Here's What I'm Going To Tell Congress

(The following testimony is being delivered to Congress)

The Federal Reserve has been working to ensure that our bank
supervision does not inadvertently impede sound lending and thus slow
the recovery. Achieving the appropriate balance between necessary
prudence and the need to continue making sound loans to creditworthy
borrowers is in the interest of banks, borrowers, and the economy as a
whole. Toward this end, in cooperation with the other banking
regulators, we have issued policy statements to bankers and examiners
emphasising the importance of lending to creditworthy customers, working
with troubled borrowers to restructure loans, managing commercial real
estate exposures appropriately, and taking a careful but balanced
approach to small business lending.

We have accompanied our guidance with training programs for both
Federal Reserve and state examiners, and with outreach to bankers
throughout the industry. For example, we just completed a training
initiative that reached about 1,000 examiners. We are also conducting a
series of meetings across the country with private- and public-sector
partners to gather information about the credit needs of small
businesses and how those needs can best be met.

We have also stepped up our information gathering, so that we can
better understand factors that may be inhibiting bank lending. These
efforts include a survey by examiners of banks’ practices in working out
loans, the results of which will serve as a baseline against which we
will assess the effectiveness of our supervisory guidance. We are also
obtaining additional information on small business credit conditions.
For example, we assisted the National Federation of Independent Business
in developing a survey to assess barriers to credit access by small
businesses. And we are using our own Senior Loan Officer Opinion Survey
on Bank Lending Practices to monitor changes in bank lending to small

Fiscal Policy

In addition to the near-term challenge of fostering improved
economic performance and stronger labour markets, we as a nation face the
difficult but essential task of achieving longer term sustainability of
the nation’s fiscal position. The federal budget deficit is on track
this year to be nearly as wide as the $1.4 trillion gap recorded in
fiscal year 2009. To an important extent, these extremely large deficits
are the result of the effects of the weak economy on revenues and
outlays, along with the necessary actions that were taken to counter the
recession and restore financial stability. But an important part of the
deficit appears to be structural; that is, it is expected to remain even
after economic and financial conditions have returned to normal.

In particular, the Administration and the Congressional Budget
Office (CBO) project that the deficit will recede somewhat over the next
two years as the temporary stimulus measures wind down and as economic
recovery leads to higher revenues. Thereafter, however, the annual
deficit is expected to remain high through 2020, in the neighbourhood of
4 to 5 per cent of GDP.

Deficits at that level would lead the ratio of federal debt held by
the public to the GDP, already expected to be greater than 70 per cent at
the end of fiscal 2012, to rise considerably further. This baseline
projection assumes that most discretionary spending grows more slowly
than nominal GDP, that no expiring tax cuts are extended, and that
current provisions that provide most taxpayers relief from the
alternative minimum tax are not further extended.

Under an alternative scenario that drops those assumptions, the
deficit at the end of 2020 would be 9 per cent of GDP and the federal
debt would balloon to more than 100 per cent of GDP. Although sizable
deficits are unavoidable in the near term, maintaining the confidence of
the public and financial markets requires that policymakers move
decisively to set the federal budget on a trajectory toward sustainable
fiscal balance. A credible plan for fiscal sustainability could yield
substantial near-term benefits in terms of lower long-term interest
rates and increased consumer and business confidence. Timely attention
to these issues is important, not only for maintaining credibility, but
because budgetary changes are less likely to create hardship or
dislocations when the individuals affected are given adequate time to
plan and adjust. In other words, addressing the countrys fiscal
problems will require difficult choices, but postponing them will only
make them more difficult.

Thank you. I would be pleased to take your questions.

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