WASHINGTON (Reuters) - Below are highlights of the question and answer session of Federal Reserve Chairman Ben Bernanke’s testimony on the U.S. economy to the congressional Joint Economic Committee on Wednesday.
“I am not prepared to answer that question now.”
BERNANKE ON POLICY‘S IMPACT ON HIGH MARKET LEVELS:
Currently high market levels “may be because the market thinks that monetary policy is creating more profits and growth.”
”If you can get a mortgage ... the payments are low and affordability is high.
”I agree with you ... that mortgage lending is still too tight. There’s a number of reasons for that: excessive conservatism on the part of the banks, some uncertainty about regulation - there’s still work to be done to clarify the securitization rules, for example, the need for GSE reform and other things; fear of put backs that the banks still have.
“I think over time, particularly as house prices go up a bit, that mortgage lending will become a little bit more accessible to a broader range of people, but right now it’s still relatively tight.”
“To this point our sense is that major asset prices like stock prices and corporate bond prices are not inconsistent with the fundamentals.”
“In thinking about risk to financial stability you also have to look at things like leverage, credit growth and other indicators that suggest not only is there some mispricing going on but that mispricing has the possibility of greatly damaging the broader financial system, and we’re not seeing that at this point. So at this point ... our sense is that those issues are still relatively modest, but they require very close attention and we will continue to do that.”
BERNANKE ON BANKS THAT ARE “TOO BIG TO FAIL”:
”I think that many of the suggestions to break them up have either involved relatively small changes or a form of Glass Steagall. I think Glass Steagall is not the solution because as we saw in the crisis, investment banks (and) commercial banks separately got into serious trouble.
”So I think that we are doing a lot of things which I don’t have time to go through - through Dodd Frank, through Basel III, through orderly liquidation authority and other authorities - to move in the right direction toward addressing too-big-to-fail.
“And as I have said, if we don’t feel after some additional work here that we have addressed that problem, I would certainly be supportive of additional steps. I think the best direction is probably requiring the largest firms to hold more capital proportionally.”
“We have not updated the exit strategy we put out two years ago, which included sales of MBS, and as I said, we have not done that yet and so the committee has not officially communicated our plans there, but I will say that we have done a lot of work on this, and I personally believe that we could exit without selling any MBS, because most of them will run off in a reasonable period, but decision has not been taken, and we will certainly let people know it when it is taken.”
“I would say that (concern) has increased a bit. We have greatly increased our monitoring and attention to these issues ... to ascertain both whether there is a sign of frothiness or bubbles and moreover what exposure there is in the sense of high leverage or other kinds of vulnerabilities if a frothy asset price were to reverse, what implications would that have for the broader economy.”
“So we’re paying close attention to that.”
BERNANKE ON JAPAN‘S POLICIES:
“We are supportive of Japan’s policies and I would make two observations. One is that under their current plan, the Bank of Japan’s balance sheet as a share of GDP will be three times larger than the Fed‘s, just to give you a sense of proportion. And secondly, though, that the actions they have taken seem to be having fairly dramatic effects, both on financial markets but also on - so far as we can tell - on some aspects of the real economy. And I take that as a bit more evidence that these policies do have effects on the economy.”
“I would point out that even though we have a dual mandate, that inflation if anything is a little bit too low. Inflation has been very low; the dollar has been strong. We have not in any way failed on that responsibility.”
”The slowness of the recovery can be explained by a number of important headwinds, including the after-effects of the financial crisis, developments in Europe, the problems with the housing market and very importantly the fact that fiscal policy for the last few years has actually been a significant headwind to recovery rather than a supporting tailwind.
”And I would submit that without monetary policy’s aggressive actions, that this economy’s recovery would be much weaker than it has been. ... I fully realize the importance of budgetary responsibility, but I would argue that it’s not responsible to focus all of the restraint on the very near term, and do nothing about the long term, which is where most of the problems exist.
”The program relates the flow of asset purchases to the economic outlook. As the economic outlook - and particularly the outlook for the labor market - improves in a real and sustainable way, the committee will gradually reduce the flow of purchases.
“I want to be very clear that a step to reduce the flow of purchases would not be an automatic, mechanistic process of ending the program. Rather, any change in the flow of purchases would depend on the incoming data and our assessment of how the labor market and inflation are evolving.”
“If we see continued improvement and we have confidence that that’s going to be sustained then we could in the next few meetings ... take a step down in our pace of purchases. If we do that it would not mean that we are automatically aiming towards a complete wind down. Rather we would be looking beyond that to see how the economy evolves and we could either raise or lower our pace of purchases going forward.”
“I don’t know” was his answer when asked if purchases would be lowered before the Labor Day holiday, which is September 2.