(Updates with Bernanke on fiscal risks and new mortgage rules)
WASHINGTON, July 22 The following are highlights from the
question and answer session at the U.S. Senate Banking Committee hearing on
Wednesday with Federal Reserve Chairman Ben Bernanke.
Bernanke was delivering the central bank's semiannual report on monetary
policy and the economy, and repeated prepared testimony he gave to the House
Financial Services Committee on Tuesday.
For a story on Bernanke's testimony on Tuesday, see, [ID:nN21221058]
For highlights of Bernanke's prepared testimony, see [ID:nN21357294]
For a text of Bernanke's prepared testimony, see [ID:nN21207618]
To access other stories on Fed policy, see [FED/AHEAD]
BERNANKE ON NEW RULES ON MORTGAGE ORIGINATOR COMPENSATION:
"We are going to ban the practice of tying the compensation to the type of
mortgage to the, having pre-payment penalties for example. ... We will be
providing all the details at our meeting tomorrow. But the purpose of the
regulation would be ... to provide no incentives to brokers to steer borrowers
into inappropriate high-cost mortgages."
BERNANKE ON INTERVENTIONS AND FISCAL RISKS:
"I think what we have, including the fact that some banks are now
restructuring (commercial) mortgages, will help lead in the right direction.
Whether they will be enough, I honestly can't tell you. Again, I'm not sure
what interventions there are except those that would involve fiscal risks and
fiscal costs to the government which may be appropriate but I think it's
Congress's call on that one."
SENATOR JIM BUNNING AND BERNANKE ON FED INDEPENDENCE
BUNNING: "I understand your concern about the Fed's independence, but you
are the one that who threw away the independence by acting as an arm of the
Treasury and engaging in fiscal policy. Do you understand why Congress and the
public think the Fed's independence has already been compromised?"
BERNANKE: "I understand but I think it's a misconception. The Federal
Reserve has worked with the Treasury, both the Republican and the Democratic
Treasury, because in a situation of financial crisis, it's very important and I
think the American people want to see their financial leadership working
together to protect the stability of the system."
BUNNING: "But your job is monetary policy, not fiscal policy."
BERNANKE: "My job is also financial stability."
BUNNING: "So you think interfering or assisting the Treasury with fiscal
policy is part of the Fed's task?"
BERNANKE: "Not fiscal policy. We have a joint statement with the Treasury
which makes clear that the Fed should not be responsible for credit allocation
or fiscal policy. We are looking at financial stability. That's our
BERNANKE AND BUNNING ON TIGHTENING DURING TOUGH ECONOMY
BUNNING: "Yesterday you made it clear that you think the Fed has the tools
to stop the coming inflation by controlling all of the new money you have
printed. You may be right. But do you have the will as former Chairman (Paul)
Volcker did to tighten even if the economy is still weak?"
BERNANKE: "Senator it was in 1978 in the Humphrey-Hawkins bill that
Congress put in the exclusion for monetary policy from the GAO audit bill. That
was right before Volcker came in and Volcker was able to take those decisions
because Congress did not intervene, although there were plenty in Congress who
said they should intervene, so I guess --"
BUNNING: "But I'm asking you, would you do it?"
BERNANKE: "We will absolutely do it, so long as we are not forced to do
something different by Congress."
BUNNING: "Even if the economy is still weak?"
BERNANKE: "We will take the necessary actions to balance off appropriately
the price stability and full employment parts of our mandate."
BERNANKE ON HEALTHCARE COSTS:
"I do believe, for the broad economy's health or fiscal health, we do need
to address the problem of increasing cost. And so any program that is
undertaken should look to how we're going to get control of costs so it will
not bankrupt both our government and eventually our economy."
BERNANKE ON GLOBAL ECONOMIC REBALANCING:
"The American consumer is not going to be the source of a global boom by
any means. On that very topic, we are continuing to encourage our trading
partners in Asia and elsewhere to understand -- and I believe that they do --
that they need to substitute their own domestic spending, their own domestic
demand, for American consumers as the engine of growth in their economies."
"We're seeing, for example in China with their large large fiscal package
and their attempts to strengthen their infrastructure spending, we're seeing
some motion in that direction."
BERNANKE ON GAO AUDITS OF FED:
"The Congress should have the ability to oversee all aspects of our
operations, including whether or not we we have appropriate financial controls,
whether we are lending on a good basis of collateral, and so on. So, we are
willing to work with you on that. We do think that the Congress has the right
to see how we are using taxpayer money. Where we are concerned is that the
Congress would be intervening in our specific policy decisions relating to
monetary policy and the economy."
"So, yes we are quite willing to work with Congress to try to figure out
exactly where the line should be."
BERNANKE ON CONSUMER PROTECTION:
"We were not quick enough and we were not aggressive enough to address
consumer issues early in this decade. I agree with that. I think what we have
demonstrated in the last few years is that we have the capacity, we have the
ability, we have the expertise, the range of abilities, and the complementarity
with our others activities to be effective when we are working in that
"My recommendation to you to consider would be to ask whether there are
steps that could be taken that would strengthen the commitment of the Federal
Reserve so that it would be strongly committed to this area in the future. A
few suggestions I would make. One would be to put consumer protection in the
Federal Reserve Act along with full employment and price stability as a major
goal of the Fed. A second step could be to require the chairman to come before
you or another committee at least once a year to present a report, the same way
we do for monetary policy, on our consumer protection steps."
BERNANKE ON COMMERCIAL REAL ESTATE:
"We are working to improve those conditions. We are working with banks, for
example. In the same way that banks should be encouraged to work out defaulting
mortgages for residential borrowers, it's in their interest to work out problem
loans in CRE (commercial real estate) areas, as well. And many banks will be
facing mountains of CRE challenges going forward. On the TALF, as you know, we
have recently added to the list of assets we are supporting both new and legacy
commercial mortgage-backed securities in an attempt to open up the CMBS market,
which has been an important source of financing for this area in the past. It's
early yet to know how much effect it will have. ...
We currently have an expiration date of Sept. 31 on the TALF. We will
certainly be monitoring the situation and if markets continue to need support
we will be extending the final date of that program.
BANKING COMMITTEE RANKING REPUBLICAN RICHARD SHELBY ON FED SUPERVISION:
"In the end, it was the failure, I believe, of the Fed to adequately
supervise our largest financial institutions that required the deployment of
its monetary policy resources to stave off financial disaster. In light of the
Fed's record of failure as a bank regulator, it should come as no surprise that
Congress is taking a closer look at the Fed and reconsidering its regulatory
SENATE BANKING COMMITTEE CHAIRMAN DODD ON CONCERNS ABOUT FEDERAL RESERVE:
"Concerns that I'll raise here this morning more go to the institutional
issue of the Federal Reserve, as distinguished from your leadership over the
last several years in grappling with these many complicated issues.
I'm very supportive of the efforts you've been trying to make as the
chairman of the Federal Reserve, but I have some serious issues about the
institutional response to all this as we go forward."
DODD ON FED AS SYSTEMIC REGULATOR:
"The administration has also proposed expanding the Fed's power over
systemically important companies. I have a number of concerns about this
proposal, as many of my colleagues do on this committee, not the least of which
is why does the Fed deserve more authority when institutionally, it seemed to
have failed to prevent the current crisis?"