Statement

Thank you Chairman Casey and Vice-Chairman Brady.  I do not wish to make a lengthy statement.  I am far more interested in the testimony of our Federal Reserve Chairman.  I would, however, like to share some of my own thoughts about the current state of the economy and some of my concerns about the Federal Reserve System. 

In 1977, Congress first gave the Federal Reserve a dual mandate to promote both “maximum employment” and “stable prices.” Unfortunately, in the last few years, we’ve had anything but maximum employment and stable prices.  Most Americans believe the prices of products and services they buy on a daily basis like food, gasoline, electricity, heating oil, and health care services have increased significantly in recent years and grown more volatile.  Moreover, we have official unemployment over 9 percent and many Americans struggling to find work in a difficult economy.  Therefore, in my view, the Federal Reserve is failing in its Congressional mandate and some action should be taken to remedy this.

Moreover, I am troubled by the Federal Reserve’s role in bailing out troubled banks, creating asset bubbles through artificially low interest rates, and the general veil of secrecy under which the Federal Reserve typically operates. 

Recently, we received reports of the Fed’s role in bailing out banks in Europe to the tune of several trillion dollars.  This decision was not made with the knowledge or consent of Congress, although I should also say that congressional consent was not required.  And with the banking crisis in Europe ongoing as we speak, we do not know what the Federal Reserve might be doing there now or in the future.  Although the Fed may not be legally obligated to inform anyone of all of its actions, many are of such scope and importance that reason suggests that consultation with Congress would be a good idea.

From 2003 to 2005, the Fed kept interest rates very low, partly out of concern for employment. However, those very low rates created a housing boom, and later a terrible bust — a very significant factor in the financial crisis that eventually caused a devastating increase in unemployment.  We continue to feel the affects of this financial crisis today and would add that it hasn’t really seemed to end as new problems unfold and old ones persist.

That concludes my remarks.  I look forward to Chairman Bernanke’s testimony. 

Questions:

Senator Lee: Thank you.  Mr. Bernanke, I want to refer back to something that I understood you to have said earlier, which is roughly to the effect that Congress not engage in any deep spending cutting activities until such time as the economy recovers. If I understood you correctly, I think you were saying that if we engaged in too much deep cutting, in the near-term future, that might thwart any recovery.   First of all, did I understand you correctly in saying that?

Chairman Bernanke: I didn’t say that quite precisely. What I said was that you can do both. You can take policy actions, which are supportive of recovery. And that would involve perhaps not doing sharp, near-term cuts but might involve other things; other things that might be helpful, like in the housing market, for example. At the same time that you provide clarity and a strong and credible plan for achieving fiscal sustainability. Those two things are not incompatible.

Lee: Okay. So a strong and credible plan? Does that imply both spending cuts and tax reform?

Bernanke: Well, that’s up to Congress. You can do — you know, as i have said often before, I’m in favor of the law of arithmetic. I don’t care. Spending cuts, tax increases, as long it adds up and as long as the policies themselves make sense, I think that’s what counts.

Lee: But do you have an opinion as to the rate at which that cutting might occur? I mean, are you suggesting that not — not to cut more than $1 trillion over the first three years, or —

Bernanke: No, I don’t have specific numbers, except to say that I think, as you look at the — the amount of cuts, and somebody mentioned — I think Senator Casey mentioned $4 trillion over the next decade or so to get stability and the debt to GDP ratio, clearly that’s something that can be done, you know, with an increasing effect over the decade.

Lee: Now, there’s a fair amount of empirical support for the notion that if you’re wanting to help an economy recover, but you’re also trying to balance the federal budget, that there are a couple ways of going about it. One way is to increase taxes, the other way is to cut federal spending or perhaps a combination of the two. But the empirical evidence tends to support the notion that you’ll help the economy recover faster if you focus primarily on cutting expenses rather than on increasing taxes. Do you agree with that viewpoint?

Bernanke: The empirical evidence is very complex. I mean, it — there’s some literature which suggests that sharp budget cuts can lead to recovery. But that’s only in limited circumstances. I don’t think that’s a general proposition. I think generally you ought to look at your tax and spending policies and ask, you know, are these policies doing what we want them to do for our economy? And are the tradeoffs that they engender good tradeoffs for us?

Lee: Okay.