditions in the credit markets in which primary dealers obtain funding continue to be fragile and subject to unusual strain and uncertainties. This fragility continues to threaten the satisfactory functioning of broader financial markets and thus poses significant risks to the economy. In view of these unusual and exigent circumstances, the Board authorizes the Federal Reserve Bank of New York to continue to make credit available to primary dealers through the Primary Dealer Credit Facility, subject to the same collateral, interest rate, and other conditions previously established, until January 30, 2009, unless the Board finds that the unusual and exigent circumstances no longer prevail. The Reserve Bank may extend credit where it has evidence that reasonable credit accommodations are not available to a borrower from other banking institutions."" " CHRG-111hhrg52406--138 Mr. Manzullo," Thank you. The basic facts about your mortgage loan, a 1-page document, it is simple. It is easy, perhaps too simple and too easy for Congress to pass, editorialized by the Washington Post as being the best statement that the consumer understands. When I practiced law, I went through probably at least a couple thousand real estate closings before RESPA, which screwed up America. It has done more harm. We used to close in 20 minutes, and now that you have documents like this, you close in 2 hours. No one reads the dang thing because if you don't sign everything there, you don't get the keys to your house. Mr. Pollock, why hasn't your 1-page form been adopted, and what is wrong with the city that insists upon screwing everything up? How do you like that question? " CHRG-110hhrg46591--428 Mr. Bartlett," Congressman, the executives of my companies feel a heightened and a strong sense of responsibility, a sense of accountability, and a sense of accountability for getting it right and moving forward. I do have to say it is easy to say ``they.'' I am sure that each of the 435 Members of Congress have a sense of responsibility also. " CHRG-111shrg57320--125 Mr. Reich," I grew up in an era where the fundamental principles of credit administration were character, collateral, capacity, and conditions. Senator Levin. You used the word ``anathema'' in your statement. " CHRG-111hhrg49968--110 Mr. Bernanke," I wouldn't go that far, but there are many other issues we face. And I want to say that you have had a lot of experts. And it is easy for us to sit at this table and tell you that you have to solve this problem, and it is a very hard problem to solve. But it is critical that we address that. " CHRG-109hhrg22160--269 Mr. Greenspan," That is the choice of the Congress. I mean, the point is, the wonderful thing about our system is we have elected representatives who have to make these judgments. And if they don't reach you, somebody else made them, and they are easy decisions. You only get the tough ones. " FOMC20081216meeting--133 131,MR. FISHER.," I guess my point is that the way in which it works is that it gives people incentives to be even more conservative in the financial management of their operations. On household credit, do we have a sense of how much shift is taking place between credit card usage and debit card usage? Under these conditions of duress, has that been a noticeable change, or is it just marginal? " FOMC20070807meeting--182 180,MR. MADIGAN.," I just want to point out, Mr. Chairman, that those two clauses seem to overlap to a considerable degree, “tighter risk premiums” and “tighter credit conditions.” It’s not clear to me precisely what distinction we’re trying to draw there." CHRG-111hhrg54873--17 Mr. Foster," Thank you. And I would like to thank Chairman Kanjorski for convening this hearing today to discuss the important topic of how best to reform the credit rating agencies. While I applaud the general thrust of this bill, and I think it signals advanced improvement over today's regulatory environment, there are at least two major areas where I think the bill could be improved. The first major problem that we are wrestling with is the conflicts of interest inherent in the issuer pays business model for the rating agencies. I believe that the best model for going forward is to mimic the way that we handle similar conflicts and oversight of accounting and maybe modeled on the public company accounting oversight board, PCAOB. An oversight board like the PCAOB would be constituted largely or dominantly by users of credit ratings and would have teeth. Specifically, it would have powers to set standards and mandate disclosures, conduct spot checks and investigations, impose civil fines, ban firms and individuals from the credit rating industry. I believe that the PCAOB has been a necessary and sufficient entity to restore the credibility of the accounting industry in the post-Enron area. So the question I will be asking is what, if anything, might be the downside of instituting a similar oversight board for the credit rating industry. The second major problem that I see is the nonuniformity and nonquantitative nature of the language in which the ratings are reported by the CRAs. While the draft bill mandates the CRAs use generally recognized models when arriving at their ratings, I believe that greater detail under various well-defined market conditions would be very beneficial to investors. Specifically, I would emphasize the desirability of, first, standardization of ratings terminology so that all firms report ratings using identical terms. Second, industrywide standardization of stress conditions under which the ratings are evaluated. Thirdly, unambiguous quantitative correspondence between the ratings and the default probabilities under standardized conditions of economic stress. And fourth, standardization of terminology across asset classes so that, for example, a given rating applied to a municipal bond and a corporate bond will have the identical default probability under identical market stress conditions. One specific proposal that I would like to see investigated are what might be called ABZ ratings at a glance in which the three digits of a rating, instead of just being things that are made up, correspond to default probabilities under three different, well-defined levels of market stress. So the first digit, for example, could represent the default probability under normal market stress, the second digit under severe market stress and the third digit represents the default probability under extreme market stress. A 50 percent asset price drop, 10 percent increase in unemployment and so on. So a rating, if this style of ratings had been applied, then the ratings that would be assigned to an intermediary tranche of a mortgage pool, for example, might hold up well under normal market conditions and then collapse at times of stress would be ABZ. And had this sort of language been applied to the ratings of mortgage-backed securities, then the right questions would have been asked and there would have been no way that AAA ratings would have been so freely disbursed. I thank the chairman for convening this hearing and I look forward to working with him to strengthen this critical legislation. I yield back. " CHRG-111shrg62643--29 Mr. Bernanke," I think we do still have options, but they are not going to be the conventional options and so we need to look at them carefully and make sure we are comfortable with any step that we take. Senator Shelby. I want to get into the area of small business lending. Mr. Chairman, I hear reports of a credit crunch for small businesses and calls by other people to initiate more government programs to jump start lending in this area. I have two questions related to small business credit. First, is there some market failure or regulatory failure inhibiting the flow of small business credit which requires even more government intervention? Second, is there any slow down in small business credit because of weaker demand, because of a deterioration in financial conditions of small businesses and values of the collateral that they hold, or because of regulators somehow inhibiting or preventing good loans from being made? In other words, do we know the definitive reason for the slow down in credit flow to small businesses and what is your take? " CHRG-111hhrg53244--125 Mr. Bernanke," In terms of having the same terms and conditions that they had before the crisis, maybe that will never come back, because credit is sort of permanently tightened up in that respect. I am hopeful that as banks stabilize--and we are seeing some improvements in the banking system--and as the economy stabilizes to give more confidence to lenders, that we will see better credit flows. " CHRG-111shrg55117--56 Mr. Bernanke," Thank you, sir. Senator Johnson. Senator Schumer. Senator Schumer. Thank you, Mr. Chairman. I thank you, Chairman Bernanke, for these 2 long days of hearings. This job is a very tough one, and, of course, you are subject to criticism, and that is part of it. And some of it is valid, and some of it I agree with, but I just would remind people where we were 6 months ago--worried that we might enter a Great Depression. And I think the actions that you and others have taken have avoided that. We still have a long way to go, but it is easy to take all the shots, and certainly I have my criticisms. But also we should remember where we were 6 months ago and where we are today and give you some good credit for that. So I thank you for that. Now I would like to talk about credit cards, something I care a lot about. I know Chairman Dodd has mentioned them briefly. And the JEC hearing back in May, we had an exchange about the Federal Reserve's new credit card rules, and I was troubled by the 18-month delay. Senator Dodd and I asked you to use your emergency authority to put the new rules into effect immediately. And we talked about how consumers were suffering from an increase in predatory credit card practices, arbitrary rate increases, and you had said you would look into it. So the first part of my question is: Have you looked into it? It looks to me as if nothing has changed; things are getting worse. Credit card issuers right now are changing fixed rates to floating rates so that they can say when the law takes effect, as the rates go up, well, we are not raising the rates. That is outrageous. That is against the whole intent of the law. They are also increasing fees for balance transfers. They are cutting credit card limits, hiking up interest rates. So I would like to ask you: How do these new advance notification rules help consumers hit hard by this kind of behavior? Isn't it true that consumers slammed with fee or rate hikes have no recourse other than to pay the increase and cancel the card? Canceling a credit card adds insult to injury by lowering a consumer's credit score. So I have a question for you. I do not think we can afford to wait until our legislation goes into effect. Can the Fed take some actions now, which you have the power to do, to deal with these practices, some of which are clearly predatory? " CHRG-110hhrg46594--311 Mr. Wagoner," Yes. The issue is they have, just as we have, been significantly unable to raise credit. The availability of credit to them in the markets has been dramatically reduced. So unfortunately, in order to manage their cash flow to be able to provide wholesale financing at dealers and be able to finance some customers' sales, they have had to severely tighten their credit conditions. They would like nothing better than to get broader access to credit, which they are working on in this case to try to perhaps become a bank holding company to expand their deposit base to enable them to provide more credit. So they would like to have access to more credit and to be more proactive in the marketplace. We are working with other lenders who have a little more availability to see if they could help our customers out. " FOMC20080724confcall--114 112,MR. ALVAREZ.," Yes. The Board also votes on the TSLF. This is on the second page, the third resolution. ""The Board finds that conditions in the credit markets in which primary dealers obtain funding continue to be fragile and subject to unusual strain and uncertainties. This fragility continues to threaten the satisfactory functioning of broader financial markets and thus poses Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes significant risks to the economy. In view of these unusual and exigent circumstances, the Board authorizes the Federal Reserve Bank of New York to continue to make credit available to primary dealers through the Term Securities Lending Facility, subject to the same collateral, interest rate, and other conditions previously established, until January 30, 2009, unless the Board finds that the unusual and exigent circumstances no longer prevail. The Reserve Bank may extend credit where it has evidence that reasonable credit accommodations are not available to a borrower from other banking institutions."" " fcic_final_report_full--491 There were subprime loans and subprime lenders, but in the early 1990s subprime lenders were generally niche players that made loans to people who could not get traditional mortgage loans; the number of loans they generated was relatively small and bore higher than normal interest rates to compensate for the risks of default. In addition, mortgage bankers and others relied on FHA insurance for loans with low downpayments, impaired credit and high debt ratios. Until the 1990s, these NTMs were never more than a fraction of the total number of mortgages outstanding. The reason that low underwriting standards were not generally used is simple. Low standards would result in large losses when these mortgages defaulted, and very few lenders wanted to hold such mortgages. In addition, Fannie and Freddie were the buyers for most middle class mortgages in the United States, and they were conservative in their approach. Unless an originator made a traditional mortgage it was unlikely that Fannie or Freddie or another secondary market buyer could be found for it. This is common sense. If you produce an inferior product—whether it’s a household cleaner, an automobile, or a loan—people soon recognize the lack of quality and you are out of business. This was not the experience with mortgages, which became weaker and riskier as the 1990s and 2000s progressed. Why did this happen? In its report, the Commission majority seemed to assume that originators of mortgages controlled the quality of mortgages. Much is made in the majority’s report of the so-called “originate to distribute” idea, where an originator is not supposed to care about the quality of the mortgages because they would eventually be sold off. The originator, it is said, has no “skin in the game.” The motivation for making poor quality mortgages in this telling is to earn fees, not only on the origination but in each of the subsequent steps in the securitization process. This theory turns the mortgage market upside down. Mortgage originators could make all the low quality mortgages they wanted, but they wouldn’t earn a dime unless there was a buyer . The real question, then, is why there were buyers for inferior mortgages and this, as it turns out, is the same as asking why mortgage underwriting standards, beginning in the early 1990s, deteriorated so badly. As Professor Raghuram Rajan notes in Fault Lines , “[A]s brokers came to know that someone out there was willing to buy subprime mortgage-backed securities without asking too many questions, they rushed to originate loans without checking the borrowers’ creditworthiness, and credit quality deteriorated. But for a while, the problems were hidden by growing house prices and low defaults—easy credit masked the problems caused by easy credit—until house prices stopped rising and the flood of defaults burst forth.” 60 Who were these buyers? Table 1, reporting the number of NTMs outstanding on June 30, 2008, identified government agencies and private organizations required by the government to acquire, hold or securitize NTMs as responsible for two-thirds 60 Raghuram G. Rajan, Fault Lines , p.44. 487 of these mortgages, about 19 million. The table also identifies the private sector as the securitizer of the remaining one-third, about 7.8 million loans. In other words, if we are looking for the buyer of the NTMs that were being created by originators at the local level, the government’s policies would seem to be the most likely culprit. The private sector certainly played a role, but it was a subordinate one. Moreover, what the private sector did was respond to demand—that’s what the private sector does—but the government’s role involved deliberate policy, an entirely different matter. Of its own volition, it created a demand that would not otherwise have been there. CHRG-111hhrg51698--617 Mr. Moran," Thank you so much. I have a couple of questions. I explored this with the previous panel and what I think I see in this draft, and what I hear from a number of witnesses, is that we are headed down the path of a forced clearing with a narrow exemption. And I just wanted to explore one more time what does anyone think the alternative should be to that. Is there an easy way to summarize that? " CHRG-111hhrg51592--235 Mr. Bachus," On Page 4 of your written testimony, you say, even in the midst of the unprecedented economic conditions, that Realpoint was able to issue accurate credit downgrades 6 to 9 months sooner than your largest competitors. " CHRG-111hhrg48868--585 Mr. Liddy," Yes, that's a hard one to answer, sir. I understand the intent of the question. The people at FP, it is easy to paint with one brush and capture everybody. In fact, there are a lot of really good people up there. They are basic Americans, they want to do a good job for us. The trades that were done that brought us to our knees, that was a very small number of people-- " CHRG-111hhrg52406--69 The Chairman," Professor Warren, if you want to answer the question, we will find some opportunity to do so later on within her allotted time. The gentlewoman from California. Ms. Waters. Thank you very much, Mr. Chairman. I would like to start with kind of a basic question about oversight and regulation. I sincerely believe that there are some products. They have often been referred to, because of this subprime meltdown that we have had, as ``exotic products'' that were offered in the markets, such as Alt A loans and option adjustable rate mortgage, etc. There appears to be a feeling or an understanding or a basic way that the financial services community works that says you cannot deny products, that you can regulate them, no matter what someone decides to market that it is no so bad that it could be banned, that it could be stopped, that it could be disallowed, but whatever comes on the market, we will regulate it. How many of these products can reasonably be regulated? We discovered that there was very little regulation going on with these exotic products that came on the market. There was no real oversight. Nobody seems to have had to introduce them to any agency to say, you know, this is what we are about to do. They did not seem to know what was going on. What about that? Are there any products that are so bad that there needs to be some way to stop them altogether or do we go along with the idea that, well, if new products come on the market--1,000 of them or 2,000 of them--it does not matter, and we will regulate them? I would like someone to speak to that. Let me ask Ms. Seidman what you think about that? Ms. Seidman. Thank you, Congresswoman Waters. You know, I think one of the questions that we have to ask is: What is a ``product'' and what is a ``term?'' So, clearly, no one would ban mortgages or credit cards. On the other hand, I think we have a system that recognizes that banning terms is very much within the power of the regulator. In fact, interestingly enough, the Fed actually banned double-cycle billing, which Professor Warren just described. Are there some products that are so bad they should not be allowed? You know, I think there are, but I also think it is incredibly important that we understand what the needs of the population are and how those needs are going to be met. I do not happen to like payday lending. When I was at OTS, we made sure that the institutions we regulated did not do that. On the other hand, in a world in which we have discouraged savings, in a world in which we do not make saving easy, in a world in which there are a lot of people, immigrants and nonimmigrants, who do not have easy access to our mainstream financial institutions, we need to figure out something else so that they can have access to well-priced, well-structured, short-term credit. There are both mainstream institutions, credit unions in particular, some banks and some non-banks that are doing that. So the question is: What is the function that needs to be served, and how can that function be served in a responsible way? That is the question that this new agency is going to have to answer, and I think it is a creative way and a really important way to think about consumer protection. Ms. Waters. Thank you. Mr. Yingling, we are being told--and it is being whispered and talked about in the back rooms and in other places--that the bankers are going to have a big pushback on this agency as to what it stands for and what it is supposed to do. What is it about the agency that would cause the bankers, one, not to have a consumer protection agency as you understand it? " FOMC20081216meeting--168 166,MR. DUDLEY.," You can look at credit ratings, for example, or what's happening to their profitability. It is highly likely that the strains in the CP market are more dramatic than any change in the underlying financial condition of the A2/P2 borrowers. " CHRG-110shrg38109--143 Chairman Bernanke," The general principle I was trying to address was the insecurity the people feel about job loss and job change. And I think it would be beneficial if we could reduce that insecurity. One way to do that would be to increase portability of benefits across jobs. There are many ways to do that, so I am not taking a specific means. Wage insurance is an interesting idea that has been advocated by a number of economists. Again, I am not sure I can take a specific position on it. One of the things I said, and I should reiterate, is that it is easy enough for me to say we should address these issues. The actual implementation is quite difficult. These are very complex problems. I just urge Congress to look at them and try to get as much good input and advice as they can in thinking about how to best address these issues. Senator Reed. A final issue, which is the Earned Income Tax Credit, which seems to me to be a very efficient way to deal with this issue that has been the constant source of our discussions this morning, inequality of wages, inequality of opportunity. Is that something that we should be looking at seriously, to expand it? " FOMC20070807meeting--19 17,MR. POOLE.," I have two questions. First, does the New York Fed have what I might call material nonpublic information about firms that would suggest that there is more difficulty than we see in the newspapers? That is one question. The other question has to do with the distribution of views among dealers about probable Fed policy. There is obviously an arbitrage relationship between, let’s say, a two-year Treasury and these futures markets. My sense is that probably what is going on here—and I will use the two-year as the example—is a flight to safety. People are trying to shore up their liquid assets in case they have to sell some stock into the market, so they are trying to hold more of that. But there is no easy way for those on the other side of that market to go short and push that yield back to where the best-informed people think it will be once we are past this turmoil. So what we may be seeing is less a reflection of expectations about future policy actions than a flight to liquidity as a desperate effort— “desperate” may be too strong—to shore up the liquidity of a balance sheet, and there is no easy way for people to go on the other side. Those are the two questions I have." CHRG-110hhrg34673--214 Mr. Bernanke," That is a difficult one. We don't want to rule out the possibility that when someone's creditworthiness drops for a variety of reasons, that their creditors get that information and use it. However, I think some of the concern about universal default provisions is that people don't get enough warning or notice that this condition is going to kick in. So that might be one direction to go, which is to increase the amount of warning that consumers get when their credit histories deteriorate and when that may affect their pricing and their credit cards. " CHRG-110hhrg41184--107 Mr. Bernanke," Well, there is an interaction between the economy and the financial system, and it is perhaps even more enhanced now than usual in that the credit conditions in the financial market are creating some restraint on growth, and slower growth in turn is concerning the financial markets because it may mean that credit quality is declining. And so this financial accelerator or adverse feedback loop is one of the concerns that we have and one of the reasons why we have been trying to address those issues. " FOMC20070918meeting--120 118,MR. STERN.," Thank you, Mr. Chairman. Let me make a few comments about current economic conditions and then talk a bit about the outlook. By way of overview, I will say that I largely agree with the Greenbook, both about the current quarter and about the near-term outlook, in any event. The current quarter does look as though it is going to turn out to be certainly respectable real growth of 2½ percent or perhaps a bit more. The anecdotes from our District that relate to the third quarter seem to be consistent with that. Employment has been sustained, and if anything, the reports of the scarcity of skilled labor have probably increased. In fact, some of our directors have speculated that perhaps the aggregate employment gains have been restrained by that availability issue. The largest bank in our District and several others say that, based on what they are seeing, consumer spending and consumer unsecured borrowing are proceeding normally. Repayments are proceeding normally, and credit quality on the consumer side is in good shape. The one exception to what I would describe as a generally positive picture is what we are hearing in the nonresidential construction sector. I don’t want to make too much of this, but I have a sense that it is significant. Some of the large developers in the District have reported that, because of the change in financial conditions that has occurred in the past month or two, some projects are clearly being postponed. Whether they will ultimately be cancelled remains to be seen, but there certainly have been some effects there. Turning to the outlook, I think that the outlook for real growth over the next several quarters is less favorable than it was formerly. I admit that it’s a stretch to get there, if we rely on our familiar models to produce that result. Nevertheless, I take a cue from the comments I made a moment ago about nonresidential construction. It looks as though that will be somewhat slower than I earlier anticipated because of changing financial conditions. I would guess that we would see the same thing in outlays for equipment and software, so I’m expecting a less favorable performance there. As far as the housing sector is concerned, it seems to me that, given the inventory of unsold homes, even if financial conditions improve and improve relatively quickly, housing is going to exert a depressing effect on the economy for quite some time to come, just because of the inventory overhang. More broadly, the changes in the cost and availability of credit that we see are likely to hamper the economic expansion for several quarters. So I have marked down my forecast accordingly, based on changes in the factors I cited—namely, a somewhat less favorable outlook for nonresidential construction and ultimately for spending on equipment and software, prolonged weakness in the housing sector, and a somewhat less favorable outlook for consumer spending as a consequence of changes in credit cost and credit availability. On the inflation front, the incoming information is slightly more favorable than I had earlier expected, and so on margin I have adjusted my forecast there as well. I had been expecting a diminution of core inflation as a consequence of the ebbing of transitory factors and of a moderately restrictive monetary policy. It appears to me now that the decrease in underlying inflation is occurring a little sooner than I had anticipated, and I think this is obviously a positive development from a number of perspectives, one of which is that it is potentially significant as it gives us a little more maneuvering room on the policy front if, in fact, it is sustained. Thank you." CHRG-111hhrg56767--40 The Chairman," Mr. Feinberg has arrived, and I just want to thank him--it hasn't been an easy day for him--and just reassure him that the next witness will be Mr. Alvarez, so he will have at least 7 or 8 minutes to collect himself. We understand that there was, literally, a train wreck, and we thank you for making every effort to come here. I apologize, Mr. DeMarco. Please continue. " CHRG-109shrg26643--82 Chairman Bernanke," Well, actually we are looking for them to give us statistical indicators of their own loss experience in their past credits. And part of the process will be validation. That is, they have to show us that their numbers were derived from their actual experience over a period that encompasses both strong and weak credit conditions and that they are using those models for their own internal analysis of capital. So there will be a lot of checks and we will continue to work with the banks and with the Congress on this issue. " FOMC20070807meeting--186 184,MR. HOENIG.," I’m okay if you want to put “premium,” the Vice Chairman’s language, in there. But I think that the markets have become more volatile, and nothing is wrong with saying that, and credit conditions have tightened, which is a fact, and people are thinking about the volatility of the markets. So that is on their minds. We’re acknowledging it, as you said, and so I was comfortable with the language." FOMC20080310confcall--37 35,MR. ROSENGREN.," I just want to follow up on one of Bill Dudley's comments. I noticed in the terms and conditions that it included that the New York Fed reserves the right to reject or declare ineligible any bid entirely at its own discretion. Under the TAF, we require that people be qualified under the primary credit program. Are we planning on using a credit standard equivalent to what is done for the TAF for the broker�dealer community? Do we currently have the capacity to make that determination? " CHRG-111hhrg48868--192 Mr. Capuano," Thank you, Mr. Chairman. Ladies and gentlemen, I think I heard most of you say that you didn't have oversight over CDS, but I didn't hear any disagreement with Mr. Ackerman's general description or the general belief that credit default swaps are all some sort of insurance. And I take that to be an accurate assessment of what they are. They're just insurance with nothing backing it up. If that's what they were, I would then argue that you did have the authority to oversee these. If we were a part of the holding company, it was your responsibility at the OTS to include any activity that might have impacted the holding company. If it was part of the insurance company, the State regulators had a responsibility to oversee some sort of insurance; and, certainly, the credit rating agencies had some responsibility to see that this game wasn't going to undermine investors' confidence. So I know nobody wants to take fault for it, and again, I don't think it's actually anybody's fault. It's everybody's fault. Credit default swaps were simply a way to get around any sort of regulation, any sort of oversight, and everybody here allowed it to happen. Everybody allowed it to happen. To say you didn't have any authority to me is simply an easy way out and a wrong way out. But I do want to know now. I mean, okay, it's done. We are where we are. I presume that everybody, you're here today, because you know a lot about AIG, and AIG to me is just one of the many problems, but it's the one that we're talking about today. I presume that even though the OTS isn't technically the regulator, I presume you are still keeping an eye on it, because in theory there will come a time when you will be the regulator again unless we change everything. So I don't think you probably just dropped the ball. I hope you have. And that being the case, I would like to know when do you think that the path that we are on now should, has a reasonable expectation, of leading AIG back to profitability at some point of stability; and, if so, when. And I'm not saying when, tomorrow, but within a year, 2 years, 10 years, 100 years, never. Mr. Polakoff? " FOMC20070918meeting--298 296,MR. POOLE.," I understand that, but that can be different from the current target rate that’s in effect right now. That’s my point. This rate could be below the current target rate, and that seems to me to create an issue that we are going to have to be prepared to explain, and I’m not so sure that’s going to be easy to explain. At any rate, I’ll leave that on the table for the moment." CHRG-111shrg52619--88 Mr. Fryzel," Thank you, Senator. Paramount to NCUA is the safety and soundness of the funds of all our 90 million members in credit unions across this country, and in an effort to maintain their confidence is not an easy task, and we have made every effort to do so by public awareness campaigns. Certainly the action by Congress in raising the $250,000 limit has been fantastic in regards to the safety and their ability to think that their funds, or to know that their funds are safe. We tried to draw the fine line in letting them know that, yes, there are problems in our financial structure, but we are dealing with them and we are going to use the tools that we have to make sure that things get better. And when this economy turns around, financial institutions are again going to be in the position where they are going to be able to serve these consumers in the way they have in the past. So yes, Senator, it is a fine line, but I think it is one that we have to keep talking about. We cannot let anyone think that there are not problems out there. We have to tell them we are in a great country. This economy does come back and everything is going to be better in the future. Senator Reed. Mr. Tarullo. " CHRG-110shrg50420--58 Mr. Dodaro," Well, that is one of the reasons we would suggest, if Congress decides assistance is warranted and provided that there be a short-term mechanism to get the money, most of the plans--or the two plans that require immediate assistance, the General Motors plan and the Chrysler plan, call for help during the--immediately, but also the January, February, March timeframe, first quarter. You know, we believe that there is sufficient expertise now available in the Federal Government to get a board together to at least look at, while there may be an initial outlay--and that initial outlay ought to be conditioned on certifications by the automakers that no other credit is available to them and other conditions, but then they could immediately focus on the cash-flow positions of those entities and then take a look at the longer-term issues associated with restructuring. That would buy enough time to do that. Senator Reed. Thank you. Thank you, Mr. Chairman. " FOMC20060808meeting--118 116,MR. MOSKOW.," Thank you, Mr. Chairman. The incoming data have heightened my concerns about inflation. I think it’s true, as a number of people have mentioned around the table, that inflation expectations have not moved up. The markets seem pretty confident that we’re going to be successful in fighting inflation. But as Kevin Warsh said, the markets can be pretty fickle. We’re going to get some further bad news on inflation in the coming months, and I hope the markets will maintain their confidence in the Federal Reserve. But their confidence in us could change as the news continues to be bad in the coming months. Also, I think we have to ask whether our failure for two years now to keep inflation inside what many of us have said is our comfort zone—1 to 2 percent—is going to weigh eventually on the assessment of the markets and their confidence in the Federal Reserve. I’m concerned that the public’s confidence in us may begin to waver if we don’t express our readiness to tighten if inflation doesn’t head down soon. It’s not clear to me that we’ve put restrictive-enough financial conditions in place to put inflation on much of a downward path. According to the Bluebook, the fed funds rate is close to neutral. In the Bluebook’s longer-run simulation, the optimum policy requires further rate increases to put us on the path to 1½ percent. We won’t get there just staying where we are now. I realize it’s a very close call, and everyone has mentioned that; but on balance, I would prefer to raise rates 25 basis points at this meeting. I won’t repeat all the comments that Cathy, Charlie, and Jeff made. I think they were very persuasive. It would surprise the markets, but we shouldn’t be doing what the markets expect us to do. We should be doing, as someone said, what’s right for the economy and for the American people. It doesn’t appear that an increase will be the consensus coming out of this meeting. I’d just add that, if we do pause, it’s not going to be easy for us to start again. I don’t think we should kid ourselves about that. We’re going to be accused of whipsawing by the markets, and we’ll take a lot of criticism. So we’re going to have to take a very tough stand if we decide to raise rates again. It’s not going to be easy, and we should just be prepared to do that. Looking ahead, I’d say that if we determine that factors are not reducing growth too much and if inflation does not appear to be moderating, then we’re going to need to increase rates further to coax inflation back toward price stability. We have to make it clear in our public statements that we’re prepared to do that. If we do go with the pause, then I certainly agree with Don Kohn’s recommendation that we should use the language from section 3 of alternative C and move it to section 2 of alternative B. To omit the reference to high levels of resource utilization, when we’ve had it in our past statements, would be a serious error." CHRG-111shrg55117--128 PREPARED STATEMENT OF SENATOR JACK REED Today's hearing provides an important opportunity to hear from Chairman Bernanke on the overall health of the economy, labor market conditions, and the housing sector. These semiannual hearings are a critical part of ensuring appropriate oversight of the Federal Reserve's integral role to restore stability in our economy and protect families in Rhode Island and across the country. I continue to work with my colleagues on this Committee to address three key aspects of recovering from the financial crisis. First, we must stabilize and revive the housing markets. With estimates of more than a million foreclosures this year alone, we must recognize this as a national emergency no different than when banks are on the verge of failing. One in eight mortgages is in default or foreclosure. These are more than statistics. They represent individuals and families uprooted, finances destroyed, and communities in turmoil. We need to keep pushing servicers to expand their capacity and hold them accountable for their performance. And we need to make the process more transparent for homeowners. Second, we need to create jobs, which the American Recovery and Reinvestment Act is already doing throughout the U.S. Although there have been some positive signs in the economic outlook, the unemployment rate in Rhode Island and nationally has continued to climb steeply. In the 5 months since you addressed the Committee in February, the national unemployment rate has risen from 8.1 percent to 9.5 percent, and in Rhode Island it has surged from 10.5 percent to 12.4 percent--the second highest in the country. I will soon introduce legislation to encourage more States to use work share programs, similar to our program in Rhode Island, which provide businesses with the flexibility to reduce hours instead of cutting jobs. Third, we need to stabilize and revitalize the financial markets. We've made significant progress in this area, but we need to continue to monitor these institutions to ensure they remain well-capitalized and are able to withstand market conditions much better than they did in the recent past. And we need to be smart about the Federal Reserve lending programs to get our credit and capital markets once again operating efficiently and effectively. This is especially true for small businesses, our job creators, which are the key to our Nation's economic recovery. Finally, complimenting all of these is a need for comprehensive reform of the financial regulatory system. We face several major challenges in this area, including addressing systemic risk, consolidating a complex and fragmented system of regulators, and increasing transparency and accountability in traditionally unregulated markets. It is important to recognize that our economic problems have been years in the making. It will not be easy to get our economy back on the right track. But in working with President Obama we can begin to turn the tide by enacting policies that create jobs and restore confidence in our economy. ______ CHRG-111shrg57923--3 Mr. Tarullo," Certainly, Senator. A number of other regulators and overseers around the world have already begun to address the issue of information, among them the various organs of the European Union and the United Kingdom, the Bank of England. The G-20 itself has issued a couple of recommendations that are particularly salient to this question on developing a template for reporting of information of the large internationally active financial firms. Now, this is, of course, not an easy undertaking for any one nation much less for the world as a whole, but it is something which the Financial Stability Board has taken on as a task. There have been some preliminary discussions on how to organize the work of trying to see if we can come to agreement on a template for reporting of the largest, most globally active financial institutions. It is far too early to report progress there, Senator, but I can say that the effort has been launched. Senator Reed. Well, thank you, Governor. As you know, as we are proceeding down, and I think appropriately so, a legislative path which we hope will incorporate this systemic collection of information, I have got legislation in--and, in fact, I want to thank Dr. Mendelowitz and Professor Liechty for their assistance and help. But this is going to have to be an effort that goes beyond the United States to understand that, but I think it is important that we begin here. Another aspect of this international question is the issue of sovereign behavior. The Greek Government now is in a very serious crisis which is rattling the markets. There also is some indication that another one of our favorite topics, derivatives and credit default swaps, have come into it. Apparently, there are reports that investment banking firms have helped them legally avoid treaty obligations under Maastricht, et cetera. But the long and the short of it is, do we also have to include sort of sovereign entities in terms of data collection? " CHRG-111hhrg55811--177 Mr. Campbell," Let us get to that, because homogenizing derivative products is not an easy thing. Obviously, everyone even in the bond market you haven't been able to homogenize and make an exchange trade and so forth. How much would fit in this standardized? How much homogenization is there going to be? And is there, then, incentive for me to create products that do not homogenize, because even though there is transparency, there can be more margins in something that is outside of this--well, not exchange, but outside of this clearing than would be inside the clearing? " CHRG-110hhrg44901--33 Mr. Manzullo," Thank you, Mr. Chairman. Chairman Bernanke, earlier this week you took an action to crack down on a range of shady lending practices that have hurt the Nation's riskiest subprime borrowers and also have caused a tremendous amount of economic distress in this country. Among other things, the Fed issued regulations that would prohibit lenders from lending without considering the borrower's ability to repay and also would require creditors to verify their income and assets at the time of the borrowing. These are pretty basic. Although hindsight is a 20/20 issue, and it is easy to sit here and say the Fed should have done this a long time ago, the evidence of this housing bubble has been going on for some time. And my question is, what took the Fed so long to act? And then the regulation you are coming out with is not going to be effective until October 1st of next year. Those are the issues just involving in the subprime borrowers. As to the regular borrowers, you came up with another landmark regulation that says, whenever a borrower gives a check to the bank that the bank has to credit it that day to the borrower's account. I mean, this shows knowledge of some very basic problems that have been wrong in the housing industry. But what took the Fed so long to act? And why wait 15 months before the regulations go into effect? " FOMC20080130meeting--188 186,MS. PIANALTO.," Thank you, Mr. Chairman. In my view, economic conditions have deteriorated significantly since our December meeting. Taken as a whole, the stories that have been relayed to me by my Fourth District business contacts have been downbeat, and several of the contacts are concerned that we may be slipping into a recession. I'm hearing that consumer spending has declined appreciably since the soft December retail sales numbers were reported. The CFO of one of the nation's major department store chains told me last week that her company's January sales are shaping up to be the worst that they have seen in the past twenty years. She said that they had already cut back some of their buying plans because of the weak holiday sales, but after seeing the numbers for the first three weeks of January, she is concerned that they have not cut back buying plans enough. In December I had heard some upbeat assessments about the demand for capital goods and exports, but in January the incoming numbers are softer, and expectations for the coming year are less optimistic than they were just a month ago. I'm also concerned that I'm now detecting the first signals of a credit crunch. Bankers in my District tell me that they're finding it much more difficult to issue debt and that they are safeguarding their capital. I've heard several motivations for this, depending on the institution. Some bankers are simply preparing for further losses. Some are expecting to have to bring some downgraded assets back onto their balance sheets. Even those bankers who have adequate capital say that they have become much more disciplined about how they're going to allocate that capital. Collectively, the concerns that bankers have expressed to me about capital have convinced me that credit will be less available and more expensive than it has been in quite a while. Deals that bankers would have done for creditworthy borrowers not long ago are simply not being done today. Of course, it's possible that nonbank financial companies will step in and fill the gap, but it is not clear to me that they have the capital and the risk appetites to do so. These developments have had a significant influence on the economic projection that I submitted for today's meeting. Like many around the table, I continue to mark down my outlook for residential and nonresidential investment in response to the incoming data and also in response to greater business pessimism about the economic prospects. In addition, I've built in a sharper and more protracted slowing in consumer spending stemming from greater deterioration in the household balance sheet and tighter credit market conditions. These adjustments have caused me to cut my 2008 GDP growth projection about 1 percentage point since the December meeting, and some of that weakness spills over to the out years. If credit conditions deteriorate further than I have expected, then my projection would more closely resemble the persistent weakness alternative scenario described in the Greenbook. But that isn't my projection for the economy. Rather, my projection is roughly in line with the Greenbook baseline. My inflation outlook hasn't changed much from where it was in December--or October, for that matter. Like the Greenbook, I still project inflation to moderate as commodity prices level off and business activity wanes, but the risks to my inflation outlook have shifted to being weighted to the upside. The December CPI report was not much improved from the troubling November data, and my business contacts continue to report that commodity prices are being passed downstream. So I have less conviction in the inflation moderation than I did a month ago. That said, the downside risks to the economy still dominate my thinking about the outlook today. I do believe, however, that our policy response to date combined with an additional rate cut tomorrow will allow the economy to regain some momentum as we move into the second half of 2008. Thank you, Mr. Chairman. " CHRG-110hhrg46594--408 The Chairman," Thank you. Professor, one side point, on putting other members on the board, we run into the problem of the appointments clause. You cannot give a board that has any power any membership other than a presidential appointee. We could add a presidential appointee who was not in the Cabinet but it couldn't be a congressional appointee. That is why in the TARP we have two boards, one that is congressionally appointed that is oversight but no power and then one with power but it is all the Administration. So it doesn't do as much good. But beyond that, part of your mandate at Columbia, in which you have done such a good job, is on the whole question of sustainability. And one of the criticisms we have in the auto industries has come understandably from people concerned about the environment because of their past record. One proposal we got--in fact it is the Bush Administration's approach, which is to take away from the $25 billion that was already voted the conditions on that that were--that said it had to be used to promote energy efficiency; that is, their view is all right. We gave them $25 billion for the specific purpose of retooling credit deficiency. Let's just take those conditions off. What would your response be to that? " FOMC20081216meeting--377 375,MR. MADIGAN.," ""The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to � percent. Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further. Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters. The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time. The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasuries securities. Early next year, the Federal Reserve will also implement the term assetbacked securities loan facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity."" " CHRG-111shrg50814--97 Mr. Bernanke," Well, the two principal steps that are being taken, first, is the set of measures to try to reduce preventable foreclosures, which will reduce the supply of homes in the market and would be helpful to prices and construction. The other step has been the Federal Reserve's concerted efforts to lower mortgage rates by the purchase of GSE securities. We have had some success in that direction. So house prices are down quite a bit, obviously, and interest rates are pretty low. So affordability is not the issue it was a few years ago. So at this point, I would recommend focusing broadly on the economy and the financial system as a whole. People are not likely to buy houses when they are feeling very unsure about their jobs, for example. So the more we can do to strengthen the overall economy and stabilize the financial system, and along Senator Bayh's line, restore confidence, I think that will be the best thing to get the housing market going again. Senator Martinez. In December, the Federal Reserve reduced the fund rates further, and then obviously you noted on February 18 that widening credit spreads, more restrictive lending standards, and credit market dysfunction have all worked against the monetary easing and have led to tighter financial conditions overall. What other tools is the Fed employing to ease credit conditions and to support the broader economy? " CHRG-110shrg50416--145 Chairman Dodd," We are in a pro forma session. You may decide to do something here. I have got to keep an eye on you. Senator Corker. Is there any need for the Federal Government whatsoever to be involved in the secondary market? It is a simple, easy--I mean, it makes our exotic derivatives look like, you know, elementary stuff. Is there any reason whatsoever for the Federal Government to be involved in the secondary market? " CHRG-111hhrg48867--269 Mr. Plunkett," Well, I am going to talk about one aspect of this issue that hasn't been addressed: the need to assure that attempts to spur credit availability, whether through larger institutions or smaller institutions, are offered on a sustainable basis. The TARP program, the TALF program--we are concerned, particularly with the TALF program, that it may end up subsidizing, for instance, credit card loans with terms and conditions that are not sustainable for consumers. So I think that is an important aspect to the issue that we should think about. " CHRG-111hhrg54869--16 Mr. Volcker," When I comment that I think banks should be restricted in their, what I think of as truly capital market impersonal activity, it is pretty easy to talk about hedge funds and equity funds because they are identifiable institutions. Proprietary trading is not an identifiable institution in the same way, although many financial institutions will have a proprietary trading desk. That is the way they label it themselves. " CHRG-110hhrg45625--95 Mr. Bernanke," Well, we really had two stages in this credit cycle. The first stage was the write-downs of subprime and CDOs and those kind of complex instruments. We are now in the stage, with the economy slowing down, where we are seeing increased losses in a variety of things, ranging from car loans and credit cards, to business loans and so on. And that is going to put additional pressure on banks. It is another reason why they are pulling back, building up their reserves, building up their capital, de-leveraging their balance sheets, and that is going to prevent them from providing as much credit as our economy needs. Ms. Velazquez. Thank you. Secretary Paulson, we are hearing about small business loans being called in, and up to a third may have a callable provision and not be delinquent. Lenders are also reducing credit to entrepreneurs, and we are aware that the Federal Reserve reported that 65 percent of lending institutions tightened their lending standards on commercial and industrial loans to small firms. Given these challenging conditions, how will the current proposal specifically address the challenges facing small business? Before, you said in your intervention how this is going to help small businesses. Well, they too are victims now of the financial market mess that we are in. " FOMC20070816confcall--63 61,MS. YELLEN.," Thank you, Mr. Chairman. I want to say that I strongly support the proposal that you’ve made, both the changes to the primary credit program, and also I would strongly endorse the statement that you just recommended that the Federal Open Market Committee put out. I’ve been doing my best to follow developments in financial markets in recent days, and it seems very clear that we have a situation of almost complete illiquidity in the asset-backed commercial paper market and in asset-backed markets more broadly. Although I agree with President Plosser that the proposed changes to the operation of the discount window and the cut in the discount rate are not certain to succeed in regenerating the functioning of these markets, I think this is a very well reasoned, thoughtful, creative program that has as good a chance to succeed as anything that certainly I could dream up. So I strongly support it. I could go along with a larger cut in the discount rate, but I understand the reasons that you’ve given for making it a 50 basis point cut. So I strongly support that. I also think it is highly appropriate for the FOMC to issue this statement that you have suggested. First of all, it is just straightforward that the outlook has deteriorated. We’ve developed a credit crunch. If liquidity isn’t quickly restored in these markets, we are looking at a credit crunch—signs of it are everywhere. Just to see that, Countrywide itself is 20 percent of the market, and it announced that it is tightening credit standards. Every day we hear about companies that are trying to finance prime quality jumbo mortgages and cannot get the financing to do that and are tightening standards. Although we may not have yet seen data suggesting that these changes in financial conditions are having an effect on economic growth, I think any forward-looking assessment would suggest that tighter credit conditions have to have that effect. So I certainly support the recognition of that, and I can easily imagine that we will be cutting the federal funds rate in the not-too-distant future." FinancialCrisisInquiry--211 So – Do I understand what you’re saying is that the Wall Street banks are now calling for more regulation, which you think are going to redound to the detriment of the community banks who already are adequately regulated. CLOUTIER: Correct. I mean, you know, one example is if they had to live with my capital levels. I had 12 percent capital. When I heard them talk about their capital levels here earlier today, I wondered how in the world they got away with that. Because I guarantee you, if I walked and told my regulator I was going to have 6 percent capital, I’d have a C&D in the morning on my desk. You know, it’s an unfair system. So when they say send more regulation, more regulation only means that’s more stuff that I don’t have to worry about and that’s an easy way to go out the back door. You know, when we had the crisis at Enron, they passed—which by the way, Citicorp and them were deeply involved in. You know, they paid big fines for. It didn’t affect them at all. It was crushing to small business. It was a crushing event. Gramm-Leach-Bliley, when they changed the rules, it didn’t affect them. It affected us. So more regulation usually doesn’t have much effect. My question is, and the question this commission should ask: Why wasn’t the regulations on the books enforced? And then that would be an amazing question to ask. And I think most of the answer is is that they’re a member of the FAC they’re very closely interlinked into the Washington circles. GRAHAM: Ms. Gordon, you made some very strong statements about the fact that there was a preference given to the worst mortgages and actual economic incentives to create harsh conditions and possibly overprice to the consumer mortgages. What is—do you have some evidence to substantiate those charges? CHRG-110hhrg41184--26 Mr. Bernanke," Well, they certainly need to know the interest rate and how it varies over time and what that means to them in terms of payments. And they also need to understand other kinds of penalties or other fees that might occur if they violate certain conditions or other things occur. So they need to have a good understanding, not only of how they use a credit card for example, but also what the cost might be so they can make an informed judgment. " FOMC20070509meeting--63 61,MS. PIANALTO.," Thank you, Mr. Chairman. The economy from the perspective of the Fourth District isn’t materially different from the way I heard Dave describe national conditions. Manufacturers in the District generally report modest but steady growth. In particular, metals producers and their suppliers report strong orders and production. My business contacts are telling me that capital investment is a bit soft, but it should not at this point pose a serious problem for the overall economy. I’ve had several meetings with homebuilders throughout my District in the past few weeks, and they confirmed some of the information that we see in the national data—sales are still very anemic, and the inventory of unsold homes remains quite high. They also shared some information that is not easy to pull from the national indicators. For example, sales of starter and lower-end homes are particularly slow, in part because lending standards have been significantly tightened. This means that there has been a shift in the composition of homes sold toward the upper end of the price spectrum, causing the reported sales-price data to be a little inflated. The builders I spoke with assure me that price discounts are occurring and that the discounts have been substantial. Likewise, I am told that appraisers are increasingly being asked by lenders to do whatever possible to appraise the properties relative to current market conditions and to discount price information from the historical comparables. My contacts are also saying that the expectation that home prices are going to fall further has been keeping some buyers on the sidelines for now. I also hear that, when possible, residential contractors are shifting resources to nonresidential projects. Some nationally publicly traded home construction companies are completing houses and selling them for a loss in some markets just so that they can exit those markets more quickly. What I take away from my conversations with homebuilders and lenders is that the national data may not yet fully have caught up with the poor conditions in the residential construction sector and, further, those closest to the markets are betting that any semblance of a recovery is still a long way off. This information had an influence on the economic projections that I submitted for today’s meeting. Like the Greenbook, which as a consequence of more weakness in residential construction has shaved an additional 0.5 percentage point off GDP growth in the latter half of this year, I have marked down my expectations for growth in 2007. My projection sees a little more growth relative to what I see in the Greenbook as we move into 2008 and 2009, although I do see slower economic growth as an obvious risk to my outlook. I’m especially concerned about the possibility of some spillover from the housing sector to the business investment outlook. My inflation projection calls for a slightly more optimistic trend in core PCE than what I see in the Greenbook. I had difficulty endorsing a three-year projection that doesn’t assume that our policies are going to be positioned so that we eventually bring core PCE inflation back below 2 percent, if only just below. So my inflation projection represents my interpretation of appropriate monetary policy—namely one that will bring core PCE in under 2 percent. My economic projection is, therefore, based on a federal funds rate path that is very similar to the Greenbook baseline, a constant path over the projection period; but I have assumed a slightly more optimistic price path for oil. Given Karen’s comments this morning, I am a little more comfortable with that assumption. I also have slightly more potential than the Greenbook does. So with these two assumptions, I do have a slightly lower path for inflation than the Greenbook does. Obviously, these assumptions are not made with great conviction, and inflation may continue to track just north of 2 percent. If it does, we do risk conditioning expectations to this level, and that is an outcome that I would not welcome. I had an opportunity just a few weeks ago to spend a day with Paul Volcker, who visited Cleveland. On the subject of inflation, he reminded me that in his experience big inflations start out as a tolerance of modest inflations. Once inflation expectations drag their anchor a little, it’s difficult and costly to get them re-anchored; and this, I think, remains the biggest risk that we face as a Committee. Thank you, Mr. Chairman." FinancialCrisisReport--262 Subprime loans, Alt A mortgages that required little or no documentation, and home equity loans all posed a greater risk of default than traditional 30-year, fixed rate mortgages. By 2006, the combined market share of these higher risk home loans totaled nearly 50% of all mortgage originations. 1014 At the same time housing prices and high risk loans were increasing, the National Association of Realtors’ housing affordability index showed that, by 2006, housing had become less affordable than at any point in the previous 20 years, as presented in the graph below. 1015 The “affordability index” measures how easy it is for a typical family to afford a typical mortgage. Higher numbers mean that homes are more affordable, while lower numbers mean that homes are generally less affordable. By the end of 2006, the concentration of higher risk loans for less affordable homes had set the stage for an unprecedented number of credit rating downgrades on mortgage related securities. 1013 3/2009 U.S. Department of Housing and Urban Development Interim Report to Congress, “Root Causes of the Foreclosure Crisis,” at 8. 1014 Id. 1015 11/7/2007 “Would a Housing Crash Cause a Recession?” report prepared by the Congressional Research Service, at 3-4. (2) Mass Downgrades fcic_final_report_full--400 THE ECONOMIC FALLOUT CONTENTS Households : “I’m not eating. I’m not sleeping” ..................................................  Businesses: “Squirrels storing nuts” ...................................................................  Commercial real estate: “Nothing’s moving” ......................................................  Government: “States struggled to close shortfalls” .............................................  The financial sector: “Almost triple the level of three years earlier” ....................  Panic and uncertainty in the financial system plunged the nation into the longest and deepest recession in generations. The credit squeeze in financial markets cascaded throughout the economy. In testifying to the Commission, Bank of America CEO Brian Moynihan described the impact of the financial crisis on the economy: “Over the course of the crisis, we, as an industry, caused a lot of damage. Never has it been clearer how poor business judgments we have made have affected Main Street.”  In- deed, Main Street felt the tremors as the upheaval in the financial system rumbled through the U.S. economy. Seventeen trillion dollars in household wealth evaporated within  months, and reported unemployment hit . at its peak in October . As the housing bubble deflated, families that had counted on rising housing val- ues for cash and retirement security became anchored to mortgages that exceeded the declining value of their homes. They ratcheted back on spending, cumulatively putting the brakes on economic growth—the classic “paradox of thrift,” described al- most a century ago by John Maynard Keynes. In the aftermath of the panic, when credit was severely tightened, if not frozen, for financial institutions, companies found that cheap and easy credit was gone for them, too. It was tougher to borrow to meet payrolls and to expand inventories; businesses that had neither credit nor customers trimmed costs and laid off employees. Still to- day, credit availability is tighter than it was before the crisis. Without jobs, people could no longer afford their house payments. Yet even if moving could improve their job prospects, they were stuck with houses they could not sell. Millions of families entered foreclosure and millions more fell behind on their mortgage payments. Others simply walked away from their devalued proper- ties, returning the keys to the banks—an action that would destroy families’ credit for  years. The surge in foreclosed and abandoned properties dragged home prices down still more, depressing the value of surrounding real estate in neighborhoods across the country. Even those who stayed current on their mortgages found themselves whirled into the storm. CHRG-110hhrg34673--227 Mr. Bernanke," It is a bit early to tell. We saw a big spike in bankruptcy filings in advance of the law because people, if they were thinking of going bankrupt, they wanted to get that done before the law change. Since then we have seen a moderate rate of bankruptcy, I think somewhat lower than in the past, but whether that is due to the change in the law or just to generally good financial conditions in the last few years is hard to say. Again, we have seen, for example, very few delinquencies in consumer credit or in mortgages outside the subprime market, so there has been a generally good credit situation in the last couple of years, and that seems to be reflected in a relatively low rate of bankruptcies. " CHRG-110shrg50369--112 Mr. Bernanke," Well, if higher inflation were to become well embedded in inflation expectations and wages and other parts of the economy, it would be difficult, and we do not really have new methods. It is a risk, and we take it very seriously, and we are monitoring it very closely. But as I have said several times, we are dealing with a number of different concerns here, and we are trying---- Senator Schumer. I know. It is not easy. " Mr. Bernanke," ----the risks as best we can. Senator Schumer. Thank you, Mr. Chairman, and I thank my colleagues. " CHRG-111hhrg48874--59 Mr. Long," I will take a shot at it, Congressman. And they are concerns that we hear too. There are a couple of things. In terms of, do we think it's going to get worse? I would tell you, from the OCC's standpoint, where we are in the cycle, I believe for many community banks, it is going to get worse. So we are definitely asking our examiners to have good communications with bank management and make sure that they're vigilant, make sure that they have a good handle around the concentrations of credit, the amount of loans that they have to a certain--whether it be industry, developer or whatever. It may be that being told to slow down could be appropriate, but I would need some more information to address it specifically. It may be that the banker or the regulators feel like that concentration level in total on that balance sheet is getting a little heavy and they need to be a little more selective in terms of the risk. It may be in terms of their underwriting, given the credit quality of the borrowers and the stress that the borrowers are under, as you know, Congressman, over the last 3, 4, or 5 years underwriting standards got pretty loose. It was pretty easy to extend credit, and it wasn't that difficult to get a loan. What is happening in the industry right now is a normal occurrence. Bankers tighten up, underwriting standards tighten. Loan demand by good quality borrowers--as I said in my statement, businesses aren't expanding, they don't have capital expenditures--good quality loan demand is harder to come by. But the examiners and the bankers hopefully are having good robust conversations around risk management issues, concentration issues, underwriting issues, whether it be from an individual loan or from a portfolio loan. So the comments along those lines could very well be not: Slow down, we don't want you making good loans. It may be: Make sure you have a good handle around the risk profile of your portfolio, because certain concentration levels, no matter how good they get, when you get into an economic downturn, it doesn't take much to tip a bank over. " CHRG-110shrg50414--76 Secretary Paulson," The answer is yes, and it is very easy to rationalize it to the American people. Senator Shelby. I need your help here. " Secretary Paulson," OK. Here is how I want to--this is all about the American taxpayer. That is all we care about. And so any business, any banking operation in the United States that is doing business here and dealing with the American public is important. They are all important to keeping our markets open, keeping credit flowing. The American public, when they are dealing with the financial system, does not know who owns that bank. What they care about is how is the system working. And so we are doing this to protect the system, and it is about keeping credit flowing, protecting savings, making it possible to have car loans, student loans, mortgages. And, again, if you have operations in the United States and you are doing business with the American people, that is what we are focused on. But let me also say to you we have a global financial system, and when I was on the phone a number of times, and most recently Monday morning, talking with central bankers and finance ministers around the world, I urged them all to put in place where it is necessary similar programs with similar objectives. Senator Shelby. What do you say to people that ask us, or at least ask me--and I am sure others--how do you rationalize or justify bailing out banks and so forth that cause, are the root cause of a lot of this problem where they will be made whole with capital, at least it will strengthen them? And I understand that strengthens the economy, but they will profit dearly from this, more than likely. " CHRG-111shrg57320--387 Mr. Corston," Well, policy is not my area of expertise, but I will say this: As an examiner in an institution, a tool such as a regulation is fairly easy to support. Guidance becomes--you can support it, but it is not as strong. Because it goes more to best practices, again, it becomes more something you need to influence. So it is something that, certainly from a rules standpoint, obviously needs to be looked at. From an examiner's standpoint, it is a challenge. Senator Levin. You had an acceptable structure at WaMu, as you said. " CHRG-111shrg53176--86 Mr. Levitt," With respect to say on pay, what I would say about this, this sounds like an easy call. How can you be against it? And I am not. But I think it is simplistic. It can be a check the box kind of mentality, which businesses can easily incorporate and just move on. I urge any legislation to allocate to the SEC the responsibility of defining exactly what that means under what circumstances, how it is done, how far down it goes, what the details should be, what the explanation should be, what the history should be. Not simply pass a rule because, I assure you, it looks differently than if you refine it in a way that I think the Commission should be charged with doing. " FOMC20061212meeting--49 47,MR. STOCKTON.," Well, it is in the forecast. It’s just not so easy to see on a revision-by- revision basis because we’re also being surprised by the tightness of the overall labor market, by the decline of the dollar, and by somewhat higher import prices. So there have been other offsetting factors that are masking the underlying effect of the lower energy prices. We have built in those energy prices on the upside; we’re taking them out on the downside; and they are, I think, an important factor behind the contour that we’re projecting. It’s just that there are other factors operating." FOMC20050630meeting--25 23,MR. GALLIN.," Okay. I can tell something from the tone of your voice. [Laughter] In any event, the idea there was to look at house prices and construction costs and to try to back out as a sort of mechanical operation—not an easy one—the value of the land. He shows that land prices have increased very rapidly and that the land share of the property values has gone up over time. As you mentioned, we know something about farm prices. But besides those two things, there really aren’t—" CHRG-110shrg50414--92 Secretary Paulson," I wish it were that simple because--and even that would not be easy. But what the Chairman said, when he presented, he said no one has been faced with this situation before. We spent a lot of time thinking about it, and there are different types of asset classes--mortgage derivatives, mortgage-backed securities. There are different whole loans. And so when you look at dealing with this, we are going to have to use different approaches in different situations, and there will be market-based approaches, and that is all--even I cannot sit here and figure out what the auction technique should be and how to use it and in what situations to use it. So what we asked for was broad-based authority to use a series of market-based approaches, and we will be dealing in different approaches in different situations. We cannot sit here and say here is the reverse auction we are going to use in every situation. So we need flexibility. Senator Bennett. My time is up. I understand that. My time is up. I just wanted to leave this last comment. This is the whole core of what you are trying to accomplish, and this is the whole problem with our giving you blank-check authority to accomplish it, because in theory it is easy to describe and it will work, but if you end up paying too little to these institutions, which mark-to-market accounting might drive you to, you are not giving them the support that they need. If you end up paying too much, then there is no upside potential for the taxpayer when the time comes for you to liquidate these, and the details of how you find the right balance here are the ones that all of us need--you, but certainly as much as we--all of us need to understand better as we make our determination whether or not to support your proposal. " FOMC20080130meeting--208 206,CHAIRMAN BERNANKE.," Thank you, and thank you all for succinct and very insightful comments. [Laughter] I'm going to try as usual to summarize what I've heard; but even more so than usual, no warranty is expressed or implied. Again, trying to bring together some of the comments, we noted that incoming data since the last meeting have been broadly weaker than expected, and anecdotes generally suggest slower growth, in some cases significantly slower growth. Housing demand, construction, and prices have continued to weaken, and inventories of unsold homes are little changed. Housing weakness has implications for employment, consumer spending, and credit conditions. With respect to households, consumption growth has slowed, reflecting falling house and equity prices and other factors, including generally greater pessimism about the labor market and economic prospects. The labor market has softened by a range of measures, with unemployment jumping in December. However, workers in some occupations remain in short supply. Together with financial indicators, weaker labor and consumption data suggest that the economy is at a risk of recession; in any case, it is likely to grow slowly for the first half of the year. The second half of the year may be better, the result of easier monetary policy, fiscal stimulus, and possible improvement in housing and credit markets. However, there are significant downside risks to growth, including the possibility of an adverse feedback loop between the economy and credit markets. Reports by firms are mixed. Investment may have slowed, reflecting uncertainty and slower growth in demand. Commercial real estate activity may be constrained by tighter credit conditions. Manufacturing is slow to mixed, though IT, energy, and some other sectors continue to be strong. Financial markets remain stressed. Credit conditions more generally appear to be worsening, and the problems may be spreading beyond housing. Additional risks are posed by the problems of the monoline insurers. Credit losses have induced tighter lending standards, and a key question is how severe those may become and how persistent they may be. One offset is the ability of banks to raise capital. Core inflation and headline inflation have remained stubbornly high and are a concern. One risk is the ability of some firms to pass through higher input costs. Inflation compensation has risen at long horizons, reflecting some combination of higher inflation expectations and inflation risk premiums. Going forward, a slowing economy, anchored inflation expectations, and possibly stabilizing food and energy prices should lead to more moderate core and total inflation. However, some see upside risks, especially the possibility that higher headline inflation might affect inflation expectations. So that's my attempt to summarize. There's a great deal more detail and a great deal more color in the conversations around the table. Let me try to add a few points. Again, much of what I'll say has been said. I do think that there has been a significant deterioration in the outlook for economic growth and an increase in the downside risks to growth. It was sufficiently severe as to prompt me to call the January 9 videoconference that we had, and I think that since then we have had further deterioration. A number of things have happened and are going on. Very important, perhaps most important, is the continued further deterioration in the prospects for the housing market. Housing, of course, feeds directly into the real economy through employment, income, and wealth, and I think there are some indications that spillover from the housing sector to the rest of the economy is increasing. However, the critical aspect of the housing outlook is the relationship to the financial system, which I'll come back to. Consumer spending has slowed. I think there's little doubt about that at this point. There are a lot of factors now that are acting as headwinds in the consumer sector. Let me just point out the basic fact that most households in the United States have very little in the way of liquid financial assets. Therefore, when they, on the one hand, are denied access to home equity if they see tighter credit conditions on cards, autos, and so on, and if at the same time they see greater uncertainty in the economy and the labor market, then their natural tendency would be to be much more conservative in their spending. I do note that fiscal action may be of some help, particularly for people in that kind of situation. Like President Yellen, I think the indicators of a weakening labor market are broader than just the payroll report. There are a number of other things as well. We may get a better report this week. The UI claims are a little encouraging, but I do think that the weakening economy is going to drag down the labor market to some extent. Certainly the financial markets have deteriorated, reflecting greater concern about recession. We see it in the equity markets but also in short-term interest rates and a variety of credit measures as well. Finally, just going through this list of items, we continue to see problems--credit issues, banks concerned about additional losses not just in mortgages but perhaps in other areas as well--with the potential implication of a further tightening of credit conditions. Those are some of the developments that we've seen since the last meeting. On our January 9 call, I talked about the regime-switch model and those ways of thinking about the business cycle. Others have talked about that today. I think many of those models would suggest that the probability of recession at this point is quite high, at least 50 percent or more. I don't think any of us would be happy to see a garden variety NBER recession; but if we had that, there would probably be a few benefits, including correction of some imbalances that we're seeing in the economy and perhaps some reduction at the edge in the inflation picture. But, like others, I am most concerned about what has been called the adverse feedback loop--the interaction between a slowing economy and the credit markets. A phrase you might have heard, which is getting great currency among bankers, is ""jingle mail."" Jingle mail is what happens when otherwise prime borrowers decide that the value of their house is worth so much less than the principal of their mortgage that they just mail their keys to the bank. (I wonder if that 140 percent is the right loan-tovalue number. Maybe it's less than that.) Even if prime mortgages hold up--and I think in some regions of the country there will be significant problems with prime mortgages--there is a lot of other potential trouble. We're just beginning to enter the period of maximum subprime ARM resets. Second lien piggybacks and home equity loans are all questionable at this point. We haven't begun to address the option ARM issue, which is about the same size as the subprime ARM category, and of course, we have the issues with the monolines and private mortgage insurers. Outside of mortgages, expectations for credit performance are worsening in a range of areas, including commercial real estate and corporate credit. So I think that even under the relatively benign scenario that the Greenbook foresees, we're going to see a lot of pressure in the credit markets and perhaps a long period of balance sheet repair, tight credit, and a drag on the economy. Again, our experience with financial drag or headwinds has been that it can be quite powerful and deceptively so, and I think that's a significant concern. Now, the central issue here, though, ultimately comes back to the housing market. Certainly by this point there must be some pent-up demand for housing. We've had obviously very low sales for a period. House prices are soft. Mortgage rates are low. Affordability is better. What's keeping people from buying houses is the fact that other people aren't buying houses. If there were some sense that a bottom was forming in the market or in house prices, we probably could actually see a pretty quick snap-back, an increase in housing demand, and that in turn would feed back into the credit markets, I think, in a very beneficial way. So there's the possibility that, if the housing market can get restarted, we could get a relatively benign outcome. " FOMC20081029meeting--263 261,CHAIRMAN BERNANKE.," Okay. Thank you. Let me try to summarize all that I heard today and yesterday, and then I'll try to add some new comments to that. The outlook for economic growth appears to have deteriorated quite significantly since the last meeting. Data on consumer spending, production, and employment had weakened more than expected even before the recent intensification of the financial crisis. Over the past six weeks or so, however, financial conditions have greatly worsened, and risk aversion has increased, despite actions here and abroad to stabilize the banking system. Equity values have declined sharply amid conditions of low liquidity and extraordinary volatility. Credit market conditions have improved modestly since the global actions to recapitalize banks and guarantee their deposits, assisted also by additional central bank liquidity actions. However, in almost all credit markets, spreads remain much wider, maturities shorter, and availability more constrained than was the case before the intensification of the crisis. Firms face continued funding risk and rollover risk. Banks have probably not reserved sufficiently for the credit losses to come, and hedge funds will be hitting their net asset value triggers in greater numbers, forcing them to liquidate assets. The duration of future financial turmoil is hard to judge, but it could be lengthy. The worst thing is that financial conditions appear already to have had a significant and remarkably quick effect on activity and consumer and business expectations and plans. Most Committee participants see us in or entering a recession and have marked down significantly their expectations for near-term growth or for the pace of the recovery. The difficulty of predicting the course of the crisis or its effects on the economy has also increased forecast uncertainty. In particular, the ultimate effects of some major policy actions, such as the creation of the TARP and the bank guarantee, are not yet known. Uncertainty about future policy actions, as well as uncertainty about the economy, has affected behavior in markets and the broader economy. Consumer spending has weakened considerably and probably fell sharply in the third quarter, reflecting in part a recessionary psychology. Consumer durables, such as automobiles and discretionary expenditures, have been particularly hard hit. This weakness reflects the same set of negative influences on consumption that we have been seeing for a while, now compounded by losses of equity wealth and confidence effects on prices, although lower oil prices may provide some relief. The labor market continues to decline, with many firms reporting that they are cutting back workers. The housing sector has not been noticeably worse than expected, and reports are somewhat mixed. But on a national basis, the contraction is continuing, and recent developments in the economy and credit markets are likely to have adverse effects. Inventories of unsold new homes remain high, putting pressure on prices. Nonresidential construction continues at a moderate pace; but backlogs are falling, and the sector is looking increasingly vulnerable to weakening fundamentals and tighter credit conditions. Whether a new fiscal stimulus package will be passed and to what extent such a package would be helpful remain open questions. Manufacturing production has weakened significantly as have expectations of demand, including export demand. Credit is becoming more of a problem for many firms and their customers. Spending on equipment and software appears to have slowed, reflecting greater pessimism and uncertainty. Falling commodity prices may reduce mining activity and cool the boom in agriculture. On the plus side, firms are reporting fewer cost pressures, and inventories do not appear excessive. Deterioration in global growth expectations has been marked. Industrial economies had already shown signs of slowing, and they have been hit hard by recent financial developments. Emerging market economies, until recently evidently not much affected by the U.S. slowdown, have in recent weeks also been hit hard by the spreading financial crisis. Together with the stronger dollar, these developments are likely to restrain future growth of U.S. exports. Inflation risks have declined materially, reflecting the fall in the prices of energy and other commodities, the stronger dollar, and the prospect of considerable economic slack. Firms report much reduced pricing power and lower markups. Inflation expectations have come down, both in the surveys and in the TIPS market, though it wasn't noted--but I will note--that the TIPS market is distorted by illiquidity and other problems there. Most participants see both overall and core inflation moderating in the coming quarters toward levels consistent with price stability, with some seeing a risk of undesirably low rates of inflation. Some note, however, that financial dislocations affect aggregate supply as well as aggregate demand and may reduce the extent to which slower growth damps inflation. So that's just my sense. Any comments? Additions? Let me make just a few additional comments, none of which will be radically different from what we have already discussed. I do think it is overwhelmingly clear that we are now in a recession and that it is going to be a severe one. To give some sense of perspective, the postwar record for duration is 16 months. If the NBER sets this experience as having begun early this year, I think we have a reasonable chance to break that record. The largest increase from peak to trough in unemployment rate was in 1981. It was 3.6 percentage points. Starting from 4.4 percent, I think we have a chance to come close to that number. Yesterday's drop in consumer confidence in one month from 61 to 38 shattered the previous low of 43 in December 1975. So I think we are talking about an episode here that could easily be among the largest postwar recessions. We don't know how things would have evolved without the developments in September, but obviously we have to deal with that reality. It was just a few weeks ago that we were dealing with what might have been a true systemic crisis, in the week leading up to the G-7 and IMF meeting. I think it has been very fortunate that Europe, the United States, and other countries have adopted vigorous responses to that, including bank capitalization, bank guarantees, and other measures. That has been very important in calming the situation somewhat and reducing the systemic aspects of investor concerns. That being said, concern about counterparties remains very strong. Risk aversion is intense, spreads remain high, and I think that this has now become really pervasive. It isn't just a question of junk bonds and weak borrowers or weak credit histories. The spreads on GSE debt, on high-grade corporate debt, and other areas have also widened, leading to a very broad based tightening in credit conditions. So I think that, overall, any reasonable reading of financial conditions suggests that the tightening of credit or financial conditions in the last six weeks or so has been quite substantial and overwhelms the effects of our coordinated rate cut. Now, normally you would expect to see a tightening of credit conditions affect the economy with some lag. It takes time for people to borrow money and to use the money they borrow to make expenditures. But compared with that prediction, we have instead seen a sudden stop--a remarkable and very rapid effect on economic activity. It is possible this is due less to the direct effects of credit availability and more to the psychological impact of these events. One possible analogy is the 1980 Carter credit controls, when the government announced what seemed to be a tightening of credit. There was a very sharp response in economic activity, probably based more on expectations than on actual credit availability. Unfortunately, the credit controls could be removed by government fiat; we are not able to do that today. One interesting development is that the labor market has not yet shown as much weakness as one would expect. Unemployment insurance claims and other indicators do not yet show a marked deterioration. I expect that we will see more deterioration of the labor market. Besides the intensification of the financial crisis that has markedly increased the restrictiveness of financial conditions, I think the other very important development since our last meeting has been the internationalization of the crisis. We had already seen weakening in Europe before the most recent intensification, but it has become much more severe. There is little doubt that the United Kingdom and Europe are in or about to enter recession. My sense is that their monetary policy responses will be stronger than what the Greenbook anticipates. I believe they will be very aggressive in responding to that. A new and particularly worrying development is the fact that the crisis has now spread beyond the industrial countries to the emerging markets. The G-7 weekend was quite an interesting one. It was a striking experience. I heard over and over again from the Indians, from the Brazilians, and from all over the world that, until the middle of September we were fine, we were not being much affected, we didn't see much effect on our trade flows, and suddenly everything changed; and now we are under severe stress. We are seeing tremendous outflows. Our currencies are plummeting. Commodity price declines are hurting many countries. I think that is going to be a very significant development as we go forward. Just to give some data, in just a few weeks the EMBI spread, the emerging market sovereign debt spread, went from 280 basis points to 850 basis points; and the emerging market equity index has fallen about 40 percent since the last meeting. It is not obvious that these changes were justified by economic fundamentals. Many of these countries are very well run and had shown a lot of progress in their domestic policies and their domestic economies. Instead, I think they are suffering contagion from us mostly. Unfortunately, the implications of this will be not only the usual trade and commodity price type of implications but also, and even more important, financial implications. We are now seeing that the adverse feedback loop, which we've been talking about for a long time in the United States, is becoming a global phenomenon. In particular, European banks are very heavily exposed to emerging market debt. So we are going to see yet more of this interaction between the financial markets and the broader economy, except at a global rather than a national level. These developments, obviously, are very disturbing and don't bode well for U.S. growth or now for global growth. Somewhat ironically, all of this deterioration in the global outlook has led the dollar to appreciate very sharply, which is interesting to say the least. For us that obviously also has important implications for inflation, and as Governor Kohn mentioned, it means that we will be less a recipient of foreign strength and more a supporter of foreign weakness than we have been until now. On inflation, I know there is some discomfort in talking about a 1 percent policy rate and promising to keep it low for a protracted period--and all those things. We have seen this movie before, and I think we all have to recognize the importance of watching the implications of that for our economy and for asset prices and to take quite seriously the responsibility for removing accommodation in a timely fashion once the crisis has begun to moderate. That being said, I don't think that there is really any case in the near term to be worrying very much about inflation--or, perhaps even less so, the dollar--as we look at our policy. Pricing power is evaporating. And given what is happening in the global economy, I don't see a commodity price boom any time soon, although I think as the economies do begin to recover in the next year or so that we might see some recovery in commodity prices. So I think that, as everyone has indicated, this is a very worrisome situation. I don't think we have control of it. I don't think we know what the bottom is, so we have to remain very flexible and very open to new initiatives as they become necessary. There has been some comparison of this to the Japanese situation. I'm beginning to wonder if that might not be a good outcome. The advantage of the Japanese was, first of all, that they were isolated. The rest of the world was doing okay, and they were able to draw strength from their exports and the rest of the global economy. Although they had very slow growth, they never really had a deep recession or big increases in unemployment. I think we are looking at perhaps a much sharper episode, and our challenge will be to make sure that it doesn't persist longer. I do think that one lesson of both Japan and the 1930s as well as other experiences is that passivity is not a good answer. We do have to continue to be aggressive. We have to continue to look for solutions. Some of them are not going to work. Some of them are going to add to uncertainty. I recognize that critique. I realize it's a valid critique. But I don't think that this is going to be a self-correcting thing anytime soon. I think we are going to have to continue to provide support of all kinds to the economy. Let me stop there and, unless there is any question or comment, ask Brian to introduce the policy round. " FOMC20080130meeting--207 205,MR. MISHKIN.," By the way, if you know my wife, no it wasn't close. The second issue is that the potential for weaker house prices, which really is a significant possibility, not only could lead to lower household wealth but, more important, also could reduce the value of collateral for households and as a result mean that the relaxation of credit constraints that collateral affords is no longer there. That could have major implications in terms of household spending, so it is also a very substantial downside risk to PCE. The third issue is that we also see that the financial disruption has already gotten worse. The good news is that there has been improvement on the liquidity front, and I give a lot of credit to the TAF, which was superbly thought out by our staff and has been quite helpful. However, credit conditions have worsened. Particularly worrisome--and something that hasn't been discussed much--is that the Senior Loan Officer Opinion Survey had substantial tightening. Usually when you see this kind of tightening, it could indicate that we could have serious negative economic consequences. Again, that actually makes me very nervous. Finally, to get even more depressed, there really is potential for a negative feedback loop that has not yet set in. The financial disruption that we're seeing right now could then mean a more substantial worsening of the aggregate economy, and that could make the financial markets have even more strain, and you have a problem. So I really worry about the downside risks and think that they are very substantial and that we should be very concerned about them in thinking about what the appropriate policy stance is. On the issue of inflation, I'm more sanguine. I see inflation going down to 2 percent by 2009. The key here is that I think that inflation expectations are grounded--in fact, are grounded at a level that is consistent with my inflation objective, around 2 percent on PCE, which might be different from others' views, but that's where I am right now. In that context, given that inflation expectations plus expectations about future slack in the economy are the primary drivers of inflation dynamics, I actually think that inflation will come down. It is true that the recent inflation numbers have been very bad; but in thinking about the overall risks, I'm a bit different from the average person on this Committee because I think the risks are balanced and actually somewhat to the downside. The reason I say this is that I think that inflation expectations are grounded. At the same time, there is a substantial downside risk in the economy that could really widen slack in the economy, and that would mean that inflation would come down. I don't want to be too sanguine on the issue of inflation expectations being grounded. In fact, one thing that I think we have to monitor very closely is what's happening in terms of inflation expectations, particularly financial markets' views of inflation expectations. In a sense, I think of that as the canary in the coal mine. We are also going to want to look at expectations spreading to professional forecasters and to households, but I think information would come in first in terms of the financial markets for the reason that they put their money on the table and react quickly. That's one reason I think it's very important to look at things like inflation compensation. But we do need to look at this and do the analysis. My reading of the analysis that the staff gave and my thinking about the issue is that there is just no evidence that inflation expectations have gone up. The story is extremely hard to tell to go in that direction. However, it is very easy to tell a story that inflation uncertainty has gone up a lot, and this is something that President Evans talked about and we talked about at the very beginning of a long day. In this context, that does concern me, and it really tells me that we have to think about whether we can better anchor inflation expectations. So I think that this is something that we have to be concerned about, but I do not think that what has happened in inflation compensation is that the canary is dropping dead at this stage. But we do have to monitor this very, very closely, and again, it's part of the risk-management strategy that I think we have to pursue. Thank you, Mr. Chairman. " CHRG-109shrg21981--134 Chairman Greenspan," I would say that whatever it is we do in the short-run, unless we start getting serious about the longer-run problems, I think we are going to run into them and be poorly positioned to effectively handle them without very significant problems. Senator Bayh. At some point when you feel comfortable, in some forum, it really would help us to try and have some benchmarks of performance against which we can judge all of ourselves, both sides of the aisle, all branches of Government. As you know, it is easy to talk about these things. It is a lot more difficult to implement them and then hold ourselves to some kind of standard. " CHRG-111shrg62643--110 Mr. Bernanke," I would much prefer to see consolidation or cuts over the medium term as opposed to immediately. Senator Tester. Let me get to that, because we all know that large and unsustainable deficits, as you have pointed out in the past, ultimately, we are going to have to make some tough decisions. Ultimately, we are going to have to make some choices, none of which will be easy, whether you are talking about cutting expenditures or increasing the income. What are the indicators that you would use to determine when we start addressing those issues, and is today the day we start or when do we start? " CHRG-110hhrg46596--260 Mr. Kashkari," It is a very important issue. And I don't think there is a perfect brightline test that anybody can apply. But ultimately, each of these mergers and acquisitions needs to be approved by their primary Federal regulator, in many cases of both the target bank and the acquiring bank. And the regulators who are there onsite are in the best position to judge is this a prudent acquisition or is this a risky acquisition. Treasury, as you know, is not a bank regulator. But they don't have an easy job either. " CHRG-110shrg50414--60 Mr. Bernanke," Mr. Chairman, the financial markets are in quite fragile condition, and I think, absent a plan, they will certainly get worse. But even in the current state, they are not serving the necessary function to support the economy. Credit is not being provided. As Secretary Paulson mentioned, non-financial companies are not able to finance themselves overnight. Credit is just not going to be available. It is going to also affect savers because of the values of their assets that they have. So even in the current condition, even if things do not get severely worse--but I think they would get worse without some kind of action--this will be a major drag on the U.S. economy and will greatly impede the ability of the economy to recover in a healthy way. The amounts involved are intended to be enough. We do not want to go in and underwhelm the situation. That might be to suggest more problems down the road. There have been some ways of looking at it. This is about 5 percent of all the mortgages outstanding, for example, $700 billion. But it certainly illustrates the size of these markets and the size of the problem. I think it is important to state that, as I mentioned before, this is not an expenditure of $700 billion. This is a purchase of assets, and if auctions are done properly, if the valuations are done properly, the American taxpayer will get a good value for his or her money. And as the economy recovers, most all or perhaps more than all of the value will be recovered over time, as was the case in other similar situations in the past. " CHRG-110hhrg46595--126 Mr. Manzullo," Thank you, Mr. Chairman. I am quite distressed over the continuous talk coming from the Big Three that there is no money available for consumers to buy your automobiles. Credit unions, local branches of national banks, and community banks are loaded with money and are ready, willing, and eager to give to people to buy your automobiles. On the current business environment on the Ford, page 3, quoting the Federal Reserve's senior loan officers, it says, ``Over 60 percent of banks have tightened standards for consumer credit.'' That is not the case. I talked to a bank yesterday. I said, ``Have you changed any standards in the past year?'' He said, ``No.'' He said what happened is the Big Three set up their own financing arm and they pushed the community banks out of lending. And then you come back here, and you have created much of the crisis among yourselves because you created your own subprime market in automobile loans that is sitting out there because it was too easy credit to people who couldn't afford to buy the automobiles that you sold to them. That originally is what TARP was set up for was to buy that back. And now, Mr. Wagoner, you want to go into the commercial banking business. You want to be able to take demand deposits or set up checking accounts. I mean, you would be a bank on the order of Wal-Mart, which we stopped, and Mr. Nardelli, of Home Depot, which we also stopped. Why would an automobile manufacturer go into the commercial banking business and wreak havoc on the community banks, credit unions, and local branches of national banks? You are there to make cars, not to run a banking operation. That is part of the bailout, so that you can become a commercial bank? I don't expect an answer because there is no good answer to that. Your job is to make cars. And the other thing is I noticed that both Ford and GM have overseas subsidiaries that are doing quite well. My question to each of you is, have you taken advantage of the IRS 60-day window to bring back profits from overseas operations to infuse them into your domestic operation without having to pay 35 percent tax? Mr. Wagoner, have you done that? " FOMC20071211meeting--118 116,CHAIRMAN BERNANKE.," Thank you, Governor. Well, again, thank you for a very helpful discussion. Let me just try to briefly summarize and then offer a few additional comments. Many participants obviously gave considerable attention to the resurgence of stresses in financial markets, including the increased losses by financial institutions, widening spreads, and poorly functioning markets. Some expressed concern that these developments were likely to result in tighter credit—not just in mortgages, where conditions are already tight, but in other areas as well— perhaps resulting in spillovers to the broader economy. A weakening economy could cause financial conditions to worsen further, leading to a negative feedback loop, and indeed, there are signs of some broader credit deterioration. Impending mortgage rate resets and foreclosures pose further risks. Some took these developments as increasing downside risk to growth, perhaps significantly. However, other participants noted some mitigating factors, including the fact that banks came into the situation with a lot of capital. Some institutions have raised capital. There’s the possibility that other credit providers could take over from money center banks. Corporate balance sheets are strong. The credit problems have a regional focus in some cases, and there is a lack of effect so far on many on Main Street. Some also noted that the price discovery process was inevitable and needed. With respect to the macroeconomic data, overall the incoming data were slightly weaker than expected, particularly in housing and consumption, although, again, the anecdotes were somewhat mixed. Fundamentals for consumption are weaker but not collapsing, with the labor market and perhaps wealth still providing some support and mixed information on retail sales. Differences across regions and products were noted. With the possible exception of commercial real estate in some cases, investment is not yet much affected by credit conditions. Improvements in inventory management were cited as a positive. Unemployment remains low, and wage pressures exist in some areas, but they were less cited, I think it’s fair to say, than in past meetings. Export demand related to the weaker dollar and strong foreign growth provides some help to the manufacturing sector, although it was noted that other countries might not be immune to a slowdown in U.S. growth. Overall, most participants saw slower growth, but there is greater agreement that the outlook is in any case more uncertain. On inflation, some took a relatively benign view noting the restraint from a slowing economy and less tightness in labor markets. Others noted some recent increases in core inflation and continuing pressures from energy, food, and the dollar. Many stressed that stable inflation expectations cannot be taken as a given. Any comments or questions? Let me just add a bit to the discussion because, as usual, it has already been very thorough. Again, if one looks at the incoming macro data, I think a fair judgment is that it was a little weaker than we expected. The economy has been a little slower than we expected. Housing data, consumption, and I would argue investment and production numbers were all somewhat lower than we thought was going to be the case at the end of October. I would also argue that, in particular, the consumer, who of course is crucial to the expansion, is facing somewhat weaker conditions— including higher oil prices, less wealth from lower stock and house prices, and perhaps tighter credit—than was the case a month and a half ago. I think it is noteworthy that the unexplained portion of consumer sentiment has declined considerably. There seem to be attitudes or, if you like, forecasts among consumers that are even weaker than would be suggested by some of the conditions they are currently seeing, and I think that is a concern. Now, there have certainly been positive developments in the data. The labor market has held up pretty well. The unemployment rate actually dropped a bit last week. Stocks have come back a bit from their so-called correction, although I should say that this is conditional on a lot of expected easing by the Federal Reserve. ISM surveys show manufacturing as flat, but manufacturing is still growing, and there was a bit of good news yesterday in housing, with some slight indications of improved pending sales. I think it’s interesting that the Michigan survey notes that prospective homebuyers are actually a bit upbeat because they see interest rates as low and prices as more favorable. So, again, the data suggest some weakness, but the story is not entirely unmixed. So how would we interpret this? I think you could take a more sanguine view that we are seeing the continuation of a zigzag pattern that we’ve seen for quite a while. We had very weak growth in the first quarter of this year, for example; but even with the zero growth projected for the fourth quarter, we will see 2.2 percent growth in the first half of ’07 and 2.5 percent growth in the second half of ’07. So it could be that we’re just seeing a zigzag pattern, and some of that is certainly true. It’s also still true that a lot of the weakness we’re seeing is in the housing sector. For example, for all of ’07, growth excluding housing is about 3½ percent—so again, not suggestive of great weakness. Now, all of that being noted, I don’t think I’d go quite as far as Governor Mishkin; I try to maintain an even keel here in my mood. [Laughter]" FOMC20080805meeting--89 87,MR. LOCKHART.," I just want to point out that we hear a fair amount of anecdotal feedback suggesting that just determining what is the net real price for a house is not so easy because of incentives, particularly in multifamily but also new homes in general. You pay list, but you get a Mercedes and a year's worth of gasoline and your lawn mowed and a lot of things thrown in for the seller to hold the price close to what the list is. So I don't know how these things are actually measured to take into account those kinds of incentives. " FOMC20080724confcall--123 121,MR. HOENIG.," It doesn't affect how I come out on this, but if I understand the conversations, if we made an 84-day loan and if during the period we found the institution's condition deteriorating, we could in the Reserve Bank's judgment change that to a primary credit loan, call that loan if we felt it necessary, have conversations with the primary supervisor, and deal with that loan whether it was 84 days or 28 days. That is my understanding. Is that correct? " CHRG-111shrg61513--112 Mr. Bernanke," Well, it is a difficult problem and one we are very focused on, as well. First of all, there is a tradeoff. Probably credit terms were too easy before the crisis. They have tightened up some. Lately, banks seem to have leveled out. They are not tightening any further, at least. But there is a tradeoff between making sure that you are really making good loans versus making sure that creditworthy borrowers are not denied. Now, our focus at the Federal Reserve has been to achieve an appropriate balance. We want to make sure that creditworthy borrowers who are creditworthy can obtain credit, and we have been very aggressive in trying to do that. We started with, again, these guidances, but these are instructions to our examiners as well as to the banks which say, first of all, that we strongly encourage banks to make creditworthy loans because it is good for the bank, it is good for the borrower, it is good for the economy. We have trained our examiners to take that approach. We have most recently put out yet another guidance on small business which actually says, you know, you should not be denying credit based on what business you are in, whether you are restaurant or whatever, or what geographic location you are in. Again, this issue about your collateral value. If that has declined, that should not be a reason not to make the loan. We are encouraging so-called Second Look Committees who look, again, at loans that have been turned down just to make sure that there is not a way to make that loan. So our guidances, our regulatory philosophy, our training of our examiners has been very focused on getting that appropriate balance. Now, I have said this in previous testimonies. People say, well, I am not convinced. What is your evidence? So since then, we have been really trying to do outreach and try to get information directly back from banks, small businesses. We have, for example, put questions in the NFIB's Survey of Small Businesses to get more information about their credit experience. We are requiring banks to provide us more information on small business loans. We have a series of meetings and programs at the Reserve Banks which bring together small banks, small businesses, community development organizations, and so on. We are doing our best to go out there and find out what is really happening, because in some cases, I mean, I think you would agree, in some cases, the regulator is a good scapegoat and---- Senator Bennett. Yes. I understand that. " Mr. Bernanke,"----and gets the credit for the problem. But the Federal Reserve, because we have interest, of course, in safety and soundness, but we also have interest in a healthy economy, and that insight that we get and that balance is very important. I realize it doesn't filter down to every bank and every situation, but we are making enormous efforts to get that balance. When you do talk to your business acquaintances, first, ask them who the regulator is who is causing the problem, because it is not always the Federal Reserve---- Senator Bennett. I think that is fair. " FOMC20070918meeting--96 94,CHAIRMAN BERNANKE.," President Fisher, you raised a legitimate issue, which I think I should address now. We will this afternoon be discussing this auction credit facility with a possible swap that would allow the Europeans to provide term dollar funding as well. This work has been going on for a few weeks. It has been very intensive. The staff has done a great job, but as you know and as Bill explained, the financial market conditions have improved somewhat in the past few days, and so we view it—I view it and I think the Board views it now—as a relatively close call as to whether such a facility is needed at this juncture. What I would propose to do is discuss it as planned on the agenda. We would like to have a thorough discussion and, if the Committee approves the contingent permission, to use it should market conditions appear, in our judgment, to warrant it. But just because, as you point out, there is some interaction with the monetary policy decision, I’d just like to say that, at this point, it is not by any means a certainty that we will go ahead and apply that particular agency." CHRG-111shrg56415--38 Mr. Smith," I would only add, Senator, that in the most successful period I know of in home lending in the United States, there were mainly two, maybe three varieties of loans generally in the underwriting standards world, as you say. There was a requirement of a downpayment, for standard documentation, and the people that made the loans kept them. And on the basis of that lending experience, we projected--the magicians on Wall Street did projections about the loans that weren't like that. So, I think there is--as you point out, the issue there is the issue of access to housing, and that is what it is. There is no free lunch and no easy answer. Senator Gregg. Thank you. Thank you very much for your testimony. Senator Johnson. Senator Bennet. Senator Bennet. Thank you, Mr. Chairman, and I would also like to thank the panel for your excellent testimony. Every weekend when I go home to Colorado, what I hear from small businesses is they have no access to capital, no access to credit, and we are in this, as the panel has talked about, in this remarkably difficult period where, on the one hand, the securitized market that blew up or imploded is now gone and has not been replaced, which is probably a good thing from a leverage point of view, but it hasn't been replaced. On the other hand, we have got this looming commercial real estate issue that is still out there. And sort of caught in between all that are our small businesses who need access to capital in order to grow and in order to deal with the unemployment rate that Senator Tester talked about and sort of this folding back on top of itself. And I wondered, Mr. Tarullo, you mentioned in your testimony at the beginning your view that maybe some more direct efforts--I think you described it as temporary targeted programs--might be necessary to get our small businesses access to the credit that they need, and I wonder if you could elaborate a little bit more on that, because I suspect you are right. And in addition to that, I would ask to what extent we think the current accounting regimes are ones that are either helping banks extend credit to small businesses or are intruding on their ability to do that. " CHRG-111hhrg55814--218 Mrs. Capito," The fact is, this is the third infusion of TARP funds, taxpayer dollars into GMAC. I don't know what category they would fall in and so I would say, I think that the adaptability issue that you talked about on the resolution, I would like to see an enhanced bankruptcy resolution that provides that partition from the government into the court systems. I think we can create an enhanced bankruptcy through our court system that could address these adaptability issues and the GMAC issue and other issues. And even some of your fellow Presidents of the Federal Reserve have spoken in favor of this because, and I'll just take one quote, there's a widespread relief that public funds will soften the blow to private creditors. And I think this is an option we need to look at as we're working this through. My last comment, question, sort of, and clarification would be, the whole secrecy issue here. You even, in questioning the gentleman from Alabama, basically said, once everybody is required to have larger capital requirements, those will be out in the public realm. There really is no secret in Washington, D.C., for long; they are not too easy to keep, so I think we think that there will be, in the public domain, knowledge of these institutions, and there will be, they will be in a separate class from our community bankers, our credit unions and our other financial institutions. And I think that's problematic because I think that does bring about, whether it says it or not, brings about the ``too-big-to-fail'' concept that we have just seen over the last year. " fcic_final_report_full--82 SUBPRIME LENDING CONTENTS Mortgage securitization: “This stuff is so complicated how is anybody going to know?” .............................................................................  Greater access to lending: “A business where we can make some money” ............  Subprime lenders in turmoil: “Adverse market conditions” .................................  The regulators: “Oh, I see” ..................................................................................  In the early s, subprime lenders such as Household Finance Corp. and thrifts such as Long Beach Savings and Loan made home equity loans, often second mort- gages, to borrowers who had yet to establish credit histories or had troubled financial histories, sometimes reflecting setbacks such as unemployment, divorce, medical emergencies, and the like. Banks might have been unwilling to lend to these borrow- ers, but a subprime lender would if the borrower paid a higher interest rate to offset the extra risk. “No one can debate the need for legitimate non-prime (subprime) lending products,” Gail Burks, president of the Nevada Fair Housing Center, Inc., tes- tified to the FCIC.  Interest rates on subprime mortgages, with substantial collateral—the house— weren’t as high as those for car loans, and were much less than credit cards. The ad- vantages of a mortgage over other forms of debt were solidified in  with the Tax Reform Act, which barred deducting interest payments on consumer loans but kept the deduction for mortgage interest payments. In the s and into the early s, before computerized “credit scoring”—a statistical technique used to measure a borrower’s creditworthiness—automated the assessment of risk, mortgage lenders (including subprime lenders) relied on other factors when underwriting mortgages. As Tom Putnam, a Sacramento-based mort- gage banker, told the Commission, they traditionally lent based on the four C’s: credit (quantity, quality, and duration of the borrower’s credit obligations), capacity (amount and stability of income), capital (sufficient liquid funds to cover down pay- ments, closing costs, and reserves), and collateral (value and condition of the prop- erty).  Their decisions depended on judgments about how strength in one area, such as collateral, might offset weaknesses in others, such as credit. They underwrote bor- rowers one at a time, out of local offices.  CHRG-111hhrg54872--171 Mr. John," That is easy, it is the consumer when it comes down to it. One of the problems we have been facing and the chairman pointed out that there were a few problems with State preemption prior to, I believe in 2005 or 2006 or so. However, we didn't have the same level of extremely activist attorneys general, most of whom are seeking to be senators or governors, who actively seek out situations and actively promote more than reasonable solutions to them. So we are much more likely in the current situation to have attempts by various ambitious State officials to move into and obstruct national markets. " CHRG-110hhrg44900--203 Secretary Paulson," You know, that's interesting. I have heard a number of people say that one of the reasons the price of oil has gone up so much is the dollar has depreciated. And yet when you look at the statistics, look at what has really happened, if you go back to February of 2002, the dollar has declined in value 24 percent, the price of oil gone up over 500 percent. And so again, I really think the price of oil is being driven by supply-and-demand factors, and the real solution here is to address both. There is not an easy, short-term solution, but there is a lot that has to be done. " FOMC20070918meeting--111 109,MR. EVANS.," Thank you, Mr. Chairman. To date, economic conditions in the Seventh District have changed little since our last meeting. We continue to expand at a modest rate, as reported in the Beige Book two weeks ago. Even after accounting for continuing declines in the housing sector, most of my contacts thought the national economy had softened. Outside of housing, they generally reported a modest deceleration rather than an abrupt change in conditions. Retailers thought that continued high energy prices were holding back consumers, but demand was not seen as deteriorating sharply. A similar slowing was reported on the hiring front. For instance, Kelly and Manpower experienced softer demand for temporary workers, but again this was not characterized as a general pullback in hiring. Many contacts added that finding skilled workers remained difficult, as President Fisher mentioned. In terms of the business outlook going forward, several directors and other contacts noted that many in the business community were apprehensive about the prospects for growth. They were concerned that these worries might soon begin to weigh more heavily on actual spending. For example, in the motor vehicle sector, both Ford and General Motors cautioned that the August sales numbers overstated the underlying strength in demand for vehicles. They thought some selective incentive programs had boosted the sales figures. I asked all my contacts about the effects of the turmoil in credit markets. Though it is still early, none of them thought that the recent financial turbulence was causing creditworthy nonfinancial firms to have unusual difficulty in finding adequate financing. As several people have said, many business people suggested that the situation is much better than what they hear from financial commentators on Wall Street. Of course, we heard many examples of difficulties from financial market contacts, and several have spoken about that already. Turning to the national outlook, three broad developments since our August meeting have influenced my views on the economic situation. First, financial conditions have become more restrictive. Second, the incoming data suggest a greater decline in housing and a somewhat weaker labor market. Third, inflation prospects have improved to the point where my outyear projections are within a range that many participants would view as consistent with price stability. These projections embed a path for the federal funds rate that is similar to the Greenbook assumption. With regard to financial conditions, I think it is useful to consider the situation relative to an assessment of a neutral or an equilibrium federal funds rate. Taking into account the slower growth of structural productivity, a neutral rate is likely between 4½ and 4¾ percent. The Greenbook-consistent rate is in this range. Until recently, one argument for keeping the target funds rate at 5¼ percent had been to offset otherwise accommodative conditions. As recently as June, we had very low risk premiums and ample liquidity for all types of private borrowing, including large commitments for private equity deals. Now, of course, overall financial conditions have tightened and in some markets have turned very restrictive. Clearly, this restrictiveness is a downside for growth. Whether it is as large as ½ percentage point, as the Greenbook assumes, is uncertain. In any event, the ongoing repricing of risk also adds a good deal of uncertainty to the forecast. You all know it is very difficult to forecast the impact of such financial turbulence. Recent history and Dave Stockton remind us of this. In the early 1990s, restrictive credit due to depositories’ capital adequacy problems had a significant impact on real economic activity. In contrast, in the fall of 1998, we thought financial conditions would impinge a good deal on the real economy, but 1999 turned out to be a very strong year for growth. Bottom line—and we all recognize this—we need to be careful how we react to the current financial situation. Turning more specifically to the outlook for growth, our Chicago forecasts have tended to be somewhat more optimistic than the Board staff forecast, and we remain so. That said, the incoming data have been softer than we expected. So we marked down our assessment of residential investment again, but not as much as the Board staff did—again, and the decline in payroll employment caused us to lower our near-term outlook somewhat. As long as the financial difficulties are contained, and that is our working assumption, we expect growth to return to potential by the second half of 2008, and we have a higher potential output growth rate than the Board staff. However, I admit that the risks seem weighted to the downside of this projection. With regard to inflation, the improvement in core PCE inflation earlier this year appears to have a bit more staying power than we thought it might. If aggregate demand does weaken, as expected, then there is less risk of inflationary pressures arising from constraints on resource utilization. Energy prices, though, are a concern. My contacts do not seem to have much difficulty passing cost increases through to their customers. Overall, however, we have core PCE inflation edging down to 1.8 percent next year and remaining near that rate in 2009. I see the risk to this inflation forecast, conditioned on the outlook for growth, as being fairly well balanced. Thank you, Mr. Chairman." FinancialCrisisReport--314 The report also found the credit rating “analysts [did] not view themselves as accountable for their actions,” since the rating agencies were subject to little regulation or oversight, and their liability for poor quality ratings was limited by regulatory exemptions and First Amendment protections. 1224 The report recommended “increased oversight for these rating agencies in order to ensure that the public’s trust in these firms is well-placed.” 1225 In 2002, the Sarbanes-Oxley Act required the SEC to conduct a study into the role of credit rating agencies in the securities markets, including any barriers to accurately evaluating the financial condition of the issuers of securities they rate. 1226 In response, the SEC initiated an in-depth study of the credit rating industry and released its findings in a 2003 report. The SEC’s oversight efforts “included informal discussions with credit rating agencies and market participants, formal examinations of credit rating agencies, and public hearings, where market participants were given the opportunity to offer their views on credit rating agencies and their role in the capital markets.” 1227 The report expressed a number of concerns about CRA operations, including “potential conflicts of interest caused by the [issuer - pays model].” 1228 The Credit Rating Agency Reform Act, which was signed into law in September 2006, was designed to address some of the shortcomings identified by Congress and the SEC. The Act made it clear that the SEC had jurisdiction to conduct oversight of the credit rating industry, and formally charged the agency with designating companies as NRSROs . 1229 The statute also required NRSROs to meet certain criteria before registering with the SEC. In addition, the statute instructed the SEC to promulgate regulations requiring NRSROs to establish policies and procedures to prevent the misuse of nonpublic information and to disclose and manage conflicts of interest. 1230 Those regulations were designed to take effect in September 2007. In the summer of 2007, after the mass downgrades of RMBS and CDO ratings had begun and as the financial crisis began to intensify, the SEC initiated its first examinations of the major 1223 10/8/2002 “Financial Oversight of Enron: The SEC and Private-Sector Watchdogs,” prepared by the U.S. Senate Committee on Governmental Affairs, at 6, 108. 1224 Id. at 122. 1225 Id. at 6. 1226 Section 702 of the Sarbanes-Oxley Act of 2002. 1227 1/2003 “Report on the Role and Function of Credit Rating Agencies in the Operation of the Securities Markets,” prepared by the SEC, at 4. 1228 Id. at 19 . 1229 9/3/2009 “Credit Rating Agencies and Their Regulation,” report prepared by the Congressional Research Service, Report No. R40613 (revised report issued 4/9/2010). 1230 Id. credit rating agencies. According to the SEC, “[t]he purpose of the examinations was to develop an understanding of the practices of the rating agencies surrounding the rating of RMBS and FOMC20080109confcall--21 19,CHAIRMAN BERNANKE.," Are there other questions for Dave? If not, if I could kick off the general discussion, I will talk a bit about how I see the economy. I have two main points to make. First, I think the downside risks to the economy are quite significant and larger than they were. Speaking as a former member of the NBER Business Cycle Dating Committee, I think there are a lot of indications that we may soon be in a recession. I think a garden variety recession is an acceptable risk, but I am also concerned that such a downturn might morph into something more serious, and I will talk about that in a moment. My second point is that I think that 100 basis points of easing may or may not be a rough offset, in terms of expectations, to the decline in demand that we have seen, but I don't think that we have done really very much at all in terms of taking out insurance against what I perceive to be the greater risk at this point. So let me address those questions just a bit. President Lacker already anticipated me in mentioning the regime-switching models of recession. Those suggest a nonlinear process: There are two states of the world--a growth state and a recession state--and the behavior of the economy is different in those two states. Those models fit pretty well, although, of course, like many econometric models they are mostly retrospective. But some of the indicators suggesting a switch are things like falling equity prices, slower manufacturing growth, rising credit spreads, and--an often very effective indicator--the fact that the federal funds rate is so far above twoyear interest rates at this point. Those would all be indications that the regime is about to switch, if it hasn't already. President Lacker also mentioned the idea of a stall speed. I presented some figures on that in a meeting in 2006. There have been situations of a 0.3 percentage point increase in the unemployment rate in a month that have been reversed, but there has never been in our case a 0.6 increase over a period of time that didn't translate into a recession and a much greater increase in unemployment. Similarly, there has never been a sustained GDP growth rate below 2 percent-- and we have a 1 percent forecast for 2008--that has not turned into a recession. Indicative of the kind of behavior that we have seen in the past, let me just refer to the last two recessions. Unemployment was 5.2 percent in June 1990, having been there for about two years. It jumped to 5.5 percent in July, by the next June it was 6.9, and the following June it was 7.8. In December 2000, unemployment was 3.9, it was 4.3 at the cyclical peak in March 2001, and ultimately it hit 6.3 in June 2003. So there is some tendency, once a stall speed is reached, for the economy to slow quite considerably. Again, like David, I don't know if we're there yet. Obviously, ex ante it's extremely hard to tell, but I do think the risks are at least 50 percent at this point that we will see an NBER recession this year. Now, as I said, the concern I have is not just a slowdown but the possibility that it might become a much nastier episode. The main mechanism I have in mind--there are several possibilities, but I think the financial markets are the main risk. Let me talk a bit about banks, which are at the center of this set of issues. I'm going to talk a bit about the 21 large, complex banking organizations (LCBOs). I have had some data worked up for me by the supervisory staff. Since August these 21 LCBOs have announced $75 billion in extraordinary markdowns associated with various credit issues. They have, on the other hand, either raised or plan to raise $50 billion in capital. Therefore, one might say, ""Well, that looks pretty good."" I think, though, on net that there is really actually quite a fragility here. Several factors are going to put pressure on bank capital going forward. First, they have been taking assets on the balance sheet, as you know--about $250 billion so far of semi-voluntary additions coming from off-balance-sheet conduits and others. It is hard to say how much contingent additional exposure they have. There are a lot of different estimates. For these 21 banks, the Board supervisory staff identified between $250 billion and $300 billion more of potential exposures to bring back on the balance sheet. The BIS, at the meeting I attended over the weekend, looking at the 20 largest international banks, estimated $600 billion. We don't know how much it is going to be, but the banks themselves are somewhat unsure about potential exposures. Loan-loss reserves are quite low for this stage in the cycle, about 1.4 percent, compared with, say, 2.5 percent during the headwinds period of the early 1990s, and that is partly a result of the SEC regulations, which have forced banks to keep their reserves low. There is a lot of concern in banks about additional credit losses and downgrades, concern about financial guarantors, and, of course, macro concerns. Finally--and I think this is one of the most worrisome things to me--we are beginning to see some credit issues outside of housing and mortgages. Credit card delinquencies have jumped in a few banks' home equity lines. There are concerns in commercial real estate, particularly in some regions like Florida and California. And with fair value accounting, as pricing goes down, even if you don't yet see a cashflow effect, you get immediate effects on capitalization. The implications of this, even if the economy continues along, say, the Greenbook's estimates, are that lending is going to be quite tight. Banks are reluctant to take loans onto their balance sheets because of the capital constraints. They are, in fact, raising their internal capital targets because of their concerns about credit losses and about additional off-balance-sheet responsibilities. We have seen contraction not only in the primary mortgage market but also in home equity lines of credit, and I suspect we will see tighter conditions for credit cards, CRE lending, and non-investment-grade corporates. A question is high-grade corporates. There has even been some deterioration in, say, A-rated corporations. I have had a lot of opportunities to talk to bankers. We had a meeting over the weekend in Basel between the central bankers and about 50 private-sector representatives. The thrust that I got was that things are going to be pretty tight. ""We are going to meet our regular customers' needs, but all of this is conditioned on no recession."" As one banker put it in our meeting, ""There is no Plan B."" So a concern that is evident is that, if economic conditions worsen notably, the effects on bank capital, on credit risk, and so on will create a more severe credit situation, which could turn a garden variety downturn into something more persistent. The other issue, of course, is housing. Credit markets and housing are interacting very closely. I think that residential construction is going to stop subtracting so much from GDP growth because there is a non-negativity constraint. Eventually, the declines in residential construction will have to stop, but we are pretty far from the non-negativity constraint on prices, and I think that is where the issue is. I have reviewed the staff's analysis of house prices. They make perfectly reasonable guesses about what house prices will do. But it is inherently very difficult, and there is a very wide range of possible outcomes. If the housing market continues to be weak and if credit continues to be tight, then the possibility of a much more significant decline in house prices, particularly in some regions, is certainly there; and that, in turn, would have significant effects on credit markets and on the economy. So I have tried to be quick; I don't want to take too much time; but I see a lot of indications that a recession may well happen. Given the additional considerations of credit markets and housing markets, I am concerned that we might get something worse than, say, 2001. The other question I raised was, Have we done enough? We have done 100 basis points. Of course, it is hard to know. A few indicators: The Greenbook-consistent medium-term r*, which is an indicator of the real funds rate that leads to full employment in three years, was 3.3 percent in August 2007. It is currently about 1.8 percent, so that is a decline of 150 basis points. That is just one rough indicator of the decline in aggregate demand. I have not redone the Taylor rules, but for December the estimated forecast- and outcome-based Taylor rules showed a rate of about 4.0 to 4.1. Again, that would not include any risk-management considerations. That is just sort of an average over periods of both inflation risk and growth risk. I guess I would also mention the 2001 pattern, the most recent episode. The FOMC--many of you were there, I was not--dropped the rate 250 basis points in a little over four months in early 2001. Obviously, that was a much more aggressive episode. What about inflation? The fact is that we are in a tough bind here, and we don't have any easy, simple solution. We are going to have to balance risks against each other. We are going to have to do it in a forward-looking way, and we are going to have to try to make some judgments. I'll make a couple of comments. First, even assuming no recession, as the staff does, the staff has core and total inflation back into a reasonable approximation of price stability by 2009. As they note, wage growth has slowed; that doesn't seem to be incorporating any inflation pressures. The other thing I would say is that, if we do have a recession, inflation during recession periods does tend to fall fairly quickly. In the 1990 episode I mentioned before, between June 1990 and June 1993, core PCE inflation fell from 4.4 to 2.7 percent. Of course, in the 2001 episode, despite 550 basis points of easing, we went from 2.2 percent in the fall of 2001 to unwelcome disinflation in 2003. So should there be a recession, the inflation problem would probably take care of itself. Now, there is an argument--and Governor Mishkin's speech on Friday makes the case pretty well--that, when you have these kinds of risks, the best way to balance the growth and inflation risks is to be aggressive in the short run but to take back the accommodation in a timely way when the economy begins to stabilize. I realize this is not easy to communicate, but I think if we attempt to do so we can make some progress on that front. So, to summarize, we have a very difficult situation, but I do think the downside risks have increased and are quite significant. I don't think that our policy thus far has gotten ahead of the curve, so to speak, in terms of taking out insurance. Although, again, I'm not recommending any action today, I think we need to be cognizant of this issue as we go into the January and subsequent meetings. So let me stop there and open the floor for your reactions and comments. I'd like to know if you are comfortable not acting today--waiting until the January meeting. On the other hand, I am also interested in knowing if you share my assessments or if you don't. Let me be clear: I am not asking now for a commitment to any particular action in January. I am not asking for carte blanche. I am simply trying to see if we are all on the same page, or more or less on the same page, so that we can collectively communicate more effectively and I hope take the right actions when the time comes. So let me stop there, and Debbie will call on members. President Lacker. " CHRG-111hhrg48868--220 Mr. Lynch," I am not going to let you off the hook that easily. You know, you looked at these CDOs. I know that, by virtue of an Act of Congress back in 2000, CDOs are not regulated, but you did look at the condition of this company on the holding company end. What about information on what these instruments were valued at? I know you are saying we had no credit losses on the super senior tranch, but you have a mezzanine tranch and an equity tranch that were just deteriorating, and that has an impact on the margin for those senior tranches. I mean what about the information on that stuff that we would be looking for? " CHRG-110hhrg41184--50 Mr. Bernanke," Well, again, I don't necessarily want to try to explain fluctuations over short periods of time; financial markets move back and forth. But a couple of things have happened. There has been some back-up in longer-term Treasury rates--the safe long-term rates. But, again, I think a big part of the story is that even as the Fed has lowered interest rates, and as the general pattern of interest rates has declined, the pressures in the credit markets have caused greater and greater spreads, particularly for risky borrowers. And that to some extent--I would say not entirely by any means--offset the effects of our easing. Our easing is intended in some sense to respond to this tightening of credit conditions, and, I believe we have succeeded in doing that. But there certainly is some offset that comes from widening spreads, and this is what's happening in the mortgage market. " CHRG-111hhrg50289--33 Mr. Heacock," Thank you. We have not backed off at all. As I said before, we wrote more SBA loans than any other lender in South Dakota last year, and it is continuing this year. As far as non-SBA loans, we had a record year last year and it is continuing very, very strong. Credit unions nationwide, for the most part, have plenty of capital to lend, and we have had, I know, locally some financial institutions that are not willing to lend to some small businesses. Also, they are changing some terms and conditions. They are coming to us. Oftentimes we can help them. Sometimes we cannot, but we are there and available and have the funding. " FOMC20070807meeting--163 161,VICE CHAIRMAN GEITHNER.," Don’t give up yet. “Risk premiums in financial markets have increased, credit conditions have tightened for some households”—it is true that you don’t really know what the source of the increase in risk premiums is, but it is true that risk premiums have increased. Volatility itself is not particularly interesting from a policy perspective, and as many people have said, we’re not here to damp volatility. The considerations relevant to the macroeconomy and to financial market stability in some sense are what happened—and that’s a different way of saying it." CHRG-111shrg55117--68 Mr. Bernanke," But I do think that examiners should be appropriately weighing the fact that profitable lending to creditworthy borrowers is good for the bank and that maintaining those relationships is good for the bank. At the Federal Reserve, we have for a long time tried to communicate that message, and we have ongoing training, workshops, manuals, and other communications with the examiners and with the regional directors of supervision to try and put that message through. Now, I have to admit that it does not always get through, but, on the other hand, it is also probably true that, you know, bank terms and conditions just are going to be tougher now for a while given the difficulties in the economy. And so, you know, not everybody who was used to getting credit is going to get credit, but to the extent that we can continue to make loans to creditworthy borrowers, we really want to support that, and we are trying to put that message to our examiners. Senator Martinez. I think your statement is very helpful and I think also, with no question, that what used to be a good credit may not be a good credit in current circumstances, and we have to be wary of that. But along the same lines, the Federal Reserve implemented a TALF program to restart the securitized debt markets and my question has to do with the commercial real estate and the potential shortfall there. What do you think in terms of your program for the private commercial real estate lending, investing, and what may be coming in the months ahead, which is a very, very serious situation. " FinancialCrisisInquiry--428 MAYO: You know, as I listened to Mr. Blankfein, he brought up one word that hit me that I think, if I’m still doing this job 20 years from now, is going to stick with me. And that’s when he said, “rationalized.” We rationalized what we were doing based on the circumstances at the time. And I think one of the conclusions of your hearings throughout this year, that’s a warning to the future. Look how much we rationalized the activities that were taking place in the industry. So I very much agreed with that. And with regard to Morgan Stanley, Mr. Mack mentioned there was just too much leverage at the firms. That’s an easy call, and you can certainly track that. Well, let me yield to... CHRG-111hhrg74090--174 Mr. Rush," Ms. Hillebrand? Ms. Hillebrand. Yes. Thank you, Mr. Chairman. Under the one rule writing many enforcers model, we want it to be as easy as possible for the FTC to bring the cases in its existing jurisdiction as well as to enforce the CFPA rules. If the Commission recommends a shorter time period, we would want you to look at that very seriously. We think a waiver process also could help here. The Commission and the CFPA could agree that for this kind of case we don't need to know in advance and for these other cases we need a shorter period. " CHRG-110hhrg46595--49 The Chairman," Before I get to Mr. Wagoner, I want to make an announcement for us. Managing this fairly is not always easy, but many of the Members got to ask questions of the auto industry and the Union last time, and then others asked of the second panel. I am going to reverse that. I am going to begin by recognizing any Member on the Democratic side who did not get to ask questions of this panel. We will then go to others. So I just tell you that in advance so you have a chance to formulate your questions. We will then pick up the regular rotation. Mr. Wagoner, please go ahead. STATEMENT OF G. RICHARD WAGONER, JR., CHAIRMAN AND CHIEF FOMC20081029meeting--207 205,MS. YELLEN.," Thank you, Mr. Chairman. In the run-up to Halloween, we have had a witch's brew of news. Sorry. [Laughter] The downward trajectory of economic data has been hair-raising--with employment, consumer sentiment, spending and orders for capital goods, and homebuilding all contracting--and conditions in financial and credit markets have taken a ghastly turn for the worse. It is becoming abundantly clear that we are in the midst of a serious global meltdown. Like the Board staff, I have slashed my forecast for economic activity and now foresee a recession with four straight quarters of negative growth starting last quarter. I wish that I could claim that I place a lot of confidence in the sobering forecast, but I am sorry to say I can't. In fact, I think we will be lucky if the adverse feedback loop that is under way doesn't wrench us into a much more pronounced and more protracted downturn. The outlook for inflation has shifted markedly, too, with the days of heightened upside inflation risks behind us. In fact, I am concerned that beyond next year we run the risk of inflation falling below the level consistent with price stability. Even before the extraordinary deterioration in financial market conditions over the past few weeks, there were numerous signs that the economy had weakened dramatically. I won't recite the litany of disappointing data but instead try to touch upon some high, or I guess I should say low, notes based on what my contacts tell me. They are consistent with President Fisher's observations. Consumer purchases of durable goods, especially motor vehicles, have been particularly hard hit by the one�two punch of tight credit and reeling consumer confidence. The mood on showroom floors is downright grim. One auto dealer in my District reports that he is now experiencing the worst period in his thirty-plus years in the business. A home appliance retailer adds that he has never seen more uncertainty and gloom from both the retailers and the vendors. This sentiment is echoed by a large retailer who says simply, ""The holiday shopping season is going to stink."" Businesses are under siege from weak demand, high costs of borrowing, curtailed credit availability, and pervasive uncertainty about how long such conditions will last. Our contacts report that bank lines of credit are more difficult to negotiate. Many have become more cautious in managing liquidity and in committing to capital spending projects that can be deferred. They are even cutting back trade credit to customers. Even firms that are currently in good shape report that they are hunkering down, cutting back on all but essential spending, and preparing for the worst. Our venture capital and private equity contacts tell us that they are instructing their portfolio companies to cut costs, put expansion plans on hold, and draw down existing credit lines. The market for commercial mortgage-backed securities has all but dried up, and lenders have also become less willing to extend funding. With financing unavailable, I am hearing talk about substantial cutbacks on new projects and planned improvements on existing buildings, as well as the potential for distress sales of properties whose owners will be unable to roll over debt as it matures. The deterioration in overall financial conditions since the September FOMC meeting is truly shocking. Even with today's 900-point increase in the Dow, broad indexes are still down about 20 percent, and the latest data suggest house prices in a freefall. Baa corporate bonds are up about 200 basis points since our last meeting, low-grade corporate bonds are up a staggering 700 basis points, and to top it all, the dollar has appreciated nearly 10 percent against the currencies of our trading partners. The sharp deterioration in financial and credit conditions will weigh heavily on economic activity for some time. In addition, prospects for the one remaining cylinder in the engine of growth--namely, net exports--are bleak owing to the slowdown in global demand and the appreciation of the dollar. We now expect real GDP to decline at an annual rate of 1� percent in the second half of this year and to register two more negative quarters in the first half of next year. That forecast is predicated on cutting the funds rate to � percent by January, as assumed in the Greenbook, and also is premised on another fiscal package. An absolutely critical pre-condition for the economy to recover next year is for the financial system to get back on its feet. In that regard, I have been greatly heartened by the important actions that the Treasury, the FDIC, the Fed, foreign governments, and other central banks have taken in recent weeks to improve liquidity and inject capital into the financial systems. But we are fighting an uphill battle against falling home prices, an economy in recession, and collapsing confidence. It is not clear whether these steps will reopen credit flows to households and businesses, especially those with less than sterling credit. Under the Greenbook forecast we will see further large declines in housing prices over the next two years. Banks and other financial institutions will likely suffer larger losses than many had anticipated, and that will mute the impact of recent capital injections. The interaction of higher unemployment and rising delinquencies raises the potential for even greater losses by banks and other financial institutions and for an intensification of the adverse feedback loop we have worried about and are now experiencing. Such a sequence of events plausibly could lead to outcomes described in the ""more financial fallout"" alternative scenario in the Greenbook. There are considerable downside risks to the near-term outlook as well. As I mentioned, the most recent economic data have consistently surprised on the downside, and I see a real risk that the data may continue to come in weaker in the near term than the Greenbook has assumed. For example, a dynamic factor model that my staff regularly uses is much more pessimistic in the near term than is the Greenbook. This model aggregates the information contained in more than 140 data series. Based on the most recent economic and financial data available, this model predicts that real GDP will fall 2� percent in the fourth quarter. The model's pessimism reflects the combination of the recent weak data releases for the month of September, followed by the abysmal data that we have available so far for October, including financial market prices, regional business surveys, and consumer sentiment. Turning to inflation, the most recent data have been encouraging. Looking forward, the sharp decline in commodity prices, especially oil prices, will bring headline inflation down relatively quickly. More fundamentally, the considerable slack in labor and product markets will put downward pressure on the underlying rate of inflation over the next few years. A number of my contacts already report that their businesses are working on lower margins in the more challenging economic environment. I expect headline PCE price inflation to decline to about 1� percent in 2009 and core PCE price inflation to be 1� percent next year. I expect both inflation rates to edge down to 1� percent in 2010. Given the sizable downside risk to the forecast for growth, the risks to the inflation forecast are likewise weighted to the downside. In conclusion, I think the present situation obviously calls for an easing of policy, as I assumed in my forecast. Given the seriousness of the situation, I believe that we should put as much stimulus into the system as we can as soon as we can. " FOMC20060808meeting--122 120,MR. WARSH.," Thank you, Mr. Chairman. From a capital markets perspective, as I think about this decision, what matters more than the pricing of this issuance—that is, the decision on 25 basis points—is really what the after-market effects are. How is this security going to trade over the next weeks and months? When I think about the decision in that context, it puts the burden on the communications, which are only in small part in the message of our statement today. At the end of the day, I am willing to agree to a pause. But, again, I think that puts the burden on laying the predicate that we are in fact poised and prepared to act as necessary. That begins with our statement, but it doesn’t end there. Given the data that are likely to come in between this meeting and the next (a couple of CPIs, a couple of PPIs, maybe a revised PCE) and what’s likely to happen to some of the forward-looking market indicators (TIPS spreads, some of the commodity prices), I think it is very important that the markets understand, before the trading in the security gets very significant, the depth of our thinking on the subject and of the discussion around this meeting. The minutes can be part of that communication. Such communication is important so that they don’t perceive us when we meet next to be reacting to one or two pieces of data, the way they seem to have overreacted to one or two pieces of data last week, but really recognize the depth of our thinking on this subject. To be consistent with that view, I think Governor Kohn’s suggestion of indicating a pause as powerfully as we can is critical. The markets, in the first days, are going to take our pause to be a stop, as reflected currently in the Eurodollar futures contracts and the fed fund futures contracts. But we need to disabuse them of that view as quickly, as frequently, and as consistently as we can so that the pause does not become read as a stop. We will then have set out the conditions for the ways in which we might react if different data arise. Again, I think that the decision today is not an easy one. It’s important that the markets recognize that it is unlikely that our work here is done. With all that said, I’m prepared to support Governor Kohn’s suggestion." CHRG-111hhrg67816--7 Mr. Radanovich," Thank you, Mr. Chairman. I want to thank you so much for holding today's hearing on the FTC's role in financial consumer protection. Given the current economic downturn and the slow thawing freeze in the credit markets, this discussion is particularly timely. Abuses must have the disinfectant of sunlight shone brightly on them, and it is our responsibility as representatives of our constituents to examine the protections afforded to consumers by the law. Any credit scam that takes advantage of innocent consumers is deplorable and we must have our regulators pursue all those responsible for this kind of despicable crime behavior with vigor. My district is located in California San Joaquin Valley, which is suffering from one of the Nation's highest foreclosure rates due to the easy availability of credit, unfortunately, so the easy money was available to consumers because of deception and fraud. These were cases of mortgage fraud, appraisal fraud, and income fraud that all played a part in creating the current mess that we are in. It is reprehensible that people who may have been taken advantage of when they bought their house could now be victims in their time of need. Today, we focus on the Federal Trade Commission's efforts. The FTC deals with matters that affect the economic life of all our constituents. The Commission's consumer protection mission is to ensure consumers are protected from unfair and deceptive practices in or affecting commerce. That Herculean task puts the Commission in the position of overlooking a multitude of industries, and the Commission's responsibility to protect consumers of financial service products are a critical part of this work. The Commission helps to protect consumers at every stage of the consumer credit market from the advertising and the marketing of financial products to debt collection and debt relief. However, the Commission's legal authority does not extend to all entities that provide financial services to consumers. The FTC Act and the statutes the Commission enforces specifically exempt banks, thrifts, and federal credit unions. The FTC, however, had jurisdiction over non-bank financial companies including non-bank mortgage companies, mortgage brokers, and finance companies. As the lead consumer protection agency, it has the expertise and the experience that was recognized by our colleagues on the House Financial Services Committee last Congress. They developed legislation to improve the existing framework of the consumer protection regulations to better coordinate banking regulators rulemakings with those of the Commission, and while avoiding duplicative efforts in the government this coordinated approach to protect consumers of financial services is essential. The same rule should apply regardless of what entity sells the product. I am anxious to hear about the FTC's recent activity in this area, the cooperative efforts among agencies, and whether these efforts are effective. I do have concerns about some of the reforms that have been discussed over the years that would change how the Commission operates. As I mentioned, the FTC's jurisdiction is enormous. Except for the few exempted entities, the Commission's authority to promulgate regulations impacts nearly our entire economic spectrum. Unlike some other agencies who promulgate rules using the procedures of the Administrative Procedures Act, the FTC's rulemaking process is laid out in the Magnusson-Moss FTC Improvement Act. Congress established the Magnusson-Moss rulemaking procedures in the 1970's specifically to be more rigorous than the APA process, in part, to provide affected industries the opportunity to present arguments in an evidentiary hearing. The FTC must base any rule on that hearing record and substantial evidence must be presented to justify it. I am concerned that any significant change to this process would not allow for such careful consideration before rules are finalized. Congress set up the Magnusson-Moss process to be intentionally deliberative, but Congress also has been highly effective in enacting consumer protection legislation on specific issues and providing the Commission with APA rulemaking authority in those cases where it is warranted, such as the Do Not Call Act. I want to thank all our witnesses for being here today, and I look forward to their insight and expertise on how consumers can be best protected. I am particularly interested in hearing if there are any holes in the current law which prevent the FTC from pursuing bad actors and whether or not additional regulations would be effective in deterring unscrupulous lenders and others. If the testimony and the evidence we receive lead to the conclusion that the Commission should be doing more, including regulating entities that it currently does not, I stand ready to work with you, Mr. Chairman, to develop the appropriate legislation. Thank you, Mr. Chairman, and I yield back. " CHRG-110hhrg46596--496 Mr. Kashkari," Congresswoman, it is a great question and very hard to answer. The best I can do is to try to give examples of what might have happened, examples I mentioned earlier. Imagine if your constituents couldn't get access to their 401(k) plans, or they couldn't get money out of their checking accounts. It is possible, if their banks were failing. Their life savings could go way down, and just a complete freezing of the basic money flow in our economy. It could grind to a halt. I mean, the downside was enormous. It is easy to make hard decisions when the consequences of inaction are so great. And I don't know what else to say other than that. " CHRG-110shrg50416--27 Mr. Lockhart," Chairman Dodd, Senator Shelby, and members of the Committee, thank you for the opportunity to testify on the Federal Housing Finance Agency's response to the turmoil in the credit markets. I will begin by talking about our activities as the regulator of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, and then turn to TARP. There is no doubt that the mortgage market pendulum swung extremely widely toward easy credit, poor underwriting, risky mortgages, and even fraud. The market had to correct. But we need to prevent the pendulum from swinging too far in the other direction. Fannie Mae, Freddie Mac, and the 12 Federal Home Loan Banks have played a critical role in dampening that pendulum swing. In mid-2006, their market share of all new mortgage originations was less than 40 percent. With the demise of the private label mortgage-backed security market, their share is now 80 percent. On September 6th, FHFA placed Fannie Mae and Freddie Mac into conservatorship. Market conditions, compounded by a weak regulatory capital structure, meant that they were unable to fulfill their mission of providing stability, liquidity, and affordability to the mortgage market. A critical component of the conservatorship was the three Treasury facilities that were put in place. The most important one is a Senior Preferred Agreement, which ensures that the Enterprises always will have a positive net worth. These $100 billion each facilities, which have not been withdrawn on yet, are well over three times the statutory minimum capital requirements and last until all liabilities are paid off. Effectively, it is a government guarantee of their existing and future debt in mortgage-backed securities. Both can grow their portfolios by over $100 billion, which will further support the mortgage market, as will Treasury's mortgage-backed security purchase facility. Treasury has also provided the Enterprises and the Federal Home Loan Banks credit facilities to provide liquidity if needed. The Federal Home Loan Banks counter-cyclical capital structure has allowed them to play a critical role in supporting financial institutions and mortgage lending over the last year. Their secured advances to financial institutions have just reached $1 trillion, which is about 58 percent up from June of last year. The new legislation added the Enterprises affordable housing goals and mission enforcement to the responsibilities of the agency. I have instructed both CEOs to examine their underwriting standards and pricing. Earlier this month, Fannie Mae and Freddie Mac canceled a planned doubling of an adverse market delivery fee. I expect future changes to reflect both safe and sound business strategy and attentiveness to their mission. A critical component of stabilizing the mortgage market is assisting borrowers at risk of losing their homes by preventing foreclosures. Keeping people in their homes is critical, not only for the families and the neighborhoods, but for the overall housing market. Through August, the Enterprises have done $130,000 in loss mitigation activities, but they have to do a lot more. A more systematic approach to loan modifications is essential. Well before the conservatorship actions, we had asked the Enterprises to accelerate their loan modifications with features that included potential principal write downs and forbearance. We encouraged them to join the FDIC's IndyMac loan modification program. I expect loan modifications to be a priority, both as a matter of good business and supporting their mission. During this difficult time in our financial markets, the FHFA has been working with the Treasury, the Fed, the SEC, and the Federal banking agencies to monitor market conditions and coordinate regulatory activities. We have been assisting the Treasury Department as it develops ideas for the TARP. I also serve as a Director on the Financial Stability Oversight Board. Foreclosure mitigation is an important objective under the TARP program. The objective applies to all Federal agencies that hold troubled assets, including FHFA as conservator of Fannie Mae and Freddie Mac. In support of the TARP, and as a Federal property manager, FHFA will work to ensure the successes of these foreclosure minimization programs. In conclusion, FHFA and the housing GSEs have a critical role in returning the mortgage market to stability and preventing foreclosures. It will take time but I believe the many steps that have been taken will provide a much more solid foundation for creating a stable future for the mortgage markets and, most importantly, American homeowners, renters, workers, and investors. I look forward to working with the Committee and all of Congress in achieving this goal. Thank you. " FOMC20070807meeting--67 65,MR. HOENIG.," Mr. Chairman, the Tenth District economy overall continues to perform well, with strength in energy and agriculture partially offset by the weaknesses in residential construction. Developments since the last meeting include some softening in District manufacturing activity similar to that shown in the July ISM survey numbers and in other regional Reserve Bank indexes. We have also seen a slowing in overall employment growth. In contrast, consumer spending seems to be holding well in spite of higher gasoline prices. Indeed, reports from District directors and business contacts indicate a strong summer tourism season with increased air traffic and higher hotel occupancy rates throughout the western part of our region. The recent slowing in District employment growth has been somewhat surprising to us, given the activity in much of our region. Since the beginning of 2004, District employment growth has been running around 2 percent, and in the past few months has slowed to about 1½ percent. Geographically, the slowdown has been most notable in Wyoming, New Mexico, Colorado, and Oklahoma, and anecdotal information suggests that the slower growth is due more to a shortage of skilled and semi-skilled labor than to any weakening in demand. This anecdotal information is supported by new regional information on employment costs by the BLS. According to them, recent employment cost increases in these states have been well above increases nationally and in other parts of our region. Construction activity remains mixed, with weakness in residential construction offset to some extent by strength in commercial construction. Just an aside, when you talk about things that are on the horizon, we are a little concerned about commercial real estate because it is very hot right now and there is a fairly large portion of it on the books of the banks in our region. On the residential side, there is considerable variation across our region. In some areas where energy and agriculture are strong, housing activity is actually above normal. In other parts of the District, however, both national and local developers are experiencing the most difficult conditions in some time. In most District metro areas, inventories of unsold homes continue to rise, but the rate of increase has diminished somewhat in recent months. Turning to the national outlook, data released since the last meeting support the view that growth will pick up over the year. Compared with the Greenbook, I am more optimistic about both the near-term outlook and longer-run growth. Specifically, I think second-half growth is likely to be around 2½ percent. Growth in 2008 and 2009 is likely to be near potential, which we estimate to be around 2¾ percent. Housing obviously constitutes the major downside risk to growth over the next few quarters. I am not yet convinced, however, that recent financial market volatility and repricing of credit risk will have significant implications for the growth outlook. It is still reasonable at this point to think that the recent volatility will prove transitory, and the repricing of credit risk is, in that sense, desirable. I am also encouraged by the results of the July senior loan officer survey, which suggests no general tightening of bank credit conditions. Like the Bluebook, I think that Treasury yields are likely to move back up once the markets feel more comfortable about the state of the economy and credit conditions and realize that policy easing is not likely to be forthcoming. Although weakness in housing and tighter credit conditions have increased the downside risk to output, I believe that strength in consumer spending, exports, and government spending will help maintain moderate growth in the period ahead. With regard to the inflation outlook, recent data on core CPI and PCE continue to be favorable. However, I am expecting some pass-through of higher energy prices to temporarily boost core measures over the second half of this year. In addition, pressures from resource utilization and slow productivity growth remain. Thus, despite recent improvements, I continue to believe that some upside risk to inflation remains. Thank you." FOMC20080121confcall--33 31,MS. PIANALTO.," Thank you, Mr. Chairman. I support your proposal for a 75 basis point reduction in the fed funds rate today. At the time of our last call, I was hesitant about moving because it was in advance of some important data. Obviously, we got those data, and they were very weak. Financial conditions, as many have indicated, have also deteriorated. My conversations with the bankers in my District indicate that the earnings reports that are coming out will demonstrate that problems have spread beyond just the mortgage sector. They are also seeing deterioration in credit card and other consumer debt. I think that it is important that we move in a timely and an aggressive way. I don't think that there is much to gain by waiting another week. In this environment, I do believe that we should make every effort to make sure that we are more accommodative and not stay inadvertently restrictive, as the evidence suggests we are today. So I do support moving 75 basis points today. Thank you, Mr. Chairman. " FOMC20080430meeting--106 104,MR. LACKER.," Thank you, Mr. Chairman. Fifth District economic conditions softened further in recent weeks. Following a pop-up in March, our manufacturing contacts said that factory activity lost momentum in April. Services firms that we surveyed again reported tepid growth in their revenues, and retail sales continued to be very weak. In real estate, the story is mixed. Our housing markets continue to post generally slow sales, but recent anecdotes suggest some scattered firming. Realtors and others indicate that Northern Virginia and Maryland have seen a spring bounce in sales in recent weeks. One Realtor said that a factor supporting sales is that sellers now seem more willing to come off 2006 prices. The Charlotte market has also seen a spring bounce. Coastal areas in the Carolinas, hard hit until recently, are said to be more active lately. Of course, it is hard to know what these anecdotes mean on a seasonally adjusted basis, and contacts caution that it is too soon to call the bottom. In contrast, home sales are weakening in many other areas of the Carolinas, where markets had posted sales and price gains well after the national market had turned down. Residential construction in nearly all areas continues to weaken. On the commercial real estate front, conditions have softened somewhat, although in D.C. proper, commercial rents are firm and vacancies are low. Commercial construction activity is broadly softening. My reading of the national report since the last FOMC meeting is that the real outlook has not changed much. In particular, we still appear to be in a recession. Payroll employment has continued to decline, falling an average of 77,000 per month in the first quarter. Unemployment is rising, although it is still relatively low. Nonresidential construction is weakening, and the falloff in architectural billings is particularly discouraging. Other business investment has been soft as well. Consumer spending, like business spending, appears to have slowed to a crawl. The length and depth of the recession are likely to depend on stabilization in the housing market. The sharp decline in home construction has continued unabated, and outside of the one-month tick-up in the brand new, as yet untested, monthly home-price index from OFHEO, there's no sign of any bottoming in any of the national data on housing. Having said that, I noted earlier some scattered reports of a seasonable pickup in home sales. So there's a chance, perhaps only a slim one, that we'll see some stability in markets this summer. Concerns are often voiced about the possibility of broad spillovers from financial market conditions in the form of sharply tightening credit conditions for households and businesses. But if we look past the drama in wholesale markets and the end-user credit markets that gave rise to it (in housing and buyout financing), evidence of such spillover is hard to come by, at least so far. It is true that delinquencies have risen across a broad class of credits--commercial real estate, C&I loans, and auto and credit card portfolios, for example--and lenders are reporting tightening terms across many of these borrower classes. But that is generally what happens in recessions: Spreads widen and credit flows fall because many consumers and firms become genuinely riskier. So far, delinquency rates and credit spreads faced by consumers and firms appear to be well within the bounds of what happened in past credit cycles. More broadly, recent experiences have revealed important new information about the efficacy of some prominent financial market mechanisms--information that is, in turn, affecting the current behavior of financial market participants. Auction-rate securities, for example, seem to have worked well for decades because investors attached relatively low probability to contractual clauses that reset their rates and prevented their exit. Reaching those clauses has naturally caused investors to update their estimates of the probability of reaching those clauses, and the result has been much less--in fact, virtually nil--demand for those securities. Similarly, recent experience has brought dramatic revelations about the informativeness or lack thereof of credit agencies' ratings of assetbacked securities. Its revelations would seem to warrant fairly dramatic shifts in investor portfolios, just as a matter of Bayesian updating. These changing expectations in light of recent information revelation are just as much a change in fundamentals as the invention of the light bulb. Spreads in interbank markets certainly are elevated, of course, but one fundamental factor here is the continuing uncertainty about the severity of looming losses on mortgage-backed securities. Another fundamental factor is the demand for term funding by European banks about which uncertainty remains regarding mortgage-related losses that may be imminent. Those sources of uncertainty will persist as long as uncertainty about the bottom of the housing cycle persists. At our March meeting I had strong concerns about inflation, particularly the increase in fiveyear, five-year-ahead inflation compensation and the rising trend in overall inflation. Since then we received more-moderate inflation numbers for February, and five-year, five-year-ahead inflation compensation has backed off as well. Although I still believe that these TIPS spreads are too high to be consistent with stable, long-run inflation below 2 percent, it's heartening to see them come down following our March meeting. It seems reasonable to infer that the improvement in inflation expectations occurred because of the unanticipated emphasis on inflation risks in our statement and the 25 basis point surprise on the funds rate. That response, however, confirms for me the hypothesis that the previous erosion in expectations was caused largely by the aggressiveness of our January policy actions. I believe that substantial risks for inflation and our credibility remain. The Michigan survey number for 12-month-ahead inflation expectations popped up to 4.8 percent, a relatively large number. The March CPI was again too high, and further increases in food and energy prices in recent weeks will continue to press headline inflation upward. Persistently high headline numbers could become ingrained in household and business decisionmaking. I believe the risk remains that cutting the funds rate again will have undesirable effects on inflation expectations. The real federal funds rate using the Greenbook's forecast of overall PCE inflation is now between minus � and minus � percent. That seems like plenty of stimulus for now. Thank you. " CHRG-110shrg50369--82 Mr. Bernanke," One of the concerns that I have is that there is some interaction between the credit market situation and the growth situation--that is, if the economy slows considerably, which reduces credit quality, that worsens potentially the condition of credit markets, which then may tighten credit further in a somewhat adverse feedback loop, if you will. I think that is an undesirable situation. I would feel much more comfortable if the credit markets were operating more nearly normally and if we saw forecasted growth--not necessarily current growth but forecasted growth--that looked like it was moving closer toward a more normal level. So what I would like to see essentially is a reduction in the downside risks which I have talked about, particularly the risk that a worsening economy will make the credit market situation worse. Senator Bayh. Well, let me ask you--but I have got only 1 minute so I am going to need to hurry. I did have two questions. What aspect of the credit markets will you look to? And, in particular, I have been interested--you talked about the flight from risk. There have been some aspects of the credit market that seem to me to be almost without risk, and yet people are fleeing from those as well. These auction rate securities, very short term, the underlying assets, particularly in the municipal sector, virtually no risk of default, and yet that seems to have seized up as well. What do you think will lead people to begin to assume rational levels of risk again? And what indicia will you look to in the credit markets to reassure yourself that this situation is beginning to work itself through? " fcic_final_report_full--173 As one recent study argues, many economists were “agnostics” on housing, un- willing to risk their reputations or spook markets by alleging a bubble without find- ing support in economic theory.  Fed Vice Chairman Donald Kohn was one. “Identification [of a bubble] is a tricky proposition because not all the fundamental factors driving asset prices are directly observable,” Kohn said in a  speech, cit- ing research by the European Central Bank. “For this reason, any judgment by a cen- tral bank that stocks or homes are overpriced is inherently highly uncertain.”  But not all economists hesitated to sound a louder alarm. “The situation is begin- ning to look like a credit-induced boom in housing that could very well result in a systemic bust if credit conditions or economic conditions should deteriorate,” Federal Deposit Insurance Corporation Chief Economist Richard Brown wrote in a March  report. “During the past five years, the average U.S. home has risen in value by , while homes in the fastest-growing markets have approximately doubled in value.” While this increase might have been explained by strong market fundamen- tals, “the dramatic broadening of the housing boom in  strongly suggests the in- fluence of systemic factors, including the low cost and wide availability of mortgage credit.”  A couple of months later, Fed economists in an internal memo acknowledged the possibility that housing prices were overvalued, but downplayed the potential im- pacts of a downturn. Even in the face of a large price decline, they argued, defaults would not be widespread, given the large equity that many borrowers still had in their homes. Structural changes in the mortgage market made a crisis less likely, and the financial system seemed well capitalized. “Even historically large declines in house prices would be small relative to the recent decline in household wealth owing to the stock market,” the economists concluded. “From a wealth-effects perspective, this seems unlikely to create substantial macroeconomic problems.”  CHRG-111hhrg54872--117 Mr. John," I think an article from the Washington Post from Sunday has already been cited here. I was deeply disturbed, for instance, to see a Washington Post article last December which pointed out a low-income immigrant couple who were moved into a multi-hundred thousand dollar housing loan despite the fact they had a very low income. We could go through the list. And the list would be very long, both on a State and a Federal area. One of the problems the chairman has pointed out very effectively is that this is not one of the key responsibilities of the regulatory agencies. Now, I think you can make it a responsibility and make it an emphasis just as easy with a coordinating council as you can by massively disrupting the whole consumer regulatory system by creating a new agency. Mr. Moore of Kansas. But you do think existing law and practice worked to prevent the financial crisis last year? " CHRG-109hhrg31539--228 Mr. Pearce," And again, it kind of lets us know that we probably should be doing some things on our energy policies, because of the descriptions in the Middle East, a $10 or $15 increase would be fairly easy to achieve, fairly within reach. The problem in the Middle East then brings us up to a different point, and that is even the availability of crude oil at any price. And could you see a scenario that might play out where the lack of energy, the lack of ability to move products around could drive us toward deflation rather than inflation? Would that be a potential scenario if the price--let's say that there is no price at which the Middle East would ship oil to the rest of the world. " CHRG-110shrg38109--7 STATEMENT OF SENATOR JIM BUNNING Senator Bunning. Thank you, Mr. Chairman. Chairman Bernanke, thank you for being here today. To repeat what I told you at the Budget Committee hearing a few weeks ago, the Federal Open Market Committee did the right thing by stopping the increases in the Fed fund rates after the June 2006 Fed meeting. By holding rates constant, you have done the right thing ever since. After the latest increase, the stock markets took off and the cost of credit leveled off. If the Fed had chosen to continue hiking rates, mortgages and other forms of credit would have become less and less affordable to the average American. Over the last 2 years, the costs of credit, such as mortgages, student loans, and credit cards, have all increased. I am not sure how much more tightening consumers could have handled before serious harm was done to the economy. Higher interest rates accelerated the housing decline. We will not know the full extent of the damage for months, if not longer. If the Fed had not stopped when it did, we would have been in even more danger. You have been at the helm of the Fed for a year now. My initial fears were that you would be a carbon copy of your predecessor, yet you have done some things I have never seen your predecessor do: Embrace open and full debate. There is an old saying that there is a reason we have two ears and one mouth: It is often more important to listen than to talk. During your brief tenure at the Fed, you have made a serious effort to improve on how the Fed listens, but you know I am not going to let you off that easy, even though today is Valentine's Day. The people of my State and I have real concerns about the dangers that lie ahead for our economy. As this Committee discussed with Secretary Paulson last month, our constituents are nervous when they see more and more manufacturing jobs going to the Chinese. They are concerned about the future of the housing market. They are particularly concerned about the effects that the potential repeal of the Bush tax cuts will have on our economic recovery. You inherited an economy that was approaching a tipping point, and so far you have managed not to push it over. I urge you to act with caution and deliberation in the coming year. Finally, soon there will be two vacancies on the Board of Governors. I hope the President moves quickly to fill these positions with people who have real experience in financial services and commercial banking, not just ivory tower academics. I look forward to your remarks. Thank you, Mr. Chairman. " CHRG-110hhrg44901--3 Mr. Bachus," I thank the chairman. Chairman Frank, I am going to follow your lead and restrict my remarks to the real economy, which is the purpose of this hearing, and not some of the recent developments in the past week or two. Chairman Bernanke, looking at the economy, we had an overextension of credit. We had too easy of credit, it wasn't properly underwritten, and the risks were not taken into account. As a result of that, we have had, I think, massive debt accumulation in this country, and we are going through what is inevitable when people borrow more than they can repay. I think a second factor, and it may be in your remarks or questions, you can address this, but a tremendous amount of leverage and risk-taking and other risky and speculative investment practices and a lot of fortunes were made on the way up, but there is pain on the way down. As I see it, it is not an easy thing to go through, but it is a part of a market cycle. The third factor, and this is a factor that I think is the most important, is the high commodity prices, and particularly energy prices that have been a particular hardship on importing nations, and we are obviously an importing Nation. It has been a financial windfall to exporting countries. I have been to Abu Dhabi and Dubai, and the fabulous wealth that has been created out of really a desert society there in the past 40 years is just almost beyond belief. I think T. Boone Pickens, he is running a commercial right now, and he calls this, I think rightly so, the largest transfer of wealth in the history of the world. That, to me, and the effect it is having on Americans day-to-day, is our biggest problem. I believe it is the largest source of instability in our financial markets. I think that the consumers are stressed, they are paying high gas prices, high diesel prices, and they can't pay their other bills. They are even having trouble putting food on their tables. Finally, while we require the American people to live within their budget, we had deficit spending here, and have for some time, and there is a tremendous lack, I think, in Washington of financial discipline. The Federal Government has more obligations than it can fund today, but it continues to obligate itself, it continues to expand and create new programs, and it continues to assume responsibility for funding services that were traditionally in the province of local or State governments or families themselves. Obviously, all of these problems, the problem of tremendous mushrooming of extension of credit and debt accumulation, of overleveraging and risk-taking, of high energy costs, high food costs, high gas prices, and then a Federal Government that spent beyond its means, obviously there is no single approach we can take to getting ourselves out of this. I think the banks have repriced for risk. There has been a lot of--they have raised capital. I will state right here that I know there is a debate in this country on the overall financial stability of our financial system, but I, for one, think that we are well on our way to recovery in the financial system. I think the present stock prices of our banks don't accurately reflect the value of those banks. I think the stock prices are too low. The banks are sound, they are solid. I think the stock prices, right now you may have--I think there is a real--it is just a confidence factor. Anyway, we have had a retrenching and a correction, and I do worry about some attempts that we are doing to short-circuit the correction and the period of adjustment. I think long term they can deepen the damage. But, in contrast, there is something that I think we should do, and we can do now, and that is to address high energy prices. High energy prices mean higher production and transportation costs. Those increases are passed on to the consumers, and we saw that this morning, causing inflationary pressures. Particularly hard hit are those Americans, a million-and-a-half Americans, whose adjustable-rate mortgages are adjusting. Those families are facing a double whammy. To sum up, what I believe is needed now is a concerted bipartisan effort by Congress and the Administration to develop and implement a comprehensive energy and conservation initiative. It needs to be done now. It should have been last year or the year before that. I believe until we get a handle on our dependency on foreign oil, we are going to continue to have real severe problems. Thank you. " CHRG-110hhrg46594--76 Mr. Wagoner," Yes. What we are trying to do, Congresswoman, is also work on the ability of our finance companies to be able to go back to the kind of traditional funding that they have offered to all of our dealers; and we have been working with the captive finance companies, either fully owned or in our case partially owned, to work with the Fed to get better credit availability. Ms. Waters. GMAC has a letter here to your dealers that says, in response to difficult credit market conditions and recent actions by the Federal Reserve Board regarding the Federal fund rates, GMAC is making a change to its wholesale floor plan finance program. The following change is effective. And it goes on to talk about what it can no longer do. So what I am asking you, in addition to the work that you do with your captives, will you also commit to the floor plans that you are involved with to at least dedicate a billion dollars of this money to assist these dealerships? May I get those answers, Mr. Chairman? " FOMC20081216meeting--90 88,MS. CUMMING.," Thank you. Again, I'd also like to thank the staff for the excellent notes. It's useful to start out with our near-term goals, as most of us have done, to provide stimulus and support for the economic recovery and to prevent too large a fall in inflation. The root problems, I think, are worth focusing on for a second: insufficient global demand, hurdles to economic activity from a severely impaired financial system, and as I'll report tomorrow, behavior that is influenced by confusion and fear among businesses and households that are tending to reinforce the downward trend of the economy. That environment, I think, gives us some goalposts to look for in terms of framing the strategy. I find very appealing Marvin Goodfriend's characterization of the duality of the central bank's policy. We have a monetary and what he calls a credit policy at the same time. In normal times setting the fed funds rate influences financial conditions, especially credit markets, in a fairly predictable manner, and this Committee from time to time has discussed where overnight rates and financial conditions have diverged. In these times, we're observing a major disconnect between overnight rates and financial conditions that is reflected in huge spreads but also in a lack of transactions and in nonprice rationing in markets. So coming back to the question of what some of our goals are: To address the problems that we see, communication is really the essential element, and we should be aiming for maximum impact in whatever actions we take and also in our communications. I think, therefore, that we should bring rates down now as far as we think we can take them. But the more important decision is articulating what we are going to do going forward, why we are doing it, how long we are planning to do it, and under what conditions we would stop doing it. Some of the confusion that is out there about what the Federal Reserve has been doing reflects the fact that our operations really cover two very different kinds of things. On one side we are expanding liquidity and supporting the recovery of financial markets by the CPFF, the MBS purchases, and the upcoming TALF. In other facilities we are preventing catastrophic market outcomes through asset disposition, such as the Bear Stearns transaction, AIG, and the recent transaction we've had with Citi. In addition, there are a lot of technicalities and legalities to these facilities that make it hard for the general public to understand what we are doing. So more fundamentally we need to communicate what we want to accomplish, and that importantly involves our commitment to price stability, as many have said here in the sense of keeping prices in the medium term rising in line with our 1� to 2 percent preference, and our commitment to a resumption of sustainable economic activity. When I turn to look at what kind of facilities we should be thinking about going forward, once interest rates are down to their minimum level, there are really a few things that I would highlight. First, in many ways we could influence expectations about short-term policy rates through our long-term debt purchases, as many have said. In particular, when we try to lean against expectations expressed in the yield curve that rates are going to rise soon, and we're seeing some of that today, we can intervene in markets that directly affect major elements of aggregate demand, and I would see that as a very important role of our agency MBS program and also the CPFF to address where firms are really being starved of working capital. Because of its structure, the TALF provides a very broad umbrella under which we could do intervention, again, where we see credit markets failing and economic activity impeded by the lack of finance of a wide variety. I think that we should look at the CPFF and the TALF more as backstop facilities that provide the credit we need but also build in a kind of exit strategy so that, when spreads come down, there is an opportunity for the market basically to tell us, ""You can wind this down now."" We need to communicate the criteria by which we are choosing these markets. We have mentioned these three big market segments. I think simpler is much better than having something that's very complicated or having many, many facilities. As part of this, the crucial thing is to provide to the marketplace some kind of conditional commitment. If we don't feel that we're ready yet for the inflation target, certainly between this meeting and the next we really need to think about what kind of conditional commitment we could make--what conditions in the marketplace would lead us to feel that our work was largely done. I would also note, though, that the historical notes made the excellent point that the risk is that we withdraw stimulus too quickly--that we believe the patient is healing when, in fact, the patient is merely stabilized. So our commitment must be both ambitious in its level and compelling as it is communicated to the public. I think we need to return to the expository approach that the Fed and then-Governor Bernanke took during 2002 and 2003, by which we carefully laid out the elements, the foundation, and the expected outcomes of our approach in that period. As valuable as it was in 2002-03, it is even more valuable today, when confusion and anxiety are shaping behaviors that will amplify the downward forces in the economy. I also endorse the recommendation that many have made to think about a press conference. The need for reassuring communication to the public is, I think, very great. I would add two more thoughts. Of course, it is really crucial that we are coordinating our policy with Treasury, and there are many ways in which we do that today--certainly, we need coordination of fiscal and monetary policy. I frankly would like to see more of our asset-disposition activities taken on by the U.S. government so that it would be easier for us to describe the facilities that we have as supporting the market and restoring market functioning. I also believe, as I'm sure that many of you do, that we will probably need some kind of agreement with the Treasury vis-�-vis our exit strategy. I particularly underline the real possibility, which several have mentioned here, that we may want to raise interest rates well before the markets are really fully healed or fully sustainable by themselves. We'll need to be able to negotiate that in the sense of both the path we take and the understanding we have with the fiscal authorities. Then just to conclude here, I also very much want to endorse the point that President Rosengren made about needing to fix the banking system and doing it sooner rather than later. There really is no ability for the economy to function without a strong banking system. Certainly I believe that you are hearing, as I am, of many instances in which the rationing that is going on through the banking system right now is reaching a destructive potential. In that kind of world, I think we need to turn our attention to that. The Federal Reserve is one of the most important supervisors in our country and in the world, and I think we can do a lot to lead to the very tough actions that need to be taken there. Thank you. " CHRG-111hhrg48873--91 Mr. Kanjorski," Well, that being the case, I assume that you recognize that there is not an awful lot of sympathy up here to necessarily provide additional funds, not going on the merits of whether the funds are necessary. I, for one, am absolutely convinced that for orderly process we need additional funding, and probably will, as we did back in September and October, vote in favor of that funding. But it is not going to be an easy lift on behalf of the Congress. In light of those facts, what are you designing or what are you putting in place so that we could adequately inform the American people as to what the real problems are and what the potential solutions to those problems are so there are more partners in this act that we are going through? " FOMC20080724confcall--9 7,MS. KRIEGER.," Well, as I said before, we imposed it to provide us with some comfort that DIs could stretch toward extra collateral, should they need it during the term of a loan. It came against the background of a term primary credit program that didn't have any such requirements or expectations. So I think we were a little cautious about the measures that we were taking at that time. It is spelled out in the terms and conditions. I think the Reserve Banks have been comfortable administering it on auction day, and the DIs seem to understand it. Maybe they understand it too well because some of them have figured out that they can bring in collateral and withdraw it. " CHRG-111shrg51303--108 Mr. Polakoff," Correct. Correct. The FP is the one that is under the most intense scrutiny today. I go back and I look at what we did over the years as we examined this company on a consolidated basis. We had throughout the years, many times, recommendations for action either at the consolidated level or at the FP level for better risk management practices within FP. I stand on my prior statement, sir, that in 2004, we should have done a better job in identifying what the liquidity risk was associated with these credit default swaps and insisted on a plan to mitigate that risk. When the business stopped in 2005, what we had post-2005 was how do we handle this risk that is now on the books. I would also--I have to remind myself and others that in 2004, this was a AAA-rated company and we were in an entirely different financial environment than we are now. Many of our models, many of our analyses, many of our discussions were driven by the economy that we were operating in in 2004 and 2005. It is easy to look back now in 2009 with some, we should have done X, Y, and Z, and we should have. A post-mortem is absolutely appropriate in this case. Senator Martinez. I think that is fair, and I think Monday morning quarterbacking is always a much easier thing to do. I think that also applies to Governor Kohn and some of the things that we have been discussing about what did or didn't take place in September of 2008. I understand that. Now, tell me the relationship between the S&L holding company and the FMP part of the business. Was there a connection between the two, other than the fact that they were both part of the same holding company? " Mr. Polakoff," AIG FP was a subsidiary of the holding company, so---- Senator Martinez. Of the S&L holding company? " CHRG-110shrg50420--69 Chairman Dodd," In fact, that was a condition. Wasn't that a condition? " FOMC20080430meeting--102 100,MS. PIANALTO.," Thank you, Mr. Chairman. Regardless to whom I talk with these days, the conversation quickly turns to both the fragile condition of financial markets and the spectacular rise in energy and commodity prices. I had hoped that one of these problems would have gone away by now, but clearly that is not how conditions have unfolded since our last meeting. The bankers with whom I talked are paying close attention to their capital and liquidity positions. They remain concerned about wide bid�asked spreads and low trading volumes in a broad array of securities markets. Indeed, the repercussions of financial turmoil appear to have touched every channel of credit intermediation. It appears that a rewiring of credit channels is simply going to take some time to work out. The most significant financial news coming out of the Fourth District is the $7 billion investment of new capital into National City Bank. National City is the country's tenth largest commercial bank, and its problems with mortgage-related credits are now well known. National City still has much work to do to clean up its balance sheet, just as many other financial institutions with impaired capital positions must do before they can stand on solid ground again. Although the fragile state of the financial sector represents a pretty sizable risk to my economic outlook, the National City situation, along with other stories I'm hearing, suggests that modest progress is being made. With regard to District business conditions, the stories I hear remain downbeat. Commercial builders are reporting mixed though generally positive first-quarter numbers. But their expectations for retail sales in the stores that they lease out across the country have deteriorated, and they are fairly pessimistic about 2008 growth prospects. One large national commercial developer whom I talked with told me that, for the first time in his 45-year career, his company has seen sales declines in March in every retail center that they own across the country. The manufacturers I talked with indicated moderate first-quarter revenue growth as export markets, especially in Asia and Eastern Europe, are still helping to sustain production despite weak domestic demand. At the same time, manufacturers report intense commodity price pressures, and they report little resistance as they attempt to pass along the rising cost of commodities to their customers. The projection I submitted for this meeting shows real GDP growth under 1 percent in 2008, with virtually all of that growth coming in the second half of the year. This is a decidedly more pessimistic projection than the one I submitted in January but not materially different from the outlook when we met just six weeks ago. I have, however, boosted my headline inflation projection for 2008 compared with what I submitted in January, and it is somewhat higher than what I was estimating when we met in mid-March. Although I am still projecting that the slack in the economy will be sufficient to bring the core inflation number under the 2 percent threshold sometime next year, I am now anticipating a little more pass-through of commodity prices into core measures than I thought probable six weeks ago. Indeed, every time I see commodity prices ratcheting up, I become less confident that slack alone will be able to prevent an upward drift in the inflation trend. To be clear, I think the downside risks that we face in the real economy remain substantial, and I am inclined to believe that some insurance against those risks is probably warranted. But in taking such a step, I am inclined to judge that the downside risks we face in the real economy will be roughly in balance with the upside risks that we face from a rising inflation trend. Thank you, Mr. Chairman. " FOMC20071031meeting--84 82,CHAIRMAN BERNANKE.," Thank you. Thank you everyone. Let me try to summarize this discussion. It is a little harder than usual. Broadly, the macroeconomic news came in slightly better than expected during the intermeeting period. Housing has been very weak, as expected; but consumption, investment, and net exports were relatively strong in recent months. In the aggregate data, there is yet no clear sign of a spillover from housing. Most participants expect several weak quarters followed by recovery later next year. The risks remain to the downside but may be less than at our last meeting. One issue, given all these factors, is determining the equilibrium short-term interest rate. Financial market conditions have improved somewhat since our last meeting, with investors discriminating among borrowers and with the process of price discovery proceeding. There was general agreement that conditions are not back to normal and that it would be some time before that happened. Some suggested that a risk of relapse remains, should credit quality worsen or further bad news be disclosed. Lending conditions have tightened, particularly for mortgages, and securitization remains impaired. There is not yet much evidence that this tightening is affecting business borrowing, however, although financial conditions may have somewhat increased uncertainty among business leaders. Views on how consumption would evolve were mixed. Consumer sentiment is on the weak side, house prices are down, and oil prices are up, which suggests some weakening ahead. However, the labor market remains reasonably solid, which should support consumer spending. Anecdotal information about consumer spending was unusually mixed. Some saw evidence of growing weakness in consumption. This evidence included weak reports from shippers and credit card companies. Others saw the consumer side as slowing a bit but generally healthy. Investment, including investment in commercial real estate, may also be slowing somewhat; but again, the evidence is mixed. Manufacturing growth appears to be moderating. Other sectors— including energy, agriculture, high-tech, and tourism—are doing well. Core inflation has moderated, and there was generally more comfort that this improvement would persist. There was less concern expressed about tightness in labor markets and wage pressures. Energy prices and food prices could lead total inflation to rise, perhaps even into next year, and there is the risk of pass-through to the core. Similar concerns apply to the dollar and to export prices. Some, but not all, TIPS-based measures of inflation expectations have risen, and survey-based measures have been stable. Most participants saw inflation risks to the upside, but at least some saw them as less pressing than earlier this year. That is my summary. Comments? Well, again, as usual, it is hard to be the last person to speak, but let me make just a few comments. First, as always, the Greenbook was very thoughtful. The authors have done a good job of balancing the risks, and I find their forecast very plausible as a modal forecast. Housing does seem to be very weak, of course, and manufacturing looks to be slowing further. But except for those sectors, there is a good bit of momentum still in the economy. Having said that, I think there is an unusual amount of uncertainty around the modal forecast, maybe less than in September but still a great deal. Let me talk briefly about three areas: financial markets, housing, and inflation. A lot of people have already spoken about financial markets. Market functioning certainly has improved. Our action in September helped on that. For example, commercial paper markets are working almost normally for good borrowers, the spreads are down, and volumes are stable. One concern that we had for quite a while was that banks would be facing binding balance sheet constraints because of all the contingent liabilities that they had—off-balance-sheet vehicles, leveraged loans, and so on. That problem seems to be somewhat less than it was. Some of the leveraged loans are being sold off, some of the worst off-balance-sheet vehicles are being wound down. So there is generally improvement in the financial market, certainly. In the past couple of weeks there has been some deterioration in sentiment, and I see that as coming from essentially two factors. First, there were a number of reports of unusually large and unanticipated losses, which reduced the confidence of investors that we had detected and unearthed all the bad news. This problem will eventually be resolved, but clearly we still have some way to go to clarify where people stand. The other issue, which I think is more pertinent to our discussion, is about economic fundamentals. There was a very bad response, for example, to Caterpillar’s profit report, and so the market is appropriately responding to economic fundamentals as they feed through into credit concerns. From our perspective, one of the key issues will be the availability of credit to consumers and firms going forward. My sense—based on my talking to supervisors, looking at the senior loan officer survey, and talking to some people in the markets—is that banks are becoming quite conservative, and that is what Kevin said. It is not necessarily a balance sheet constraint but more a concern about renewed weakness in markets. It is also a concern about the condition of borrowers, about credit risk, and the demands of investors for very tight underwriting. Now, of course, tight underwriting is not a bad thing; it is a good thing. But from our perspective, we need to think about its potential implications for growth and, if you like, for r*. The biggest effect of the tighter underwriting, of course, has been on mortgage loans, although we have seen a bit of improvement in the secondary market for prime jumbos, which is encouraging if that continues. This is the area in which vicious-circle effects, which Vice Chairman Geithner and others have talked about, is most concerning. House prices, according to the Greenbook, are projected to fall 4½ percent over the next two years. Clearly, there is some downside risk to that. If house prices were to fall much more, that would feed into credit evaluations, into balance sheets, back into credit extension, and so on. So I think there is a risk there, as Governor Kroszner and Governor Mishkin also discussed. The corporate sector is not much of a problem. Good firms are issuing debt without much problem. I don’t really have much read on small business, but I have not heard much complaining in that area either. With respect to consumers, my guess is that we are going to see some effects on consumers. Certainly, home equity loans and installment loans have tightened up. We can see that in the senior loan officer survey. We don’t see that yet for credit cards, but since a lot of credit cards are used by people with subprime credit histories, I suspect that we will see some tightening there. So I do expect to see some effect on consumers from credit conditions. As has already been mentioned, an area we also need to note is commercial real estate. Financing conditions have already tightened there quite considerably, and spreads are much wider. The senior loan officer survey shows the tightening of terms and conditions that matches previous recessions, and CMBS issuance has dropped very significantly. You can debate whether or not this tightening is justified by fundamentals. On the one hand, vacancy rates remain low, and rents are high. On the other hand, it is still also true that price-to-rent ratios are quite high. If you calculate an equity risk premium for commercial real estate analogously to the way you calculate one for stocks, you would find that it is at an unusually low level, which would tend to suggest that prices may fall. So it is uncertain, I would say. Certainly one area in which we might see further retrenchment in commercial real estate is the public sector: Tax receipts are slowing, and that might affect building decisions. So I do think this is another area in which we will be seeing some effects from credit tightening. I should be clear—the Greenbook already incorporates a considerable slowdown in commercial real estate, but that means it will no longer offset the residential slowdown. I just want to make one comment about housing, which I think we all agree is a central source of uncertainty, both for the credit reasons I have discussed and in terms of prices, wealth, and other issues. Let me just make one point that I found striking anyway, which is that—at least from the Greenbook—the forecast of a strengthening economy by next spring and the second half of next year is very closely tied to the assumption that housing will turn around next spring. In particular, if you look at all the final demand components for the economy, other than housing, in 2007 those components contributed 3.5 percentage points to GDP. According to the Greenbook forecast, in 2008 all those components together will contribute 2.0 percentage points to GDP. So the fact that GDP doesn’t slow any more than 0.6 comes from the assumption that the negative contribution of housing next year will be much less than it was in this year. It is certainly possible—again, I think the Greenbook authors have done a good job of balancing the risks. But as we have noted, we have missed this turn before, and it could happen again. So let me just note that as an important issue. If we do miss on that turn, the other forecast errors for consumption and so on obviously would be correlated with that miss. Finally, let me talk for a moment about inflation. I want to share the concerns that some people have noted. If you wanted to be defensive about inflation, you could point out that the movement in oil prices and the dollar and so on is in part due to our actions. But it is also due to a lot of other things—for example, the dollar in broad real terms is about where it was in the late ’90s. In that respect, it is perhaps about where it should be in terms of trying to make progress on the current account deficit. Similarly, with oil, a lot of other factors besides monetary policy are involved. That said, I share with Governor Warsh the concern that the visibility of these indicators day after day in financial markets and on television screens has a risk of affecting inflation psychology. I do worry about that. I think we should pay attention to that. So I do think that is a concern, and we obviously need to take it into consideration in our policies, in our statements, and in our public remarks. I have one more comment on housing before ending. In thinking about the turnaround for housing next year, Governor Kroszner talked about resets and those sorts of issues. We spend a lot of time here at the Board thinking about different plans for refinancing subprime borrowers or other borrowers into sustainable mortgages. We have looked at the FHA and other types of approaches. A very interesting paper by an economist named Joseph Mason at Drexel discusses, at a very detailed institutional level, the issues related to refinancing, in terms both of the servicers’ incentives and of the regulatory perspective. Mason points out that there are some serious regulatory problems with the massive refinancing effort, including consumer protection issues, because refinancing can be a source of scams. There are also issues of safety and soundness because refinancing can be a way to disguise losses, for example. If you read that paper, I think you will be persuaded—at least I am becoming increasingly persuaded—that a significant amount of refinancing will not be happening and that we will see substantial financial problems and foreclosures that will peak somewhere in the middle of next year. So I think that is an additional risk that we ought to take into account as we think about the evolution of housing. Those are just a few comments on the general outlook. Let me just note, we will adjourn in a moment. There will be a reception and a dinner, for those of you who wish to stay. There will be no program or business, so if you have other plans, feel free to pursue them. A number of pieces of data, including GDP, will arrive overnight, and we will begin tomorrow morning with a discussion of the new data. Perhaps that will help us in our discussion of policy. Thank you. The meeting is adjourned. [Meeting recessed] October 31, 2007—Morning Session" CHRG-111hhrg48874--12 OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Ms. Duke. Thank you, Mr. Chairman. Chairman Frank, Ranking Member Bachus, and members of the committee, I am pleased to be here today to discuss several issues related to the state of the banking system. As you are all well aware, the Federal Reserve is taking significant steps to improve financial market conditions and has worked with the Treasury and other bank and thrift supervisors to address issues at U.S. banking organizations. We remain attentive to the need for banks to remain in sound financial condition, while at the same time to continue lending prudently to creditworthy borrowers. Indeed, the shutdown of most securitization markets and the evaporation of many types of non-bank credit make it that much important right now for the U.S. banking system to be able to carry out the credit intermediation function. Recent data confirm severe strains on parts of the U.S. banking system. During 2008, profitability measures at U.S. commercial banks and bank holding companies deteriorated dramatically. Indeed, commercial banks posted a substantial, aggregate loss for the fourth quarter of 2008, the first time this has happened since the late 1980's. This loss in large part reflected write-downs on trading assets, high goodwill impairment charges, and, most significantly, increased loan loss provisions. With respect to overall credit conditions, past experience has shown that borrowing by households and nonfinancial businesses has tended to slow during economic downturns. However, in the current case, the slow down in private sector debt growth during the past year has been much more pronounced than in previous downturns, not just for high mortgage debt, but also consumer debt and debt of the business sector. In terms of direct lending by banks, Federal Reserve data show that total bank loans and leases increased modestly in 2008 below the higher pace of growth seen in both 2006 and 2007. Additionally, the Federal Reserve Senior Loan Officer Opinion Survey on Banking Practices has shown that banks have been tightening lending standards over the past 18 months. The most recent survey data also show the demand for loans for businesses and households continue to weaken on balance. Despite the numerous changes to the financial landscape during the past half-century, such as the large increase in the flow of credit coming from non-bank sources, banks remain vital financial intermediaries. In addition to direct lending, banks supply credit indirectly by providing back-up liquidity and credit support to other financial institutions and conduits that also intermediate credit flows. In terms of direct bank lending, much of the increase last year likely reflected households and businesses drawing down existing lines of credit rather than extensions of loans to new customers. Some of these draw-downs by households and businesses were precipitated by the freeze-up of the securitization markets. The Federal Reserve has responded forcefully to the financial and economic crisis on many fronts. In addition to monetary policy easing, the Federal Reserve has initiated a number of lending programs to revive financial markets and to help banks play their important role as financial intermediaries. Among these initiatives are the purchase of large amounts of agency debt and mortgage-backed securities; plans to purchase long-term Treasury securities; other efforts including the Term Asset-backed Securities Loan Facility known as TALF to facilitate the extension of credit to households and small businesses; and, the Federal Reserve's planned involvement in the Treasury's Public-Private Partnership Investment Program, announced on Monday. The Federal Reserve has also been active on the supervisory front to bring about improvements in banks' risk-management practices. Liquidity and capital have been given special attention. That said, we do realize that there must be an appropriate balance between our supervisory actions and the promotion of credit availability to assist in the economic recovery. The Federal Reserve has long-standing policies and procedures in place to help maintain such a balance. We have also reiterated this message of balance in recent interagency statements. We have directed our examiners to be mindful of the procyclical effects of excessive credit tightening and to encourage banks to make economically viable loans, provided that such lending is based on realistic asset valuations and a balanced assessment of borrowers' repayment capacities. The U.S. banking industry is facing serious challenges. The Federal Reserve, working with other banking agencies, has acted and will continue to act to ensure that the banking system remains safe and sound and is able to meet the credit needs of our economy. The challenge for regulators and other authorities is to support prudent bank intermediation that helps restore the health of the financial system and the economy as a whole. As we have communicated, we want banks to deploy capital and liquidity to make credit available, but in a responsible way that avoids past mistakes and does not create new ones. Accordingly, we thank the committee for holding this hearing to help clarify the U.S. banking agencies' message that both safety and soundness and credit availability are important in the current environment. I look forward to your questions. [The prepared statement of Governor Duke can be found on page 82 of the appendix.] " FOMC20081029meeting--213 211,MR. ROSENGREN.," Thank you, Mr. Chairman. While the LIBOR�OIS spread has narrowed somewhat, the mutual fund industry is no longer experiencing waves of redemptions, and commercial paper market conditions have improved, we're still not back to the short-term credit conditions that prevailed before the failure of Lehman Brothers. This outcome is striking considering the historic interventions that have occurred in the past month. With all of the new government guarantees and equity infusions here and abroad, the limited improvement in short-term credit markets attests to the degree of concern and risk aversion prevailing in financial markets. These concerns are likely to become even more elevated if the economy slows to the degree expected in most forecasts. Like the Greenbook, our forecast anticipates a significant recession. The Boston forecast includes three consecutive quarters of negative GDP growth and results in an unemployment rate peaking above 7� percent. The weakening labor market and the large losses in housing and stock wealth make it quite likely that consumption will shrink in the second half of this year. While we need housing to reach bottom, mortgage rates relative to federal funds rates remain quite high, and further job losses are likely to aggravate the upward trend in foreclosures and add to the downward pressure on housing prices. With limited new home purchases and demand for vehicles weak, consumption of consumer durables is unlikely to recover until next year. Commercial real estate, which has held up reasonably well, all things considered, is likely to be much weaker next year as new and rollover financing is difficult to obtain and staff cuts and hiring freezes affect the space needed by businesses. More generally, firms are likely to have little incentive to make new investments until the severity of the downturn becomes much clearer. Unfortunately, many of our trading partners are likely to face an even more severe downturn, aggravated by their slow fiscal and monetary response to deteriorating economic and financial conditions. While the Greenbook assumes the stock market will rise by 8 percent for the remainder of this year--it looks as though that happened today-- " CHRG-111hhrg56776--206 Mr. Volcker," I would be glad to add a comment, because I think this is an old problem. I remember when I was a young fellow writing about the Federal Reserve. And the long-standing chairman of the Federal Reserve in the 1930's was one Marriner Eccles, who repeatedly complained in the 1930's, in the midst of the recession, that the other banking--the sole responsibility for banking supervision and other agencies--they were being too tough because they had had a lot of losses on their watch, and they were overreacting, in terms of strict regulations at a time when it was inappropriate, because the economy was mired in recession. There have been other times when, if you're just looking at banking regulation, that's your only responsibility, maybe you're going to be too easy when things are going very well, and the economy is on the verge of--you know, the party is getting a little too ebullient. I think, really, that the Federal Reserve is in a better position to get a balanced regulatory position, regulatory approach, simply because they are responsible for monetary policy and responsible for business activity, too. That is one of the strengths in keeping the Federal Reserve in the regulatory business, in my view. " CHRG-110hhrg34673--153 Mr. Bernanke," Well, the incidence of delinquencies and bankruptcies for the economy as a whole remains quite low. Because the job market is pretty good and incomes have gone up, wealth has gone up, the stock market is up, and so on. Most families, many of them, have home equity built up and have been able to manage their finances pretty effectively, and as I said, we have not seen any significant increase in financial stress in the broader economy. Now, there are pockets of problems, as I mentioned already several times, such as the variable rate subprime mortgage area. I think there are a number of approaches. The one that the Federal Reserve is particularly involved in is disclosures. We are responsible for Regulation Z, which implements the Truth in Lending Act, and it includes such things as the famous Schumer Box and other things that show to potential credit card applicants what are the terms, you know, what are the fees and so on. We are in the process now of completely reworking Reg Z for credit cards, for revolving debt, and we anticipate going out with a proposed rule in the next couple of months, and we have worked very hard on that. In particular, one thing we have done--people find it very difficult to understand the legalese that they see in the credit card applications, the credit card contracts, and yet of course the legal information has to be there. Otherwise, it is not a legitimate contract, and so the challenge is to create disclosures that meet the legal standards but that are also understandable, and so we have gone out and done a lot of consumer focus group testing and those kinds of things to try to find disclosures that will actually work in practice, and we hope that these new disclosures we are going to put out for comment in just a couple of months will be helpful in helping people understand, you know, the terms and conditions of credit cards and make them use them more responsibly. " FOMC20070628meeting--126 124,MR. LOCKHART.," Thank you, Mr. Chairman. I would like to speak earlier next time, so I don’t have to give credit to so many of the previous speakers—[laughter] including President Poole, who really said a lot of what I have to say. There wasn’t much change in the Sixth District economic picture during the intermeeting period, particularly regarding things that are relevant to the national outlook. So I am not going to devote a lot of time to discussing across-the-board conditions in the District. My staff’s outlook— and my outlook—for the national economy doesn’t differ much from the Greenbook analysis and forecast, so I also won’t detail small differences between those two forecasts. The Greenbook outlook reflects the baseline expectation of a diminishing drag on real growth from residential investment. Since our forecast largely agrees with the Greenbook, we obviously see the most likely playout of the housing correction similarly. However, as suggested in the Greenbook’s first alternative simulation, we may be too sanguine. I think this is really President Poole’s message about a recovery in the housing sector. That is to say, the downturn in residential investment will be deeper and more prolonged and possibly involve spillovers. So I would like to devote my comments, in a cautionary tone, to this particular concern. Credit available for residential real estate purchases is contracting, and the credit contraction, specifically in the subprime mortgage market, has the potential to lengthen the transition period required to reduce housing inventories to normal levels. This tightening of credit availability, along with higher rates, may affect the timeline of the recovery. One market of concern is the starter home market. The subprime mortgage market has been a major credit source for first-time homebuyers—although, as has been mentioned earlier, subprime mortgages are a small portion of the aggregate stock of mortgages. Subprimes were 20 percent of originations in 2005 and 2006, and if you added alt-A nonprime mortgages, you would get 33 percent of originations in the past two years. In many suburban areas, like those around Atlanta and Nashville in my District, much home construction was targeted at first-time buyers. We have heard anecdotal reports from banking and real estate contacts in our region that tighter credit conditions have aggravated the already sluggish demand for homes. The country’s largest homebuilder—there may be a debate with President Fisher—[laughter] so one of the country’s largest homebuilders, headquartered in Miami, reported on Tuesday a 29 percent drop in homes delivered and a 7.5 percent drop in average prices. But that is combined with a 77 percent increase in sales incentives. They attribute their negative sales experience to rising defaults among subprime borrowers and higher rates. That company’s CEO said that he sees no sign of a recovery, and he provided guidance of a loss position in the third quarter. Because of the major role that homebuilding—and, I might add, construction materials, particularly in forest products—plays in the Sixth District economy and because of some tentative signs of spillover, we will continue to monitor these developments in our District very carefully. As I stated at the outset, we share the basic outlook described in the Greenbook, but observation of the housing sector dynamics in the Sixth District has raised our level of concern that the national housing correction process may cause greater-than-forecasted weakness in real activity. If that is the case and inflation gains prove transitory, as suggested in the Greenbook commentary, we may be dealing with a far more challenging policy tradeoff than we are today. Thank you, Mr. Chairman." FOMC20080121confcall--53 51,MS. DANKER.," I will read the directive and then the statement and call the roll. ""The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee, in the immediate future, seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 3� percent."" The statement goes, ""The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3� percent. The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets. The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully. Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks."" Chairman Bernanke Vice Chairman Geithner President Evans President Hoenig Governor Kohn Governor Kroszner President Poole Yes Yes Yes Yes Yes Yes No " FOMC20070816confcall--22 20,MR. KOHN.," Okay. Well, you have the statement, I think, and I’ll be happy to read it. “To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board today approved temporary changes to its primary credit discount window facility. The Board approved a reduction in the spread between the primary credit rate and the FOMC’s target funds rate to bring the primary credit rate to 5¾ percent. The Board is also announcing a change to the Reserve Banks’ usual practices to allow the provision of term financing for as long as thirty days, renewable by the borrower. These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially. These changes are designed to provide depositories with greater assurance about the cost and availability of funding. The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets. Existing collateral margins will be maintained.” Just to repeat, our hope is that this breaks the logjam—that it sends a signal that we’re encouraging them to make markets without relieving them of the credit risk and that the signal will help the banks come to the collective judgment really that’s in everybody’s interest to start financing these securities." FOMC20080130meeting--31 29,MR. DUDLEY.," Those are a lot of questions. [Laughter] Okay, I'll take the easy one first. The TAF is completely sterilized. For every dollar that goes into the TAF we drain reserves, and we've been doing that mainly by redeeming maturing Treasury bills. Regarding whether these are additional funds to those entities, it is hard to know what they would have done if the TAF facilities hadn't been available. This may have funded some assets on their balance sheets that they otherwise would have decided not to fund. I think it is very difficult to know what that counterfactual is. It is hard to believe that in the system as a whole it led to a lot of additional funding. I would be surprised by that, especially given that we did sterilize reserves and didn't allow expansion of the balance sheet. In terms of the issue of crowding out, the way I think about the TAF is changing the composition of our balance sheet and changing the composition of the banking system's balance sheet. It's not crowding out. We are basically supplying Treasury securities by redeeming bills, and then the Treasury issues more bills that the markets want, and we are essentially absorbing collateral from the marketplace that's hard for them to finance elsewhere. So it is a change in the composition of the balance sheet. That's how I would think of the way it works. In terms of how we should evaluate the success, we don't know how much was the yearend. We don't know how much was monetary policy easing. But market participants view the TAF as very positive. I think that, if we were to discontinue it abruptly, they would be unhappy. There's no evidence to suggest that the TAF has caused any great harm. It looks as though the benefits, to my mind, are likely to significantly exceed the costs even though we can't measure those benefits very accurately. Regarding the foreign institutions issue--the choice between dollar balances from us versus dollar balances from foreign central banks--I think it was a little more complicated than that because, if I remember how we got to the foreign exchange swaps, they were essentially more or less conditional on our doing the TAF. They were willing to do the swaps if they could get the auctions in tandem with our term auction facilities. So my judgment would be that we probably didn't really have a choice of getting the dollars to those foreign banks through the ECB if we hadn't done the term auction facility. " FOMC20071206confcall--83 81,MS. YELLEN.," Thank you, Mr. Chairman. I support the swap arrangement, and I can also support the TAF. In thinking about the TAF, I tried to weight the potential costs and benefits of the program. It hasn’t been an easy task given the uncertainty about what’s responsible for the run-up in term funding spreads. So I thought about potential costs. I certainly don’t see them as particularly large. It is true that it may not have the desired effects, and one could argue that the Fed’s reputation would be tarnished by a failure to succeed, but I didn’t find this compelling. On the contrary, it seems to me that taking an innovative and proactive approach does a much better job of enhancing our reputation. The greater threat is not being willing to cope with what clearly is a very difficult and disturbed situation in money markets. I congratulate the staff. I think this does represent innovative thinking. On the cost side also, the TAF would subsidize probably low-quality borrowers, but I think that’s a side effect that any intervention that’s aimed at improving liquidity will have, and that’s an acceptable price to pay. On the benefit side, though, I guess I’m concerned that the benefits won’t be particularly large. I agree with the comments that have been made. I don’t quite see how the TAF solves the stigma problem. I think there will be stigma as long as the equilibrium rate ends up being a penalty rate, and I think that’s likely to deter bidding. So I guess I don’t really see that this is very advantageous—the TAF relative to changing the spread of the discount rate and the funds rate—but I do see the merit in the arguments that you’ve made about the predictability of the quantity of discount window lending and the desirability of international cooperation. I would say that to my mind the principal risk in introducing the TAF is that it may be seen by the Committee as a substitute for standard monetary policy action since I see it as essentially a kind of sterilized intervention that may have some but not a huge effect. I’m also concerned that it won’t change the cost of funding at the margin, as President Poole argued. I don’t expect the TAF to have large effects on financial conditions, and so it’s not going to affect my own views very much on what the appropriate policy measures are to take when we meet next week." CHRG-111hhrg56766--136 Mr. Bernanke," Well, first, let me say that we're not going to be monetizing the debt, but I think everyone understands the basic arithmetic here, that if deficits go on at 3, 4, and 5 percent of GDP and that picture, if you extend it beyond 2020, would probably get worse because entitlement spending, aging society and so on, that you'll get increasing interest payments and it will spiral out of control and the CBO will give you the same results. Again, it's very easy for me to say this because I don't have to grapple with these difficult problems, but it is very, very important for Congress and the Administration to come to some kind of program, some kind of plan that will credibly show how the United States Government is going to bring itself back to a sustainable position. " FOMC20061025meeting--121 119,MR. STOCKTON.," If you think about the extension of the staff forecast—basically, if you look at beyond the 2008 period—it’s easy to see how you get back to 2 percent. Beyond that, I guess our underlying assumption would be that you will have to get inflation expectations down if you want to have inflation below 2 percent over that longer term. Now, given the way that we typically run these simulations, you have to create an output gap. There could be other channels that the model can’t capture—perhaps talk or communications or something could shift that. As we have indicated, we don’t know the evidence that we would be able to present to you to assure you that that would be the case. But it looks as though, to get below 2 percent, more work would have to be done to get at those expectations." CHRG-111shrg57319--516 Mr. Killinger," The statement was I was passing on to some executives a letter that I received from somebody outside of the organization who had an opinion about Option ARMs, and part of why I was passing it on is to the folks to think through both what does this mean in terms of what investor interest might be and how we might need to explain about Option ARMs to the investors in our company, and also to take a look, again, if market conditions are changing and, if they are, is there anything else that we should consider doing in our Option ARM portfolio. Senator Coburn. Exhibit 11,\2\ you said, in April 2006, ``We may want to continue to sell most of the Long Beach originations until everyone gets comfortable with credit.'' Why do you think anyone would have wanted to buy what you were selling if the Long Beach product was bad?--------------------------------------------------------------------------- \2\ See Exhibit 11, which appears in the Appendix on page 414.--------------------------------------------------------------------------- " CHRG-110hhrg46591--438 The Chairman," The gentlewoman from California. Ms. Speier. Thank you, Mr. Chairman. And thank you for being here and for your participation. I will make this painless because I know I am the last to ask questions here. One of the things that is very apparent to me, and I think to all of us really, is if you have no skin in the game it is really easy to make mischief and get out there. And a lot of that went on in this crisis. You all are supportive of ceasing mark to market. And yet I worry that if we do in fact get rid of mark to market, that it is going to create an environment where banks can take on risks because there is not going to be the accountability that mark to market requires. So my question is, are you interested in seeing mark to market suspended for a short period of time because we are in this crisis, and then return to it? Or are you supporting doing away with mark to market completely? " FOMC20081216meeting--311 309,MR. HOENIG.," Thank you, Mr. Chairman. If we were still working with the framework of targeting the fed funds rate, I would prefer D, and I would accept C, and I would vote accordingly. But I think what I've heard in the past two days is that we have really abandoned that framework, and this is kind of a ratification of that. I think that our framework now is actually in A and B in the statement that we are going to ""expand its purchases . . . as conditions warrant."" If that's the case, then going with A, in which you don't set a fed funds rate or talk about it, is probably preferred. I also think that we're now in a credit policy type of framework, and it bothers me. I have a lot of sympathy for what Presidents Lacker and Bullard said. I would prefer, rather than a statement that says ""as conditions warrant,"" that we have some kind of a monetary base criterion for the future. This is something that we ought to think about. At the same time, I do not think that we should have inflation below optimal in this statement. I don't think we're there, and, at this point, I think it should not be hinted at. I think that ""purchasing longer-term Treasury securities"" goes with the conditionality statement anyway. We'll do what it takes, and if it takes purchasing longer-term Treasuries, that's it. That is what we have unless we go back and look at a new framework that we need to get out and talk about with the public, and I hope that as our meetings and our discussions progress, we begin to focus on that. Thank you. " FOMC20080625meeting--249 247,MR. ROSENGREN.," Okay. So roughly $100 billion. The numbers seemed to be in that range. Now, one of the reasons that we're worried about the tri-party repo was that the securities in that tri-party repo were very illiquid. Was Bear Stearns unusual in the amount of illiquid securities that were being financed? As we look down this list, is the nature of the tri-party repo across these different parties similar or different? You could have a tri-party repo with collateral that would be easy to liquidate, or you could have a tri-party repo with something very difficult so that the counterparty would have a difficult time actually selling it into a distressed market. From the work you all have been doing, are there big differences or not? " CHRG-111hhrg48875--206 The Chairman," The gentleman from Texas. Dr. Paul. Thank you, Mr. Chairman. The chairman in his opening statement talked about the problem being excessive leverage, and I certainly agree with that. And others refer to that as pyramiding of debt. And then we run into trouble, and we come up with the idea that regulations will solve this without asking the question: where did all this leveraging come from and how much of it was related to easy money from the Federal Reserve and artificially low interest rates? So I am very skeptical of regulations per se because I don't think that solves the problem. And of course, everybody knows I am a proponent of the free market, and this is not certainly free markets that got us into this trouble, and this certainly won't solve it. But, you know, in other areas we never automatically resort to regulations. When it comes to the press, if we had regulations on the press, we would call it prior restraint and we would be outraged. If we wanted to regulate personal behavior, we would be outraged and call this legislating morality. But when it comes to economics, it seems like we have been conditioned to say, oh, that is okay because that is good economic policy. I accept it in the first two but not in the third, and therefore I challenge the whole system. And it hasn't been that way forever. It has really been that way since the 1930's, about 75 years, that we in the Congress have deferred to the Executive Branch to write regulations, which are essentially laws. And yet the Constitution is very clear. All legislative power shall be vested in the Congress. So we write laws and we transfer this power. So essentially--we have done this for years--we have reneged on our responsibility. We have not met our prerogatives. And therefore, we participate in this. But in your position, you have been trained throughout your life to be a regulator, and that is something I know you can't deal with. But there is one area that I think that you might be able to shed some light on and work toward the rule of law because, you know, traditionally under common law--our system has always assumed that we are innocent until proven guilty. And yet when it comes to regulations, first we allow the Executive Branch to legislate as well as the court. But in the administrative courts, we are assumed to be guilty until proven innocent. You are in charge of the IRS. So this is someplace where, if there were a reasonable respect for the rule of law, that we could change that tone and assume that the taxpayer and the person that is on the receiving end of these regulations could say, hey, at least now the burden of proof is on the government to prove that somebody broke these regulations. And yet look at what we are doing endlessly. And yet I see that as the real culprit in all this because we are assuming the citizen is guilty. Could you comment on that and tell me what you might be able to do in changing the direction? " CHRG-111shrg51395--66 Mr. Ryan," Thank you for your question. We have given a lot of thought to a number of issues, and on some of these issues we do not have final decisions. I am talking now within the industry. For instance, we spent a lot of time talking about should we recommend the Fed immediately as the systemic regulator, and we have not come to that conclusion yet. If we had to do it right away, they are probably the best qualified to do it, but we think that the industry and the Congress, the American people, deserve a really comprehensive view. The same is true of who is systemically important. It is pretty easy to identify the early entrants because they meet the test that Professor Coffee has enunciated. They are too interconnected. They are very large. They are providing consolidated services to the citizens of this country and we need a better understanding of their interconnected aggregated risks. So the first group will be easy. The second group will be more difficult because they may not be so interconnected. They may not even be that large. But they may be engaged in practices which could have a very dramatic impact on our health. So our hope would be that we anoint a systemic regulator, maybe it is a new entity, maybe it is within Treasury, maybe it is the Fed, that we orient them in legislation toward preselection of the people who are very obvious, and that we give them the flexibility to include and actually to have people move out of systemically important status going forward. So once you are in it doesn't necessarily mean that you will stay in it. I think it is pretty clear, though, we all know the basic early entrants and they are our larger financial institutions. We, by the way, would not limit this by charter at all, so there will be banks, there will be insurance companies, there will be hedge funds, there could be private equity players. It is people who could have a dramatic effect on our lives. Senator Shelby. Professor Coffee, why should we continue to prop up banks that are basically insolvent, some of our large banks that are walking dead, so to speak, give them a transfusion, and there is no end in sight? Why should we do that rather than take over some of their--guarantee some of their assets and whatever we have to do and wind them down? " FOMC20070807meeting--124 122,MR. HOENIG.," Mr. Chairman, a couple of things. First, I am satisfied with the current policy. I think that for the moment our concern should still be on inflation, and I think our policy is designed to address that. In saying that, I also recognize—from my own observations and from what I’ve heard here today—that more downside risks are emerging and that we have brought the risks more in balance, I guess is the way to say it. Complicating that, of course, are the tighter credit conditions. I think they are probably transitory, but we won’t know that for a while yet—maybe by the next meeting. That leads me to conclude that I am comfortable with alternative B and its language because I think it recognizes this dynamic and puts it out there for the public. So I would stick with what we have in alternative B and then see how we develop between now and the next meeting. Thank you." FOMC20071031meeting--79 77,MR. WARSH.," Thank you, Mr. Chairman. I thought I’d just talk about four subjects today: first, spend a few more moments on the capital market conditions, which Bill did a great job of summarizing; second, talk about financial intermediaries; and third and fourth, talk briefly about implications for growth and inflation. In terms of the capital markets, I think it is important that we judge their state today not from where they might have been two weeks ago or from where they might have gotten ahead of underlying reality—if you look at credit spreads and equities—but from where they were before we last met or from where they were in the darkest days of August. I think these markets are at the very high end of what are reasonable expectations for improvement. As Governor Kohn suggests, it doesn’t mean that they can’t reverse themselves. It certainly doesn’t mean that they are solid—plenty of fragility is there. But all things considered, as a function of both time and Fed policy, there is, indeed, better sentiment; bid-asked spreads have narrowed; price discovery is at work; and differentiation and tiering are very real. I’d highlight a few markets that have gone into the category of being on more solid ground. Bill referred to the interbank funding markets. The multiseller bank-sponsored conduit is performing well. Prime auto finance paper has gone through quite a volatile period in the past couple of months but has now found its way to the good side, where I think those markets are increasingly open. High-quality paper is increasingly being received on terms that don’t look dramatically different from the way they would have looked before August. Another example is credit card receivables. Of course, as many others around this table have pointed out, there is no panacea. Serious problems remain in some asset markets, particularly housing and certain parts of structured finance. But I note that might be for good reason. I’d hesitate to call this poor market functioning. By and large, it may be that some investors don’t like the outcomes, but as the asset-backed commercial paper markets have separated the haves from the have-nots and the have-nots are without bank sponsorship and have poorer quality assets and poorer disclosure, they are having a hard time finding and securing bids. Another example might be some large financial institutions that are rolling over more of their funding on a shorter-term basis than they desire. There may be good reasons for that, and as we think about our policy tools tomorrow, we shouldn’t try to come to the rescue with any fixes for institutions that may not have been managed well or, at least, may not have had a capital structure that fit the risks. There are a couple of other indicators of continued concern. Obviously, the Treasury bill market has been quite volatile and is a pretty good reminder to us that these markets are not back to anything that we’d even want to consider normal. Another indicator that I look to in evaluating whether the capital markets are coming back to some normalcy is the percentage of cash holdings in money market mutual funds. In the pre-July period, money market mutual funds, particularly those that hold these prime-plus securities, would hold 5 to 10 percent of their assets in cash. On the darkest day in August, that was up to 45 percent. By and large, my sense is that the average now is something in the mid-20s. That suggests that there might be requests for redemptions and liquidations for which they need to keep cash available, but they are feeling a little better about their prospects and about some of the paper that they’re holding. On balance, I’d say it’s pretty easy for us to sit here and judge improvement. It’s a lot harder for us to judge success. I think President Plosser talked about the normalization in these markets, and we must hesitate to think that the markets before their August turmoil were normal. Risk premiums were abnormally low, and access to credit perhaps unusually easy. So in judging the success of time in our policy prescriptions, I think we’re having a hard time—at least I’m having a hard time—figuring out what are the new steady-state outcomes that are trying to be achieved. These markets appear delicately balanced between fear and greed. One example of greed, as we discussed in previous meetings, is some of the pay-in-kind, or PIK, securities with toggle features in the high-yield market. One of them was priced just last week between 97 and 98. So some of these corporate credits may well have improved in the eyes of the market beyond what we think might be sustainable. On the other side is fear. A new paradigm is trying to take root in the markets, but the risk of reversal remains very real. The marks on many leveraged loans look good. But if you judge the financial institutions that hold this paper, they are rushing to get the paper to market as soon as they possibly can, perhaps with a view that the corporate credit conditions won’t hold at these levels. Second, let me talk briefly about financial intermediaries. As we discussed before, after the tumult in mid-August, many of them retrenched. Then many of them tried to re-liquefy. At that time they were trying to revalue their securities. Now they are probably somewhere in the process of revaluation, review, and refinement. Some of them, after the earnings announcements of the past couple of weeks, might be going back to step 1 and trying to understand what the risks are and what their liabilities are. Some of the improvements that we saw in the capital markets after our September 18 meeting might have been upended or seemed so by a couple of announcements from a leading investment bank and commercial bank that represented a negative surprise to the markets. A couple of explanations are possible for why the market seemed to react not just with respect to the securities of those two banks. Were the losses and risk-management systems particular to those banks that called the risk management into question, or were they illustrative of losses to larger segments of their peer group owing to poor risk-management systems? It was probably a combination, but I guess the key question for me is whether we are seeing impairment of the entire financial sector or simply the realignment of the competitive landscape. I think the answer is the latter, but I’m not certain. The best-in-class comparables among commercial banks and investment banks seem to suggest that bifurcation is at work. If you look at the credit default swaps, at the profits, and at the share prices for the best in class of this group, they seem to have come out of the scare of a couple of weeks ago stronger and more profitable and, frankly, in much better shape. I would have thought that those sorts of entities would be putting opportunistic capital to work in a hurry, particularly when many of their competitors are down. I’m afraid that is not the case. Even they are playing defense in this market. We talk, I talk, about the resilience of our capital markets. What they tell many of us, I think, is that the way for them to be resilient is to be exceptionally prudent here. The risk-reward tradeoff for them suggests that this is a time to be careful. You can’t succeed if you don’t survive, and I suspect that many of them are still quite jarred by recent events. The profitability of most of these financial institutions has been significantly called into question. I suspect that the losses in the fourth quarter are going to look particularly bad, but I would expect that many of these financial institutions are asking themselves the question of what business they really should be in after all. Third, let me speak briefly about the implications for economic growth. To me there is no question that we have less market uncertainty than two months ago, and the prospects of some really bad tail events have dissipated somewhat; but there is still caution, as Vice Chairman Geithner said. Certainly, large multinational nonfinancial companies, excluding housing, seem to be holding up well, as represented by their bottom-up S&P earnings forecast for the fourth quarter of next year, and certainly there’s good news to report, as President Poole suggested, from many in the tech sector. Housing is, of course, as bad as the Greenbook has long suggested. So at the end of the day in terms of trying to judge what’s going on in the real economy, we go back to a discussion the Greenbook highlighted for us, which is the state of the consumer. Even though on balance I am a bit more optimistic than the Greenbook for GDP growth for the balance of ’07 and ’08, I have to admit that the conclusion that consumer sentiment has taken a hit seems, at least from my reading and my discussions with some business leaders, to be backed up by some very disappointing consumer spending for October. Having surveyed a few of the credit card companies, I think that it looks to many of them that October spending is really not at comforting levels. Nominal spending excluding fuel for their consumer base appears flat to down over the past four weeks. That is, I think, a rather remarkable outcome. Delinquencies have also ticked up a bit, but I would say that’s probably less disconcerting to me than what the credit card companies seem to be reporting as a proxy for retail spending. The key over the medium term, however, is job growth and real disposable income, in my judgment more important than the negative wealth effects from housing. Let me turn to the final issue for discussion—at least on my list—which is inflation risks. At the end of this six-week period, I must admit to being considerably less sanguine about inflation prospects and risks than the Greenbook. It is true that incoming data have not been bad at all. Some have even been pretty good, and inflation expectations are seemingly anchored. But as Governor Kohn suggested, I worry a lot about inflation psychology and the real effect of importing inflation given dollar weakness and the effect of commodity price increase pass-throughs on a breadth of products. Given the massive liquidity on the sidelines, given uncertainty in the global capital markets and the current political calendar, and given the rather large and growing expected discrepancies in interest rate differentials between us and our trading partners, I worry about outsized moves between the U.S. dollar and foreign currencies. A disorderly move in the dollar could prove very costly, even undermining foreign direct investment in the United States and perhaps threatening to unanchor inflation expectations, particularly if the judgments of this Committee aren’t well understood by the markets. I have never been a big believer in looking at artificial levels for prices or at charts to figure out where we should worry. Nonetheless, I must say a euro-dollar move beyond 150 strikes me as a level that the markets will be paying keen attention to. We’ll obviously talk about the policy tradeoffs involving these risks in the next round. Thank you, Mr. Chairman." FOMC20080310confcall--69 67,MS. YELLEN.," Thank you, Mr. Chairman. I strongly support the proposed term securities lending facility. I certainly agree that we face a situation in which systemic risk is large, and it's escalating very quickly. A dangerous dynamic has set in. Bill, Don, and all the memos did a great job in describing it. I think financial stability is truly at stake here, and although there are financial and reputational risks in pursuing this approach, it is a creative and well-targeted approach, and it is worth taking these risks to try to arrest the downward spiral in market conditions. Our monetary policy efforts have been seriously thwarted by the spread-widening that's taking place, and the rapid escalation we're seeing in these spreads--large increases in a matter of just the past couple of days in the absence of significant news that relates to the real creditworthiness of borrowers--suggests to me that the spread increases are, indeed, related to deteriorating liquidity conditions and not primarily to higher underlying credit risk. I think it is absolutely right to worry that liquidity problems are escalating into solvency problems. So as with the TAF, I am not 100 percent convinced that this is going to work, but I definitely think it is a good idea to move ahead and to do so quickly. " CHRG-111hhrg48674--8 Mr. Bernanke," Thank you. Chairman Frank, Ranking Member Bachus, and other members of the committee, I appreciate this opportunity to provide a brief review of the Federal Reserve's various credit programs, including those relying on our emergency authorities under 13(3) of the Federal Reserve Act. I will also discuss the Federal Reserve's ongoing efforts to inform the Congress and the public about these activities. As you know, the past 18 months or so have been extraordinarily challenging for policymakers around the globe, not least for central banks. The Federal Reserve has responded forcefully to the financial and economic crisis since its emergence in the summer of 2007. Monetary policy has been especially proactive. The Federal Open Market Committee began to ease monetary policy in September 2007 and continues to ease in response to a weakening economic outlook. In December 2008, the committee set a range of zero to 25 basis points for the target Federal funds rate. Although the target for the Federal Reserve rate is at its effective floor, the Federal Reserve has employed at least three types of additional tools to improve the functioning of credit markets, ease financial conditions, and support economic activity. The first set of tools is closely tied to the central bank's traditional role of providing short-term liquidity to sound financial institutions. Over the course of the crisis, the Fed has taken a number of extraordinary actions, including the creation of a number of new facilities for auctioning short-term credit to ensure that financial institutions have adequate access to liquidity. In fulfilling its traditional lending function the Federal Reserve enhances the stability of our financial system, increases the willingness of financial institutions to extend credit, and helps to ease conditions in interbank lending markets, reducing the overall cost of capital to banks. In addition, some interest rates, including the rates on some adjustable rate mortgages, are tied contractually to key interbank rates, such as the London Interbank Offered Rate or LIBOR. To the extent that the provision of ample liquidity to banks reduces LIBOR, other borrowers will also see their payments decline. Because interbank markets are global in scope, the Federal Reserve has approved bilateral currency liquidity agreements with 14 foreign central banks. These so-called swap facilities have allowed these central banks to acquire dollars from the Federal Reserve that the foreign central banks may lend to financial institutions in their jurisdictions. The purpose of those liquidity swaps is to ease conditions in dollar funding markets globally. Improvements in global interbank markets in turn create greater stability in other markets at home and abroad such as money markets and foreign exchange markets. The provision of short-term credit to financial institutions exposes the Federal Reserve to minimal credit risk, as the loans we make to financial institutions are generally short-term, overcollateralized, and made with recourse to the borrowing firm. In the case of the currency swaps, the foreign central banks are responsible for repaying the Federal Reserve, not the financial institutions that ultimately receive the fund. And the Fed receives an equivalent amount of foreign currency in exchange for the dollars that it provides to the foreign central banks. Although the provision of ample liquidity by the central bank to financial institutions is a time-tested approach to reducing financial strains, it is no panacea. Today, concerns about capital, asset quality, and credit risk continue to limit the willingness of many intermediaries to extend credit, notwithstanding the access of these firms of central bank liquidity. Moreover, providing liquidity to financial institutions does not directly address instability or declining credit availability in critical non-bank markets such as the commercial paper market or the market for asset-backed securities. To address these issues, the Federal Reserve has developed a second set of policy tools which involve the provision of liquidity directly to borrowers and investors in key credit markets. For example, we have introduced facilities to purchase highly-rated commercial paper at a term of 3 months and to provide backup liquidity for money market mutual funds. In addition, the Federal Reserve and the Treasury have jointly announced a facility expected to be operational shortly that will lend against AAA rated asset-backed securities, collateralized by recently originated student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Association. Unlike our other lending facilities, this one combines Federal Reserve liquidity with capital provided by the Treasury. If the programs works as planned, it should help to restart activity in these key securitization markets and lead to lower borrowing rates and improved access in the markets for consumer and small business credit. This basic framework could also expand to accommodate higher volumes as well as additional classes of securities as circumstances warrant, and Secretary Geithner alluded to that possibility this morning. These special lending programs have been set up to minimize credit risk to the Federal Reserve. The largest program, the commercial paper funding facility, accepts only the highest rated paper. It also charges borrowers a premium which is set aside against possible losses. As just noted, the facility that will lend against securities backed by consumer and small business loans is a joint Federal Reserve Treasury program. Capital provided by the Treasury from the Troubled Asset Relief Program will help insulate the Federal Reserve from credit losses and the Treasury will receive most of the upside from these loans. The Federal Reserve's third set of policy tools for supporting the functioning of credit markets involves the purchase of a longer term securities for the Fed's portfolio. For example, we have recently announced plans to purchase up to $100 billion of the debt of the Government-Sponsored Enterprises, which include Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, and $500 billion in agency-guaranteed mortgage-backed securities by midyear. The objective of these purchases is to lower mortgage rates, thereby supporting housing activity in the broader economy. The Federal Reserve is engaged in an ongoing assessment of the effectiveness of its credit. Measuring the impact of our programs is complicated by the fact that multiple factors affect market conditions. Nevertheless, we have been encouraged by the response to these programs, including the reports and evaluations offered by market participants and analysts. Notably, our lending to financial institutions, together with actions taken by other agencies, has helped to relax the severe liquidity strains experienced by many firms and has been associated with considerable improvements in interbank lending markets. For example, we believe that the aggressive liquidity provision by the Fed and other central banks has contributed to the recent declines in LIBOR and is a principal reason that liquidity pressures around the end of the year, often a period of heightened liquidity strains, were relatively modest. There is widespread agreement that our commercial paper funding facility has helped to stabilize the commercial paper market, lowering rates significantly and allowing firms access to financing at terms longer than a few days. Together with other government programs, our actions to stabilize the money market mutual fund industry have shown some measure of success, as the sharp withdrawals from funds seen in September have given way to modest inflows. Our purchases of agency debt at MBS seem to have had a significant effect on conforming mortgage rates, with rates of 30-year fixed rate mortgages falling close to a percentage point since the announcement of our program. All of these improvements have occurred over a period in which the economic news has generally been worse than expected and conditions in many financial markets, including the equity markets, have worsened. We evaluate existing and perspective programs based on the answers to three questions: First has normal functioning in the credit markets been severely disrupted by the crisis? Second, does the Federal Reserve have tools that are likely to lead to a significant improvement in function and credit availability in that market? And are the Federal Reserve tools the most effective methods either alone or in combination with other agencies to address the disruption? And third, do improved conditions in the particular market have the potential to make a significant difference for the overall economy? To illustrate, our purchases of agency debt and MBS meet all three criteria. The mortgage market is significantly impaired, the Fed's authority to purchase agency securities gives us the straightforward tool to try to reduce the extent of that impairment. And the health of the housing market bears directly and importantly on the performance of the broader economy. Section 13(3) of the Federal Reserve Act authorized the Federal Reserve Board to make secured loans to individuals, partnerships or corporations, ``in unusual and exigent circumstances,'' and when the borrower is, ``unable to secure adequate credit accommodations from other banking institutions.'' This authority added to the Federal Reserve Act of 1932 was intended to give the Federal Reserve the flexibility to respond to emergency conditions. Prior to 2008, credit had not been extended under this authority since the 1930's. However responding to the extraordinary stressed conditions in financial markets the Board has used this authority on a number of occasions over the past year. Following the Bear Stearns episode in March 2008, the Federal Reserve Board invoked section 13(3) to make primary securities dealers, as well as banks, eligible to borrow on a short-term basis from the Fed. This decision was taken in support of financial stability during a period in which the investment banks and other dealers faced intense liquidity pressures. The Fed has also made use of the section 13(3) authority in its programs to support the functioning of key credit markets, including the commercial paper market and the market for asset-backed securities. In my view, the use of section 13(3) in these contexts is well-justified in light of the breakdowns of these critical markets and the serious implications of those breakdowns for the health of the broader economy. As financial conditions improve, and circumstances are no longer unusual and exigent, the programs authorized under section 13(3) will be wound down as required by law. Other components of the Federal Reserve's credit programs, including our lending to depository institutions, liquidity swaps with other central banks, and purchases of agencies and securities make no use of the powers conferred by section 13(3). In a distinct set of activities, the Federal Reserve has also used the 13(3) authority to support government efforts to stabilize systemically critical financial institutions. The Federal Reserve collaborated with the Treasury to facilitate the acquisition of Bear Stearns by JPMorgan Chase & Company, and to prevent a failure of the American International Group or AIG. And we worked closely with the Treasury and the Federal Deposit Insurance Corporation to help stabilize Citigroup and Bank of America. In the cases of Bear Stearns and AIG, as part of a strategy to avoid impending defaults by the companies, the Federal Reserve made loans against polls of collateral. Activities to stabilize systemically important institutions seem to me to be quite different in character from the use of section 13(3) authority to support the repair of credit markets. The actions that the Federal Reserve and the Treasury have taken to stabilize systemically critical firms were essential to protect the financial system as a whole. And in particular the financial risks inherent in the credit extended by the Federal Reserve were, in my view, greatly outweighed by the risk that would have been faced by the financial system and the economy had we not stepped in. However, many of these actions might not have been necessary in the first place had there been in place a comprehensive resolution regime aimed at avoiding disorderly failure of systemically critical financial institutions. The Federal Reserve believes that the development of a robust resolution regime should be a top legislative priority. If specification of this regime were to include clear expectations of the Federal Reserve's role in stabilizing or resolving systemically important firms, a step we very much support, then the contingencies in which the Fed might need to invoke emergency authorities could be tightly circumscribed. I would like to conclude by discussing the Federal Reserve's ongoing efforts to inform the Congress and the public about its various lending programs. I firmly believe that central banks should be as transparent as possible, both for reasons of democratic accountability and because many of our policies are likely to be more effective if they are well understood by the markets and the public. During my time at the Federal Reserve, the FOMC has taken important steps to increase the transparency of monetary policy, such as moving up the publication of the minutes of policy meetings, and adopting the practice of providing longer-term projections of the evolution of the economy on a quarterly basis. Likewise, the Federal Reserve is committed to keeping the Congress and the public informed about its lending programs and its balance sheet. For example, we continue to add to the information shown in the Fed's H.4.1 release, which provides weekly detail on the balance sheet and the amounts outstanding for each of the Federal Reserve's lending facilities. Extensive additional information about each of the Federal Reserve's lending programs is available online, as shown in the appendix to this testimony. Pursuant to a requirement included in the Emergency Economic Stabilization Act passed in October, the Fed also provides monthly reports to the Congress on each of its programs that rely on the section 13(3) authorities. Generally the Fed's disclosure policies are consistent with the current best practices of major central banks around the world. With that said, recent developments have understandably led to a substantial increase in the public's interest in the Fed's balance sheet and programs. For this reason we at the Fed have begun a thorough review of our disclosure policies and the effectiveness of our communication. Today I would like to mention two initiatives. First, to improve public access to information concerning Fed policies and programs, Federal Reserve staff are developing a new Web site that will bring together in a systematic and comprehensive way the full range of information that the Federal Reserve already makes available, supplemented by new explanations, discussions and analyses. Our goal is to have this Web site operational within a few weeks. Second, at my request, Board Vice Chairman Donald Kohn has agreed to lead a committee that will review our current publications and disclosure policies relating to the Fed's balance sheet and lending policies. The presumption of the committee will be that the public has a right to know, and that the nondisclosure of information must be affirmatively justified by clearly articulated criteria for confidentiality based on factors such as reasonable claims to privacy, the confidentiality of supervisory information, and the effectiveness of policy. Thank you. I will be pleased to respond to your questions. [The prepared statement of Chairman Bernanke can be found on page 67 of the appendix.] " FOMC20080430meeting--176 174,MR. STERN.," Thank you, Mr. Chairman. Well, I have given serious consideration to both alternatives B and C, and I think a credible case can be made for either one. There are, of course, risks associated with adopting either one as well. On balance, I come out in favor of alternative B, for the following reasons. First, we are certainly not yet out of the economic woods. Although my forecast is for a relatively mild recession, I would not be particularly surprised if it turned out to be both deeper and more prolonged, given, among other things, the persistent overhang of unoccupied, unsold homes and the severity of the financial dislocations of the past nine months. As I have tried to emphasize, I think it could be dangerous to underestimate the effects of the financial headwinds now in train and likely, in my judgment, to get more severe. Second, and closely related to those observations, financial conditions remain quite sensitive. Even if improvement is now under way in some markets, I think it will be some time, as I said yesterday, before credit conditions are fully supportive of economic growth. To amplify a bit, I think we need to be a bit careful about the weight we put on the low level of the real federal funds rate per se for, as Governor Kohn pointed out yesterday, the credit situation is a good deal more complicated than that. My principal reservation about supporting alternative B has to do with the inflation outlook. The news here has not been uniformly bad, especially with regard to core inflation, but I am not convinced that inflation will abate in a timely way without policy action. On the other hand, I take some comfort from the fact that apparently financial market participants do not anticipate further reductions in the federal funds rate target beyond this meeting. I think the language associated with alternative B should help to reinforce the view that, at a minimum, a pause in the reductions in the target is not that far off, given what we know today. I think it important that we find opportunities to bolster that view when we can. Thank you. " FOMC20080724confcall--60 58,MS. PIANALTO.," Thank you. During the presentation, it was mentioned that many banks were asking for this longer-term TAF. I am not getting that request here in my District, but I wonder whether any thought was given to keeping the 28-day TAF and then adding the longer 84-day TAF. Is that even an option? The reason I raise this question is that I am concerned about the credit risk. We have had situations in which it has been difficult to assess whether an institution was going to stay in sound financial condition over a 28-day period. Obviously, it would be even more challenging over an 84-day period. So I just wondered if it 1s even an option to keep the 28-day TAF and add the 84-day TAF. " FOMC20070816confcall--92 90,MR. KROSZNER.," Yes, I certainly want to endorse the proposals and the approach going forward, and I also agree with Governor Kohn and with President Stern. Perhaps one amendment to the statement could be adding “going forward” to the end of the first sentence. So the beginning would read, “Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace,” the risks have increased. I think it nicely captures that, and it really focuses on the forward-looking nature of what we’re trying to do. It emphasizes what we’ve always talked about in our statements, and I think it fits very nicely with the structure of the statement itself. I agree that we are in an uncertain area where we don’t know whether or not this will be effective, but also we have uncertainty about the evolution of the housing market and about the evaluation of securities that are related to the housing market. Certainly it is helpful to provide some liquidity backstop to make it worthwhile for people to do the due diligence to make the investment, to try to find out what the securities are worth, because they think it’s more likely that someone is going to be there to trade with. I’m not sure that this will be the definitive way to achieve that goal, but I think it’s a worthwhile step to take. So I very much endorse this series of steps going forward." CHRG-111shrg62643--87 Mr. Bernanke," Well, the excess reserves in particular, which are created by Federal Reserve purchases of securities in the open market, are a strength of the system in the sense that they ensure that banks have easy access to large amounts of liquidity. But it is a separate issue from capital. Senator Gregg. Well, I guess my point is: Isn't our financial structure in pretty good shape right now compared to where it was a year and a half ago? And isn't it moving in the right direction? And so when you say ``unusual uncertainties,'' isn't at least one certainty that at least that element of the crisis which we confronted a year and a half ago has been settled out and is moving in the right direction? " CHRG-111hhrg52406--2 The Chairman," The hearing will come to order. I apologize for being late. Let me make a request of my colleagues. I guess we will go to the opening statements. I will begin. We have 10 minutes each. One of my frustrations as the ranking member, as the chairman and even previously has been the problem of getting adequate response to consumer complaints. It has been my experience that when you have an ongoing responsibility for broad systemic issues, consumer complaints can get crowded out. It is also the case that when you, and it has been my experience, have bank regulators whose primary role is the health and safety and soundness of the banks, consumer regulation, again, tends to get crowded out. We certainly have the history of the Federal Reserve previous to the co-chairman, who has been a great improvement, literally ignoring their consumer responsibilities. So I think the proposal that has come forward for a separate entity charged with protecting consumers from abuse is a very good one. The fear that this will be some out of control entity ravaging the financial sector is unsupported by anything in American history. There is no pattern of overregulation that I can see in the consumer area, and I don't see one here. So I am very pleased that the Administration sent us this recommendation. I am glad that we have with us one of the original authors of it, if not the original author, Professor Warren from Massachusetts. And I will just say as a matter of schedule, we will be spending a good deal of time between now and the rest of this congressional session dealing with the question of financial regulation. This is an important piece of it. It is my intention that following this hearing, we will be moving in July when we return to a mark-up on this. Ultimately, the financial regulation is going to be one bill, in part because of the United States Senate. Let me say, I was invited to speak on a project involving an entity that is going study the Senate. And I said, I thought that was going to be both important and fairly easy because it is a very significant institution with very few moving parts, which makes it somewhat easy to study it. But I do believe in the interest of this committee's doing its job the best it can that we should mark these up individually. So I do want to announce that this is a hearing that will lead to a mark-up in the period between the 4th of July and the recess at the end. So I urge members to pay very close attention. With that, I now recognize the gentleman from Alabama for 2 minutes. " FOMC20080430meeting--121 119,CHAIRMAN BERNANKE.," Thank you, and thank you all for very helpful comments. As usual, let me briefly summarize what I heard today and then make a few comments of my own. Again, in summary, data since the March meeting have been soft, and economic activity is weak. But the recent news has not generally been worse than expected. There was disagreement over whether we are technically in a recession. Most saw improved economic growth in the second half of 2008 with further improvement in 2009, although some saw more-protracted weakness. The housing sector remains weak, though there were reports of improvement. Starts and the demand for new houses continue to decline. Prices are falling. Inventories of unsold homes remain very high. Housing demand is affected by restrictive conditions in mortgage markets, fears that house prices have much further to fall, and weakening economic conditions. Retail sales, sentiment, and consumer spending have generally been soft, reflecting a long list of headwinds, including tightening credit, weaker house prices, and higher energy prices. Payrolls are falling, although there are some pockets of strength. Unemployment is likely to keep rising. It may remain somewhat high into 2010. We will soon see whether the fiscal stimulus package affects either the consumer or business investment plans. Possibly, liquidity-constrained consumers may respond more strongly than normally. Business sentiment is also relatively weak, reflecting in part credit conditions but also the uncertain prospects for the economy and continued cost pressures. Investment has softened somewhat, including declines in commercial real estate investment. Strength in foreign markets is helping support U.S. production and profits, especially manufacturing, although foreign economies may slow in the coming quarters. The energy and agricultural sectors are strong. Financial conditions have improved in the past month, with financing conditions better, credit risk spreads coming in a bit, and both equities and real interest rates up since the last meeting. Decent earnings, a sense on the part of some that the bulk of the write-downs in the banking sector have been taken, the ability of financial institutions to raise capital, and possibly Fed actions, including liquidity provision and the actions regarding Bear Stearns, have contributed to the improvement. On the other hand, many markets remain fragile, including the key interbank market and other short-term funding markets. Some expressed the view that moresignificant write-downs and financial stress lie ahead, as house prices continue to fall and the slowing economy weakens credit quality, and that the full impact of tighter credit has not yet been felt in the nonfinancial economy. Others, however, were less concerned about the real effects of the financial conditions. Financial conditions and the housing market probably remained the most important downside risks to growth, although energy prices were also cited. Readings on core inflation were moderate in the intermeeting period, although some of the reasons for improvement may be transitory. Oil prices have continued to move up, contributing to higher headline inflation. Other commodity prices have also begun to rise again. Many firms noted these strong cost pressures and indicated some ability to pass those costs along to consumers. Inflation breakevens showed improvement at some horizons since the March meeting, possibly reflecting lower risk premiums, though survey inflation expectations were higher. The dollar appreciated during the intermeeting period, but longer-term depreciation and rising import prices remain another source of pressure on inflation. Nominal wage gains remain moderate, however, and markups are high. Uncertainty about the course of oil and other commodity prices adds to overall inflation uncertainty and perhaps to inflation risks that are now somewhat more to the upside. Many participants expressed concerns about these upside risks, about inflation expectations, and about the maintenance of the Fed's inflation-fighting credibility. Any comments? Let me just add a few thoughts to what has already been said. On the real side, I think that I am probably somewhat more pessimistic than the median view that I heard around the table. First of all, I am reasonably confident that we are in a recession. We don't see these dynamic patterns of employment, sentiment, and so on without a recession being eventually called by the NBER. That fact, I believe, raises the risks of more-rapid declines in employment and consumer spending in the months ahead because there seem to be somewhat more-adverse dynamics in a recession scenario. Second, I remain concerned about housing, which is not showing really any significant signs of stabilization. Mortgage markets are still dysfunctional, and the only source of mortgage credit essentially is the GSEs, which are doing their best to raise fees and profit from the situation. Sales of new homes remain weak. Inventories of unsold homes are down in absolute terms, but they still are very high relative to sales. We heard this morning of yet even faster price declines for housing. As I've said several times at this table, until there is some sense of a bottoming in the housing market and in housing prices, I think that we are not going to see really broad stabilization, either in the economy or in financial markets. Now, there are some positives--exports, for example--which have kept manufacturing and other industries from declining as much as usual during a recession. Interestingly, this could be a mirror image of the 2001 recession. In 2001, the business sector was weak, and consumption and housing were strong. We could have the mirror image this time. In financial markets, there certainly have been improvements, and that is certainly encouraging. I agree with people about that. But we have heard a few people in the market say that credit losses and write-downs are in the ninth inning. As a baseball fan, I think we are probably closer to the third inning. Let me explain why I think that. The IMF recently projected aggregate credit losses on U.S.-based assets of about $945 billion worldwide, with about a quarter of those coming in the U.S. banks and thrifts. The Board staff has a somewhat lower number, around $700 billion to $800 billion, but they have a higher fraction in U.S. banks and thrifts. So the basic numbers are pretty similar in that respect. The staff projection for credit losses for U.S. commercial banks and thrifts, excluding investment banks, is about $215 billion for this year and next year and $300 billion if the recession is more severe. In addition, the staff projects about $60 billion in write-downs of CDOs and other types of traded assets. Now, most of those $60 billion write-downs have been taken. They are mostly held by the top banks, and they have mostly been already written off. However, of the $215 billion to $300 billion in projected credit losses, so far U.S. banks and thrifts have acknowledged only about $60 billion. So if you put together those numbers, you find that we are about one-third of the way through total losses. Now, there are, in fact, obviously some countervailing factors. Banks and thrifts have already raised about $115 billion in capital since the middle of last year, which essentially covers the losses announced so far. But that said, there is still a lot of deleveraging to go. There is going to be a long process of selling assets, reducing extensions of credit, and building capital ratios. This may not yet be fully felt in the real economy, but it will eventually be there. So I do think that we are going to see continued pressure from financial markets and credit markets, even if we don't have any serious relapses into financial stress. So, again, I am somewhat more skeptical about a near-term improvement in economic growth, although I do acknowledge that the fiscal package and other factors that the Greenbook mentions will be helpful. The question has been raised about whether monetary policy is helpful and what the stance of monetary policy is. I agree with the comment that the real federal funds rate is not necessarily the best measure of the stance of monetary policy right now. Let me take an example that was given in the New York Fed's daily financial report a couple of days ago, which was about the all-in cost of asset-backed securities backed by auto loans. According to this report, in February of '07, the three-year swap rate was about 5 percent, and the spread on AAA tranches of auto-backed ABS was about 10 basis points. The all-in cost was 5.07 percent for this particular asset. In February of '08, the three-year swap rate was 3.15 percent, almost 2 percentage points lower, but the spread on AAA tranches was 195 basis points. Therefore, the overall all-in cost of auto loan ABS was 5.36 percent. So the net effect is--well, is monetary policy doing anything? Absolutely. We have reduced the safe rate. We have brought down the cost of funds. But the spreads have obviously offset that. So what we have really done is essentially offset the effects of the credit crisis. Obviously, if we had not responded to the situation, those costs would be much higher, and the extent of restriction would be a lot greater. For these reasons, I really do believe that we need to take a much more sophisticated look at what the appropriate interest rate is. The Taylor rules, in particular, are just not appropriate for the current situation because the equilibrium real interest rate of 2 percent that is built into them is not necessarily appropriate. Let me turn to inflation, which a lot of people talked about today. First, let me just say that I certainly have significant concerns on the nominal side. In particular, I have a lot of anxiety about the dollar. Foreign exchange rates in general are not well tied down, and they are very subject to sentiment and swings in views. Therefore, although I think that the depreciation of the dollar so far is a mixed bag--obviously, it has effects on different parts of the economy--I do think that there is a risk of a sharper fall with possibly adverse implications, in the short run, for U.S. assets and, in the long run, perhaps implications for our position as a reserve currency and so on. So I think that is an issue to be concerned about. For that reason and for other reasons as well, I am very sympathetic to the view I hear around the table that we are now very, very close to where we ought to be, that it is time to take a rest, to see the effects of our work, and to pay equal attention to the nominal side of our mandate. I agree with all of that. So I am hopeful that in our policy discussion tomorrow we will be fairly close around the table. That being said, I do want to take a little exception to some of the discussion about inflation. There is an obvious and very elementary distinction between relative price changes and overall inflation. Let me ask you to do the following thought experiment. Imagine you are speaking to your board. Last year, as a first approximation, headline inflation was 4 percent, labor compensation grew at 4 percent, and oil prices rose 60 percent. Let's imagine that we had been so farsighted and so effective that we managed to keep headline inflation last year at 2 percent. The implications would have been, assuming that relative price changes were the same, that wages would have grown at 2 percent and that oil prices would have risen at 57 percent. In the conversation with your board, your board would say, ""This inflation is killing us. These costs are killing us. We have to pass them through."" They would, and they would be right. When there are big changes in relative prices, that is a real phenomenon, and it has to be accommodated somehow by nominal price shifts. So to the extent that the changes in food and oil prices reflect real supply-and-demand conditions, obviously they are very distressing and bad for the economy and create a lot of pain, but they are not in themselves necessarily under the control of monetary policy. If we give the impression that gasoline prices are the Fed's responsibility, we are looking for trouble because we cannot control gasoline prices. That said, of course we need to address the overall inflation rate. We need to address inflation expectations. All of that is very important. But, again, we need to make a distinction between relative price changes and overall inflation. Now, a more sophisticated response to that is, ""Well, maybe monetary policy is contributing to these relative price changes as well""; and I think that is a very serious issue. Certainly the dollar has some effects on oil prices. But keep in mind that a lot of the depreciation of the dollar is a decline in real exchange rates, which is essential in any case for balancing our external accounts. So, yes, the depreciation of the dollar, through our policies, has contributed somewhat to commodity prices. But compared with the overall shifts in relative prices that we have seen, I think it is not that large. There are other hypotheses suggesting that we have been stimulating speculation in a bubble, suggesting that low real interest rates contribute to commodity price booms. I don't want to take more time, but the evidence for those things is very limited. In particular, the fact that we have not seen any buildups in hoarding or inventories is a very strong argument against the idea that inflation expectations, hoarding, or speculation is a major factor in energy price increases. So, yes, the nominal side is very important. We need to address that. I agree with that. But we should try to help our audiences understand the very important distinction between real and nominal changes. I think I will stop there. If I can ask for your patience, we could do the briefing on the alternatives today and give ourselves more time tomorrow. Around the table, does that seem okay? I'll call on Bill English. " CHRG-111hhrg52406--235 Mr. Wilson," We have a position that we could support the concept with conditions, ``conditions'' being choice for the agent, consumer protection and to retain State-based as well, and so we have a dual position, a dual system of a position. So based on those conditions-- Ms. Speier. Meaning that you could forum shop then? " FOMC20070321meeting--303 301,VICE CHAIRMAN GEITHNER.," Thank you, Mr. Chairman. I think three things about our current regime are worth reflecting on as to whether we can improve them. They are, first, the lack of clarity that exists about how we define our objective; second, the relative lack of texture that we provide about the outlook and the risks that underpin our decisions relative to some other central banks; and third, the way we run our internal conversation. In all these areas, because institutions are subject to inertia, we’re probably short of the frontier of the achievable, but I think it’s worth thinking about whether we can get closer to the frontier. I just want to raise some questions that I think are the hardest for us to work through in figuring out how we should evolve—and I think we should evolve. The first issue is about the balance between the benefits of the regime and the costs. The problem we face is that, based on what we know about the theory and the experience, the gains on expectations relative to what we have already achieved as a central bank look pretty small. I think there’s a broad consensus that they’re small. There’s a greater dispersion of views about what the costs are. Some of them are transition costs—how you get where you’re going and the political issues that surround that. Some of the costs are more uncertainty about the effect on how you operate going forward. The difficulty in judging the balance between what we think we know about the potential gains and those costs is that it’s hard to narrow uncertainty around the costs even after looking at the experience of other central banks. As many people have said, the experience of other central banks is pretty reassuring as to the costs. It’s hard to argue that they are worse off because they have achieved this in terms of outcomes. But some of that uncertainty is difficult to narrow ex ante, and a lot of it will depend on judgments that we make about the design of the regime. But even those judgments won’t fully answer the questions because, even if we tied them down now, they would still leave some uncertainty about the effect on our incentives, our behavior, and our management of a regime that will have much more exacting demands on communication. This problem is magnified by the fact that it is hard for us to adopt a regime with an explicit, fixed, relatively short horizon and to justify it as consistent not only with the dual mandate and the politics that surround that, but also—based on what we know about the experience of other central banks—with making sensible decisions about monetary policy that has multiple objectives over time. I don’t think that outcome is realistic for us as a Committee. Therefore, you’re talking about a range of options that are much toward the softer end—no fixed horizon, a horizon that varies according to the circumstances. The gains are going to look more tenuous. That’s one issue that I think is interesting for us to think through. The second issue concerns the initial conditions and the transition costs. If you’re going to adopt an objective that’s different from what people think your objective is and different from what best estimates of trend core inflation or trend inflation are today, those conditions and costs are very complicated. The dialogue between Rick and Jeff was very interesting. Both choices that exist today, if we were going to launch today, look very unattractive. You can basically decide that you will pick a target that’s pretty close to what your judgment is about trend because that is slightly above what the market infers our objective is. To validate a higher objective than what they have been inferring is awkward and hard to see. It would be easy to say that you’re going to adopt an objective substantially lower than that and believe that it would be easy for us to make it a simple, compelling political endeavor to achieve. So I think that issues about timing, initial conditions, and transition costs are very important and complicated to work through. But I thought you did a nice job of laying out the obvious issues on both sides. The third issue that I think is interesting is the question about the strength of the consensus necessary to go forward and how you deal with it. I think you’d need a very strong consensus to go forward. Some would view this change in regime by the Fed as the most significant since Humphrey-Hawkins, maybe since well before Humphrey-Hawkins, and so you’d want to have a very strong consensus. When you decide, on the strength of that consensus, you had better move forward. You have to have agreement. People have to agree that they’re going to operate under that regime, and I think we will, in effect, need to bind our successors to operate within that regime. Even if you have a regime in which, because of the legal or practical circumstances surrounding the institution, you have to have a periodic reaffirmation of that objective, in effect you’re binding our successors because we all agree that once you do this you can’t go back. We can’t contemplate the possibility that we’re going to adjust it in response to the changing preferences of different Committees over time. The fourth issue that I think is interesting for us is that we have to design a process of internal deliberation before launch that allows us to get more comfortable with the way we would operate. The aspects of our internal decisionmaking process that are least well suited to operating comfortably in any of the variants of the regime that we’ve been discussing are the lack of clarity that we live with about what our individual preferences are, about how that informs our different views about the structure, about how we inform our choices about appropriate, desirable paths for inflation, and about what monetary policy we think is consistent with that. As we’ve been discussing, we need to bring a little more internal clarity to that conversation. We need to know why we’re disagreeing when we disagree if we’re going to be better at thinking through difficult choices. There is also the related gap in how we talk about this stuff today, as Don Kohn said. Even if you only talk about a regime toward which you may be leaning or publicly disclose things about your forecast or move in the direction of a quantitative definition of inflation, we’re going to have to have a more explicit conversation about what we think is the appropriate path or slope of the path. Even if we don’t want to adopt a fixed horizon that varies over time and have that embedded in what we disclose about our forecast, we’re going to have to have more explicit conversations about what we think is an adequate, acceptable path toward trend. That is a complicated conversation to have, and in my brief experience on the Committee, we haven’t spent much time thinking about those kinds of choices. We’d prefer to live with squishiness, lack of definition, and ambiguity around those kinds of things because it is easier. I don’t think we’d have that option in a regime in which we’re moving toward more-frequent disclosure, three-year forecasts, and a central tendency of a path for these kinds of things. So my fourth issue is that we need to be careful in thinking through how we’re going to get comfortable with the evolution in our internal regime that’s going to be necessary to live within these kinds of regimes before we launch. My last point is—I’m not sure how to describe this—about the stability in any proposal we adopt. We’re all going to be tempted to soften the edges of what we’re agreeing on to make the consensus as broad as possible. We need to be careful that, if we adopt the intermediate things, we look at them and think they will stand up pretty well to external criticism and that we’re not going to find ourselves uncomfortable with having moved to that intermediate position. I think we’re going to get pulled naturally further toward more clarity. The discussion about the past—for example, whether we reveal the conditioning assumptions of our forecast—is the best example of that. That’s one instance in which you might decide that it’s expedient to agree today that we’re going to have an unstated, undisclosed, appropriate policy conditioning assumption for a forecast that has more clarity. But over time, as we’ve seen in other cases, there’s going to be a lot of pressure to say, “But what does this tell us really? We don’t really understand this.” So we want to think through this question about how to do something that is going to look stable over time. It doesn’t mean we have to fix it and say we would never evolve beyond that. But if we know we’re going to adopt something that’s going to be unstable and subject to pressure to move, let’s try to think through a bit in advance how we’d anticipate that pressure and respond to it. We can make the same point about the importance of thinking through the sequence of any evolution. I take Rick’s point about the importance of being evolutionary in that respect. Just as an example, if we decide that we want to go first with the transparency around our forecast before consensus or clarity on a quantitative objective as publicly announced, we should be sure that we think that’s an optimal chain of decisions, too. So the questions about sequence are going to be important to work through. I have a bunch of comments on the initial proposal for a narrative description of our forecast and the way uncertainty is captured. But if the Chairman permits, I will submit those directly to the staff for the record." FOMC20071211meeting--128 126,MS. YELLEN.," Thank you, Mr. Chairman. With respect to policy, I also favor alternative A, a 50 basis point rate cut. Let me explain my reasoning. Otherwise I certainly agree with what President Rosengren said. First, I think the equilibrium real rate of interest is low relative to its long-run average. The range of medium-run measures of r* reported in the Bluebook is between 1.8 and 2.3 percent, and this range includes the Greenbook-consistent measure and the staff’s Kalman filter model estimate of 2.1 percent. Market perceptions of future real interest rates are also very low, with yields on five-year Treasury inflation-indexed bonds now below 1¼ percent. I think the headwinds from financial market turmoil and the more general reassessment of risks that is taking place in global markets are good reasons why the equilibrium real rate may be low in the current situation. We do have historical precedence for this. For example, Kalman filter estimates of r* fell noticeably during the credit crunch of the early 1990s. Given the current state of the economy with inflation near a level consistent with price stability and resource utilization near its equilibrium level, policy should be close to neutral, which implies a nominal funds rate of 4 to 4¼ percent. The forecast and risk assessment must also enter the analysis. With an assumed 25 basis point cut at this meeting, the Greenbook foresees the economy barely skirting a recession, so any more bad news could put us over the edge; and the possibility of getting bad news—in particular, a significant credit crunch—seems far from remote. To my mind, the risk to the forecast and the risk of a vicious cycle, in which deteriorating financial conditions and a weakening economy and house prices feed on each other, argue for adopting a risk-management strategy that, at the very minimum, moves our policy stance to the low end of neutral—namely, a cut of 50 basis points—and I think it argues for doing so now rather than taking a “wait and see” approach and lowering it only grudgingly. This may not be enough to avoid a recession—we may soon need outright accommodation—but it would at least help cushion the blow and lessen the risk of a prolonged downturn. I should also say that my recommendation assumes that the implementation of the TAF, even if it succeeds in improving liquidity in the money market, will not appreciably alleviate macroeconomic conditions. Regardless of the policy actions taken at this meeting, I think we need to be very careful in these unsettled conditions about how we communicate our assessment of risks and likely future policy actions. We should maintain maximum flexibility so that our future actions can, in Governor Kohn’s well-chosen words, be nimble. If the Committee chooses to cut the funds rate 50 points, I would favor the assessment of risks from section 4, alternative B, in table 1. This appropriately leaves open what the future policy will be and stresses that it depends on developments. If the Committee goes with the 25 basis point cut, then I would support using the assessment of risks from section 4, alternative C, which states clearly that the predominant concern is the downside risk to growth. Otherwise I fear that market participants may mark up their expected path for policy over the next year, leading to further erosion in financial conditions. Finally, I would suggest that, given the long period of time between today and the next FOMC meeting, we be open to the possibility of a special intermeeting videoconference to assess economic and financial developments, and this meeting could also benefit from an assessment of the effects of the TAF once it’s in place." FOMC20070918meeting--131 129,CHAIRMAN BERNANKE.," Thank you, and thank you all. Let me just briefly summarize and make a few additional comments. Financial market conditions were a key theme of our discussion today. Recent developments in financial markets have been reflected in reduced willingness to take risk and in tighter credit conditions. Bank balance sheets are a potential constraint on credit extension. Participants were unsure about how long these conditions would persist, but the repricing of risk seems likely to be persistent. The tighter credit conditions will very likely weaken an already very weak housing market, as nonprime borrowers are rationed out and jumbo mortgage borrowers pay higher premiums. Mortgage rate resets and foreclosures pose further risks. Industries related to housing are naturally showing weakness. However, creditworthy borrowers are able to obtain credit. Second-quarter and third-quarter GDP figures may be solid, but even so there have been some signs of slowing in the economy, even before the financial market developments, notably in the labor markets and in housing. Auto output is also on the weak side. Labor markets do remain tight, and in general Main Street has been far less affected thus far than Wall Street. Consumer spending continues to grow along with incomes, and net exports remain strong. Financing should continue to be available for capital investment. There were some regional differences in soundings on business confidence and expectations, but in any case, uncertainty has increased. Some of the key questions include whether the further weakness of housing will spread to consumer spending; whether credit tightness will affect sectors other than housing, including the household sector and commercial real estate; and whether the labor market will continue to slow. There is a general view that downside risks to output have increased with some very bad scenarios at least conceivable. However, others noted the resilience of the U.S. economy and the fact that previous financial crises had not necessarily reduced growth. Inflation has moderated somewhat, and more participants view the risk to inflation as closer to balance. Inflation expectations remain stable, and cyclical slowing is likely to reduce the pressure on resources. However, tight labor markets, strong foreign demand, high oil prices, and other pressures still do exist. Are there any questions or comments? Let me just make, as I said, a few extra comments here. More so than usual, we have to look forward rather than backward. We have to try to assess how these recent developments change the outlook, and that is very difficult. To me, the critical elements to look at are housing and labor markets. I think the interaction of those two sectors will determine the dynamics of the economy. There has been some discussion about the fact that in 1998 there was very little effect of the financial markets on the real economy. There was no obvious channel of effect in that episode. In this case, there is, I think, a pretty clear channel of effect through mortgage lending, and we have already seen changes in availability of mortgages and changes in cancellations, sales expectations, and the like. I would note that there are also—as you can see in the consumer confidence numbers, for example—expectations on the buyer side. If buyers think that the housing market is going to be very weak, they will be less likely to want to get into it. Finally, credit availability to homebuilders may also be an issue. So I think there is pretty much a consensus that the housing sector will take another leg down based on financial market conditions. I mention parenthetically that I have some concerns also about a few other areas, notably commercial real estate, and perhaps others like consumer credit and autos as well; but, again, I think the focus should be on housing. On the labor side, I think we can parse the job report numbers in some detail. For example, on the one hand, the August report was not quite as weak as the markets thought it was. On the other hand, it revised down some previous numbers. So overall there seems to be a sense that labor markets were slowing a bit before the financial crisis. Even so, we have been expecting weakening in labor markets for some time, and I think now that the odds of that are really quite high. I do expect to see continued expansion in construction layoffs. There are losses of jobs, obviously, in mortgage finance and other related areas. So I don’t know how quickly the labor market will weaken, but I do believe that it will weaken over the next couple of quarters. Now, those are two predictions. Then the question is, What is the interaction between those two things? I think there is potential for a negative feedback cycle, which is of some concern. If labor markets weaken, particularly if they weaken severely in certain local areas, it will hurt house prices through two mechanisms. First, house prices capitalize employment and other economic opportunities in an area, so house prices will fall as economic activity slows. Second, the demand for housing or the ability to make house payments directly depends on labor income. Working in the other direction, as house prices fall, the normal wealth effects, but also possible precautionary saving effects or other liquidity effects, could begin to affect consumer confidence and consumer spending, and we get the makings of a potential recessionary dynamic that may be difficult to head off. That is the scenario that concerns me. I don’t know if it’s the modal scenario, but I think it’s one we need to watch very carefully. Beyond that scenario, there are further tail risks. As a number of people have mentioned, most recently Governor Mishkin, these financial effects—financial accelerator effects, if you will—can be quite nonlinear. The Greenbook has a 2 percent decline in house prices in each of the next two years. It’s very possible that the decline could be greater than that. Even if it’s not greater than that, it will not be uniformly distributed around the country. In some parts of the country, house price declines will be much more significant. The nonlinearity I’m talking about has to do with the distribution of equity among families. If you have a 10 percent decline in house prices and two families, each of which has 50 percent equity in their home, then each family is going to experience basically the normal wealth effect. But if one family has 100 percent equity and the other has 5 to 10 percent equity, the effects on behavior will not be linear. There will be a bigger effect on the family that finds itself in financial stress, and the possibility exists that weakening in these markets could feed back into some of the financial problems we are seeing. So I am concerned about getting ahead of what could be an adverse dynamic between the job market and the housing market. On inflation, I think the slowing that we are likely to see will probably remove some of the upside risk that we have been concerned about. I don’t know how these housing developments will affect owners’ equivalent rent. We saw some perverse effects last time. They are still possible. A very small piece of information is that the PPI numbers yesterday actually had some favorable news in them in terms of both intermediate goods and medical costs. So the near term still looks to be fairly good. But I don’t dismiss inflation risks by any means, and we know that policy changes can work through expectations as well as through resource pressure, and so I consider that to be a serious concern. Nevertheless, I do at this point think the principal risks are to the downside, and the interaction between different components of the economy presents the biggest challenge in that respect. I will stop there. Brian, if you are ready to introduce the policy alternatives now." CHRG-111hhrg55811--52 Mr. Hu," Well, in terms of that issue, right now there is a distinction, for instance, between broad-based security-based swaps and narrowly-based security swaps. Broad-based security swaps basically fall under the jurisdiction of the CFTC, while security-based swaps and narrow-based security swaps fall under the jurisdiction of the SEC. We feel that because of the arbitrage possibilities from using two broad-based security-based swaps to get targeted exposure to a single company or a narrow group of companies, that it allows for easy gaming. By simplifying things to treat, for instance, all security-based swaps as securities and falling within the parameters of the Federal securities laws simplifies matters, reduces the possibility of gaming of gaps, and facilities more efficient responses. " CHRG-111shrg56415--81 PREPARED STATEMENT OF JOHN C. DUGAN * Comptroller of the Currency Office of the Comptroller of the Currency October 14, 2009--------------------------------------------------------------------------- * Statement Required by 12 U.S.C. Sec. 250: The views expressed herein are those of the Office of the Comptroller of the Currency and do not necessarily represent the views of the President.---------------------------------------------------------------------------I. Introduction Chairman Johnson, Senator Crapo, and members of the Subcommittee, I am pleased to testify on the current condition of the national banking system, including trends in bank ending, asset quality, and problem banks. The OCC supervises over 1,600 national banks and Federal branches, which constitute approximately 18 percent of all federally insured banks and thrifts, holding just over 61 percent of all bank and thrift assets. These nationally chartered institutions include 15 of the very largest U.S. banks, with assets generally exceeding $100 billion; 23 mid-sized banks, with assets generally ranging between $10 billion and $100 billion; and over 1,500 community banks and trust banks, with assets between $1.5 million and $10 billion. The OCC has dedicated supervisory programs for these three groups of institutions that are tailored to the unique challenges faced by each. My testimony today makes three key points. First, credit quality is continuing to deteriorate across almost all classes of banking assets in nearly all sizes of banks. As the economy has weakened, the strains on borrowers that first appeared in the housing sector have spread to other retail and commercial borrowers. For some credit portfolio segments, the rate of nonperforming loans is at or near historical highs. In many cases, this declining asset quality reflects risks that built up over time, and while we may be seeing some initial signs of improvement in some asset classes as the economy begins to recover, it will generally take time for problem credits to work their way through the banking system. Second, the vast majority of national banks are strong and have the financial capacity to withstand the declining asset quality. As I noted in my testimony last year before the full Committee, we anticipated that credit quality would worsen and that banks would need to further strengthen their capital and loan loss reserves.\1\ Net capital levels in national banks have increased by over $186 billion over the last 2 years, and net increases to loan loss reserves have exceeded $92 billion. While these increases have considerably strengthened national banks, we anticipate additional capital and reserves will be needed to absorb the additional potential losses in banks' portfolios. In some cases that may not be feasible, however, and as a result, there will continue to be a number of smaller institutions that are not likely to survive their mounting credit problems. In these cases we are working closely with the FDIC to ensure timely resolutions in a manner that is least disruptive to local communities.--------------------------------------------------------------------------- \1\ Testimony of John C. Dugan before the Committee on Banking, Housing, and Urban Affairs, United States Senate, June 5, 2008, page 2.--------------------------------------------------------------------------- Third, during this stressful period we are extremely mindful of the need to take a balanced approach in our supervision of national banks, and we strive continually to ensure that our examiners are doing just that. We are encouraging banks to work constructively with borrowers who may be facing difficulties and to make new loans to creditworthy borrowers. And we have repeatedly and strongly emphasized that examiners should not dictate loan terms or require banks to charge off loans simply due to declines in collateral values. Balanced supervision, however, does not mean turning a blind eye to credit and market conditions, or simply allowing banks to forestall recognizing problems on the hope that markets or borrowers may turn around. As we have learned in our dealings with problem banks, a key factor in restoring a bank to health is ensuring that bank management realistically recognizes and addresses problems as they emerge, even as they work with struggling borrowers.II. Condition of the National Banking System: Credit Quality Has Replaced Liquidity as Major Concern Beginning in the fall of 2007 and extending through the first quarter of this year, bank regulators and the industry were confronted with unprecedented disruptions in the global financial markets. In the wake of severe problems with subprime mortgages, the value of various securitized assets and structured investment products declined precipitously. Key funding and short term credit markets froze, sparking a severe contraction in the liquidity that sustains much of our economy and banking system, including uninsured deposit funding. The combination of these events led to failures, government assistance, and government takeover of several major financial institutions. Through the collective efforts and programs resulting from actions taken by Congress, the Treasury Department, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and governments around the world, there has been significant stabilization in credit and funding markets for all financial institutions, including banks of all sizes. As reflected in both the TED and Libor-OIS spreads,\2\ each of which has fallen to less than 20 basis points after peaking at well over 300 basis points during the crisis, the interbank funding market has vastly improved, with banks once again willing to extend credit to counterparties. There has also been a slight rebound in certain securitization markets. For example, non-mortgage asset-backed securities issuance for 2Q:2009 totaled $49 billion, up 121 percent from 1Q:2009. Similarly, syndicated market loan issuances increased to $156 billion in 2Q:2009, up 37 percent from 1Q:2009.--------------------------------------------------------------------------- \2\ The TED spread reflects the difference between the interest rates on interbank loans in the Eurodollar market and short-term U.S. Government Treasury bills. The OIS is the overnight indexed swap rate. Both spreads are a measure of how markets are viewing the risks of financial counterparties.--------------------------------------------------------------------------- The drag on national banks' balance sheets and earnings from the overhang of various structured securities products has been very significantly reduced due to the substantial write-downs that banks took on these assets in 4Q:2008 and 1Q:2009 and the overall recovery in credit markets. Losses sustained at our 10 largest banking companies for these securities reached $44 billion in 2008, but dropped to $8 billion in 1Q:2009 and $1 billion in 2Q:2009. There are some banks that still face strains in their investment portfolios, largely due to their holding of certain private label mortgage-backed and trust preferred securities. While most banks will be able to absorb the losses that may arise from these holdings, there is a small population of banks that have significant concentrations in these products that we are closely monitoring. We expect these banks will continue to take incremental credit impairments through earnings until mortgage metrics improve. In my financial condition testimony before the full Committee last year, I observed that, as market conditions began to stabilize, the focus of supervisors and bankers would increasingly turn to the more traditional challenges of identifying and managing problem credits.\3\ That has indeed proven to be the case, as declining asset quality has become the central challenge facing banks and supervisors today. While there recently have been some signs of economic recovery, data through the second quarter of this year demonstrate that asset quality across the national bank population significantly deteriorated over the preceding twelve months, as both retail and commercial borrowers remained under stress from job losses and the overall contraction in the economy. The percentage of noncurrent loans (loans that are 90 days or more past due or on nonaccrual) increased dramatically and reached the highest level in at least twenty 5 years (see Chart 1).--------------------------------------------------------------------------- \3\ Testimony of John C. Dugan before the Committee on Banking, Housing, and Urban Affairs, United States Senate, June 5, 2008, page 9. In addition, the rate at which banks are charging off loans has also accelerated and, for some portfolio segments, now exceeds previous peaks experienced during the last credit cycle. Continued concerns about the economy are also affecting loan growth and demand as businesses, consumers, and bankers themselves retrench on the amount of leverage and borrowing they want to assume. As a result, loan growth through 2Q:2009 has slowed across the national bank population and in various portfolio segments. (See charts 2 and 3) A number of factors are evident for this decline in credit, including the following: Reduction in loan demand, as reductions in consumer spending have caused businesses to cut back on inventory and other investments; Reduction in the demand for credit from borrowers who may have been able to afford or repay a loan when the economy was expanding, but now face constrained income or cash-flow and debt service capacity; Reductions in loan demand as households work to rebuild their net worth, as reflected in the increased U.S. savings rate; Actions taken by bankers to scale back their risk exposures due to weaknesses in various market and economic sectors, and to strengthen underwriting standards and loan terms that had become, in retrospect, too relaxed. In addition, many banks have increasingly shifted their focus and resources to loan collections, workouts, and resolutions, and some troubled banks have curtailed lending due to funding and capital constraints; and Continued uncertainty on the part of borrowers and lenders about the strength and speed of the economic recovery in many regions of the country. As demonstrated in chart 4 below, businesses have significantly reduced their investments and inventories and, in an effort to strengthen their own balance sheets, many larger businesses have replaced short-term borrowing with longer-term corporate bond issues. Similarly, chart 5 shows that consumers are repairing their personal balance sheets with significant increases in their personal savings rates. This interplay of factors and their effects on lending are consistent with our recent annual underwriting survey and the Federal Reserve Board's most recent Senior Loan Officer Survey. OCC examiners report that the financial market disruption continues to affect bankers' appetite for risk and has resulted in a renewed focus on fundamental credit principles by bank lenders. Our survey indicates that primary factors contributing to stronger underwriting standards are bankers' concerns about unfavorable external conditions and product performance.\4\ In its July Senior Loan Officer Survey, the Federal Reserve reported that ``demand for loans continued to weaken across all major categories except for prime residential mortgages.''\5\--------------------------------------------------------------------------- \4\ OCC Survey of Underwriting Practices 2009, page 3. \5\ Board of Governors of the Federal Reserve System, ``The July 2009 Senior Loan Officer Survey on Bank Lending Practices,'' page 1.--------------------------------------------------------------------------- Some have also suggested that unnecessary supervisory actions may have significantly contributed to the decline in credit availability. While I do not believe the evidence supports this suggestion, I do believe, as addressed in more detail at the end of this testimony, that it is critical for supervisors to stay focused on the type of balanced supervision that is required in the stressful credit conditions prevalent today. Finally, the combination of deteriorating credit quality, lower yields on earning assets, and slower loan growth is the primary factor currently affecting national banks' earnings. As shown in Chart 6, there has been a marked deterioration in the return on equity across the national banking population as modest increases in banks' net interest margins due to more favorable costs of funds have failed to offset credit quality problems and the continued need for banks to build loan loss reserves.III. Trends in Key Credit Portfolios and Capital and Reserve Positions Against this backdrop, let me now describe trends in major credit segments and in capital and loan loss reserve levels.A. Retail Credit Although retail loans--mortgages, home equity, credit cards, and other consumer loans--account for just over half of total loans in the national banking system, they currently account for two-thirds of total losses, delinquencies, and nonperforming credits. To a large extent, however, these problems are confined to the largest 15 national banks, which hold almost 91 percent of retail loans in the national banking system.1. First and Second Mortgages The residential mortgage sector was the epicenter of the financial turmoil and continues to figure prominently in the current condition of the banking industry. As the economy has worsened, problems that started in the subprime market have spread to the so-called ``Alt A'' market, and increasingly, to the prime market. While over-leverage and falling housing prices were the initial drivers of delinquencies and loan losses, borrower strains resulting from rising unemployment and underemployment are an increasingly important factor. In the first mortgage market, the June 30, 2009 Mortgage Bankers Association's National Delinquency Survey shows continued growth in foreclosure inventory, but a relatively flat rate of new foreclosure starts overall between the first and second quarter of this year. The rate of prime foreclosures, however, continues to increase, with starts at about 1 percent of the surveyed population as of the end of the second quarter. Although this percentage is still relatively small, the impact is significant given the much larger size of the prime market segment compared to the markets for subprime and Alt-A loans. While it is true that many first mortgages were sold to third party investors via the securitization market, and the loan quality of such mortgages retained by banks is generally higher than those sold to third parties, it nevertheless remains the case that a number of larger banks have significant on-balance sheet exposure to first mortgage losses from portfolios that continue to deteriorate. The same is true of second mortgages--home equity loans and lines of credit--except that the overwhelming majority of these loans reside on bank balance sheets. There were some positive signs in the second quarter showing home equity loan delinquency rates falling, and the pace of increase in second lien charge-off rates slowing. But the hard fact is that losses on these loans through the first half of this year nearly equaled total losses for all of 2008, and loss rates are expected to continue to climb--though at a slower rate--through at least the middle of 2010. In short, deterioration in the first and second residential mortgage markets continue to dominate the credit quality performance in national banks' retail portfolios, as it has since the second half of 2008. Total delinquent and nonperforming residential real estate loans (mortgage and home equity) in national banks now hover around 9.4 percent, with a loss rate of just over 2.5 percent--the highest level since we have been collecting this data. There have been some positive indicators in the housing market in recent months that could slow the pace of losses in residential mortgages, including increased home sales in June and July, and slight increases in the Case-Shiller composite index for certain metropolitan areas. While these signs are encouraging, it is too early to determine whether they signal a true turning point in this sector. For example, the increase in home sales this summer is consistent with seasonal trends and may not be sustainable. In addition, sales may be enjoying a temporary boost from the First-Time Homebuyer Tax Credit program which, unless extended, will end in November. Much will depend, of course, on the extent to which economic recovery takes hold and truly stabilizes the housing market. In terms of mortgage modifications, all of the major national bank mortgage servicers are actively participating in the Administration's Making Home Affordable Program. Servicers have been significantly expanding their staff levels in the loss mitigation/collection areas--doubling and tripling customer contact personnel, and requiring night and weekend overtime work. Servicers have also been ramping up their training efforts, customer service scripts, and automated qualification and underwriting systems to improve the processing of loan modification requests. The OCC is closely monitoring these and other home modification efforts through onsite examinations and other ongoing supervisory initiatives, as well as through our Mortgage Metrics quarterly reporting program. And examiners continue to monitor modification programs for compliance with all applicable fair lending and consumer compliance laws. Our latest Mortgage Metrics report shows that actions to keep Americans in their homes grew by almost 22 percent during 2Q:2009.\6\ Notably, the percentage of modifications that reduced borrowers' monthly principal and interest payments continued to increase to more than 78 percent of all new modifications, up from about 54 percent in the previous quarter. We view this as a positive development, as modifications that reduce borrowers' monthly payments generally produce lower levels of re-defaults and longer term sustainability than modifications that either increase payments or leave them unchanged.--------------------------------------------------------------------------- \6\ See OCC News Release 2009-118, September 30, 2009.---------------------------------------------------------------------------2. Credit Cards Credit card performance began to deteriorate sharply in the latter part of 2008 and has continued to weaken further this year, with record levels of losses and delinquencies. As with second lien mortgages, there have been some encouraging signs recently in the form of declining early stage delinquency rates, but loss rates continue to climb. As of June 30, the overall loss rate was 10.3 percent for national banks, and more recent data shows continued deterioration-with industry analysts predicting even higher loss rates into 2010. In response to these trends and the overall deterioration in the economy, many credit card issuers are adjusting their account management policies to reflect and respond to the increased risk in these accounts. In some cases these actions have resulted in credit lines being reduced or curtailed. In other cases, they have led to increased interest rates, effectively increasing the minimum payment to cover the higher finance charges. In still other cases they have resulted in an increase in minimum payments to extinguish the outstanding debt more quickly. Many credit card issuers are also re-evaluating certain credit card product features, such as ``no annual fees'' or various reward programs, and are offering cards with simpler terms and conditions, in part due to the recently enacted Credit CARD Act. We are monitoring these changes in credit card account terms to ensure that they comply with all applicable limit and notice requirements, including those mandated by the Credit CARD Act. For example, in July we notified national banks that, effective August 22, 2010, they must conduct periodic reviews of accounts whose interest rates have been increased since January 1, 2009, based on factors including market conditions and borrower credit risk. More recently, we issued a bulletin advising national banks abut the interim final rules issued by the Federal Reserve under the Credit CARD Act that became effective on August 20, 2009. The Federal Reserve's rules require lenders to notify customers 45 days in advance of any rate increase or significant changes in credit card account terms and to disclose that consumers can have the right to reject these changes. Under the rules, the new rates or terms can be applied to any transaction that occurs more than 14 days after the notice is provided--even if the customer ultimately rejects those terms. To address the risk of consumer confusion, the OCC directed national banks to include an additional disclosure not required by the rules to alert consumers, if applicable, to the imposition of the new terms on transactions that occur more than 14 days after thenotice is provided, regardless of whether the consumer rejects the change and cancels the account. As with residential mortgages, we are encouraging national banks to work with consumers who may be facing temporary difficulties and hardships, and more banks are reaching out to assist customers before they become delinquent. Banks have a number of viable default management options to assist in this endeavor, although it is important that, as they do so, they continue to appropriately account for losses as they occur. Card issuers are also reevaluating the size of unused credit lines in response to current credit conditions, recent regulatory changes, and recent adoption by the Financial Accounting Standards Board (FASB) of two new accounting standards, Statement No. 166, Accounting for Transfers of Financial Assets--an amendment of FASB Statement No. 140 (FAS 166) and Statement No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167). These standards become effective for an entity's first fiscal year beginning after November 15, 2009, and will have a significant impact on many banking institutions. In particular, many securitization transactions, including credit card securitizations, will likely lose sales accounting treatment, prompting the return of the securitized assets to banks' balance sheets. Although we are still evaluating the impact of these changes, we anticipate that they will have a material effect on how banks structure transactions, manage risk, and determine the levels of loan loss reserves and regulatory capital they hold for certain assets, including credit cards. The net effect of these changes is that banks will most likely face increased funding and capital costs for these products. The combination of all these factors has resulted in a decline in overall credit card debt outstanding and--especially--overall unfunded credit card commitments, reflecting pullbacks by both consumers and lenders. For national banks, managed card outstandings (i.e., funded loans both on and off banks' balance sheets) declined by 4 percent thus far this year, or roughly $27 billion. Unfunded credit card commitments (lines available to customers) have declined more precipitously, by 14.8 percent or $448 billion. These trends are consistent with overall industry data. In summary, retail credit quality issues continue to be an area of concern, especially for the larger national banks. Although there are some early signs of delinquency rates declining, with some bankers telling us they are beginning to see adverse trends leveling off, sustained improvements in this sector will largely depend on the length and depth of the recession and levels of unemployment.B. Commercial and Industrial Loans The fallout from the housing and consumer sectors to other segments of the economy is evident in the performance of national banks' commercial and industrial (C&I) loan portfolios. Adverse trends in key performance measures, including 30-day or morepast due delinquencies, non-performing rates, and net loss rates, sharply accelerated in the latter part of last year and have continued to trend upward in 2009. For example, the percentage of C&I loans that are delinquent or nonperforming has risen from a recent historical low of 1.02 percent in 2Q:2007 to 3.90 percent in 2Q:2009. Although this is the highest rate since the ratio peaked at 4.15 percent in 2Q:2002 during the last recession, it is still well below the 1991 recession peak of 6.5 percent. In contrast to retail loans, which primarily affect the larger national banks, the effect of adverse trends in C&I loans is fairly uniform across the national bank population. This segment of loans represents approximately 20 percent of total loans in the national banking system, with levels somewhat more concentrated at larger institutions than at community banks, where C&I loans account for approximately 16 percent of total loans. While credit quality indicators are marginally worse at the larger national banks, the trend rate and direction are fairly consistent across all sizes of national banks. One measure of C&I loan quality comes from the Federal banking agencies' Shared National Credit (SNC) program, which provides an annual review of large credit commitments that cut across the financial system. These large loans to large borrowers are originated by large banks, then syndicated to other banks and many types of nonbank financial institutions such as securitization pools, hedge funds, insurance companies, and pension funds.\7\ This year's review, which was just recently completed, also found sharp declines in credit quality. The review, which covered 8,955 credits totaling $2.9 trillion extended to approximately 5,900 borrowers, found a record level of $642 billion in criticized assets--meaning loans or commitments that had credit weaknesses--representing approximately 22 percent of the total SNC portfolio. Total loss of $53 billion identified in the 2009 review exceeded the combined loss of the previous eight SNC reviews and nearly tripled the previous high in 2002. Examiners attributed the declining credit quality to weak economic conditions and the weak underwriting standards leading up to 2008.\8\--------------------------------------------------------------------------- \7\ In fact, nonbanks hold a disproportionate share of classified assets compared with their total share of the SNC portfolio, owning 47 percent of classified assets and 52 percent of nonaccrual loans, whereas FDICinsured institutions hold only 24.2 percent of classified assets and 22.7 percent of nonaccrual loans. \8\ See OCC News Release 2009-11, September 24, 2009.---------------------------------------------------------------------------C. Commercial Real Estate Loans The greatest challenge facing many banks and their supervisors is the continued deterioration in commercial real estate loans (CRE). There are really two stories here, with one related to the other. The first involves residential construction and development (C&D) lending, especially with respect to single family homes. Not surprisingly, given the terrible strains in the housing sector over the last 2 years, delinquency rates have already climbed tohigh levels, with significant losses already realized and more losses continuing to work their way through the banking system. For national banks as of June 30, total delinquent and nonperforming rates were at just over 34 percent in the largest national banks; 23.4 percent in mid-size banks; and 17.5 percent in community banks. The relative size of these loss rates is somewhat misleading, however, because many community banks and some mid-size banks have much greater concentrations in residential C&D loans than the largest banks. As a result, the concentrated losses in these smaller institutions has had a much more pronounced effect on viability, with concentrated residential C&D lending constituting by far the single largest factor in commercial bank failures in the last two years. At this point in the credit cycle, we believe the bulk of residential C&D problems have been identified and are being addressed, although a number will continue to produce losses that result in more bank failures. The second story involves all other types of commercial real estate loans, including loans secured by income producing properties. Credit deterioration has spread to these assets as well, and trend lines are definitely worsening, but thus far the banking system has not experienced anywhere near the level of delinquency and loss as it has in C&D lending. Still, the signs are troubling. Declining real estate values caused by rising vacancy rates, increasing investor return requirements, falling rental rates, and weak sales are affecting all CRE segments. For example, Property and Portfolio Research reports that apartment vacancy rates have hit a 25-plus year high at 8.4 percent nationally, and there are similar patterns for retail, office, and warehouse space as demand falls across all segments. But unlike the CRE markets in 1991, much of the current fallout is driven more by a decrease in demand than from an oversupply of properties. The outlook for these markets over the near term, especially for the income producing property sector, is not favorable. In general, deterioration in performance for these CRE loans lags the economy as borrowers' cash-flows may be sufficient during the early stages of a downturn, but become increasingly strained over time. There are alsogrowing concerns about the refinancing risk within the commercial mortgage-backed securities market (CMBS) where there is a currently moderate-but-growing pipeline of loans scheduled to mature. Permanent or rollover refinancing of these loans may be difficult due to the declines in commercial property values coupled with the return to more prudent underwriting standards by both lenders and investors. While this is an area that we are monitoring, the largest proportion and more problematic of these mortgages will not mature until 2011 and 2012. As with C&I loans, trends in total delinquent and nonperforming CRE rates (including C&D loans) have been fairly consistent across all segments of the national bank population, climbing to roughly 8.3 percent in 2Q:2009. While C&D losses will continue to be most problematic for the banks that have the largest concentrations in these assets, theextent to which other types of CRE loan losses will continue to climb will depend very much on the overall performance of the economy.D. Capital and Reserve Levels Perhaps the most critical tools for dealing with and absorbing credit losses are substantial levels of capital and reserves. As a result, in anticipation of rising credit losses over the last 2 years, the OCC has directed banks to build loan loss reserves and strengthen capital. In aggregate, the net amount of capital in national banks (i.e., the net increase after items such as losses and dividends and including capital as a result of acquisitions and net TARP inflows) has risen by over $186 billion over the last 2 years, and the net build to loan loss reserves (i.e., loan loss provisions less net credit losses) has been over $92 billion. These increases in loss-absorbing resources are critical contributors to the overall health of the national banking system. As illustrated by the dotted line in the chart below, the level of reserves to total loans in the national banking system has increased dramatically to a ratio of 3.3 percent, the highest in over 25 years. While such high reserves are imperative for dealing with the high level of noncurrent loans, the solid line in the chart below shows that more provisions may be needed, because the ratio of reserves to noncurrent loans has continued to decline, to under 100 percent--reflecting the fact that the substantial growth in reserves is not keeping pace with the even greater growth in noncurrents. Substantially building reserves at the same time as credit conditions weaken is often described as unduly ``pro-cyclical,'' because bank earnings decline sharply from provisioning well before charge-offs actually occur. That is certainly an accurate characterization under the current accounting system for loan loss reserving, although there will always be a need to build reserves to some extent as credit losses rise. The issue is really about how much; that is, if reserve levels are high going into a credit downturn, then the need to build reserves is far lower than it is when the going-in levels are low. Unfortunately, our current accounting standards tend to produce very low levels of reserves just before the credit cycle turns downward, especially after prolonged periods of benign credit conditions as we had in the first part of this decade. In such periods, the backward-looking focus of the current accounting model creates undue pressure to decrease reserve levels even where lenders believe the cycle is turning and credit losses will clearly increase. I strongly believe that a more forward looking accounting model based on expected losses would both more accurately account for credit costs and be less pro-cyclical. This is an issue that I have been working on as co-chair of the Financial Stability Board's (FSB) Working Group on Provisioning, and I continue to be hopeful that accounting standard setters will embrace this type of change as they consider adjustments to loan loss provisioning standards.IV. Most National Banks Have Capacity to Weather This Storm The credit conditions I have just described are stark and will require considerable skills by bankers and regulators to work through. Despite these challenges, I believe the vast majority of national banks are and will continue to be sound, and that they have the wherewithal to manage through this credit cycle. Notwithstanding the negative trends and earnings pressures that banks are facing, we should not lose sight that, as of June 30, 2009,97 percent of all national banks satisfied the required minimum capital standards to be considered well capitalized, and 76 percent reported positive earnings. As previously described, the OCC has separate supervisory programs for Large Banks (assets generally exceeding $100 billion); Mid-Sized Banks (assets from $10 billion to $100 billion); and Community Banks (assets below $10 billion). Let me summarize our general assessment of the condition of each group.A. Large Banks In some respects, large banks faced the earliest challenges, with the disruptions in wholesale funding markets, the significant losses they sustained on various structured securities. and the pronounced losses that emerged earlier in their retail credit portfolios. As I mentioned, there are some preliminary indicators that the rate of increased problems in the retail sector may have begun to slow, but as with credit conditions in general, much of this will depend on the timing and strength of the economy, and in particular, on unemployment rates. C&I and CRE loan exposures remain a concern for these banks, but they have more diversified portfolios and exposures than many smaller banks and thus may be in a better position to absorb these problems. Collectively, the fifteen banks in our Large Bank program raised $132 billion in capital (excluding TARP funding) in 2008 and, over the past twenty 4 months, their net build to loan loss reserves totaled approximately $85 billion. Earlier this year we and the other Federal regulators conducted a detailed stress test of the largest U.S. banks as part of the Supervisory Capital Assessment Program (SCAP) to examine their ability to withstand even further deterioration in market and credit conditions. I believe that was an extremely valuable exercise for four reasons. First, the one-time public assessment of individual institution supervisory results--which was only made possible by the U.S. Government backstop made available by TARP funding--alleviated a great deal of uncertainty about the depth of credit problems on bank balance sheets, which a number of analysts had assumed to be in far worse condition. Second, the reduction of uncertainty allowed institutions to access private capital markets to increase their capital buffer for possibly severe future losses, instead of requiring more government capital. Third, the additional capital required to be raised or otherwise generated now--over $45 billion in common stock alone has already been issued by the nine SCAPinstitutions with national bank subsidiaries--provides these banks with a strong buffer to absorb the severe losses and sharply reduced revenue associated with the adverse stress scenario imposed under SCAP for the 2-year period of 2009 and 2010, should that scenario come to pass. Fourth, as we track banks' actual credit performance against the SCAP adverse stress scenario to ensure that capital levels remain adequate, we have found that, through the first half of 2009--which constitutes 25 percent of the overall 2-year SCAP stress period--actual aggregate loan losses were well below 25 percent of the aggregate losses projected for the full SCAP period, and actual aggregate revenues were well above 25 percent of the aggregate projected SCAP revenues. While those trends could change as the stress period continues, the early results are promising.B. Mid-Size Banks Although mid-size national banks engage in retail lending, the scope and size of their exposures are not as significant as those of the largest national banks. Mid-size banks also did not have the significant losses that larger banks did from various structured investment products. Nevertheless, loan growth at these banks turned negative in 2Q:2009, and although they experienced modest improvements in net interest margins in the second quarter, they still face downward earnings pressures, primarily due to increasing loan loss provisions. Given their exposures to the C&I and CRE markets, we expect these pressures will persist, notwithstanding the $3.5 billion in net reserve builds over the last twenty four months. These banks have also had success in attracting new capital, raising close to $5 billion thus far this year.C. Community Banks Nearly all national community banks entered this environment with strong capital bases that exceeded regulatory minimums. As a group, they have been less exposed to problems in the retail credit sector that have confronted large and mid-size banks, and the vast majority of these banks remain in sound financial condition. As noted earlier, there is a small number of community banks that have concentrations in trust preferred and private label mortgage-backed securities that we are closely monitoring. Of more significance are the exposures that many community banks have to commercial real estate loans. As I noted in my June 2008 testimony, we have been concerned for some time about the sizable concentrations of CRE loans found at many smaller national banks. While national banks of all sizes have significant CRE exposures, as shown in Chart 8, CRE concentrations are most pronounced at community and mid-size banks. Because of this, the OCC began conducting horizontal reviews of banks with significant concentrations about 5 years ago. As credit conditions worsened, our efforts intensified in banks that we believed were at high risk from downturns in real estate markets. Our goal has been to work with bankers to get potential CRE problems identified at an early stage so that bank management can take effective remedial action. In most but not all cases, bank management teams are successfully working through their problems and have adequate capital and stable funding bases to weather additional loan losses and earnings pressures.V. Resolution of Problem Banks Given the strains in the economy and banking system, it is not surprising that the number of problem banks has increased from the recent historical lows. In the early 1990s, the number of problem national banks--those with a CAMELS composite rating of 3, 4 or 5--reached a high of 28 percent of all national banks. Thereafter, the number of problem national banks relative to all national banks dropped dramatically and then fluctuated in a range of three to 6 percent until 2007. Since then, however, the number of problem banks has risen steadily, and it is now approximately 17 percent of national banks. As would be expected, this upward trend in problem banks also has resulted in an increased number of bank failures. In January, 2008, we had the first national bank failure in almost 4 years, the longest period without a failure in the 146-year history of theOCC. That began the current period of significantly increased failures. In total, since January 1 of 2008, there have been 123 failures of insured banks and thrifts. Of these, 19 have been national banks, accounting for 11 percent of the total projected loss to thedeposit insurance fund from all banks that failed during this period. All of the 19 failed national banks have been community banks, although the total obviously does not include the two large bank holding companies with lead national banks that were the subject of systemic risk determinations and received extraordinary TARP assistance on an open-institution basis. While the vast majority of national banks have the financial capacity and management skills to weather the current environment, some will not. Given the real estate concentrations in community banks, the number of problem banks, the severe problems in housing markets, and increasing concern with CRE, we expect more bank failures in the months ahead. Some troubled banks will be able to find strong buyers--in some instances with our assistance--that will enable them to avoid failure and resolution by the FDIC. But that will not always be possible. When it is not, our goal, consistent with the provisions of the Federal Deposit Insurance Corporation Improvement Act, is to effect early and least cost resolution of the bank with a minimum of disruption to the community.VI. OCC Will Continue to Take a Balanced Approach in Our Supervision of National Banks Finally, I want to underscore the OCC's commitment to provide a balanced and fair approach in our supervision of national banks as bankers work through the challenges that are facing them and their borrowers. We recognize the important roles that credit availability and prudent lending play in our nation's economy, and we are particularly aware of the vital role that many smaller banks play in meeting the credit needs of small businesses in their local communities. Our goal is to ensure that national banks can continue to meet these needs in a safe and sound manner. I have heard some reports that bankers are receiving mixed messages from regulators: on one hand being urged to make loans to creditworthy customers, while at the same time being subjected to what some have characterized as ``overzealous'' regulatory examinations. In this context, let me emphasize that our messages to bankers have and continue to be straight-forward: Bankers should continue to make loans to creditworthy borrowers; But they should not make loans that they believe are unlikely to be repaid in full; and They should continue to work constructively with troubled borrowers--but recognize repayment problems in loans when they see them, because delay and denial only makes things worse. Let me also underscore what OCC examiners will and will not do. Examiners will not tell bankers to call or renegotiate a loan; dictate loan structures or pricing; or prescribe limits (beyond regulatory limits) on types or amounts of loans that a bank may make if the bank has adequate capital and systems to support and manage its risks. Examiners will look to see that bankers have made loans on prudent terms, based on sound analysis of financial and collateral information; that banks have sufficient risk management systems inplace to identify and control risks; that they set aside sufficient reserves and capital to buffer and absorb actual and potential losses; and that they accurately reflect the condition of their loan portfolios in their financial statements. Nevertheless, balanced supervision does not mean that examiners will allow bankers to ignore or mask credit problems. Early recognition and action by management are critical factors in successfully rehabilitating a problem bank. Conversely, the merepassage of time and hope for improved market conditions are not successful resolution strategies. We have taken a number of steps to ensure that our examiners are applying these principles in a balanced and consistent manner. For example, we hold both regular meetings and periodic national teleconferences with our field examiners to convey key supervisory messages and objectives. In our April 2008 nationwide call, we reviewed and discussed key supervisory principles for evaluating commercial real estate lending. In April of this year we issued guidance to our examiners on elements of an effective workout/restructure program for problem real estate loans. We noted that effective workouts can take a number of forms, including simple renewal or extension of the loan terms, extension of additional credit; formal restructuring of the loan terms; and, in some cases, foreclosure on underlying collateral. We further reiterated these key principles in a nationwide call with our mid-size and community bank examiners earlier this month. Through the FFIEC, we are also working with the other Federal and state banking agencies to update and reinforce our existing guidance on working with CRE borrowers and to help ensure consistent application of these principles across all banks. This guidance will reaffirm that prudent workouts are often in the best interests of both the bank and borrower and that examiners should take a balanced approach in evaluating workouts. In particular, examiners should not criticize banks that implement effective workouts afterperforming a comprehensive review of the borrower's condition, even if the restructured loans have weaknesses that result in adverse credit classification. Nor should they criticize renewed or restructured loans to borrowers with a demonstrated ability to repay, merelybecause of a decline in collateral values. Consistent with current policies, loans that are adequately protected by the current sound worth and debt service capacity of the borrower, guarantor, or the underlying collateral generally will not be classified. However, deferring issues for another day does not help the CRE sector or banking industry recover. It is important that bankers acknowledge changing risk and repayment sources that may no longer be adequate.VII. Conclusion I firmly believe that the collective measures that government officials, bank regulators, and many bankers have taken in recent months have put our financial system on a much more sound footing. These steps are also crucial to ensuring that banks will be ableto continue their role as lenders and financial intermediaries. Nonetheless, it is equally clear that there are still many challenges ahead, especially with regard to the significant deterioration in credit that both supervisors and bankers must work through. There are no quick fixes to this problem, and there is the real potential that, for a large number of banks, credit quality will get worse in the months ahead. Notwithstanding the significant loan loss provisions that banks have taken over the past 2 years, more may be needed as provisions and resulting loan loss reserves have not kept pace with the rapid increase in nonperforming assets. The OCC is firmly committed to taking a balanced approach as bankers work through these issues. We will continue to encourage bankers to lend and to work with borrowers. However, we will also ensure that they do so in a safe and sound manner and that they recognize and address their problems on a timely basis. ______ CHRG-111shrg50815--7 STATEMENT OF SENATOR SCHUMER Senator Schumer. I also have a moderately brief statement, like my colleague from across the Hudson River, but I thank you for calling on me. It is an issue that I have been involved with and care about for a long time. We know how important this is. Average credit card debt for the average--the average American family has $8,500 in credit card debt on a yearly income of $52,000. That ought to make you stop and think right then and there. I have been working on this issue for a long time. When I started in the 1980s, there were two schools. Some said disclosure is enough and competition would take hold. Others said, let us put limits. I was in the former school. I said, free market, let disclosure work. I worked long and hard on legislation and the Fed and the result was something that became known as the ``Schumer Box,'' clear, concise disclosures of important credit card terms in an easy-to-read table, and it worked. Before the Schumer Box, credit card interest rates were at 19.8 percent. Every company somehow came up with the conclusion that was the exact right rate. There was no competition. The box came in and rates came down. Good old fashioned American competition did the job. So it worked. Disclosures at that point seemed to be a good balance between consumer protection and fostering business and innovation. But now, credit card companies have become so clever at inducing consumers to buy and use cards and trapping them with high interest rates and fees that I believe disclosure is no longer enough. Over the past few years, we have seen explosion of debt. The card industry began using many of the same sales tactics as mortgage brokers, below-market fees or interest rates that shoot up for the most minor of infractions, and fine print, as Senator Menendez mentioned, containing dozens of fees that a consumer has to pay. Now, recently, the Federal Reserve updated the Schumer Box. I was glad to see that. But more has to be done. Consumers are trapped in a business model that is designed to induce mistakes and jack up fees. That sums it up. And then the fees go from 7 percent to 19 percent for some minor infraction on all the debt, something is very wrong and disclosure is not enough. The type of trip-wire pricing is predatory. It has to end. One issuer went so far as to provide its customers with incorrectly addressed return envelopes to ensure that consumer payments wouldn't arrive on time and allowed the company then to charge late payment fees. That is outrageous. Other companies charge fees so often, so many fees so often, borrowers end up paying over the limit fees because their credit has been maxed out by the previous round of fees, a vicious treadmill cycle. So as I said, the Fed has made a good step, but the rule, which doesn't go into effect until July 2010, that is too far from now. Too many families are struggling to make their minimum payment. And while the Fed's intentions are now good, we cannot be too shortsighted. There is going to come another time when credit will be loose and issuers will seek to roll back some of the important protections the Fed has implemented. That is why we must legislate. I have introduced the bill on the Senate side along with my friend, Senator Udall, that Congresswoman Maloney, my colleague, has introduced and successfully passed on the House side. And I know that Senator Dodd is considering many of the points in that legislation, as many of my other colleagues' legislation, when he puts together a bill, and I hope we will move one quickly, Mr. Chairman. Senator Johnson. Does anyone else feel absolutely compelled to make a comment? Senator Reed. Can I make a very, very, very brief comment? Senator Johnson. Senator Reed. CHRG-110shrg50414--112 Chairman Dodd," Thank you very much, Senator. Senator Schumer. Senator Schumer. Thank you, Mr. Chairman, and I thank all the witnesses. This is not an easy day. One of the things that I mentioned I want to focus on is taxpayers, and so I have a couple of questions in that regard, first to Secretary Paulson. One of the things I have thought about is whether we shouldn't create an insurance fund, similar to the FDIC, for the whole financial system. All firms over a certain size would pay, not small little community banks but everything else. They would pay a fee, not too onerous or too large, but over time it could help defray the costs of any losses we might suffer. It is the financial system that has the trouble and the taxpayers are bailing it out, as you say, in part because it will help the taxpayers. But why do the taxpayers have to do the whole thing? What would be your initial reaction--I am not asking for a commitment here--of some kind of broad FDIC that would help pay for some of these losses from financial institutions, as I said, above a certain size, whether they participate in the program or not? " CHRG-111hhrg48874--14 Mr. Gruenberg," Thank you, Mr. Chairman. Thank you for the opportunity to testify on behalf of the FDIC on the balance between increased credit availability and prudent lending standards. The FDIC is very aware of the challenges faced by financial institutions and their customers during these difficult economic times. Bankers and examiners know that prudent, responsible lending is good business and benefits everyone. Adverse credit conditions brought on by an ailing economy and stressed balance sheets, however, have created a difficult environment for both borrowers and lenders. Resolving the current economic crisis will depend heavily on creditworthy borrowers, both consumer and business, having access to lending. In response to these challenging circumstances, banks are clearly taking more care in evaluating applications for credit. While this more prudent approach to underwriting is appropriate, it should not mean that creditworthy borrowers are denied loans. As bank supervisors, we have a responsibility to assure our institutions, regularly and clearly, that soundly structured and underwritten loans are encouraged. While aggregate lending activity for FDIC-insured institutions fell in the fourth quarter of 2008, this decline was driven mostly by the largest banks, which reported a 3.4 percent fall in loan balances. In contrast, lending activity at community banks with assets under $1 billion actually increased by 1.5 percent. Community banks are playing an important role in the current stressful environment and appear to be benefiting from their reliance on traditional core deposit funding and relationship lending. Some have questioned whether bank supervisors are contributing to adverse credit conditions by overreacting to current problems in the economy and discouraging banks from making good loans. The FDIC understands the critical role that credit availability plays in the national economy and we balance these considerations with prudential safety and soundness requirements. Over the past year, through guidance, the examination process and other means, we have sought to encourage banks to maintain the availability of credit. We have also trained our examiners on how to properly apply this guidance at the institutions we supervise and how to conduct examinations and communicate their findings to bank management without infringing on bank management's day-to-day decisionmaking and relationships with customers. The FDIC has taken a number of recent actions specifically designed to address concerns about credit availability. On November 12th of last year, we joined with the other Federal banking agencies in issuing the ``Interagency Statement on Meeting the Needs of Creditworthy Borrowers.'' The statement encourages banks to continue making loans in their markets, work with borrowers who may be encountering difficulties, and pursue initiatives such as loan modifications to prevent unnecessary foreclosures. Recently, the FDIC hosted a roundtable discussion with banking industry representatives and Federal and State bank regulators focusing on how they can work together to improve credit availability. One of the important points that came out of the session was the need for ongoing dialogue between these groups as they work toward a solution to the current financial crisis. Toward this end, FDIC Chairman Bair announced last week that the FDIC is creating a new, senior level office to expand community bank outreach, and plans to establish an advisory committee to address the unique concerns of this segment of the banking community. On January 12th of this year, the FDIC issued a Financial Institution Letter advising insured institutions that they should track the use of their capital injections, liquidity support, and/or financing guarantees obtained through recent financial stability programs as part of a process for determining how these Federal programs improve the stability of the institution and contribute to lending to the community. Internally at the FDIC, we have issued guidance to our examiners for evaluating participating banks' use of funds received through the TARP Capital Purchase Program and the Temporary Liquidity Guarantee Program. Examination guidelines for the new Public/Private Investment Fund will be forthcoming. Banks should be encouraged to make good loans, work with borrowers who are experiencing difficulties whenever possible, avoid unnecessary foreclosures, and continue to ensure that the credit needs of their communities are fulfilled. In concert with other agencies, the FDIC is employing a range of strategies to ensure that credit continues to flow on sound terms to creditworthy borrowers. Thank you for the opportunity to testify. I would be happy to answer any questions. [The prepared statement of Vice Chairman Gruenberg can be found on page 97 of the appendix.] " CHRG-111shrg57709--47 Mr. Volcker," If they get in trouble, they are going to fail, and that will make their own financing more difficult, or less easy, and presumably in itself tend to contain their leverage. So between the oversight and their natural self-protective instincts, hopefully, knowing that they are not going to be saved, we reduce the chance of crisis. Senator Shelby. Dr. Volcker, one of the President's recent proposals is a limit on consolidation in the financial sector. In particular, the President proposal would, to quote from a White House press release, quote, place limits on the excessive growth of the market share of liabilities at the largest financial firms to supplement existing caps on the market share of deposits. Along those lines, I have three questions. First, could you elaborate on what constitutes excessive growth and on what particular liabilities restrictions will be imposed there? In other words, what would excessive growth be? This is important. " CHRG-111hhrg56776--278 Mr. Nichols," Congressman Foster, I think it was a perfect storm of activities, activities, conditions, behaviors, failures, in a lot of places. So like Chairman Bernanke pointed to two or three different factors, I even think it's broader than that. Certainly, the industry played a role in terms of internal controls and risk management; lack of mortgage origination standards; the role of credit rating agencies; even our trade imbalance, a lot of money coming in for yield, interest rate policy. There was a perfect storm of failures. People were overleveraged. Some Americans bit off more than they could chew. It was really--I don't think you could just point to one thing that led to the housing bubble. There were a lot of accelerates and a lot of contributors to it, but it's a dozen different factors all intertwined, in my humble opinion. " FOMC20071211meeting--94 92,MR. EVANS.," Thank you, Mr. Chairman. Coming out of our October meeting, I expected a period of subpar growth stretching into the middle of 2008. Since I was anticipating some soft data, it was not obvious to me that the outlook had worsened until later in the intermeeting period. A lot of the data that we have cited are financial items that are difficult to assess and are somewhat unusual for the current period. But the incoming information has caused us to mark down our outlook further, although we don’t see growth declining as far below potential as in the Greenbook baseline forecast. Although housing continues to weaken, that by itself did not cause a substantial revision to our outlook. The bigger factor was a noticeable weakening of consumption. PCE was basically flat in September and October—I guess dead on arrival. The financial headlines are taking their toll on consumer sentiment, and higher energy prices are lowering real incomes. It is not clear, however, that we are seeing a major sustained pullback in consumption; but, of course, that is arguable. The limited information we have about November—motor vehicle sales and the chain store data—suggest at least modest gains in consumer expenditures. I realize that the chain store sales could be a bit artificial. I was talking to one of my business contacts who has a significant presence in retail, and I am accustomed to hearing that, “Well, the Christmas season is a bit short this year, so that could be a problem.” But I actually caught him this time saying, “Gee, it’s so long this time that people seem to be losing interest.” [Laughter] On balance, I think the fundamentals for consumption are still reasonably good. Importantly, although they may be somewhat lagging, the payroll numbers are still consistent with decent growth in wage income, and the unemployment rate remains low. Elsewhere, foreign growth remains good, which along with the lower dollar should support continued growth in exports. We have seen some softening in capital spending as well, but the usual indicators still point to moderate gains in investment. These developments seem reasonably consistent with what I heard from business contacts. Most of them think that growth is slowing, and they are more cautious, but I would summarize their views as guarded and not alarmist. Furthermore, many say that their improved inventory control methods are preventing an inventory cycle from exacerbating the current situation, and they bring this up without my prompting. So to me their comments do not yet suggest a sharp curtailment in real economic activity. Of course, the financial markets continue to weigh negatively on the outlook. In my view, the biggest concerns are the large markdowns on structured securities and the volume of assets that may be returning to banks’ balance sheets. These effects appear to be larger than the banks had planned for as of October and could have a significant impact on lending capacity. This is an important downside risk to the real economy, as the Greenbook highlights in many places. That said, when I talk with my business contacts, there continues to be a disconnect between the credit conditions they report facing and the turbulence we see in money and credit markets. Outside of lending for residential and nonresidential construction, my CEO contacts at nonfinancial firms do not report much change in credit costs or availability. We have heard this from a number of sources. For example, two of the larger banks in our District said they have not changed terms to borrowers, and they expressed relatively sanguine views of lending conditions overall. For the time being, some lenders report offsetting a portion of their higher funding costs by taking a hit on their interest margins. Credit conditions for construction-related industries are another matter. A major shopping center developer who has been one of the largest issuers of commercial mortgage- backed securities indicated that this market has dried up completely. However, the developer has been able to obtain financing from other traditional sources, such as life insurance companies. He is paying similar interest rates, he says, but the terms include lower loan-to-value ratios. So there is some credit effect, but he still has access for the moment. That is a bit like what President Lacker was suggesting. He said the switch is not a big deal for him currently, but if it continues for too long—say, for more than six months or so—it would then weigh more heavily on his business activity. The evolution of such developments will obviously be an important thing to watch over the next few meetings. I would just note that I don’t often look at the Duke University survey of CFOs. But as I looked at it—and I don’t have a great deal of experience— it did seem to indicate that they had higher spending plans on average from their September survey for capital expenditures and technology spending. It wasn’t a great bit, but given all the negative headlines associated with the credit conditions—which are unweighted, whereas these spending plans are weighted—that was a bit of a surprise. Putting all of this together, we have marked down our current quarter and 2008 real GDP forecasts 0.4 percentage point, which is pretty significant. We now have growth next year of 2¼ percent. We expect growth to improve to our assessment of potential thereafter, namely about 2½ percent. This forecast assumes two policy easings, similar to but sooner than the Greenbook, and it is shaded toward the “stronger domestic demand” alternative scenario, which has less financial restraint on PCE and business fixed investment than in the Greenbook baseline. Turning to inflation, our forecast is for PCE inflation to settle in at 1.8 percent. This continued favorable projection for inflation is important for my policy views now. We think resource utilization likely will be about neutral for inflation over this forecast period. Our GDP projection does not result in appreciable resource slack over the forecast period. Even under the weaker Greenbook scenario, the GDP gap remains less than ½ percentage point. But there are upside risks. The most recent data on core prices have been a bit higher. The lower dollar could put pressure on prices, and my business contacts remain concerned about the cost of energy and other commodities. Finally, at least by the Board staff calculations, five-year forward TIPS inflation compensation has moved up to the range that it was in during the spring of 2006, a period when we were more concerned about the inflation outlook. I wouldn’t put too much weight on this particular inflation expectation development at the moment, but it may be looming ahead. So I continue to see upside risk to inflation, which if realized would complicate our policy reaction to developments on the growth and employment side of the ledger. Thank you, Mr. Chairman." FOMC20070321meeting--173 171,MR. WARSH.," Thank you, Mr. Chairman. I also generally share the views of alternative B and favor maintaining the federal funds rate today. I thought what I’d do is just highlight a couple of things. First, I think the statement needs to be reflective of the real economy rather than financial markets, as we discussed yesterday. So let me spend a moment on the reference to “still-favorable financial conditions” in alternative B. I think the financial conditions are still favorable, and so that’s an honest depiction of events, as is the rest of the statement after the reference to coming quarters. I think the question really is, If we enter the debate over describing the financial conditions, how do we get out of it? So when we meet next, I’m wondering how we’ll then describe the financial conditions. Or if we stop any reference thereto, what is that saying? That is, I think these markets are adjusting in a very orderly way. I don’t feel now, as I feared a few weeks ago, that we would have to say and do things to ensure that adjustment occurs. If we don’t refer to these financial conditions and we continue to suggest that we think the economy will expand at a moderate pace over the coming quarters, that in itself shows that we have some degree of comfort that the financial market tumult hasn’t really changed our central tendency. So though I’m comfortable with the honest depiction of all of alternative B, I worry a bit about what our exit strategy is. I can’t come up with a better way in which to refer to financial conditions without inviting that discussion, and so I’m left with puzzlement about an exit strategy on that question. The most important thing that we’re accomplishing in alternative B is suggesting that we aren’t going to come to the rescue of market tumult, that market discipline is working, that we don’t want complacency in the markets, and that our job is not to make sure that people make money in those markets. Our job, as many of you have said, is to keep the economy on an even keel. So with that, I favor alternative B, but I will remain a little uncomfortable until someone can tell how we answer the question about what we do next regarding the reference to still-favorable financial conditions." FOMC20080430meeting--184 182,MS. YELLEN.," Thank you, Mr. Chairman. I favor alternative B with the wording that has been proposed. But I do appreciate that there is a case for alternative C as well, and I understand and appreciate the arguments that have been made in favor of it. On the pure economic merits, I definitely support a 25 basis point cut. As I noted in my comments on the economic situation, it appears that the economy has stalled and may have fallen into a recession. I share the same concerns as Governor Kohn and President Stern. My forecast is close to the Greenbook. I think a further easing in financial conditions is needed to counter the credit crunch, and I believe that a cut in the federal funds rate will be efficacious in easing financial conditions. Although the real federal funds rate is accommodative by any usual measure of it, I completely agree with Governor Kohn's discussion of this topic. This is a situation in which spreads have increased so much and credit availability has diminished so much that looking at the real federal funds rate is just a very misleading way of assessing the overall tightness of financial conditions. I consider them, on balance, to be notably tighter than they were in the beginning of August. I don't agree that further cuts in the federal funds rate will be ineffective in helping us achieve our employment goal or counterproductive to the attainment of price stability over the medium term. Given that a 25 basis point cut is what the markets are now anticipating--it is built in--I would not expect this action, coupled with the language in alternative B, to touch off further declines in the dollar or to exacerbate inflationary expectations. That said, I did see arguments in favor of alternative C as well. I can see some advantage in doing a little less today than markets are expecting as long as we reaffirm that we do retain the flexibility to respond quickly to further negative news with additional cuts. A case that could be made for pausing is that we will soon get information relating to GDP in the second quarter and get a better read on just how serious the downturn is. With respect to market and inflationary psychology, I also can see a case for doing less than markets expect. It is true that some measures of inflation expectations have edged up a bit, and I would agree with President Fisher that perhaps a pause would counter any impression that we have become more tolerant of inflation in the long run. But I don't think we have become more tolerant of inflation in the long run, and I did see today's reading on the employment cost index as further confirmation that at this point nothing is built into labor markets that suggests that we are developing a wage�price spiral of the type that was of such concern and really propelling the problems in the 1970s. On the other hand, I agree with President Plosser, too. Wages aren't a leading indicator. We have to watch inflationary expectations. So I don't think that is definitive. Nevertheless, I do find it quite reassuring that nothing is going on there at this point. I think doing nothing today might mitigate the risk of a flight from dollar assets, which could exacerbate financial turmoil. So there are arguments in favor of alternative C, and I recognize them. But, on balance, I believe that the stronger case is for B. " FOMC20070816confcall--60 58,CHAIRMAN BERNANKE.," All right. That’s true. I’m sorry. So I’ll read it. I hope you can get it from there. “Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.” It still gives us our base case—“Recent data suggest that the economy has continued to expand at a moderate pace”—and we say that we’re monitoring the situation and are prepared to act as needed to mitigate the effects. Basically what we are doing here is acknowledging increased risks. It’s a little ambiguous as to what the balance of risks is. Clearly, it raises the probability of action—no question. I certainly don’t think, particularly if financial markets are somewhat calmer, that it commits us to action, but it does increase the probability. It is possible that, given what the markets are discounting for future actions, they’ll be disappointed with this statement, and we might even get a de facto tightening. But I think we just need to state an accurate expression of our views at this time." FOMC20080625meeting--94 92,MR. WARSH.," Thank you, Mr. Chairman. At this point everything has been said, but everybody hasn't said it. So let me try. [Laughter] Let me make three summary points, and then I will talk about three issues that I think are harder. First, on the economy, through late May, as the Greenbook suggests, the real economy proved more resilient and more dynamic than the consensus had anticipated. Consumer spending was moderate but positive, and the labor markets were soft, but neither was necessarily indicative of a recession through late May. Business fixed investment and corporate profits ex financials look all right. Productivity growth looks, frankly, impressive, and corporations, unlike consumers, still appear okay through the month of June--but I'm going to return to June in just a short while. In sum, my assessment of the economy reasonably approximates the average GDP from the Greenbook for 2008, but I remain considerably more cautious on the catalyst for return-to-trend growth in the forecast period of 2009 and beyond. I suspect that this is a long, slow climb with the credit channels needing to be rebuilt and that the process is still in its very early stages. Second, let me talk about the financial markets. Financial markets continue to show tenuous but real improvements in market functioning--which, as Bill Dudley suggested, is remarkable given the weakness among financial institutions themselves. Leveraged loans and high-yield markets continue to trend toward improved market functioning. Credit spreads are well off their March highs. Credit markets, in particular, are holding up well, despite the broad weakness across equities. Third, let me turn to inflation risks. Inflation risks, in my view, continue to predominate as the greater risk to the economy. There is more evidence of a global secular reversal of inflation trends, making the jobs of central bankers worldwide considerably more difficult. I remain worried about energy and food pass-through and the effect of a weakening dollar if our policy rates and those of our major trading partners are perceived to diverge. I would expect import prices, core inflation, and expectations to move up in the coming months even more than in the Greenbook, likely causing a policy response by our foreign peers. Commodity prices, again, with the exception of metals, have been moving up while global demand is falling, and markets have come to see this rise of some, if not most, commodities as essentially permanent. So at the end of the day, we have to be concerned about this period of above-acceptable inflation. It's crucial that broader prices do not start to rise at still-faster rates, and that could well happen if those making decisions about prices and pay expect higher inflation in the future. Anecdotes are not comforting, particularly on the price front. As a result, I think the trajectory of inflation is less favorable than in the Greenbook, thereby necessitating a policy response more significant than the Greenbook would suggest. Let me turn to three even harder issues. One is consumer spending. We're not done with the second quarter, and my sense of what's happened in the first three weeks of June is pretty miserable. I hate to extrapolate based on three weeks of data to the trajectory of the economy. But from a discussion with contacts from three credit card companies that constitute a little more than half of the credit card spend, I would say that the views from these guys were shocking in how bad things looked in the past three to four weeks, particularly in comparison to reasonably positive news from the previous two months. It is suggestive that June will be much weaker than May, and if I add that to the figures on autos that are coming out of the Detroit Three, those are a couple of anecdotes that make me a little hesitant to declare with an exclamation mark what an enviable second quarter we've had. I also look at equity market prices sometimes as maybe telling us something. I would say that consumer companies and retailers over the last three weeks have gotten killed. So I'm a little hesitant to suggest that the second quarter is going to be strong. Delinquencies and charge-offs have also moved meaningfully to the downside in the last three or four weeks among these credit card companies, and this weakness appears to be much more focused on the coasts than it is in the center of the country. I heard that from three of three. My own view may be influenced by my take on the fiscal stimulus--it sure doesn't appear to be helping very much. The second issue that I continue to struggle with is financial institutions. Financial institution equity prices showed significant underperformance, and some people say that is the Federal Reserve's fault. We're talking up our concerns about inflation. We're changing the Treasury curve going forward. I think that is a total red herring. The reason that financials are getting killed is an equity story. They have business models that are having a hard time delivering profits in this environment. They have had to show a very tough quarterly set of losses. I think the problems on financials have to do with financials and not with the Fed, though there is a disturbing amount of chatter in the markets that somehow we're the cause of that. I am comforted, again as Bill Dudley reminded us, that the broader market functioning has been able to withstand this dramatic financial institution weakness. Whether at some point that will give out I don't know, but I'd say that's extremely encouraging. In addition, we have to recognize that massive amounts of new capital are going to be needed for financial institutions of all sizes. Given the weak performance of virtually every financial investment from November till now, I think it is very easy to see a supply�demand problem. It is very easy to see that, with the number of banks that come to these markets, some of them at some point might not be able to find capital even at dramatically lower prices than their expectations. It is prudent for us at the Fed to think about alternative sources of more-patient institutional funding during this period. The third issue for discussion is credit availability, especially for small businesses. This strikes me as being key to the labor market situation. Credit availability for small businesses has held up better than I would have expected four or five months ago, but pockets of weakness remain, particularly among the regional banks, which are a source of concern. I guess I've become convinced that credit lines have not been tapped out. There was a theory, one that I even had some sympathy toward, that increases in C&I lending in the last few quarters were involuntary, reflecting existing credit lines that were called upon. That strikes me as being somewhat overstated. According to anecdotes and our own survey of the terms of business lending, it does suggest that capital is still available for these small businesses to provide some strength to the economy; but again, continued weakness among the regionals could call that into question. Let me turn finally, Mr. Chairman, to the projections. I have some sympathy for the view that Vice Chairman Geithner put forth. It strikes me that at this time the markets will see the benefits of changing our communication strategy as, yet again, pretty small. The costs are harder for me to be certain about. So if anyone is proposing to do this during the next six months, I would have real hesitancy about introducing this variable into our communication strategy amid our assessment of all the other challenges that we have. So I favor having a trial run come October, but I think we should revisit where we stand on the inflation front, the financial institution front, and the growth front before adding this to the mix. To the extent that we find the appropriate time to go down this path, I would favor option 3. Thank you, Mr. Chairman. " FinancialCrisisReport--107 If salespeople don’t understand Option ARMs, they won’t sell them. Many felt that more training would be needed to better educate salespeople about this type of loan, and to change the mindset of current Loan Consultants. Some felt there were many within Washington Mutual who simply felt these loans were ‘bad’ for customers, probably from a lack of understanding the product and how it could benefit customers. ... It is critical that salespeople fully understand a customer’s financial situation and motivation for the loan. By taking into account these factors, they can recommend the loan that will best fit their customers’ needs. Given today’s low interest rate environment, it can be challenging to get salespeople to take the time to do this. Currently it is easier to give customers what they ask for (a 30 year fixed loan) than to sell them an Option ARM . They can take 20 minutes and sell a 30 fixed-rate loan, or spend an hour trying to sell an Option ARM. Commission caps make it unappealing for Mortgage Brokers to sell Washington Mutual Option ARMs . Most would not sell loans to customers with prepayment penalties, and given the low commission rate for selling them without the prepayment penalty, many simply go to another company or product where they can make more money. Slow ARM processing times (up to 90 days) can cause Mortgage Brokers to take business elsewhere . … Improving collateral would help salespeople better explain Option ARMs to customers and take away some of the mystery . … They also would like improved brochures which talk to the customer in simple, easy to understand terms about features and benefits. They liked the current sample statements they are provided.” 366 The second focus group with existing Option ARM customers showed they were also unenthusiastic about the product. The focus group report stated: “In general, people do not seem to have a good understanding of their mortgage and its terms. What understanding they do have is framed by the concept of a 30-year fixed mortgage. Option ARMs are very complicated and need to be explained in simple, easy 366 8/14/2003 “Option ARM Focus Groups – Phase I, WaMu Loan Consultants and Mortgage Brokers,” WaMu research report, at 2, Hearing Exhibit 4/13-36 [emphasis in original]. to understand terms, prospective borrowers need to be educated about the loan – this is not a product that sells itself.” 367 FOMC20070628meeting--177 175,MS. MINEHAN.," Thank you, Mr. Chairman. I, too, am in favor of keeping policy where it is. As I stated yesterday, I see the risks around growth as better balanced than they were, even given the potential for the housing problems to be deeper and longer-lasting than we might have expected earlier in the year. I remain concerned about the risks that inflation will not continue to moderate, but I am not wed, as I have said many times, to a particular low number. I would be as happy at 2 as at 1½ and perhaps even happier given that levels that start with 1 seem to have downside risks—or at least they did the last time we were there. I am concerned, however, about the pressures on the economy, whether you think of them in terms of headline inflation or in terms of the components of headline, particularly energy costs, tight labor markets, and a growing world. I think, although we may not want to put it in the statement, that Richard is right—our economy is subject to pressures from the rest of the world at this point and, related to that, the falling dollar. A lot of things could take inflation from its current moderate level and push it back up, and that I would be very concerned about. It is true that financial conditions have tightened slightly, so markets are starting to do a little work for us. But I believe that we need to continue with policy in a slightly restrictive stance to provide some insurance that the inflation pressures in the economy stay moderate. Staying with current policy is a good balance between the prospects we see for moderate growth and the prospects we also have recognized around the table for the potential for inflation pressures to get worse. I support alternative B’s language. I want to say two things. First, the more substantive concern—I think that Governor Kohn’s thoughts about inflation pressures are slightly better than the current language. I was attracted to the “transitory” language that I think President Moskow raised first, and we fiddled around with it a bit in Boston, but I have been convinced that “convincingly demonstrated” and “transitory” are equivalent. [Laughter] So I don’t want to battle about that at this table. The statement in section 3 is headed in the right direction, and I would be in favor of its current form or the form that Governor Kohn suggested. Second, I may be the only one sensitive to this, but in section 2 we have two sentences that start with exactly the same words. I never wrote that way when I was in school. [Laughter] There is an easy way to make that sentence a little better from an English composition point of view. But, again, that is tricky to argue about at the table, so I guess I am fine." CHRG-111shrg51395--96 Mr. Pickel," Yes, I think as far as the products themselves, if you look, for instance, at the credit default swap market, there is information that has been published by the Depository Trust and Clearing Corporation through their trade information warehouse, which encompasses 80 to 90 percent of credit default swaps engaged in around the world. And the information there is that virtually all the trades in that warehouse, essentially all, 100 percent, are done involving at least one dealer party who is, in fact, a regulated institution, and actually 86 percent of them are between two dealer institutions. So you have got that structure of the institutional regulation there, of the oversight of those individual firms looking at the activities of those firms. And I think the Committee, again, heard testimony from the OTS last week admitting some shortcomings in their enforcement and in their execution of their authority, but perhaps we should look at making sure that they have got the ability to understand and get more detail on the products that those individual entities are---- Senator Warner. Just a quick question, Mr. Pickel. But those 86 percent of institutions that are involved in using these products, are you saying the market knows all the terms and conditions and that we have got a transparent market there? " FOMC20081007confcall--3 1,MR. DUDLEY.," Yes. Thank you, Mr. Chairman. Despite our massive escalation on the liquidity provision front and passage of legislation granting the Treasury authority to set up a $700 billion troubled asset relief program, or TARP, market conditions continue to deteriorate. This is occurring in three broad respects. First, market participants continue to pull back in their willingness to engage with one another. This pullback is evident in elevated interbank lending rates and elevated foreign exchange swap bases and market liquidity more generally. The one-month and three-month LIBOR�OIS spreads have widened to 271 and 296 basis points, respectively. That is up more than 175 basis points in the past three weeks since the September 16 FOMC meeting. The all-in cost of dollar funding via the foreign exchange swap market, although bouncing around day to day, has actually been even higher than LIBOR, often by 100 basis points or more. In addition to the interbank market, the commercial paper market has come under stress. The breaking of the buck by the Reserve Fund led to a wholesale flight out of prime institutional money market funds. This forced the liquidation of assets, which has led to impairment of the commercial paper market. Term commercial paper rates are elevated, and the average tenor of commercial paper has shortened considerably. Second, financial conditions continue to tighten, and in recent weeks, the tightening has been substantial. Equity prices have plunged both in the United States and abroad. Corporate bond yields, especially for non-investment-grade debt, have increased substantially. Short- and long-term tax-exempt rates have climbed, and credit availability has been even further impaired. On the equity market side, for example, the S&P 500 index has fallen about 18 percent since the September 16 FOMC meeting. Although there is considerable uncertainty about the appropriate metrics and weights to use in examining the evolution of financial conditions over time, most data are consistent with the judgment that conditions have tightened significantly since the onset of the crisis, despite the 325 basis point reduction in the federal funds rate target. Compared with the previous two monetary policy easing cycles, there have been four important divergences. First, corporate bond yields have climbed. In previous cycles, the widening credit spreads were more than offset by the decline in Treasury note and bond yields, causing corporate bond yields to fall. Second, credit availability has declined greatly in this cycle. In the two previous cycles, the proportion of banks tightening credit standards actually fell through the easing cycle. That stands in sharp contrast to what has been happening in this cycle. Third, housing price declines have been far larger than in previous cycles, in real and in nominal terms. Fourth, the dollar has weakened actually much less than in the previous two easing cycles. The third aspect of the market that I think warrants noting is that the U.S. financial sector in particular remains under pressure, especially with respect to share prices and banks' ability to obtain funding, especially term funding. Today was a particularly bad day for financial shares, with double-digit declines common for many banks. The only good news was that credit default swaps actually narrowed a bit, maybe helped by the introduction of our commercial paper backstop facility or the fact that we've escalated so massively in terms of the term auction facility and the foreign exchange swaps with our foreign central bank counterparts. On the inflation side of the ledger, pressures continue to abate. Since the last FOMC meeting, both industrial and agricultural commodity price indexes have fallen about 15 percent. At the same time, the dollar has strengthened. The fall in the commodity prices and the strength in the dollar are two factors that have contributed to a fall in breakeven measures of inflation on both the spot and the five-year, five-year-forward basis. For example, the Barclays measure of five-year, five-year-forward breakeven inflation has declined more than 60 basis points since the September FOMC meeting. Today it was around 1.5 percent. The interbank, money market, and capital market dysfunction, the tightening of financial conditions, and the apparent easing in inflation risks have caused investors to conclude that the FOMC is likely to lower its federal funds rate target in the near future. Late today, the November federal funds futures contract implied an effective rate for the coming month of about 1.4 percent. That's more than 50 basis points below the current target. Interestingly, the failure of the FOMC to ease today actually led to a rise in October and November federal funds futures contracts. Market participants presumably interpreted the introduction of the commercial paper funding facility as potentially a substitute for further monetary policy accommodation at this time. Obviously, this is an extremely fragile and dangerous environment. I am struck by the feeble market response to the substantial escalations implemented over the past ten days. These include expanding standing foreign exchange swap facilities' capacity to $620 billion from $290 billion; expanding the TAF auction cycles to $900 billion from $150 billion; and proposing a major backstop for the commercial paper market. With respect to the commercial paper market backstop facility, the market reaction today was generally positive, but market participants clearly want to know more in terms of the specifics, especially when the program will be up and operational. Of course, I'm happy to take any questions. " CHRG-109hhrg28024--130 Mr. Bernanke," Congressman, I would say in terms of capital investment, there is currently plenty of funding available. Corporations have retained a lot of these profits they have earned in recent years, and they have very liquid balance sheets. There have been actually relatively low rates of bank borrowing by corporations because they have sufficient internal funds to finance their investment spending. Moreover, the general credit conditions still appear to be quite positive. Spreads are low. That is, bankruptcy risk appears to be relatively low. My sense is that we will continue to see strong growth in capital investment in the U.S. economy, and that is going to be beneficial both in terms of generating demand in the short run, but also in terms of expanding our capacity to produce and our productivity in the longer term. " FOMC20081029meeting--6 4,MR. BASSETT.," 2 Thank you, Nathan. I will be referring to the exhibits labeled in red, ""Staff Presentation on Financial Developments."" The intermeeting period was characterized by persistent strains in financial markets and a sharp drop in asset prices. Although some markets have improved in recent days, the ongoing disruptions have generated intense pressures on financial institutions and have contributed to a significant further tightening of credit conditions for households and businesses. As Bill Dudley noted, spreads on credit default swaps (CDS) for financial institutions have been quite volatile. As shown by the top left panel of your first exhibit, median spreads for large bank holding companies (the black line) and regional commercial banks (the red line) declined substantially after the announcement of the Treasury's capital purchase program and the FDIC's temporary liquidity guarantee program on October 14; they ended the period almost 70 basis points lower, on balance. The median CDS spread for insurance companies (the blue line) increased substantially over the latter part of the intermeeting period amid concerns about the financial condition of these firms. Judging from the wide range of dealers' price quotes on CDS for the same firms (shown in the top right panel), liquidity and price discovery in the CDS market remain strained. The functioning of markets for corporate debt is also impaired. As shown by the blue line in the middle left panel, the staff's proxy for the bid-asked spread on highyield bonds spiked to more than 4 percent before partially reversing course over the past week. This spread is also unusually elevated for investment-grade bonds (the black line). As shown to the right, the average bid-asked spread on syndicated loans traded in the secondary market (the black line) jumped up over the intermeeting period. Secondary market prices for syndicated loans (the blue line) dropped to unprecedented levels, reportedly reflecting heavy sales by hedge funds that were forced to meet investor redemptions as well as the unwinding of some types of structured investments. Municipal finance, the subject of the bottom two panels, was significantly disrupted by dislocations in money market mutual funds in September and record 2 The materials used by Mr. Bassett are appended to this transcript (appendix 2). withdrawals from long-term municipal bond funds in early October. Markets for structured products, such as tender-option bonds, that issued short-term variable-rate debt backed by longer-term municipal bonds were particularly affected. Yields on those short-term instruments (shown by the black line in the bottom left panel) jumped for a time, and the sales of the underlying long-term bonds as the structures unwound boosted long-term municipal bond yields (the blue line). As shown to the right, issuance slowed substantially until mid-October, when a few states--notably California--placed a sizable amount of new debt, though they paid fairly elevated interest rates to do so. In recent days, however, liquidity conditions have shown signs of improvement, yields have decreased somewhat, and issuance has moved back up from the extremely slow pace seen in the second half of September and the first half of this month. Please turn to exhibit 2. As noted by Bill Dudley, prime money market funds suffered a wave of redemptions in mid-September, shown by the red bars in the top left panel. Although the flows diminished after the Federal Reserve and the Treasury announced steps to support money funds on September 19, prime funds lost about one-fifth of their assets, on net, over the intermeeting period. As a result, prime funds have dramatically reduced their holdings of commercial paper, generating significant disruptions in that market. As shown by the black line in the top right panel, unsecured financial commercial paper outstanding has declined sharply since midSeptember, and the ongoing contraction in ABCP (the blue line) has continued. In contrast, the amount of unsecured commercial paper placed by nonfinancial firms (the yellow line) was little changed, on net, over the period. As shown in the middle left panel, broad equity prices (the black line) dropped about 30 percent over the intermeeting period as the outlook for both economic growth and earnings dimmed, and implied volatility increased to record levels. As depicted by the red bars to the right, those developments were accompanied by record outflows of about $60 billion from equity mutual funds in September. Weekly data indicate that, over the first half of October, investors withdrew more than $100 billion from long-term mutual funds, including about $70 billion from equity funds, but outflows have slowed in recent days. As shown in line 1 in the bottom left panel, M2 expanded rapidly in September and early October as some firms and households shifted toward safer assets. Liquid deposits (line 2) increased significantly in September and stayed about flat in October. In contrast, retail money funds (line 3) were little changed in September but have grown briskly this month. The sizable increases in small time deposits in both months (line 4) were widespread, in contrast to the more concentrated gains seen over the summer in response to elevated yields at a few financial institutions. Currency (line 5) began increasing rapidly in recent weeks, apparently supported by higher demand from both foreign and domestic holders. As a result of the disruptions in short-term funding markets, a range of borrowers turned to banks for funding. The ""other loans"" category (the blue line in the bottom right panel) rose sharply beginning in mid-September as a result of both unplanned overdrafts and draws on existing credit lines by nonfinancial businesses, money market mutual fund complexes, foreign banks, nonbank financial institutions, and municipalities. C&I loans at banks (the black line) have also increased significantly in recent weeks, as a broad spectrum of nonfinancial firms tapped existing credit lines. According to the October Senior Loan Officer Opinion Survey, however, about 25 percent of the largest banks and 35 percent of other banks surveyed indicated that C&I loans not made under previous commitment accounted for some of the recent increase. Additional results from the survey are the subject of your next exhibit. Large net fractions of institutions reported having continued to tighten their lending standards and terms on all major loan categories over the previous three months, with some banks reporting that they had tightened lending policies considerably. As shown by the black line in the top left panel, about 80 percent of domestic respondents tightened their lending standards on C&I loans since July, and all but one of the 54 banks surveyed reported charging higher spreads over their cost of funds on such loans (the red line). As noted to the right, nearly all the banks that tightened standards or terms did so in response to a more uncertain or less favorable economic outlook and a reduced tolerance for risk. Almost 40 percent of domestic banks tightened in part because of concerns about their capital or liquidity position, somewhat more than had cited those pressures in July. As indicated in the middle left panel, a large fraction of domestic banks again reported tightening standards on commercial real estate loans over the past three months. Moving to loans to households, almost 70 percent of respondents tightened standards on residential mortgages to prime borrowers (the red line in the middle right panel). As shown by the blue line, nearly 90 percent of the institutions that originated nontraditional mortgages tightened standards on such loans. As shown by the short black line in the bottom left panel, about 75 percent of the respondents tightened lending standards on home equity lines of credit, and about 60 percent tightened standards on both credit cards (the blue line) and other consumer loans (the red line). As noted to the right, almost 25 percent of banks, on net, reported reducing the credit limits on existing credit card accounts of some prime customers over the past three months, and about 60 percent of banks reported cutting existing lines of some of their nonprime borrowers. Banks that had trimmed the limits on existing credit card accounts most often cited the more uncertain economic outlook as a very important reason followed, in turn, by a reduced tolerance for risk and deterioration in the credit quality of individual customers. Business finance is the subject of your next exhibit. The spread on BBB-rated bonds issued by nonfinancial corporations (the blue line in the top left panel) rose about 275 basis points over the intermeeting period, to more than 600 basis points, whereas that on bonds of financial firms (the black line) reached nearly 1,000 basis points before easing some in recent days. As spreads spiked and volatility increased, bond issuance by both nonfinancial and financial corporations (shown in the table to the right) dropped appreciably in the third quarter (row 3) relative to the pace seen in the first half of the year (row 2). As shown in the last row, there has been no highyield issuance by nonfinancial firms so far this month, and bond issuance by financial firms has come to a near halt. In commercial mortgage markets, secondary market spreads on AAA-rated commercial mortgage-backed securities (CMBS), shown in the middle left panel, continued to increase on net, and no new CMBS have been issued for several months. As noted to the right, using announced earnings for about 200 firms and analysts' estimates for the rest, the staff expects third-quarter S&P 500 earnings to come in about 10 percent below the level posted in the third quarter of last year. Losses at financial companies account for the drop. Bank holding companies reported further substantial write-downs on mortgage-related and other securities as well as higher loan-loss provisions necessitated by widespread deterioration in credit quality. In contrast, earnings of nonfinancial companies are projected to have risen about 12 percent from a year earlier, but increased profits of energy companies account for virtually all of those gains. As indicated in the bottom left panel, analysts have revised down significantly their expectations for earnings of nonfinancial firms (the red line) over the next year, likely in response to the worsening economic outlook. Expected earnings for financial firms (the black line) also have been cut further this month. A rough estimate of the equity premium (shown in the bottom right panel) stands at an extremely high level. The household sector is the subject of your last exhibit. As shown by the top left panel, interest rates on conforming residential mortgages have been volatile--partly in response to the renewed pressures on GSE debt noted by Bill Dudley--but ended the period only slightly higher at around 6 percent. The staff expects home prices (the black line to the right) to decline significantly further through the end of 2010 and mortgage debt (the red line) to be about flat over that period. Both paths have been marked down from the September forecast to reflect a weaker economic outlook and tighter credit conditions. Spreads on asset-backed securities backed by credit card loans (the black line in the middle left panel) and auto loans (the red line) have risen more than 150 basis points since mid-September, moving well above their spring peaks. The cumulative increase in spreads since midyear has hindered issuance of such securities, and the volume of new deals, shown to the right, dropped more than 50 percent in the third quarter. The latest data, available through October 17, suggest that very little issuance has occurred this month. As shown in the bottom left panel, consumer credit has decelerated recently. With lending conditions likely to remain tight and with spending on durables expected to be soft, the staff sees significant further weakness in consumer credit in coming quarters. Summing up, although there has been modest improvement in several financial markets recently, the worsening of the global financial crisis sharply increased pressures on financial firms and markets over the intermeeting period as a whole. Those pressures have led to further deleveraging, diminished liquidity, increased concerns among investors about the economic outlook, and a reduced tolerance for risk-taking. The resulting sharp fall in asset prices and the further tightening of credit conditions have had substantial adverse effects on nonfinancial businesses and households. That concludes my prepared remarks. " CHRG-111hhrg56766--74 Mr. Bernanke," Congresswoman, it is not the Federal funds rate, it was the discount rate, the rate at which we lend on a special overnight basis to banks, we cut that very low because of the financial crisis. We wanted to make sure that banks had access to lots of liquidity in case there was a run on the banks. Now that there is easy access to private markets, they do not need that kind of help any more, so we have just slightly reduced the subsidy we are giving to banks. It has nothing to do with the Federal funds rate or the overall stance of monetary policy. It has to do with normalizing our extraordinary support for the banks and the financial markets. We do not anticipate that action having any implications-- Ms. Waters. Let's be clear. The change that you have made, no matter how slight it is, at the discount rate, will increase the amount they have to pay for their loans, the banks; is that right? " fcic_final_report_full--5 Much attention over the past two years has been focused on the decisions by the federal government to provide massive financial assistance to stabilize the financial system and rescue large financial institutions that were deemed too systemically im- portant to fail. Those decisions—and the deep emotions surrounding them—will be debated long into the future. But our mission was to ask and answer this central ques- tion: how did it come to pass that in  our nation was forced to choose between two stark and painful alternatives —either risk the total collapse of our financial system and economy or inject trillions of taxpayer dollars into the financial system and an array of companies, as millions of Americans still lost their jobs, their savings, and their homes? In this report, we detail the events of the crisis. But a simple summary, as we see it, is useful at the outset. While the vulnerabilities that created the potential for cri- sis were years in the making, it was the collapse of the housing bubble—fueled by low interest rates, easy and available credit, scant regulation, and toxic mortgages— that was the spark that ignited a string of events, which led to a full-blown crisis in the fall of . Trillions of dollars in risky mortgages had become embedded throughout the financial system, as mortgage-related securities were packaged, repackaged, and sold to investors around the world. When the bubble burst, hun- dreds of billions of dollars in losses in mortgages and mortgage-related securities shook markets as well as financial institutions that had significant exposures to those mortgages and had borrowed heavily against them. This happened not just in the United States but around the world. The losses were magnified by derivatives such as synthetic securities. The crisis reached seismic proportions in September  with the failure of Lehman Brothers and the impending collapse of the insurance giant American Interna- tional Group (AIG). Panic fanned by a lack of transparency of the balance sheets of ma- jor financial institutions, coupled with a tangle of interconnections among institutions perceived to be “too big to fail,” caused the credit markets to seize up. Trading ground to a halt. The stock market plummeted. The economy plunged into a deep recession. The financial system we examined bears little resemblance to that of our parents’ generation. The changes in the past three decades alone have been remarkable. The financial markets have become increasingly globalized. Technology has transformed the efficiency, speed, and complexity of financial instruments and transactions. There is broader access to and lower costs of financing than ever before. And the financial sector itself has become a much more dominant force in our economy. CHRG-110hhrg46594--409 Mr. Sachs," First, before getting to the specifics of section 136, we should not ease the conditions. We should see this as an opportunity to enforce the conditions. I actually am more optimistic than the three CEOs that we heard that they could be accelerated even more because when you consider the Chevy Volt promises to be a leapfrog technology, in fact because we will go from hybrid to plug-in hybrid, we are on the verge in my opinion of getting back to U.S. technological leadership. GM also has invested more than $1 billion in hydrogen fuel cells. And Chrysler, I think very impressively, is looking at extended range electric vehicles. Don't ease the conditions, that is for sure. My only question would be, you know, section 136 could be a bridge. We could see the money as a bridge to the Chevy Volt, to the EREV, and so forth. So it doesn't seem to me to be contradictory in that way. I think the approach this committee has taken is the right one though. The TARP really fits, in my opinion. This is a financial crisis. The money is there, adjust it in a modest way and get a very pragmatic result. Section 136, if it had to be a fallback position, seems to me to be a viable one but not by easing the conditions at all. Indeed, by seeing the money is precisely to get us to that Chevy Volt. It is to get us to the EREV. Please don't ease the conditions. That would send every wrong message for the country. " CHRG-111shrg50814--8 Mr. Bernanke," Thank you. Chairman Dodd, Senator Shelby, and Members of the Committee, I appreciate the opportunity to discuss monetary policy and the economic situation and to present the Federal Reserve's monetary policy report to the Congress. As you are aware, the U.S. economy is undergoing a severe contraction. Employment has fallen steeply since last autumn, and the unemployment rate has moved up to 7.6 percent. The deteriorating job market, considerable losses of equity and housing wealth, and tight lending conditions have weighed down on consumer sentiment and spending. In addition, businesses have cut back capital outlays in response to the softening outlook for sales, as well as the difficulty of obtaining credit. In contrast to the first half of last year, when robust foreign demand for U.S. goods and services provided some offset to weakness in domestic spending, exports slumped in the second half as our major trading partners fell into recession and some measures of global growth turned negative the first time in more than 25 years. In all, U.S. real gross domestic product declined slightly in the third quarter of 2008, and that decline steepened considerably in the fourth quarter. The sharp contraction in economic activity appears to have continued into the first quarter of 2009. The substantial declines in the prices of energy and other commodities last year and the growing margin of economic slack have contributed to a substantial lessening of inflation pressures. Indeed, overall consumer price inflation measured on a 12-month basis was close to zero last month. Core inflation, which excludes the direct effects of food and energy prices, also has declined significantly. The principal cause of the economic slowdown was the collapse of the global credit boom and the ensuing financial crisis, which has affected asset values, credit conditions, and consumer and business confidence around the world. The immediate trigger of the crisis was the end of the housing booms in the United States and other countries and the associated problems in mortgage markets, notably the collapse of the U.S. subprime mortgage market. Conditions in housing and mortgage markets have proved a serious drag on the broader economy, both directly through their impact on residential construction and related industries and on household wealth, and indirectly through the effects of rising mortgage delinquencies on the health of financial institutions. Recent data show that residential construction and sales continue to be very weak, house prices continue to fall, and foreclosure starts remain at very high levels. The financial crisis intensified significantly in September and October. In September, the Treasury and the Federal Housing Finance Agency placed the Government-sponsored enterprises Fannie Mae and Freddie Mac into conservatorship, and Lehman Brothers Holdings filed for bankruptcy. In the following weeks, several other large financial institutions failed, came to the brink of failure, or were acquired by competitors under distressed circumstances. Losses at a prominent money market mutual fund prompted investors, who had traditionally considered money market mutual funds to be virtually risk free, to withdraw large amounts from such funds. The resulting outflows threatened the stability of short-term funding markets, particularly the commercial paper market, upon which corporations rely heavily for their short-term borrowing needs. Concerns about potential losses also undermined confidence in wholesale bank funding markets, leading to further increases in bank borrowing costs and a tightening of credit availability from banks. Recognizing the critical importance of the provision of credit to businesses and households from financial institutions, the Congress passed the Emergency Economic Stabilization Act last fall. Under the authority granted by this act, the Treasury purchased preferred shares in a broad range of depository institutions to shore up their capital basis. During this period, the FDIC introduced its Temporary Liquidity Guarantee Program, which expanded its guarantees of bank liabilities to include selected senior unsecured obligations and all non-interest-bearing transactions deposits. The Treasury, in concert with the Federal Reserve and the FDIC, provided packages of loans and guarantees to ensure the continued stability of Citigroup and Bank of America, two of the world's largest banks. Over this period, governments in many foreign countries also announced plans to stabilize their financial institutions, including through large-scale capital injections, expansions of deposit insurance, and guarantees of some forms of bank debt. Faced with the significant deterioration of financial market conditions and the substantial worsening of the economic outlook, the Federal Open Market Committee continued to ease monetary policy aggressively in the final months of 2008, including a rate cut coordinated with five other major central banks. In December, the FOMC brought its target for the Federal funds rate to a historically low range of zero to one-quarter 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 near its floor, the Federal Reserve has taken additional steps to ease credit conditions. To support housing markets and economic activity more broadly and to improve mortgage market functioning, the Federal Reserve has begun to purchase large amounts of agency debt and agency mortgage-backed securities. Since the announcement of this program last November, the conforming fixed mortgage rate has fallen nearly 1 percentage point. The Federal Reserve also established new lending facilities and expanded existing facilities to enhance the flow of credit to businesses and households. In response to the heightened stress in bank funding markets, 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, and we expanded our network of swap lines with foreign central banks to ease conditions in interconnected dollar funding markets at home and abroad. We also established new lending facilities to support the functioning of the commercial paper market and to ease pressures on money market mutual funds. In an effort to restart securitization markets to support the extension of credit to consumers and small businesses, we joined with the Treasury to announce the Term Asset-backed Securities Loan Facility, or TALF. The TALF is expected to begin extending loans soon. The measures taken by the Federal Reserve, other U.S. Government entities, and foreign governments since September have helped to restore a degree of stability to some financial markets. In particular, strains in short-term funding markets have eased notably since last fall, and London Interbank Offered Rates, or LIBOR, upon which borrowing costs for many households and businesses are based, have 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 seen in September have been replaced by modest inflows. Corporate risk spreads have declined somewhat from extraordinarily high levels, although these 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. As I mentioned earlier, conforming fixed mortgage rates for households have declined. Nevertheless, despite these favorable developments, significant stresses persist in many markets. Notably, most securitization markets remain shut other than that for conforming mortgages, and some financial institutions remain under pressure. In light of ongoing concerns over the health of financial institutions, the Secretary of the Treasury recently announced a plan for further actions. This plan includes four principal elements. First, a new Capital Assistance Program will be established to ensure that banks have adequate buffers of high-quality capital based on results of comprehensive stress tests to be conducted by the financial regulators, including the Federal Reserve. Second is a Private-Public Investment Fund in which private capital will be leveraged with public funds to purchase legacy assets from financial institutions. Third, the Federal Reserve, using capital provided by the Treasury, plans to expand the size and scope of the TALF to include securities backed by commercial real estate loans and potentially other types of asset-based securities as well. And, fourth, the plan includes a range of measures to help prevent unnecessary foreclosures. Together, over time, these initiatives should further stabilize our financial institutions and markets, improving confidence and helping to restore the flow of credit needed to promote economic recovery. The Federal Reserve is committed to keeping the Congress and the public informed about its lending programs and balance sheet. For example, we continue to add to the information shown in the Fed's H41 statistical release, which provides weekly detail on the balance sheet and the amounts outstanding for each of the Federal Reserve's lending facilities. Extensive additional information about each of the Federal Reserve's lending programs is available online. The Fed also provides bimonthly reports to the Congress on each of its programs that rely on the Section 13(3) authorities. Generally, our disclosure policies reflect the current best practices of major central banks around the world. In addition, the Federal Reserve's internal controls and management practices are closely monitored by an independent Inspector General, outside private sector auditors, and internal management and operations divisions, and through periodic reviews by the Government Accountability Office. All that said, we recognize that recent developments have led to a substantial increase in the public's interest in the Fed's programs and balance sheet. For this reason, we at the Fed have begun a thorough review of our disclosure policies and the effectiveness of our communication. Today, I would like to highlight two initiatives. First, to improve public access to information concerning Fed policies and programs, we recently unveiled a new section of our Web site that brings together in a systematic and comprehensive way the full range of information that the Federal Reserve already makes available, supplemented by explanations, discussions, and analyses. We will use that Web site as one means of keeping the public and the Congress fully informed about Fed programs. Second, at my request, Board Vice Chairman Donald Kohn is leading a committee that will review our current publications and disclosure policies relating to the Fed's balance sheet and lending policies. The presumption of the committee will be that the public has the right to know and that the non-disclosure of information must be affirmatively justified by clearly articulated criteria for confidentiality based on factors such as reasonable claims to privacy, the confidentiality of supervisory information, and the need to ensure the effectiveness of policy. In their economic projections for the January FOMC meeting, monetary policymakers substantially marked down their forecasts for real GDP this year relative to the forecast they had prepared in October. The central tendency of their most recent projections for real GDP implies a decline of one-and-one-half percent to one-and-one-quarter percent over the four quarters of 2009. These projections reflect an expected significant contraction in the first half of this year, combined with an anticipated gradual resumption of growth in the second half. The central tendency for the unemployment rate in the fourth quarter of 2009 was marked up to a range of eight-and-a-half percent to eight-and-three-quarters percent. Federal Reserve policymakers continue to expect moderate expansion next year, with a central tendency of two-and-a-half percent to three-and-a-quarter percent growth in real GDP and a decline in the unemployment rate by the end of 2010 to a central tendency of 8 percent to eight-and-a-quarter percent. FOMC participants marked down their projections for overall inflation in 2009 to a central tendency of one-quarter percent to 1 percent, reflecting expected weakness in commodity prices and the disinflationary effects of significant economic slack. The projections for core inflation also were marked down to a central tendency bracketing 1 percent. Both overall and core inflation are expected to remain low over the next 2 years. This outlook for economic activity is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside. One risk arises from the global nature of the slowdown, which could adversely affect U.S. exports and financial conditions to an even greater degree than currently expected. Another risk arises from the destructive power of the so-called adverse feedback loop in which weakening economic and financial conditions become mutually reinforcing. To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets. If actions taken by the administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability, and only if that is the case, in my view, there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery. If financial conditions improve, the economy will be increasingly supported by fiscal and monetary stimulus, the salutary 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. To further increase the information conveyed by the quarterly projections, FOMC participants agreed in January to begin publishing their estimates of the values to which they expect key economic variables to converge over the longer run, say at a horizon of 5 to 6 years, under the assumption of appropriate monetary policy and in the absence of new shocks to the economy. The central tendency for the participants' estimates of a longer run growth rate of real GDP is two-and-a-half percent to two-and-three-quarters percent. As to the longer rate of unemployment, it is four-and-three-quarter percent to 5 percent. And as to the longer rate of inflation, it is one-and-three-quarter percent to 2 percent, with the majority of participants looking for 2 percent inflation in the long run. These values are all notably different from the central tendencies of the projections for 2010 and 2011, reflecting the view of policymakers that a full recovery of the economy from the current recession is likely to take more than 2 or 3 years. The longer-run projections for output growth and unemployment may be interpreted as the Committee's estimates of the rate of growth of output and the unemployment rate that are sustainable in the long run in the United States, taking into account important influences such as the trend in growth rates of productivity in the labor force, improvements in worker education and skills, the efficiency of the labor market at matching workers and jobs, government policies affecting technological development, or the labor market and other factors. The longer-run projections of inflation may be interpreted, in turn, as the rate of inflation that FOMC participants see as most consistent with the dual mandate given to it by the Congress, that is the rate of inflation that promotes maximum sustainable employment while also delivering reasonable price stability. This further extension of the quarterly projection should provide the public a clearer picture of the FOMC's policy strategy for promoting maximum employment and price stability over time. Also, increased clarity about the FOMC's views regarding longer-run inflation should help to better stabilize the public's inflation expectations, thus contributing to keeping actual inflation from rising too high or falling too low. At the time of our last monetary policy report, the Federal Reserve was confronted with both high inflation and rising unemployment. Since that report, however, inflation pressures have receded dramatically while the rise in the unemployment rate has accelerated and financial conditions have deteriorated. In light of these developments, the Federal Reserve is committed to using all available tools to stimulate economic activity and to improve financial market functioning. Toward that end, we have reduced the target for the Federal Funds Rate close to zero and we have established a number of programs to increase the flow of credit to key sectors of the economy. We believe that these actions, combined with the broad range of other fiscal and financial measures being put into place, will contribute to a gradual resumption of economic growth and improvement in labor market conditions in a context of low inflation. We will continue to work closely with the Congress and the administration to explore means of fulfilling our mission of promoting maximum employment and price stability. Thank you, Mr. Chairman. " CHRG-111hhrg48674--128 Mr. Meeks," Thank you, Mr. Chairman. Mr. Chairman, I have really two separate questions that I want to ask. The first goes toward local municipalities. I actually had a big question with my comptroller in the City of New York, and we started talking about munibonds that the City of New York tries to, has to sell. It is important for them to sell the variable rate debt. One of the things that they had indicated to me that was tremendously important was that, under the numerous programs that were designed for banks and security firms to use as commercial paper to credit cardholders, that they can continue to get access to credit. But the one group of borrowers that I am told left out of all this help is State and local governments. I am told the conditions in the municipal bond market are better than they were 2 months ago but by no means back to normal, and many State and local governments want to borrow to finance new construction projects. We have a lot of new construction projects but cannot access the capital market at reasonable terms. So the question is, do you think to help these local governments and municipalities, would you support initiatives designed to make financing more readily available to States and localities, such as providing standby liquidity facilities for variable rate municipal bonds? " FOMC20060808meeting--181 179,MR. PLOSSER.," Thank you, Mr. Chairman. The goals are pretty clearly stated, and I have no real problems with them. I agree that communication and transparency are really a key part of maintaining and enhancing our own credibility. I also understand, as I listen to people around the table and other conversations, that some of these issues have no easy or clear answers to them, and I should note in advance that my own views are evolving as I think about and understand the nuances of the issues. I agree with President Yellen. I’d like to applaud the Committee because in the past ten years there have really been great strides in both transparency and communication. Part of the challenge, it seems to me, is how we meet these goals. I think it’s true that putting some limits on what information is released is probably necessary over certain periods of time. For example, I wouldn’t advocate opening the FOMC meetings to the public; I think that would not be terribly useful. On the other hand, Governor Warsh was just talking about perhaps releasing minutes earlier or faster or some version of them, maybe with incomplete detail, but including the tone and nature of the discussion. I think it could be fairly useful and informative, particularly if it noted disagreements or discussions in terms of where the tension happened to be within the meeting. I spent several months at the Bank of England a couple of years ago and watched the give and take among committee members at the MPC and also watched them go out in public and discuss their different views and why they disagreed with each other. That was very instructive to me because they did it without apparently adding to volatility in the marketplace. The market had come to accept the notion that these people disagreed on some things. The information released might differ depending on the type of monetary regime we think we’re in—whether in a regime of inflation targeting or one of full discretion. However, regardless of the regime, the need for policymakers to clearly communicate what their goals are, their understanding of the economy’s current economic conditions and expected future conditions, and then the reasons for their decisions is an important part of communication. As to the quantity of information, quantity and quality to me are intertwined, so I’m going to talk about both of them together. Again, I applaud the expedited release of the minutes. Instituting that was a tremendous step forward, and I think it’s a very good idea. However, I would favor the Committee’s releasing some additional pieces of information. I obviously favor stating an explicit definition of price stability because doing so would help clarify our goals. The current practice of citing the range and central tendency of members’ forecasts is fine, but I would favor our releasing more information, perhaps in a quarterly forecast or in something like an inflation report, to help convey to the marketplace and the public what our range of views is and where the Committee stands on the state of the economy. It might help the public’s assessment of our views if we based our forecasts on some underlying policy assumptions rather than on what one might call appropriate policy, which might differ from member to member obviously and would likely not be well understood by the public anyway. One suggestion that has already been mentioned is conditioning the forecasts on the market’s expected funds rate path, for example. But in some way stating our assumptions or projections about potential GDP would be important as well because that information, again, will help the markets and market participants understand where the Committee is coming from. In regard to forward-looking information, I think there are a number of things that the FOMC could and should communicate, but its current expectation about the future path of the fed funds rate is not one of them. I don’t think that’s a very good practice in general. However, I do think that what we need to do is talk more about what our goals are, what our forecasts of those goals are, and even more in a qualitative sense the process by which we think we’re going to get there. That is to say, talking about how monetary policy will respond to various events—I hesitate to use the phrase “decision rule”—wouldn’t necessarily say anything about the future path of the fed funds rate, but it would be very informative. It’s critical, as has already been mentioned, that the FOMC members agree on what the goals are. The members don’t need to agree on the model of the economy or the channel by which they think monetary policy actually operates. Indeed, given the state of economic science, the differences in models and channels can aid in policy formation. Similarly, since dissents at this meeting are public, dissenters should feel free to explain the reasons for their dissent. We shouldn’t discourage presidents and other members from expressing their views about the state of the economy and the process. Committee members should be free to indicate how their views on the economy are evolving. In fact, I think that doing so supports our goal of helping the public form sound expectations of what policy is actually going to be." CHRG-111hhrg53244--123 Mr. Bernanke," We will extend it if conditions warrant. And we will try to give the markets plenty of advance notice. We are not going to necessarily try to hit any particular number. We are going to have to make a judgment whether the conditions in markets are still sufficiently disrupted that such an intervention is necessary. Remember, this is based on a determination that conditions are unusual and exigent. And if markets normalize, we should no longer be using that kind of program. " CHRG-111hhrg49968--126 Mr. Bernanke," That is right. So this is a very serious problem. Because besides the very important fact that people without jobs have difficulty meeting their house payments and other bills, people who are out of the labor force for a few years tend to lose their skills, tend to lose their connection to the labor force, and maybe when the economy recovers they may not even be employable. It is possible. So there are a lot of costs involved in this. And if I had an easy answer, I would give it to you. All I can say is that, as you know, the Federal Reserve has been very aggressive in trying to support the economy, and the Congress has been as well. We might look at trying to help people retain their skills through educational programs or other kinds of training programs. Ms. Schwartz. So maybe while people are on unemployment, we might want to actually get them into other kinds of job training or education? " FOMC20071031meeting--64 62,MR. LOCKHART.," Thank you, Mr. Chairman. As I have noted in the past, the industrial mix in the Sixth District looks a lot like the country as a whole. The regional data and anecdotal information show that, although the Sixth District economy is still expanding, the pace is marginally weaker than it was in September. In earlier meetings I commented on the severity of the housing situation in the District. There is no improvement in sight for the housing market, and there are signs that the sharp decline in residential construction is spilling over into nonresidential real estate segments, such as shopping center development. Employment growth is softening as well. Although the largest negative effects are in construction-related sectors, the slowdown in job growth appears to be fairly broad based. The broad contour of our national forecast is similar to the Greenbook baseline. Like the Greenbook, our forecast includes a slowing in business investment. Based on our survey of District business contacts, it appears that the low levels of expected capital expenditure are due mainly to pessimism about the pace of economic activity rather than restrictive credit conditions per se. Specifically, financial market turbulence does not appear to have directly affected economic activity, but it has created a greater uncertainty about the outlook for the economy. As a consequence, the majority of my directors and business contacts are reporting very little in the way of plans to increase capital expenditures in the coming year. Where business investment is discretionary, most respondents report a wait-and-see posture. More positively, the weaker dollar does appear to be having a positive effect on exports from the region. For the year to date, the dollar value of exports through the Sixth District ports was up 35 percent through August, whereas import growth was only 21 percent. Not coincidentally, the majority of businesses that indicated they were increasing capital expenditures over the coming months were exporters. In the run-up to this FOMC meeting, I again made calls to a few financial market participants, and they reflected a range of institutional and market perspectives. A synthesis of this opinion is consistent with the views that were expressed earlier by Bill Dudley and others. There’s a widespread view that persistent volatility in credit markets is bound to negatively affect the general economy. Credit market conditions have improved somewhat, but stability may be a long way off. A second wave of volatility may accompany incoming details regarding mortgage delinquencies caused by rate resets in 2008, and there’s a suspicion that third-quarter writedowns may be followed by substantial further losses recognized at year-end. Also, as referenced in the Bluebook, there is skepticism about the M-LEC (master liquidity enhancement conduit) proposal from several angles. In summary, our soundings of the economy, informed by formal modeling work, point to a continued slowing of the economy that will likely persist well into next year. Anecdotally, credit constraints outside the housing sector do not appear to be a major factor at this stage. But uncertainty created by financial market turbulence does seem to be acting as a constraint, and I believe that the heightened uncertainty regarding the economic outlook for 2008 warrants consideration of insurance against this downside risk. With respect to the outlook for inflation, I agree with the view expressed by others that recent developments in energy prices, if they persist, make it likely that we are about to enter another period in which headline numbers substantially exceed the trends suggested by core measures. Because of this, I feel it’s appropriate to characterize inflation risk as having increased. Thank you, Mr. Chairman." CHRG-111hhrg48674--100 Mr. Bernanke," Congressman, I have a very open mind about this, and I think it is very important to understand what went wrong, and there are probably many elements that contributed to the crisis. I do not think the evidence supports the view that Federal Reserve monetary policy in the early part of this decade was the principal source of the crisis. I think the principal source of the crisis had to do with the huge capital inflows coming from our trade deficit which overwhelmed our system and made risk management inadequate. That being said, I think we need to review monetary policy and make sure in particular that we don't err in terms of leaving policy too easy too long. Now, whether inflation targets would have helped, I am not sure. One of the key proponents of this view that the Federal Reserve kept rates too low explains the worldwide nature of this crisis by saying all the other central banks did the same thing, and most of them had inflation targets. " fcic_final_report_full--139 Overall, while the mortgages behind the subprime mortgage–backed securities were often issued to borrowers that could help Fannie and Freddie fulfill their goals, the mortgages behind the Alt-A securities were not. Alt-A mortgages were not gener- ally extended to lower-income borrowers, and the regulations prohibited mortgages to borrowers with unstated income levels—a hallmark of Alt-A loans—from count- ing toward affordability goals.  Levin told the FCIC that they believed that the pur- chase of Alt-A securities “did not have a net positive effect on Fannie Mae’s housing goals.”  Instead, they had to be offset with more mortgages for low- and moderate- income borrowers to meet the goals. Fannie and Freddie continued to purchase subprime and Alt-A mortgage–backed securities from  to  and also bought and securitized greater numbers of riskier mortgages. The results would be disastrous for the companies, their share- holders, and American taxpayers. COMMISSION CONCLUSIONS ON CHAPTER 7 The Commission concludes that the monetary policy of the Federal Reserve, along with capital flows from abroad, created conditions in which a housing bub- ble could develop. However, these conditions need not have led to a crisis. The Federal Reserve and other regulators did not take actions necessary to constrain the credit bubble. In addition, the Federal Reserve’s policies and pronouncements encouraged rather than inhibited the growth of mortgage debt and the housing bubble. Lending standards collapsed, and there was a significant failure of accounta- bility and responsibility throughout each level of the lending system. This in- cluded borrowers, mortgage brokers, appraisers, originators, securitizers, credit rating agencies, and investors, and ranged from corporate boardrooms to individ- uals. Loans were often premised on ever-rising home prices and were made re- gardless of ability to pay. The nonprime mortgage securitization process created a pipeline through which risky mortgages were conveyed and sold throughout the financial system. This pipeline was essential to the origination of the burgeoning numbers of high- risk mortgages. The originate-to-distribute model undermined responsibility and accountability for the long-term viability of mortgages and mortgage-related se- curities and contributed to the poor quality of mortgage loans. (continues) (continued) FOMC20080318meeting--46 44,MR. STOCKTON.," We have thought about that, and the difficulty at this point is trying to identify the truly exogenous features of the current financial stress that is operating over and beyond the channels that are normally incorporated in our models. Our models, obviously, have asset prices, such as house prices and stock prices, and have interest rates and interest rate spreads, and as those things have changed, we have been able to incorporate them into our forecast. But then, over and above that, we think that the model doesn't really capture a lot of the credit-availability channels. There is a lot more stress in the market beyond that captured by the interest rates in our models. So taking this with more than a grain of salt, we think roughly � percentage point on the level of GDP this year--over and beyond the effects of lower house prices, the weaker stock market, and the higher interest rate spreads--that basically lingers on into next year and only then begins to gradually phase out. That is an important factor as to why this forecast is based on such a low real federal funds rate. Obviously, if you came to a different conclusion either about the depth of what is likely to be occurring in the next few months in terms of the restraint--not just from these financial stress conditions but also from our call that we are moving into a recession--or about the way that restraint fades out over the forecast, that would have a huge influence on the projected path for the funds rate. So it is important to recognize that this forecast is conditioned on one in which those effects linger quite significantly into next year. " CHRG-111hhrg56776--204 Mr. Bernanke," This has been one of our top priorities. It's very, very important. What you need to do here is get an appropriate balance, on the one hand, between making sure the banks are safe and sound, making good loans. On the other hand, making sure that credit-worthy borrowers can get credit, and that the economy can grow. So we need to find the appropriate balance there, and we have done that in a number of ways. We have taken the lead on issuing guidance to our examiners and to the banks on small business lending, on commercial real estate lending, where the emphasis is on finding that appropriate balance. And it's giving lots of examples to the banks and the examiners, where you can look at the example and it gives you some insight into what criteria to apply when you're looking at a loan. And, in particular, one point that we have made repeatedly is that just because the asset value underlying a loan, the collateral of the loan has gone down, doesn't mean that it's a bad loan. Because as long as the borrower can make the payments, that still can be a good loan, and we shouldn't penalize the banks for making those loans. So, we have issued those guidances, and we have done an enormous amount of training with our examiners to make sure they understand it. We have been gathering information and feedback from the field, including asking for more data and more information, but at each of the reserve banks around the country, having meetings that bring in small businesses, banks, and community leaders, to try and get into the details of what's going on. We have also tried to support the small business lending market with our TALF program, which has helped bring money from the securities markets into the small business lending arena. So it is a very important priority for us. We were asked before about the interaction between being responsible for the macro-economy and being a supervisor. Well, here is one case where knowing what's going on in the banking system is extremely important for understanding what's going on in the economy broadly. And we take that very seriously. So, I realize it's still an issue. It's going to be a concern, because certainly standards have tightened up. Certainly some people who were credit-eligible before are no longer eligible, because their financial conditions are worse. But we really think it's very important that credit-worthy borrowers be able to get credit, and we are working really hard on that. " CHRG-111shrg50815--14 Mr. Clayton," Thank you, Senator, members of the Committee. My name is Kenneth J. Clayton, Senior Vice President and General Counsel of the ABA Card Policy Council. I appreciate the opportunity to testify today. Credit cards are responsible for more than $2.5 trillion in transactions a year and are accepted in more than 24 million locations worldwide. It is mind boggling to consider the systems needed to handle 10,000 card transactions every second around the world. It is an enormous, complicated, and expensive structure, all dedicated to delivering the efficient, safe, and easy payment vehicle we have all come to enjoy. As the credit card market has evolved to provide greater benefits and broader access, it has become more complex. As a result, legitimate concerns have been raised about the adequacy of disclosures and other regulations. In response to these concerns, the Federal Reserve and two other regulators released comprehensive rules that fundamentally change the protections offered to cardholders. In many respects, these rules reflect the input from those on this Committee and others. They have heard you. Federal Reserve Chairman Ben Bernanke noted that the new rules were, and I quote, ``the most comprehensive and sweeping reforms ever adopted by the Board for credit card accounts.'' These changes have forced the complete reworking of the credit card industry's internal operations, pricing models, and funding mechanisms. As this Committee considers new restrictions on credit cards, it is important to understand the sweeping nature of the Fed's rule and the extent to which it has already addressed the core concerns of cardholders. The rule essentially eliminates many controversial card practices. For example, it eliminates the repricing of existing balances, including the use of universal default. It eliminates changes to interest rates for new balances for the first year that the card is in existence. It eliminates double-cycle billing. It eliminates payment allocation methods perceived to disadvantage customers. And it eliminates high up-front fees on subprime cards that confuse consumers over the amount of credit actually available. The rule likewise ensures that customers will have adequate time to pay their bills and adequate notice of any interest rate increase on future balances so they can act appropriately. Perhaps most importantly, the rule provides significant enhancements to credit card billing statements, applications, solicitations, and disclosures that ensure that consumers will have the information they want in a manner they will understand and in a format they will notice so they can take informed actions in their best interests. These new rules will have even broader implications for consumers, card issuers, and the general economy. The rules affect every aspect of the credit card business, from how cards are funded to how they are priced to how they are marketed and to how credit is allocated among customers with different credit histories and risk. For example, because of the limitations on the repricing of risk, the rules will reduce credit availability and increase the price of credit. The rule will also impact the ability of card lenders to fund consumer loans in the secondary market as pricing restrictions coupled with increased delinquencies in this recession make investors very wary of buying asset-backed securities backed by card receivables. These securities fund about half of all card loans, to the tune of $450 billion. This can have enormous implications for the U.S. economy going forward and it is why the Fed and Treasury are currently working hard to unlock this market. Finally, the rules will impose enormous operational challenges for card issuers. Card lenders must completely overhaul internal processes, software, billing, product lines, advertising, customer service, and a host of other internal workings. Risk management models must be completely revised. The Fed understood the enormity of this challenge and stressed that adequate time to implement it is critical to avoid significant harm to consumers, and I want to stress that last point about the harm to consumers because there is a real concern that moving the date up on some of these rules will actually end up harming the consumers more than it benefits them. In closing, we would urge that any discussion over further legislation in this area be viewed in the context of the recent Federal Reserve rule, recognizing its sweeping nature, protection to consumers, impact on operations, and most importantly, its potential impact on our broader economy and the provision of credit to consumers and small businesses. Thank you. I would be happy to answer any questions you have. " Chairman Dodd," [Presiding.] Thank you very much. I appreciate your testimony and your presence here. Did you introduce all the witnesses? Senator Johnson. Yes. " FOMC20070321meeting--207 205,MR. KROSZNER.," As I said in my discussion, obviously I’m very concerned about a reference to financial conditions, especially “still-favorable financial conditions.” But as I also said, I think that it hangs out there a bit naked without some color around it. I would be fine with keeping personal income gains and the gradually waning correction to the housing market. My preference would be just something like “income gains, among other factors” to put something there. But that may be so weak that it may be better to cut off. I’m sympathetic to having some color, but I think the wrong color is the financial market condition." CHRG-110shrg50414--74 Mr. Bernanke," I do, Senator, but let me just add a couple comments. As you know, I am a student of financial crises and financial history, and we have looked at past experiences in the United States and other countries, like the Homeowners Loan Corporation, the RTC, the RFC, Japan, other situations. Those were all situations, again, as the Secretary said, where you were dealing with failed institutions and having to dispose of relatively simple assets that were taken over by the Government. That works in that context, and there are ways to do that. The situation we have now is unique and new. It involves not failing institutions--although we have had a few failures. Where we had failures, we dealt with them in a very tough way. You know, we have insisted on, you know, bringing the shareholder value down close to zero, imposing tough terms and so on. But the firms we are dealing with now are not necessarily failing, but they are contracting, they are de-leveraging, they are pulling back. And they will be unwilling to make credit available as long as these market conditions are in the condition they are. So, in order to address the illiquidity of the market and how to deal with these complex securities in the hands of going concerns, the methods used to resolve failed institutions in other contexts are not really appropriate because that would involve, I think, a great deal of concern on the part of other potential investors that if they invest in a bank that the Government is going to come in and take away their value. So I think that we are better off trying to address the root cause of the problem. Senator Shelby. What banks would be eligible to participate in this plan, assuming Congress adopted it as you proposed it, in selling their nonperforming assets to the Treasury or to an entity? And what size banks would be eligible to participate in that plan? " fcic_final_report_full--520 Finally, in a December 21, 2007, letter to Brian Montgomery, Assistant Secretary of Housing, Fannie CEO Daniel Mudd asked that, in light of the financial and economic conditions then prevailing in the country—particularly the absence of a PMBS market and the increasing number of mortgage delinquencies and defaults— HUD’s AH goals for 2007 be declared “infeasible.” He noted that HUD also has an obligation to “consider the financial condition of the enterprise when determining the feasibility of goals.” Then he continued: “Fannie Mae submits that the company took all reasonable actions to meet the subgoals that were both financially prudent and likely to contribute to the achievement of the subgoals…. In 2006, Fannie Mae relaxed certain underwriting standards and purchased some higher risk mortgage loan products in an effort to meet the housing goals. The company continued to purchase higher risk loans into 2007, and believes these efforts to acquire goals-rich loans are partially responsible for increasing credit losses.” 133 [emphasis supplied] This statement confirms two facts that are critical on the question of why Fannie (and Freddie) acquired so many high risk loans in 2006 and earlier years: first, the companies were trying to meet the AH goals established by HUD and not because these loans were profitable. It also shows that the efforts of HUD and others— including the Commission majority in its report—to blame the managements of Fannie and Freddie for purchasing the loans that ultimately dragged them to insolvency is misplaced. Finally, in a July 2009 report, the Federal Housing Finance Agency (FHFA, the GSEs’ new regulator, replacing OFHEO), noted that Fannie and Freddie both followed the practice of cross-subsidizing the subprime and Alt-A loans that they acquired: Although Fannie Mae and Freddie Mac consider model-derived estimates of cost in determining the single-family guarantee fees they charge, their pricing often subsidizes their guarantees on some mortgages using higher returns they expect to earn on guarantees of other loans. In both 2007 and 2008, cross-subsidization in single-family guarantee fees charged by the Enterprises was evident across product types, credit score categories, and LTV ratio categories. In each case, there were cross- subsidies from mortgages that posed lower credit risk on average to loans that posed higher credit risk. The greatest estimated subsidies generally went to the highest-risk mortgages. 134 The higher risk mortgages were the ones most needed by Fannie and Freddie to meet the AH goals. Needless to say, there is no need to cross-subsidize the G-fees of loans that are acquired because they are profitable. Accordingly, both market share and profitability must be excluded as reasons that Fannie (and Freddie) acquired subprime and Alt-A loans between 2004 and 131 132 133 134 Fannie Mae, “Housing Goals Forecast,” Alignment Meeting, June 22, 2007. Fannie Mae, Forecast Meeting, July 27, 2007 slide 4. Fannie Mae letter, Daniel Mudd to Asst. Secretary Brian Montgomery, December 21, 2007, p.6. FHFA, Fannie Mae and Freddie Mac Single Family Guarantee Fees in 2007 and 2008, p.33. 2007. The only remaining motive—and the valid one—was the effect of the AH goals imposed by HUD. CHRG-110shrg38109--36 Chairman Bernanke," Thank you, Mr. Chairman. The very important drivers of economic growth and prosperity in this country include free and open trade and technological progress. It is very important to allow those forces to continue to operate in our economy. However, we do have to recognize, as I discussed in Omaha, that the effects of these forces can be differential across the population. They may create greater income possibilities for some than others. They may create painful dislocations, for example, if the composition of industries changes or job skill requirements change. I agree with Chairman Greenspan's general point that in order to support and retain support for policies of free trade, open borders, technological change, flexible labor markets, we need to make sure that the gains and benefits from these powerful, growth-producing forces are broadly shared and that people understand that these things are good for the American economy and good for people generally in the economy. How to do that is very difficult. It is easy enough to say let us promote economic opportunity. I certainly support that idea. Doing it is not necessarily easy. I discussed in my speech some general issues and approaches, including education, not only K-12 education but also training throughout the life span, from early childhood through adult retraining. We need to help people who are dislocated by these powerful dynamic forces to find new jobs, to find new opportunities. I think that is very important. I would just say, though, that I am glad you did not ask me to endorse specific policies, because making that work in practice is difficult. We have to find ways to achieve these objectives. For example, retraining workers in ways that are effective, and are effective in terms of the spending that we put into it. So it is a great challenge for us going forward to look among all the possible approaches and decide which types of programs, which types of initiatives will be most effective at achieving this objective. That being said, again, I do agree that we need to spread the benefits widely and make people understand that open trade and technological change are beneficial for not only the economy in the aggregate, but also for the great majority of people in the economy. " FOMC20070918meeting--107 105,MR. LOCKHART.," Thank you, Mr. Chairman. In the Sixth District, we indulge ourselves with the conceit that our District looks a lot like the nation as a whole. We have 45 million consumers and an industrial composition that does resemble the country, so you can process my regional remarks with that conceit in mind. Housing markets continued to deteriorate in August in the Sixth District. Housing market weakness was most pronounced in Florida, as you might expect, followed by Atlanta and middle Tennessee. The consensus view is that the recent tightening in mortgage credit availability will exacerbate the region’s housing market problems, and most regional contacts believe that housing markets will continue to weaken, bottoming out no earlier than mid-2008, and some see a much longer adjustment period. Aside from housing, real economic readings in the Sixth District were mixed. Anecdotal feedback across a number of industries suggested that business spending has not yet slowed markedly, but the majority of contacts indicated that they are now approaching new capital spending more cautiously. That said, most contacts acknowledge that tighter credit standards have not significantly affected business capital investment outlays. Reports of factory activity were mixed, with defense and export industries doing well, while industries linked to housing were predictably weak. Transportation contacts indicated ongoing weak domestic demand. Consumer activity in the District was flat to slightly up in August compared with a year ago. Housing-related home product sales were especially weak, as were auto sales. Perhaps the most notable change from previous months was a turn to pessimism on the part of directors, reflecting their soundings of business contacts in their communities. I will mention that we have five Branches, so we actually get director feedback from more than forty directors across the District. Sixty percent believe that economic activity will be slower six months out, twice the percentage recorded in July. Even factoring out idiosyncratic conditions in localities such as south Florida and the Gulf Coast, the outlook, based on these anecdotal reports, has turned to the negative. To summarize my regional comments—current fundamentals are mixed, and the outlook is pessimistic. In our view, the economic outlook has changed since the last meeting, and the balance of risk has clearly shifted to the downside. We do not see a near-term recession as a high likelihood, but we do anticipate that growth will approach trend much more slowly with employment edging up as a consequence. So in direction and tone, if not magnitude, we are in agreement with the Greenbook, but our forecast differs from the Greenbook baseline forecast in the depth of the below-trend growth, ours being somewhat milder because we condition our forecast on deeper cumulative cuts in the fed funds rate over the coming months. Turning to capital markets, my recent conversations with a number of capital market participants suggest that the adjustment process in financial markets is far from complete. Their anecdotal feedback reflects a range of views about the severity of the current problems and the outlook for stabilization. Here is the overall picture I gleaned from these conversations. Some debt markets have firmed a bit. The leveraged-loan market, for example, is likely to renew trading in the coming weeks, but structured-debt security markets are not yet clearing. The principal reason—and this has been mentioned earlier by Bill and others—that debt markets remain illiquid is weak counterparty transparency and, therefore, uncertain counterparty risk, as well as uncertainty regarding the performance of collateral pools that back securities. The process of achieving adequate clarity and stabilization of the markets will likely take many more weeks. Markets will remain volatile while the condition of heightened uncertainty persists. There has been some spillover into markets that are unrelated to structured debt and subprime, but creditworthy borrowers are getting credit. There is sufficient buyer liquidity currently on the sidelines awaiting greater clarity regarding counterparties, market pricing of securities, and the depth and scope of the difficulties. Widespread deleveraging, particularly by SIVs and hedge funds and nonbank entities, is occurring and is likely to continue. One party argued, however, that all the news of financial distress has not pushed risk spreads to the extremes of historical bands. This party argued, “We are experiencing a painful adjustment from excessively high leverage to more-rational or more-realistic pricing in line with historical averages.” But all contacts believe—and this is perhaps not unexpected—that prolonged credit market problems will affect the broad economy, mostly through the consumer credit channel. So I believe our decision today boils down to whether we cut ¼ percentage point or ½ percentage point, obviously in combination with careful wording of the statement that conveys a rationale focused on economic fundamentals while signaling some recognition that the problems in the capital markets have the potential to deliver a credit shock to the broad economy. I consider it appropriate to adjust the federal funds rate to the now-weaker economic outlook, and I support a 50 basis point move with the rationale that at least 25 basis points of that represents recognition of a lower equilibrium rate and the remainder is a preemptive, preventive measure designed to renew confidence, facilitate conditions that resolve uncertainty, and shorten the necessary adjustment timeline in a deleveraging financial sector. It is a fair question whether the process of information revelation—that is, removing uncertainty—will be accelerated by an aggressive rate cut. My view is that this action, along with other liquidity actions, removes the psychological barrier—that being the concern that the Fed might fail to ensure enough upfront liquidity and might be pursuing an inadvertently tight policy, compounding problems by putting undue stress on the real economy. I think a distinction can be drawn between trying to influence the psychology around dangerous financial sector circumstances and bailing out the markets, and care should be taken to reflect this in the minutes. Let me add that I agree with the earlier comments of President Fisher that we perhaps should be looking at any policy move in the context of a total package that includes the auction credit facility. So I do have, let’s say, some sympathy for the view that the total package must be discussed. Thank you, Mr. Chairman." CHRG-110hhrg41184--22 Mr. Bernanke," Yes, I will. The Reg Z regulations are still out for comment. We are receiving comments, which we are going to review very carefully. But the intent of Reg Z was to provide clearer disclosure so people could understand what their credit card account involved. In particular, we have created a new Schumer Box, as it is called. It has new information about fees and penalties and provides more information to the consumer about the terms and conditions of their account. In addition, we propose to lengthen the period of time over which a consumer must receive notice before there is a change in terms of their credit card. These disclosures have been consumer tested. We have used companies to go out and use actual consumers to see what works, how much they recall, how much they understand. And we think there will be a substantial improvement in terms of allowing people to understand what is involved in their credit card accounts. We are beginning, as I mentioned, to look at some practices under the Unfair and Deceptive Acts and Practices rules. We anticipate setting out a proposal for comments within a couple of months, this spring, to address some issues that the disclosure rules themselves cannot address. The final release of both sets of rules will probably take place later this year. If possible, to minimize burden on the industry, would be to release the Reg Z disclosures and the new rules on unfair and deceptive acts and practices at about the same time, if possible. So I don't have a specific date yet for that release. " CHRG-111hhrg56767--72 Mr. Feinberg," Very high, but Fannie and Freddie, although they are not on my watch, pose some unique problems that I do not have to address with the five companies I am now dealing with. First, the future of Fannie and Freddie is sufficiently uncertain, as you well know, so that attracting people to Fannie and Freddie with the talent necessary to administer that program is more problematic. Not impossible, of course, but more problematic. Second, it is not easy to develop a pay package that has long-term performance-based delay, like I have with the five companies before me, when long-term performance-based delay is uncertain with a company like Fannie and Freddie. You cannot simply say, we will pay you over 4 or 5 years out, when there is a question as to what Fannie and Freddie will look like 4 or 5 years out. Finally, a major component of what I am doing and what the Office of the Special Master is doing is tied to stock. The fortunes of the individual will depend on the fortunes of the company. Your stock's value will depend on how well the company is doing. With Fannie and Freddie, there is no stock. It is cash. " CHRG-111shrg50814--205 PREPARED STATEMENT OF BEN S. BERNANKE Chairman, Board of Governors of the Federal Reserve System February 24, 2009 Chairman Dodd, Senator Shelby, and members of the Committee, I appreciate the opportunity to discuss monetary policy and the economic situation and to present the Federal Reserve's Monetary Policy Report to the Congress.Recent Economic and Financial Developments and the Policy Responses As you are aware, the U.S. economy is undergoing a severe contraction. Employment has fallen steeply since last autumn, and the unemployment rate has moved up to 7.6 percent. The deteriorating job market, considerable losses of equity and housing wealth, and tight lending conditions have weighed down consumer sentiment and spending. In addition, businesses have cut back capital outlays in response to the softening outlook for sales as well as the difficulty of obtaining credit. In contrast to the first half of last year, when robust foreign demand for U.S. goods and services provided some offset to weakness in domestic spending, exports slumped in the second half as our major trading partners fell into recession and some measures of global growth turned negative for the first time in more than 25 years. In all, U.S. real gross domestic product (GDP) declined slightly in the third quarter of 2008, and that decline steepened considerably in the fourth quarter. The sharp contraction in economic activity appears to have continued into the first quarter of 2009. The substantial declines in the prices of energy and other commodities last year and the growing margin of economic slack have contributed to a substantial lessening of inflation pressures. Indeed, overall consumer price inflation measured on a 12-month basis was close to zero last month. Core inflation, which excludes the direct effects of food and energy prices, also has declined significantly. The principal cause of the economic slowdown was the collapse of the global credit boom and the ensuing financial crisis, which has affected asset values, credit conditions, and consumer and business confidence around the world. The immediate trigger of the crisis was the end of housing booms in the United States and other countries and the associated problems in mortgage markets, notably the collapse of the U.S. subprime mortgage market. Conditions in housing and mortgage markets have proved a serious drag on the broader economy both directly, through their impact on residential construction and related industries and on household wealth, and indirectly, through the effects of rising mortgage delinquencies on the health of financial institutions. Recent data show that residential construction and sales continue to be very weak, house prices continue to fall, and foreclosure starts remain at very high levels. The financial crisis intensified significantly in September and October. In September, the Treasury and the Federal Housing Finance Agency placed the government-sponsored enterprises, Fannie Mae and Freddie Mac, into conservatorship, and Lehman Brothers Holdings filed for bankruptcy. In the following weeks, several other large financial institutions failed, came to the brink of failure, or were acquired by competitors under distressed circumstances. Losses at a prominent money market mutual fund prompted investors, who had traditionally considered money market mutual funds to be virtually risk-free, to withdraw large amounts from such funds. The resulting outflows threatened the stability of short-term funding markets, particularly the commercial paper market, upon which corporations rely heavily for their short-term borrowing needs. Concerns about potential losses also undermined confidence in wholesale bank funding markets, leading to further increases in bank borrowing costs and a tightening of credit availability from banks. Recognizing the critical importance of the provision of credit to businesses and households from financial institutions, the Congress passed the Emergency Economic Stabilization Act last fall. Under the authority granted by this act, the Treasury purchased preferred shares in a broad range of depository institutions to shore up their capital bases. During this period, the Federal Deposit Insurance Corporation (FDIC) introduced its Temporary Liquidity Guarantee Program, which expanded its guarantees of bank liabilities to include selected senior unsecured obligations and all non-interest-bearing transactions deposits. The Treasury--in concert with the Federal Reserve and the FDIC--provided packages of loans and guarantees to ensure the continued stability of Citigroup and Bank of America, two of the world's largest banks. Over this period, governments in many foreign countries also announced plans to stabilize their financial institutions, including through large-scale capital injections, expansions of deposit insurance, and guarantees of some forms of bank debt. Faced with the significant deterioration in financial market conditions and a substantial worsening of the economic outlook, the Federal Open Market Committee (FOMC) continued to ease monetary policy aggressively in the final months of 2008, including a rate cut coordinated with five other major central banks. In December the FOMC brought its target for the federal funds rate to a 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 near its floor, the Federal Reserve has taken additional steps to ease credit conditions. To support housing markets and economic activity more broadly, and to improve mortgage market functioning, the Federal Reserve has begun to purchase large amounts of agency debt and agency mortgage-backed securities. Since the announcement of this program last November, the conforming fixed mortgage rate has fallen nearly 1 percentage point. The Federal Reserve also established new lending facilities and expanded existing facilities to enhance the flow of credit to businesses and households. In response to heightened stress in bank funding markets, 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, and we expanded our network of swap lines with foreign central banks to ease conditions in interconnected dollar funding markets at home and abroad. We also established new lending facilities to support the functioning of the commercial paper market and to ease pressures on money market mutual funds. In an effort to restart securitization markets to support the extension of credit to consumers and small businesses, we joined with the Treasury to announce the Term Asset-Backed Securities Loan Facility (TALF). The TALF is expected to begin extending loans soon. The measures taken by the Federal Reserve, other U.S. Government entities, and foreign governments since September have helped to restore a degree of stability to some financial markets. In particular, strains in short-term funding markets have eased notably since the fall, and London interbank offered rates (Libor)--upon which borrowing costs for many households and businesses are based--have 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 seen in September have been replaced by modest inflows. Corporate risk spreads have declined somewhat from extraordinarily high levels, although these 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. As I mentioned earlier, conforming fixed mortgage rates for households have declined. Nevertheless, despite these favorable developments, significant stresses persist in many markets. Notably, most securitization markets remain shut, other than that for conforming mortgages, and some financial institutions remain under pressure. In light of ongoing concerns over the health of financial institutions, the Secretary of the Treasury recently announced a plan for further actions. This plan includes four principal elements: First, a new capital assistance program will be established to ensure that banks have adequate buffers of high-quality capital, based on the results of comprehensive stress tests to be conducted by the financial regulators, including the Federal Reserve. Second is a public-private investment fund in which private capital will be leveraged with public funds to purchase legacy assets from financial institutions. Third, the Federal Reserve, using capital provided by the Treasury, plans to expand the size and scope of the TALF to include securities backed by commercial real estate loans and potentially other types of asset-backed securities as well. Fourth, the plan includes a range of measures to help prevent unnecessary foreclosures. Together, over time these initiatives should further stabilize our financial institutions and markets, improving confidence and helping to restore the flow of credit needed to promote economic recovery.Federal Reserve Transparency The Federal Reserve is committed to keeping the Congress and the public informed about its lending programs and balance sheet. For example, we continue to add to the information shown in the Fed's H.4.1 statistical release, which provides weekly detail on the balance sheet and the amounts outstanding for each of the Federal Reserve's lending facilities. Extensive additional information about each of the Federal Reserve's lending programs is available online. \1\The Fed also provides bimonthly reports to the Congress on each of its programs that rely on the section 13(3) authorities. Generally, our disclosure policies reflect the current best practices of major central banks around the world. In addition, the Federal Reserve's internal controls and management practices are closely monitored by an independent inspector general, outside private-sector auditors, and internal management and operations divisions, and through periodic reviews by the Government Accountability Office.--------------------------------------------------------------------------- \1\ For links and references, see Ben S. Bernanke (2009), ``Federal Reserve Programs to Strengthen Credit Markets and the Economy,'' testimony before the Committee on Financial Services, U.S. House of Representatives, February 10, http://www.federalreserve.gov/newsevents/testimony/bernanke20090210a.htm--------------------------------------------------------------------------- All that said, we recognize that recent developments have led to a substantial increase in the public's interest in the Fed's programs and balance sheet. For this reason, we at the Fed have begun a thorough review of our disclosure policies and the effectiveness of our communication. Today I would like to highlight two initiatives. First, to improve public access to information concerning Fed policies and programs, we recently unveiled a new section of our Web site that brings together in a systematic and comprehensive way the full range of information that the Federal Reserve already makes available, supplemented by explanations, discussions, and analyses. \2\ We will use that Web site as one means of keeping the public and the Congress fully informed about Fed programs.--------------------------------------------------------------------------- \2\ The Web site is located at http://www.federalreserve.gov/monetarypolicy/bst.htm--------------------------------------------------------------------------- Second, at my request, Board Vice Chairman Donald Kohn is leading a committee that will review our current publications and disclosure policies relating to the Fed's balance sheet and lending policies. The presumption of the committee will be that the public has a right to know, and that the nondisclosure of information must be affirmatively justified by clearly articulated criteria for confidentiality, based on factors such as reasonable claims to privacy, the confidentiality of supervisory information, and the need to ensure the effectiveness of policy.The Economic Outlook and the FOMC's Quarterly Projections In their economic projections for the January FOMC meeting, monetary policy makers substantially marked down their forecasts for real GDP this year relative to the forecasts they had prepared in October. The central tendency of their most recent projections for real GDP implies a decline of \1/2\ percent to 1\1/4\ percent over the four quarters of 2009. These projections reflect an expected significant contraction in the first half of this year combined with an anticipated gradual resumption of growth in the second half. The central tendency for the unemployment rate in the fourth quarter of 2009 was marked up to a range of 8\1/2\ percent to 8\3/4\ percent. Federal Reserve policymakers continued to expect moderate expansion next year, with a central tendency of 2\1/2\ percent to 3\1/4\ percent growth in real GDP and a decline in the unemployment rate by the end of 2010 to a central tendency of 8 percent to 8\1/4\ percent. FOMC participants marked down their projections for overall inflation in 2009 to a central tendency of \1/4\ percent to 1 percent, reflecting expected weakness in commodity prices and the disinflationary effects of significant economic slack. The projections for core inflation also were marked down, to a central tendency bracketing 1 percent. Both overall and core inflation are expected to remain low over the next 2 years. This outlook for economic activity is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside. One risk arises from the global nature of the slowdown, which could adversely affect U.S. exports and financial conditions to an even greater degree than currently expected. Another risk derives from the destructive power of the so-called adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing. To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets. If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability--and only if that is the case, in my view--there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery. If financial conditions improve, the economy will be increasingly supported by fiscal and monetary stimulus, the salutary 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. To further increase the information conveyed by the quarterly projections, FOMC participants agreed in January to begin publishing their estimates of the values to which they expect key economic variables to converge over the longer run (say, at a horizon of 5 or 6 years), under the assumption of appropriate monetary policy and in the absence of new shocks to the economy. The central tendency for the participants' estimates of the longer-run growth rate of real GDP is 2\1/2\ percent to 2\3/4\ percent; the central tendency for the longer-run rate of unemployment is 4\3/4\ percent to 5 percent; and the central tendency for the longer-run rate of inflation is 1\3/4\ percent to 2 percent, with the majority of participants looking for 2 percent inflation in the long run. These values are all notably different from the central tendencies of the projections for 2010 and 2011, reflecting the view of policymakers that a full recovery of the economy from the current recession is likely to take more than 2 or 3 years. The longer-run projections for output growth and unemployment may be interpreted as the Committee's estimates of the rate of growth of output and the unemployment rate that are sustainable in the long run in the United States, taking into account important influences such as the trend growth rates of productivity and the labor force, improvements in worker education and skills, the efficiency of the labor market at matching workers and jobs, government policies affecting technological development or the labor market, and other factors. The longer-run projections of inflation may be interpreted, in turn, as the rate of inflation that FOMC participants see as most consistent with the dual mandate given to it by the Congress--that is, the rate of inflation that promotes maximum sustainable employment while also delivering reasonable price stability. This further extension of the quarterly projections should provide the public a clearer picture of the FOMC's policy strategy for promoting maximum employment and price stability over time. Also, increased clarity about the FOMC's views regarding longer-run inflation should help to better stabilize the public's inflation expectations, thus contributing to keeping actual inflation from rising too high or falling too low. At the time of our last Monetary Policy Report, the Federal Reserve was confronted with both high inflation and rising unemployment. Since that report, however, inflation pressures have receded dramatically while the rise in the unemployment rate has accelerated and financial conditions have deteriorated. In light of these developments, the Federal Reserve is committed to using all available tools to stimulate economic activity and to improve financial market functioning. Toward that end, we have reduced the target for the Federal funds rate close to zero and we have established a number of programs to increase the flow of credit to key sectors of the economy. We believe that these actions, combined with the broad range of other fiscal and financial measures being put in place, will contribute to a gradual resumption of economic growth and improvement in labor market conditions in a context of low inflation. We will continue to work closely with the Congress and the Administration to explore means of fulfilling our mission of promoting maximum employment and price stability. FOMC20080430meeting--108 106,MR. STERN.," Thank you, Mr. Chairman. Well, for some time I have been using the headwinds period of the early 1990s as a frame of reference for thinking about credit conditions, economic growth, and inflation prospects for the next several years. I won't belabor that comparison much this afternoon, except to say that I continue to find it helpful. With that, and given that the information we have received since our March meeting hasn't caused me to change my views about financial conditions or about growth, let me just say that I continue to expect financial headwinds of some intensity to persist well into next year. I think that the economy will decline--contract in this quarter and in the next quarter--before growth resumes, and that the resumption will initially be fairly mild. So my outlook for economic growth next year is below that of the Greenbook. It is a pretty modest outlook. Recent anecdotes from business contacts and from people in financial services firms have not been what I would call overly negative. If I were to give those anecdotes more weight, I would probably be somewhat more optimistic about the economic outlook than I am. But I am guessing that those anecdotes are underestimating the weight of the credit constraints that are in train, and people--at least people that I have talked to--don't fully appreciate that yet. Turning to inflation, on average it seems to me that the inflation situation and its prospects are no better, and possibly worse, than I had been anticipating. To be sure, the core measures of inflation have not accelerated recently and look to be what I might call close to acceptable, looking at their recent performance. But we have been warned that some of that better performance is likely to prove transitory. Meanwhile, headline inflation has been elevated and has tended to surprise on the upside. Moreover, I worry that the persistence of sizable increases in energy and general commodity prices will have a more pronounced effect on core inflation going forward than they have in the recent past. Further, I have the sense, both from some estimates of inflation expectations and from the comments and questions I have been getting about inflation and the foreign exchange value of the dollar, that the public's conviction about monetary policy's willingness and ability to maintain low inflation is starting to waver. Thank you. " FOMC20080430meeting--104 102,MR. HOENIG.," Thank you, Mr. Chairman. Economic activity continues to be slow in the Tenth District with a soft tone in our residential and nonresidential construction and certainly in our retail sales. Mitigating this weakness, however, to some extent is continued strength in energy and agriculture exports and, to a lesser degree, manufacturing. With regard to exports, one interesting development is a shortage of shipping containers domestically and internationally that is limiting the volume of exports of both our agricultural and some of our manufacturing products. On balance though, the District activity continues to be stronger than the national economy, and this is reflected in better employment growth and firm labor markets in many parts of our region. In my recent discussions with directors at our Bank and in our Branches and the Economic Advisory Council members, several themes have been prominent. Concern about inflation has escalated to the highest level I've been involved with in the last decade. Businesses across the board are experiencing the largest input cost pressures in recent memory for them. Many businesses have not been able to absorb these cost pressures and have raised prices to both retail and business customers, and generally speaking, businesses are finding much less resistance to price increases than in the past. Businesses also report that suppliers are increasingly reluctant to make contractual price quotes very far in the future. We have also been monitoring the effects of credit availability on business capital spending in our area. Although businesses report some tightening of credit conditions, credit costs and availability are not the primary factors behind reduced capital spending plans. Bank loans have actually continued to grow. Instead, businesses cite uncertainty about the economic outlook as the main impediment to investment. They are in a wait-and-see mode. So spending is being held back not for financial reasons but just caution. Indeed, they suggest that uncertainty about whether monetary policy will be eased further is a factor currently inhibiting their capital spending plans. They want to see when we're done. Turning to the broader economic output and the national economy, I have revised down my growth estimate for the first half of 2008 but have had few changes to my longer-term outlook. Compared with the Greenbook, I see somewhat stronger growth this year and somewhat weaker growth next year. Weaker growth in the first half of this year is coming largely from the effects of higher energy prices on consumer and business spending coupled with the continued weakness in residential construction. I would say that the effect of high energy prices is now about as large as or even larger than the contraction in residential construction, and I think that the energy outlook constitutes a main downside risk to growth in the period ahead. In contrast--and contrary to the Greenbook and the views of some--I think that energy and housing perhaps now more than credit problems are holding back economic growth. Certainly credit conditions have continued to tighten as reflected in the April Senior Loan Officer Opinion Survey, and markets for many asset-backed securities, of course, have shut down. But the availability of credit for good business and household borrowers does not appear to have really been restricted that much. They are pricing more wisely for risk, and that is probably a positive. Consequently, the downside economic risks from a pronounced credit contraction appear to have diminished considerably over the past few months. I want to turn to inflation. In my view, the inflation outlook has worsened considerably. For the first time in many years, we are seeing significant inflation pressure from goods prices, especially imported goods prices. Moreover, the recent moderation in monthly inflation numbers is coming mainly from some softness in service prices, which in my opinion, is unlikely to continue. More optimistic views of inflation, including those in the Greenbook, rely heavily on economic slack and a turnaround in food and energy prices to improve the outlook. I am skeptical on both counts. I do not think that there will be as much slack generated in the current slowdown as does the Greenbook, and there is evidence that the effects of output and employment gaps on inflation have fallen, well, actually more than a little over the past two decades. Furthermore, I have not seen any indication that elevated energy and food price inflation is likely to dissipate soon, as many of these pressures are reflective of international economic developments that we have talked about here, including the weakness in the dollar. I believe that we are entering a dangerous period, if I can use that word, in which inflation expectations are beginning to move higher and inflation psychology is becoming more prominent in business decisions. In this regard, I also do not take much comfort from favorable readings of labor costs as wages tend to follow prices in my experience. In these circumstances, I am concerned that maintaining a highly accommodative policy stance for an extended period would greatly increase the likelihood that inflation exceeds our long-run objectives. Thank you. " FOMC20080109confcall--26 24,MS. YELLEN.," Thank you, Mr. Chairman. I agree with both the concerns that you expressed and the analysis that you offered. Based on the data we now have in hand, I support a 50 basis point reduction in the federal funds rate in the near future. I think a very good case can be made for moving down 25 basis points today, and it would be my preference. According to what Bill Dudley said, markets apparently do attach some probability to a move of that magnitude before the January meeting. I could also support a 50 basis point move today, but I am concerned that it might be taken as a sign of panic by the Committee and somehow wrongly indicate that we have inside information showing that things are even worse than markets already think or, alternatively, be seen as an overreaction to the employment report. But if we don't move today, I do think we need to take decisive action in January, and I hope you will give a strong signal that we will do so in your speech. I agree with the staff's assessment that the outlook for economic growth has weakened since December, and I also see the downside risks to the forecast as having increased since then. We have revised down our 2008 forecast also because of the sharp increase in energy prices and the deterioration we have seen in financial conditions just since December. It is good that conditions in money markets have improved somewhat, but equity prices have fallen very substantially--I guess around 6 percent since our last meeting. Credit spreads are up, and borrowing rates for many borrowers are higher in spite of a decline in Treasury yields. I also find the labor market developments worrisome. I try not to put too much weight on any single monthly observation, but I find it entirely believable and consistent with everything else we are seeing that we have entered, at best, a period of slow employment growth. It is something that we have been expecting all along. It helps to resolve some of the puzzles we have been discussing about why labor markets have been so strong relative to goods markets. It is true that consumer spending has been amazingly robust so far, but I find it unimaginable that it can continue when slow growth in disposable income is added to everything else that is weighing on households, particularly rising energy prices, accelerating declines in house prices, and falling stock prices. It seems to me that, with the stagnant or contracting labor market, the odds of a recession--and, as you argued, a potentially very nasty one--have risen. I am also very worried about the possibility of a credit crunch if higher job losses begins to make lenders pull back credit. It is true that on the inflation front the recent news hasn't been particularly good. It certainly is true that there are upside risks. But I do take comfort from the fact that inflation compensation has remained well behaved and that we already have slack in the labor market and more seems likely to develop. I support a significant rate cut not only because of the downgrade to the economic forecast since December but also because I think the stance of policy even now with the actions we have taken--I agree with you--is still within the neutral range. Given current prospects and the asymmetric nature of the risks, particularly the high tail risk associated with the credit crunch, I believe that policy should be clearly accommodative. So having revised down my forecast, I would support a significant funds rate cut as a way to catch up with where policy should be. " CHRG-110shrg50418--80 Mr. Wagoner," I just want--your comment about the 2003, 2004, 2005 period, I think it was a period that in retrospect was definitely fueled by low-cost credit, ready availability of credit to just about anybody who wanted it under, frankly, looser terms than probably would have been appropriate in retrospect. I think the wealth that was in the housing market, or perceived wealth, I think a lot of that was taken out by people with home equity loans and they would trade up and buy vehicles. And then I would have to say, within the industry, we had a bit of a structural issue, which I know from GM's side we had a lot of employees. We had huge cash obligations. I mentioned we owed $103 billion, or we paid over a certain period that in health care. And so the pressure to keep revenues quite high, and I think the learning from that period is we really have had to significantly reduce our structural costs so we don't have to force, if you will, try to push a string when the market isn't really there. And second of all, we are all going to have to adapt to a period of, I think, not only much more realistic credit terms, which means much less leasing, needing customers to offer some sort of downpayments, but we are also going to have to stick on this path that while energy prices have plummeted here recently, we don't for a second believe that that is a long-term situation. It is driven by the current credit crisis, and eventually with the growing demand for autos around the world, we have got to stick with the fuel economy. So, I mean, it was a heady period to a certain extent, and for, like, 5 or 6 years, the industry ran over 17 million. I think, as Alan suggested, for me, a more likely trend volume, if we weren't in a massive credit crisis, and it is probably a million and a half, two million less anyway, rather than if we were normal conditions today we would probably be running more like, I would guess, 15-and-a-half or 16 million units than 17-and-a-half or 18 million units. And it could actually be lower, and the other lesson we have learned is we are planning our business on a much lower volume than that, and if we have to stretch on the up-side, that is a more fun thing to do, anyway. " FOMC20071031meeting--77 75,MR. KOHN.," Thank you, Mr. Chairman. In broad outline, the situation is evolving as we anticipated in our last meeting. Spending outside of housing has been well maintained. The housing market is very weak. Financial markets have been returning more toward normal functioning, banks have tightened credit terms and standards, and core inflation has remained low. I think it is the nuances around each of these that complicate our decision at this meeting. As Dave Stockton and others pointed out, spending outside housing has been a bit stronger than expected. Paths of consumption and investment, along with employment, seem to be moderating going into the fourth quarter, but gradually. Importantly, the data for September haven’t been especially weak, and these could have potentially been affected by the financial tightening, increased uncertainty, and reduced consumer confidence that followed the events of August. With growth in the third quarter likely to be at or above 3 percent and no material change in the output gap for several quarters now, it does appear that the real funds rate of 3 percent plus that persisted since mid-2006, while quite high relative to historical averages, was not far from the equilibrium real rate at that time, given the low level of long-term rates, the ready availability of credit at historically low spreads, and the high level of wealth relative to income through this period. It seems somewhere between difficult and impossible to calibrate the effects on aggregate demand of the rise in long-term rates last spring, the tightening of credit conditions of the past few months, and the expected decline in housing prices. The staff has judged 50 basis points of easing—we did that at the last meeting—to be enough to keep the economy near its potential in the context of the relatively solid incoming data. That doesn’t seem unreasonable, though it does leave the fed funds rate at the higher end of its historical range. Nonetheless, I see a couple of reasons for important downside risks to such a growth forecast. First, though the housing market was roughly in line with staff forecasts, builders have made only a little progress in reducing inventory overhangs. Moreover, reports suggest that downward price pressures are increasing—for example, the constant quality new home index declined in the past two quarters. Market expectations for the Case-Shiller index revised down, suggesting that the drop in house prices could be steeper than the moderate drop assumed in the staff forecast. Substantial decreases in house prices would at some point revive the demand for housing. At the same time, that decline threatens greater spillovers from wealth effects on consumption and from tighter credit conditions as lenders react to threats to their capital from declining collateral values. Second, although financial markets are improving in many respects, the trajectory is gradual, uneven, and subject to reversal. We saw this just in the past couple of weeks, when adverse housing data, downgrades of highly rated mortgages and senior tranches, and earnings warnings caused some risk spreads to widen out. The secondary markets for nonconforming mortgages are still quite disrupted. Clearly, uncertainty about the pricing of many of the assets in question, about the amount of credit that will get put back to the bank balance sheets, and about the size and location of the losses that have to be taken continue to make lenders very skittish. In this environment, I wouldn’t be at all surprised to see a further tightening of credit availability at banks in the coming months. The developments in housing and financial markets are also likely to weigh on business spending plans, as we saw hinted at in the capital spending revisions that some of the Reserve Banks reported, and for households as evidenced by the low confidence surveys. These downside risks are strong enough that I think they will persist even if we ease slightly tomorrow. Besides the influences I already cited, my judgment in this regard takes account of market expectations. The markets’ implied r* has been below the staff’s and, I think, the Committee’s implied r* for some time now, but the gap seems to have widened considerably. In an environment of increased uncertainty about the outlook, such disparities perhaps aren’t surprising, and we can’t substitute market participants’ judgment for our own, but I did take a little signal from the extent of the pessimism about aggregate demand that I inferred from the interest rate path in the market relative to the staff’s path in the Greenbook. I don’t think r* is quite as low as President Yellen was suggesting—it is perhaps in the 2 to 2½ range since term premiums are still low; and even with house prices declining, the wealth-to-income ratios are still pretty high, and the dollar has been falling. But I did assume a slight easing of monetary policy sometime in the fourth quarter in my projection. I also projected low, stable core and ultimately total inflation, but I do see some upside risks around this outcome if the economy follows its most likely path. It is still producing at a high level of resource utilization, and some measures of compensation and labor costs have been rising. Core CPI inflation on three-month and six-month bases has accelerated even if the acceleration hasn’t shown through to the PCE measures. Increases in energy and commodity prices, along with recent declines of the dollar, are also a risk factor—less from their direct effects on prices, which are likely to be small, but more because they could suggest a potential for a more inflationary psychology that could feed through to expectations. Our decision tomorrow will involve weighing these risks, the extent of the relative risk to our dual objectives, and the potential costs of missing in either direction in the context of the market conditions and expectations built into markets. Thank you, Mr. Chairman." CHRG-110shrg50410--55 Mr. Bernanke," Well, I was going to just say that if the investment is made, just like any investor there would be terms and conditions. And if management changes or part of what the assessment was at that point in time, then that would certainly be something that the Treasury Secretary would be able to bring to the table as a possible condition. Senator Hagel. Mr. Chairman. " CHRG-111hhrg54869--113 Mr. Volcker," Well, I am not sure how helpful I can be. I think there is a problem. Obviously you are seeing a lot of failing of small banks, and they are kind of easy to take care of in terms of the capacity of the FDIC, and disturbance or lack thereof, and the failure of a particular small bank. But I do think that it takes judgment. But in a particular case of a small bank, to what extent is the problem one of accounting practice maybe, and I think bank accounting needs some review. I am not sure how important that is to these smaller banks. Are their cases where--bad word, but I will use it--that forbearance would have been justified, and the benefit of the doubt in some sense given to the small bank to see whether it can hold together for a while without forcing it into either a merger or liquidation? I don't know. That takes a very sophisticated and understanding regulatory regime, which may be beyond us. " FOMC20071211meeting--111 109,MR. KOHN.," Thank you, Mr. Chairman. The outlook for economic activity has weakened over the intermeeting period. The housing bust looks steeper with importantly greater declines in prices, and that will affect future consumption. Weakness in housing and the uncovering of greater losses at key financial intermediaries have contributed to a notable deterioration in financial markets and a tightening of some financial conditions. We are also beginning to see signs that economic weakness has not been confined to the housing-related sectors. With regard to activity outside of housing, like many others who have spoken today, I see the most notable development as the flattening-out of consumption spending in September and October. That could reflect the rise in energy prices, but it seems to me that the very deep dip in consumer sentiment suggests that more is at work—that the actual and expected effects of financial market turmoil, for example, on the cost and availability of credit to households along with lower house and stock prices might also be contributing to less-ebullient consumption spending in the recent past and going forward. Capital spending also seems to be slowing. Although business investment spending hasn’t been revised down in the fourth quarter in the Greenbook, logically slower consumption growth will show through before long, as it does beginning in the first quarter in the Greenbook. In addition, we have some more evidence of greater business caution, which could damp business investment relative to expected activity. The NFIB survey for November, for example, shows that the outlook by small businesses deteriorated decidedly in November. There’s a sharp downturn in almost all the outlook indexes for small businesses in this November survey; and as I listen to the reports from around the table, I think for all except a swath of states from Nebraska through Texas, maybe the lower Midwest, I’m hearing a little more pessimism from other places around the country consistent with this. To be sure, employment continues to expand. Various purchasing manager surveys also suggest that activity continues to increase, albeit slowly. But I agree with the staff that, on balance, the incoming data suggest more near-term weakness than anticipated at our last meeting, including some tentative evidence of spillovers from housing. Financial market conditions have deteriorated substantially, and that will place further restraint on growth next year. I think what we learned in the first few weeks of November was that losses are much larger than had been previously anticipated. Those losses stretched into what had been seen as higher quality mortgage-related assets, as Bill Dudley showed us, and the losses are large enough to call into question the ability of some very essential intermediaries to provide support for markets or to extend much additional credit. Those intermediaries include Fannie and Freddie and the financial guarantors, as well as some investment and commercial banks. As concerns about downgrades and potential fire sales rose, investors and institutions moved to protect themselves, with the rise in term funding spreads symptomatic of the greater level of concern. It is logical and reasonable that the response of intermediaries to this concern would be to tighten terms and conditions for their loans to exert greater control over their balance sheets. Expectations that intermediaries will be tightening credit, along with the incoming spending data, led to a more pessimistic view of the economic outlook, and although Treasury rates fell substantially, concern about the performance of borrowers meant that those declines did not show through very much into the cost of funds to private lenders and borrowers. Indeed, a number of indicators point to a net tightening of credit conditions across a range of borrowing sources over the intermeeting period, and that tightening will persist past the New Year. That tightening will have adverse implications for demand by households and businesses in 2008—that is, I do think there’s going to be some spillover from Wall Street to Main Street. Forward measures of the LIBOR-OIS spread for after the year-end moved substantially higher. In effect, the cost to banks of funding will not reflect the full extent of the easing we’ve done in the federal funds market. The spreads on corporate bonds have widened sufficiently to actually increase borrowing costs for both investment- grade and junk-bond issuers over the intermeeting period. The leveraged-loan market deteriorated in late November, forcing banks to take more loans onto their balance sheets, using up scarce balance sheet room. Secondary markets for nonconforming mortgages remain moribund, with no signs of life, and any loans that will be made in these nonconforming sectors will be placed onto the balance sheets of thrifts and banks, many of which are already facing strains. Perhaps as a consequence, rates on prime jumbo mortgages have actually risen over the intermeeting period; Fannie and Freddie have increased fees and are tightening standards, and they face slightly higher spreads. So the damping effect of lower Treasury rates on the cost of conforming housing credit will be held down. All that said, I do see some encouraging signs that the preconditions for future improvements are coming into place. As others have noted specifically, institutions are recognizing and dealing more directly with the implications of these losses. They are recognizing the losses more aggressively. They’re raising capital, and they’re being more explicit about taking contingent liabilities like SIVs onto their balance sheets. Even so, I think that what we have learned over the intermeeting period is that the process of returning financial markets to more normal functioning is going to take longer and the disruption to the cost and availability of credit will be greater than I had thought just six weeks ago. Prospects for a period of weaker economic growth and reduced resource utilization do work to lower inflation risks. In addition, we’ve seen a downward revision to compensation and unit labor costs, and commodity prices outside food and energy have fallen substantially in recent weeks. At the same time, energy prices have risen, and past inflation data have been revised higher, and the staff has actually revised up its inflation forecast by a tenth or two over the next few years. So on balance, I judge the inflation risk still to be to the upside if the economy follows the modal forecast but by considerably less than I thought at the last meeting. I look forward to a discussion in the next part of the meeting about how we deal with the policy implications of this changing situation." CHRG-111hhrg58044--344 Mr. Pratt," Thank you. A couple of things. First of all, credit scores are not used--I just want to make that clear--I understand the credit history is used, but not credit scores. So that's an irrelevant discussion. Credit scores are not used in employment. An employer wants to know, when they look at a credit report, what caused the problem in the credit report. Employers are smart, and they want to hire good people. That's why they use resumes, and that's why they use other types of tests of your qualifications. And that's why a credit report is not a single determining factor in whether or not you get the job. And if you show some financial distress over the last couple of years, employers are smart enough, because it's a credit history, which shows the full history of your hard work. It shows, by that band of difficulty is correlating very closely with the circumstances we have had in this country, with unemployment. So, an employer is not going to simply flip that application aside, particularly when they have a qualified person. The other very important point--and I keep coming back to this--is credit reports are not being used across the whole spectrum for every kind of job. If you're stocking a shelf, a credit report is probably not being used. If you're entering the construction trades, a credit report is probably not being used. It's being used, based on the surveys from the Society for Human Resources Management, as you would expect, if you are a CFO, and you have fiduciary responsibilities, if you have access to cash, a small business owner may want to know that. And, by the way, small business owners are some of the ones who do want to use a credit history as part of the review process. But that's why they have interviews, Mr. Hensarling. They have interviews to learn more about why you are qualified for the job, and why you should be the one hired for the job. " CHRG-111hhrg52407--7 Mr. Marchant," Thank you, Mr. Chairman. After reviewing last night all of the testimony that we will be given today, I am struck that all of your testimony seems to be directed towards a system that I think Mr. Hensarling has already pointed out is most likely not to be in place this time next year. In fact, with the current--the legislation that we just passed in the last few months, two pieces of legislation about credit cards, and the President has signed one of those pieces of legislation, significantly limiting the terms and conditions of credit cards and simplifying the credit card system; and taking into consideration that probably 80 percent of all home loans are made now through either FHA, VA, Fannie Mae, or Freddie Mac, and all of those documents are promulgated through HUD and through government agencies already; it seems to me that your task in the future may be trying to figure out how you can work with those Federal agencies, this new Financial Consumer Protection Agency, how you can work with them to try to help them promulgate all of these loan forms and all of the loan documents that each and every banker and lender in America will most likely have to go and get their loan papers approved and everything they do, and make sure that promulgation of documents is done through that agency. So it may simplify your job if you can, if you think you can trust this new financial consumer agency to draft the documents to where everyone who reads them will have no problem. So I think my questions today, Mr. Chairman, are going to be directed in that direction, and ask you what your opinion is of that agency and how you plan on interfacing with that agency. Thank you. " FOMC20081029meeting--211 209,MR. LACKER.," Thank you, Mr. Chairman. Business and consumer sentiment in the Fifth District has deteriorated markedly. Even though economic conditions were already decelerating heading into our September meeting, a discrete shift in outlook seems to have occurred. It seems to me to have originated during the week of September 15 or shortly thereafter. Our business contacts express anxiety about the national economy, and they express uncertainty about the meaning for their firms' prospects of the astonishing sequence of events that began unfolding that week. Both consumers and firms have been increasingly unwilling to make long-term commitments and engage in discretionary expenditures. Consumers are delaying large and discretionary expenditures. Firms have adopted a wait-and-see attitude on investments. Our regional survey released this morning shows a substantial drop in business conditions as well. Our business survey respondents report that obtaining business loans is more difficult than three months ago, and there are widespread reports of lenders tightening credit terms and seeking to reduce exposures. Most respondents, however, also indicated that they would still be able to satisfy their borrowing needs. When you listen to bankers, they will tell you that they are tightening standards, but they also report that they are still extending credit to solid borrowers with high-quality deals. I find it difficult right now to pin down the real effects of the financial market turmoil of the last few weeks. As the Greenbook notes, assessing such effects ""poses significant identification challenges."" Specifically, it is hard to disentangle the effects of the increased cost of bank capital from those of the deterioration in the economic environment facing borrowers. Personally, I suspect the latter are playing the more prominent role in the tightening of credit terms right now. Looking on the bright side, the near-term inflation picture has eased noticeably since our September meeting, mainly because of the decline in oil and other commodity prices. The Greenbook carries this moderation into its long-term forecast, where PCE inflation now converges to 1 percent in 2013. I did a double-take when I saw that--it had me wondering whether the Greenbook was ghost-written this month by President Plosser. [Laughter] Whoever's forecast it is, the longer-term projected moderation in inflation relies heavily on the opening-up of a large and persistent output gap. In the current circumstances, I am not sure how plausible that story is. In particular, I have been struggling with how to think about the effect of credit market disruptions on the concept of potential output. To the extent that we think of these disruptions as analogous to shocks to intermediation technology--and that is what the models of these kinds of credit channel effects generally tell you to do--it seems to me that we should see them as pulling down potential as well as actual output. I believe this point has been made at previous meetings. We have also talked before about the tenuous nature of the Phillips curve relationship, and it is difficult to forecast. The slope is sort of flat. We had been scheduled to discuss inflation dynamics, and we postponed that, for good reasons I believe. I hope we can get back to it soon because I think it's going to be relevant to how we see our way through this. In any event, I think we should be careful not to be overly optimistic about the forecast of an inflation decline driven by a large output gap. The shift in the Greenbook's long-term inflation projection is noteworthy for another reason, I believe. We are getting closer to a 1 percent target federal funds rate, and we may actually reach 1 percent at some meeting soon. The last time this happened it sparked a widespread discussion of and concern about the zero lower bound on nominal interest rates. I want to make a couple of related observations. First, a key to conducting monetary policy at the zero bound is being able to keep inflation expectations from falling and thereby increasing real interest rates. From this perspective, the revision of the Greenbook's forecast from 1.7 percent one meeting ago to 1.0 percent for five-year-ahead inflation implies that we run a monetary policy regime in which five-year-ahead expected inflation varies pretty significantly in response to contemporaneous shocks. I don't think that variability in long-run inflation projections can help our ability to manage inflation expectations at the zero bound. We'd be better if we ran a policy in which long-run expected inflation was more anchored, more stable. You can tell where I'm going with this, I'm sure. This highlights the value of an explicit inflation objective as well as the value of being able to communicate clearly about how we view the functioning of monetary policy at the zero bound. Second, I will just note briefly that the economics of monetary policy at the zero bound are closely related to the economics of paying interest on reserves at close to the target rate. In fact, if I'm not mistaken, they are virtually identical. I think progress on both fronts would be useful right now. Finally, let me just comment on financial market conditions. My sense is that what the public has seen--the large failures, the variety of resolution techniques, the deliberations leading up to the Congress's adoption of the bill it adopted--taken together have added up to significant pessimism on people's parts and have altered optimal strategy for a lot of financial institutions. So I think that is altering how people allocate portfolios and has led to further volatility in certain markets. It has led some institutions to adopt a wait-and-see attitude, to see how particular programs are going to be implemented. I think that we are seeing at least some dead-weight loss associated with the burdens of shifting financial flows between things that are covered and things that aren't and we are seeing a good deal of rent-seeking behavior as well. What we are seeing is going to have the effect of masking the evolution of underlying fundamentals. It is going to make it harder to see our way through this and understand just what is happening. I think that is going to be a thicket that we will need to cut through in the months ahead. That concludes my comments, Mr. Chairman. " CHRG-110hhrg44901--11 Mr. Bernanke," Thank you, Chairman Frank, Ranking Member Bachus, and members of the committee. I am pleased to present the Federal Reserve's Monetary Report to the Congress. The U.S. economy and financial system have confronted some significant challenges thus far in 2008. The contraction in housing activity that began in 2006 and the associated deterioration in mortgage markets that became evident last year have led to sizable losses at financial institutions and a sharp tightening in overall credit conditions. The effects of the housing contraction and of the financial headwinds on spending and economic activity have been compounded by rapid increases in the price of energy and other commodities, which have zapped household purchasing power even as they have boosted inflation. Against this backdrop, economic activity has advanced at a sluggish pace during the first half of this year, while inflation has remained elevated. Following a significant reduction in its policy rate over the second half of 2007, the Federal Open Market Committee eased policy considerably further through the spring to counter actual and expected weakness in economic growth and to mitigate downside risks to economic activity. In addition, the Federal Reserve expanded some of the special liquidity programs that were established last year and implemented additional facilities to support the functioning of financial markets and foster financial stability. Although these policy actions have had positive effects, the economy continues to face numerous difficulties, including ongoing strains in financial markets, declining house prices, a softening labor market, and rising prices of oil, food, and some other commodities. Let me now turn to a more detailed discussion of some of these issues. Developments in financial markets and their implications to the macroeconomic outlook have been a focus of monetary policymakers over the past year. In the second half of 2007, the deteriorating performance of subprime mortgages in the United States triggered turbulence in domestic and international financial markets as investors became markedly less willing to bear credit risk of any type. In the first quarter of 2008, reports of further losses and write-downs in financial institutions intensified investor concerns and resulted in further sharp reductions in market liquidity. By March, many dealers and other institutions, even those that had relied heavily on short-term secured financing, were facing much more stringent borrowing conditions. In mid-March, a major investment bank, The Bear Stearns Companies, Inc., was pushed to the brink of failure after suddenly losing access to short-term financing markets. The Federal Reserve judged that a disorderly failure of Bear Stearns would pose a serious threat to overall financial stability and would most likely have significant adverse implications for the U.S. economy. After discussions with the Securities and Exchange Commission, and in consultation with the Treasury, we invoked emergency authorities to provide special financing to facilitate the acquisition of Bear Stearns by JPMorgan Chase & Company. In addition, the Federal Reserve used emergency authorities to establish two new facilities to provide backstop liquidity to primary dealers, with the goals of stabilizing financial conditions and increasing the availability of credit to the broader economy. We have also taken additional steps to address liquidity pressures in the banking system, including a further easing of the terms for bank borrowing at the discount window and increases in the amount of credit made available to banks through the Term Auction Facility. The FOMC also authorized expansion of its currency swap arrangements with the European Central Bank and the Swiss National Bank to facilitate increased dollar lending by those institutions to banks in their jurisdictions. These steps to address liquidity pressures, coupled with monetary easing, seem to have been helpful in mitigating some market strains. During the second quarter, credit spreads generally narrowed, liquidity pressures ebbed, and a number of new financial institutions raised new capital. However, as events in recent weeks have demonstrated, many financial markets and institutions remain under considerable stress in part because of the outlook for the economy and thus for credit quality, which remains uncertain. In recent days, investors became particularly concerned about the financial condition of the Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac. In view of this development, and given the importance of these firms to the mortgage market, the Treasury announced a legislative proposal to bolster their capital, access to liquidity, and regulatory oversight. As a supplemental to the Treasury's existing authority to lend to the GSEs, and as a bridge to the time when Congress decides how to proceed on these matters, the Board of Governors authorized the Federal Reserve Bank of New York to lend to Fannie Mae and Freddie Mac, should that become necessary. Any lending would be collateralized by U.S. Government and Federal agency securities. In general, healthy economic growth depends on well-functioning financial markets. Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve. I turn now to current economic developments and prospects. The economy has continued to expand, but at a subdued pace. In the labor market, private payroll employment has declined, falling at an average pace of 94,000 jobs per month through June. Employment in the construction and manufacturing sectors has been particularly hard hit, although employment declines in a number of other sectors are evident as well. The unemployment rate has risen and now stands at 5\1/2\ percent. In the housing sector, activity continues to weaken. Although sales of existing homes have been about unchanged this year, sales of new homes have continued to fall, and inventories of unsold new homes remain high. In response, homebuilders continue to scale back the pace of housing starts. Home prices are falling, particularly in regions that experienced the largest price increases earlier this decade. The declines in home prices have contributed to the rising tide of foreclosures. By adding to the stock of vacant homes for sale, these foreclosures have in turn intensified the downward pressure on home prices in some areas. Personal consumption expenditures have advanced at a modest pace so far this year, generally holding up somewhat better than might have been expected, given the array of forces weighing on households and attitudes. In particular, with the labor market softening and consumer price inflation elevated, real earnings have been stagnant so far this year. Declining values in equities have taken their toll on household balance sheets, credit conditions have tightened, and indicators of consumer sentiment have fallen sharply. More positively, the fiscal stimulus package is providing some timely support to household incomes. Overall, consumption spending seems to be constrained over coming quarters. In the business sector, real outlays for equipment and software were about flat in the first quarter of the year, and construction of nonresidential structures slowed appreciably. In the second quarter, the available data suggests that business fixed investment appears to have expanded moderately. Nevertheless, surveys of capital spending plans indicate that firms remain concerned about the economic and financial environment, including sharply rising cost of inputs and indications of tightening credit, and they are likely to be cautious with spending in the second half of this year. However, strong export growth continues to be a significant boon to many U.S. companies. In conjunction with the June FOMC meeting, Board Members and Reserve Bank Presidents prepared economic projections covering the years 2008 through 2010. On balance, most FOMC participants expected that over the remainder of this year, output would expand at a pace appreciably below its trend rate, primarily because of continued weakness in housing markets, elevated energy prices, and tight credit conditions. Growth is projected to pick up gradually over the next 2 years as residential construction bottoms out and begins a slow recovery, and as credit conditions gradually improve. However, FOMC participants indicated that considerable uncertainty surrounded their outlook for economic growth and viewed the risks to their forecasts as skewed to the downside. Inflation has remained high, running at nearly a 3\1/2\ percent annual rate over the first 5 months of this year as measured by the price index for personal consumption expenditures. And with gasoline and other consumer energy prices rising in recent weeks, inflation seems likely to move temporarily higher in the near term. The elevated level of overall consumer inflation largely reflects a continued sharp run-up in the prices of many commodities, especially oil, but also certain crops and metals. The spot price of West Texas intermediate crude oil soared about 60 percent in 2007, and thus far this year has climbed an additional 50 percent or so. The price of oil currently stands at about 5 times its level toward the beginning of this decade. Our best judgment is that the surge has been driven predominantly by strong growth in underlying demand and tight supply conditions in global oil markets. Over the past several years, the world economy has expanded its fastest pace in decades, leading to substantial increases in the demand for oil. Moreover, growth has been concentrated in developing and emerging market economies, where energy consumption has been further stimulated by rapid industrialization and by government subsidies that hold down the price of energy faced by ultimate users. On the supply side, despite sharp increases in prices, the production of oil has risen only slightly in the past few years. Much of the subdued supply response reflects inadequate investment and production shortfalls in politically volatile regions where large portions of the oil reserves are located. Additionally, many governments have been tightening their control over oil resources, impeding foreign investment and hindering efforts to boost capacity and production. Finally, sustainable rates of production in some of the more accessible oil fields, such as those in the North Sea, have been declining. In view of these factors, estimates of long-term oil supplies have been marked down in recent months. Long-dated oil futures prices have risen, along with spot prices, suggesting that market participants also see oil supply conditions remaining tight for years to come. The decline in the foreign exchange value of the dollar has also contributed somewhat to the increase in oil prices. The precise size of this effect is difficult to ascertain, as the causal relationships between oil prices and the dollar are complex and run in both directions. However, the price of oil has risen significantly in terms of all major currencies, suggesting that factors other than the dollar, notably shifts in the underlying global demand for and the supply of oil, have been the principal drivers of the increase in prices. Another concern that has been raised is that financial speculation has added markedly to upward pressures on oil prices. Certainly, investor interest in oil and other commodities has increased substantially of late. However, if financial speculation were pushing above the levels consistent with the fundamentals of supply and demand, we would expect inventories of crude oil and petroleum products to increase as supply rose and demand fell. But, in fact, available data on oil inventories show notable declines over the past year. This is not to say that useful steps could not be taken to improve the transparency and functioning of futures markets, only that such steps are unlikely to substantially affect the prices of oil or other commodities in the longer term. Although the inflationary effect of rising oil and agricultural commodity prices is evident in the retail prices of energy and food, the extent to which the high prices of oil and other raw materials have been passed through to the prices of nonenergy, nonfood finished goods and services seems thus far to have been limited. But with businesses facing persistently higher input prices, they may attempt to pass through such costs into final goods and services more aggressively than they have so far. Moreover, as the foreign exchange value of the dollar has declined, rises in import prices have been greater upward pressure on business costs and consumer prices. In their economic projections for the June FOMC meeting, monetary policymakers marked-up their forecast for inflation during 2008 as a whole. FOMC participants continue to expect inflation to moderate in 2009 and 2010, as slower global growth leads to a cooling of commodity markets, as pressures on resource utilization decline, and as longer-term inflation expectations remain reasonably well-anchored. However, in light of the persistent escalation of commodity prices in recent quarters, FOMC participants viewed the inflation outlook as unusually uncertain and cited the possibility that commodity prices will continue to rise as an important risk to the inflation forecast. Moreover, the currently high levels of inflation, if sustained, might lead the public to revise up its expectations for longer-term inflation. If that were to occur, and those revised expectations were to become embedded in the domestic wage and price-setting process, we would see an unwelcome rise in actual inflation over the longer term. A critical responsibility of monetary policymakers is to prevent that process from taking hold. At present, accurately assessing and appropriately balancing the risks to the outlook for growth and inflation is a significant challenge for monetary policymakers. The possibility of higher energy prices, tighter credit conditions, and a still deeper contraction in housing markets all represent significant downside risks to the outlook for growth. At the same time, upside risks to the inflation outlook have intensified lately as the rising prices of energy and some other commodities have led to a sharp pickup in inflation, and some measures of inflation expectations have moved higher. Given the high degree of uncertainty, monetary policymakers will need to carefully assess incoming information bearing on the outlook for both inflation and growth. In light of the increase in upside inflation risk, we must be particularly alert to any indications, such as an erosion of longer-term expectations, that the inflationary impulses are becoming embedded in the domestic wage and price-setting process. I would like to conclude my remarks by providing a brief update on some of the Federal Reserve's actions in the area of consumer protection. At the time of our report last February, I described the Board's proposal to adopt comprehensive new regulations to prohibit unfair or deceptive practices in the mortgage market, using our authority under the Home Ownership and Equity Protection Act of 1994. After reviewing the more than 4,500 comment letters we received under the proposed rules, the Board approved the final rules on Monday. The new rules apply to all types of mortgage lenders and will establish lending standards aimed at curbing abuses, while preserving subprime lending and sustainable homeownership. The final rules prohibit lenders from making higher-priced loans without due regard for consumers' ability to make the scheduled payments, and require lenders to verify the income and assets on which they rely when making the credit decision. Also, for higher-priced loans lenders now will be required to establish escrow accounts so that property taxes and insurance costs will be included in consumers' regularly monthly payments. The final rules also prohibit prepayment penalty for higher-priced loans in cases in which the consumer's payment can increase during the first few years and restrict prepayment penalties or other higher-priced loans. Other measures address coercion of appraisers, servicer practices, and other issues. We believe the new rules will help to restore confidence in the mortgage market. In May, working jointly with the Office of Thrift Supervision and the National Credit Union Administration, the Board issued proposed rules under the Federal Trade Commission Act to address unfair or deceptive practices for credit card accounts and overdraft protection plans. Credit cards provide a convenient source of credit for many consumers, but the terms of credit cards loans have become more complex, which has reduced transparency. Our consumer testing has persuaded us that disclosures alone cannot solve this problem. Thus, the Board's proposed rules would require card issuers to alter their practices in ways that will allow consumers to better understand how their own decisions and actions will affect their costs. Card issuers will be prohibited from increasing interest rates retroactively to cover prior purchases except under very limited circumstances. For accounts having multiple interest rates, when consumers seek to pay down their balance by paying more than the minimum, card issuers will be prohibited from maximizing interest charges by applying excess payments to the lowest rate balance first. The proposed rules dealing with bank overdraft services seek to give consumers greater control by ensuring that they have ample opportunity to opt out of automatic payments of overdrafts. The Board has already received more than 20,000 comment letters in response to these proposed rules. Thank you. I have would be very pleased to take your questions. " FOMC20071211meeting--102 100,MR. PLOSSER.," Thank you, Mr. Chairman. There has been little change in the economic conditions in our District since the October meeting. Except for housing activity, manufacturing and other businesses are expanding at a modest pace, somewhat below trend. Our business contacts are a little less optimistic about growth in the near term than they were earlier in the fall primarily because of uncertainty surrounding the outlook rather than any immediate change in their business activity. I’ll begin by reporting on what our contacts say about credit conditions. Business contacts as well as our board of directors have told me that credit activity has changed very little. Creditworthy borrowers, as far as they were concerned, have had no problem accessing credit. Banks have reported some tightening of lending standards, but mostly that has occurred for real estate developers and in residential mortgages. Some loan demand has dropped because of businesses’ uncertainty about the future, as I suggested earlier. That is, businesses seem to be a bit more cautious. But banks do not appear to be conserving capital. In fact, they’re actively seeking good credits. To quote one of my directors, “The crunch on Wall Street has not hit Main Street.” A couple of bankers I spoke to, one representing a very large regional bank and another a very large community bank, expressed the view that they were actively seeking to regain market share from the larger banks because they did not engage in the same off-balance-sheet financing of riskier debt that the large banks did and so they were not facing either capital or funding constraints. Some bankers acknowledge that consumer credit quality seems to have deteriorated slightly, but they reminded me that this was from very good levels. So the defaults and delinquencies remain well within historical norms. Turning to the economy, payroll employment continues to expand at a somewhat slow pace in our three states, yet the unemployment rate is still 0.4 percentage point below that of the nation. Retail sales picked up in November. Moreover, retailers generally said they met their expectations for the Thanksgiving weekend. However, these sales seem to have been boosted by fairly heavy discounting, according to them; and despite the reasonable showing to date, retailers are wary and uncertain for the holiday season. Housing construction and sales continue to decline, but the pace of that decline is in line with the expectations at the time of our last meeting. Nonresidential real estate markets remain firm in our District. Office vacancy rates continue to decline, and commercial rents are rising. New contracts for commercial real estate have declined, however; but with the decline in vacancy rates and with rising rents, the outlook of many developers is not as negative as the current level of spending would suggest. According to our Business Outlook Survey, manufacturing activity in the District has been increasing at a modest pace for the past few months. The index of general activity moved up slightly, to 8.2 in November from 6.8 in October. This is actually about the same average level that the outlook survey has maintained over the past two years. Shipments and new orders moved up slightly. However, optimism regarding the outlook over the next six months declined. It’s a common theme of many of our business contacts that their businesses have not changed much, but they seem to be reacting to the steady stream of negative news, and it is affecting their outlook. Indeed, the CEOs of several very large industrial firms in our District report business to be very strong both domestically and overseas, and the CEOs have seen little effect of the turmoil on Wall Street on their ability to obtain credit. Now, last time I said that there had been little change in the District’s inflation picture. However, we have started to see evidence of increased price pressures. The Business Outlook Survey’s prices-paid index has risen considerably since the beginning of the year and has doubled since August. The index for prices received has also more than doubled since August, rising sharply in both October and November. Also retailers have noted spreading price increases for imported goods, and a wide range of industries are reporting increases in energy and transportation costs. Firms continue to report higher health care costs, and at the same time, wages continue to be moderate, they say. In summary, economic conditions have changed little since our last meeting. The business activity in the region is advancing at a moderate pace. Credit constraints experienced by the large money center banks have not appreciably affected the banks in our District or their lending practices. In general, firms in the District remain cautiously optimistic about their businesses six months from now but not so much as they were last month. Price pressures have increased on the input side related to energy and commodity costs; more generally, many firms are now prepared to raise their own prices and are looking to do so in the near future, and the financial conditions of our banks remain good. Turning to the nation, financial market conditions, especially those associated with the big money center banks, have clearly deteriorated in recent weeks. Until the end of October, spreads were gradually declining. It seems that the potential for a serious meltdown was monotonically declining. However, since early November, as we all pointed to, a number of financial institutions, subprime mortgages, jumbo mortgages, asset-backed commercial paper, below-investment-grade bonds, and LIBOR have experienced increased spreads. Volatility has risen as well. Clearly, risk premiums have risen for certain classes of assets, and investors have fresh concerns about the way credit market conditions are evolving. Overall, the recent financial developments suggest that it will take longer before conditions are “back to normal” in all segments of the market. As I’ve said before, I continue to believe that price discovery still plagues many of these markets. It now looks as though it will take a little longer before these markets can sort things out and return to normal. Financial institutions continue to write off some of the investments and take losses. I view these write-downs as a necessary and healthy part of the process toward stabilization. Infusions of capital in some financial institutions, I think, are encouraging and helpful to the process. This does not mean that the ultimate agreed-upon market prices for some of these assets will bear any resemblance to what they did before August. Indeed, they probably won’t. But that’s not necessarily a bad sign, nor is it a cause for concern. In general, it may be a very healthy development. The news on economic activity has softened somewhat since our last meeting. Among the negatives, of course, the housing market and residential investment continue to decline. Foreclosures have continued to grow at unprecedented rates. Firms have become a little more cautious in their investment plans. Consumer spending has softened slightly, and real disposable personal income declined in October. Oil prices have moved higher. On the brighter side so far, there is some evidence of spillovers from the financial and housing markets to the broader economy, but I believe it is limited. Net exports and business fixed investment have been surprises on the upside. Finally, and most important, the labor market still looks pretty solid. Foreclosures and consumer weaknesses appear to be heavily concentrated in those states where the housing boom and thus the housing price declines have been most pronounced—especially California, Nevada, and Florida—and in those states, such as Ohio and Michigan, that are feeling the effects of the decline in automobile manufacturing. As President Poole indicated, credit card delinquencies were up but highly concentrated in California, Nevada, and Florida. Thus, based on such observations and the news that I hear from my District, I sense that the stresses in the economy vary significantly by region, and we must be mindful that the weaknesses on Wall Street are in those states that have exaggerated housing volatility and may not be representative of the rest of the economy. To be sure, we must be wary of continued deterioration and spillovers, but at this point my assessment is that they remain concentrated in a few regions and are not as widespread as some of the aggregate data might suggest. It’s important to note that, for a good part of the forecast for the fourth-quarter GDP, it’s payback for strong inventories and net export numbers in the third quarter. I note that, absent payback and despite the worsening news, economic growth would be on the order of 2 percent higher. To put this differently, the news since the last meeting has not altered the overall GDP forecast for the second half of 2007. It’s about the same. The news has clearly altered the Greenbook’s forecast for 2008, especially for the first half of the year but also extending into the second half of 2008. The forecast calls for explicit spillovers from financial markets and the housing sector to the broader economy, to consumption, to fixed investment, and so forth. I should note, however, that most private sector forecasters are significantly less pessimistic than the Greenbook. The Blue Chip survey, our just-released Livingston Survey, our Survey of Professional Forecasters, and several of the major forecasting firms that have issued forecasts in the last couple of weeks see weakness extending into the first and maybe the second quarter of 2008 but a much more rapid bounceback in the second half of 2008 than is suggested in the Greenbook. These private sector forecasts are more in line with my own view. While the news on growth is somewhat on the downside, the news on inflation is on the upside. Readings on core inflation have been stable over the last few months, but headline inflation rates have risen sharply, with increases in energy and commodity prices. The broader scope of these commodity price increases and their breadth suggest that perhaps there are more-generalized inflationary pressures out there rather than these isolated relative price shocks. I will note that the core PCE inflation rate for March to June was 1½ percent; and in every three-month window subsequently, the inflation rate has risen monotonically, now reaching 2.26 percent for the latest three-month period from August to October. This comes after fairly steady declines in core rates during the first half of the year. In my comments on the Third District, I noted the greater prospects for price increases indicated by our manufacturing firms. I also am going to cite another statistic from the same survey that President Evans referred to—Duke University’s CFO Magazine survey. The survey to which he referred was a survey conducted in late November and early December of more than 600 CFOs. In the survey, the average price increase that these CFOs were estimating for their own products in the coming year was 2.8 percent, and that was up from just 2 percent in the previous quarter. Thus, it appears that firms are beginning to be more interested in increasing prices and are more able to do so than they were just a few months ago, even though the same CFOs were more pessimistic about the economy than they were in the last quarter. Another piece of news on inflation expectations comes from the Livingston Survey, which was just released yesterday. There the forecast of the average annual change for the CPI for 2007 to 2008 moved up from 2.3 percent to 3 percent. This, of course, partially reflects the behavior of oil prices during the past several months. The December-to-December forecast, on the other hand, also rose, but only slightly. Thus, overall, the economy is weak but only slightly more so than I anticipated. Volatility in the financial markets continues, and the repricing of risk has not progressed as smoothly as I would like to see. Nevertheless, the spillovers from the financial turmoil seem geographically concentrated, and broader spillovers appear limited to date. I view inflation expectations as fragile and see evidence that price pressures are growing and that more and more firms feel that price increases are coming and are supportable. I think we will have to be very careful not to presume that just because price expectations and prices have remained contained that they will continue to be so, independent of our actions. Thank you." CHRG-111shrg54589--104 Mr. Whalen," Oh, I think most over-the-counter contracts do not have a problem in that regard. If you are talking about energy, currency, whatever it is, if there is a rigorous traded cash market, it is easy to come up with a derivative, even if it is a very complex derivative. But when you are talking about illiquid corporate bonds or even loans to corporations, if you are talking about a complex structured asset that is, let us say, two or three levels of packaging away from the reference asset that it is supposed to be ``derived'' from, that creates complexity in terms of pricing that I think is rather daunting. And I will tell you now, there are very few firms on the street that have the people, the resources, and the money to do that work. Let me give you an example---- Senator Johanns. Mr. Whalen, doesn't that get us to the point that I was raising in previous questioning? You know, you have now got a whole regulatory scheme. You have got somebody that is going to regulate it. They are hired and paid---- " CHRG-111shrg56415--3 Mr. Dugan," Thank you, Chairman Johnson, Senator Crapo, and members of the Subcommittee. I am pleased to testify on the current condition of the national banking system, including trends in bank lending, asset quality, and problem banks. The OCC supervises over 1,600 national banks and Federal branches, which constitute approximately 18 percent of all federally insured banks and thrifts, holding just over 61 percent of all bank and thrift assets. As described in my written statement, the OCC has separate supervisory programs for large, mid-sized, and community banks that are tailored to the unique challenges faced by each. Today I would like to focus on three key points. First, despite early signs of the recession ending, credit quality is continuing to worsen across almost every class of asset in banks of almost every size. The strains on borrowers that first appeared in the housing sector have spread to other retail and commercial borrowers. For some credit portfolio segments, the rate of nonperforming loans is at or near historical highs. In many cases, this declining asset quality reflects risks that have been built up over time. While we are seeing some initial signs of improvement in some asset classes, as the economy begins to recover, it will take time for problem credits to work their way through the banking system because credit losses often lag behind the return to economic growth. Second, it is very important to keep in mind that the vast majority of national banks are strong and have the financial capacity to withstand declining asset quality. As I noted in testimony before the full Committee last year, we anticipated that credit quality would worsen and that banks would need to further strengthen their capital and loan loss reserves. Net capital levels in national banks have increased by more than $186 billion over the last 2 years, and net increases to loan loss reserves have exceeded $92 billion. While these increases have considerably strengthened national banks, we anticipate additional capital and reserves will be needed to absorb additional potential losses in banks' portfolios. In some cases, that may not be possible, however, and as a result, there will continue to be a number of smaller institutions that are not likely to survive their mounting credit problems. In these cases, we are working closely with the FDIC to ensure timely resolutions in a manner that is least disruptive to local communities. Third, during this stressful period, we are extremely mindful of the need to maintain a balanced approach in our supervision of national banks. We strive continually to ensure that our examiners are doing just that. We are encouraging banks to work constructively with borrowers who may be facing difficulties and to make new loans to creditworthy borrowers, although it is true that in today's weaker economic environment, credit demand among businesses and consumers has significantly declined. And we have repeatedly and strongly emphasized that examiners should not dictate loan terms or require banks to charge off loans simply due to declines in collateral values. Balanced supervision, however, does not mean turning a blind eye to credit and market conditions or simply allowing banks to forestall recognizing problems on the hope that markets or borrowers may turn around. As we have learned in our dealings with problem banks, a key factor in restoring a bank to health is ensuring that bank management realistically recognizes and addresses problems as they emerge, even as they work with struggling borrowers. One area where national banks are stepping up efforts to work with distressed borrowers is in foreclosure prevention. Our most recent quarterly report on mortgage metrics shows that actions by national bank servicers to keep Americans in their homes rose by almost 22 percent in the second quarter. Notably, the percentage of modifications that reduced monthly principal and interest payments increased to more than 78 percent of all new modifications, up from about 54 percent the previous quarter. We view this as a positive development since modifications that result in lower monthly payments are less likely to redefault. While many challenges lie ahead, especially with regard to the significant decline in credit quality, I firmly believe that the collective measures that Government officials, bank regulators, and many bankers have taken in recent months have put our financial system on a much more sound footing. The OCC is firmly committed to a balanced approach that encourages bankers to lend and to work with borrowers in a safe and sound manner while recognizing and addressing problems on a timely basis. Thank you. Senator Johnson. Thank you, Mr. Dugan. " Mr. Tarullo," STATEMENT OF DANIEL K. TARULLO, MEMBER, BOARD OF GOVERNORS OF FOMC20070807meeting--120 118,MS. PIANALTO.," Thank you, Mr. Chairman. As I said earlier, I do think that the risks to the outlook for economic growth have increased while the risks to the outlook for inflation have moderated but are still to the upside. So I found the suggestion on page 25 of the Bluebook that we might want to mix and match the alternative A and B language appealing, but I did think that changing our statement in that way could convey a greater shift in our risk assessment than I believe is warranted today. So I think the revised version of alternative B makes the modest but important adjustment of acknowledging the recent change in credit conditions in the rationale section, and it signals the greater downside risks to growth in the risk assessment section. So I support our alternative B—that is, no change in the fed funds rate today and the language that is in the revised version. Thank you." CHRG-110shrg50409--8 Mr. Bernanke," Chairman Dodd, Senator Shelby, and Members of the Committee, I am pleased to present the Federal Reserve's Monetary Policy Report to the Congress. The U.S. economy and financial system has confronted some significant challenges thus far in 2008. The contraction in housing activity that began in 2006 and the associated deterioration in mortgage markets that became evident last year have led to sizable losses at financial institutions and a sharp tightening in overall credit conditions. The effects of the housing contraction and of the financial head winds on spending and economic activity have been compounded by rapid increases in the prices of energy and other commodities which have sapped household purchasing power even as they have boosted inflation. Against this backdrop, economic activity has advanced at a sluggish pace during the first half of this year while inflation has remained elevated. Following a significant reduction in its policy rate over the second half of 2007, the Federal Open Market Committee eased policy considerably further through the spring to counter actual and expected weakness in economic growth and to mitigate downside risk to economic activity. In addition, the Federal Reserve expanded some of the special liquidity programs that were established last year and implemented additional facilities to support the functioning of financial markets and foster financial stability. Although these policy actions have had positive effects, the economy continues to face numerous difficulties, including ongoing strains on financial markets, declining house prices, a softening labor market, and rising prices of oil, food, and some other commodities. Let me now turn to a more detailed discussion of some of these key issues. Developments in financial markets and their implications to the macroeconomic outlook have been a focus of monetary policymakers over the past year. In the second half of 2007, the deteriorating performance of subprime mortgages in the United States triggered turbulence in domestic and international financial markets as investors became markedly less willing to bear credit risks of any type. In the first quarter of 2008, reports of further losses and writedowns by financial institutions intensified investor concerns and resulted in further sharp reductions in market liquidity. By March, many dealers and other institutions, even those that had relied heavily on short-term secured financing, were facing much more stringent borrowing conditions. In mid-March, a major investment bank, the Bear Stearns Companies Incorporated, was pushed to the brink of failure after suddenly losing access to short-term financing markets. The Federal Reserve judged that a disorderly failure of Bear Stearns would pose a serious threat to overall financial stability and would most likely have significant adverse implications for the U.S. economy. After discussions with the Securities and Exchange Commission and in consultation with the Treasury, we invoked emergency authorities to provide special financing to facilitate the acquisition of Bear Stearns by JPMorgan Chase and Company. In addition, the Federal Reserve used emergency authorities to establish two new facilities to provide backstop liquidity to primary dealers, with the goals of stabilizing financial conditions and increasing the availability of credit to the broader economy. We have also taken additional steps to address liquidity pressures in the banking system, including a further easing of the terms for bank borrowing at the discount window and increases in the amount of credit made available to banks through the Term Auction Facility. The FOMC also authorized expansion of its currency swap arrangements with the European Central Bank and the Swiss National Bank to facilitate increased dollar lending by those institutions to banks in their jurisdictions. These steps to address liquidity pressures, coupled with monetary easing, seem to have been helpful in mitigating some market strains. During the second quarter, credit spreads generally narrowed, liquidity pressures ebbed, and a number of financial institutions raised new capital. However, as events in recent weeks have demonstrated, many financial markets and institutions remain under considerable stress, in part because the outlook for the economy and, thus, for credit quality remains uncertain. In recent days, investors became particularly concerned about the financial condition of the Government-sponsored enterprises Fannie Mae and Freddie Mac. In view of this development, and given the importance of these firms to the mortgage market, the Treasury announced the legislative proposal to bolster their capital, access to liquidity, and regulatory oversight. As a supplement to the Treasury's existing authority to lend to the GSEs, and as a bridge to the time when the Congress decides how to proceed on these matters, the Board of Governors authorized the Federal Reserve Bank of New York to lend to Fannie Mae and Freddie Mac should that become necessary. Any lending would be collateralized by U.S. Government and Federal agency securities. In general, healthy economic growth depends on well-functioning financial markets. Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve. I turn now to current economic developments and prospects. The economy has continued to expand, but at a subdued pace. In the labor market, private payroll employment has declined this year, falling at an average pace of 94,000 jobs per month through June. Employment in the construction and manufacturing sectors has been particularly hard hit, although employment declines in a number of other sectors are evident as well. The unemployment rate has risen and now stands at 5.5 percent. In the housing sector, activity continues to weaken. Although sales of existing homes have been unchanged this year, sales of new homes have continued to fall, and inventories of unsold new homes remain high. In response, home builders continue to scale back the pace of housing starts. Home prices are falling, particularly in regions that experienced the largest price increases earlier this decade. The declines in home prices have contributed to the rising tide of foreclosures. By adding to the stock of vacant homes for sale, these foreclosures have in turn intensified the downward pressure on home prices in some areas. Personal consumption expenditures have advanced at a modest pace so far this year, generally holding up somewhat better than might have been expected given the array of forces weighing on household finances and attitudes. In particular, with the labor market softening and consumer price inflation elevated, real earnings have been stagnant so far this year. Declining values and equities in house have taken their toll on household balance sheets, credit conditions have tightened, and indicators of consumer sentiment have fallen sharply. More positively, the fiscal stimulus package is providing some timely support to household incomes. Overall, consumption spending seems likely to be restrained over coming quarters. In the business sector, real outlays for equipment and software were about flat in the first quarter of the year, and construction of nonresidential structures slowed appreciably. In the second quarter, the available data suggests that business fixed investment appears to have expanded moderately. Nevertheless, surveys of capital spending plans indicate that firms remain concerned about the economic and financial environment, including sharply rising costs of inputs and indications of tightening credit, and they are likely to be cautious with spending in the second half of the year. However, strong export growth continues to be a significant boon to many U.S. companies. In conjunction with the June FOMC meeting, Board members and reserve bank presidents prepared economic projections covering the years 2008 through 2010. On balance, most FOMC participants expected that, over the remainder of this year, output would expand at a pace appreciably below its trend rate, primarily because of continued weakness in housing markets, elevated energy prices, and tight credit conditions. Growth is projected to pick up gradually over the next 2 years as residential construction bottoms out and begins a slow recovery and as credit conditions gradually improve. However, FOMC participants indicated that considerable uncertainty surrounded their outlook for economic growth, and they viewed the risks to their forecast as skewed to the downside. Inflation has remained high, running at nearly a 3.5-percent annual rate over the first 5 months of this year, as measured by the price index of personal consumption expenditures. And with gasoline and other consumer energy prices rising in recent weeks, inflation seems likely to move temporarily higher in the near term. The elevated level of overall consumer inflation largely reflects a continued sharp run-up in the prices of many commodities, especially oil, but also certain crops and metals. The spot price of West Texas intermediate crude oil soared about 60 percent in 2007 and thus far this year has climbed an additional 50 percent or so. The price of oil currently stands at about 5 times its level toward the beginning of this decade. Our best judgment is that this surge in prices has been driven predominantly by strong growth in underlying demand and tight supply conditions in global oil markets. Over the past several years, the world economy has expanded at its fastest pace in decades, leading to substantial increases in demand for oil. Moreover, growth has been concentrated in developed and emerging market economies, where energy consumption has been further stimulated by rapid industrialization and by government subsidies that hold down the price of energy faced by ultimate users. On the supply side, despite sharp increases in prices, the production of oil has risen only slightly in the past few years. Much of the subdued supply response reflects inadequate investment and production shortfalls in politically volatile regions where large portions of the world's oil reserves are located. Additionally, many governments have been tightening their control over oil resources, impeding foreign investment and hindering efforts to boost capacity and production. Finally, sustainable rates of production in some of the more secure and accessible oil fields, such as those in the North Sea, have been declining. In view of these factors, estimates of long-term oil supplies have been marked down in recent months. Long-dated oil future prices have risen along with spot prices, suggesting that market participants also see oil supply conditions remaining tight for years to come. The decline in the foreign exchange value of the dollar has also contributed somewhat to the increase in oil prices. The precise size of this effect is difficult to ascertain as the causal relationships between oil prices and the dollar are complex and run in both directions. However, the price of oil has risen significantly in terms of all major currencies, suggesting that factors other than the dollar--notably, shifts in the underlying global demand for and supply of oil--have been the principal drivers of these increases in prices. Another concern that has been raised is that financial speculation has added markedly to upward pressure on oil prices. Certainly, investor interest in oil and other commodities has increased substantially of late. However, if financial speculation is pushing oil prices above the levels consistent with the fundamentals of supply and demand, we would expect inventories of crude oil and petroleum products to increase as supply rose and demand fell. But, in fact, available data on oil inventories show notable declines over the past year. This is not to say that useful steps could not be taken to improve the transparency and functioning of futures markets, only that such steps are unlikely to substantially affect the prices of oil or other commodities in the longer term. Although the inflationary effect of rising oil and agricultural commodity prices is evident in the retail prices of energy and food, the extent to which the high prices of oil and other raw materials have passed through to the prices of non-energy, non-food finished goods and services seems thus far to have been limited. But with businesses facing persistently higher input prices, they may attempt to pass through such costs into prices of final goods and services more aggressively than they have done so far. Moreover, as the foreign exchange value of the dollar has declined, rises in import prices have put greater upward pressure on business costs and consumer prices. In their economic projections for the June FOMC meeting, monetary policymakers marked up their forecasts for inflation during 2008 as a whole. FOMC participants continue to expect inflation to moderate in 2009 and 2010 as slower global growth leads to a pooling of commodity markets, as pressures on resource utilization decline, and as longer-term inflation expectations remain reasonably well anchored. However, in light of persistent escalation of commodity prices in recent quarters, FOMC participants view the inflation outlook as unusually uncertain and cited the possibility that commodity prices will continue to rise as an important risk to the inflation forecast. Moreover, the currently high level of inflation, if sustained, might lead the public to revise up its expectations for longer-term inflation. If that were to occur and those revised expectations were to become embedded in the domestic wage- and price-setting process, we could see an unwelcome rise in actual inflation over the longer term. A critical responsibility of monetary policymakers is to prevent that process from taking hold. At present, accurately assessing and appropriately balancing the risks to the outlook for growth and inflation is a significant challenge for monetary policymakers. The possibility of higher energy prices, tighter credit conditions, and a still deeper contraction in housing markets all represent significant downside risks to the outlook for growth. At the same time, upside risks to the inflation outlook have intensified lately as the rising prices of energy and some other commodities have led to a sharp pick-up in inflation, and some measures of inflation expectations have moved higher. Given the high degree of uncertainty, monetary policymakers will need to carefully assess incoming information bearing on the outlook for both inflation and growth. In light of the increase in upside inflation risk, we must be particularly alert to any indications, such as erosion of longer-term inflation expectations, that the inflationary impulses from commodity prices are becoming embedded in the domestic wage- and price-setting process. I would like to conclude my remarks by providing a brief update on some of the Federal Reserve's actions in the area of consumer protection. At the time of our report last February, I described the Board's proposal to adopt comprehensive new regulations to prohibit unfair or deceptive practices in the mortgage market using our authority under the Home Ownership and Equity Protection Act of 1994. After reviewing more than 4,500 comment letters we received on these proposed rules, the Board approved the final rules yesterday. The new rules apply to all types of mortgage lenders and will establish lending standards aimed at curbing abuses while preserving responsible subprime lending and sustainable homeownership. The final rules prohibit lenders from making higher-priced loans without due regard for consumers' ability to make the scheduled payments and require lenders to verify the income and assets on which they rely when making the credit decision. Also, for higher-priced loans, lenders now will be required to establish escrow accounts so that property taxes and insurance costs will be included in consumers' regular monthly payments. The final rules also prohibit prepayment penalties for higher-priced loans in cases in which the consumer's payment could increase during the first few years and restrict prepayment penalties on other higher-priced loans. Other measures address the coercion of appraisers' service or practices and other issues. We believe the new rules will help to restore confidence in the mortgage market. In May, working jointly with the Office of Thrift Supervision and the National Credit Union Administration, the Board issued proposed rules under the Federal Trade Commission Act to address unfair or deceptive practices for credit card accounts and overdraft protection plans. Credit cards provide a convenient source of credit for many consumers, but as the terms of credit card loans have become more complex, transparency has been reduced. Our consumer testing has persuaded us that disclosures alone cannot solve this problem. Thus, the Board's proposed rules will require card issuers to alter their practices in ways that will allow consumers to better understand how their own decisions and actions will affect their costs. Card issuers would be prohibited from increasing interest rates retroactively to cover prior purchases, except under very limited circumstances. For accounts having multiple interest rates, when consumers seek to pay down their balance by paying more than the minimum, card issuers would be prohibited from maximizing interest charges by applying excess payments to the lowest-rate balance first. The proposed rules dealing with bank overdraft services seek to give consumers greater control by ensuring that they have ample opportunity to opt out of automatic payments of overdrafts. The Board has already received more than 20,000 comment letters in response to these proposed rules. Thank you very much. I would be pleased to take your questions. " FOMC20070807meeting--55 53,MR. MOSKOW.," Thank you, Mr. Chairman. Conditions in the Seventh District have changed little since our last meeting. We continue to lag the nation largely because of difficulties in the auto industry. Our contacts thought that the U.S. economy had softened a little since June but that international sales continue to be strong. They also voiced continuing concerns about input cost pressures. There is no good news to report on residential construction. Some of my contacts again pushed back their expectations on when housing markets would begin to improve and are now saying later in 2008. We did hear some upbeat comments from our directors about nonresidential construction in the District, but manufacturers of heavy equipment indicated that they were seeing less demand for products that are used in nonresidential construction. We also heard some less-optimistic reports about consumer spending. A major shopping center developer and operator scaled back his expectations for the second half of this year and now thinks that spending will be softer than in the first half. In addition, a large national specialty retailer saw a broad-based slowing in its sales over the past six weeks. Still, no one was overly pessimistic. In our own forecast, we assume that the weakness in consumption relative to trend during the second quarter was largely transitory, perhaps a reaction to the run-up in gasoline prices. Regarding the motor vehicle sector, the major topic of discussion is the current labor negotiations and the possibility of a strike in September. I get the sense that the odds of a walkout are small because both the automakers and the UAW think that a strike would be very damaging. As our director who heads the Michigan AFL-CIO noted, a strike would be mutually assured destruction. The UAW realizes that the negotiations are occurring against the backdrop of very bad economic conditions in the traditional automaking regions. For example, since 2000, Michigan has lost 400,000 jobs. That’s an 8½ percent decline in employment. A strike would be seen as just adding to these economic woes. So from all my discussions with management and labor, my impression is that the climate for change underlying these negotiations is stronger than it has been in the past, but I am not sure how big a move the UAW leadership thinks it can get approved by its members. Of course, the major development affecting the forecast since the last round is the turmoil in credit markets that we were talking about earlier. Our director who runs a major private equity firm made a number of interesting comments regarding the difficulties that banks were having selling off loans that had been made to risky borrowers with extremely beneficial terms, such as covenant-lite and an option to accrue interest charges. The bottom line is that he thought that after the current shakeout there would be fewer buyouts and that pricing and terms would become more reflective of risk. Going forward, it seems likely that the market will favor so- called strategic buyers, the nonfinancial firms that are looking for acquisitions that would directly enhance the efficiency and scale of their business operations. So while we are concerned about the negative implications of tighter credit conditions, markets may now do a better job in pricing the tradeoff between risk and return, which is a positive development. So how might these financial developments affect the real economy? If sustained, the fallout of credit market jitters on the stock market and other assets would weigh on spending through the standard wealth-effect channels. With regard to the credit markets themselves, the key question is how many of the deals that are now being canceled or scaled back would have resulted in an expansion of business activity as opposed to simply transferring ownership. Given the modest changes in interest rates on higher-rated debt, continued growth in C&I lending, and ample internal funds of nonfinancial firms, the cost of capital for most investment projects probably has not risen substantially. So the first-order effects on spending will likely be limited. Of course, this could change quickly in the current volatile markets, and we will need to monitor these developments carefully, or should I say you will need to monitor these developments carefully. [Laughter] However, right now, putting all these factors together, we view the developments in credit markets as a risk to the near-term forecast but not a reason to lower the outlook for growth very much. That said, we, like the Greenbook, have marked down our assumptions concerning potential. We now see potential as a bit above 2½ percent. However, relative to potential, our forecast for real activity is not much different from last round. We see growth averaging close to potential in the second half of ’07, which is stronger than the Greenbook, but running a touch below potential in ’08 and ’09, which is similar to the Greenbook. Our inflation forecast also has not changed much since June. We still see core PCE prices increasing a shade below 2 percent by 2009. But I must say I remain concerned about the inflation forecast. The standard list of upside risks—the lack of resource slack, cost pass- throughs, inflation expectations—these could break the wrong way and require a policy response. So, if potential output growth is, in fact, significantly lower than our earlier assessment, then you could face some challenges in calibrating policy as the economy and economic agents adjust to the lower trend in productivity growth." CHRG-110shrg50420--90 Mr. Dodaro," And the conditions that were set during the Chrysler period in 1979, that was for a $1.5 billion loan guaranty program at that point in time, and so my advice would be those would be the starting point for the conditions. Here, we are talking about multiple entities with a lot more money at stake, so Congress would be, at its discretion, add additional conditions if it so deemed appropriate. Senator Menendez. Now, at least maybe one, I don't know, maybe more, but one of these companies has suggested the possibility of having a merger with a foreign manufacturer. In that case, would it not be of interest to the United States to ensure that there are some conditions precedent at least on its financial interests in that respect to make sure that, in fact, what we are doing--that may create greater viability for the company at the end of the day, but what we want to ensure is that we are helping a domestic auto industry, not a foreign auto industry. " CHRG-110shrg50414--32 STATEMENT OF SENATOR MEL MARTINEZ Senator Martinez. Thank you, Mr. Chairman. I look forward to hearing from the witnesses, and I will be very, very brief. But I do think it merits for us to look for a moment to how we got here because a lot can be said about the lack of regulation. And I want to associate myself with the excellent comments from Senator Dole. I cannot help but have a sense that a lot of what has transpired here, a lot of what we are dealing with today, has its origins in Fannie Mae and Freddie Mac. And as we look at that, and we try to deal with the current problem, we cannot help but also look back. We have not looked back enough to know how Fannie Mae and Freddie Mac got the entire financial world in the mess that we are in today. One of the problems is that it did not have a world class regulator. And I know it is real popular today and easy to do to just beat up on the Administration and blame everything from tsunamis to hurricanes on them. But having been a part of this Administration and having come to this Congress, and before this very Committee, to testify in 2003, along with then-Secretary of Treasury Snow, to ask for stronger regulation over Fannie and Freddie, to have a world class regulator, I find it just a little troubling to just exactly overlook and not pay some attention to how we got here. And I do want to recall also Chairman Greenspan's comments in 2005 before this Committee where he said that if Fannie and Freddie continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolio--which they need to do for interest rate aversion--they potentially create ever growing potential systemic risk down the road. And that is where we are today, systemic risk. So that is just a little bit on how we got here, where I think we need to, Director Lockhart, I hope we are going to drill down and find out a lot more about how Fannie and Freddie got us here. But beyond that, we need to do what we need to do now. We need, in the long term, to also deal with a complete revamping of our regulatory scheme of our financial institutions. But that will come in the future. For now, I believe we are saddled with a problem that needs and requires action, that action needs to be thoughtful but timely. We need to talk about oversight. We need to talk about the size of this fund, and whether it will work or not. But it does appear to me that there are also some questions that we need to have answered, which is if the underlying problem regarding this entire matter has to do with the ever declining home values, what are we doing here that will help to stem that decline in home values? It seems to me, when we look at the State of Florida, that it is about a tremendous inventory of unsold properties, as well as the availability of credit. Hopefully, what we are doing here may help with the availability of credit. But certainly the tremendous inventory is something that I think we also need to address. So I look forward to hearing the testimony from the witnesses, having many questions answered. But at the end of the day, I do believe that it is our responsibility to act, to act timely, and to act responsibly but yet to act. Thank you, Mr. Chairman. " FOMC20080625meeting--256 254,MR. ROSENGREN.," One last question. Sorry for so many questions. The situation of Lehman was kind of interesting because you saw their stock price go down. Talking to financial institutions, both regulated and unregulated, in Boston, a lot of people were evaluating counterparty risk and deciding whether or not they were going to start running before the capital issue. Did your measures of liquidity pick up the amount of stress that was going on in the counterparty analysis being done, I assume, all over the country? One of the conditions for an institution's access to the discount window at a primary credit rate is that it not be rated a 4 or a 5. I know we're not doing bank exams, and I know we're not looking at all the elements of the bank exam. How confident are we, if we were to do something like that for Lehman or for Merrill Lynch, that we wouldn't rate them a 4 or a 5? " CHRG-111hhrg53021Oth--199 Secretary Geithner," Congressman, I am very worried about that risk. I spent a large part of my professional life in trying to make sure we have more cooperation, more uniform standards, partly to reduce that risk. But my general view is that our system is stronger, has been stronger over time where we were prepared to take the leadership role in strengthening protections for investors and providing greater protections against systemic risk. Where we got that right in the past, it proved to be a great competitive asset to our financial institutions and our markets in the past. I think that basic philosophy should underpin what we do. But as you pointed out, because technology has made it much more easy for capital to move where standards are lowest, we have to do a much better job, as we raise standards here, in trying to bring the world with us. And you will be able to watch with us how successful we are in that. But I believe deeply in the importance of that, and you are right to underscore the importance. " CHRG-111hhrg53021--199 Secretary Geithner," Congressman, I am very worried about that risk. I spent a large part of my professional life in trying to make sure we have more cooperation, more uniform standards, partly to reduce that risk. But my general view is that our system is stronger, has been stronger over time where we were prepared to take the leadership role in strengthening protections for investors and providing greater protections against systemic risk. Where we got that right in the past, it proved to be a great competitive asset to our financial institutions and our markets in the past. I think that basic philosophy should underpin what we do. But as you pointed out, because technology has made it much more easy for capital to move where standards are lowest, we have to do a much better job, as we raise standards here, in trying to bring the world with us. And you will be able to watch with us how successful we are in that. But I believe deeply in the importance of that, and you are right to underscore the importance. " FOMC20080805meeting--134 132,MR. WARSH.," Thank you, Mr. Chairman. I have no material changes to report in my view on the overall state of financial stability, growth, or inflation; but as I talked about at the last meeting, it still is likely to be a long, hot summer, and we're only about half over with it. I'll talk first about financial institutions--make maybe four or five points--and then turn quickly to the economy and inflation. First, on financial institutions, I think the body blow that the financial markets and the real economy have taken because of the turmoil at the GSEs is not complete. It is easy for those of us in Washington to forget that bill signings don't always solve problems. I'd say, if the last thing that happens on GSEs is that the bill was signed two weeks ago and action isn't taken in the coming weeks and months, then I would be surprised if we could get through this period without more GSE turmoil finding its way onto the front pages. Second, in terms of financial market conditions, the fall in oil prices and the rest of the energy complex is, indeed, good news, but it strikes me that it has camouflaged an even tougher period for financial institutions than would otherwise be the case. That is, financial institutions somehow look a little more resilient, but I think part of that is only because of the negative correlation that's developed in recent times between equity prices of financials and oil prices. The financial institutions themselves strike me as being in worse condition than market prices would suggest. Third, capital raising, as we have long talked about, is essential to the fix among financial institutions. The way I best describe capital raising over maybe the last nine months is that the first round of capital raising, which was in November and December, was really the vanity round. This consisted of very limited due diligence, sovereign wealth funds signing up, issuers relying upon their vaunted global brands, and capital being raised in a matter of days. The second round probably took us to the spring, a round that I'd call the confessional round. [Laughter] In this round, financial institutions said, ""Oh my, look at these real write-downs that I have. Look at the need for this real capital raising, and here I'm telling you, the investors, all that I know."" But the second and third confessions usually have less credibility than the first. The third round is the round that we're in the middle of, which I think of as the liquidation and recap round, likely to be the hardest round to pull off. It is likely to force issuers of new shares or of new forms of preferred stock to be asking of themselves and their investors the toughest choices. They have to assess the strength and durability of their core franchises. I think that this will be happening in very real time. So the circumstance of an investment bank that Bill mentioned at the outset I don't think will be the sole case of this. This liquidation and recap round is later than would be ideal from the perspective of the broader economy, but it is absolutely needed. Until we see how it occurs, it's hard for me to be much more sanguine that the capital markets or the credit markets will be returning to anything like normal anytime soon. Let me make a fourth broad point about financial institutions. Because of these different phases of capital raise, I think management credibility among financial institutions is at least as suspect as it has ever been during this period. Even new management teams that have come in have in some ways used up a lot of their credibility. It would be nice to believe that they have taken all actions necessary to protect their franchises and their businesses, but most stakeholders are skeptical that they've taken significant or sufficient action. At the end of the day, no matter where policy comes out in terms of regulatory policy from the Fed and other bank regulators or accounting policy from the SEC or FASB, it strikes me that those changes in policy are less determinative of how things shake out. That is, management credibility is so in question that the cure is not likely to come from accounting rules or regulators but from the markets' believing that what management says is what management believes and will act on it. As a result, I think that many of these financial institutions are operating in a zero-defect world, which is posing risks to the real economy. Fifth, let me make a final point about financials. We've all talked a lot about the effect of different curves for housing prices on the financial institutions themselves. I don't mean to give short shrift to any of that, but I would say that the level of uncertainty and associated risks of their non-housing-related assets are now very much a focus. According to July 2008 data, of credit currently being extended by banks, only about 20 percent is for residential real estate. Only about 9 percent is for consumer credit. So that leaves the balance in areas where these financial institutions and their management teams have to be asking themselves whether the weaknesses that are emerging in the real economy will place uncertainty over assets that have nothing to do with housing. That's a major downside risk for financial institutions and has not been much of a focus of shareholder and stakeholder concerns. There are two open issues that will guide some of our thinking, at least with respect to these credit markets. First, as we talked about a little last night with the presidents, are the embedded losses so great at such a critical mass of institutions with management credibility so low that many more than currently expected might be unable to survive? This is a question that I'm not sure I know the answer to. Second, despite the concerns about the effect of the credit markets on the broader economy that I talked about, our monetary policy may not be terribly well suited to be fixing those problems, and financial institutions may not be terribly sensitive to the extent we decide that we should change the stance of policy. Taking all that into account, let me say a couple of words about growth and inflation. First, on the economic growth front, given my views of what's happening in the credit markets, it's very hard for me to believe that the economy will get back to potential anytime soon. There are continued financial stresses that could last through year-end, and in there could be an upside surprise. Still, all things considered, my base case has second-half growth still above staff estimates owing in part to the productivity we've seen in recent months and the remarkable resiliency of this economy. If we look beyond that horizon, though, toward the Greenbook forecast in 2009 and beyond, I must say I don't really see the inflection point to take us back to economic growth of 2.2 percent or whatever the Greenbook suggests. I think we're going to be in this period of belowtrend growth for quite some time. My own view is that, when the Congress comes back after its August recess, we will be in the middle of a big debate on ""Son of Stimulus"" and that the stimulus probabilities have moved up quite materially. However, it is not at all obvious to me that it will do much in terms of helping the real economy. Outside the United States, I share the view of Governor Kohn, which is that I'd expect global GDP, particularly GDP among advanced foreign economies, our major trading partners, to continue to disappoint, making the remarkable addition of net export growth to our own GDP likely to dissipate. Turning finally to inflation, my view is that inflation risks are very real, and I believe that these risks are higher than growth risks. I don't take that much comfort from the move in commodity prices since we last met. If that trend continues, then that would certainly be good news; but I must say I don't feel as though inflation risks have moved down noticeably since we last had this discussion. The staff expects food prices to continue to be challenging; that is certainly my view. The staff also expects core import prices to fall rather precipitously. I'm a little skeptical of that view. I think it's possible, but I don't really see the catalyst for that given what we see about changes in input prices overseas and given expectations of the dollar in foreign exchange markets. So with that, I think that the inflation risks are real, and I'll save the balance of my remarks for the next round. Thank you, Mr. Chairman. " CHRG-111shrg50815--6 STATEMENT OF SENATOR MENENDEZ Senator Menendez. I will make a brief statement. I don't know about very brief, Mr. Chairman. I will make a brief statement. Senator Schumer. Moderately brief. [Laughter.] Senator Menendez. Moderately brief. Let me thank the Chairman for holding this hearing. Credit card reform has been one of the top priorities that I have had both in the House and in the Senate since I arrived here, and I think this hearing couldn't come at a more important time, when millions of Americans are increasingly using their credit cards to float their basic necessities from month to month. As a result, Americans have almost $1 trillion of credit card debt outstanding. It seems to me that it is a dangerous cycle that is piling up. And while that debt is piling up, people in our State and across the country are discovering that their credit card agreements often conceal all kinds of trap doors behind a layer of fine print. If you take one false step, then your credit rating plummets and your interest rate shoots through the roof. Many of my constituents have contacted me after facing sky-high interest rates they never expected after accepting one offer, only to learn later that the terms seem to have been written in erasable ink, or after watching in horror as their children in college get swallowed in debt. So for far too many people, credit card is already a personal financial crisis and I believe it is a national crisis. Our economy will not recover if debt ties down consumers tighter and tighter, and making credit card lending practices fairer would be the right thing to do under any circumstances, but under these economic conditions, it is an absolute necessity. Mr. Chairman, I have legislation, as well. Some of it has been incorporated in what I think Chairman Dodd is going to include. I appreciate those efforts and I hope that the Federal Reserve's guidelines, which are a good step, could actually be accelerated, because waiting a year and a half to get those guidelines into place at a critical time in our economy is only buying us more and more challenges. With that, Mr. Chairman, I ask that the rest of my statement be included in the record. Senator Johnson. Senator Schumer, do you have a very brief statement? CHRG-111shrg56415--83 PREPARED STATEMENT OF DANIEL K. TARULLO Member, Board of Governors of the Federal Reserve System October 14, 2009 Chairman Johnson, Ranking Member Crapo, and members of the Subcommittee, thank you for your invitation to discuss the condition of the U.S. banking industry. First, I will review the current conditions in financial markets and the overall economy and then turn to the performance of the banking system, highlighting particular challenges in commercial real estate (CRE) and other loan portfolios. Finally, I will address the Federal Reserve's regulatory and supervisory responses to these challenges.Conditions in Financial Markets and the Economy Conditions and sentiment in financial markets have continued to improve in recent months. Pressures in short-term funding markets have eased considerably, broad stock price indexes have increased, risk spreads on corporate bonds have narrowed, and credit default swap spreads for many large bank holding companies, a measure of perceived riskiness, have declined. Despite improvements, stresses remain in financial markets. For example, corporate bond spreads remain quite high by historical standards, as both expected losses and risk premiums remain elevated. Economic growth appears to have moved back into positive territory last quarter, in part reflecting a pickup in consumer spending and a slight increase in residential investment--two components of aggregate demand that had dropped to very low levels earlier in the year. However, the unemployment rate has continued to rise, reaching 9.8 percent in September, and is unlikely to improve materially for some time. Against this backdrop, borrowing by households and businesses has been weak. According to the Federal Reserve's Flow of Funds accounts, household and nonfinancial business debt contracted in the first half of the year and appears to have decreased again in the third quarter. For households, residential mortgage debt and consumer credit fell sharply in the first half; the decline in consumer credit continued in July and August. Nonfinancial business debt also decreased modestly in the first half of the year and appears to have contracted further in the third quarter as net decreases in commercial paper, commercial mortgages, and bank loans more than offset a solid pace of corporate bond issuance. At depository institutions, loans outstanding fell in the second quarter of 2009. In addition, the Federal Reserve's weekly bank credit data suggests that bank loans to households and to nonfinancial businesses contracted sharply in the third quarter. These declines reflect the fact that weak economic growth can both damp demand for credit and lead to tighter credit supply conditions. The results from the Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices indicate that both the availability and demand for bank loans are well below pre-crisis levels. In July, more banks reported tightening their lending standards on consumer and business loans than reported easing, although the degree of net tightening was well below levels reported last year. Almost all of the banks that tightened standards indicated concerns about a weaker or more uncertain economic outlook, and about one-third of banks surveyed cited concerns about deterioration in their own current or future capital positions. The survey also indicates that demand for consumer and business loans has remained weak. Indeed, decreased loan demand from creditworthy borrowers was the most common explanation given by respondents for the contraction of business loans this year. Taking a longer view of cycles since World War II, changes in debt flows have tended to lag behind changes in economic activity. Thus, it would be unusual to see a return to a robust and sustainable expansion of credit until after the overall economy begins to recover. Credit losses at banking organizations continued to rise through the second quarter of this year, and banks face risks of sizable additional credit losses given the outlook for production and employment. In addition, while the decline in housing prices slowed in the second quarter, continued adjustments in the housing market suggest that foreclosures and mortgage loan loss severities are likely to remain elevated. Moreover, prices for both existing commercial properties and for land, which collateralize commercial and residential development loans, have declined sharply in the first half of this year, suggesting that banks are vulnerable to significant further deterioration in their CRE loans. In sum, banking organizations continue to face significant challenges, and credit markets are far from fully healed.Performance of the Banking System Despite these challenges, the stability of the banking system has improved since last year. Many financial institutions have been able to raise significant amounts of capital and have achieved greater access to funding. Moreover, through the rigorous Supervisory Capital Assessment Program (SCAP) stress test conducted by the banking agencies earlier this year, some institutions demonstrated that they have the capacity to withstand more-adverse macroeconomic conditions than are expected to develop and have repaid the government's Troubled Asset Relief Program (TARP) investments.\1\ Depositors' concerns about the safety of their funds during the immediate crisis last year have also largely abated. As a result, financial institutions have seen their access to core deposit funding improve.--------------------------------------------------------------------------- \1\ For more information about the SCAP, see Ben S. Bernanke (2009), ``The Supervisory Capital Assessment Program,'' speech delivered at the Federal Reserve Bank of Atlanta 2009 Financial Markets Conference, held in Jekyll Island, Ga., May 11, www.Federalreserve.gov/newsevents/speech/bernanke20090511a.htm.--------------------------------------------------------------------------- However, the banking system remains fragile. Nearly 2 years into a substantial recession, loan quality is poor across many asset classes and, as noted earlier, continues to deteriorate as lingering weakness in housing markets affects the performance of residential mortgages and construction loans. Higher loan losses are depleting loan loss reserves at many banking organizations, necessitating large new provisions that are producing net losses or low earnings. In addition, although capital ratios are considerably higher than they were at the start of the crisis for many banking organizations, poor loan quality, subpar earnings, and uncertainty about future conditions raise questions about capital adequacy for some institutions. Diminished loan demand, more-conservative underwriting standards in the wake of the crisis, recessionary economic conditions, and a focus on working out problem loans have also limited the degree to which banks have added high quality loans to their portfolios, an essential step to expanding profitable assets and thus restoring earnings performance. These developments have raised the number of problem banks to the highest level since the early 1990s, and the rate of bank and thrift failures has accelerated throughout the year. Moreover, the estimated loss rates for the deposit insurance fund on bank failures have been very high, generally hovering near 30 percent of assets. This high loss level reflects the rapidity with which loan quality has deteriorated during the crisis and suggests that banking organizations may need to continue their high level of loan loss provisioning for some time. Moreover, some of these institutions, including those with capital above minimum requirements, may need to raise more capital and restrain their dividend payouts for the foreseeable future. Indeed, the buildup in capital ratios at large banking organizations has been essential to reassuring the market of their improving condition. However, we must recognize that capital ratios can be an imperfect indicator of a bank's overall strength, particularly in periods in which credit quality is deteriorating rapidly and loan loss rates are moving higher.Comparative Performance of Banking Institutions by Asset Size Although the broad trends detailed above have affected all financial institutions, there are some differences in how the crisis is affecting large financial institutions and more locally focused community and regional banks. Consider, for example, the 50 largest U.S. bank holding companies, which hold more than three-quarters of bank holding company assets and now include the major investment banks in the United States. While these institutions do engage in traditional lending activities, originating loans and holding them on their balance sheets like their community bank competitors, they also generate considerable revenue from trading and other fee-based activities that are sensitive to conditions in capital markets. These firms reported modest profits during each of the first two quarters of 2009. Second-quarter net income for these companies at $1.6 billion was weaker than that of the first quarter, but was still a great improvement over the $19.8 billion loss reported for the second quarter of last year. Net income was depressed by the payment of a significant share of the Federal Deposit Insurance Corporation's (FDIC) special deposit insurance assessment and a continued high level of loan loss provisioning. Contributing significantly to better performance was the improvement of capital markets activities and increases in related fees and revenues. Community and small regional banks have also benefited from the increased stability in financial markets. However, because they depend largely on revenues from traditional lending activities, as a group they have yet to report any notable improvement in earnings or condition since the crisis took hold. These banks--with assets of $10 billion or less representing almost 7,000 banks and 20 percent of commercial bank assets--reported a $2.7 billion loss in the second quarter. Earnings remained weak at these banks due to a historically narrow net interest margin and high loan loss provisions. More than one in four of these banks reported a net loss. Earnings at these banks were also substantially affected by the FDIC special assessment during the second quarter. Loan quality deteriorated significantly for both large and small institutions during the second quarter. At the largest 50 bank holding companies, nonperforming assets climbed more than 20 percent, raising the ratio of nonperforming assets to 4.3 percent of loans and other real estate owned. Most of the deterioration was concentrated in residential mortgage and construction loans, but commercial, CRE, and credit card loans also experienced rising delinquency rates. Results of the banking agencies' Shared National Credit review, released in September, also document significant deterioration in large syndicated loans, signaling likely further deterioration in commercial loans.\2\ At community and small regional banks, nonperforming assets increased to 4.4 percent of loans at the end of the second quarter, more than six times the level for this ratio at year-end 2006, before the crisis started. Home mortgages and CRE loans accounted for most of the increase, but commercial loans have also shown marked deterioration during recent quarters. Importantly, aggregate equity capital for the top 50 bank holding companies, and thereby for the banking industry, increased for the third consecutive quarter and reached 8.8 percent of consolidated assets as of June 30, 2009. This level was almost 1 percentage point above the year-end 2008 level and exceeded the pre-crisis level of midyear 2007 by more than 2 percentage points. Risk-based capital ratios for the top 50 bank holding companies also remained relatively high: Tier 1 capital ratios were at 10.75 percent, and total risk-based capital ratios were at 14.09 percent. Signaling the recent improvement in financial markets since the crisis began, capital increases during the first half of this year largely reflected common stock issuance, supported also by reductions in dividend payments. However, asset contraction also accounts for part of the improvement in capital ratios. Additionally, of course, the Treasury Capital Purchase Program also contributed to the increase in capital in the time since the crisis emerged.--------------------------------------------------------------------------- \2\ See Board of Governors of the Federal Reserve System, FDIC, Office of the Comptroller of the Currency, and Office of Thrift Supervision (2009), ``Credit Quality Declines in Annual Shared National Credits Review,'' joint press release, September 24, www.Federalreserve.gov/newsevents/press/bcreg/20090924a.htm.--------------------------------------------------------------------------- Despite TARP capital investments in some banks and the ability of others to raise equity capital, weak earnings led to modest declines in the average capital ratios of smaller banks over the past year--from 10.7 percent to 10.4 percent of assets as of June 30 of this year. However, risk-based capital ratios remained relatively high for most of these banks, with 96 percent maintaining risk-based capital ratios consistent with a ``well capitalized'' designation under prompt corrective action standards. Funding for the top 50 bank holding companies has improved markedly over the past year. In addition to benefiting from improvement in interbank markets, these companies increased core deposits from 24 percent of total assets at year-end 2008 to 27 percent as of June 30, 2009. The funding profile for community and small regional banks also improved, as core deposit funding rose to 62 percent of assets and reliance on brokered deposits and Federal Home Loan Bank advances edged down from historically high levels. As already noted, substantial financial challenges remain for both large and small banking institutions. In particular, some large regional and community banking firms that have built up unprecedented concentrations in CRE loans will be particularly affected by emerging conditions in real estate markets. I will now discuss the economic conditions and financial market dislocations affecting CRE markets and the implications for banking organizations.Current Conditions in Commercial Real Estate Markets Prices of existing commercial properties are estimated to have declined 35 to 40 percent since their peak in 2007, and market participants expect further declines. Demand for commercial property has declined as job losses have accelerated, and vacancy rates have increased. The higher vacancy levels and significant decline in the value of existing properties have placed particularly heavy pressure on construction and development projects that generate no income until completion. Developers typically depend on the sales of completed projects to repay their outstanding loans, and with the volume of property sales at especially low levels and with prices depressed, the ability to service existing construction loans has been severely impaired. The negative fundamentals in the CRE property markets have caused a sharp deterioration in the credit performance of loans in banks' portfolios and loans in commercial mortgage-backed securities (CMBS). At the end of the second quarter of 2009, approximately $3.5 trillion of outstanding debt was associated with CRE, including loans for multifamily housing developments. Of this, $1.7 trillion was held on the books of banks and thrifts, and an additional $900 billion represented collateral for CMBS, with other investors holding the remaining balance of $900 billion. Also at the end of the second quarter, about 9 percent of CRE loans on banks' books were considered delinquent, almost double the level of a year earlier.\3\ Loan performance problems were the most striking for construction and development loans, especially for those that finance residential development. More than 16 percent of all construction and development loans were considered delinquent at the end of the second quarter.--------------------------------------------------------------------------- \3\ The CRE loans considered delinquent on banks' books were non-owner occupied CRE loans that were 30 days or more past due.--------------------------------------------------------------------------- Almost $500 billion of CRE loans will mature each year over the next few years. In addition to losses caused by declining property cash-flows and deteriorating conditions for construction loans, losses will also be boosted by the depreciating collateral value underlying those maturing loans. These losses will place continued pressure on banks' earnings, especially those of smaller regional and community banks that have high concentrations of CRE loans. The current fundamental weakness in CRE markets is exacerbated by the fact that the CMBS market, which had financed about 30 percent of originations and completed construction projects, has remained virtually inoperative since the start of the crisis. Essentially no CMBS have been issued since mid-2008. New CMBS issuance came to a halt as risk spreads widened to prohibitively high levels in response to the increase in CRE-specific risk and the general lack of liquidity in structured debt markets. Increases in credit risk have significantly softened demand in the secondary trading markets for all but the most highly rated tranches of these securities. Delinquencies of mortgages backing CMBS have increased markedly in recent months. Market participants anticipate these rates will climb higher by the end of this year, driven not only by negative fundamentals but also by borrowers' difficulty in rolling over maturing debt. In addition, the decline in CMBS prices has generated significant stresses on the balance sheets of financial institutions that must mark these securities to market, further limiting their appetite for taking on new CRE exposure.Federal Reserve Activities to Help Revitalize Credit Markets The Federal Reserve, along with other government agencies, has taken a number of actions to strengthen the financial sector and to promote the availability of credit to businesses and households. In addition to aggressively easing monetary policy, the Federal Reserve has established a number of facilities to improve liquidity in financial markets. One such program is the Term Asset-Backed Securities Loan Facility (TALF), begun in November 2008 to facilitate the extension of credit to households and small businesses. Before the crisis, securitization markets were an important conduit of credit to the household and business sectors; some have referred to these markets as the ``shadow banking system.'' Securitization markets (other than those for mortgages guaranteed by the government) have virtually shut down since the onset of the crisis, eliminating an important source of credit. Under the TALF, eligible investors may borrow to finance purchases of the AAA-rated tranches of certain classes of asset-backed securities. The program originally focused on credit for households and small businesses, including auto loans, credit card loans, student loans, and loans guaranteed by the Small Business Administration. More recently, CMBS were added to the program, with the goal of mitigating a severe refinancing problem in that sector. The TALF has had some success. Rate spreads for asset-backed securities have declined substantially, and there is some new issuance that does not use the facility. By improving credit market functioning and adding liquidity to the system, the TALF and other programs have provided critical support to the financial system and the economy.Availability of Credit The Federal Reserve has long-standing policies in place to support sound bank lending and the credit intermediation process. Guidance issued during the CRE downturn in 1991 instructs examiners to ensure that regulatory policies and actions do not inadvertently curtail the availability of credit to sound borrowers.\4\ This guidance also states that examiners should ensure loans are being reviewed in a consistent, prudent, and balanced fashion to prevent inappropriate downgrades of credits. It is consistent with guidance issued in early 2007 addressing risk management of CRE concentrations, which states that institutions that have experienced losses, hold less capital, and are operating in a more risk-sensitive environment are expected to employ appropriate risk-management practices to ensure their viability.\5\--------------------------------------------------------------------------- \4\ See Board of Governors of the Federal Reserve System, Division of Banking Supervision and Regulation (1991), ``Interagency Examination Guidance on Commercial Real Estate Loans,'' Supervision and Regulation Letter SR 91-24 (November 7), www.Federalreserve.gov/BoardDocs/SRLetters/1991/SR9124.htm; and Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Federal Reserve Board, and Office of Thrift Supervision (1991), ``Interagency Policy Statement on the Review and Classification of Commercial Real Estate Loans,'' joint policy statement, November 7, www.Federalreserve.gov/BoardDocs/SRLetters/1991/SR9124a1.pdf. \5\ See Board of Governors of the Federal Reserve System, Division of Banking Supervision and Regulation (2007), ``Interagency Guidance on Concentrations in Commercial Real Estate,'' Supervision and Regulation Letter SR 07 1 (January 4), www.Federalreserve.gov/boarddocs/srletters/2007/SR0701.htm.--------------------------------------------------------------------------- We are currently in the final stages of developing interagency guidance on CRE loan restructurings and workouts. This guidance supports balanced and prudent decisionmaking with respect to loan restructuring, accurate and timely recognition of losses and appropriate loan classification. The guidance will reiterate that classification of a loan should not be based solely on a decline in collateral value, in the absence of other adverse factors, and that loan restructurings are often in the best interest of both the financial institution and the borrower. The expectation is that banks should restructure CRE loans in a prudent manner, recognizing the associated credit risk, and not simply renew a loan in an effort to delay loss recognition. On one hand, banks have raised concerns that our examiners are not always taking a balanced approach to the assessment of CRE loan restructurings. On the other hand, our examiners have observed incidents where banks have been slow to acknowledge declines in CRE project cash-flows and collateral values in their assessment of the potential loan repayment. This new guidance, which should be finalized shortly, is intended to promote prudent CRE loan workouts as banks work with their creditworthy borrowers and to ensure a balanced and consistent supervisory review of banking organizations. Guidance issued in November 2008 by the Federal Reserve and the other Federal banking agencies encouraged banks to meet the needs of creditworthy borrowers, in a manner consistent with safety and soundness, and to take a balanced approach in assessing borrowers' ability to repay and making realistic assessments of collateral valuations.\6\ In addition, the Federal Reserve has directed examiners to be mindful of the effects of excessive credit tightening in the broader economy and we have implemented training for examiners and outreach to the banking industry to underscore these intentions. We are aware that bankers may become overly conservative in an attempt to ameliorate past weaknesses in lending practices, and are working to emphasize that it is in all parties' best interests to continue making loans to creditworthy borrowers.--------------------------------------------------------------------------- \6\ See Board of Governors of the Federal Reserve System, FDIC, Office of the Comptroller of the Currency, and Office of Thrift Supervision (2008), ``Interagency Statement on Meeting the Needs of Creditworthy Borrowers,'' joint press release, November 12, www.Federalreserve.gov/newsevents/press/bcreg/20081112a.htm.---------------------------------------------------------------------------Strengthening the Supervisory Process The recently completed SCAP of the 19 largest U.S. bank holding companies demonstrates the effectiveness of forward-looking horizontal reviews and marked an important evolutionary step in the ability of such reviews to enhance supervision. Clearly, horizontal reviews--reviews of risks, risk-management practices and other issues across multiple financial firms--are very effective vehicles for identifying both common trends and institution-specific weaknesses. The SCAP expanded the scope of horizontal reviews and included the use of a uniform set of stress parameters to apply consistently across firms. An outgrowth of the SCAP was a renewed focus by supervisors on institutions' own ability to assess their capital adequacy--specifically their ability to estimate capital needs and determine available capital resources during very stressful periods. A number of firms have learned hard, but valuable, lessons from the current crisis that they are applying to their internal processes to assess capital adequacy. These lessons include the linkages between liquidity risk and capital adequacy, the dangers of latent risk concentrations, the value of rigorous stress testing, the importance of strong governance over their processes, and the importance of strong fundamental risk identification and risk measurement to the assessment of capital adequacy. Perhaps one of the most important conclusions to be drawn is that all assessments of capital adequacy have elements of uncertainty because of their inherent assumptions, limitations, and shortcomings. Addressing this uncertainty is one among several reasons that firms should retain substantial capital cushions. Currently, we are conducting a horizontal assessment of internal processes that evaluate capital adequacy at the largest U.S. banking organizations, focusing in particular on how shortcomings in fundamental risk management and governance for these processes could impair firms' abilities to estimate capital needs. Using findings from these reviews, we will work with firms over the next year to bring their processes into conformance with supervisory expectations. Supervisors will use the information provided by firms about their processes as a factor--but by no means the only factor--in the supervisory assessment of the firms' overall capital levels. For instance, if a firm cannot demonstrate a strong ability to estimate capital needs, then supervisors will place less credence on the firm's own internal capital results and demand higher capital cushions, among other things. Moreover, we have already required some firms to raise capital given their higher risk profiles. In general, we believe that if firms develop more-rigorous internal processes for assessing capital adequacy that capture all the risks facing those firms--including under stress scenarios--and maintain adequate capital based on those processes, they will be in a better position to weather financial and economic shocks and thereby perform their role in the credit intermediation process. We also are expanding our quantitative surveillance program for large, complex financial organizations to include supervisory information, firm-specific data analysis, and market-based indicators to identify developing strains and imbalances that may affect multiple institutions, as well as emerging risks to specific firms. Periodic scenario analyses across large firms will enhance our understanding of the potential impact of adverse changes in the operating environment on individual firms and on the system as a whole. This work will be performed by a multidisciplinary group composed of our economic and market researchers, supervisors, market operations specialists, and accounting and legal experts. This program will be distinct from the activities of onsite examination teams so as to provide an independent supervisory perspective, as well as to complement the work of those teams. As we adapt our internal organization of supervisory activities to build on lessons learned from the current crisis, we are using all of the information and insight that the analytic abilities the Federal Reserve can bring to bear in financial supervision.Conclusion A year ago, the world financial system was profoundly shaken by the failures and other serious problems at large financial institutions here and abroad. Significant credit and liquidity problems that had been building since early 2007 turned into a full-blown panic with adverse consequences for the real economy. The deterioration in production and employment, in turn, exacerbated problems for the financial sector. It will take time for the banking industry to work through these challenges and to fully recover and serve as a source of strength for the real economy. While there have been some positive signals of late, the financial system remains fragile and key trouble spots remain, such as CRE. We are working with financial institutions to ensure that they improve their risk management and capital planning practices, and we are also improving our own supervisory processes in light of key lessons learned. Of course, we are also committed to working with the other banking agencies and the Congress to ensure a strong and stable financial system. ______ CHRG-111hhrg52397--95 Mr. Pickel," If I could just comment, I think that is a very good division of how this market will evolve and is already in the process of evolving. You would have an exchange traded, or perhaps an electronically traded element, that would allow the highly standardized trades to be traded that way. You would have this category of cleared trades and then you would have the customized trades. I think the question of where a product is in the standardization process is largely a function of how actively traded and how liquid the underlying market is because keep in mind a clearinghouse will need to at least daily, and sometimes twice daily, mark those positions to market and call for margin, and so it needs to have a liquid market for that project. An exchange needs an even higher degree of liquidity, market makers who are active in the exchange, ready to do a transaction at any time during the trading day. So that liquidity I think largely drives where the dividing line would be, but that is not an easy determination to make. " CHRG-111hhrg48873--19 Mr. Bernanke," Thank you, Chairman Frank, Ranking Member Bachus, and other members of the committee. I appreciate having this opportunity to discuss the Federal Reserve's involvement with AIG. In my testimony, I will describe why supporting AIG was a difficult but necessary step to protect our economy and stabilize our financial system. I will also discuss issues related to compensation and note two matters raised by this experience that merit congressional attention. We at the Federal Reserve, working closely with the Treasury, made our decision to lend to AIG on September 16th of last year. It was an extraordinary time. Global financial markets were experiencing unprecedented strains and a worldwide loss of confidence. Fannie Mae and Freddie Mac had been placed into conservatorship only 2 weeks earlier, and Lehman Brothers had filed for bankruptcy the day before. We were very concerned about a number of other major firms that were under intense stress. AIG's financial condition had been deteriorating for some time, caused by actual and expected losses on subprime mortgage-backed securities and on credit default swaps that AIG's Financial Products unit, AIG FP, had written on mortgage-related securities. As confidence in the firm declined and with efforts to find a private-sector solution unsuccessful, AIG faced severe liquidity pressures that threatened to force it imminently into bankruptcy. The Federal Reserve and the Treasury agreed that AIG's failure under the conditions then prevailing-- " CHRG-111shrg50815--32 Mr. Clayton," Well, Senator, I know there has always been this discussion about how universal default is defined and I understand respect the fact that people take different perspectives. But it is our understanding that the Fed permits the changing of interest rates on existing balances under four conditions and four conditions alone. The first condition is if it is a promotional rate card, essentially, and it is disclosed ahead of time and that promotional rate expires. The second one is if it is a variable rate card tied to some kind of index. The third one is if there is a delinquency in excess of 30 days. And the fourth one is if it is a violation of a work-out agreement. I am unaware of any other circumstance where, when this rule becomes effective, that institutions can consider off-account information in determining the interest rate on that existing balance. " CHRG-110hhrg44900--162 Secretary Paulson," Let me say what history shows us is that it is very difficulty to predict in advance, and I don't think you're going to be able to reasonably give us any tool right now. So I'm going to just tell you that there is an urgent need. We are not saying take your time, wait. There is an urgent need to get more tools. But I also will tell you that I believe that the focus on market stability and the actions that the Fed has taken, not just in the Bear Stearns episode, but in the follow-up in opening the PDCF to the opening of the diskette window to the investment banks has sent a very strong signal. And the work that the Fed and the SEC has done with these good institutions is a strength in their liquidity management, is, I think, very important. So neither of us are predicting another incident and we are looking at the progress that has been made. We both would like additional tools. We are not saying take forever, but we recognize the fact that the regulatory structure hasn't been changed in a long time and the fact that we don't have these tools mean that it's not going to be easy. It's going to need to be thought through and the sooner the better, but we are prepared to work together, work with you to deal with the situation on the interim. " FOMC20051213meeting--122 120,MS. BIES.," Thank you, Mr. Chairman. First, let me say that I support the 25 basis point increase today. And I give my sympathy to Brian, who has heard our many different viewpoints in the last week. I think he has done a good job of trying to get all our ideas out here in a reasonable balance. My initial feeling was that I really didn’t want to keep the word “measured” in the statement; I wanted to drop it as part of this change. But for the reasons everybody has suggested, I can accept the wording in alternative B as it is now. Mr. Chairman, you talked about some of the risks to the long-term side of the market. I think that is a serious concern because so much of the pricing these days seems not to involve looking at the longer-term risks, and it’s so critical to what is currently driving investment and risk-taking. And for that reason, I guess I’d like to leave the words as they are now. But the big change that I would like to see is a move away from forward-looking language as we get to the point where there is more uncertainty about future policy. It was easy for the last thirteen meetings to say, “We’re on a trend; the funds rate is way too low and we have to get it back up.” So it was easy for us to signal ahead. But as we signaled ahead, the market looked at what we were saying we were going to do as opposed to what the data were saying we would do. We, in effect, have taken the risk away from the market, especially at the long end, because market participants think we’re going to signal ahead of time and they will have time to get out of their long positions. In my view, we should go back to structuring section 4 to say basically where we think the risk is. Then I’d take the second part of that sentence and put it down in section 5, because it’s still a December 13, 2005 83 of 100 around this table is going to say that we’re not going to follow the mission of the Fed. So if we’re going to put in a tautology, I’d put it in part 5. And in part 4 I’d just indicate our assessment of the risks—that we think the risks are balanced or that the risk to growth or for inflation is greater. That would give the markets the message that they need to go back to looking at the data to figure out what we’re going to do, rather than our laying out for them what our next policy moves are going to be. As we get to the cusp, that risk perspective is really important. We saw when we turned from the bottom and rates were heading back up again that it disrupted the markets. But we need the markets to be ready to absorb that kind of risk because, as we sit around this table, we do not know exactly how we’re going to engineer getting out of this pattern of moving 25 basis points at each meeting. And I think the way to do it is to focus on where we see the risks and to stop giving any kind of signal on what our likely moves are going forward. I would like to see that happen at the next meeting." FOMC20080430meeting--97 95,MR. LOCKHART.," Thank you, Mr. Chairman. Our high-level view of current circumstances is that the real economy is quite weak, with weakness widespread. The financial markets are turning optimistic, and elevated prices and inflation remain a serious concern. Reports from our directors and District business contacts were broadly similar to the incoming national data and information from other Districts reported in the Beige Book. Observations from such District input support themes in the national data--for example, employment growth is quite weak. In this round of director reports and conversations, I heard an increasing number of reports of holds on hiring and expansion plans. One representative of a major retailer of home improvement goods reported that hiring for seasonal employees will be down 40 percent this spring. This translates to approximately 45,000 jobs. Nonresidential real estate development continues to slow in the District, especially in Florida and Georgia. Of the 18 commercial contractors contacted in April, 15 expect that commercial construction will be weaker for the rest of 2008 than for the same period in 2007, with several predicting even more pronounced weakness in 2009. On the brighter side, Florida Realtors are anticipating that sales over the next few months will exceed year-ago levels, and builders are signaling less weakness than in recent reports. This is a level of optimism we have not heard from Florida for some time. However, housing markets in the rest of the District continue to weaken. We heard several complaints that obtaining financing is a serious problem for commercial and residential developers and consumer homebuyers. In sum, the information from the Sixth District seems to confirm what I believe is the continuing story of the national real economy captured in the Greenbook--that is, shrinking net job creation, developing weakness in nonresidential construction, and a bottom in the housing market still not in sight. In contrast, conditions in the financial markets appear to have improved substantially. As has been my practice, I had several conversations with contacts in a variety of financial firms. There was a consistent tone suggesting that financial markets are likely to have seen the worst. This does not mean that no concerns were expressed. Some contacts had concerns about European banks and credit markets, and concern about the value of the dollar, notwithstanding the recent rally, is coming up in more contexts. Concern was expressed about the dollar's disruptive effect on commodity markets, in turn affecting the general price level--in particular, the effect of high energy prices on a wide spectrum of businesses' consumer products and even on crime rates in rural and far suburban areas related to the theft of copper wiring and piping from vacant homes and air conditioning units. I worry that a narrative is developing along the lines that the ECB is concerned about inflation and the Fed not so much. This narrative encourages a dollar carry trade mentioned, again, by some financial contacts that puts downside pressure on the dollar that potentially undermines both growth and inflation objectives. I remain concerned about the vulnerability of financial markets to a shock or surprise, but overall, my contacts express the belief that conditions are improving. The Atlanta forecast submission sees flat real GDP growth in the first half of 2008, with gradual improvement in the second half. We continue to believe that the drag on economic activity from the problems in the housing and credit markets will persist into 2009. On the inflation front, I am still projecting a decline in the rate of inflation over this year. I've submitted forecasts of declining headline inflation in 2009 and 2010, but I should note that my staff's current projections suggest that improvement to the degree I would like to see may require some rises in the federal funds rate. It is my current judgment that, with an additional 25 basis point reduction in the fed funds rate target, policy will be appropriately calibrated to the gradual recovery of growth and the lowering of the inflation level envisioned in our forecast. This judgment is based on the view that, with a negative real funds rate by some measures, policy is in stimulative territory; that a lower cost of borrowing in support of growth depends more on market-driven tightening of credit spreads than a lower policy rate; that further cuts may contribute to unhelpful movements in the dollar exchange rate; and that extension of the four liquidity facilities may allow us to decouple liquidity actions from the fed funds rate target. In my view, we are in a zone of diminishing returns from further funds rate cuts beyond a possible quarter in this meeting. That said, as stated in the Greenbook, uncertainty surrounding the outlook for the real economy is very high, and the Committee needs, in my view, to preserve flexibility to deal with unanticipated developments. Thank you, Mr. Chairman. " FOMC20080805meeting--115 113,MS. YELLEN.," Thank you, Mr. Chairman. Developments during the intermeeting period have heightened my concern about downside risks to economic growth and slightly allayed my concern about upside risks to inflation. Let me begin with growth. The moderate growth rate registered in the second quarter was disappointing, especially because it benefited from the temporary effects of the fiscal stimulus package. Moreover, the pattern of consumer spending during the quarter, with weakness in June, is worrisome. With all the publicity surrounding the rebate checks, households may have put them to work earlier than usual, especially since they were facing significantly higher prices for food and gasoline. This interpretation does not bode well for activity in the current quarter. Assuming no change in the funds rate this year, we have lowered our forecast for real GDP growth for the second half of the year about percentage point, to just � percent, and project a correspondingly higher unemployment rate. Our forecast for weak second-half growth reflects not only the unwinding of fiscal stimulus but also adverse financial sector developments. The credit crunch appears to have intensified since we last met. Evidence of tighter financial conditions abound. Risk spreads and the interest rates charged on a variety of private loans, including mortgages, are up noticeably, and lending standards have tightened further. Credit losses have risen not only on mortgages but also on auto loans, credit cards, and home equity lines of credit. As a consequence, the list of troubled depository institutions is growing longer. IndyMac and First National will not be the last banks in our region to fail. Indeed, the decline in broad stock market indexes is partly a reflection of the market's concerns about the health of the financial sector. Many financial institutions are deleveraging their balance sheets and reducing loan originations. For example, a large bank in my District has begun now in earnest to cancel or cap outstanding home equity loans and lines of credit, despite an ongoing concern about alienating consumers. Tighter credit is affecting demand. Anecdotal reports suggest that the plunge in July car sales partly reflects a tightening of credit standards for auto loans and leases. A large bank reports a substantial drop in demand for mortgage credit in response to the recent rise in mortgage interest rates, and the anecdotal reports that we hear support the Greenbook's negative view of the effect of credit conditions on investment in nonresidential structures. The housing sector is of considerable concern. House prices have continued to fall at a rapid rate, and futures prices suggest a further decline of around 10 percent over the next 12 months. This forecast seems reasonable given the overhang of homes for sale, the recent rise in mortgage rates, and the tightening of credit. Unfortunately, the risk of an adverse feedback loop from tighter credit to higher unemployment, to rising foreclosures, to escalating financial sector losses, to yet tighter credit remains alive and well, in my opinion. Indeed, stress tests conducted by some of the large financial institutions in our District reveal an exceptionally high sensitivity of credit losses to both home-price movements and unemployment. The ""severe financial stress"" simulation in the Greenbook illustrates my concern. It is not my modal forecast, but it certainly seems well within a reasonable range of outcomes. The probability of such a scenario has risen, in my view, since we met in June. One partially mitigating factor that should help to support consumer spending is the drop in the price of oil since our last meeting. But to the extent that the decline in oil prices partly reflects reduced expectations for global growth, the net impetus from stronger domestic spending will be offset by weaker export growth. Continued declines or even stabilization in oil prices will, however, be good for inflation. We have revised down slightly our forecast for core inflation as a consequence. Moreover, the fact that we were not once again surprised on the upside by oil prices has had a small favorable effect on my perception of inflation risks going forward. That said, inflation risks obviously remain. Even with the recent decline, energy prices are well above year-ago levels and are not only pushing up headline inflation but also spilling, to some extent, into core. Higher headline inflation could undermine our credibility and raise inflation expectations. If the public concludes that our implicit inflation objective has drifted up, workers may demand higher compensation, setting off a wage�price dynamic that would be costly to unwind. Fortunately, the reports I hear are consistent with the view that no such dynamic has taken hold. My contacts uniformly report that they see no signs of wage pressures. They note that high unemployment is suppressing wage gains. Growth in our two broad measures of labor compensation are low and stable; and taking productivity growth into account, unit labor costs have risen only modestly. I tend to think of the chain of causation in a wage�price spiral running from wages to prices, but it is certainly possible that the causation also, or instead, runs in the opposite direction. Either way, though, faster wage growth is an inherent part of the process by which underlying inflation drifts up, and at present we see not the slightest inkling of emerging wage pressures. Growth in unit labor costs also remains at exceptionally low levels. I would also note that I have looked for evidence of some increase in the NAIRU due to sectoral reallocation by examining the Beveridge curve, thinking that if there were sectoral reallocation we might see an outward shift in the Beveridge curve. I have detected no evidence of such an outward shift. These facts provide me with some comfort. Moreover, various measures of longer-term inflation expectations suggest that they remain relatively well contained. When we met in June, the Michigan survey of inflation expectations five to ten years ahead had recently jumped a couple tenths of a percentage point. I argued then that the respondents to that survey typically overrespond to contemporaneous headline inflation. Since that meeting, oil prices have come down a bit, and so have the Michigan survey measures. Assuming that the funds rate is raised from 2 percent to 3 percent in 2009, my forecast shows both headline and core PCE inflation falling to about 2 percent in that year. So, in summary, during the intermeeting period, my forecast for economic growth has weakened, and that for inflation has edged down slightly. I consider the risks to our two policy objectives pretty evenly balanced at the present time. " CHRG-110shrg46629--45 Chairman Bernanke," No, I think the market will find solutions. They already are finding some. For example, even if the individual instruments are not particularly liquid, there are indices that are based on the payments from CDOs or CLOs which are traded and therefore give some sense of the market valuation of these underlying assets. So this is a market innovation. Sometimes there are bumps associated with a market innovation. I think we just have to sit and see how it works out. There are very strong incentives in the market to change the structure of these instruments as needed to make them attractive to investors. Senator Reed. Let me change gears just slightly. You alluded to it, not the CDOs but the CLOs, the collateralized loan obligations, essentially derivatives of corporate debt. There has been a lot of discussion that it is very easy now to go out in this market and to prop up companies that do not have the ability to borrow directly. And that the underwriting standards have slipped a bit because the banks who typically do the underwriting do not hold the product. They move them out very quickly in these complex secondary markets. First, can you comment on the underwriting standards for the corporate borrowing? Are they loosening to a degree that could-- " FOMC20080430meeting--112 110,MR. KOHN.," Thank you, Mr. Chairman. My forecasts of output and inflation for this and the next two years are in the central tendencies of the Committee forecasts. My Okun's law machine went haywire under the pressure of Debbie's deadline, [laughter] so my unemployment forecasts need to be revised. But I hit the 5:00 deadline, I think. I have stronger growth in 2008 than the Greenbook because I was hesitant to adopt the staff's assumption about persistent, serially correlated downside misses relative to fundamentals in consumption and investment implied by entering a recessionary period when we haven't seen those misses yet. But I didn't discount this possibility entirely, reasoning that the extraordinarily depressed business and household sentiment was significant. I came out between the Greenbook baseline and the ""nearterm upside risk"" alternative scenario. Despite slightly stronger growth than in the Greenbook, I have roughly the same headline and core inflation paths that are declining gradually through the next few years. I took some slight encouragement from recent better readings on core. I reasoned that flat commodity prices would reverse any recent tendency for inflation expectations to rise, and I anticipate that vacant housing units will continue to put downward pressure on rent increases. I have a couple of observations on the outlook. First, I think the expectation of improving financial conditions is critical to the favorable medium-term outcome for the economy that President Geithner was just talking about. We don't really know what the current state of overall financial conditions is and how spending is likely to respond to them. Directionally, I think we can say that the severe deterioration that was much in evidence around the time of the last meeting has stopped, as concerns about an even more generalized set of failures--the seizing up of markets and lending--have abated with our actions and with successful capital-raising by intermediaries. We have seen improvements in many segments of the markets, but continued deterioration in term funding suggests to me that there are continued worries about and pressures on credit availability, and credit availability and the cost of credit will be under some pressure as credit is re-intermediated through the banks. Even with some of the recent gains, markets are still fragile and impaired. Spreads have retraced only a small portion of the run-up since last summer. I noticed in Bill's charts that most of those spreads are back down to, say, those in January; and in January, we thought the markets were pretty impaired. So they are still very, very high by historical standards. Mortgage securitization markets away from GSEs remain broken. There are problems in some other securitization markets, including CMBS. A number of intermediate- and longer-term interest rates are still higher than they were before the crisis hit in August. Baa corporate bonds, which is about the median borrower rating for a corporation, long-term muni bonds, and prime jumbo mortgages are all higher than before we did any easing. Nonprice terms and standards are being tightened considerably, judging in part from the Senior Loan Officer Opinion Survey, and I think that process is likely to continue for a while. To be sure, short-term interest rates are a lot lower than they were in August. But I suspect that a continuation of current conditions would not be consistent with much of a pickup in growth and an eventual return toward full employment. This is a circumstance in which relationships between the federal funds rate and other measures of financial conditions have changed very, very substantially, and characterizing the stance of policy and financial conditions by looking at some measure of the real federal funds rate can be quite misleading in these circumstances. I think we need to be careful about how we characterize and think about the stance of policy. The sense that it is neutral right now, much less accommodative, depends very much on our expectations of substantial increases in risk-taking in financial markets. Now, I do think that the most likely path is improving financial market conditions, lower spreads, reopened securitization markets, and stabilization and maybe partial reversal of some of the tighter terms that have evolved. But this process is going to be slow. Until the housing market shows more signs of stabilizing, it is more likely to be subject to backsliding than to sudden unexpected improvements. A corollary to this line of thinking is that there isn't a lot of ease in the pipeline in the conventional sense. Our reductions in the fed funds rate have not eased financial conditions. They have kept them from tightening even more than they would have done otherwise. The lagged effects of policy easing come from improvements in financial markets. That is, as we look forward, the lagged effects of policy easing come from the improvements in financial markets that allow the reductions in the actual and expected paths of short-term rates to show through to the cost of capital more broadly defined. This is a longer and more nuanced process than the usual rules of thumb about seeing the effects of ease on output after X quarters and inflation after Y quarters. My second point about the outlook is that the risks around my forecast for growth are still to the downside. Uncertainty is huge. We are sailing in a fog in uncharted waters, and the depth finder is on the fritz. So much for sailing analogies. [Laughter] Too bad Bill Poole is not here, though I am glad Jim is here. Let me note that for the record. [Laughter] Downside risks from financial market meltdown have been reduced, though not eliminated. But I think an important source of downside risk now is the economy itself--the threat of recessionary tendencies taking hold. I am told we have never had three months of substantial employment declines and business and household sentiment as depressed as they are right now without sliding into a recession. Businesses and households have been unusually cautious in how they invest their savings, moving into government-only money funds and bank deposits, boosting M2, and demanding much larger compensation for taking risks. They are facing much tighter terms for their credit and uncertainty about its availability. It seems to me there is a reasonable possibility that this extraordinary caution in managing their financial portfolios and uncertainty about credit availability will carry over into their spending decisions. That is not my projection or apparently the central tendency of the Committee, but it must be a significant downside risk. In contrast, the risk to total inflation seems skewed to the upside by the potential behavior of commodity prices. I don't understand why these prices have risen so much over the last six months or so. To be sure, over the last several years the rise in prices must have reflected increasing demand in emerging-market economies, but over the past half-year the prospects for global growth have weakened. In those circumstances, I would expect the effects of lower interest rates--say, in the United States--to be offset by weaker demand. Still, prices have risen. The possibility that those types of surprises will continue poses an upside risk to headline inflation and, along with that, a risk to inflation expectations. Nonetheless, I saw the risk around a gradual downtrend in core inflation as about balanced, with the possibility of greater slack offsetting the possibility of higher commodity prices. I take some comfort in my projection for core inflation and implicitly for the more persistent aspects of overall inflation from the continued moderate increases in labor compensation. Those increases have been moderate for some time despite very high headline inflation for several years along with still-elevated markups for nonfinancial businesses. Outside of commodities, cost pressures appear to be muted, and businesses are able to absorb increases. Still, I agree that commodity price increases, like any supply shock, have complicated our choices. We are facing a sluggish economy with downside risks as well as uncomfortably high total inflation that is feeding through to some limited extent into core inflation and, by some measures, into inflation expectations, especially near-term expectations. I do think, however, that we need to keep in mind that the higher inflation is largely a function of these commodity prices rather than a broad acceleration in overall prices. Core inflation has come in less than we anticipated it would. I also take some comfort, relative to some of the tone I have heard around the table, in what has happened in markets over the intermeeting period. Markets have built in another � point decline in the fed funds rate but then an increase further out. So somehow they are taking this promise of an increase seriously. At the same time they did that, the dollar rose--it didn't fall--and the long-term inflation compensation built into markets came down. So I don't see the evidence in financial markets that we are on the cusp of the broad decline in our credibility that I have sensed that some others see around the table. Thank you, Mr. Chairman. " CHRG-111hhrg48868--62 Mr. Clark," Thank you, Mr. Chairman, Ranking Member Garrett, and members of the subcommittee. Good morning. My name is Rodney Clark. I serve as a managing director in Standard & Poor's rating services business and from 2005 until very recently, I served as S&P's lead rating analyst covering AIG. I am pleased to appear before you today. Let me begin by speaking generally about our ratings process and the nature of our credit ratings. S&P's credit ratings are current opinions on the future credit risk of an entity or debt obligation. Our ratings do not speak to the market value of a security or the volatility of its price and they are not recommendations to buy, sell or hold a security. They are one tool for investors to use as they assess risk and differentiate credit quality of issuers and the debt that they issue. S&P analysts gather information about a particular issuer or debt issue, analyze the information according to our published criteria, form opinions and then present their findings to a committee of experienced analysts that votes on what ratings to assign. S&P publishes its ratings opinion in real time and for free on our Web site and we also generally publish a narrative that provides additional information about our opinion. This is the process by which S&P arrived at its ratings on AIG, which I will now discuss in more detail. Attached to my written submission is a table listing our global ratings history of AIG since 1990, as well as a more detailed description of our rationale for our rating changes. For many years, S&P had a triple A rating on AIG. Our opinion began to change in 2004 and since March 2005, we have lowered our ratings on AIG 4 times. In February of last year, S&P announced a negative outlook on the company's ratings related to the way AIG was determining the fair value of credit default swap contracts or CDS. AIG's CDS guaranteed an array of structured finance securities. Several months later, in May 2008, we lowered AIG's rating to double A minus following the company's announcement of further losses in their CDS portfolio and we maintained a negative outlook on AIG throughout the summer of 2008. In August, S&P announced that its view of the actual expected credit losses in the CDS area would likely amount to around $8 billion, significantly higher than the mark-to-market losses. AIG's financial condition continued to deteriorate sharply amid the substantial market turbulence in September 2008 leading to a sudden drop in the market value of AIG's investments and its CDS portfolio. In light of these events, on September 12, 2008, S&P placed its ratings on AIG and its subsidiaries on credit watch with negative implications. On September 15, 2008, as AIG's condition continued to deteriorate, S&P lowered its rating further to A minus in light of the increase in CDS related losses and AIG's reduced flexibility in meeting its collateral needs. Since then, AIG has benefitted from government support. Our rating on AIG remains at A minus, but includes a six notch uplift for the government support. Thus, without government support, our rating on AIG today would be double B minus. S&P recently affirmed its A minus rating on AIG; however, we maintain a negative outlook on the company's rating going forward. I have also been asked to address the effect of AIG's troubles on creditworthiness of its insurance subsidiaries. We believe those subsidiaries are, to some extent, protected by insurance regulations from AIG's financial problems. Nevertheless, we believe there is increased reputational risk for the subsidiaries at this time, which may eventually affect their earnings. Moreover, they may have reduced access to capital in the event AIG's condition should worsen. I have also been asked to address whether S&P's ratings may have contributed to the decline of AIG. We believe that AIG's difficulties resulted from the convergence of many factors, including the unprecedented and substantial deterioration in the market value of AIG's CDS portfolio. While some have argued that S&P's downgrade was too slow, others have said that we acted too aggressively and that our downgrades contributed to AIG's decline. We would not refrain from taking any rating actions simply out of deference to a particular issuer or at the request of a market participant. Our ratings are not driven by market sentiment; rather, our role to act as an independent observer offering our views on creditworthiness. Finally, you have asked me to describe any involvement S&P may have had in connection with the structuring or restructuring of the government support packages to AIG. Although S&P has been informed by government officials about the actions that have been taken, we have had no participation in the structuring or restructuring of these packages, nor has S&P provided or been asked to provide any advice or consultation to the government in connection with its support of AIG. I think you for the opportunity to participate in this hearing and I would be happy to answer any questions you have. [The prepared statement of Mr. Clark can be found on page 148 of the appendix.] " CHRG-111hhrg53238--220 Mr. Manzullo," Mr. Chairman, you know it is amazing, if I had asked each of you guys--that of course includes the gentlelady--what caused everything, the answer is pretty simple: too easy credit. The Federal Reserve had the authority to stop the 2/28 and the 3/27 mortgages, and the Federal Reserve also had the authority to require, goodness gracious, written proof of a person's income before that person was eligible to get the mortgage. You know something? No one starts with the problem. The problem is not in the derivatives, the problem is in the stinky piece of financial garbage that was generated because of the bad subprime loans. So if we already have a government agency that had the powers to stop this, and didn't do so for any number of reasons, why create another agency given the authority to come in and mess up? I mean, I don't know if you guys have taken a look at this Consumer Financial Protection Agency Act of 2009, the proposal on it. You know what that does? That says that this new organization gets to work with HUD, and perhaps FHSA, on a Truth-in-Lending and RESPA financial disclosure form. And how long did we fight those people at HUD on RESPA? When I chaired the Small Business Committee, that went on for 6 years. They finally came up with something they thought would work. And now FHA says well, we are going to take care of the appraisers. It allows banks to own an appraisal management company so that the appraisal management company can be wholly owned by the bank. But if you separate the men's bathroom from the women's bathroom, they can go out there and do an independent appraisal. And if a person gets an appraisal that he doesn't like--you know, we were told by the head of the FHFA what his resolution is: to contact them or the CC. You know, the more power and the more agencies we set up, it just screws everything up. I mean, Mr. Menzies, you know, you are a community banker. In your opinion--I like to pick on you--this is the third time since you have been here. In your opinion, if we did not have those exotic mortgages, if they were not allowed, and people had to show proof of their income, don't you agree that this crisis probably never would have occurred? " CHRG-110hhrg46596--25 Mr. Bachus," And I compliment you, Mr. Garrett, for your, I think, very constructive role. It has now been a little over 2 months since Congress passed legislation establishing TARP. A lot has happened in that time, some good and some bad. A particular concern of many members on this committee has been the Treasurer's ever-shifting strategies and explanations for its actions in implementing TARP, which have resulted in uncertainty among market participants and confusion among the American people. This has made it more difficult to achieve the goals that Congress has set in creating TARP and stabilizing the financial markets and increasing the flow of credit to Main Street. There has been some semblance of order restored in certain segments of the credit markets and among the financial service industry, and that is a good thing. No one faults Treasury for trying to tailor its policy responses to changing market conditions and challenges. But as the GAO report clearly states, implementing its various initiatives, Treasury has often failed to explain to Congress and the public what it hoped to achieve or to clearly communicate its expectations for the institutions that receive funding. For example, Treasury and the regulators have indicated recently that they expect the banks that have received an infusion of government money under the Capital Purchase Program to lend, rather than hoard, the cash. But the time to have thought about that, about what we expected banks to do with those funds, was before the money went out the door as a condition of investment rather than after the money was already in the banks' vault. That is why some of us in the negotiations on TARP asked if there would be conditions, and we were told that would limit the program. We talked about clawbacks, we talked about restrictions on dividends, we talked about something that Mr. LaTourette has complained about, and that is these banks using those funds to acquire their competitors or other banks. We think that is a serious matter. It is not in the legislation. But if there is any way to undo that admission, it needs to be done. Now I will close with this. I wonder whether Secretary Paulson or Mr. Kashkari, back when they were still working for Goldman Sachs, ever agreed to a deal in which billions of dollars changed hands, based on a 2-page application, without asking what the money was going to be used for or whether it was going to be paid back. For instance, the Uniform Residential Mortgage Application is 8 pages. The application for Federal Student Aid is 11 pages. When student lenders and mortgage companies ask more questions in lending thousands of dollars than the Federal Government does when it injects billions of dollars' worth of capital, we should all be concerned. The application process for the Capital Purchase Program, consisting of a 2-page form in which the bank identifies itself as a bank and asks for money and little else is very surprising. Secretary Paulson and Mr. Kashkari, you cannot be faulted for not having all the answers and for not being able to predict the future. But when you are acting on behalf of the American taxpayer, the taxpayer has the right to expect they will exercise the same basic judgment, the same standard of care that they would have exercised when they were working for Goldman Sachs and its investors. They should be held to the standard of care that we would expect from a reasonable, prudent investment banker whom I hope would not agree to a deal without doing some minimal amount of due diligence and conditions. Secretary Paulson and Mr. Kashkari should learn something from what we have seen in these past few weeks in connection with the committee's consideration of a possible bailout for the domestic auto industry. The CEOs of those automobile makers appeared before us to present detailed business plans showing how they intended to return their companies to profitability. They tried to justify their pleas for taxpayer help by admitting that their business models were flawed and explaining how they are going to change them. While the jury is still out on whether they made their case successfully, the detailed explanations and documents they put before us and the American people stand in stark contrast to the lack of information we have received from Treasury or from the financial institutions that have received taxpayer money under TARP. Let me close by thanking Chairman Frank for holding today's hearing, giving me the opportunity to focus on yesterday's hearing before the Oversight and Government Reform Committee, which was very important, and for inviting our colleague, the gentleman from Texas, Mr. Hensarling, to testify on the important work being done by the TARP Congressional Oversight Panel. He has some concerns. I share those concerns, and I look forward to his testimony. I look forward to his insights and those of the other witnesses. Thank you. " CHRG-111shrg57923--4 Mr. Tarullo," Well, Senator, I think that one of the lessons that the international community drew from some of the sovereign debt crises of the late 1990s and the very early years of this century was that there needed to be more transparency associated with a lot of sovereign debt issuance. And the International Monetary Fund undertook to create special data dissemination standards which would provide more such information. Generally speaking, I would distinguish between the sovereign information and private financial system firm information since we as regulators obviously have a mandate over private firms rather than certainly over sovereigns. It is relevant, though, for us in thinking about systemic risk because, to the degree that our large institutions have significant exposures to sovereigns which may conceivably have difficulty in servicing their debt, that becomes a matter of concern for the private financial regulators as well. Senator Reed. One of the issues that repeatedly is made--points, rather than issues--is that, you know, too big to fail is the first chapter, but the second chapter is too interconnected to fail. And that raises the issue of a focal point on large institutions might miss small institutions that could cause systemic risk. In fact, you know, there is the possibility that multiple failures in small institutions could have a systemic problem. So how do we sort of deal with that in terms of these interconnections? I mean, traditionally, it is easy for us to go to a big financial institution and say report X, Y, and Z. " FOMC20080625meeting--96 94,MR. KROSZNER.," Thanks a lot. Well, as I've mentioned many times before, I have thought about this as sort of a long, slow burn scenario; and as we well know, the embers are still smoldering. It seems to be less of a risk that they could re-ignite, causing a major conflagration; but there is still some chance of re-ignition, and I think there's still a fair amount of heat. Consistent with that, my central tendency view is probably closer to the Greenbook's ""delayed credit recovery"" alternative scenario than to the main Greenbook forecast. In looking at the alternative scenario, there's not much of a real effect on growth, but that response is due to a lower fed funds path. Given the discussions that we've had, I think it may be very difficult to pursue something like that in this environment, particularly given higher uncertainty about inflation and inflation expectations, even if, as a number of people have mentioned, inflation expectations haven't moved up that much or you pick your favorite measure and some have moved up more than others. Given that it's likely that we had some transitory factors keeping core and headline inflation down a little lower than they otherwise might have been and they probably are going to go up, I think that dealing with the ""delayed credit recovery"" alternative scenario in the way that's discussed in the Greenbook makes our policy choices particularly difficult. So let me focus briefly on why I think the delayed credit recovery or slow burn scenario is a reasonable central tendency one. I think it relates largely to our continuing challenges on banks' balance sheets, liquidity, and capital. Banks are facing very high short-term financing costs. Those LIBOR�OIS spreads are still at extremely elevated levels compared with what they're used to in funding themselves, and this is true whether they are commercial banks or investment banks. The forwards suggest that this ain't going away anytime soon. So one thing that this does is simply to cut into profitability and the ability to earn your way out of the challenges. An easy way to do it-- of just allowing the machine to go forward--is going to produce less than it otherwise would. A lot of institutions rely on the Federal Home Loan Banks, but those are largely tapped out as another source of financing. We know that the monoline issue has sort of come back, and the challenges there are great. It is undoubtedly going to be leading to a lot more write-downs over the next couple of quarters. On the other hand, as President Lockhart, Governor Warsh, and some others have mentioned, there have been a few areas that seem to have opened up. The leveraged-loan market seems to have opened up a bit. People seem to be getting those leveraged loans off their books-- and not even at effectively subsidized financing rates. They were proud of getting these off their books before, but they were doing it by basically just making another loan, which effectively doesn't get them off the books. Now it seems as though they are legitimately able to move this, and obviously that book is not growing. That book is shrinking. Of course, one of the biggest challenges is in housing, and I see the shocks of some of the resets from the nontraditional mortgages continuing through '09. We're seeing very significant increases in delinquencies and foreclosures, not only in the subprime space but also in the adjustable rate space generally--that's both subprime and prime, although the levels for prime are dramatically lower. The increases are quite significant for prime ARMs, and that starts to raise some challenges for the institutions that didn't do subprime but may still have a reasonable amount of prime ARMs on their books. HELOCs have been mentioned and the inability to securitize anything that's nonconforming. We've seen very little benefit yet from the changes that allow Freddie Mac and Fannie Mae to raise those limits. Also, as many of you know, from my visits around the country to your Districts, I see that conditions in different areas are dramatically different, but in general a lot of markets remain in very difficult circumstances. One of the largest mortgage lenders in the country said that, over the last couple of months, their average FICO score on what they've been originating outside the conforming market has been 800. That's astonishingly high--so that gets back to President Yellen's comment about even with FICO scores in the stratosphere--and they claim that's an average FICO score, and they have been pulling back on the HELOCs et cetera. On rising delinquency rates for credit cards, I didn't hear quite as bleak a view as Governor Warsh described. I wouldn't want to say a positive view. They seemed to say that it is where they would have expected it to be in this part of a cycle with increasing delinquencies. One thing that they were seeing was a little increase in payments, and so that may be one of the consequences of the stimulus check coming--that people are using it to pay down some of their credit card debt. But a big challenge that they have been seeing is the so-called roll rates--that once someone begins to go delinquent, they tend to roll right to full loss rather than getting some recovery. It suggests that, when people get into trouble, they are in fairly deep trouble. All of this means that the demand for capital is going to be very high going forward at these institutions as provisioning has to go up. You know, we've tapped sovereign wealth funds, institutional investors, and a lot of others. As Governor Warsh said, tapping other sources, encouraging perhaps private equity to come in, is something that's important. But how long are these guys willing to invest when over the past nine months every single investment has seen a reduction rather than an increase in value? I'm borrowing a prop from President Fisher--we have been going around and saying, ""Raise capital. You're worth it."" [Laughter] I hope the investment banks are going around to their shareholders and saying that also. So far there's not a lot of evidence that they have been. I think in the long run they will, but we have to worry about that. This slow burn scenario is even more problematic in the context of what Vice Chairman Geithner mentioned about some slowing of foreign demand that I think may be coming and in the context of a fair amount of increases in interest rates that may be coming in a lot of these countries. You're going to be seeing some credit tightening globally, as I think a number of people have mentioned. It is more likely, unless there's a major shock, to be more on the tightening side going forward. This makes it more difficult to deal with some of the issues in the ""higher inflation expectations"" alternative scenario that was in the Greenbook because, when you have this financial fragility, it's harder perhaps to raise interest rates as quickly or as much as you would like because of the concerns about what might happen in the financial markets. On inflation, I think much like President Stern and a number of others--it depends on which particular series you look at. It is hard to say that things have really become unmoored, but I think there's a lot more uncertainty in the minds of both the public and the market participants about where inflation may go. That's particularly problematic when you have the likely increase in the actual numbers coming that the Greenbook is forecasting for the next quarter or so; and in that context, dealing with some of the challenges is more difficult. But we'll talk about that more tomorrow. On the projections, I think it is important that we continue to increase transparency over time. We structured what we did last time to make it part of a process, and I think it makes sense to periodically revisit whether we want to continue on that road. I very much prefer a gradualist approach, in principle, to add year 5 or so--as the Chairman said--but I think there's a bit of a problem in doing that because too much meaning may be attributed to it. It may be too difficult to avoid saying, ""Well, we're just doing a target."" If we add year 4 and year 5, even though there's not a lot of information content in year 4, I think it helps to reduce the kind of shock value of seeing that fifth year out there. Now, that's potentially a negative because, in some sense, we want to provide more information that way. But given the fragile conditions, as Vice Chairman Geithner mentioned, I don't think that we want to generate a debate on inflation targets, employment targets, and other things like that particularly right now. So maybe having a gradualist approach, by which we just extend things to year 4 and year 5, which is seen as a natural outgrowth, wouldn't be as much of a shock. Not that I think it would be shocking, but I think it might raise as many concerns and as much of a debate and distract us from the key issues that we have before us. Thank you. " CHRG-111shrg50815--30 Mr. Plunkett," Thank you, Chairman Dodd, members of the Committee. I am Travis Plunkett, the Legislative Director at the Consumer Federation of America. I am testifying today on behalf of CFA and five other national consumer organizations. I appreciate the opportunity to offer our analysis of the very serious national consequences that unfair and deceptive credit card practices are having on many families in this recession as well as what this Committee can do to stop these traps and tricks. American families cannot become the engine of economic recovery if they are burdened by high credit card debt that can further escalate at a creditor's whim. I would like to summarize five points that I will leave with the Committee and then come back at the end of my testimony and provide a little detail on each point. First, the number of families in trouble with their credit card loans is approaching historic highs, as Senator Dodd said. Based on loss trends the card issuers are reporting, 2009 could be one of the worst years on record for credit card consumers. Second point, credit card issuers share a great deal of responsibility for putting so many Americans in such a vulnerable financial position through their reckless extension of credit over a number of years and use of abusive and unjustified pricing practices, which seem to be accelerating at this time when consumers can least afford it. Third, the need for quick action to end abusive lending practices is more urgent than ever now because taxpayers are propping up major credit card issuers through several enormously expensive programs. If the government is going to attempt to spur credit card issuers to offer more credit, it must ensure that the loans they are offering now are fair and sustainable. Fourth, the recent credit card rule finalized by the Federal regulators is a good first step in curbing abusive practices. It does have significant gaps, though, and as we have heard, it doesn't take effect until July of 2010. Fifth, Senator Dodd's comprehensive Credit Card Act fills in many of these gaps, as do a number of other legislative proposals that have been offered by members of this Committee. It will make the credit card marketplace fairer, more competitive, and more transparent. So let us talk a little detail here. On loss trends, Senator Dodd went through some of the most worrisome factors. One thing to watch is something industry insiders look at a lot. It is called the payoff rate. This is the amount of money that credit card consumers pay on their credit card bill every month and it has just dropped at the end of last year precipitously for credit cards. It is now at one of the lowest levels ever reported, showing that cardholders are having a harder time affording their bills and that the amount of money they can pay every month is dropping. Charge-offs and delinquencies--charge-offs is the amount of money proportionate to how much is loaned that credit card issuers write off as uncollectible--it is looking like they may approach the highest levels ever by the end of this year, and they are already quite high and have shot up very fast. Personal bankruptcy is up by about a third. On the responsibility that issuers have for this problem, just so you don't think this is last year's news or old news, let me just cite a few recent problems with some of the pricing practices you have heard about. They involve issuers adding new fees, increasing the amount of fees that they are charging, using harmful rather than responsible methods to lower credit lines, and a number of other abusive practices. Citigroup last fall back-pedaled on its promise to note increase interest rates any-time for any-reason, and then increased interest rates on a large part of their portfolio. Chase, as we have heard, has suddenly started charging people $120 a year for their accounts. These are cardholders who were promised a fixed rate for the life of their balance. Bank of America has used a variety of questionable methods for cardholders who appear to have done nothing wrong to violate their agreement, citing risk-based pricing and not providing clear information to these cardholders about the problem. Capital One and a number of other issuers over the last year, year and a half, have used very vague clauses in the cardholder agreements that allow them to increase interest rates for large parts of their portfolio for so-called market conditions. Let me be clear. Issuers do have the right to try and limit their losses in a recession, but these kinds of arbitrary and unjustified practices for cardholders who thought they were playing by the rules are very, very harmful. On the need for quick action because of government support, a couple of days ago, Treasury Secretary Geithner announced the expansion of a program that is supposed to provide taxpayer dollars to support securitization of credit card loans. They want more credit card lending. We have urged the Secretary to establish minimum fair practices standards for credit cards now so that our tax money isn't supporting unfair loans. On the Federal Reserve and regulator credit card rule, several positive aspects that we have heard about to the rule related to double-cycle billing, restrictions on increasing interest rates on existing balances, payment allocation. There are gaps, though. Fees are not addressed at all. Credit extension is not addressed at all. Bringing down rates if cardholders say they have a problem, then they pay on time for, say, 6 months, not addressed. And as we have heard, it doesn't take effect for a long time. The Credit Card Act and a number of other bills introduced in the Senate address many of these gaps. No any-time, any-reason repricing. That is the excuse Chase used. Limiting unjustified penalty fees by requiring that fees be reasonably related to the cost issuers incur, a very important part of the Credit Card Act. Limiting aggressive marketing and irresponsible lending to young consumers and lowering rates if consumers perform well after a problem occurs. Let me just close by saying that we have heard a lot about fears that fair regulation of the credit card market will lead to less credit, will lead to people who need it not having access to credit, especially lower-income or minority consumers. I always get a little worried because this context, or the context for this discussion is to ignore what has happened through essentially self-regulation of the market. I mean, where are we now? Issuers have been able to write their own rules for a very long time and they are cutting back on credit, especially to more vulnerable borrowers, especially to lower-income and minority borrowers. Plus, we have to deal with the kind of uncompetitive, not transparent marketplace we have heard about. So it sounds like the worst of all possible worlds to me, and that is why we support Senator Dodd's bill and fair regulation of the marketplace. " CHRG-111hhrg56766--92 Mr. Bernanke," Well, we have been working on it very hard. We have, for example, increased substantially our information-gathering so that we can make an assessment of how many loans are turned down, what is the rate of loss on small loans versus large loans. We added questions to the National Federation of Independent Businesses Survey asking small firms about their experience with borrowing and so on. So we are trying very hard. We have also our reserve banks around the country currently having a series of summit meetings with community leaders, development organizations, small business lenders, and small companies to try to figure out what the problems are. So we are actively going out and learning about the situation the best we can. It's very difficult because there will be some cases where tighter standards are justified because of the weakness of the economy and the weakness of the borrower's condition. We just want to make sure that when there is a creditworthy borrower that they can obtain credit. " CHRG-111shrg56415--12 Mr. Candon," Honorable Chairman Johnson, Ranking Member Crapo, and members of the Subcommittee, thank you for the opportunity to testify. I am the Deputy Commissioner of Banking and Securities for the Vermont Department of Banking, Insurance, Securities, and Health Care Administration. I appear on behalf of the State Credit Union Regulators as Chairman of NASCUS. Today, I will share information on the conditions of State credit unions and areas for reform. Like all financial institutions, State credit unions have been adversely affected by the current economy. However, at this point, State natural person credit unions remain generally healthy and continue to serve the needs of their members and their communities. For the most part, natural person credit unions did not engage in many of the practices that precipitated the current market downturn. However, we have several issues to bring to your attention about the impact of the economy and the need for capital options for credit unions. State regulators remain concerned about unemployment and its effects on credit union members' ability to meet their obligations. We also see increases in delinquencies and charge-offs as well as pressure on earnings, especially in smaller State credit unions. Although loan delinquency and net charge-offs have increased, State regulators indicate that the levels remain manageable. In response to this trend, regulators are increasing their oversight of consumer credit products, including auto loans, credit cards, real estate and home equity loans. State regulators are also closely monitoring member business lending in credit unions. Some States, including my home State of Vermont, have not experienced the fallout from commercial real estate or subprime lending because State credit unions do not engage in those activities. State regulators continue to encourage credit unions to exercise sound underwriting practices, proper risk management, and due diligence, as these are the practices that have kept credit unions healthier through the economic downturn. In anticipation of prolonged economic problems, State regulators will closely monitor both lending and investment activities. State regulators also emphasize strong governance standards at the credit union board level. We will continue close supervision through offsite monitoring and onsite examinations and visitations. The growing trend toward consolidation is on the minds of State regulators as credit union mergers continue to occur, both voluntarily and for regulatory purposes. As economic pressures continue, finding suitable merger partners may become more difficult. In response to your question about capital needs, access to capital for credit unions is critical. Unlike other financial institutions, credit union access to capital is limited to reserves and retained earnings. State regulators recommend capital raising options for all credit unions. Access to supplemental capital will enable credit unions to respond proactively to changing market conditions, thereby strengthening safety and soundness and providing a buffer for the Credit Union's Share Insurance Fund. It is NASCUS's studied belief that a change to the Federal law could provide this valuable tool to credit unions without altering their nonprofit and cooperative structure. Supplemental capital will not be appropriate for every credit union nor would every credit union need access to supplemental capital. However, the option should be available. State regulators are also concerned about the impact of corporate credit union losses on natural person credit unions. Given the severity of the losses, it is clear that enhanced regulatory standards for capital, governance, and risk management are necessary. State regulators are working with the NCUA to ensure the safety and soundness of corporate credit unions and to mitigate future risk. Last, I would like to emphasize the value of the dual regulatory system. State regulators have demonstrated the importance of local supervision of State-chartered institutions and the value of the dual regulatory system. State regulators have always emphasized consumer protection along with safety and soundness as an important part of their mission and accountability to Governors and State legislatures. Further, State regulators have the expertise to identify areas of risk and take enforcement actions where necessary. As regulatory modernization efforts are considered by the Senate Banking Committee, we encourage you to retain State supervision and reaffirm State authority. NASCUS and State regulators appreciate the opportunity to testify today. I will be pleased to respond to any questions that you have. Thank you, Mr. Chairman. Senator Johnson. Thank you, Mr. Candon. Let us put 7 minutes on the clock for each member to ask questions of our witnesses. Ms. Bair, so far, 98 institutions have failed this year and the FDIC's watch list has grown to 416 institutions. How many more of the troubled institutions do you anticipate will fail? Is the FDIC staffed up to deal with an increase in failures? Ms. Bair. Mr. Chairman, thank you for asking that question. There will be more failures. We do not make our failure projections public, but failures will continue at a pretty good pace this year and next. We think we will have about $100 billion in losses over a 5-year period starting at the beginning of 2009. Twenty-five billion of that has already been realized from failures this year, and we have already reserved for another $32 billion as of the end of the second quarter. We are ready for this, though. We have been prepared for some time. We started staffing up in 2007, especially in our receivership and resolution staff, but also beefing up our examination staff. We have 6,300 staff on board now. That number will likely go to 7,000. We also have a significant roster of consultants that we use to help with bank closings as well as asset valuations, asset management, and asset marketing. The FDIC really is designed for this type of activity. We can expand very quickly and then contract very quickly. A lot of our hires are temporary 2-year hires. Overall, we have got a very good track record. These closings have been seamless. Through using loss share, we have been able to, more often than not, do a whole bank transaction. So another bank that serves that same community acquires both the deposits and the assets, which is good for bank customers. Frequently, the depositors are also the borrowers at the bank. Overall, it has been handled well. I think the staff have made a tremendous effort. We are well staffed and very much prepared for this. Senator Johnson. Governor Tarullo, there has been much concern raised that commercial real estate is the next problem area for financial institutions. What are the differences between the concerns over commercial real estate and the problems we experienced last year with mortgages? " FOMC20070918meeting--124 122,MR. KOHN.," Thank you, Mr. Chairman. The repricing of risk and rechanneling of credit flows under way I believe will exert restraint on spending, especially in the near term, but over the longer run as well. A critical channel of contagion that came into play in the intermeeting period was the involvement of the banks as providers of credit and liquidity backstops in the ABCP market. As a consequence, uncertainties about real estate markets, the performance of nonprime mortgages, and structured-credit products came to rest as greater uncertainty about bank exposures. The classic flight to safety under way—the desire to protect capital and liquidity—has caused banks and those providing them credit to become more cautious. This has resulted in greatly reduced funding in term markets spreading the constriction of credit potentially well beyond the mortgage and leveraged-loan markets we talked about in early August. Like so many around the table, I feel that I can honestly say that the uncertainties around the output forecast were indeed larger than usual this time. Fortunately, we don’t have many degrees of freedom to test hypotheses about the sorts of relationships that we’re talking about here. I think we can expect effects on spending to be greatest in the short and intermediate terms, while markets are disrupted and while participants are struggling to find new ways of intermediating credit that address the perceived shortcomings of the previous practices. In the short run, to preserve capital and liquidity while secondary markets are impaired, banks have tightened terms and standards for loans. You can see this directly in the rise in spreads in the prime jumbo market, but it must be true for other less easily observed credits as well. Some credits, such as nonprime mortgages and leveraged loans, just haven’t been available for a while. An already weak housing market has been most directly affected, and construction sales and prices will probably fall substantially further because of the reduced demand along with a large overhang of unsold homes. Consumption spending is also likely to be trimmed. Tighter terms for home equity lines of credit and second mortgages mean not only that housing wealth is declining but also that it is probably less liquid and more expensive. To the extent that asset- backed security markets are affected and lenders have questions about consumer balance sheets, the cost of consumer credit could well rise also. Household confidence has apparently been affected by the adverse financial market news. Investment spending may also be held down by uncertainty, by a sense that consumer demand will be growing less rapidly. I have been struck in listening to presidents around the table report about their Districts that the tone has shifted noticeably toward less optimism, slower growth, and more caution on the part of our business respondents. It has been one of those shifts that you hear every couple of years around the table that are different from what might have been anticipated, say, from reading the Beige Book. There is also some tightening of credit conditions in the business sector—for example, for commercial real estate credit, as some have noted, and for credit for below-investment-grade firms. As a consequence, some downshift in GDP is highly likely over the next few quarters, and without policy action, we would most likely end up with a substantially lower GDP a few quarters out. Indeed, in the Greenbook, the output gap is noticeably wider at the end of ’08 despite near-term policy easing of 50 basis points. I also noted downside risk to my output forecast. It seems to me that, in this period when markets are adjusting, those risks are most skewed. The potential for adverse interactions seems large, as nervous creditors assess the implications of declines in house prices, volatile earnings of commercial and investment banks, and setbacks in overall confidence. I think there is a non-negligible risk that the constrictions in credit availability would feed back on the economy and, in turn, feed back on credit supply. As market participants are better able to distinguish and assess risk, liquidity will be re-established in many markets. Although we have seen some improvement in the past week or two, markets are still quite dysfunctional in many regards. Like others, I think it could take a while to discover how to structure securitizations that have the requisite transparency and appropriate principal-agent incentives to restore investor confidence and to recalibrate the roles of securities markets and banks. The process could be particularly drawn out in mortgage and related markets, which are likely to be affected for some time by uncertainties about the prices of houses and about the performance of mortgages. Moreover, some effects of the recent turmoil will be longer lasting. Risk spreads in a great variety of markets are likely to be at higher, more- realistic, and more-sustainable levels; banks should be charging more for credit liquidity backstops; less leverage in the financial sector implies a need for return on the greater amount of capital involved in intermediation, including at banks; and some credit conditions at any given fed funds rate will be tighter one year from now than they were a few months ago. I have concentrated on problems for growth, but the upside inflation risks have not disappeared. Unit labor costs have been rising. Markups, while still high, have come in, affording a reduced cushion for absorbing labor costs. Resource utilization remains high by historical standards. Import prices may prove problematic. Although commodity prices may level out as in the staff forecast, foreign economies also are producing at high levels. Pressures on the costs of finished goods could increase, especially if the dollar declines further. My expectations for the most likely path for inflation have been revised just a tick lower, given the favorable incoming data and the lower path for economic activity relative to potential, which will increase competitive pressures in labor and product markets. For now, given this outlook, we need to concentrate on the potential effects of the disruptions to financial markets on the real economy when we consider policy in the next portion of this meeting. Thank you, Mr. Chairman." CHRG-111hhrg52261--89 Mr. Hirschmann," I think you are right to identify the scope of the proposed CFPA as one of the problems. There are a couple of other issues, including, it separates out consumer protection from safety and soundness regulation. So you might have one regulator telling you to go left and the other telling you to go right with no way to reconcile the differences. That clearly will impact the availability of credit, particularly for small firms. The other is the ill definition of all the terms. For example, it sets up a new, vaguely defined abuse standard. What our study reveals is that a product that might seem to be abusive for one individual consumer in a particular financial condition might be the lifeline for a small business to meet their payroll that week and perfectly appropriate for the small business. It is hard to imagine how a Federal regulator could anticipate those differences and make sure we don't accidentally cut off the vital lifeline for small businesses. " FOMC20080724confcall--144 142,MR. HOENIG.," I'm comfortable with 84. I'd be interested in thinking about the 28-day as well, but I'm comfortable with 84 as long as we have the conditions that I talked about. Thank you. " CHRG-111shrg382--18 Mr. Tarullo," Thank you, Senator. Let me reemphasize the premise of your question, which is that resolution is very much of a challenge. Let me step back for a second and suggest why it is such a challenge, even more than a lot of the other areas we are talking about. If we want to make changes in capital standards and the FSB gets together and we converge around a set of changes, we all have ample domestic legal authority under our own constitutional structures to go back and make those changes. In the area of resolution, of course, we are talking about bankruptcy law. We are talking about bank insolvency law under the FDI Act, things that the Congress and parliaments around the world have put into legislation. So here, each country has its own set of legal rights and priorities for creditors. We have our own set of laws on what constitutes a fraudulent conveyance, for example. We have our own set of practices as to what kinds of creditor adjustments can be made during a bankruptcy or resolution procedure. So, from some people's point of view, the first best or at least the cleanest solution would be one that would have to harmonize the bankruptcy and resolution mechanisms and laws all around the world---- Senator Shelby. And that is no easy task. " CHRG-111shrg57321--161 Mr. McDaniel," Thank you, Mr. Chairman and Senator Kaufman. I am Ray McDaniel, Chairman and CEO of Moody's Corporation, the parent of the credit rating agency Moody's Investor Service. I want to thank you for the opportunity to contribute Moody's views today.--------------------------------------------------------------------------- \1\ The joint prepared statement of Mr. McDaniel and Ms. Yoshizawa appears in the Appendix on page 186.--------------------------------------------------------------------------- The global financial crisis has sparked a necessary debate about the role and performance of numerous participants in the financial markets. With respect to credit rating agencies, many market observers have expressed concerns that ratings did not better predict the deteriorating conditions in the subprime mortgage market. Let me assure you that Moody's is not satisfied, and I am not satisfied, with the performance of our ratings during the unprecedented market downturn of the past 2 years. We did not anticipate the extraordinary confluence of forces that drove the unusually poor performance of subprime mortgages. We were not alone in this regard, but I believe that we should be at the leading edge for predictive opinions about credit risk. Some key issues influencing the unanticipated performance included the steep and sudden nationwide decline in home prices and the sharp contraction that followed in credit available from banks for mortgage refinancing. Moody's did observe a trend of loosening mortgage underwriting and escalating home prices. We highlighted that trend in our reports and incorporated it into our analysis of mortgage-backed securities. And, as conditions in the U.S. housing market began to deteriorate beyond our expectations, we took the rating actions that we believed at the time were appropriate based on the information we had. Let me summarize our actions during the 2003 to 2007 time frame. First, starting in 2003, we identified and began commenting on the loosening of underwriting standards and escalating housing prices through our sector publications. Second, we tightened our ratings criteria in response to these loosening standards. In fact, between 2003 and 2006, we steadily increased our loss expectations and the levels of credit protection required for a given rating level. In practical terms, this meant that by 2006, half the mortgages in a pool would have to default and provide a recovery of just half the appraised value of the home before a subprime RMBS bond rated AAA by Moody's would suffer its first dollar of loss. This is a level of anticipated loss that far exceeded the losses that actually occurred in the past four real estate recessions. But even these conservative assumptions proved insufficient. Third, we took steps to watch and analyze the unprecedented market conditions and the behavior of various market participants as the crisis continued to unfold. For example, one question before the market was how borrowers, servicers, and banks would respond to the resetting of mortgage interest rates and how that behavior would affect default rates. Faced with extraordinary conditions, we saw market participants, including borrowers, mortgage servicers, mortgage originators, and the Federal Government, behave in historically unprecedented ways. Fourth, we took rating actions when the mortgage performance data warranted. Moody's monitors the actual performance of the mortgages and the securities that we rate throughout the life of the security. The early performance of the 2006 loans was, in fact, comparable to the performance of similar subprime loans during the 2000 and 2001 recession. And not until performance data from the second quarter of 2007 was available did it become clear that many of the 2006 vintage bonds might perform worse than those from the prior recession. In short, Moody's did see the loosening of some prime lending standards. We reported our observations to the market and we incorporated our increasingly unfavorable views into the ratings we assigned. However, let me emphasize again that we, like most other market participants, did not anticipate the severity or the speed of deterioration that occurred in the U.S. housing market, nor did we anticipate the behavior of market participants in response to the housing downturn, including the speed of credit tightening by financial institutions that followed and exacerbated the situation. The unprecedented events of the last few years provide critical lessons to all market participants, certainly including us. At Moody's over the past 2 years, we have undertaken a wide range of initiatives to strengthen the quality, transparency, and independence of our ratings. Some of these measures include establishing common macroeconomic scenarios for rating committees, publishing volatility scores and sensitivity analysis on structured finance securities, consolidating surveillance activities and structured finance under one leadership, and further bolstering the independence of and resources for our credit policy function. Moody's is firmly committed to meeting the highest standards of integrity in our rating practices. We wholeheartedly support constructive reforms and we are eager to work with Congress, regulators, and other market participants to that end. I am happy to respond to your questions. Senator Levin. Thank you very much, Mr. McDaniel. Ms. Corbet. TESTIMONY OF KATHLEEN A. CORBET,\1\ FORMER PRESIDENT (2004- 2007), STANDARD AND POOR'S Ms. Corbet. Thank you, Mr. Chairman and Senator Kaufman.--------------------------------------------------------------------------- \1\ The prepared statement of Ms. Corbet appears in the Appendix on page 210.--------------------------------------------------------------------------- My name is Kathleen Corbet and my career spans over 25 years of experience within the financial services industry. For a 3-year period during my career, I served as President as Standard and Poor's, a division of the McGraw-Hill Companies, from April 2004 until my voluntary departure in September 2007. Before turning to the substantive issues raised by the Subcommittee's investigation, I would like to acknowledge the important work of the Subcommittee and Congress more broadly in its examination of the causes and consequences of the financial crisis. It is difficult not to feel personally touched by the pain experienced by many as a result of the turmoil in the subprime market and the financial crisis that followed. Many people feel anger, and in my view, that anger is understandable. Accordingly, I believe strongly that we should collectively use the lessons from this crisis to focus on effective reforms, stronger investor protections, better industry practices, and accountability. As background, I was recruited to join the McGraw-Hill Companies as an Executive Vice President of its Financial Services Division in April 2004 and served as President of Standard and Poor's until my successor, Deven Sharma, took over that position in September 2007. During my 3-year tenure, I led an organization of 8,000 employees based in 23 countries which provided financial information and market analysis to its customers and the broader market as a whole. The company was organized across four primary business units, including Rating Services, Equity Research Services, Index Services, and Data and Information Services. Each business unit was led by a seasoned executive having direct operating responsibility in the respective area and reporting directly to me. One of those units was Rating Services, which issued credit ratings on hundreds of thousands of securities across the globe, including corporate securities, government securities, and structured finance securities. Rating Services was led by an Executive Vice President for Ratings, an executive with over 30 years of experience in the ratings business, who had day-to-day operational responsibility for that business. Among her direct reports was the Executive Managing Director of Structured Finance Ratings, who was responsible for the day-to-day operations of the Structured Finance Ratings Group, the group that issued the ratings that are the subject of this Subcommittee's focus. Consistent with S&P's longstanding and publicly disclosed practice, ratings decisions were and are solely the province of committees comprised of experienced analysts in the relevant area. This practice is based on the principle that the highest quality analysis comes from the exercise of independent analytical judgment free from both undue external or internal pressure. Accordingly, during my tenure, I did not participate in any rating or analytical criteria committee meetings regarding ratings on any type of security, including mortgage-backed securities. All that said, I do hope to be able to provide a business perspective that is helpful to the Subcommittee, and in my view, it is clear that many of the ratings S&P issued on securities backed by subprime mortgages have performed extremely poorly. S&P has publicly stated its profound disappointment with that performance, and I deeply share that sentiment. From my personal perspective, I believe the primary reason for these downgrades is that, despite its efforts to get the rating right and despite rooting its analysis in historical data, S&P's assumptions did not capture the unprecedented and unexpected outcomes that later occurred with respect to the housing market, borrower behavior and credit correlations. S&P, along with others, has been criticized for its failure to predict what happened in the subprime market, and in many ways, that criticism is justifiable. Moreover, the subsequent outcome of the severe economic downturn and downgrades of securities backed by subprime mortgages highlight the challenges inherent in the nature of ratings. At their core, ratings are opinions about what may happen in the future, specifically, the likelihood that a particular security may default. I think that most people agree that predicting the future is always challenging and outcomes can often turn out very differently than even the most carefully derived predictions anticipate. The key from my perspective is to learn from these experiences and to take specific actions to improve. The credit rating industry has begun to respond in a constructive fashion, but there is much more to be done. Through the course of history and through many market cycles, the credit rating industry has played an important role in the financial system for nearly a century, and I do believe that it has the opportunity to continue to do so through the commitment to continual improvements and from appropriate regulatory reform. Again, I appreciate the goals of the Subcommittee's work and would be glad to answer any questions that you have. Senator Levin. Thank you, Ms. Corbet. Thank you both. Before we start with questions, let me put into the record a statement of the Attorney General of the State of Connecticut, Richard Blumenthal. He has made a very powerful statement about the topic of the hearing today, which is ``Wall Street and the Financial Crisis: The Role of Credit Rating Agencies,'' and that will be made part of the record at an appropriate place.\1\--------------------------------------------------------------------------- \1\ The prepared statement of Mr. Blumenthal appears in the Appendix as Exhibit 109, on page 1201.--------------------------------------------------------------------------- Were you both here earlier? Ms. Corbet. Yes, I was. Senator Levin. Mr. McDaniel, were you here, too? " fcic_final_report_full--89 In , President Bill Clinton asked regulators to improve banks’ CRA perform- ance while responding to industry complaints that the regulatory review process for compliance was too burdensome and too subjective. In , the Fed, Office of Thrift Supervision (OTS), Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) issued regulations that shifted the regulatory focus from the efforts that banks made to comply with the CRA to their actual re- sults. Regulators and community advocates could now point to objective, observable numbers that measured banks’ compliance with the law. Former comptroller John Dugan told FCIC staff that the impact of the CRA had been lasting, because it encouraged banks to lend to people who in the past might not have had access to credit. He said, “There is a tremendous amount of investment that goes on in inner cities and other places to build things that are quite impressive. . . . And the bankers conversely say, ‘This is proven to be a business where we can make some money; not a lot, but when you factor that in plus the good will that we get from it, it kind of works.’”  Lawrence Lindsey, a former Fed governor who was responsible for the Fed’s Divi- sion of Consumer and Community Affairs, which oversees CRA enforcement, told the FCIC that improved enforcement had given the banks an incentive to invest in technology that would make lending to lower-income borrowers profitable by such means as creating credit scoring models customized to the market. Shadow banks not covered by the CRA would use these same credit scoring models, which could draw on now more substantial historical lending data for their estimates, to under- write loans. “We basically got a cycle going which particularly the shadow banking industry could, using recent historic data, show the default rates on this type of lend- ing were very, very low,” he said.  Indeed, default rates were low during the prosper- ous s, and regulators, bankers, and lenders in the shadow banking system took note of this success. SUBPRIME LENDERS IN TURMOIL: “ADVERSE MARKET CONDITIONS ” Among nonbank mortgage originators, the late s were a turning point. During the market disruption caused by the Russian debt crisis and the Long-Term Capital Management collapse, the markets saw a “flight to quality”—that is, a steep fall in de- mand among investors for risky assets, including subprime securitizations. The rate of subprime mortgage securitization dropped from . in  to . in . Meanwhile, subprime originators saw the interest rate at which they could borrow in credit markets skyrocket. They were caught in a squeeze: borrowing costs increased at the very moment that their revenue stream dried up.  And some were caught holding tranches of subprime securities that turned out to be worth far less than the value they had been assigned. Mortgage lenders that depended on liquidity and short-term funding had imme- diate problems. For example, Southern Pacific Funding (SFC), an Oregon-based sub- prime lender that securitized its loans, reported relatively positive second-quarter results in August . Then, in September, SFC notified investors about “recent ad- verse market conditions” in the securities markets and expressed concern about “the continued viability of securitization in the foreseeable future.”  A week later, SFC filed for bankruptcy protection. Several other nonbank subprime lenders that were also dependent on short-term financing from the capital markets also filed for bank- ruptcy in  and . In the two years following the Russian default crisis,  of the top  subprime lenders declared bankruptcy, ceased operations, or sold out to stronger firms.  CHRG-110shrg50420--334 Mr. Wagoner," We did consider an acquisition. I would say two things happened during the process. One, the market dropped dramatically so our own funding needs increased more than we thought, and so as we discussed that with the board, they said, boy, we had better make sure we have enough funding to take care of our own business. And as you know, any kind of merger-acquisition activity is pretty human resources intensive. Second of all, at the beginning of these conversations, there was a lot of discussion about public funding, be it public market funding being available. And as the credit market conditions deteriorated, that opportunity changed. And so as a result of that, the whole issue of focusing on the very important issue of liquidity for GM was, I think, appropriately at the top of the issue for our board. Senator Corker. Let me ask you this. The plan at the time, and I realize things have changed, it did say that there would be lesser outside money necessary, a pretty large amount, if the two of you all merged, did it or did it not? " FOMC20070321meeting--188 186,MR. POOLE.," The way I would look at the issue is to suppose that we have another break in the stock market of 5 percent or 8 percent, something like that. If we put “financial conditions” now, we clearly couldn’t put it in the next time if we had that condition. Then what would it mean for us to take it out? That’s why, among the other things that people have said, I would prefer not to have it in." CHRG-110shrg50409--111 PREPARED STATEMENT OF BEN S. BERNANKE Chairman, Board of Governors of the Federal Reserve System July 15, 2008 Chairman Dodd, Senator Shelby, and Members of the Committee, I am pleased to present the Federal Reserve's Monetary Policy Report to the Congress. The U.S. economy and financial system have confronted some significant challenges thus far in 2008. The contraction in housing activity that began in 2006 and the associated deterioration in mortgage markets that became evident last year have led to sizable losses at financial institutions and a sharp tightening in overall credit conditions. The effects of the housing contraction and of the financial headwinds on spending and economic activity have been compounded by rapid increases in the prices of energy and other commodities, which have sapped household purchasing power even as they have boosted inflation. Against this backdrop, economic activity has advanced at a sluggish pace during the first half of this year, while inflation has remained elevated. Following a significant reduction in its policy rate over the second half of 2007, the Federal Open Market Committee (FOMC) eased policy considerably further through the spring to counter actual and expected weakness in economic growth and to mitigate downside risks to economic activity. In addition, the Federal Reserve expanded some of the special liquidity programs that were established last year and implemented additional facilities to support the functioning of financial markets and foster financial stability. Although these policy actions have had positive effects, the economy continues to face numerous difficulties, including ongoing strains in financial markets, declining house prices, a softening labor market, and rising prices of oil, food, and some other commodities. Let me now turn to a more detailed discussion of some of these key issues. Developments in financial markets and their implications for the macroeconomic outlook have been a focus of monetary policymakers over the past year. In the second half of 2007, the deteriorating performance of subprime mortgages in the United States triggered turbulence in domestic and international financial markets as investors became markedly less willing to bear credit risks of any type. In the first quarter of 2008, reports of further losses and write-downs at financial institutions intensified investor concerns and resulted in further sharp reductions in market liquidity. By March, many dealers and other institutions, even those that had relied heavily on short-term secured financing, were facing much more stringent borrowing conditions. In mid-March, a major investment bank, The Bear Stearns Companies, Inc., was pushed to the brink of failure after suddenly losing access to short-term financing markets. The Federal Reserve judged that a disorderly failure of Bear Stearns would pose a serious threat to overall financial stability and would most likely have significant adverse implications for the U.S. economy. After discussions with the Securities and Exchange Commission and in consultation with the Treasury, we invoked emergency authorities to provide special financing to facilitate the acquisition of Bear Stearns by JPMorgan Chase & Co. In addition, the Federal Reserve used emergency authorities to establish two new facilities to provide backstop liquidity to primary dealers, with the goals of stabilizing financial conditions and increasing the availability of credit to the broader economy. \1\ We have also taken additional steps to address liquidity pressures in the banking system, including a further easing of the terms for bank borrowing at the discount window and increases in the amount of credit made available to banks through the Term Auction Facility. The FOMC also authorized expansions of its currency swap arrangements with the European Central Bank and the Swiss National Bank to facilitate increased dollar lending by those institutions to banks in their jurisdictions.--------------------------------------------------------------------------- \1\ Primary dealers are financial institutions that trade in U.S. government securities with the Federal Reserve Bank of New York. On behalf of the Federal Reserve System, the New York Fed's Open Market Desk engages in the trades to implement monetary policy.--------------------------------------------------------------------------- These steps to address liquidity pressures coupled with monetary easing seem to have been helpful in mitigating some market strains. During the second quarter, credit spreads generally narrowed, liquidity pressures ebbed, and a number of financial institutions raised new capital. However, as events in recent weeks have demonstrated, many financial markets and institutions remain under considerable stress, in part because the outlook for the economy, and thus for credit quality, remains uncertain. In recent days, investors became particularly concerned about the financial condition of the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. In view of this development, and given the importance of these firms to the mortgage market, the Treasury announced a legislative proposal to bolster their capital, access to liquidity, and regulatory oversight. As a supplement to the Treasury's existing authority to lend to the GSEs and as a bridge to the time when the Congress decides how to proceed on these matters, the Board of Governors authorized the Federal Reserve Bank of New York to lend to Fannie Mae and Freddie Mac, should that become necessary. Any lending would be collateralized by U.S. government and Federal agency securities. In general, healthy economic growth depends on well-functioning financial markets. Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve. I turn now to current economic developments and prospects. The economy has continued to expand, but at a subdued pace. In the labor market, private payroll employment has declined this year, falling at an average pace of 94,000 jobs per month through June. Employment in the construction and manufacturing sectors has been particularly hard hit, although employment declines in a number of other sectors are evident as well. The unemployment rate has risen and now stands at 5\1/2\ percent. In the housing sector, activity continues to weaken. Although sales of existing homes have been about unchanged this year, sales of new homes have continued to fall, and inventories of unsold new homes remain high. In response, homebuilders continue to scale back the pace of housing starts. Home prices are falling, particularly in regions that experienced the largest price increases earlier this decade. The declines in home prices have contributed to the rising tide of foreclosures; by adding to the stock of vacant homes for sale, these foreclosures have, in turn, intensified the downward pressure on home prices in some areas. Personal consumption expenditures have advanced at a modest pace so far this year, generally holding up somewhat better than might have been expected given the array of forces weighing on household finances and attitudes. In particular, with the labor market softening and consumer price inflation elevated, real earnings have been stagnant so far this year; declining values of equities and houses have taken their toll on household balance sheets; credit conditions have tightened; and indicators of consumer sentiment have fallen sharply. More positively, the fiscal stimulus package is providing some timely support to household incomes. Overall, consumption spending seems likely to be restrained over coming quarters. In the business sector, real outlays for equipment and software were about flat in the first quarter of the year, and construction of nonresidential structures slowed appreciably. In the second quarter, the available data suggest that business fixed investment appears to have expanded moderately. Nevertheless, surveys of capital spending plans indicate that firms remain concerned about the economic and financial environment, including sharply rising costs of inputs and indications of tightening credit, and they are likely to be cautious with spending in the second half of the year. However, strong export growth continues to be a significant boon to many U.S. companies. In conjunction with the June FOMC meeting, Board members and Reserve Bank presidents prepared economic projections covering the years 2008 through 2010. On balance, most FOMC participants expected that, over the remainder of this year, output would expand at a pace appreciably below its trend rate, primarily because of continued weakness in housing markets, elevated energy prices, and tight credit conditions. Growth is projected to pick up gradually over the next 2 years as residential construction bottoms out and begins a slow recovery and as credit conditions gradually improve. However, FOMC participants indicated that considerable uncertainty surrounded their outlook for economic growth and viewed the risks to their forecasts as skewed to the downside. Inflation has remained high, running at nearly a 3\1/2\ percent annual rate over the first 5 months of this year as measured by the price index for personal consumption expenditures. And, with gasoline and other consumer energy prices rising in recent weeks, inflation seems likely to move temporarily higher in the near term. The elevated level of overall consumer inflation largely reflects a continued sharp run-up in the prices of many commodities, especially oil but also certain crops and metals. \2\ The spot price of West Texas intermediate crude oil soared about 60 percent in 2007 and, thus far this year, has climbed an additional 50 percent or so. The price of oil currently stands at about five times its level toward the beginning of this decade. Our best judgment is that this surge in prices has been driven predominantly by strong growth in underlying demand and tight supply conditions in global oil markets. Over the past several years, the world economy has expanded at its fastest pace in decades, leading to substantial increases in the demand for oil. Moreover, growth has been concentrated in developing and emerging market economies, where energy consumption has been further stimulated by rapid industrialization and by government subsidies that hold down the price of energy faced by ultimate users.--------------------------------------------------------------------------- \2\ The dominant role of commodity prices in driving the recent increase in inflation can be seen by contrasting the overall inflation rate with the so-called core measure of inflation, which excludes food and energy prices. Core inflation has been fairly steady this year at an annual rate of about 2 percent.--------------------------------------------------------------------------- On the supply side, despite sharp increases in prices, the production of oil has risen only slightly in the past few years. Much of the subdued supply response reflects inadequate investment and production shortfalls in politically volatile regions where large portions of the world's oil reserves are located. Additionally, many governments have been tightening their control over oil resources, impeding foreign investment and hindering efforts to boost capacity and production. Finally, sustainable rates of production in some of the more secure and accessible oil fields, such as those in the North Sea, have been declining. In view of these factors, estimates of long-term oil supplies have been marked down in recent months. Longdated oil futures prices have risen along with spot prices, suggesting that market participants also see oil supply conditions remaining tight for years to come. The decline in the foreign exchange value of the dollar has also contributed somewhat to the increase in oil prices. The precise size of this effect is difficult to ascertain, as the causal relationships between oil prices and the dollar are complex and run in both directions. However, the price of oil has risen significantly in terms of all major currencies, suggesting that factors other than the dollar, notably shifts in the underlying global demand for and supply of oil, have been the principal drivers of the increase in prices. Another concern that has been raised is that financial speculation has added markedly to upward pressures on oil prices. Certainly, investor interest in oil and other commodities has increased substantially of late. However, if financial speculation were pushing oil prices above the levels consistent with the fundamentals of supply and demand, we would expect inventories of crude oil and petroleum products to increase as supply rose and demand fell. But in fact, available data on oil inventories show notable declines over the past year. This is not to say that useful steps could not be taken to improve the transparency and functioning of futures markets, only that such steps are unlikely to substantially affect the prices of oil or other commodities in the longer term. Although the inflationary effect of rising oil and agricultural commodity prices is evident in the retail prices of energy and food, the extent to which the high prices of oil and other raw materials have been passed through to the prices of non-energy, non-food finished goods and services seems thus far to have been limited. But with businesses facing persistently higher input prices, they may attempt to pass through such costs into prices of final goods and services more aggressively than they have so far. Moreover, as the foreign exchange value of the dollar has declined, rises in import prices have put greater upward pressure on business costs and consumer prices. In their economic projections for the June FOMC meeting, monetary policymakers marked up their forecasts for inflation during 2008 as a whole. FOMC participants continue to expect inflation to moderate in 2009 and 2010, as slower global growth leads to a cooling of commodity markets, as pressures on resource utilization decline, and as longer-term inflation expectations remain reasonably well anchored. However, in light of the persistent escalation of commodity prices in recent quarters, FOMC participants viewed the inflation outlook as unusually uncertain and cited the possibility that commodity prices will continue to rise as an important risk to the inflation forecast. Moreover, the currently high level of inflation, if sustained, might lead the public to revise up its expectations for longer-term inflation. If that were to occur, and those revised expectations were to become embedded in the domestic wage- and price-setting process, we could see an unwelcome rise in actual inflation over the longer term. A critical responsibility of monetary policymakers is to prevent that process from taking hold. At present, accurately assessing and appropriately balancing the risks to the outlook for growth and inflation is a significant challenge for monetary policymakers. The possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth. At the same time, upside risks to the inflation outlook have intensified lately, as the rising prices of energy and some other commodities have led to a sharp pickup in inflation and some measures of inflation expectations have moved higher. Given the high degree of uncertainty, monetary policymakers will need to carefully assess incoming information bearing on the outlook for both inflation and growth. In light of the increase in upside inflation risk, we must be particularly alert to any indications, such as an erosion of longer-term inflation expectations, that the inflationary impulses from commodity prices are becoming embedded in the domestic wage- and price-setting process. I would like to conclude my remarks by providing a brief update on some of the Federal Reserve's actions in the area of consumer protection. At the time of our report last February, I described the Board's proposal to adopt comprehensive new regulations to prohibit unfair or deceptive practices in the mortgage market, using our authority under the Home Ownership and Equity Protection Act of 1994. After reviewing the more than 4,500 comment letters we received on the proposed rules, the Board approved the final rules yesterday. The new rules apply to all types of mortgage lenders and will establish lending standards aimed at curbing abuses while preserving responsible subprime lending and sustainable homeownership. The final rules prohibit lenders from making higher-priced loans without due regard for consumers' ability to make the scheduled payments and require lenders to verify the income and assets on which they rely when making the credit decision. Also, for higher-priced loans, lenders now will be required to establish escrow accounts so that property taxes and insurance costs will be included in consumers' regular monthly payments. The final rules also prohibit prepayment penalties for higher-priced loans in cases in which the consumer's payment can increase during the first few years and restrict prepayment penalties on other higher-priced loans Other measures address the coercion of appraisers, servicer practices, and other issues. We believe the new rules will help to restore confidence in the mortgage market. In May, working jointly with the Office of Thrift Supervision and the National Credit Union Administration, the Board issued proposed rules under the Federal Trade Commission Act to address unfair or deceptive practices for credit card accounts and overdraft protection plans. Credit cards provide a convenient source of credit for many consumers, but the terms of credit card loans have become more complex, which has reduced transparency. Our consumer testing has persuaded us that disclosures alone cannot solve this problem. Thus, the Board's proposed rules would require card issuers to alter their practices in ways that will allow consumers to better understand how their own decisions and actions will affect their costs. Card issuers would be prohibited from increasing interest rates retroactively to cover prior purchases except under very limited circumstances. For accounts having multiple interest rates, when consumers seek to pay down their balance by paying more than the minimum, card issuers would be prohibited from maximizing interest charges by applying excess payments to the lowest rate balance first. The proposed rules dealing with bank overdraft services seek to give consumers greater control by ensuring that they have ample opportunity to opt out of automatic payments of overdrafts. The Board has already received more than 20,000 comment letters in response to the proposed rules. Thank you. I would be pleased to take your questions. FOMC20071031meeting--170 168,MR. PLOSSER.," First quarter perhaps, but that was conditioned on inflation and inflationary expectations remaining well behaved." FOMC20071206confcall--10 8,MR. MADIGAN.," Given the circumstances that Bill discussed, policymakers might wish to explore possible policy measures that might help address the strains in bank funding markets. A range of options that involve the discount window could be considered. These options might include (1) a temporary reduction in the spread between the primary credit rate and the target federal funds rate; (2) the adoption of a term credit program, under which term credit could be extended, potentially at a lower rate than the primary credit rate, at a borrower’s initiative; and (3) the adoption of a term auction facility (TAF) at which term discount window funds would be auctioned at the System’s initiative. All these options share the potential advantage that their announcement would provide a highly visible signal of the Federal Reserve’s willingness to provide adequate liquidity to promote market functioning. At the same time, it is clear that what ails financial markets now is not simply a shortage of liquidity. There are more fundamental problems of credit losses, credit risk, and balance sheet capacity that these options cannot address. But easing banks’ concerns about access to liquidity could be helpful in the current circumstances. I will now briefly summarize the advantages and disadvantages of each of these options. Of course, various combinations of these options are also possible, at least in principle; but the marginal effectiveness of exercising multiple options is not clear, and rolling out more than one initiative might run the risk of suggesting a greater degree of concern on the part of the Federal Reserve than is actually the case. The first option is a reduction in the primary credit rate that would temporarily narrow the spread of that rate over the target federal funds rate, say to 15 or 25 basis points. This approach has several possible advantages. First, from one perspective it has the lowest operational risk, as it does not involve the creation of new discount window facilities; and by the same token, it does not require a lightning campaign to educate banks on the characteristics of a new facility. Second, this approach is simpler for the general public to understand. Third, this approach would be relatively easy to coordinate with parallel foreign central bank actions to reduce the spreads on their own lending facilities—assuming that they were inclined to do so. A reduction in the primary credit spread has some disadvantages. These disadvantages relate primarily to the difficulty in predicting the reaction of banks to the change. First, it is quite possible that the stigma of borrowing at the window would persist or even intensify. If so, a reduction in the primary credit spread would likely be ineffective in stemming money market pressures. Conversely, it is also possible that banks will respond nonlinearly to the reduction in the spread and demand quite large amounts of primary credit. Given the unpredictability of the banks’ demand for discount window funding, the Desk could experience significant difficulties in reserve management under the approach of reducing the primary credit spread. Another option would be to establish a term credit facility, under which banks could come to the window at their own volition for fixed-term discount window loans, say of twenty-eight-day maturities. This option was not covered in the memorandums that you recently received. These loans could well be priced differently from primary credit, partly to help sharpen the distinction from primary credit. This option shares some of the potential drawbacks with the first option that I discussed. In particular, it is difficult to predict how banks would react. In order to help guard against the effects of abrupt and large increases in discount window borrowing that would complicate reserve management, the Federal Reserve could require the borrower to provide advance notice of, say, two days before drawing funds. Even with this notice, however, such a program might risk triggering very large demands for discount window credit whose absolute size could pose reserve management difficulties and balance sheet issues for the Federal Reserve. Reducing this risk might require applying limits on individual banks’ borrowing through some form of rationing. Determining such limits and explaining them to the banks and the public would complicate the design, exposition, and implementation of this program. The third option that might be considered is a term auction facility. This program would be generally similar to the auction credit facility discussed by policymakers in September. The TAF has several advantages relative to the other two options. First, it would allow the Federal Reserve to retain close control over the supply of reserves because we would determine the auction amounts—at least assuming that the minimum bid rate is not binding. Second, the facility arguably has a better chance of avoiding stigma, partly because the auction format implies that no institution is being forced to borrow. Third, each auction would reveal information about the strength of the demand for funds. Finally, a TAF could also have potential longer-run benefits for managing reserves and conducting monetary policy both in routine circumstances and in circumstances of financial stress. A temporary TAF could provide valuable experience to the Federal Reserve about these possible longer-run benefits. The TAF has some potential disadvantages as well. Among these are some degree of operational risk, questions about whether the contemplated sizes of the facility would be sufficient to be effective in addressing market pressures, and the fact that no individual institution will have assurance that it will win funds at the auction. Nathan will now continue our presentation." FinancialCrisisInquiry--455 MAYO: I think the misallocation of capital in the housing market was partly facilitated by the GSEs. I personally have never covered Fannie and Freddie and those enterprises. There’s usually a separate set of analysts that covered those companies. But I think what we should have seen is the massive amount of capital that was allocated to the housing sector, government-incurred with a government guarantee, and that encouraged a whole industry off these government- sponsored entities. And that was a mistake, easy to say in hindsight. Many of us in the industry saw it for a while, and that goes back to the loan growth, some of the fastest growing areas, as I showed on my loan chart. I mean, every slice of real estate, you know, first mortgages, second mortgages, and then Wall Street certainly facilitated some of these activities. But you know what? Wall Street also met the demand. So it was kind of together—the government with Wall Street with the banks that facilitated this market. I made the general comment, I would prefer to see markets over government allocate capital, but with very strong oversight and regulation. CHRG-111shrg55479--80 Mr. Ferlauto," It is actually a very good point, but who I am concerned about are actually the large financial intermediaries, particularly mutual funds, who are seeking to do business, you know, with other large companies to sell their investment products through their 401(k) plans so that they actually may cast their votes in a way that would be looked kindly on by the CEO because they are not voting against his compensation plan, rather than voting in the interests of all the small individual investors who put their money into that fund, you know, thinking that that is the way to achieve value. And those are the kinds of conflicts that are rife in this system that we are very concerned about. Senator Johanns. Yes, and I am going to be very direct again. You and I are going to have an easy time agreeing that there are a lot of ways to be self-interested. A lot of ways. So, Mr. Castellani, let me turn to you. Based on your corporate experience, what impact does that have on your company if there is, for lack of better terminology, ease of entry here? " CHRG-111shrg52619--62 Chairman Dodd," Thanks very much. Senator Corker. Senator Corker. Thank you, Mr. Chairman, and I thank all of you for your testimony and your service. Ms. Bair, Chairman Bair, let me ask you this: Do you think that not having an entity that can do the overall resolution for complex entities is affecting the policies that we have in place right now as it relates to supporting them? Ms. Bair. It absolutely is. There is really no practical alternative to the course that has been set right now, because there is no flexibility for resolution. Senator Corker. So much of the actions that we are taking as a Congress and as an administration to support some of these entities have to do with the fact that we really do not have any way to unwind them in a logical way. Is that correct? Ms. Bair. I do agree with that. Senator Corker. I know the Chairman mentioned the potential of FDIC being the systemic regulator. What would be the things that the FDIC would need to do to move beyond bank resolution but into other complex entities like AIG, Lehman Brothers, and others? Ms. Bair. Right. Well, we think that if we had resolution authority, we actually should be separate from where we have the requirements for prudential supervision of systemic institutions. Those responsibilities are actually separated now, and I think it is a good check and balance to have the resolution authority with some back-up supervisory authority working in conjunction with the primary regulator who has responsibility for prudential supervision. In terms of resolution authority, I think that the current system--that we would like--if we were given it, is a good one. We can set up bridge banks, or conservatorships to provide for the orderly unwinding of institutions. There is a clear set of priorities, so investors and creditors know in advance what the imposition of loss will be. We do have the flexibility to deviate from that, but it is an extraordinary process that includes a super majority of the FDIC Board, the Federal Reserve Board, the concurrence of the Secretary of the Treasury and the President. So it is a very extraordinary procedure to deviate from the baseline requirement to minimize cost. So I think the model we have now is a good one and could be applied more broadly to complex financial organizations. Senator Corker. It sounds like in your opinion in a fairly easy way. Ms. Bair. Well, I think one easy step would be just to give us authority to resolve bank and thrift holding companies. I think that would be--I think there are going to be larger, more complex issues in terms of going beyond that category, what is systemic when you talk about insurance companies, hedge funds, other types of financial institutions. But, yes, I think that would be a relatively simple step that would give us all some additional flexibility, yes. Senator Corker. Thank you Mr. Dugan, you know, we talk about capital requirements and institutions, but regardless of the capital that any particular institution has, if they make really bad loans or make really bad decisions, it really does not matter how much they have, as we have seen, right? Are we focusing enough on minimum lending standards as we think about the overall regulation of financial institutions? " FOMC20071206confcall--17 15,CHAIRMAN BERNANKE.," That is a good point and a good issue. The opposite concern is that, if we announce it as being permanent and it is not successful or there is no bid, it would obviously give us a problem as well. We have tried to split the difference and say that this may be permanent depending on need, on market conditions, and on response. If we do that, it would give us the opportunity to get feedback. I would note also that, if we do this, we will be doing it under essentially an emergency provision that allows us to change Regulation A without public comment. So that, generally speaking, would point to a temporary facility. But, again, we would be clear that we would be willing to make this permanent if the conditions suggest it and if the demand is there." CHRG-111hhrg48868--531 Mr. Liddy," But it's very dependent upon what happens to market conditions around the globe. " fcic_final_report_full--523 Freddie Mac. As noted earlier, in its limited review of the role of the GSEs in the financial crisis, the Commission spent most of its time and staff resources on a review of Fannie Mae, and for that reason this dissent focuses primarily on documents received from Fannie. However, things were not substantially different at Freddie Mac. In a document dated June 4, 2009, entitled “Cost of Freddie Mac’s Affordable Housing Mission,” a report to the Business Risk Committee, of the Board of Directors, 136 several points were made that show the experience of Freddie was no different than Fannie’s: • Our housing goals compliance required little direct subsidy prior to 2003, but since then subsidies have averaged $200 million per year. • Higher credit risk mortgages disproportionately tend to be goal-qualifying. Targeted affordable lending generally requires ‘accepting’ substantially higher credit risk. • We charge more for targeted (and baseline) affordable single-family loans, but not enough to fully offset their higher incremental risk. • Goal-qualifying single-family loans accounted for the disproportionate share of our 2008 realized losses that was predicted by our models. (slide 2) • In 2007 Freddie Mac failed two subgoals, but compliance was subsequently deemed infeasible by the regulator due to economic conditions. In 2008 Freddie Mac failed six goals and subgoals, five of which were deemed infeasible. No enforcement action was taken regarding the sixth missed goal because of our financial condition. (slide 3) • Goal-qualifying loans tend to be higher risk. Lower household income correlates with various risk factors such as less wealth, less employment stability, higher loan-to-value ratios, or lower credit scores. (slide 7) • Targeted affordable loans have much higher expected default probabilities... Over one-half of targeted affordable loans have higher expected default probabilities than the highest 5% of non-goal-qualifying loans. (Slide 8) The use of the affordable housing goals to force a reduction in the GSEs’ underwriting standards was a major policy error committed by HUD in two successive administrations, and must be recognized as such if we are ever to understand what caused the financial crisis. Ultimately, the AH goals extended the housing bubble, infused it with weak and high risk NTMs, caused the insolvency of Fannie and Freddie, and—together with other elements of U.S. housing policy—was the principal cause of the financial crisis itself. When Congress enacted the Housing and Economic Recovery Act of 2008 (HERA), it transferred the responsibility for administering the affordable housing goals from HUD to FHFA. In 2010, FHFA modified and simplified the AH goals, and eliminated one of their most troubling elements. As Fannie had noted, if the AH goals exceed the number of goals-eligible borrowers in the market, they were being forced to allocate credit, taking it from the middle class and providing it to low- income borrowers. In effect, there was a conflict between their mission to advance affordable housing and their mission to maintain a liquid secondary mortgage 136 Freddie Mac, “Cost of Freddie Mac’s Affordable Housing Mission,” Business Risk Committee, Board of Directors, June 4, 2009. 519 market for most mortgages in the U.S. The new FHFA rule does not require the GSEs to purchase more qualifying loans than the percentage of the total market that these loans constitute. 137 FOMC20060131meeting--95 93,MS. PIANALTO.," Thank you, Mr. Chairman. By now I’m sure that most of you are tired of hearing me report that conditions in my District are not as vigorous as conditions in most of the country. I know that I’m tired of repeating it. Fortunately, optimism is increasing in many parts of my District. My directors and business contacts that have national and international business interests report fairly solid conditions in most of their industries. They tell me that they plan to maintain a strong pace of capital spending this year and that they expect healthy productivity gains from doing so. These trends encourage me to think that our economy will be able to maintain the 3 percent rate of structural productivity growth that underlies the Greenbook baseline projection. Since we are nearing the point of monetary policy neutrality, I’m counting on a strong rate of productivity growth to help us gradually nudge the inflation rate back down over the next several years. I have not changed my thinking about the underlying trends in the economy since our last meeting. I was pretty much in sync with the Greenbook outlook then and remain so today. The BEA’s fourth-quarter revisions appear to affect the timing of economic activity across a couple of quarters but not to affect the longer-term outlook. Even though I still expect to see headline and core inflation moderate over the projection period, I have become a bit more sensitive to the upside inflation risks in the baseline projection. First, in the Greenbook we received last week, the staff concluded that inflation this year could creep up a bit more than they had thought in December, and the staff elevated their estimate of core PCE inflation for the fourth quarter from 1.9 percent to 2.2 percent as a result of the most recent BEA report. The staff hedged against that possibility by imposing a temporary 25 basis point surtax on their December fed funds rate path beginning at our next meeting, and it seems sensible to me to keep this option open. At our December meeting I said that I thought we were very close to being able to stop increasing our fed funds rate target at every meeting. I still think so. If monetary policy is a combination of science and art, I think we’re now out of the laboratory and inside the art studio, and having flexibility as we go forward is highly desirable to me. Finally, Mr. Chairman, I have to admit that I’ve spent more time since our last meeting thinking about what to say in acknowledgement of your last meeting than I’ve thought about economic conditions, and it’s impossible to come up with words to express my feelings. I just simply want to say that it has been truly an honor and a privilege to serve under your leadership of this Committee. Thank you, Mr. Chairman." FinancialCrisisReport--574 In advance of the conference call, Mr. Lehman’s staff prepared a two-page summary of Goldman’s liquidation agent duties, the liquidation procedures specified in the CDO documents, the CDOs affected, and the assets that Goldman anticipated would be affected by the downgrades. 2570 Four days after the conference call, on July 23, 2007, Benjamin Case, who had been assigned lead responsibility for carrying out Goldman’s liquidation agent functions, circulated a draft document describing Goldman’s role. It stated that Goldman’s goal as liquidation agent was: “to attempt to maximize proceeds on the unwind of credit risk assets pursuant to the liquidation process governed by the CDO documents, rather than to liquidate at an arbitrary pre-specified time without regard to market conditions.” 2571 It identified the assets that had been classified as Credit Risk Assets and provided Goldman’s “Current Strategy” for handling them: “– wait and continue to evaluate market conditions, rather than liquidating now. - upside is that continued short-covering by hedge funds anxious to monetize profits could cause minor rally (5-10 points)[.] - downside is that speed up of foreclosure process vs. current timeline expected by market could decrease IO value, or significant forced selling of similar names by CDO vehicles could push levels wider [lower prices].” Hudson Liquidation Agent. Although the liquidation agent role was originally designed for use in Goldman’s “high grade” CDOs, where “there is substantially less credit risk in the assets vs. a mezzanine structured product CDO portfolio,” the feature was also added to some of its riskier mezzanine CDOs, including Hudson Mezzanine 2007-1 (Hudson 1). 2572 Hudson 1 was a synthetic CDO whose assets consisted entirely of CDS contracts referencing subprime RMBS or ABX assets with BBB or BBB- ratings. Goldman had selected 100% of the reference assets and held 100% of the short side of the CDO. Hudson 1’s marketing materials outlined Goldman’s liquidation agent role. The Hudson marketing booklet, for example, told potential investors: 2570 2571 7/19/2007 Goldman document, “GS Liquidation Agent Role in ABS CDOs, ” GS MBS-E-014055117. 7/23/2007 email from Mr. Case to Mr. Bieber, “CDO Liquidation Agent Role - Draft Talking Points - INTERNAL USE ONLY, ” GS MBS-E-015240358. 2572 7/17/2006 Goldman memorandum to Mortgage Capital Committee, GS MBS-E-013458155, at 57. A “mezzanine ” CDO is one in which the underlying assets carry credit ratings such as BBB or BBB-. “Hudson CDOs are non-managed and static in nature and provide term non-recourse funding where Goldman Sachs acts as Liquidation Agent on an ongoing basis. The Liquidation CHRG-110hhrg41184--123 Mr. Bernanke," The high rate of foreclosures would be adverse to the economy. Obviously, it hurts the borrowers, but it also hurts their communities if there are clusters of foreclosures. And it hurts the broader economy, because it makes the housing market weaker and that has effects on the whole economy. So clearly, if we can take actions to mitigate the rate of foreclosure, do workouts and otherwise modify loans or find ways to help people avoid foreclosure, I think that is certainly positive. Mr. Moore of Kansas. Thank you, sir. Some believe that we should enact legislation that would amend the bankruptcy code to allow judges to modify the terms of a loan on a debtor's principle residence in chapter 13 in order to provide relief to these homeowners. This would essentially treat primary residences in a similar way to credit cards under the bankruptcy code. In 1978, Congress created this exemption in the bankruptcy code with the intent of encouraging homeownership by providing certainty to mortgage lenders that terms and conditions of the loan were secure. Do you believe that changes in the bankruptcy code to make primary residence lending more akin to credit cards will place up our pressure on mortgage interest rates and what effect could this have on investor confidence and mortgage-backed securities market in the broader economy? " CHRG-110shrg50409--113 RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING FROM BEN S. BERNANKEQ.1. The number and severity of credit rating downgrades from credit rating agencies in the last year casts doubt on the reliability of such ratings. What is the Fed doing to verify the credit rating of the collateral you are accepting at the various Fed facilities?A.1. The Federal Reserve regularly updates the credit ratings of assets pledged as collateral and uses multiple ratings rather than just one. Assets are regularly marked to market and haircuts are applied to provide adequate protection against market, liquidity, and credit risks. In cases where ratings are less reliable, we require a higher rating than we would otherwise. It should be noted that the entire pool of collateral pledged by a depository institution secures any loans to that institution; moreover, the Federal Reserve has recourse to the borrower under all of its lending facilities beyond the specific collateral pledged. Although credit ratings are one determinant of the eligibility of collateral pledged to Federal Reserve liquidity facilities, Reserve Banks also perform independent credit analysis when receiving collateral and especially when extending a loan to a depository institution. That analysis is based on publicly available information as well as on supervisory information on both the quality of the collateral and on the financial condition of the pledging institution.Q.2. In 2006, Congress passed the Credit Rating Agency Reform Act, which created a formal process for recognizing and examining credit rating agencies with a goal of increasing competition and rating quality. Under that law, the SEC has now recognized 10 National Recognized Statistical Rating Organizations. However, the Fed only accepts credit ratings from the three largest rating agencies for collateral taken at the various Fed facilities. Why does the Fed not accept ratings from the other approved agencies? Are there any plans to revisit that prohibition?A.2. The Federal Reserve accepts a very large volume of collateral, and it is critically important to be able to access credit ratings and other information on a timely basis in a fully automated fashion. The Federal Reserve is open to utilizing credit ratings of all NRSROs consistent with this basic requirement.Q.3. Given the concerns about the government-sponsored entities that led the Fed to grant them access to a lending facility and the Treasury Department to ask for rescue legislation, has the Fed changed its practices on accepting GSE-backed securities as collateral at the Fed facilities? Have you increased the collateral required when GSE-backed collateral is posted?A.3. Securities issued or guaranteed by the GSEs remain eligible collateral at the Federal Reserve's various liquidity support facilities. The market prices of GSE securities pledged as collateral are regularly updated and the haircuts are determined to provide the Federal Reserve with adequate protection against market, liquidity, and credit risk. The haircuts applied to collateral pledged by depository institutions to the discount window are regularly recalibrated by the Federal Reserve, and it has not been necessary to change those applied to GSE-related securities. Haircuts applied to securities pledged by primary dealers for repurchase agreements, the primary dealer credit facility, and the term securities lending facility are chosen to be consistent with, but slightly more conservative than, market practice.[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]" CHRG-110shrg50414--56 Mr. Lockhart," Chairman Dodd, Senator Shelby, and Members of the Committee, thank you for the opportunity to testify on the Federal Housing Finance Agency's decision to place Fannie Mae and Freddie Mac into conservatorship. Fannie Mae and Freddie Mac share the critical mission of providing stability, liquidity, and affordability to the Nation's housing market. Between them, these enterprises have $5.3 trillion of guaranteed mortgage-backed securities and debt outstanding, which is equal to the total publicly held debt of the United States. Their market share earlier this year reached 80 percent of all new mortgages made. During the turmoil that started last year, they had played a very important role in providing liquidity to the conforming mortgage market. They required capital to support a very careful and delicate balance between safety and soundness and mission. That balance was upset as house prices, earnings, and capital have continued to deteriorate. In particular, the capacity to raise capital without Treasury Department support vanished. That left both enterprises unable to fill their mission. Worse, it threatened to further damage the mortgage and housing markets if they had to sell their assets. Rather than letting those conditions worsen and put the financial markets in further jeopardy, FHFA decided to take action. The goal of these dual conservatorships is to help restore confidence in Fannie Mae and Freddie Mac, enhance their capacity to fulfill their mission, reduce systemic risk, and make mortgages--and this is the most important--make mortgages available at lower cost for the American people. FHFA based its determination on five key areas, each of which worsened significantly over the last several months: First, there were accelerating safety and soundness weaknesses. Second, there was a continued and substantial deterioration in equity, debt, and MBS market conditions. Third, the current and projected financial performance and condition of each company, as reflected in the second quarter financial reports and our ongoing examination. Fourth, the inability of the companies to raise capital or to issue debt according to normal practices and prices. And, last, the critical importance of each company in supporting the country's residential mortgage market. I shared our growing concerns with Federal Reserve Chairman Bernanke, who was made our consultant in the law you passed in July, and with Secretary Paulson. They agreed that a conservatorship was necessary, as did the boards of both firms. A detailed list of events leading to our conclusion to appoint a conservator is provided in my written statement. I will just highlight a few. It became apparent during this intense supervisory review that began in July that market conditions were deteriorating much more rapidly than anybody expected. We supplemented our examination team with senior examiners from the Fed and the OCC. All three sets of examiners corroborated that there was a significant deterioration in the credit environment and it was a threat to the capital of these two companies. We also finished our semi-annual examination ratings of the companies and, across the board, there were significant and critical weaknesses. The companies themselves disclosed in their second quarter filings how rapidly the environment had deteriorated and was negatively affecting their outlook and their ability to raise capital. Freddie Mac reported losses of $4.7 billion over the last year. Fannie Mae reported losses of $9.7 billion. Now, let me turn to the conservatorships. The first signs are that the conservatorships are positive. The enterprise funding costs and the spreads on MBS have declined. This lower cost has been passed on to homebuyers, with 30-year mortgage rates well below 6 percent for the first time since January. On the first day, business opened as normal but with stronger backing for the holders of their mortgage-backed securities, their debt, and their subordinated debt. Over the next 15 months, they are allowed to increase their portfolios to provide support to the housing market. They will also be able to continue to grow their guaranteed MBS books. As the conservator, FHFA assumed the power of the board and management. Highly qualified new chief executive officers and non-executive chairmen have been appointed. They will be delegated significant powers. In order to conserve over $2 billion in annual capital, the common stock and preferred dividends were eliminated. The U.S. Treasury financing facilities, which are critical to this conservatorship, are all in place and will provide the needed support to Fannie Mae and Freddie Mac to fulfill their mission over the long term, while giving upside potential for taxpayers. FHFA will continue to work expeditiously on the many regulations needed to implement the new law. The new legislation adds, importantly, affordable housing, a trust fund, and mission enforcement to the responsibilities of the safety and soundness regulator. We are also continuing to work with the enterprises on loan modifications, foreclosure preventions, pricing, and credit issues. The decision to appoint a conservator for each enterprise was a tough but necessary one. They can now become part of the solution. Unfortunately, all the good and hard work put in by the FHFA and the enterprises was not sufficient to offset the consequences of the antiquated regulatory structure which was overwhelmed by the turmoil in the housing markets. Conservatorship will give the enterprises the time to restore the balances between safety and soundness and their mission. Working together with the enterprises, Congress, the administration, and other regulators, I believe we can restore confidence in the enterprises and, with the new legislation which you passed, build a stronger and safer future for the mortgage markets, homeowners, and renters in America. Thank you. I would be pleased to answer questions. " FOMC20080130meeting--386 384,MR. GIBSON.," The regulatory structure has been changed now as a result of the law that was passed in 2006, at least if you're talking about getting the regulatory stamp of approval from the SEC to become a nationally recognized statistical rating organization. That's now just a notification process by which, if you meet some minimum requirements, the SEC is required to okay you. So entry is now easy whereas before it used to be restricted by the SEC. In some sense there's a bit of a natural monopoly going on because, if you really had a couple of rating agencies that you trusted, it's not clear why someone would be willing to transfer from an established to a new one. But if you were to take some of our recommendations to the next level and talk about how you would actually implement this and how you would go about making this have some success, one thing people have suggested is that maybe we should help investors set up their own rating agencies-- maybe they don't want to do that now--and maybe more transparency from the existing rating agencies and from the issuers. It would then be easier for a new rating agency that's funded by investors to get going and get some traction if there were more transparency around the whole process. That's just one possibility " FOMC20081029meeting--248 246,MR. KOHN.," Thank you, Mr. Chairman. A number of the presentations yesterday talked about falling off a cliff in the middle of September. I think we need to remind ourselves that we were sliding downhill pretty fast before we hit that cliff. The third-quarter data, which aren't really affected by what happened in the last two weeks of September, indicate that the economy was weaker than we thought at the time of the last FOMC meeting. I think Dave Stockton or Norm Morin noted that about a third of their downward revision reflected incoming data rather than the credit tightening. That was especially true for consumption, with real consumption spending falling through the summer, responding to lower employment and tighter credit. Private domestic final purchases were revised down to a decline of 3� percent in the third quarter after being flat in the first half. Housing price declines picked up in August, and I think the deteriorating economy and concerns about the economy were reflected in increased nervousness in financial markets over the summer into the first half of September. It was really those worries about what the losses were going to be and how they would spread from mortgages to loan books generally--that deepening pessimism--that doomed the marginal institutions like AIG and Lehman and the GSEs. They just didn't have a chance to recapitalize or stabilize themselves when so many of the other market participants were worried about what their own positions would be. The resulting flight to liquidity and safety, the loss of confidence that followed, the deepening gloom, and the failures and near failures and associated losses triggered a tremendous tightening of financial conditions over the intermeeting period--President Yellen and others discussed this--despite the 50 basis points of easing. Even after the 900 point increase yesterday, equity prices are down about 20 or 22 percent over the intermeeting period. The dollar is up 10 percent. Corporate borrowing rates are up for investment-grade corporations 200 to 250 basis points. Banks tell us that they're tightening across every dimension of their lending; and other lenders, like finance companies, are also cutting back very, very sharply. You can see this in autos clearly, but the stress is much broader than just the auto finance companies. We have good programs in place to deal with many of these problems--the capital, the FDIC guarantees, and the Federal Reserve balance sheet facilities--and they are having some effects relative to the freezing up of markets that we had in mid-September. We can see that interbank spreads and LIBOR have come down some. Commercial paper rose, I guess, on Monday with the introduction of our facility. Declines in money market mutual funds have abated, though they're still there, and there are some signs that maturities are beginning to lengthen in funding markets. As these programs are more fully implemented, we'll see some greater effects--including, I hope, some greater willingness to extend credit. I also assume that the fiscal package is necessary, as in the Greenbook ""fiscal stimulus"" alternative. But we need to remember that the improvement we've seen over the last couple of days is relative to a situation in which funding markets were in effect frozen beyond a very short term, and although a sharp snapback is possible, as President Plosser was noting yesterday, I think further gains are more likely to be gradual. In the past few days, the declines in LIBOR have seemed very grudging and gradual, and LIBOR remains quite high--I think close to 75 basis points higher-- relative to what it was in mid-August, before we even cut rates. This was three-month LIBOR that I looked at this morning. In an environment of economic weakness, spreading credit problems, falling house prices, a number of false dawns in this episode so far, and death and near-death experiences, lenders and investors are going to continue to be very cautious and conserve their liquidity and capital. So despite further improvements, financial conditions will remain quite tight. The effects of lower wealth, higher borrowing costs, the stronger dollar, and tighter nonprice terms of credit will play out over the next few quarters, putting downward pressure on an economy that was already in recession. At the same time, heightened uncertainty and fear of future problems caused a sharp deterioration in attitudes and spending even apart from the effects of credit. Judging from the Conference Board index, regional purchasing manager surveys, and anecdotes--including what we heard around the table yesterday--it feels like a recessionary psychology, as I think Charlie Evans called it. Others talked about pulling back and curtailment of discretionary spending in train, and this is not just caused by credit effects. This is just fear. So we've had a downward shift in aggregate demand as well as a movement along the aggregate demand curve, and this downward shift in aggregate demand will propagate through multiplier�accelerator effects even if attitudes begin to improve some. The global dimensions of the shock are important. As we talked about yesterday, heightened risk aversion has had a pronounced effect on emerging market economies as well as on industrial economies. Net exports cushioned domestic weakness in the first half of the year, but with the dollar strong, if anything we'll be absorbing weakness from abroad, not exporting it, as the rest of the year goes on and we get into next year. Growing credit problems abroad will only add to pressures on many large global lenders who might have thought they were diversified geographically. But a little like our U.S. housing market, they will find that diversification doesn't really work when there's a global recession. The net effect of all of this is a much weaker growth path for the economy. In my forecast, I had a somewhat steeper near-term decline in economic activity and a slightly sharper bounceback than the staff, including my fiscal assumption, but I also have the unemployment rate peaking at over 7 percent, as the Greenbook did. With commodity prices plunging, the added slack maintained through several years, and declines in inflation expectations, inflation will be on a clear downward track. In the Greenbook, this downward track for inflation obtained even with the assumption of some rebound in commodity prices and the resumption of dollar weakness. In my forecast for inflation from next year on, inflation was at or below the 1� to 2 percent rate I would like to see as a steady state consistent with avoiding the zero bound when adverse shocks hit. Critically, the downside risks around activity forecasts are huge and tilted to the downside. I think they're huge because we've never seen a situation like this before, certainly not in my experience dating all the way back to 1970, and have only the vaguest notion of how it will play out in financial markets and spending. I think they're tilted to the downside because I, like the staff, assumed a gradual improvement in financial markets. That could be delayed or even go in the wrong direction for a time, further tightening financial conditions. In addition, the effect on spending of the heightened concerns and tighter credit conditions could be larger and longer lasting than I assumed. For some time an important downside risk to the forecast has been a sharp upward revision to household saving as wealth, job availability, and borrowing capacity eroded. I assumed a moderate increase in the saving rate, but I can definitely see the possibility that adverse developments will galvanize a more thorough rethinking by the household sector of what saving is needed, and that will affect investment as well as consumption. We'll get to the policy implications of all of this in the next round. Thank you, Mr. Chairman. " CHRG-110shrg50414--213 Secretary Paulson," Well, we have thought a lot about it. We need a systemic approach, and again, I think it is--I have described the systemic approach. I have also heard conversations about taking equity stakes, various other things, and I just believe very strongly if you impose these kinds of conditions, if you impose any kind of punitive conditions, this program won't work and we will all lose. And---- Senator Bayh. This wouldn't be punitive. This is including the private sector along with the public sector in answering the problem and---- " CHRG-111hhrg58044--150 Mr. Hinojosa," Thank you, Mr. Chairman. Chairman Gutierrez, I want to thank you for holding this important hearing on a very important issue, consumer credit. I commend my colleague, Congresswoman Mary Jo Kilroy, for introducing H.R. 3421, the Medical Debt Relief Act of 2009. The intent of her legislation is admirable. I agree with her that medical debt should be removed from credit reports 30 days after that debt has been repaid or settled, and that it not continue to hurt the credit rating of that individual, having gone through so many difficulties with sickness. I am concerned about one issue involving credit reporting agencies. They buy and sell information from virtually all adult residents in the United States. For a long time, we have been encouraging them to provide credit reports in languages other than English, especially Spanish. Mr. Chairman, I would ask that each credit reporting agency provide in writing their proposals to provide credit reports in languages other than English or that we at least have an opportunity to debate that. I would like to ask my question to Mr. Snyder. I am interested in legislation that would require that every adult American citizen 21 years or older receive a free credit score on an annual basis. Would the American Insurance Association support such legislation? " FOMC20070918meeting--151 149,MR. KOHN.," Thank you, Mr. Chairman. I’ll be glad if you don’t tell how many years of experience I have around this table. [Laughter] I support the action and the language of alternative B for the reasons that have been given by many others around this table. I think that the odds favor a significant reduction in aggregate demand owing to the financial conditions we’ve all been talking about. I agree with Governor Mishkin that part of the disruptive effects of the financial conditions are the small chance of a very adverse effect—the sort of interactions you were talking about, Mr. Chairman. Holding back and doing just 25 in that context would be a mistake. Going ahead and doing 50 will largely relieve some uncertainty. With regard to some of the comments about language, the discussion of credit conditions in financial markets in paragraph 2, I guess my read of what we talked about today was just this, and it seems to me that the way it is now is very transparent. It’s a nice replication of the discussion we have had, and so I don’t see a need to subtract language about financial markets from this. With regard to the balance of risks in paragraph 4, also consistent with our discussion is the sense that there’s a huge amount of uncertainty about how things are going to evolve, both the markets and the effect on the economy. I don’t feel as though I know enough to say that the risks are balanced. I don’t know. The range of outcomes is just too wide, and there’s very little central tendency in it. So I’d be very uncomfortable with a statement saying that I kind of thought the risks were balanced. I am much more comfortable with a statement that says there is a lot of uncertainty out there and that’s uncertainty around the economic outlook. So I think the current language in paragraph 4 is also a nice representation of the discussion we had today and consistent with our ignorance. I’m not concerned about the moral hazard issues. I think our job is to keep the economy at full employment and price stability and let asset markets fluctuate around that. There will be winners and losers. That’s fine. The Congress told us to have maximum employment and stable prices, and that’s what we should be about here. Sometimes that means you need to move to keep employment maximum or prices stable, and we need to take account of the asset markets but not worry about the effects of those actions on asset markets per se. Holding back—inertia—because of concerns about moral hazard would be a serious mistake. We shouldn’t hold interest rates higher than they need to be in order to impose additional cost on borrowers to teach lenders a lesson. Too many innocent bystanders would be hurt in that process. Thank you, Mr. Chairman." FOMC20080625meeting--92 90,MR. KOHN.," Thank you, Mr. Chairman. My forecasts for both economic growth and inflation are within the central tendency of the rest of you and a little stronger than the staff's outlook. In fact, my 2008 projections for economic activity for the second half of the year were revised very little from two months ago. Growth turned out to be stronger than I expected in the first half, and that carries some weight going forward; but financial conditions are tighter with higher bond rates and lower equity prices, and of course oil prices are a lot higher and that will damp demand going forward. So I expect slow growth in the second half followed by expansion around, maybe a little above, the rate of growth of potential in '09 and '10, with the same basic story that everybody else has: drags on activity from declining housing activity, decreasing wealth, tight credit conditions, and higher petroleum prices. All of those drags will abate over time, allowing the natural resilience, with slightly accommodative financial conditions, to show through, and I assume a gradual tightening of monetary policy beginning next year. Incoming information on prices and costs has been mixed. Oil and food price increases will raise headline inflation, but core has been stable and has come in a little to the soft side of expectations, and labor costs as yet show no signs of accelerating. Going forward, I see a sharp decline in headline inflation later this year with the assumed leveling-out in oil prices and a gradual decrease in core as economic slack inhibits wage and price increases, offsetting the pass-through from oil prices. Now, that's my central tendency. I consider the odds on that being realized to be even lower than usual, and the usual odds are disappearingly small. It seems to me that the defining characteristics of the current situation are uncertainty and risk. We're facing multiple shocks, many of them unprecedented in size and persistence, in the housing market, financial markets, and commodities. The outlook is full of puzzles, and in my mind anyone who thinks he or she understands what's going on is either a lot smarter than I am or delusional--or both. [Laughter] I class the risks for both output and headline inflation as greater than usual, and let me tell you about some of the things I wrestled with. Financial conditions, are they accommodative? I continue to believe that the 2 percent nominal funds rate is not indicative of a highly accommodative financial condition, given the current state of financial markets. That is, in my view we have limited insurance. Spreads have widened sufficiently over the past 10 months both for long-term and short-term credit, and bank terms and conditions for loans and lines of credit have tightened enough that only a small part of the drop in the fed funds rate is showing through to the cost of capital for median households and firms. The staff's flow of funds estimates show a marked deceleration in the growth of both household and business debt in the first half of this year, from 10 percent for households last year to 3 percent in the first half of the year and from 12 percent for businesses to 7 percent in the first half of the year. A 2 percent fed funds rate will become accommodative as spreads narrow and financial functioning returns more toward normal, and that's one reason I assumed a gradually rising federal funds rate over 2009 and forward. The evidence about improving financial markets over the intermeeting period was decidedly mixed. Some spreads did come in from late April. Investment-grade businesses tapped bond markets in size, but almost all spreads remain unusually wide. We were reminded of the fragility of the evolving situation, especially in the financial sector, with the worries about continuing credit problems resulting in sharp declines in equity prices on financials and an uptick in their CDS spreads, which had narrowed the previous month or two; the downgrading of monolines and investment banks; and the increasing attention to the problems of regional banks. It would be surprising if these were not reflected in even greater caution by banks and other lenders in their lending practices. Also the securitization markets, especially for non-agency mortgages, are not functioning in a way to replace bank intermediation. This is going to be a prolonged process of reintermediation, deleveraging, and building liquidity with an uncertain endpoint. Like the staff, I assume that the conditions return to something approaching normal over the next 18 months, but the risks are skewed toward an even longer recovery period. The second topic is household spending. Households are facing a huge number of adverse shocks: higher oil prices, tighter credit, declining house prices, and rising unemployment. It's not surprising that confidence is at recessionary levels. It is surprising that spending is so resilient. I assumed that the saving rate would rise very gradually once the tax rebate effects wore off, but I think a more abrupt and sizable increase in household saving is a distinct downside risk. What about housing? Some sales measures have shown a few tentative indications of leveling off. I was encouraged by President Lockhart's report from Florida, but I'm also struck by renewed pessimism about housing in the financial markets. Equities of construction firms and builders have declined after stabilizing, actually rising, earlier this year. ABX indexes have turned down, reversing earlier improvements; and perhaps underlying the previous two developments, the Case-Shiller futures indexes remain in steep decline, though today's information was less weak than expected. The view of the financial markets, anyhow, is that the light at the end of the housing tunnel is receding, and declines in expected house prices must be an important reason for the erosion in market confidence in financial intermediaries. In sum, although the incoming data may have reduced the threat of a sharp drop in spending, in my view there remains a very pronounced downward skew around my outlook for modest growth in H2 and a strengthening next year. However, that downward skew around output did not translate into a downward skew around my forecast for headline inflation. In fact, I saw the risks on headline inflation as tilted to the upside, though roughly balanced around the gradual decrease in core. I think the upside risks result from two additional areas of uncertainty. One area is commodity prices, though the trend increases in commodity prices over the past few years can be attributed to rising demands from emerging market economies relative to sluggishly responding supplies. Despite Nathan's best efforts, I really don't think we have much of a clue about the cause of the spike in oil prices this year. It has been especially striking to me over the intermeeting period, when the prices of industrial commodities have been falling on balance. Presumably prices in these markets already incorporate expectations of reasonably strong global growth outside the United States as in the Greenbook. Absent any surprises, futures market quotes ought to be the best guide, but what we don't understand can fool us, especially when so much of the relevant information involves emerging market economies, where data are sparse and of questionable value. Given our experience over the past few years, I think continued increases in commodity prices would seem to be an upside risk. The other area is inflation expectations. I assume that as headline inflation comes down, both short- and long-term inflation expectations, especially in the survey data, will reverse their recent increases based a lot on the kind of information that President Yellen was observing about how the household survey has tended to follow contemporaneous inflation. I'm encouraged by the relatively flat readings on core inflation and labor compensation increases. Higher expectations have not so far become embedded in prices and costs, despite all the talk of passing along cost increases. But headline inflation is going to rise before it falls. Real wages will be further eroded by higher energy costs. Although this is a necessary part of an adjustment to an adverse terms-of- trade shock, it will be resisted. Hence, a further rise in inflation expectations and a stronger determination by households and businesses to act on those expectations will be a risk over coming months. With that further rise in oil prices, it's a bigger risk than it was a couple of months ago. In terms of the long-term projections, Mr. Chairman, I think I'm fine with something like your proposal. Our objective for adding a year was to give the public a better sense of where we're going over the long term. Given the shock to the economy, that's not as informative as it was before. I think we're close to where most people would say their inflation objective was, but not for the growth rate of potential or the NAIRU. I could live with option 3 or President Bullard's alternative to that--to state exactly what our long-term expectations are instead of talking about five to seven years or five to ten years. I don't think we'll gain a lot. I don't think the costs or benefits are very large on either side of this. Our problems now are not that people don't understand where we're going in the end. I think they have a pretty good idea that we want inflation to be a lot lower than it has been. But I think they don't really understand how we're going to get either to full employment or to price stability, given where we're starting. So I think the uncertainty about our objectives is a very small problem relative to the other problems now. But if we can reinforce what those objectives are, it might help a little around the edges. I do worry, as President Lacker said, that what we say about output and employment not be interpreted as goals but rather as a judgment about the state and the structure of the economy. I am hopeful that we could take care of that in what we say about what we're publishing. Thank you, Mr. Chairman. " CHRG-111hhrg58044--373 Chairman Gutierrez," You should ask them and come back and let us know. Again, I do not know. We are going to ask them because it says, ``Equifax is no longer selling credit reports for employment screening.'' It says, ``used to determine eligibility, and while it is perfectly legal under the Fair Credit Reporting, the company seems to have proactively decided that selling reports to employers was not worth the trouble.'' In other words, they see trouble on the horizon with this, probably due to discriminatory actions that might or might not take place. We are going to ask them as part of our process. We are going to ask them to come here. I think it is an interesting question. If there are three credit bureaus and one of them does not want to go through the trouble, I would like to know what the ``trouble'' is. It is not about denying people information. It is just correct information. I would encourage everyone here on this panel and anyone listening, since through Congress and a law which we on this side of the aisle advocated, you now get your credit report once a year. It does not give you your credit score, only the credit report. The credit score is still a little more murky, but you get your credit report. Listen, go get one. When you see the mistakes that are in your credit, that is what we want. It is almost as though we depart from the premise that the credit bureaus are somehow, I do not know, omnipotent, they do not create any errors or mistakes. I would like to just ask one last question and that is I want to go back very, very quickly to Mr. Rukavina. They told us earlier that if I am sick, that it is put in my credit report but does not have an impact on my credit score. Just elaborate very quickly on that. " CHRG-110hhrg46593--375 Mr. Feldstein," My first choice would be that they go through Chapter 11. My second choice would be that any money that is given to them be given under the kind of conditions that would make them long-term viable, which, to me, means a rewriting of the labor contracts, the fringe benefits, the retiree benefits. " CHRG-109hhrg31539--147 Mr. Bernanke," Congressman, I agree with you. Growth doesn't cause inflation; what causes inflation is monetary conditions or financial conditions that stimulate spending which grows more quickly than the underlying capacity of the economy to produce. Anything that increases the economy to produce, be it greater productivity, greater workforce, or other factors that are productive, is only positive. It reduces inflation. " FOMC20080724confcall--6 4,MS. KRIEGER.," Thank you, Debby. Regarding the longer-term TAF, a transition from the current biweekly schedule of 28-day auctions, $75 billion each, to a schedule of biweekly 84-day auctions, $25 billion each, will require four additional biweekly auctions of 28-day credit for an eight-week period. We need to do this to keep the amount of TAF credit outstanding at $150 billion. We contemplate a schedule that permits us to auction the 84-day credit of $25 billion on the now-typical Monday ""cycle,"" announce these results Tuesday morning, and then auction 28-day credit Tuesday afternoon. The two auctions will settle Thursday of that week, the day other TAF credit matures. We are also requesting that we enhance the collateral protection for the Reserve Banks against term loans. Specifically, we are seeking a collateral cushion on term loans. The cushion is meant to provide protection to Reserve Banks if there are unanticipated needs for overnight credit during the term of the loan as well as serve as a collateral buffer that provides for deterioration in the value of the collateral or the creditworthiness of the depository institution (DI). This would apply to both TAF loans and term primary credit loans. Currently, there is a requirement that a TAF auction bid, plus other term credit that will be concurrently outstanding, not exceed 50 percent of available collateral. However, this requirement is only for the time when the bid is submitted. We imposed this as a modest measure of comfort that DIs would have adequate access to collateral to cover unanticipated needs for additional credit during the term of the TAF loan. This collateral cushion has not been an element of the term primary credit borrowing program, first introduced in August 2007. Under the current collateral policy for the TAF bids, we observe that some DIs add collateral just before an auction and withdraw the excess amount after the auction. That is, they do not maintain the cushion during the actual term of the loan. Particularly for the longer-term TAF and also for the term primary credit loans, we feel that Reserve Banks should have access to additional collateral. As I noted above, this would provide a cushion for unanticipated needs for additional credit during the term of the loan and for deterioration in the value of the collateral or the creditworthiness of the DI. An alternative would be to alter the haircuts themselves, but that could have other negative market consequences. In fact, for that reason, the Federal Reserve stated publicly in August that it was not changing its haircuts amid the uncertain market conditions. Specifically, the requirement we are proposing is that a DI's aggregate term borrowings not exceed 75 percent of available collateral. Most current holders of term credit have sufficient collateral to meet this requirement. We do not feel that this will restrict participation in any significant way. As is the case currently, the terms for TAF bidding and outstanding extensions of credit will require that Reserve Banks be collateralized to their satisfaction and that they take additional measures, including the right to ask for more collateral or to call a loan, if they feel insecure. Other terms of the auctions will remain as they are today: maximum bids and awards of 10 percent of the auction size, minimum bid size of $10 million, maximum of two bid rates, minimum bid rate based on the OIS rate, et cetera. These seem to have been working well, and we see no need to request any changes. We would be happy to answer your questions. Thank you. " CHRG-111hhrg48868--250 Mr. Polakoff," I was aware of the financial condition of FP, yes sir. " FOMC20081216meeting--496 494,MR. DUDLEY.," The way I look at it, President Lacker, is that the deleveraging process is happening at a very rapid rate, and that speed can cause quite a bit of damage to financial conditions and, therefore, to the real economy. To the extent that we intervene and slow down the pace of that deleveraging, we can probably mitigate the degree of damage to financial conditions and to the real economy. That's how I think about it. " CHRG-111shrg53176--87 Mr. Breeden," Just on say on pay, real briefly, I am chairman of the Board of H&R Block, and we put say on pay in voluntarily last year. It works fine. It is good to let shareholders express their views. If they do not like your pay policies, then you ought to find out about it sooner rather than later. And we did the same thing at Zale Corporation, where I am on the board. We put it in voluntarily. I think the American business community has been resisting something that is simple, easy and an appropriate step to take. I share Arthur's concern that say on pay alone is not going to fix our compensation problems. You really have to have some ability--if compensation committees do outrageous things--and we have all seen examples of profligate compensation that can get seriously out of whack. You have to go beyond that and have either majority voting every year where shareholders can try and withhold votes or voting against members of a compensation committee. And, ultimately, you have to have the threat that if boards do not do a good job managing compensation policy, that they could be replaced. And until you do that, an advisory vote that just every year says you are doing a terrible job is not going to solve the problem. " CHRG-111hhrg56776--3 Mr. Bachus," Thank you, Mr. Chairman. As Congress looks at ways to reform the country's financial infrastructure, we need to ask whether bank supervision is central to central banking. It is worth examining whether the Federal Reserve should conduct monetary policy at the same time it regulates and supervises banks or whether it should concentrate exclusively on its microeconomic responsibilities. It is no exaggeration to say the health of our financial system depends on getting this answer right. Frankly, the Fed's performance as a holding company supervisor has been inadequate. Despite its oversight, many of the large complex banking organizations were excessively leveraged and engaged in off balance sheet transactions that helped precipitate the financial crisis. Just this past week, Lehman Brothers' court-appointed bankruptcy examiner report was made public. The report details how Lehman Brothers used accounting gimmicks to hide its debt and mask its insolvency. According to the New York Times, all this happened while a team of officials from the Securities and Exchange Commission and the Federal Reserve Bank of New York were resident examiners in the headquarters of Lehman Brothers. As many as a dozen government officials were provided desks, phones, computers, and access to all of Lehman's books and records. Despite this intense on-site presence, the New York Fed and the SEC stood idle while the bank engaged in the balance sheet manipulations detailed in the report. This raises serious questions regarding the capability of the Fed to conduct bank supervision, yet even if supervision of its regulated institutions improved, it is not clear that oversight really informs monetary policy. If supervision does not make monetary policy decisions better, then the two do not need to be coupled. Vince Reinhart, a former Director of the Fed's Division of Monetary Affairs and now a resident scholar at the American Enterprise Institution, said that collecting diverse responsibilities in one institution is like asking a plumber to check the wiring in your basement. It seems that when the Fed is responsible for monetary policy and bank supervision, its performance in both suffers. Microeconomic issues cloud the supervisory judgments, therefore impairing safety and soundness. There are inherent conflicts of interest where the Fed might be tempted to conduct monetary policy in such a way that hides its mistakes by protecting the struggling banks it supervises. An additional problem arises when the supervision of large banks is separated from small institutions. Under Senator Dodd's proposal, the Fed would supervise 40 or 50 large banks, and the other 7,500 or so banks would be under the regulatory purview of other Federal and State banking agencies. If this were to happen, the Fed's focus on the mega banks will inevitably disadvantage the regional and community banks, and I think on this, Chairman Bernanke, you and I are in agreement, that there ought to be one regulator looking at all the institutions. H.R. 3311, the House Republican regulatory reform plan, would correct these problems. It would refocus the Fed on its monetary policy mandate by relieving it of its regulatory and supervisory responsibilities and reassign them to other agencies. By contrast, the regulatory reform legislation passed by the House in December represented a large expansion of the Fed's regulatory role since its creation almost 100 years ago. Senator Dodd has strengthened the Fed even more. His regulatory reform bill empowers the Fed to regulate systemically significant financial institutions and to enforce strict standards for institutions as they grow larger and more complex, adopts the Volcker Rule to restrict proprietary trading and investment by banks, and creates a new consumer financial protection bureau to be housed and funded by the Fed. In my view, the Democrats are asking the Fed to do too much. Thank you again, Mr. Chairman, for holding this hearing. I look forward to the testimony. " Mr. Watt," [presiding] I thank the gentleman for his opening statement. Let me see if I can try to use some of the chairman's time and my time to kind of frame this hearing in a way that we will kind of get a balanced view of what folks are saying. The Federal Reserve currently has extensive authority to regulate and supervise bank holding companies and State banks that are members of the Federal Reserve System, and foreign branches of member banks, among others. Last year, the House passed our financial services reform legislation that substantially preserved the Fed's power to supervise these financial institutions. The Senate bill recently introduced by Senator Dodd, however, would strip the Fed's authority to supervise all but approximately the 40 largest financial institutions. This hearing was called to examine the potential policy implications of stripping regulatory and supervisory powers over most banks from the Fed, especially the potential impact this could have on the Fed's ability to conduct monetary policy effectively. Proponents of preserving robust Fed supervision authority cite three main points to support their position that the Fed should retain broad supervisory powers. First, they say that the Fed has built up over the years deep expertise in microeconomic forecasting of financial markets and payment systems which allows the effective consolidated supervision of financial institutions of all sizes and allows effective macro prudential supervision over the financial system. Proponents of retaining Fed supervision say this expertise would be costly and difficult if not impossible to replicate in other agencies. Second, the proponents say that the Fed's oversight of the banking system improves this ability to carry out central banking responsibilities, including the responsibility for responding to financial crises and making informed decisions about banks seeking to use the Fed's discount window and lender of last resort services. In particular, proponents say that knowledge gained from direct bank supervision enhances the safety and soundness of the financial system because the Fed can independently evaluate the financial condition of individual institutions seeking to borrow from the discount window, including the quality and value of these institutions' collateral and their overall loan portfolio. Third, proponents say that the Fed's supervisory activities provide the Fed information about the current state of the economy and the financial system that influences the FOMC in its execution of monetary policy, including interest rate setting. On the flip side, there obviously are many critics of the Fed's role in bank supervision. Some of these critics blast the Fed for keeping interest rates too low for too long in the early 2000's, which some say fueled an asset price bubble in the housing market and the resulting subprime mortgage crisis. Consumer advocates and others accuse the Fed of turning a blind eye to predatory lending throughout the 1990's and 2000's, reminding us that Congress passed the HOEPA legislation in 1994 to counteract predatory lending, but the Fed did not issue final rules until well after the subprime crisis was out of control. Other critics accuse the Fed of ignoring the consumer protection role during supervisory examinations of banks and financial institutions across a wide range of financial products, including overdraft fees and credit cards and other things. Perhaps the appropriate policy response lies somewhere between the proponents and critics of the Fed bank supervision. I have tried to keep an open mind about the role of the Fed going forward, and hope to use today's hearing to get more information as we move forward to discussions with the Senate, if the Senate ever passes a bill. We are fortunate to have both the current Chairman and a former Chairman who are appearing today to inform us on these difficult issues, and with that, I will reserve the balance of our time and recognize Dr. Paul, my counterpart, the ranking member of the subcommittee. Dr. Paul. I thank the chairman for yielding. Yesterday was an important day because it was the day the FOMC met and the markets were hanging in there, finding out what will be said at 2:15, and practically, they were looking for two words, whether or not two words would exist: ``extended period.'' That is, whether this process will continue for an extended period. This, to me, demonstrates really the power and the control that a few people have over the entire economy. Virtually, the markets stand still and immediately after the announcement, billions of dollars can be shifted, some lost and some profits made. It is a system that I think does not have anything to do with free market capitalism. It has to do with a managed economy and central economic planning. It is a form of price fixing. Interest rates fixed by the Federal Reserve is price fixing, and it should have no part of a free market economy. It is the creation of credit and causing people to make mistakes, and also it facilitates the deficits here. Congress really does not want to challenge the Fed because they spend a lot. Without the Fed, interest rates would be very much higher. To me, it is a threat to those of us who believe in personal liberty and limited government. Hardly does the process help the average person. Unemployment rates stay up at 20 percent. The little guy cannot get a loan. Yet, Wall Street is doing quite well. Ultimately, with all its power, the Fed still is limited. It is limited by the marketplace, which can inflate like crazy. It can have financial bubbles. It can have housing bubbles. Eventually, the market says it is too big and it has to be corrected, but the mistakes have been made. They come in and the market demands deflation. Of course, Congress and the Fed do everything conceivable to maintain these bubbles. It is out of control. Once the change of attitude comes, when that inflated money supply decides to go into the market and prices are going up, once again the Fed will have difficulty handling that. The inflationary expectations and the velocity of money are subjectively determined, and no matter how objective you are about money supply, conditions, and computers, you cannot predict that. We do not know what tomorrow will bring or next year. All we know is that the engine is there, the machine is there, the high powered money is there, and of course, we will have to face up to that some day. The monetary system is what breeds the risky behavior. That is what we are dealing with today. Today, we are going to be talking about how we regulate this risky behavior, but you cannot touch that unless we deal with the subject of how the risky behavior comes from easy money, easy credit, artificially low interest rates, and the established principle from 1913 on that the Federal Reserve is there to be the lender of last resort. As long as the lender of last resort is there, all the regulations in the world will not touch it and solve that problem. I yield back. " CHRG-111shrg57319--487 Mr. Killinger," Well, again, market conditions changed very dramatically with housing prices coming down and there are a number of things that we changed. As you heard this morning, we tightened underwriting. We changed loan products. We ceased offering some of the subprime products. We ceased offering Option ARMs. We started to go back to more documentation on the loans. And there were just a number of things that became more appropriate because the housing conditions changed so dramatically. Senator Kaufman. So it was just right then when you really found out how bad stated loans were? " CHRG-111shrg52619--21 Mr. Fryzel," Thank you, Chairman Dodd, Ranking Member Shelby, and Members of the Committee. As Chairman of the National Credit Union Administration, I appreciate this opportunity to provide the agency's position on regulatory modernization. Federally insured credit unions comprise a small but important part of the financial institution community, and I hope NCUA's perspective on this matter will add to the understanding of the unique characteristics of the credit union industry and the 90 million members they serve. The market dislocations underscore the importance of your review of this subject. I see a need for revisions to the current regulatory structure in ways that would improve Federal oversight of not just financial institutions, but the entire financial services market. My belief is that there is a better way forward, a way that would enable Federal regulators to more quickly and effectively identify and deal with developing problems. Before I express my views on possible reforms, I want to briefly update you on the condition of the credit union industry. Overall, credit unions maintained reasonable performance in 2008. Aggregate capital level finished the year at 10.92 percent, and while earnings decreased due to the economic downturn, credit unions still posted a 0.30 percent return on assets in 2008. I am pleased to report that even in the face of market difficulties, credit unions were able to increase lending by just over 7 percent. Loan delinquencies were 1.3 percent, and charge-offs were 0.8 percent, indicating that credit unions are lending prudently. Credit unions are fundamentally different in structure and operation than other types of financial institutions. They are not-for-profit cooperatives owned and governed by their members. Our strong belief is that these unique and distinct institutions require unique and distinct regulation, accompanied by supervision tailored to their special way of operating. Independent NCUA regulation has enabled credit unions to perform in a safe and sound manner while fulfilling the cooperative mandate set forth by Congress. One benefit of our distinct regulatory approach is the 18-percent usury ceiling for Federal credit unions that enhances their ability to act a low-cost alternative to predatory lenders. Another is the existence of a supervisory committee for Federal charters, unique among all financial institutions. These committees, comprised of credit union members, have enhanced consumer protection by giving members peer review of complaints and have supplemented the ability of NCUA to resolve possible violations of consumer protection laws. NCUA administers the National Credit Union Share Insurance Fund, the Federal insurance fund for both Federal and State-chartered credit unions. The fund currently has an equity ratio of 1.28 percent. The unique structure of the fund where credit unions make a deposit equal to 1 percent of their insured shares, augmented by premiums as needed, to keep the fund above a statutory level of 1.20 percent has resulted in a very stable and well-functioning insurance fund. Even in the face of significant stress in the corporate credit union part of the industry, stress that necessitated extraordinary actions by the NCUA board to stabilize the corporates, the fund has proven durable. I want to underscore the benefits of having the fund administered by NCUA. Working in concert with our partners in the State regulatory system, NCUA uses close supervision to control risks. This concept was noted prudently by GAO studies over the years, as were the benefits of a streamlined oversight and insurance function under one roof. This consolidated approach has enabled NCUA to manage risk in an efficient manner and identify problems in a way that minimizes losses to the fund. NCUA considers the totality of our approach for mixed deposit and premium funding mechanism to unify supervisory and insurance activities, to be the one that has had significant public policy benefits, and one worth preserving. Whatever reorganization Congress contemplates, the National Credit Union Share Insurance Fund should remain integrated into the Federal credit union regulator and separate from any other Federal insurance funds. Regarding restructuring of the financial regulatory framework, I suggest creating a single oversight entity whose responsibilities would include monitoring financial institution regulators and issuing principles-based regulations and guidance. The entity would be responsible for establishing general safety and soundness standards, while the individual regulators would enforce them in the institutions they regulated. It would also monitor systemic risks across institution types. Again, for this structure to be effective for federally insured credit unions and the consumers they serve, the National Credit Union Share Insurance Fund should remain independent in order to maintain the dual NCUA regulatory and insurance roles that have been tested and proven to work for almost 40 years. I appreciate the opportunity to provide testimony today and would be pleased to answer any questions. " CHRG-110shrg50420--12 Chairman Dodd," Now, just on the second question related--I thank you for your answer to that question. That has been the view of this Senator for a long time over the last number of weeks that this matter has been discussed. There has been a debate, obviously, as to whether or not that exists, but I appreciate the clarity from the GAO on that question. The authority clearly exists, and the right to condition that assistance as well, which gets to the point of a trustee or a board, an oversight board. And I agree with you totally on that, I think having this disbursal of resources occur not on a lump-sum basis but, rather, conditioned on the performance of how things are moving forward with the various ideas that we are hearing from the industry itself. Tell me, though, in terms of the GAO's assessment in reference to the oversight board, how do you--one, did they require greater public scrutiny? I believe we did, obviously, there. And what has been the GAO's assessment of that scrutiny? " fcic_final_report_full--432 Commission focused thousands of staff hours on investigation, and not nearly enough on analyzing these critical economic questions. The investigations were in many cases productive and informative, but there should have been more balance be- tween investigation and analysis. Conclusions: • The credit bubble was an essential cause of the financial crisis. • Global capital flows lowered the price of capital in the United States and much of Europe. • Over time, investors lowered the return they required for risky investments. Their preferences may have changed, they may have adopted an irrational bub- ble mentality, or they may have mistakenly assumed that the world had become safer. This inflated prices for risky assets. • U.S. monetary policy may have contributed to the credit bubble but did not cause it. THE HOUSING BUBBLE The housing bubble had two components: the actual homes and the mortgages that financed them. We look briefly at each component and its possible causes. There was a housing bubble in the United States—the price of U.S. housing in- creased by more than could be explained by market developments. This included both a national housing bubble and more concentrated regional bubbles in four “Sand States”: California, Nevada, Arizona, and Florida. Conventional wisdom is that a bubble is hard to spot while you’re in one, and painfully obvious after it has burst. Even after the U.S. housing bubble burst, there is no consensus on what caused it. While we still don’t know the relative importance of the possible causes of the housing bubble, we can at least identify some of the most important hypotheses: • Population growth. Arizona, Florida, Nevada, and parts of California all expe- rienced population growth that far exceeded the national average. More people fueled more demand for houses. • Land use restrictions. In some areas, local zoning rules and other land use re- strictions, as well as natural barriers to building, made it hard to build new houses to meet increased demand resulting from population growth. When supply is constrained and demand increases, prices go up. • Over-optimism. Even absent market fundamentals driving up prices, shared expectations of future price increases can generate booms. This is the classic explanation of a bubble. • Easy financing. Nontraditional (and higher risk) mortgages made it easier for potential homebuyers to borrow enough to buy more expensive homes. This doesn’t mean they could afford those homes or future mortgage payments in the long run, but only that someone was willing to provide the initial loan. Mortgage originators often had insufficient incentive to encourage borrowers to get sustainable mortgages. FOMC20070807meeting--98 96,MR. KOHN.," Thank you, Mr. Chairman. Building on what the Vice Chairman just said, I have been listening in on that Morning Call. I’ve found it very useful, and it’s certainly an opportunity to ask questions if you have them. My forecast for the most likely outcome for output over the next few years is close to that of the staff—growth a little below potential for a few quarters, held down by the housing correction, and the unemployment rate rising a little further. Although some recent data for housing, consumption, and capital spending have been a bit to the soft side, we need to view those data against the background of a lower path for potential GDP and recall the tendency we’ve seen over the past several quarters for short runs of data that are a little hotter or a little cooler than we expected. I think this is sort of what it feels like when the economy is running at about 2 percent. I see a number of reasons to think that moderate growth remains the most likely outcome going forward. First, as President Stern has stressed from time to time, is the natural resilience of the economy, its tendency to grow near potential unless something is pushing it one way or another. If anything, this resilience has probably increased over the past couple of decades, reflecting more- flexible labor and product markets. Second, global growth remains strong, supporting the growth of exports. I don’t think this growth should be undermined by the fact that some unknown quantity of losses in the U.S. mortgage market is being absorbed by investors overseas, and the recent declines in the dollar will reinforce the effects of good foreign demand for U.S. goods and services. Third, the most likely factor to throw the economy off its potential is the financial markets. My most likely forecast assumed that the credit markets would begin to settle down over coming weeks with some, but limited, net tightening of conditions. I’ll return to the subject in a bit, but my outlook in this regard does rest fundamentally on the very strong financial condition of the nonfinancial business sector and commercial banks and my expectation that most households accounting for the vast bulk of consumer spending will not find credit availability newly constrained. Finally, a resumption of growth in consumption should be supported by moderate growth in jobs and household income as the rebound in productivity is limited by the slower path for trend productivity and as income shares shift a little toward labor. I also assumed that households would not face a repeat of the rise in gasoline prices that has taken something out of recent consumption demand. Then moderate growth in consumption along with good export markets should, in turn, support business investment spending. I expect this path for output to be associated with core inflation remaining in the neighborhood of 2 percent. If energy prices follow the path in futures markets, total inflation would come down to 2 percent as well. Basically I don’t see anything in my central tendency forecast for the economy that would push inflation very much one way or another. The economy produces around its long-run potential. My NAIRU was 4¾ percent. Inflation expectations as best we can judge are anchored at something like 2 percent PCE inflation. I’m encouraged that the most recent data on prices have tended to confirm that core inflation remains fairly low. Most measures of compensation also do not show a marked acceleration that might be associated with producing appreciably beyond the economy’s sustainable level of production. Risks around my inflation forecast remain to the upside, provided that output follows my most likely path. Utilization is tight. The recent run-up in energy prices could still feed through to expectations. The damped increase in productivity growth implies greater pressure on business costs and margins. Historically, nominal wages have tended to respond more sluggishly to changes in trend productivity than do prices, and this could be especially the circumstance when workers have seen real incomes held down by higher energy prices and business profit margins have been high. At the same time, like many around this table, I think that the downside risks around the forecast of moderate growth and production going forward have increased. For some time I thought that the risk of a shortfall from our central tendency outweighed the risk of an overshoot, mainly centered on housing and consumption. But the financial developments of the last intermeeting period have appreciably increased those risks. As many have remarked, and Bill said so nicely, problems have spread from the subprime sector to a good part of the mortgage market more generally, including a severe restriction on securitization of nonconforming mortgages. Some business credit has been affected. Spread are widening across a broad array of instruments and ratings. This has occurred in an atmosphere of greatly increased volatility and uncertainty, partly related to the questions about the pricing of complex structured credits that weren’t well understood and compounded by a loss of confidence in the rating agencies. The uncertainty is also a reflection of the perception that activity and prices in the housing market have not yet shown any signs of beginning to stabilize. I agree that we need to keep our focus on the effects of these developments and the financial markets on the economy, not on the distribution of wealth in the financial sector. The relationship of financial markets to real activity is multifaceted, not easily modeled with interest rates and stock prices, especially when markets are reconsidering risk. Tightening nonprice terms of lending, the reduced availability of credit, and simply the pervasive sense of uncertainty about the price of assets and cash flows can also affect spending. In such an environment, it wouldn’t be surprising if businesses and households postponed capital investments. I agree that this reassessment is a fundamentally healthy but somewhat messy correction to more-sustainable term and risk premiums. The most likely outcome is that it will be limited in duration and effect, and that’s what I assume for my forecast. Well-capitalized banks and opportunistic investors will come in and fill the gap, restoring credit flows to nonfinancial businesses and to the vast majority of households that can service their debts. In the end, credit conditions will be tighter than they were a little while ago, for the most part justifiably so, and the effect on output will probably not be very large. To be sure, the latest episode comes on top of a rise in term premiums over the May to June intermeeting period. As a consequence, financial conditions have tightened noticeably in the past few months, even abstracting from market disruptions of the last week. The federal funds rate has been as high as it has been in part to offset the accommodative effects of low volatility and tight term and credit premiums. I think that, even in the relatively benign adjustment scenario, we’ll need to look at whether that rate is still sufficiently supportive of economic activity. But in the circumstances—that is, the benign adjustment—that reassessment can await further information about aggregate demand and further assurance that inflation will remain low. I assumed an easing of policy in 2008 and 2009 in my projections to take account of this. But we can’t know how the market situation will evolve. I also believe that there’s a non-negligible chance of a prolonged and very messy adjustment period that would feed back substantially on confidence, wealth, and spending. With the rating agencies discredited and markets vulnerable to adverse news on the economy, the period of unusual uncertainty could be prolonged. The greatest risk is in the household sector, where uncertainty about valuations of mortgages could continue to feed back on credit availability, housing demand, and prices in a self-reinforcing cycle. Moreover, as lenders and borrowers revise assumptions about house prices even further, credit from home equity lines of credit and mortgage refinancings will become even less available and more expensive, putting to the test the hypothesis that I have been working under—that the feedback from housing on consumption can be approximated by a wealth effect, not something more serious working through housing equity withdrawal. As I noted, I don’t think this is the most likely outcome, but this tail of distribution is a lot fatter than it was only a month or so ago. Thank you, Mr. Chairman." CHRG-111hhrg56847--194 Mr. Bernanke," Well, first of all you did a good job of identifying some of the risks to the recovery: Financial market risks, small business credit, and unemployment. Those are some of the things that I have highlighted in speeches and discussions. As I have indicated, I think, once again, that we need to think about our fiscal path, our fiscal plan as a trajectory, not as a single year-by-year deficit. It is not realistic, I think, to--or even advisable to try to balance the budget this year because that would be too wrenching a change, and the economy is still in weak condition, and I don't think that would be possible or advisable. However, in order to maintain the confidence of the markets and to keep interest rates low, which is very useful for the whole economy and for the recovery, it is also very important to try to provide reassurance through some mechanism that Congress is seriously contemplating measures that will bring us back to sustainability over the medium term. I realize that is a difficult thing to do and it is difficult to be credible. But Congress is very creative on these types of matters and I hope that you will be looking at ways to find the path back to sustainability over the next few years. " CHRG-111hhrg52406--213 Mr. Bachus," Okay. Thank you. Mr. Miller of North Carolina. I like calling time on members who are much more senior than I am on this committee. We do need to try to get done before this series of votes. It is a real series of votes, not a temper tantrum of votes. For Ms. Keest and Mr. Plunkett, one series of questions, or one point repeatedly made today, is that consumer protection is a vague concept for which Congress should enact very bright line rules, which is somewhat contrary to the wisdom of previous generations. There was a famous 18th Century British case widely quoted in the United States that said that there should be no single, all-encompassing definition of ``fraud'' less the craft of men should find a way of committing fraud which might escape such a rule or definition. One of the principal functions of financial innovation in recent years appears to be to evade existing regulations. In your experience, Ms. Keest and Mr. Plunkett, how easy has it been to get legislation through Congress to protect consumers from financial practices? " CHRG-110shrg50369--100 Mr. Bernanke," That is right. Senator Bunning. That is considerable, and the market conditions indicated that that was absolutely necessary. " FOMC20081216meeting--292 290,MR. ROSENGREN.," A lot of these could go down quite substantially if conditions improve, and we wouldn't control that. " FOMC20081007confcall--37 35,CHAIRMAN BERNANKE.," Thank you. Other questions? All right. If not, let me just say a few words. I will be brief. It's more than obvious that we have an extraordinary situation. It is not a single market. It's not like the 1987 stock market crash or the 1970 commercial paper crisis. Virtually all the markets--particularly the credit markets--are not functioning or are in extreme stress. It's really an extraordinary situation, and I think everyone can agree that it's creating enormous risks for the global economy. What to do about it? The exchange we just had suggests that we may have disagreements about the benefits of liquidity provision. I personally think that it has been helpful. But I think we can agree that it is obviously not a panacea because, as the Vice Chairman points out, it doesn't address the underlying capital issues. That suggests that the right solutions probably have a significant fiscal element to them. However, one feature of the last few days is how striking, how uncoordinated, and how erratic some of the fiscal approaches have been--particularly in Europe, where there has been a remarkable lack of coordination in the European Union. So the fiscal solutions are coming, but they're not there yet, and it is going to be a while. We need greater clarity on those issues. We had a meeting today on the Treasury's authority, and they are hoping in the next few weeks to begin to provide greater clarity, which will be very helpful. But I think that, if we can find some kind of bridge, it would be helpful, and that's what this meeting is about. Although the financial markets are the dramatic element of the situation, I think we can make a case for easing policy today on the macro outlook, as given by Larry and Nathan. I won't go into detail. I think it's fairly clear. You look first at inflation, and you see the remarkable decline in commodity prices, the appreciation of the dollar, and the decline in breakevens. The 10-year breakeven this morning was about 1.35. Of course, that could be a noisy indicator, but certainly it's quite low. I would say that, in terms of activity and the relation to inflation, we don't have to rely on any flat Phillips curves here. We have a global slowdown, and the implications for commodity prices are first order for our inflation forecast. It is never safe to declare inflation under complete control, and I certainly don't claim that no risks are there; but clearly the outlook for inflation is not looking nearly so threatening as it may have in the past. On the economic growth side, what is particularly worrisome to me is that, before this latest upsurge in financial stress, we had already seen deceleration in growth, including the declines, for example, in consumer spending. Everyone I know who has looked at it--outside forecasters and the Greenbook producers here at the Board--believes that the financial stress we are seeing now is going to have a significant additional effect on growth. Larry gave some estimates of unemployment above 7 percent for a couple of years. So even putting aside the extraordinary conditions in financial markets, I think the macro outlook has shifted decisively toward output risks and away from inflation risks, and on that basis, I think that a policy move is justified. I should say that this comes as a surprise to me. I very much expected that we could stay at 2 percent for a long time, and then when the economy began to recover, we could begin to normalize interest rates. But clearly things have gone off in a direction that is quite worrisome. One could legitimately ask questions about the transmission mechanism under these conditions, and I think those are good questions. But first it seems to me that we can, to some extent, offset costs of credit through our actions, even if spreads are wide. Second, to the extent that the global coordination creates some more optimism about the future of the global economy, we may see some improvements in credit spreads. We may not, but it seems to me that this is the right direction in which to go. Despite everything that's happening, I might not be bringing this to you at this point, except that we have the opportunity to move jointly with five other major central banks, and I think the coordination and cooperation is a very important element of this proposal. First of all, again, I mentioned before the lurching and the lack of coordination among fiscal authorities and other governments. I think it would be extraordinarily helpful to confidence to show that the world central banks are working closely together, have a similar view of global economic conditions, and are willing to take strong actions to address those conditions. I think that there is a multiplier effect, if you will. Our move, along with these other moves, will have a stronger effect on the global economy and on the U.S. economy than our acting alone. Moving together has other benefits. Just to note one, we can have less concern about the dollar if we're all moving together and less concern about inflation expectations given that all the banks are moving and all see the same problem. There is a tactical issue. I think the real key to this is actually the European Central Bank. They have had some difficulty coming to the realization that Europe would be under a great deal of stress and was not going to be decoupled from the United States. They made an important rhetorical step at their last meeting to open the way for a potential cut, but I think that this coordinated action gives them an opportunity to get out of the corner into which they are somewhat painted and their move will have a big impact on global expectations about policy responsiveness. So, again, I think the coordination is a very important part of this. I want to say once again that I don't think that monetary policy is going to solve this problem. I don't think liquidity policy is going to solve this problem. I think the only way out of this is fiscal and perhaps some regulatory and other related policies. But we don't have that yet. We're working toward that. We are in a very serious situation. So it seems to me that there is a case for moving now in an attempt to provide some reassurance--it may or may not do so--but in any case, to try to do what we can to make a bridge toward the broader approach to the crisis. So that's my recommendation, that we join the other central banks in a 50 basis point move before markets open tomorrow morning. If we proceed in that direction, there are, as I mentioned, two statements. Brian, do the Presidents have the joint statement? " FOMC20071211meeting--11 9,CHAIRMAN BERNANKE., Thank you. Are there questions for Bill on financial conditions or for Bill or me on the TAF proposal? President Poole. FOMC20050202meeting--27 25,MS. BIES.," Mr. Chairman, I would just add one perspective on that, which relates to how businesses reacted when the Fed really started to bring inflation down in ’79, ’80, and ’81. One of the challenges that a lot of companies faced in that period was that they had gotten so accustomed to being able to raise prices automatically—because the climate was such that everybody was raising them—that the business processes around inflation anticipation were very different than what we have today. So to answer the question of whether low inflation is a desirable goal, one would have to look at it based on where we are today. Today I think companies understand that a major challenge in this very competitive environment is to find ways to enhance productivity. They realize that it’s a very tough world to operate in compared to the period of easy price increases that they might have experienced in the early ’80s. I think companies have learned that. So in today’s environment, since low inflation lowers the cost of capital and forces them to focus on service quality and their February 1-2, 2005 18 of 177 objective. But I think we would have heard a different answer from them if we had asked that in 1980." FOMC20080805meeting--124 122,MR. LACKER.," Thank you, Mr. Chairman. Before I begin, let me add my words of welcome to Betsy Duke, welcoming Governor Duke back to the Federal Reserve System. I say ""back"" because she has served excellently on our board of directors beginning almost 1 years ago. She's a fast friend and strong supporter of the Federal Reserve System. I'm delighted that the long wait for her installation is over, and I look forward to working with her; but I don't want any of my compliments to her to be detrimental to her effectiveness. [Laughter] The Fifth District economy has remained weak in recent weeks. Manufacturing and service sector activity fell. Real estate conditions remain sluggish. Labor markets remain soft. Export activity remains the bright spot, with reports of sustained growth in outbound cargo at District ports. In a new development, however, manufacturers' expectations for the very near future turned negative in our most recent survey. This is very unusual. Respondents are typically relatively optimistic about things six months from now. Retail contacts indicate that the decline in sales broadened in July in our survey, and there aren't many reports mentioning the effect of tax stimulus checks. Price expectations for both raw materials and final goods rose in our July survey, and some of those measures are at record highs. At the national level, my outlook for real growth is broadly consistent with the Greenbook's this time. I expect sluggish growth to continue through the remainder of the year, with a pickup beginning sometime next year. Housing is likely to continue to be a drag, though a diminishing one, until then. Consumer spending is likely to remain subdued, and business investment is likely to moderate somewhat. I expect payroll employment to continue to decline for a while at about the current pace--a pace that, as others have noted, is quite modest relative to what we typically see in a recession. I think the most likely outcome is for us to continue to skirt an outright recession. I think there is some risk of a broader and sharper contraction. I believe the magnitude of that risk is modest, but it's not negligible to me. Business investment could deteriorate, a risk that's most prominent in the nonresidential construction sector that we discussed earlier. But this is a small component of aggregate demand, smaller than housing; and given the nature of gestation lags in this sector, I think a downturn is likely to be gradual rather than abrupt. Household spending probably poses the greatest risk to growth at this point. Consumer spending has flattened out in real terms, although that's what one would expect given the increase in food and energy prices that we've seen. Given the difficulty of assessing the extent to which tax rebates are propping up consumer spending right now, we do not know how much Q4 consumption is going to be affected by the stimulus rolling off. Potential growth effects of credit constraints or financial headwinds have gotten a lot of attention these days. I remain skeptical about the magnitude of the drag on consumption and investment spending that credit market conditions are likely to create. We have, of course, seen reports in the Senior Loan Officer Opinion Survey of tightened credit terms, but through June both C&I and consumer loans have continued to grow. I would note that we are hearing in the Fifth District concerns from some of our smaller institutions that some large banks are bidding aggressively for deposits--this has been going on for several months now, of course--and as a result, the smaller banks are paying more to fund their loans. We're also hearing now--and this is a new report--of larger banks cutting back on fed funds lending to smaller institutions, no doubt out of a concern about possible bank failures. What I think we're seeing in banking markets is more of a reallocation of activity among banks. Different institutions have been affected very differently by recent events depending on the strategies they chose to pursue in the years preceding this episode. As a consequence, intermediation is just shifting from some institutions to others. In fact, we've heard of banks picking up business that other banks are shedding. Anecdotes about particular banks cutting back on lending thus need to be taken with a grain of salt, and I don't think they're necessarily representative of the banking sector as a whole. In fact, there was a really egregious case in the New York Times of people not getting credit from banks because of this credit crunch. In paragraph 6, one is introduced to their lead anecdote: a borrower at Wachovia who was denied credit. In paragraph 22, we find out that he actually got credit two weeks later at this same institution. So I'm a little skeptical about all of this anecdotal evidence about credit constraints. It's undoubtedly the case that credit standards have tightened, but the environment is such that a lot of borrowers have gotten genuinely weaker. I mention all of this just because it influences how I feel about arguments that credit market conditions make the current level of the real funds rate any less meaningful as an indicator of the stance of monetary policy. I just don't find those arguments convincing right now. The real funds rate using the Greenbook's forecast of overall inflation four quarters ahead is lower than it has been at any time since the 1970s. In fact, this measure is about 1� percentage points lower than the lows it reached in 2003 or 1994, and I think this is to my mind a better way to measure the actual real federal funds rate than what's plotted in the Bluebook. The Greenbook forecast is that core PCE inflation will rise to 2.6 percent for the second half of this year and then gradually subside to 1� percent a year or so after that. This forecast is a very risky path, I believe, because at any point along that hump, higher inflation could well become embedded in expectations. I think getting back to price stability after this episode is going to depend critically on the stability of inflation expectations, as many of you have noted. It is true that TIPS compensation measures have been reasonably steady for a few months and that wage rates show no sign of accelerating as yet. But if we wait to raise rates until wage rates accelerate or TIPS measures spike, we will have waited too long. I think that's very clear, and it will cost us too much to recover our credibility. Accordingly, I believe that the biggest policy risk we're going to be facing in the months ahead is the risk of waiting too long. In past episodes of economic or financial weakness, we've been unwilling at times to raise the funds rate until we were almost completely certain that economic recovery would be sustained. I do not think that we can afford that luxury at the present time. The risk is too great that inflation expectations will ratchet up again. We need to be prepared to raise rates even if growth is not back to potential and even if financial markets are not yet tranquil, and we need to be prepared to raise rates even if we think that we might have to reverse course. After all, we cut rates aggressively even though we were not certain that a recession was in store for us and, in part, on the grounds that we could reverse course if it proved that we cut too far. To insist on more certainty to raise rates than to reduce them would introduce a fatal asymmetry in our reaction function. Let me add a comment or two inspired by some of the discussion around the table. I want to commend President Bullard's discussion of systemic risk. You mentioned this earlier in your Q&A session, Mr. Chairman. This is a notoriously slippery concept. In popular usage, it seems to mean an episode in which one bad thing happens followed by a lot of other seemingly related bad things happening, and as such, it's a purely empirical notion without any content or usefulness by itself as a guide to policy. It doesn't say whether those other bad things are efficient--things that ought to happen--or inefficient and preventable by suitable policy intervention. To invoke the notion of systemic risk to support a particular policy course requires theory. I spoke about theory last night, but it requires some theory, some coherent understanding of the way you think the world works. The theoretical literature related to systemic risk is relatively young, and this isn't the place to go into it. I've said before that I think it would be useful for this Committee to learn more about this. The Committee might be surprised that the literature provides only relatively tenuous rationales--I think is a fair judgment--for policy intervention. I hope, Mr. Chairman, that the group you've commissioned to study the meaning of unusual and exigent circumstances can explore this terrain in a little more depth. Going forward, I think our deliberations would be aided if we were to strive to put our theoretical frameworks on the table when discussing how financial markets work and what we ought to do about them. In case there's any suspense, for my own money--and this is just one man's view--I haven't seen a convincing case for the existence of policy-relevant market failures in the financial markets in which we've intervened, apart from the usual distortions owing to the federal financial safety net. We systematically expanded that safety net. I believe what we've done has been to subsidize selected borrower classes and prop up prices of various financial assets, and I think the problem we face now is the tremendous dependency of financial institutions and markets on our credit. Thank you. " CHRG-111shrg57319--218 Mr. Schneider," Chairman Levin, Dr. Coburn, and Members of the Subcommittee, thank you for the opportunity to appear before you today. My name is David Schneider.--------------------------------------------------------------------------- \1\ The prepared statement of Mr. Schneider appears in the Appendix on page 158.--------------------------------------------------------------------------- Beginning in July 2005, I served as President of Washington Mutual's Home Loan Business, which originated prime mortgage loans. In 2006, I was given the additional responsibility for Long Beach Mortgage Company, which was WaMu's subprime lending channel. Before I arrived at WaMu, its management and Board had adopted a lending strategy for the coming years. I understood that its strategy was intended, at least in part, to reduce WaMu's exposure to market risk, that is, its exposure to interest rate changes. WaMu planned to do so by shifting the assets it held on its balance sheet away from market risk towards credit risk, for example, by holding more adjustable-rate mortgages. This strategy was called a higher-risk lending strategy and would have been implemented through the bank's Asset and Liability Committee. ALCO made decisions on which loans to hold and which to sell based on the loans' risk-return profile and other relevant issues, including the type and geographic location of the loans WaMu already had on its books. Although WaMu intended to change its business strategy, market conditions soon caused WaMu to go in another direction. As house prices peaked, the economy softened, and credit markets tightened, WaMu adopted increasingly conservative credit policies and moved away from loan products with greater credit risk. WaMu increased documentation requirements, raised minimum FICO scores, lowered LTV ratios, and curtailed underwriting exceptions. My team also enhanced WaMu's fraud detection programs. During my time at WaMu, we reduced and then entirely stopped making Alt A loans and Option ARM loans. Alt A lending ended in 2007. Option ARM loans decreased by more than a half from 2005 to 2006, and by another third from 2006 to 2007. WaMu stopped offering Option ARM loans altogether at the beginning of 2008. When the subprime lending operation at Long Beach was placed under my supervision in 2006, I was asked to address the challenges its business presented. During that year, I changed Long Beach management twice. As I became more familiar with Long Beach Mortgage, I concluded that its lending parameters should be tightened, so across various loan products we raised FICO scores, lowered LTV ratios, established maximum loan values, increased documentation requirements, improved programs to detect and prevent fraud, and in 2007 eliminated stated income lending. As a result, the percentage of approved Long Beach loans that were based on full documentation increased every year I oversaw Long Beach, and the percentage of loans with combined LTV ratios greater than 90 percent decreased every year over that same period. More broadly, WaMu eliminated many subprime products and then stopped originating subprime loans entirely. As a result, WaMu's subprime lending declined by a third from 2005 to 2006 and by 80 percent from 2006 to 2007. When I began my job at Washington Mutual, my goal was to evaluate and improve our home lending efforts in all respects. As market changes began to change, my team and I worked very hard to adapt to the new conditions and at the same time address the challenges WaMu faced. During the time I was President of Home Loans, we acted to reduce the size and associated risk of the Home Loans business. Specifically, we closed its broker and correspondent lending channels. We closed Long Beach Mortgage. We eliminated a number of higher-risk loan products and bolstered quality controls through tightening credit standards, improving the automated underwriting tools, enhancing fraud detection and prevention, and curtailing underwriting exceptions. I hope this brief summary has been helpful and I look forward to your questions. Thank you. Senator Levin. Thank you very much, Mr. Schneider. Mr. Beck. TESTIMONY OF DAVID BECK,\1\ FORMER DIVISION HEAD OF CAPITAL CHRG-111hhrg52261--109 Mr. Hampel," Thank you. Chairwoman Velazquez, Ranking Member Graves, and other members of the committee, thank you very much for the opportunity to testify at today's hearing on behalf of the Credit Union National Association, which represents over 90 percent of our Nation's 8,000 State and Federal credit unions, the State leagues, and their 92 million members. I am Bill Hampel, the Chief Economist. Credit unions did not contribute to the recent financial debacle, and their current regulatory regime, coupled with their cooperative structure, militates against credit unions ever contributing to a financial crisis. As Congress considers regulatory restructuring, it is important that you not throw out the baby with the bathwater. Regulatory restructuring should not just mean more regulation. There needs to be recognition that in certain areas, such as credit unions, regulation and enforcement is sound and regulated entities are performing well. Credit unions have several concerns in the regulatory restructuring debate. These include the preservation of the independent regulator, the development of the CFPA, and the restoration of credit unions' ability to serve their business-owning members. First, it is critical that Congress retain an independent credit union regulator. Because of credit unions' unique mission, governance, and ownership structure, they tend to operate in a low-risk, member-friendly manner. Applying a bank-like regulatory system to this model would threaten the benefits that credit unions provide their members. There is some logic for consolidating bank regulators where competition can lead to lax regulation and supervision, but that condition does not exist for credit unions which have only one Federal regulator, the National Credit Union Administration. The general health of the credit union system proves that our system works well. Considering the CFPA, consumers of financial products, especially those provided by currently unregulated entities, do need greater protection. CUNA agrees that a CFPA could be an effective way to achieve that protection, provided that the agency does not impose redundant or unnecessary regulatory burdens on credit unions. In order for a CFPA to work, consumer protection regulation must be consolidated and streamlined to lower costs and improve consumer understanding. CUNA strongly feels that the CFPA should have full authority to write the rules for consumer protection, but for currently regulated entities, such as credit unions, the examination and enforcement of those regulations should be performed by the prudential regulator that understands their unique nature. Under this approach, the CFPA would have backup examination authority. CUNA urges Congress to take the difficult step of preempting State consumer protection laws if establishing a CFPA. We are confident that by creating a powerful Federal agency with the responsibility to regulate consumer protection law, with rigorous congressional oversight, more than adequate consumer protection will be achieved. And if the CFPA is sufficiently empowered to ensure nationwide consumer protection, why should any additional State rules be necessary? Conversely, if the proposed CFPA is not expected to be up to the task, why even bother establishing such an agency in the first place? Finally, because they are already significantly regulated at the State level, we don't believe that certain types of credit life and credit disability insurance should be under the CFPA. As Congress considers regulatory restructuring legislation, CUNA strongly urges Congress to restore credit unions' ability to properly serve the lending needs of their business-owning members. There is no economic or safety and soundness rationale to cap credit union business lending at 12.25 percent of assets. Before 1998, credit unions faced no statutory limit on their business lending. The only reason this restriction exists is because the banking lobby was able to leverage the provision when credit unions sought legislation to permit them to continue serving their members. The credit union business lending cap is overly restrictive and undermines America's small businesses. It severely limits the ability of credit unions to provide loans to small businesses at a time when these borrowers are finding it increasingly difficult to obtain credit from other types of financial institutions, as was described by Mr. Hirschmann from the U.S. Chamber in the previous panel. It also discourages credit unions that would like to enter the business lending market from doing so. We are under no illusion that credit unions can be the complete solution to the credit crunch that small businesses face, but we are convinced that credit unions should be allowed to play a bigger part in the solution. Eliminating or expanding the business lending cap would allow more credit unions to generate the portfolios needed to comply with NCUA's regulatory requirements and would expand business loans to many credit union members, thus helping local communities and the economy. Credit unions would do this lending prudently; the loss rate on business loans at credit unions is substantially below that of commercial banks. A growing list of small business and public policy groups agree that now is the time to eliminate the statutory credit union business cap for credit unions. And in July, Representatives Kanjorski and Royce introduced H.R. 3380, the Promoting Lending to America's Small Business Act, which would increase the credit union business lending cap to 25 percent of total assets and change the size of a loan to be considered a business loan. We estimate that credit unions could safely and soundly lend an additional $10 billion in small loans in the first year after enactment of such a bill. Madam Chairwoman, thank you very much for convening this hearing, and I look forward to answering the committee's questions. " FOMC20080916meeting--158 156,CHAIRMAN BERNANKE.," Thank you very much, and thanks, everyone, for very helpful comments. Let me try to summarize, and I will just make some comments, and then we can turn to the statement and policy. The group indicated, of course, that economic growth has slowed and looks to be quite sluggish in the second half. I didn't hear a great deal of change in the general profile, with most people still viewing growth as being slow in the near term but perhaps recovering somewhat in 2009. But obviously there is a lot of uncertainty surrounding that judgment. The ongoing problems in housing and the financial system are, of course, the downside risks to growth. Another factor, which is becoming more relevant, is the slowing global economy, which together with the stronger dollar may mean that U.S. export growth will be somewhat less. Despite the tax rebate, consumer spending seems likely to be weak in the near term, reflecting a variety of factors that we noted before, including housing and equity wealth, credit conditions, and particularly perhaps the ongoing weakness in the labor market. The labor market is deteriorating, with unemployment up, although UI programs may play some role in the unemployment rate. It is somewhat difficult to predict the peak of the unemployment rate, given the upward momentum we are seeing. Declines in energy prices, however, will improve real incomes and help consumer sentiment--so that is a potentially positive factor. The housing sector continues to be the central concern in the economy, in both the real and the financial sides. There are no clear signs of stabilization, although obviously regional conditions vary considerably. The government action regarding the GSEs has lowered mortgage rates and may be of some assistance. Credit conditions have tightened, though, in other areas as well, including nonresidential construction. Firms are continuing to struggle with weaker demand, higher uncertainty, and high costs. Manufacturing has been relatively stable to weaker, but we had at least one report of a survey that in the medium term the outlook is looking a little better. Inventories appear to be relatively well managed. Credit conditions for business vary, but there are indications that some firms are finding it very difficult to attract capital. Financial markets received a lot of attention around the table. Conditions clearly have worsened recently, despite the rescue of the GSEs, the latest stressor being the bankruptcy of Lehman Brothers and other factors such as AIG. Almost all major financial institutions are facing significant stress, particularly difficulties in raising capital, and credit quality is problematic, particularly in residential-related areas. One member noted that it is not evident that markets are clearly differentiating between weaker and stronger firms at this point. Deleveraging is continuing, and securitization markets are moribund. Credit terms and conditions are quite tight and may be a significant drag on the economy. However, the mediumterm implications of the recent increases in financial stress for the economy are difficult to assess. We may have to wait for some time to get greater clarity on the implications of the last week or so. On the inflation front, recent core and headline numbers have been high, reflecting earlier increases in the prices of energy and raw materials. There are positive factors, including the significant intermeeting declines in the prices of oil and other commodities, which, if maintained, would bring headline inflation down rather notably by the end of the year or next year. The dollar has also strengthened. Generally speaking, inflation expectations, though noisy, have improved. We have seen a decline in TIPS breakevens and some decline in survey expectations as well. But it was noted that the five-by-five TIPS breakeven remains above a level consistent with long-term price stability. Nominal wage growth has remained subdued so far, slack is increasing, productivity has been strong, and therefore, unit labor costs are well controlled. Again, all of these factors are positive in terms of a better inflation picture going forward. On the other hand, recent declines notwithstanding, the cumulative increases in commodity prices over the past year or so do remain large, and there is some evidence that these cost increases are being passed through into core prices. Commodity prices are extremely volatile, which makes inflation very difficult to forecast and makes the inflation outlook, therefore, quite uncertain. Wages could also begin to rise more quickly as the economy strengthens. For all these reasons, inflation risks are still in play and remain a concern for the Committee. Some participants reiterated their concern that maintaining rates too low for too long risks compromising our credibility and stimulating inflation over the medium run. That is a very quick survey of the comments. Are there any comments or questions? If not, let me just make a few comments. Personally, I see the prospects for economic growth in the foreseeable future as quite weak, notwithstanding the second quarter's strength. I think what we saw in the recent labor reports removes any real doubt that we are in a period that will be designated as an official NBER recession. Unemployment rose 1.1 percentage points in four months, which is a relatively rapid rate of increase. The significance of that for our deliberations is, again, that there does seem to be some evidence that, in recession regimes, the dynamics are somewhat more powerful and we tend to see more negative and correlated innovations in spending equations. So I think that we are in for a period of quite slow growth. That is confirmed by what we are seeing in consumption, which probably would be quite negative if it weren't for the remainder of the fiscal stimulus package. Other components of demand are, likewise, quite weak. We are all familiar with the housing situation. Some other factors that were supportive in Q2 are weakening--a number of people have noted the export growth. Actually, it is net exports--which is important--not just exports, and we are seeing both slowing growth in exports and some forecast of increased growth in imports. A factor that we haven't talked about much is the fiscal side. That has been supportive and may be less supportive going forward. Generally speaking, though, I do think--and I have said this for a long time--that the credit effects will be important. They operate with a lag. It is very difficult to judge the lag. But my strong sense is that they are still some distance from their peak; that they will begin to be felt outside of housing, in nonresidential construction, for example, in consumer spending, and in investment; and that this is going to be independent of last week's financial developments. I think that is going to be a major drag, probably well into next year. There are a few positives, which give some hope of some improvement next year. We have talked about energy and commodity prices as they relate to inflation, but of course, the decline in energy and commodity prices is also a plus for consumers and raises real incomes and would be supportive of sentiment, as we have already seen. There are a few positive indications here and there on the housing market, a few glimmers of stability, particularly in some regions. I think that the GSE stabilization is going to be very important. It has already lowered mortgage rates. It suggests that there will be a market for securitized mortgages, and I think that is positive. So if I wanted to outline an optimistic scenario, it would involve stronger indications of stabilization in housing, which in turn would feed into more confidence in the financial sector and would lead over time to improvement in the broader economy. I do think that financial conditions are a major concern. The situation right now is very uncertain, and we are not by any means away from significant systemic risk. Even if we avoid a major systemic event, the increase in risk aversion, the pullback from all counterparties, the deleveraging, the sale of assets--all of these things are going to continue for some time and are going to make the financial sector very stressed, which obviously will have effects on the economy. I have been grappling with the question I raised for President Lacker, and I would be very interested in hearing other views either now or some other time. The ideal way to deal with moral hazard is to have in place before the crisis begins a well-developed structure that gives clear indications in what circumstances and on what terms the government will intervene with respect to a systemically important institution. We have found ourselves, though, in this episode in a situation in which events are happening quickly, and we don't have those things in place. We don't have a set of criteria, we don't have fiscal backstops, and we don't have clear congressional intent. So in each event, in each instance, even though there is this sort of unavoidable ad hoc character to it, we are trying to make a judgment about the costs--from a fiscal perspective, from a moral hazard perspective, and so on--of taking action versus the real possibility in some cases that you might have very severe consequences for the financial system and, therefore, for the economy of not taking action. Frankly, I am decidedly confused and very muddled about this. I think it is very difficult to make strong, bright lines given that we don't have a structure that has been well communicated and well established for how to deal with these conditions. I do think there is some chance--it is not yet large, but still some chance--that we will in fact see a much bigger intervention at the fiscal level. One is tempted to argue that by doing more earlier you can avoid even more later, but of course that is all contingent and uncertain. So we will collectively do our best to deal with these very stressful financial conditions, which I don't think will be calm for some time. With respect to inflation, I accept the many caveats around the table. I have to say that I think, on net, inflation pressures are less worrisome now. The last two meetings have been very positive in that respect. The declines in energy and commodity prices are quite substantial. Natural gas, for example, has reversed all of its gains of the year. Steel scrap is down 40 percent in two months. We are seeing many other indications that commodity prices really have come down quite a bit. The dollar's increase is also quite striking, and we have talked about wages, TIPS, and other factors. So I think overall I see at least the near-term inflation risk as considerably reduced. I do agree, though, with the points that were made that we may well see pressure on core inflation for a while longer, despite this morning's reasonably benign number. The increases in commodity costs, although they have been partially reversed, have not been entirely reversed. Certainly over the last year to year and a half there is still a net substantial increase, which will show up as firms begin to pass through those costs. It is also the case, of course, that we have seen a very, very sharp movement in commodity prices and the dollar. Therefore, there is no logical reason why that couldn't be reversed. Clearly, one problem we face is that the uncertainty about forecasting commodity prices is so large that it makes our forecasting exercises extraordinarily uncertain and means that we need to be somewhat more careful than we otherwise would be if we were back in the days of the Texas Railroad Commission, when we knew the price of oil six months in advance. We don't have that privilege anymore. So I think core inflation may be elevated for a while. It may take a while for inflation to moderate. Everything I say is contingent on the dollar and commodity trends not being strongly reversed. But if those things are not reversed, I think we will see some improvement in inflation in the near term. I also agree with those who say that, when the time comes, we do need to be prompt at removing accommodation. It is just as much a mistake to move too late and allow inflation, and perhaps even financial imbalances, to grow as it is to move too early and be premature in terms of assuming a recovery. I think that is a very difficult challenge for us going forward, and I acknowledge the importance of that, which a number of people have noted. So that is a quick summary of my views. Let me just turn briefly, then, to policy. Do we have the statement? Let me just preview. I talked with Governor Warsh, and he gave me now during the break some of those suggestions he made. As they fit closely with other things that people said around the table, we have made a version here that incorporates them. I'll discuss that in just a minute. 3 First, as a number of people have said, let me just say that I thought the memo that the staff prepared over the intermeeting period was extraordinarily helpful. We have been debating around the table for quite a while what the right indicator of monetary policy is. Is it the federal funds rate? Is it some measure of financial stress? Or what is it? I think the only answer is that the right measure is contingent on a model. As President Lacker and President Plosser pointed out, you have to have a model and a forecasting mechanism to think about where the interest rate is that best achieves your objectives. It was a very useful exercise to find out, at least to some 3 The statement referred to here is appended to this transcript (appendix 3). extent, how the decline in the funds rate that we have put into place is motivated. In particular, the financial conditions do appear to be important both directly and indirectly--directly via the spreads and other observables that were put into the model and indirectly in terms of negative residuals in spending equations and the like. The recession dynamics were also a big part of the story. I hope that what this memo does for us--again, I think it's extraordinarily helpful--is to focus our debate better. As President Plosser pointed out, we really shouldn't argue about the level of the funds rate or the level of the spreads. We should think about the forecast and whether our policy path is consistent with achieving our objectives over the forecast period. I am sympathetic to the general view taken by the staff, which argues that those recession dynamics and financial restraints are important, that we are looking at slow growth going forward, and that inflation is likely to moderate. Based on those assumptions, I think that our policy is looking actually pretty good. To my mind, our quick move early this year, which was obviously very controversial and uncertain, was appropriate. Their analysis also suggests that the amount of insurance that we have is perhaps limited, given that they take a risk-neutral kind of modeling approach. Having said that, I think they have also clearly set out the conditions and the framework in which we can debate going forward exactly where we should be going. To the extent that those around the table disagree with the model or with the projection, then that is the appropriate way, it seems to me, to address our policy situation. So, again, I do very much appreciate that. It helped me think about the policy situation. As I said, I think our aggressive approach earlier in the year is looking pretty good, particularly as inflation pressures have seemed to moderate. Overall I believe that our current funds rate setting is appropriate, and I don't really see any reason to change. On the one hand, I think it would be inappropriate to increase rates at this point. It is simply premature. We don't have enough information. There is not enough pressure on inflation at this juncture to do that. On the other hand, cutting rates would be a very big step that would send a very strong signal about our views on the economy and about our intentions going forward, and I think we should view that step as a very discrete thing rather than as a 25 basis point kind of thing. We should be very certain about that change before we undertake it because I would be concerned, for example, about the implications for the dollar, commodity prices, and the like. So it is a step we should take only if we are very confident that that is the direction in which we want to go. Therefore my recommendation to the Committee--and I will open it up for comment in a moment--is to keep the funds rate at its current level. I listened very carefully to the conversation around the table in terms of the statement. I think it was President Lockhart, President Stern, and Governor Warsh, among others, who talked about strengthening the language on financial markets. So the draft statement that you have in front of you is an attempt to make that change. It has two changes relative to existing alternative B. First, as Governor Warsh suggested, it reverses the first two sentences and so focuses in the first sentence on ""Strains in financial markets have increased significantly and labor markets have weakened further,"" and then the rest of it is basically the same as it was. The other change, which is in the last paragraph in the risk assessment, is pretty small, but it is probably worth considering. The word ""closely"" has been added to suggest, obviously, that we understand that the situation is changing rapidly and that we are carefully following conditions as they evolve. Kevin, we took your word ""market"" there--what was the rationale for it? " fcic_final_report_full--370 I nvestments i n Money Mar k et F unds In a flight to safety, investors shifted from prime money market funds to money market funds investing in Treasury and agency securities. IN TRILLIONS OF DOLLARS, DAILY $2 1 . 5 1 . 5 0 P r i me T reasury and government AUG . 2008 S EPT. OC T. SOURC E: Crane D ata Figure . anecdotally that the dealers weren’t even picking up their phones. The funds had to get rid of their paper; they didn’t have anyone to give it to,” McCabe said.  And holding unsecured commercial paper from any large financial institution was now simply out of the question: fund managers wanted no part of the next Lehman. An FCIC survey of the largest money market funds found that many were unwilling to purchase commercial paper from financial firms during the week after Lehman. Of the respondents, the five with the most drastic reduction in financial commercial paper cut their holdings by half, from  billion to  billion.  This led to unprecedented increases in the rates on commercial paper, creating problems for borrowers, particularly for financial companies, such as GE Capital, CIT, and American Express, as well as for nonfinancial corporations that used commercial pa- per to pay their immediate expenses such as payroll and inventories. The cost of commercial paper borrowing spiked in mid-September, dramatically surpassing the previous highs in  (see figure .). “You had a broad-based run on commercial paper markets,” Geithner told the FCIC. “And so you faced the prospect of some of the largest companies in the world and the United States losing the capacity to fund and access those commercial paper markets.”  Three decades of easy borrowing for those with top-rated credit in a very liquid market had disappeared almost overnight. The panic threatened to disrupt the payments system through which financial institutions transfer trillions of dollars in CHRG-111hhrg48674--351 Mr. Bernanke," Well, there are a lot of issues there. They did have zero interest rates; in fact, they still have essentially zero interest rates. I do think that speed of response is very important. As you have all experienced firsthand politically, it is not easy to bring the public along to try to address problems in the banking system. And in Japan the political resistance was one of the reasons why it took a very long time to address the problem. American people have complained a lot, and I don't blame them. On the other hand, I think people understand that something needs to be done, and these steps that are being taken, as distasteful as they are in some cases, are essential. And I think it speaks well of the Congress that you did act to take these steps, and that we are moving in a reasonably expeditious way, given the speed of events and all that has happened, to begin to tackle our problems. We are much better off addressing them quickly than letting them fester. Ms. Bean. Thank you. I have a few other questions. One is you have spoken before about the use of tax dollars, both some that have involved congressional involvement with TARP, and some of the things you have been able to do without our involvement to stabilize our system. We have also spoken to the fact that the government has the unique ability to hold certain assets that may presently be illiquid and undervalued until a point when we might get a better return on those dollars. How much has that picture changed, in your mind, from when you testified in the past about how much of that is likely to come back? Are you feeling better, worse moving forward? Are you going to have to hold onto certain things longer? What is your feeling? " FinancialCrisisInquiry--182 Can you turn your mic on, Mr. Rosen? ROSEN: I’m Ken Rosen. I want to thank Chairman Angelides and Vice Chairman Thomas, and the commission for having me here. I want to not read my testimony since you have it. But I’m going to talk a little bit about what I think is the epicenter of the crisis—where this started, how it got there, and where we are today, which is the housing market—the housing and residential mortgage market. Excessively easy credit, extremely low interest rates created a house price bubble. And the house price bubble when it burst has really caused a significant part of the problems that we had—at least the—initially. And of course it caused—helped cause the great recession where we have lost over eight million jobs. I think the most important thing to say is how did we get here. And I would say that low interest rates is part of the blame, but really it’s the poorly structured products that came about in this environment. Innovative products are important, and a good thing. And I’ve written papers on—on this in the 1970s and 80s while we needed innovative mortgage products. And they’re good for some people—some households. Subprime— there is a need for having that. But not to the market share it got. Low down payment loans – Alt-A loans, option arms. All those made some sense for a portion of the population. What happened is we layered all these risks. We went from a conservatively written subprime loan to a subprime loan that had no down payment, and didn’t document someone’s income or employment. So we made a mistake from what was a good idea by financial institutions became a bad idea for the entire overall market. And then we combine that with a second component which was I thought bad underwriting. We lowered underwriting standards dramatically. We started this in California, and it spread everywhere. We—we do this sometimes. Liars loans which are stated income loans, and there was rampant fraud at the consumer level. We’ve heard discussion of this at the institutional level, but I think the consumer basically really did this so they could qualify for the loan. There was some complicity on the part of brokers and originators. I think—I do not think this was at the high level institutions, but it’s at the individual originator level. CHRG-110shrg50420--67 Mr. Kepplinger," As you asked before and as you pointed out, the conditions in the Chrysler loan guaranty statute were very specific. Congress, I think, developed these conditions through over about a three or 4-month period, and I suspect, without really knowing, that there was general acceptance by the major players before the legislation was passed. Now, there was a series of findings that the Chrysler loan guaranty board had to make as a condition for issuing a commitment--viability, ability to repay, assurances that the concessions were in place, a financing and operating plan that was satisfactory to the board, because actually, as Gene has pointed out before, it is one of the best protections for the government is to assure that the government has confidence in the financing and operating plans going forward. Then in addition to that, at the time of the loan guaranty, there were other assurances and requirements that had to be in place--guaranty fees, warrants, other protections, financial upside advantage for the government should it happen, positions in the event of bankruptcy, a senior position, et cetera, et cetera, et cetera. I can supply, if you would like, a fairly detailed and perhaps more orderly recitation of what they were. Senator Crapo. That would be very helpful. I note I am way over my time. I apologize to the Chairman for that. I would just like to ask one quick follow-up. In terms of these kinds of conditions that Congress imposed, and I would like those specifics, would the oversight board that we are contemplating that you are talking about today, would it have authorities to engage in management decisions on behalf of the companies? " CHRG-110shrg50420--255 Mr. Mulally," Yes, I am happy to comment on it. We started by looking at history through all the economic cycles, especially around 1980, and looking at the peak to trough on the contraction of the economy and then the recovery coming out. And the scenarios that you asked us for really we believe bracketed what we think that economic scenario would look like. And it is pretty much in agreement with what the Federal Reserve just announced a few days ago about the contraction next year being in the 1 to 1.5 percent. So we have the economy contracting all the way through 2009 and not starting to recover until 2010. And I really, our economists, everybody we are talking to really believes that with the actions that we are taking today on the fiscal and the monetary policy and the stimulus that you are thinking about, that that is a very, very conservative recovery. The other scenario you asked for, which was a kind of worst case, would be an economy contraction that we have never seen before since the Depression. So I think that middle scenario that you asked for is a very conservative, realistic scenario, and that is what we based on request for a potential need of the $9 billion. So we think that is a good number. Senator Menendez. Well, let me just say there is--I understand that answer. There is a gulf between $34 billion, which grew from $25 billion, which is what we were told was necessary for viability, to $75 to $125 billion. And my concern is getting our arms around this in a way that we know the totality of the situation and can meet with--I mean, none of you could operate--well, if you operate a company like this, you are not going to succeed. If we operated as fiduciaries to the taxpayers like, we cannot succeed. It is what has happened at the TARP program where we are throwing money out there without having a sense of the strategy of understanding what is necessary in this case to assure viability. Let me ask two final questions. Are you all committed truly--and you will have to be committed because, as far as I am concerned, there are going to have to be conditions placed--to the type of fundamental transformational change that is necessary for you to survive? Are you truly committed--you know, Mr. Wagoner, Saturn was your previous commitment to that, and then you largely walked away. You know, so that is a past example. You know, are you truly committed to that? And, last, can you tell us, of those groups that are out there that already see taxpayer bailout funds, how many of them are holding a good part of your commercial debt? The final comment I will make, I just want to say, President Gettelfinger, you know, leadership is really tested in difficult times, and I appreciate what you have been willing to do to come forward. And it is never easy for a union leader to come forth and make very serious concessions and even talk about getting to the table more. But it cannot be done simply by the union. There have to be all the elements here to achieve the goal--the suppliers, the creditors, and others. Otherwise, the union cannot solve this problem on their own, and I know some would like to break the back of the union here as part of their goal. But this is not going to be achieved just simply through that. Could you just answer those questions? " CHRG-111hhrg56776--181 Mr. Bernanke," If we are the consolidated supervisor, then it's our responsibility, and we need to do a good job to do that. But, of course, there are lots of things to look at. I have to say, in the case of Lehman, it was pretty clear that they were in weak condition, independent of this particular piece of accounting. " CHRG-110hhrg38392--24 The Chairman," Well, my time has expired. I just want to say that I would urge people to read this report. And I think, first of all, debunking by Mr. Slaughter who served on the Council of Economic Advisors, I believe under your chairmanship, along with you as a colleague, Grant Aldonas, they say that education is a good thing, but being made to tow too much weight. But here is the problem, even with education. Getting people that education requires, to a great extent, some public participation. We can't expect the private sector to pay for this out of what it does. And this is another factor. As long as we have the current situation in which government is considered to be a bad thing, etc.--let me put it this way: The way in which we finance education in the country today, particularly beyond K-12, reinforces inequality, it doesn't alleviate it. So yes, education properly done could do this. But kind of oh, well, that is the way the world is and we will just have to hope for the better, is a problem. The notion that a stable economy, and this is where I think, again, we have a fundamental difference, yes, I would like to see a strong, stable economy. That is a necessary condition for diminishing inequality. But it is clearly an insufficient condition, and in the absence of any recognition of that, you are going to continue to see the kind of gridlocking in which trade promotion and immigration and other issues don't go anywhere. I just urge people who want to see us move in this direction to help us diminish inequality, or you will have continued economic gridlock. The gentleman from Alabama. " FOMC20070918meeting--126 124,MR. WARSH.," Thank you, Mr. Chairman. As Governor Kohn just suggested, I think financial market tumult is likely to be of sufficient duration to have a meaningful effect on the real economy. The policies that we’ll be considering later today are unlikely to be a panacea, but I think that is not a reason for us to avoid taking some smart and preemptive actions. The recuperation of these financial market trends is positive, but I wouldn’t measure the recovery period here in weeks or even the next couple of months. I suspect it is going to take longer. The moderate growth story that many of us have been telling and that is reflected in the Greenbook and has been for some time appears at best case to be even more moderate. The downside risks and the possibility of some nonlinear events in these financial markets are higher, perhaps not as high as they might have seemed when we last met by videoconference, but those prospects are still very real. When we had the videoconference on August 16, there appeared to be at that moment extremely poor market functioning, necessitating our actions that day. I think we rightly determined that there was a liquidity shock, maybe even a liquidity crisis, that was affecting financial intermediaries and that our actions were necessary to stop the liquidity symptoms from manifesting themselves as a credit crisis. To that end, our work goes on today. The results from that action and the benefit of time seem to have stopped the bleeding, and the deterioration of financial market conditions has largely ceased. However, although the improvements at this point are quite encouraging, I don’t think they are yet convincing. Let me just spend a few moments on the distinct phases of what this financial market distress has looked like and try to outline, maybe even oversimplify, where we are in that. Phase 1 strikes me as liquidity replenishment by financial institutions and marketmakers alike. During the past three to four weeks, commercial banks, investment banks, asset managers, and other private pools of capital have had to reassess their liquidity needs, their cash needs, in light of the tougher financial market conditions. Today, by and large, they have more cash on hand than they ever thought would be necessary or prudent. But that liquidity replenishment, at least for the median and stronger firms, is somewhat complete as they evaluate what the risks are of contingent liabilities coming on their balance sheets and as they reevaluate the stress tests and the comments of the people and the risk managers who had been telling them that they were ripe for financial distress. Some degree of confidence has been broken over the past six weeks. I wouldn’t say it has been reestablished, but I think that is probably one of the things in the post Sarbanes-Oxley era that are giving the decisionmakers at these financial institutions a little less interest in diving back into these markets—they learned that maybe what they had at their disposal or what they thought they knew wasn’t as certain as they had hoped. Many of these financial institutions during the past several weeks still thought that another leg down was possible—that strong financial institutions were continuing to ensure, and would continue to ensure even today, against four-sigma events—and that the best way for them to lose their jobs in this environment was to be short of liquidity. They are also very focused on what is happening among their peers. They are very focused on their relative strength, and they certainly want to be the survivors if the situation gets dramatically worse. All of these are in some ways ex post rationalizations for why many of these institutions didn’t serve in the shock-absorber role that we would have expected them to take quickly after market distresses had begun. I think they are getting used to the new environment. They have long since forgotten the robust times and the robust profits of the past five years, and they are looking at their capital ratios and getting some comfort from what their people are telling them. But when we look at these financial institutions, we are probably more prudent to judge them by their actions rather than what these capital ratios would suggest. Their actions are still not ebullient. Their actions are still not overly opportunistic. I said before that liquidity is confidence. Well, in times like this, I might be wrong. Liquidity is oxygen. They can’t live without it, and no price can compensate them during this liquidity replenishment period for a lack of oxygen. I think O2 levels might now finally be returning, so that they can enter phase 2 of this process, when they are able and willing to part with their cash. Phase 2, thus, is about finding new market-clearing valuations, being able to discriminate among differentiated assets, and being able to put opportunistic capital to work. Admittedly, I’d say this valuation phase is less advanced than the liquidity phase, but the process of price discovery is slowly but surely working its way through these asset classes. High-yield bonds are one example. Chrysler priced high-yield bonds at 95. A couple of days later they were trading at 99. Other sorts of leveraged loans and high-yield financing have indicative prices in the mid-90s, but there are very big pipelines, as we have discussed before, that could take a while to clear. My best guess is that we won’t see those markets clearing until after the commercial banks announce their third-quarter results. So in mid-October, we might see a new estimate of that, but I will admit it’s very hard to say. The price-discovery process around subprime mortgages is less advanced, but even there we are seeing trading desks asking the executives on the top floor for balance sheet capital because they see great prices for which they just need the balance sheet. That those discussions have begun and are somewhat more advanced than when we last talked is an encouraging sign, but the process of adjustment to the new market realities will take time. Bill Dudley spoke in great detail about other important developments—discrimination among asset-backed commercial paper programs being made depending on sponsor and collateral, financial institutions and the counterparty risk they represent being differentiated, and commercial banks more so today than even some weeks ago willing to invest in jumbo prime mortgages in the expectation that the securitization markets will reopen. It strikes me that we are substantially advanced in the liquidity phase and only somewhat advanced in valuation. That would take us to the third phase. The third phase is about the cost of capital. We’ll talk about it more in the next round, and optimally I would say that the liquidity replenishment and valuation necessary would be far more advanced before monetary policy actions would have to be put into place. But I think we bought ourselves some time, and this strikes me as the right moment for us to take monetary policy actions. The good news is that we have seen some tentative progress in those first two phases, and we’ll talk more about our actions to come. Let me just highlight a few more issues. What are the key challenges? What are the things to which we might want to look to see if the situation continues to improve modestly or reverses itself? I would look at a few things. First, as you look at some of these SIV structures and conduits, particularly outside the mortgage assets, to this point they are largely suffering from a liquidity crisis rather than a credit crisis. That could change if the real economy falters, and that is an additional reason for us to take monetary action today. Second, many still believe that it’s not safe to come out and play, and they are continuing to hunker down. I would have thought, right when this started brewing in the middle of August, that by now folks would have been more comfortable, but the median person is still more scared than I would have expected. Third, leverage is harder to come by. Even on investments for which the credit work seems pretty easy, like high yield, it is hard to get leverage alongside these equity placements, making folks less interested to jump back in a big way because the returns aren’t there. Another indicator I’d look to is the medium-term note market, which we haven’t discussed a great deal but is really a sibling of some of these other commercial paper markets. They don’t appear to be too distressed at this time, but as mentioned earlier, I would also look at the mortgage-backed securities around commercial real estate. The lack of term funding, which we’ll discuss when we discuss the auction term facility, has put financial market improvements at some risk. Even though we have been seeing real improvements in recent trading days, the prospect that these institutions are rolling over their funding and looking for funding every day strikes me as significantly increasing the tail risk and suggests that we need to take action. Finally, on the real economy, having spoken to a range of credit card companies yesterday to try to get their sense of three things, I can give I think generally positive reports. First, as a measure of retail sales, the view of institutions that cater to the high end, the middle end, and the low end is that retail sales in August and through the first two weeks of September were fine, not great. But when I asked them the question “If you weren’t aware of what was happening in the financial markets and you were just to review these data, does it look as though something happened? Does it look as though there was some exogenous shock?” to a person the answer was, “No, it looks as though things are coming along okay.” I think that’s reasonably encouraging. Second, I asked them about the credit quality of consumer behavior, whether delinquencies for individual credit card behavior at the low, medium, or high end had changed, and the answer was that they really hadn’t changed much. They can look and find yellow or red flags, but they said generally that consumer credit quality also looks fine. I’d say the biggest caution from three or four of these credit card companies came on the corporate side. Corporations wanting to be more protective, being more risk averse during this period, seemed to have cut back on allowable expenses for things like airlines, hotels, conferences, and the like, so their corporate credit volume had slowed up somewhat—but, again, nothing overly dramatic. Last, I would just share the uncertainty and hesitation that has probably crept its way back into boardrooms generally as many of these companies outside the financial sector are trying to figure out what the crystal ball looks like for the real economy. That hesitation is not useful, and as I said at the outset, I think the best case is that we give up a couple of tenths of GDP. Thank you, Mr. Chairman." CHRG-111hhrg48674--215 Mr. Bernanke," Sir, as I have indicated, people sometimes argue that once interest rates get to zero that the central bank can't do anything else. Well, we have found some other ways to try to ease financial conditions, and I have talked about three general areas: One is lending to banks, financial institutions, increase their liquidity; the second is to buy securities, including mortgage-backed securities, which lowers mortgage rates and strengthens that market; and then the third is to use various tools to try to address specific credit markets like the commercial paper market and the asset-backed securities market. I think we are going to have to explore what the alternatives are and see which markets could use assistance and whether we have tools available between us, the Treasury, and other agencies to address those problems, so I really can't tell you now. But our most immediate plans, as discussed this morning, would be to expand the TALF to include other types of asset-backed securities like commercial, mortgage-backed securities. " FOMC20070628meeting--134 132,MR. WARSH.," Thank you, Mr. Chairman. Regarding overall economic growth, my own macroeconomic views are not inconsistent with the central tendency of the projections that were pulled together for this meeting. I think the staff and the participants around the table deserve significant credit for being stubborn about the moderate-growth hypothesis while markets have been on all sides of it. The markets appear ready to look through the second-quarter GDP growth number, which appears to be a bit above trend. I’d say that we have gotten some credit from the markets for being stubborn and stubbornly right on our economic forecast, but they certainly haven’t given us their proxy, and I would not expect them to do so. They happen to share our views for now is what I would say, and I wouldn’t expect that situation to remain over the forecast period. Again, neither should our intention be to somehow get these curves to match over the coming several quarters. On the inflation picture, though it has improved a bit—and I am trying not to disregard very good news—I must say that it strikes me as thoroughly unconvincing. To me, inflation, in our old statement language, remains the predominant risk. I am less certain that core will continue the recent trend. I do believe that headline inflation may be telling us something in terms of secular trends around energy and food that we can’t dismiss, and the warnings from some of the other signals that we would see as rough proxies for inflation are still very real. Regarding what the financial conditions are telling us about growth, it strikes me that, from all the data we have received between our last meeting and this, financial conditions might be as different as any other sets of data that we received. My view is that financial conditions are still supportive of growth, but somewhat less so. It is hard to determine at this point how much, but let me take a stab at doing just that. Since we last met, as Bill said at the outset, we witnessed ten-year Treasury yields increase on the order of between 30 and 50 basis points. I am not uncomfortable with that incremental tightening of policy in the financial markets, but we have to be careful of what we wish for. I think the explanation from our staff here in Washington and Bill and the staff in New York is right, which is that markets have not come to a rosier view of the future. All they have really done is to take out the downside risk that came out of the first quarter. As the data came in a bit above expectations, that insurance bet that they had—that we were wrong and would have to cut rates—really lost credibility. I think their central view of the economy now is not one that roars back but one that is quite consistent with the moderate growth story. The financial markets have indeed tightened policy somewhat. Even since the time that the Bluebook was produced last week, spreads have apparently widened in addition to the risk-free rate being somewhat higher. But this is all happening in very real time, and my report a week ago would have sounded quite a bit different from the one today. We have witnessed increased term premiums and greater volatility across many, if not all, financial markets. Both the MOVE index for Treasuries and the VIX for equities are high relative to the averages of the past year but are still fairly reasonable over a somewhat broader period—say, the last five years. Term premiums I would characterize as returning to more-normal levels—but, again, not out of line with history. We have seen in the Bluebook that credit default swap (CDS) spreads and other spreads had widened, but that yet hadn’t happened in the high-yield market, where apparently there was some narrowing of spreads. That has changed rather dramatically in the past four or five trading days. I’m sure Vince will share more information on this tomorrow. But the CDS spreads really occurred first; then there was a lag to high-yield spreads. In the past two weeks, investment-grade CDS spreads have widened about 7 basis points, high-yield CDS spreads have widened about 20; a relatively new index of loan CDS spreads has widened about 65 basis points; and most, if not all, structured products, even assets wholly unrelated to the housing markets, have been undergoing some spread widening. As I mentioned, high-yield spreads appear to be catching up to CDS spreads, and with the incredible flow of deals in the market, I would guess that the trend continues. We’re seeing higher financing costs and slightly tougher terms for LBOs; the latter is a remarkable new development. M&A prices, probably for the first time since I have been sitting at this table, appear in the markets to be coming off their levels. So when auctions for properties of publicly traded companies are occurring, the price between initial indications of interest and final bids for the first time may actually be coming down. Why is that? Interest coverage ratios cannot go much below where they have been in this cycle. It is 1.2 or 1.3 times, but again, as the risk-free rate has gone up, as spreads have widened, you can buy just a little less debt for that. As a result, equity players that do not want to compromise their equity returns can pay a little less for these properties. Whether this phenomenon is very short term, like the phenomena we heard about after the tumult in late February and we returned to in the heady days of the capital markets, I do not know. This may just be a temporary preference shift toward quality and toward higher volatility and a return to the “glory” days, but I tend to think not. It is a tough call, and I reserve the right to change my judgment. I think that the new supply that’s coming into the markets, most of which needs to get priced before the markets slow down in August, will test the markets’ resilience, will test prices, and will test terms. Up to this point we have seen very little reduction in liquidity, but we are seeing a few deals being pulled from the market. Pricing power appears to be coming back to investors, and negotiations around prices and terms seem significantly more balanced than they have been in a very long time. Some of the instruments that we have sort of giggled about around this table—the pay-in-kind notes with optional cash payment— seem to have lost some traction in the market in the past week. I do not know whether they will return, but I take this new discipline in the markets as an encouraging sign. So what is going to be the resulting effect on prices, terms, and conditions? That is something we will have to judge; but financial conditions, as I said at the outset, are perhaps somewhat more restrictive than they were, but they should still be quite supportive of growth. At the outset I talked about the risk on the inflation front. Let me build on a couple of remarks that Vice Chairman Geithner made about risks now in the financial markets. If the problems that we have seen around structured products that have come out of the Bear Stearns scenario are really about the subprime markets and subprime collateral and housing, there’s not much to worry about. But to the extent that the story is really about structured products—products that have not been significantly stress-tested—then there is a risk that the financial markets may react and overreact. That scenario will bring up reputational risk issues. Even financial intermediaries that are in the agency business are relearning the lesson that agency business is not free—that there are, in fact, dissynergies from being in the principal investment business and the agency business under one marketing name. We are learning a lot about what the markets believe about the transparency of prices, particularly in times of financial distress. Of course, in times of distress, the correlations among all these assets do not look as they do in models, and that is something that will play itself out. I think that Tim rightly referenced the role of gatekeepers in the credit agencies, who I suspect are going to have a fairly rude awakening over the next six to nine months. As I also said, regarding this financial innovation, which on net is of great benefit to us, we will really see some of the products tested. Along with the products, moreover, the market participants’ behavior will be tested, perhaps in this upcoming period, as never before. So the financial markets are a friend on this, but there is greater risk than there was when we last met. Thank you, Mr. Chairman." CHRG-110shrg50409--58 Chairman Dodd," Thank you very much. Senator Bunning. Senator Bunning. Thank you, Mr. Chairman. Since I did not give an opening statement, I want to give an opening statement in all deference to Chairman Bernanke. I know we have a lot of ground to cover today, but I want to say a few things on the topic of this hearing and the next. First, on monetary policy, I am deeply concerned about what the Fed has done in the last year and in the last decade: Chairman Greenspan's easy money in the late 1990s and then followed the tech bust, inflated the housing bubble, and created the mess we are in today. Chairman Bernanke's easy money in the last year has undermined the dollar and sent oil prices to a new high every day, and an almost doubling since the rate cuts started. Inflation is here and hurting us and the average American, and it was brought out very clearly by the Senator from Pennsylvania. Second, the Fed is asking for more power, but the Fed has proven they cannot be trusted with the power they have. They get it wrong, do not use it, or stretch it farther than it was ever supposed to go in the first place. As I said a moment ago, their monetary policy is the leading cause of the mess we are in. As regulators, it took until yesterday to use the power we gave them in 1994 to regulate all mortgage lenders. Then they stretched their authority by buying $29 billion worth of Bear Stearns assets so JPMorgan could buy Bear Stearns at a deep discount. Now the Fed wants to be a systemic risk regulator, but the Fed is a systemic risk. Giving the Fed more power is like giving a neighborhood kid who broke a window playing baseball in the street a bigger bat and thinking that will fix the problem. I am not going to go along with that, and I will use every power in my arsenal as a Senator to stop any new powers going to the Fed. Instead, we should give them less to do so they can get it right, either by taking their monetary responsibility away or by requiring them to focus only on inflation. Third, and finally, since I expect we will try to get it right to question the next hearing, let me say a few words about the GSE bailout plan. When I picked up my newspaper yesterday, I thought I woke up in France. But, no, it turned out it was socialism here in the United States of America, and very well, going well. The Treasury Secretary is now asking for a blank check to buy as much Fannie and Freddie debt or equity as he wants. The Fed purchase of Bear Stearns assets was amateur socialism compared to this. And for this unprecedented intervention in our free markets, what assurance do we get that it will not happen again? Absolutely none. We are in the process of passing a strong regulator for the GSEs, and that is important. But it allows them to continue in the current form. If they really do fail, we should let them go back to what they were doing before? I doubt it. I close with this question, Mr. Chairman. Given what the Fed and Treasury did with Bear Stearns, and given what we are talking about here today, I have to wonder what the next Government intervention into the private enterprise will be. More importantly, where does it all stop? Thank you. " FOMC20071031meeting--190 188,MR. STERN.," Thank you, Mr. Chairman. As I commented yesterday, I think there’s a respectable chance that by the middle of next year or so the economy will be growing again at a reasonable rate, and because of the lags between our actions and their effects on the economy, there is not a lot we can do about what happens in the intervening period anyway. It seems to me that those kinds of considerations are at the heart of something like the case for alternative B. Leave well enough alone. There has been some progress in the financial markets, and that step—that is, taking no action today—would in my view be consistent with long-term achievement of the dual mandate. But I am an economist. So on the other hand, financial conditions are still unsettled, and it’s difficult to know the degree of restraint that changes in the cost and availability of credit relative to conditions back in June will have. It might well be prudent—this is the case for alternative A—to take additional steps today to err on the side perhaps of doing too much since it seems to me that it is inevitable that a lot of uncertainty is associated with the economic outlook. Weighing those two cases, I come down in favor of alternative A but with misgivings, and let me share those misgivings. I think that there is some chance that financial conditions will remain unsettled for several more months at a minimum, and so in some sense that part of the environment may not change very much in the next few months. You pointed out yesterday, Mr. Chairman, that an important ingredient in the Greenbook forecast is a cessation of the drag from housing roughly around the middle of next year. Let’s suppose that, in fact, turns out to be precisely correct. That’s all well and good, but we won’t recognize that it has actually happened with any degree of confidence, given the flow of data, probably before August or September at the earliest even if the anecdotes get a little more positive. So I can see a situation in which the circumstances we confront over the next series of meetings don’t look very different from the circumstances we’re confronting today. I think we have to be very careful of not letting good intentions on a decision-by-decision basis get into what turns out to be a policy error as a consequence of an accumulation of those kinds of decisions. It’s the time-inconsistency problem obviously, and that gives me some pause even though I come out at the moment in favor of alternative A. As far as directive language, for a variety of reasons that others have expressed, I am uncomfortable about characterizing the balance of risks the way they are characterized in alternative A. I think that a way we might consider going, although it’s not the most elegant solution, is perhaps just to drop that first sentence under alternative A. We succeeded at the last meeting in making it clear that we were data dependent, and you had significant swings in probabilities of funds rate reductions over the intermeeting period. I think this would leave us in that circumstance. As President Pianalto pointed out, we have the minutes coming out, and we may well have the communications package, including the narrative, coming out with it. Obviously there’s a three- week lag, but it seems to me that that would be an effective way of communicating what we want to communicate and perhaps of putting the attention on that communications package, which I think would turn out to be valuable." FOMC20070321meeting--190 188,MR. STERN.," No, I don’t want to speak strongly in favor of retaining the reference to financial conditions. But I do think, along the lines that Governor Kohn expressed, that we need to provide some basis for our expecting moderate growth to continue. Otherwise that sentence does come across as an act of faith and doesn’t seem to me to be particularly compelling. I don’t see that mentioning financial conditions does us any damage, and it’s actually valuable in providing some rational for that judgment—and that is the judgment." CHRG-111hhrg51592--21 Mr. Sherman," Thank you. Most entities will eventually work in their own interest. Patriotic speeches and appeals to patriotism only go so far. This is an industry that gave AAA to Alt-A, and is as responsible for where we are now as anyone else playing on Wall Street. Two things create this self-interest. The industry is picked by the issuer, and believes it cannot be sued by the investor. One of those two needs to change. Now, the public accounting forms are picked by the issuer, but they're subject to lawsuits. The auditing firm that audited WorldCom doesn't exist anymore. And in the old days, they were general partnerships, so 100 percent of all the partners' personal equity would be gone. That provided even more incentive to provide for a good audit. If we're not going to force the firms to renounce any First Amendment arguments as a condition for doing business on Wall Street, then we need to end the system where they're picked by the issuer. Otherwise, there will be a race to satisfy the issuer by providing the highest ratings to the issuer and we'll get AAA on Alt-A. It won't be mortgages next time, it'll be some other kind of bond. And we'll be back here in another economic crisis. We don't allow the pitchers to pick the umpires. If we did, the strike zone would go from the ground to well above the head. We cannot allow the issuers to pick the bond-rating agencies or the credit rating agencies unless we're going to then bring in trial lawyers with instant replay cameras. That would assure that the umpires wouldn't cater to the pitchers, if they were subject to lawsuits and instant replay. But one of those two things needs to change, or the fear of God will prevent us from being in this situation with mortgages for a few years, but we'll be back here in another semi-depression with some other kind of credit instrument. I yield back. " CHRG-110shrg50369--87 Mr. Bernanke," Yes, Senator. First of all, as you know, we cut rates by about 100 basis points during the fall, reacting to the drag on the economy arising from the housing markets and from the credit market situation. Around the turn of the year and early in January, the data took a significant turn for the worse, and it seemed clear that the economy was slowing, and slowing more than anticipated, and that the credit market condition situation was continuing. On January 9, I called a meeting of the Federal Open Market Committee by video conference to discuss the situation. It was agreed by the committee that some substantial additional cuts in the Federal funds rate were likely to be necessary. The thought at the time of that meeting was that it might be worth waiting until the regular meeting at the end of the month where we could have a fuller discussion and see the revised forecast and so on, taking into account the possibility that we could also move intermeeting, if necessary. On January 10, I gave a speech where I informed the public that I thought that substantive additional action might well be necessary, thereby signaling that the conditions had changed and that further rate cuts were likely to happen. In the days that followed that speech, the tone of the data deteriorated considerably further, which made me think that the outlook was, in fact, much weaker and the risks were greater. That was showing up both in the data and in the financial markets. We were seeing sharp declines in equity prices. We were seeing widening of spreads. And we were also seeing, again, adverse data. On January 21, I became concerned that the continued deterioration of financial markets was signaling a loss of confidence in the economy, and I felt the Fed, instead of waiting until the meeting, really needed to get ahead of that and take action. So I called an FOMC conference call, and we agreed at that point to cut the Federal funds rate target by 75 basis points. There was an understanding at that meeting that further additional action was very likely to be needed, but we felt that we could wait another 10 days until the regular meeting to determine exactly how much additional action. At the meeting at the end of January, we had a full review, discussion, forecast round and so on and determined that an additional 50 points was justified. Looking back, as the data have evolved, I think that the 125 basis points was appropriate for the change in the tone of the economy, and I think it was the right thing to do. Senator Bunning. Are the days of constant and gradual Fed rate changes over? In other words, are large and intermeeting rate changes going to become a regular part of the Fed toolbox now? " CHRG-110hhrg45625--78 Mr. Bernanke," I would just make the point, as the Secretary did, that historically these situations have dealt with institutions that have already failed or primarily close to failing. In that case you take the assets off the balance sheet, or you just put capital in them, and then you take all the ownership and restore them to functioning. In this case, we have two differences. One is that the banking system for the most part is still an ongoing concern. It is not extending credit to the extent we would like, but it is not failing. If there are failing institutions, we can address those individually. But more broadly, the problem is that with the complexity of these securities and the difficulty of valuation, nobody knows what the banks are worth and therefore, it is very difficult for private capital to come in to create more balance sheet capacity so banks can make loans. So it is a rather different situation from past episodes. That being said there is flexibility in this, and I think it is the intention of the Secretary, and certainly I would advise him--under the oversight of the oversight committee or whatever is set up to watch over this process--to be flexible and respond to conditions as they change. If this process is not working effectively, there are other ways to use this money that will again purchase assets or purchase capital and support the banking system. " CHRG-110shrg50416--152 Chairman Dodd," Who fills the vacuum? Where would it be today without this right now? You just said it. I would like to repeat that. What would happen if this did not--what condition would we be in today in the absence of that? "