Fed Chairman Ben Bernanke presented his Semiannual Monetary Policy Report to the House Committee on Financial Services. On Thursday, he’ll present the report to the Senate Committee on Banking, Housing, and Urban Affairs. You can read his prepared remarks at this Federal Reserve page. After reading his prepared remarks, Chairman Bernanke answered House committee members’ questions. I watched the 3-hour testimony on C-SPAN 3 patiently waiting for some questions and answers relevant to savers. I had to wait until after 1:00pm before I heard some interesting exchanges. The first one started with a question by Rep. Keith Rothfus (R-PA 12th District) which asked Chairman Bernanke if the Fed was printing money and if that was going to lead to rampant inflation five years down the road. Below is a transcript of this exchange:
Rep. Rothfus: Simple question that I have is when I have someone in my district that is going out to buy a Treasury bill, an individual is looking to make an investment, they go to their bank, they go to their broker, they have $1,000 or $5,000, and they get a bill. Where does the Fed get its money to buy its Treasury bills?
Chmn. Bernanke: When we buy securities from a private citizen, we create a deposit in their bank, and it shows up as reserves. So if you look up our balance sheet, our balance sheet balances. We have Treasury securities on the asset side. On the liability side we have either cash or reserves at banks, and on the margin that’s what has been building up as excess reserves at banks.
Rep. Rothfus: You create the reserves?
Chmn. Bernanke: Yes
Rep. Rothfus: Is that printing money?
Chmn. Bernanke: Not literally.
Rep. Rothfus: It’s troubling to me when I look at the balance sheet that the Fed has and you look four years ago it was $800 billion and now we’re up to $3.5 trillion. I know you say you’re confident that you have the tools available to do a draw down when necessary without risking hyper-inflation, but by your own admission this has been unprecedented what you’re doing. What assurance can you give to the American people that we’re not going to have a round of rampant inflation five years down the road?
Rep. Bernanke: It’s not unprecedented because many other central banks use similar tools to the ones we plan to use.
Rep. Rothfus: Currently? Or can you look back in history and see a country that has blown up its balance sheet by 311% in four years without any kind negative consequences?
Chmn. Bernanke: Absolutely. Japan, Europe, U.K. All have done similar kinds of things with very large balance sheets.
Rep. Rothfus: I appreciate your feedback on that, and we may reach out to get that information. Thank you.
Just a few minutes after this exchange, Rep. Steve Pearce (R-NM 2nd District) stood up for seniors by describing how seniors are getting punished by the low interest rates. Rep. Pearce described this as taking from seniors and giving it to Wall Street. Chairman Bernanke’s answer was similar to his past answers when asked about this.
Rep. Pearce: You continue to take advantage of seniors because they don’t have access to sophisticated instruments. So a lot of them have their money in cash or near cash equivalents. Now Mr. [?] noted that the home financing has increased from 3.3 to 4.5. We got a whole sheet of Wall Street profit reports. Those are going extraordinarily high. Did the seniors even get an honorable mention in the question about who’s going to pay the bill for this? When are you going start to go up on the interest rate just a little bit? Because right now you are taking from seniors and you’re giving it to Wall Street basically. In my district we’re like 43rd per capita income, $14,000 to $18,000 per year. Seniors live their lives right. They paid off their bills and they’re being punished for this economy.
Chmn. Bernanke: I don’t think the Fed can get interest rates up very much because the economy is weak, inflation rates are low. If we were to tighten policy, the economy would tank. Interest rates would be low.