WASHINGTON, Feb 26 Below are highlights from the question and
answer session of a Senate Banking Committee hearing on Tuesday with Federal
Reserve Chairman Ben Bernanke testifying on monetary policy and the U.S.
BERNANKE ON TOO-BIG-TO-FAIL BANKS, EXPECTATIONS FOR BAILOUT:
"The subsidy is coming because of market expectations that the government
would bail out these firms if they fail. Those expectations are incorrect."
"That's the expectations of markets but that doesn't mean that we have to do
"Over time you'll see increasing market expectations that these institutions
can fail. I would make another prediction - and predictions are always dangerous
- that the benefits of being large are going to decline over time."
BERNANKE ON EQUITY BUBBLE AND MONETARY POLICY:
"I don't see much evidence of an equity bubble...Equity holders are still
being somewhat risk averse in their behavior. But again, we have a two-part
plan. First is to monitor these different asset markets. The second is to try to
understand what would be the implications if we are wrong. What would happen,
who would be hurt, what would happen to financial institutions, would there be
broad knock-on effects if in fact some particular asset turned out to be in a
bubble. So we are trying to do both of those things."
"We do not rule out that if these problems become sufficiently worrisome,
that they would be taken into account in our monetary policy."
BERNANKE ON 'TOO BIG TO JAIL':
"No individual or institution should be exempt from paying for crimes that
they have committed. We also agree (too big to fail) is something that needs to
be addressed. Getting rid of too big to fail is an important objective and we
are working in that direction."
BERNANKE ON 'MUTUALLy BENEFICIAL' STIMULUS:
"We don't view monetary policy aimed at domestic goals as being a currency
war. It's not like putting tariffs on your imports so that you can
beggar-thy-neighbor to the benefit of your domestic industry. That's not what
we're doing. If all the major economies that need support provide stimulus and
extra aggregate demand, that's mutually beneficial. Because for example China
depends on the strength of Europe and the U.S. as their export market."
"This is a positive sum game, not a zero sum game, that we have here."
BERNANKE ON WEAK FOURTH-QUARTER GDP:
"I think the fourth quarter was really a combination of transitory factors.
I don't think it really signaled any real change in the pace of growth of the
"On the other hand, the pace of growth of the economy remains around 2
percent, which is positive, but it's not as strong as we would like."
BERNANKE ON CREDIT MARKETS AND LOW RATES:
"Credit markets are more open today, banks are lending more today. And so in
some sense, the low interest rates can pass through more easily today than they
could have a couple of years ago."
BERNANKE ON UNWINDING BALANCE SHEET:
"We don't anticipate having to do that (liquiditate a big portion of the
"We could exit without ever selling, by letting it run off and we could
tighten policy by raising (the) interest rates that we pay on reserves. That
would be one strategy, for example. At any case, we have said we will sell
slowly with lots of notice and we will, of course, be offering our forward
guidance about rates so that there will not be a shift in rate expectations on
the part of the market."
"There is no risk-free approach to this situation. The risk of not doing
anything is severe as well. So, we are trying to balance these things as best we
BERNANKE ON BEING A 'DOVE'
"You called me a dove. Well maybe in some respects I am, but on the other
hand my inflation record is the best of any Federal Reserve chairman in the
post-war period. Or at least one of the best, about 2 percent average
BERNANKE ON PAYING INTEREST ON EXCESS RESERVES DURING EXIT:
"We'll be paying market rates. We'll be paying exactly what they could be
getting in the repo market, in the commercial paper market, anywhere else.
There's no subsidy involved."
BERNANKE ON ITALIAN DEBT:
"The market is reacting first and foremost to uncertainty. It doesn't know
which way the Italian government will go and how those policies will effected.
I'm not an expert in Italian politics, but I don't think that any of the
candidates have outright rejected either staying in the euro or maintaining the
policies that are being required of Italy in order to continue to be in the
euro zone But again there is a lot of uncertainty there, and see what happens.
Italy is unusual in that its currency deficits are not very large but it has a
very large outstanding debt, and so there's a lot of Italian debt held around
"Our assessments going back of, say, our banking exposure to Italian and
Spanish debt is that it's moderate, that it would be meaningful, but that it
would not in itself - a writedown for example, which again I am not forecasting
in any way - would not inflict serious damage on our financial institutions."
BERNANKE ON CURRENCY WARS:
"We are not engaged in a currency war, we are not targeting our currency.
The G7 put out a statement which is very clear that it's entirely appropriate
for countries to use monetary policy to address their domestic objectives, in
our case employment and price stability. Our position is that our expansionary
monetary policies, which are being replicated in other industrial countries, are
increasing demand globally and helping not only our businesses, but also
businesses in other countries that export to us. So its not a beggar thy
BERNANKE ON BASEL 3:
"We are planning to have a final rule out on Basel 3, I can't give you the
exact date, but somewhere in the middle of this year. We aim to be getting the
implementation of Basel 3 during 2013...As far as we can tell through our stress
tests and other measures, virtually all of our banks are already well on track
to meet the Basle 3 requirements. So it's not a question of banks not being
adequately capitalized. They already either at, or about to reach, the Basel 3
BERNANKE ON SEQUESTRATION IMPACT:
"The six-tenths on GDP growth in 2013 is a CBO number, and we get very
similar results to that. I think that's a reasonable estimate."
"In terms of the impact, the sequestration takes place over time, furloughs
take place over time, spending cuts take place over time, so I wouldn't expect
to see a big impact immediately. I think it would probably build over a period
BERNANKE ON FISCAL, MONETARY POLICIES AT 'CROSS PURPOSES':
"Monetary policy is no panacea, it's not a cure all... We can all disagree
on how powerful these measures are, and I do think they are effective, but I
don't think they can offset the one-and-a-half percentage points of fiscal
restraint that we're seeing this year."
"In terms of the near-term recovery, there is a sense in which monetary and
fiscal policy are working at cross purposes... To some extent, the fiscal policy
decisions being made are mismatched with the timing of the problem. The problem
is a longer-term problem, and should be addressed over a longer time frame in a
way that, to the extent possible ... it does no harm to the ongoing recovery."
BERNANKE ON EFFECT OF PROLONGED EUROPEAN RECESSION ON U.S.:
"The risks that we've been facing for the last couple of years have been
primarily financial given uncertainties about the stability of certain
countries' sovereign debt. Given the risks on this behavior, we've been seeing
the financial markets (lose) as news comes in about financial developments. The
European central bank has taken a number of important steps, including most
recently the outright monetary transactions which have help to bring down the
sovereign debt yields."
BERNANKE ON JAPAN'S ECONOMIC POLICY:
"I think they should try to get rid of deflation. I support their attempts
to get rid of deflation."
BERNANKE ON DEFLATION RISK:
"With inflation at or below our 2-percent target, our policies have also had
the effect of greatly reducing any risk of deflation, which at the moment
doesn't seem like much of a concern, but at certain times, as inflation gets
close to the zero critical level, that risk increases and keeping inflation from
going too low -- I realize sometimes it's hard to explain to people why
inflation that's too low is a problem -- but if it's too low, you run the risk
of a Japanese-style situation, where prolonged deflation is a barrier to
economic growth and stability."