This morning, before the House Financial Services Committee, Federal Reserve Chairman Ben Bernanke delivered the Federal Reserve's semiannual "Monetary Policy Report to the Congress." Chairman Bernanke reported that, at present, the focus of monetary policy is on stimulating economic activity in order to "prevent a sustained decline in inflation below levels consistent with the Federal Reserve’s legislated objectives" and "economic conditions are not likely to warrant a tightening of monetary policy for an extended period." The report states that "all Federal Open Market Committee (FOMC) participants projected that real gross domestic product would contract over the entirety of this year and that the unemployment rate would increase in coming quarters," and that FOMC participants "generally believed that household financial positions would improve only gradually," as well as strains in the credit markets and in the banking system, resulting in the pace of recovery "to be damped in 2010."
Prior to Chairman Bernanke's testimony before the Committee, several members of the Committee questioned whether government intervention thus far has truly helped stimulate the economy. In particular, Ranking Member Spencer Bachus (R-AL) stressed that there should be an "exit strategy" with respect to the recent significant government intervention and that, in general, such interventions have "failed" with "very little bang for the taxpayer's buck," in light of rising unemployment and home foreclosure rates.
As part of his prepared testimony, Chairman Bernanke stressed that "we must make our system of financial supervision and regulation more effective, both in the United States and abroad," and suggested that comprehensive reform "should include at least the following key elements" (many of which Chairman Bernanke has stressed in previous hearings and speeches):
- a prudential approach that focuses on the stability of the financial system as a whole, not just the safety and soundness of individual institutions, and that includes formal mechanisms for identifying and dealing with emerging systemic risks;
- stronger capital and liquidity standards for financial firms, with more-stringent standards for large, complex, and financially interconnected firms;
- extension and enhancement of supervisory oversight, including effective consolidated supervision, to all financial organizations that could pose a significant risk to the overall financial system;
- an enhanced bankruptcy or resolution regime, modeled on the current system for depository institutions, that would allow financially troubled, systemically important nonbank financial institutions to be wound down without broad disruption to the financial system and the economy;
- enhanced protections for consumers and investors in their financial dealings;
- measures to ensure that critical payment, clearing, and settlement arrangements are resilient to financial shocks, and that practices related to the trading and clearing of derivatives and other financial instruments do not pose risks to the financial system as a whole; and
- improved coordination across countries in the development of regulations and in the supervision of internationally active firms.
Committee Chairman Barney Frank (D-MA) questioned Chairman Bernanke on the Federal Reserve's posture regarding the growing difficulties in obtaining refinancing in the current commercial real estate market. Chairman Bernanke stated that the Federal Reserve is "watching [the commercial real estate market] very carefully" and has taken steps to mitigate future problems by "urging banks to make loans to credit worthy borrowers" and by recently adding legacy and commercial mortgage backed securities to the Term Asset-Backed Securities Loan Facility (TALF). However, TALF is set to expire December 31. 2009. Chairman Bernanke was also generally questioned on the systemic risks associated with large and complex financial institutions that are "too big to fail", to which Chairman Bernanke stated that "If we don't do anything else, we need to solve that problem."