WASHINGTON (Reuters) - The following are highlights at the question and answer session of a House Financial Services Committee hearing on Wednesday with Federal Reserve Chairman Ben Bernanke testifying on the central bank's economic and monetary policy outlook.
BERNANKE ON GLOBAL ECONOMY HEART ATTACK
"In the fall of 2008, the world economy essentially had a heart attack and the firms started dropping employment, employees very quickly. There was a sharp contraction in global trade. A sharp contraction in economic activity.
"Through a variety of policies ... the economy stabilized in the second quarter and has been growing since then."
BERNANKE ON IMPACT OF REDUCING PURCHASES OF MORTGAGE-BACKED SECURITIES
"We're interested to see what the effect is going to be on mortgage rates. So far the evidence suggests it'll be a modest effect, which wouldn't have a big impact.
"If you're talking about interest rate risk for the GSEs, I do believe that they're mostly hedged by holding Treasuries and other securities. I don't know how much the modest increase in mortgage rates would affect their balance sheet. I don't think it would be catastrophic in any case.
"As you know, the arrangements under which Fannie and Freddie were put into conservatorship involve a gradual reduction over time, pretty slow, in their portfolios.
"I was asked earlier about what is the right long-term solution for Fannie and Freddie and that obviously needs to be worked out. But many possible outcomes would involve not having a substantial portfolio. So it would have to be a transition to that.
BERNANKE ON HOW QUICKLY CONGRESS SHOULD ACT ON THE GSE ISSUE
"The sooner you get some clarity about the ultimate objective, the better. Of course, you don't necessarily have to get there by the end of the year. It's going to take some time to make a transition."
BERNANKE SEES NO BUBBLES IN U.S. ECONOMY
"We're monitoring that very carefully. It's obviously very difficult to know if there's a bubble, particularly in the early stages, but our best assessment right now is that there's not any obvious bubble in the U.S. economy. If there was a bubble, then the response likely would depend on...what part of the economy it was. My view is in the longer term that, when possible, you want to address those kinds of systemic risk through regulation and supervision rather than through monetary policy."
BERNANKE ON DOLLAR RISK POSED BY DEFICITS
"One risk that I've described is that if there's a long-term loss of confidence in the long-term ability of the government to balance its affairs, that could raise interest rates today, which would have a drag effect on the economy. Another possibility, which I think is relatively unlikely, but it's certainly possible, is that if there's a loss of confidence in the government's ability to achieve fiscal stability...the dollar could decline, which would have a potential inflationary impact on the economy."
BERNANKE ON WHETHER U.S. CAN GROW ITS WAY OUT OF DEBT
"I don't think so. Not in the medium term."
BERNANKE ON EFFECT OF MARGINAL TAX INCREASES ON GROWTH
"I think most people would agree that a big increase in marginal tax rates is going to be counterproductive from the growth perspective."
BERNANKE ON HOW MUCH FED MIGHT HAVE TO PAY IN INTEREST ON BANK RESERVES
"We think that the interest rate we pay on reserves will bring along with it the federal funds rate within tens of basis points, not a tremendous difference."
BERNANKE ON THE VOLCKER RULE
"We all agree that we don't want banks to take excessive risks, when they have a safety net (in) the government. So the question is how do you control those risks. The Volcker rule might be appropriate. You have to be careful that you don't inadvertently, for example, prevent good hedging which actually reduce risk or that you don't prevent market-making which is good for liquidity. One possibility, if you were to go in this direction, is to give some discretion to supervisors to decide whether a set of activities is so risky or complex that the firm doesn't have risk capacity deal with it and then give the supervisor the authority to ban that activity. So there might be ways to do it, using supervisors."
BERNANKE ON IMF SUGGESTION INFLATION TARGETS SHOULD BE HIGHER
"I understand the argument and it's not without its appeal but it carries certain risks, obviously. If the Federal Reserve says we're going to raise inflation to 4 percent how do we know that later it won't go to 5 or 6 or 7?"
BERNANKE ON FUTURE OF FANNIE MAE, FREDDIE MAC
"The Federal Reserve, I think, was one of the more vocal commentators on Fannie and Freddie for many years. We were very concerned about their stability and whether they had enough capital to support those large portfolios they had. Turned out they didn't and we're paying the cost for that right now.
"We would not support -- let me be careful -- I think we would be very cautious about supporting a return to the existing structure where you have this potential conflict between private shareholders and the public objectives. I think there are alternatives... which would be a more stable long-term solution, including either a privatization approach with government guarantees or a public utility approach."
BERNANKE ON DESIRABILITY OF A WHITE HOUSE, CONGRESS PLAN TO CUT DEFICIT
"I think it would be helpful for the current situation if the Congress and the administration ... could provide a plan which shows how the deficit will fall to this two-and-a-half, three percent level, at least, over the next 10 years."
"I don't know exactly which programs, what taxes, what changes you would make. That's certainly up to Congress. But a concerted effort to do that would be, I think even a strong effort, would probably be good for confidence."
"It would increase confidence, lower expected tax rates, lower real interest rates."
BERNANKE ON MBS PURCHASE PROGRAM
"It is true that we will stop buying new mortgage-backed securities at the end of this quarter but we will continue to hold 1-and-1/4 trillion dollars in agency mortgage-backed securities and taking that off the market in itself will keep mortgage rates below what they otherwise would be. So, we believe that there will still be stimulus coming from our holdings of those securities as well as our low interest rate. So, we think the economy, as opposed to the money markets for example, still requires support for recovery."
BERNANKE ON GREECE, EUROPEAN UNION
"There are very serious challenges there involving not only fiscal issues but competitiveness issues because of the single exchange rate. We have talked to the European Union leaders. They are obviously very focused on getting this problem solved. They are working closely with Greece, which has proposed substantial fiscal consolidation. So we are keeping an eye on it but the Europeans, of course, it's most relevant to them. They're most exposed to those problems and they're very focused on trying to get them under control."
BERNANKE ON COMMERCIAL REAL ESTATE
"It remains probably the biggest credit issue that we still have. Yesterday (FDIC) Chairman (Sheila) Bair talked about a big increase in problem banks. A great number of those banks are in trouble because of their commercial real estate positions, both because the fundamentals -- shopping center vacancies, things of that sort -- have been worsening and because of problems in financing. There are a lot of troubled commercial real estate properties and they are causing a lot of problems for banks, particularly small- to medium-sized banks and we're watching them very carefully."
BERNANKE ON THE POSSIBILITY OF A U.S. SOVEREIGN DEBT RATING DOWNGRADE
"Not unless Congress decides not to pay, which I don't anticipate. No, I don't anticipate any such problem. I don't anticipate any downgrade. Of course, there are real long-term budget problems that need to be addressed."
BERNANKE ON U.S. STRUCTURAL BUDGET DEFICIT
"I think ... under current projections we have a deficit and a debt that will continue to grow, interest rate costs that will continue to grow. So, I do think it's very important that we begin to look at the path, the trajectory of the deficit as it goes forward. And there could be a bonus there, to the extent that we can achieve credible plans to reduce medium- to long-term deficits, we will have more flexibility in the short term if we want to take other actions...
"It's not necessarily just a long-term issue because it is possible that bond markets will become worried about sustainability and we may find ourselves facing higher interest rates even today."