(Adds Bernanke on the the impact of QE on commodity prices)
WASHINGTON, July 13 The following are highlights of Federal
Reserve Chairman Ben Bernanke's testimony on Wednesday to the House of
Representatives Financial Services Committee as part of his semi-annual
testimony on the U.S. economy and monetary policy.
For a story on Bernanke's testimony, see [ID:nW1E7IB008]
For highlights of Bernanke's prepared remarks, see [ID:nW1E7IB007
For a text of Bernanke's prepared remarks, see
BERNANKE ON THE IMPACT OF QUANTITATIVE EASING PROGRAMS ON COMMODITY PRICES
"There has been some contribution to commodity prices, which we
anticipated. Again, I think that supply and demand factors globally were by far
the more important. But that increase in commodity prices offset some of the
benefits that lower interest rates or accommodative financial conditions have
for growth and for addressing the risks of inflation."
BERNANKE ON ECONOMY STILL IN NEED OF HELP
"With 9.2 percent unemployment, the economy still requires a good deal of
support. As we go forward, we are going to want to make sure that as we support
the recovery, that we also keep an eye on inflation and make sure it stays well
BERNANKE ON A POSSIBLE THIRD ROUND OF QUANTITATIVE EASING
"I think we have to keep all the options on the table. We don't know where
the economy is going to go. And if we get to a point where ... the recovery is
faltering and we're looking at inflation dropping down toward zero, or
something where inflation issues are not relevant, then, you know, we have to
look at all the options."
BERNANKE ON THE U.S. DOLLAR:
"One thing we can clearly do to support the dollar is to keep our inflation
rate low and that is what we've done."
BERNANKE ON MORTGAGE SECURITIZATION
"Fannie and Freddie were effectively subsidized and therefore a private
market system is probably going to increase the cost of mortgages a little bit,
but that is the consequence of taking away a subsidy that in the end proved to
be very costly to our economy. Currently there is not much private capital
because of concerns about housing market, concerns about still-high default
rates. I suspect though that when the housing market begins to show signs of
life that there will be expanded interest. I don't see a reason why the private
sector can't play a big role in the housing market securitization going
BERNANKE ON "THE RIGHT ANALOGY" FOR NOT RAISING THE DEBT CEILING
"The analogy about balancing your check book and getting your finances in
order is wrong. The right analogy for not raising the debt ceiling is going out
and having a spending spree on your credit card and then refusing to pay the
bill. That's what not raising the debt limit is."
BERNANKE ON SPENDING CUTS
In terms of longer-term growth we really don't want to just cut, cut, cut or
we want to look at what we're cutting and how we're cutting. We want to make
sure we're doing the things, making the investments that will help the economy
grow and that includes things like fixing the tax code and so on... You need to
be a little bit cautious about sharp cuts in the very near term because of the
potential impact on the recovery. That doesn't at all preclude -- and in fact I
believe it is entirely consistent with -- a longer-term program that will bring
our budget into a sustainable position."
BERNANKE ON IMPACT TO CONSUMERS OF A DEFAULT:
"The risk is that interest rates will begin to rise as our creditors lose
confidence in our ability to repay, or willingness to repay. When Treasury
rates rise, of course it makes the deficit worse and makes the problem even
worse. Interest rates on Treasury debt feed into all other interest rates in
our economy, including farm mortgages, capital for oil or natural gas
exploration, and consumer loans of all kinds.
"It would weaken our economy, make the deficit worse and it would hurt
confidence and be a negative. I am very much in favor of trying to address this
problem in a big way, again taking a long-term perspective and understanding
this is a long-term problem."
BERNANKE ON WHAT WOULD HAPPEN IF DEBT CEILING ISN'T RAISED
"The assumption is that as long as possible the Treasury would want to try
to make payments on the principle and interest of the government debt because
failure to do that would certainly throw the financial system into enormous
disarray and have major impacts on the global economy.
"So just as a matter of arithmetic fairly soon after that date there would
have to be significant cuts in Social Security, Medicare, military pay or some
combination of those in order to avoid borrowing more money.
"If, in fact, we ended up defaulting up the debt -- or even if we didn't, I
think it's possible that simply defaulting on our obligations to our citizens
might be enough to create a downgrade in credit ratings and higher interest
rates for us, which would be counterproductive of course because that makes the
"But clearly if we went so far as to default on the debt, it would be a
major crisis because the Treasury security is viewed as the safest and the most
liquid security in the world. It's the foundation for much of our financial
system and the notion that it would become suddenly unreliable and illiquid
would throw shockwaves through the entire global financial system.
BERNANKE ON GOLD PRICE
"I think it reflects a lot of things. It reflects global uncertainties. The
reason people hold gold is as a protection against what we call tail risks,
really, really bad outcomes. To the extend that the last few years have made
people more worried about the potential of a major crisis, then they have the
protection of gold."
BERNANKE ON WHETHER HE THINKS GOLD IS MONEY
"No. It's not money. It's an asset, but it's not money."
BERNANKE ON DEBT LIMIT
"We need an increase in the debt limit, which will prevent us from
defaulting on obligations we have already incurred, and which will create
tremendous problems for our financial system and our economy. But we also need,
of course, to take a serious attack on the unsustainability on our fiscal
BERNANKE ON ADDRESSING LONG-TERM FISCAL ISSUES
"We certainly cannot continue on an unsustainable path. If we were to do so,
in the long term clearly we would have higher interest rates, less capital
formation, more foreign borrowing, slower growth of the economy. But I think we
even risk worse if we were to lose the confidence of foreign creditors and have
a threat to our fiscal and financial security.
"So I do think it's important to address these long-term issues. I guess I
would emphasize ... that these are long-term issues. It doesn't' have to be
solved today or tomorrow. But we need to take some important steps to look at
this long-term perspective and to try to restore some stability and
sustainability to our fiscal outlook."