Bernanke Q&A at House hearing on Fed policy

WASHINGTON (Reuters) - The following are highlights from the question and answer session at the U.S. House of Representatives Financial Services Committee hearing on Tuesday with Federal Reserve Chairman Ben Bernanke.

Bernanke was delivering the central bank's semiannual report on monetary policy and the economy.

BERNANKE ON TARP MONEY PROVIDED TO BANKS:

"Of the money put in as capital into banks, particularly through the Capital Purchase Program, which is money given out to healthy banks, I would say that virtually all of that money will come back (to the U.S. Treasury). For troubled firms, like AIG, it depends on how markets evolve and how the firm does going forward."

BERNANKE ON ADEQUACY OF LEVERAGE RATIOS FOR FINANCIAL FIRMS:

"That's something we should look at. I think there's room here for the regulators -- the Treasury and others and Congress -- to think about our capital regulation plan and see what changes might be made. But I wouldn't want to give an offhand comment on that -- of course, we already have a leverage ratio but the question is whether to raise it or change its format in some way."

BERNANKE ON ASSET BUBBLES:

Asked whether there was a role for the Fed or other regulators to prevent another real estate bubble from developing, Bernanke said, "I think that could be addressed under the systemic regulation rubrik that we've been discussing with the council, with the Fed overseeing large financial institutions. That, when you have an asset whose price is rising quickly, you could require greater capital against it, for example, or greater downpayments. So, even if you don't know if there's a bubble or not that still might be a prudent thing to do. So, I do think that looking at asset price fluctuations in a supervisory context could be very helpful."

BERNANKE ON STIMULUS PROGRAM'S IMPACT ON UNEMPLOYMENT:

"It's difficult to know (where we would be without the stimulus program). Clearly the forecast that was made in January of this year was too optimistic ... Some sense of the uncertainty is given by the (Congressional Budget Office's) estimate which has at the end of 2010 the impact of the program being anywhere between six-tenths of 1 percent of unemployment to 1.9 percentage points of unemployment. It's likely that it will reduce unemployment but the scale is very hard to know."

BERNANKE ON WHAT FED WILL MONITOR TO TIME EXIT:

"We will be looking to see more evidence of a sustained recovery that will begin to close the output gap, begin to improve labor markets, and we will be looking for signs of inflation or inflation expectations that would cause us to respond as well."

BERNANKE ON MORE TREASURY DEBT PURCHASES:

Asked whether the Fed would continue purchases of Treasury debt beyond the end of September, Bernanke said, "That's really a decision that the FOMC, the Federal Open Market Committee, needs to make because it has implications for monetary policy in general. But we will be talking about that as we go forward."

BERNANKE ON NEED TO GET BUDGET DEFICIT UNDER CONTROL:

"Well, I don't think there's much that can be done about this year's deficit and probably not too much about next year's deficit. But the Congress needs to develop a broad plan which encompasses all the spending plans, the taxation plans, that shows a moderation of the deficit over time to something sustainable, which I would guess would be something in the order of two or three percent of GDP."

BERNANKE ON WHETHER MORE FISCAL STIMULUS IS NEEDED:

"We'll have to see how the economy evolves, so I think it's premature to make any judgments about that."

BERNANKE ON CONSUMER SENTIMENT:

"The public has been responding to some signs, some glimmers, if you will, of improvement, so consumer sentiment, for example, has improved somewhat as the stock market has gone up and as the outlook has looked better and the jobs situation has at least stopped deteriorating quite as quickly as it was. But, you know, I want to be clear that we have a very long haul here, because even if the economy begins to turn up in terms of production, unemployment is going to stay high for quite a while, so it's not going to feel like a really strong economy."

BERNANKE ON FORECLOSURES TO PEAK THIS YEAR:

"The combination of unemployment and falling house prices -- a double trigger -- does create a very high rate of foreclosures. Our assessment of the foreclosures (rate) is that it's likely to peak in the second half of 2009, corresponding with the peak of the unemployment rate, and perhaps be somewhat less in 2010. But clearly we're going to have very high levels of foreclosures and the unemployment rate is a big reason for that."

BERNANKE ON STIMULUS SPENDING:

REP. FRANK: "It's good to know that you can unwind, but I think a premature unwinding would be a great mistake...Had we not passed the economic recovery plan in February of this year, would the economy be better or worse?"

BERNANKE: "Mr. Chairman, as you describe, we think that income has affected consumer sums and that the revenues to state and local authorities may have improved their situation somewhat, so in that respect there's been some positive impact, but I would withhold an overall judgment since we've only seen about a quarter or less of the money being disbursed. I think there is still some time to wait and see how significant the impact would be."

FRANK: "The expectation would be that that disbursement would have a positive effect..."

BERNANKE: "You would expect that higher income would tend to raise consumption."

BERNANKE ON NEED TO SETTLE THE TOO-BIG-TO-FAIL ISSUE:

"I think too big to fail is an enormous problem. If we don't do anything else, we need to solve that problem. This (a resolution regime) is very important in solving it because it would mean that creditors would take losses and if there are resolution costs, the presumption is that they would be paid by assessments on other financial companies."

HOUSE FINANCIAL SERVICES CHAIRMAN BARNEY FRANK ON NEED FOR FED TO FACE

INFLATION THREAT:

"It is an important question because when you are talking about inflation you are talking not just about a reality but about perception: if people think there's going to be inflation, then that's inflationary. It is very important that the chairman address -- as he has been doing in a very straightforward way -- these concerns. I am persuaded by the chairman and others that we are able, in an orderly way, to undo what we had to do so that there will not be that inflationary impact."