Key excerpts from Bernanke's first Humprehy Hawkins testimony before the Senate. Highlights obviously ours:
Exchange with Shelby:
SHELBY: Mr. Chairman... The portfolio or the balance sheet of the Fed, you said it'ss $3 trillion, more or less...
BERNANKE: I didn't say, but yes, that's about right?
SHELBY: Is that about right?
BERNANKE: Yes, sir.
SHELBY: But you said it then, didn't you? It's about $3 trillion.
BERNANKE: Yes, sir.
SHELBY: Is -- you studied the Fed a long time before you ever came to the Fed. Has there ever been that type of balance sheet close to that?
BERNANKE: I don't think so.
SHELBY: No. OK.
Does it concern you not how you put on -- add to the balance sheet, but how you might have to deleverage the balance sheet? And will that be a challenge to the Fed or could it be?
BERNANKE: Well, Senator, I should comment that although the Fed hasn't had a balance sheet this size, other central banks, like the Japanese, for example, have.
SHELBY: And they paid for it, too, hadn't they?
BERNANKE: Well, depends on your point of view. The current prime minister thinks they haven't done enough.
SHELBY: What do you think?
BERNANKE: I think that they should try to get rid of deflation. I support their attempts to get rid of deflation.
In terms of exiting from our balance sheet, we have put out -- a couple of years ago we put out a plan; we have a set of tools. I think we have belts, suspenders -- two pairs of suspenders. We have different ways that we can do it.
Belts... Suspenders... two pairs of suspenders: the future is safe.
Exchange with Corker:
CORKER: Thank you, Mr. Chairman. When the Fed decided it was going to stimulate a global currency war as it did, did you -- did you embark on that thinking, well you know, our country's in trouble and let's -- sort of the heck with everybody else, or did you think it would leverage the -- the wealth effect, if you will, if everybody had a race to the bottom?
I know the Fed has been really purposeful in trying to create this sort of faux wealth effect. Did you think it would multiply your efforts? And speaking to that, so overall wealth effect -- I know you all do calculations all the time, but could you tell us exactly what sort of the wealth effect is, the part of it that's not real, that if you were to stop doing what you're doing as it relates to monetary supply today, how much of a diminishment in national wealth would take place?
BERNANKE: On the first question, we're not engaged in a currency war. We're not targeting our currency. The G-7 put out a statement, which was 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, of course, in other industrial countries, are increasing demand globally and helping not only our businesses but the businesses in other countries that export to us.
And so this is not a beggar thy neighbor policy; it's one that benefits our trading partners.
...
CORKER: ... How much -- how much wealth diminishment would take place if you were to, if you will, move away from the punch bowl?
BERNANKE: Well, there would be some, but I would point out that if you look at the stock market, for example, that the so-called equity premium, the risk premium associated with stock prices, is actually quite wide.
In other words, stock prices by that metric don't appear over-valued, given earnings and given interest rates. Now if interest rates went up some, that would have some effect on stock prices.
But the point here is not to create what you call a faux wealth effect, the point here is to stimulate the economy and create some forward momentum in growth and employment. And that, in turn, shows up in earnings and that creates a genuine increase in wealth. Same with house prices.
...
CORKER: So I think that, you know, I don't think there's any question that you would be the biggest dove, if you will, since World War II. I think it's something you're rather proud of.
And we have a federal government that is spending more relative to GDP than at any time since World War II.
Those are working well together, in that the Fed is actually purchasing a large portion of the new debt issuances as we live beyond our means. And so it's very -- working very well together in that regard.
Just wondering if you -- if ya'll talk at all in your meetings about the degrading effect that's having on our society and how it's basically punishing people who've done the right things and throwing seniors under the bus and others that have saved money, do ya'll ever talk about the longer-term degrading effect of these policies as we try to, you know, live for today?
BERNANKE: I think -- I think one concern we have is about the effect of long-term unemployment on people who don't have jobs for years. That means they're never going to acquire skills, they're never going to be a productive part of our workforce. So the jobs part is very important.
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 two percent average inflation.
So we have worked on both sides of the mandate. And we're trying to achieve a stronger economy for everybody. I don't think there's any degrading going on. ts 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 two percent average inflation.
So we have worked on both sides of the mandate. And we're trying to achieve a stronger economy for everybody. I don't think there's any degrading going on.
You mentioned in particular the issue of savers and I think that is an important issue. I would just point out that if we -- if we tried to raise interest rates to -- from, say, current 10-year yield is two percent, if we tried to raise to three or four or five percent while the economy was still weak, it could not be sustained.
Our economy's not weak (sic) enough to sustain high real returns to savers. If we tried to do that, we would throw our economy back into recession and we would have low interest rates, like the Japanese do.
The only way to get interest rates up for savers is to get a strong recovery. And the only way to get a strong recovery is to provide adequate support to the recovery.
So I don't agree with that premise.
And the conclusion:
CORKER: Do you -- or do you concern yourself at all with just the whole notion of being perceived, you know, most -- we watch regulatory capture take place here where basically the regulators end up working for the people that they regulate.
And you know, we had TARP, which most people who voted felt like that was a needed thing during our crisis. And then we've had this easy money policy, which really allowed the big institutions, especially on Wall Street, to really reap tremendous benefits in the early stages without doing anything.
And then you're getting ready, I guess, in a few years, as you alluded to, when interest rates rise, to basically have to print money to sell securities at losses and then pay interest on reserves, which people have pointed out, and I think ya'll talked about it, is going to be billions and billions of dollars going to these institutions that, again, you regulate.
Do you concern yourself at all with the Fed being viewed as, you know, not as independent as it used to be and working so closely with many of these institutions that you regulate?
BERNANKE: Well, we're concerned of our perception, that's true, that's true, but none of the things you said are accurate. For example...
CORKER: ... Oh yes, they are.
And so on.
Finally, with Warren:
I'd like to go to the question about too-big-to-fail; that we haven't gotten rid of it yet. And so now we have a double problem, and that is that the big banks -- big at the time that they were bailed out the first time -- have gotten bigger, and at the same time that investors believe with too-big-to-fail out there that it's safer to put your money into the big banks and not the little banks, in effect creating an insurance policy for the big banks that the government is creating this insurance policy -- not there for the small banks.
And now some economists, including an economist at the IMF, has started to document exactly how much that subsidy is worth. Last week, Bloomberg did the math on it and came up with the number $83 billion that the big banks get in what is essentially a free insurance policy. They borrow cheaper than the small banks do.
So I understand that we're all trying to get to -- to the end of too-big-to-fail. But my question, Mr. Chairman, is, until we do, should those biggest financial institutions be repaying the American taxpayer that $83 billion subsidy that they're getting?
BERNANKE: Well, the subsidy is coming because of market expectations that the government would bail out these firms if they failed. Those expectations are incorrect. We have an orderly liquidation authority. And even -- even in the crisis, we -- in the cases of AIG, for example, we wiped out the shareholders.
WARREN: Excuse me, though, Mr. Chairman, you did not wipe out the shareholders of the largest financial institutions, did you, the big banks?
BERNANKE: Because we didn't have the tools. Now we could.
WARREN: Well...
BERNANKE: Now we have the tools.
You sure do, and they are all voting members on the FOMC.
Alternatively, here is Bill Fleckenstein explaining it all in 90 seconds: