an speeding up of tax collections. sue herera is in sacramento preparing for the tonight's special report "california in crisis." this could not come at a better time. how the golden state plans to lift itself out of troubled times an shine again. she will join us live from there in the next hour, mark. >> let's see how everything is playing in the premarket. our reporters are standing by as usual. we begin with bob. >> the trend is continuing. earnings coming in beating expectation but the revenue's on the light side but that's good enough to advance the stock market because guinn for the most part is in line or above expect a expectation for the big companies. number two, it's all about stabilization, united technology said it all in their report, year over year rate of decline to cross businesses appears to have stablize. caterpillar up 12%. popped the futures 3 points when they came out here. earnings way out of expectation but the top line is notably

light. could you drive a backhoe through this. $1.15 to $2.25 for the year but that high number is bell above expectation. same with u.nited knowledge tec they had good cost cutting. dupont, bottom line beat top line. again a little bit light. they said their cost reduction efforts continuing to pay off. coca-cola beat on the bottom line nicely. top line is little bit light. sounds like a broken record. by the way merck beat on the top and bottom line. there's the exception. ben bernanke's editorial in "the wall street journal" here's the one everybody is quotings. we are confident we have the necessary tools to withdraw trade trader policy. we could make it ten in a row to the up side. we're in the middle of the best winning streak in 11 years. let's look at what's happening after the bell. the bulk of the earnings was

nasdaq stocks after the close. we get apple, yahoo! starbums, amblin. yahoo! is launching the new home page supposedly allowing them better revenue on the ad site and also navigate other sites better. carol bart advancing that quicker than expected. we do have some if earnings i want it talk tc about, td ame ameritrade was a big up. zions bank corp under pressure today. amazon.com, there are reports they are applying for patents that allow them to sell ads on the kindle. they're up 0.4%. let's see how the bulls are doing downtown. here's sharon epperson at the nymex. >> the bulls are getting a boom

from the dollar from a six-week low as well as equities around the globe. the s&p 500 closed at hit highest level since november yesterday. add to that sites around the globe in world equities around the country, around the world. we're looking at oil prices up over $1, above $65 a barrel. when you see the msci world equity index, you'll notice that's the highest level since october, also helping to propel world energy prices higher today. keep in mind though, watch the august and september contracts, we are going to see the expiration of the august contract today, but september also up over $1 at $66 a barrel right now. rick santelli, to you in chicago. >> thank you, sharon. the dollar index has stabilize the but at a low level, well under $80, under $79. although it's close to unchanged today, hovering the at levels we haven't seen in basically six

weeks. if you look at the way the interest rates markets moved, yesterdays were an interesting day. for a variety of reasons we saw that interest rates started out high and moved lower. today, they're back up but for the most part they're hovering a 10-year note in the mid 360s right at a level most of the activity occurred early yesterday morning. the big four today, mr. person areky's testimony and many ears will be glued to his notion of a exit strategy in terms of the inspector general barofsky interview traders were glued to the tv sets to get a handle on how much taxpayer money is at risk and ultimately how will that play out in the interest rate marketplace. marx back to you. >> thank you, rick santelli. mixed picture in the asia overnight. nikkei, japan, adding 2.7%. after reopening after a long holiday weekend. south korea, up 0.7. hang seng kind of flat.

shangh shangh shangh shanghai composite lost a.6%. >> markets of generally doing well. frankfurt up by 2%. paris up by 1.7%. london up by 1.6%. volume aren't great. let me repeat that story. we're not seeing great volume through the european markets. we are kind of getting into the earnings season, not into the majors yet. we're at five-week highs, you can see we pushdz up above the beginnings at june. out of the stocks 6 hxx 600 so terms of reports, one has matched expectations, 13 have missed. it's even stevens here in europe so far on the report card.

deutsche bank is doing the rounds in germany. reported in frankfurt and elsewhere that two senior executives have been fired as a result of the spying scandal that german prosecutors are currently investigating to see whether or not they're going to pursue a criminal case in that. it seems to be gaining traction today. the stock is up by 1.8%. and talking of top line, where bob certainly was. hermes, a large jump in top line. it seems that handbags do still sell and this stock is up by nearly 3%. mark and rebecca, back over to you. >> thank you very much, guy. up next, all earnings all morning. we'll head over to earnings central. for more on cat, merck and more. plus find out what we can bubble up from coke's numbers with the analyst from credit suisse. >> then we'll talk to the senior airline analyst from jb morgan to see if he has any love left for southwest. plus bernanke isn't the only

hearing on hill. at 2:00 p.m., the house financial services tackling the topic, systemic risk, are some institutions too big to? and if so, what had we do about it. we'll talk to peter wallison, it will occur just before he testifies this afternoon. stay with us.

call or click today.

welcome back. it's been a busy day at earnings central. becky, kick us off with caterpillar, huge story there. >> absolutely. caterpillar came in with earnings that were well above expectations. you're talking about 50 cents ahead of expectations. now revenues did come in a little light close to $8 billion, off by about $1 billion from what people were expecting. the company raising full year earnings outlook. the ceo jim owens said while there's a great deal of economic uncertain, cat piller is, quote, seeing signs of stabilization. remember, this is a stock that was up yesterday by about 6% because an analyst over at i want to say at bank of america/merrill lynch said they thought things could be bottoming in this quarter and that's what they're getting from the ceo today. >> this is like the halcion days

for, like the harvest season for a farmer. >> or october if you're a baseball team. >> it's march if you're a college basketball team. merck beatings street. reven revenues came in in line with expectations. that's no small feat in this environment. profits down about 12% on slow sales of gardasil, the cervical cancer vaccine and weak sales of cholesterol drugs. let's get over to mike huckman listening in on the conference call. >> yeah, thanks. they're in the q&a portion right now. i wanted to start by the a macro comment by chairman and ceo dick clark. he said, i'm quoting him now, this time our industry has a seat at the table. what he's recovering to that there is the health care reform effort versus the effort back in the early '90s in the clinton administration, he went on to say we're convinced we need to be a part of the process and that health care reform can be

accomplished. that was his emphasis. regarding specific product perform any, you just talk and guard adill sil, the vaccine for the sexually transmitted hpv an for cervical cancer as well. interestingly sales were down a whopping 28%. but the company says it does see a possible pickup as we head into back to school season. then finally regarding gardasil sales outside the u.s., we're up 18% because the head of global health and pharmaceutical said on the conference call that they're seeing strong growth in mexico and poland. back to you guys. >> mike, thanks very much. let's talk about another dow component reporting this morning. coca-cola, this stock is indicated to open lower even though it was indicated higher earlier. earnings per share came in ahead of expectations. revenues missed but just slightly. there was a lot of good news here, company talking about how

volume was up 5% internally. global came in solid on international sales. american case volume did decline by 1%. let's bring in carlos leboy on what is happening here. why the pullback on share on good information? >> this stock is behaving just beautifully for the last seven weeks. the markets seemed to be pricing in a a little bit of a beat. numbers came in fine at 92 cents. consensus was 89 cents. i think the operating numbers were a little bit lighter than we thought, just slightly behind the long term growth outlook at 4%. but they've nailed their first half ebit growth outlook and i think on the conference call what we're going to hear about is momentum going into the second half. we open a little bit of weakness here and as the day go on, we'll be hearing more about the second

half. >> you tell people to buy it at this level? >> yes. >> how do they catch up with their peer coke or pepsi? >> pretty well. we're waiting to hear about the pepsico business model and for coke, it's aabout international for the second half. the franchise model is just looking beautifully. equity income came in better than expected and that bodes well for the second quarter outlook. that bodes well for coke. >> carlos, do you look at price targets? >> yes, we do? >> where do you see coca-cola over the next nine months? >> in earnings in line with growth over the next year. >> why can't we get some expansion. is f this is a company that you buy this, how much do you need to worry about huge disappointme disappointments, why don't you get some type of reward with a multiple on a stock like that? >> there is a room for a little bit of multiple expansion back

into september and the fourth quarter. the reason is mutar kemp has just taken over this country and just started opening his vision for the year 2020. i think they're looking for an accelerated growth outlook for volume. internally they've got to be looking for higher growth rate. numbers are coming in on the noncarp side. they look at an algorithm out to 2020. there's room for multiple expansion here. >> thank you. >> it was a 40 or 50 multiple back when buffett -- >> a lot of the major dow components, you could say the same thing about any of these. >> the nifty 50 bubble but you should get something for something that stable after what we've just been through with the financials and the cyclicals. you put your money in coke, what's the worst that's going to happen? before we go let's get to the rest of the dow components. dupont reporting ahead of expectati expectations. revenues felt just short of the streets estimates. second quarter profit down 61%.

that's a reflection of the virment for the chemical company. continuing to struggle with weak demand. unclear, that tells you nothing right there. 26 to 31. that would be an a 29 open. >> strength in their agricultural side. weakness because of the automobile industry and shutdown of car manufacturing. that's been the big pressure there. one analyst said eventually they'll have to start making cars again. also united technologist. earnings per share came out a penny better than expectations. $1.05 versus the $1.04 the street was looking for. also cutting full year revenue view but a lot of street was already there. they're talking about the full year $4.20. the street was at $4.07. >> we'll see where that opens. we're going tour seven straight, mark. i don't know if anyone would have predicted that a week ago.

but seven trading days ago. >> we're at highs for the year. >> highs for the year. >> thank you. up next the word on the street. and buzz beyond the trading floor. and less than 45 minutes away from another riveting day of testimony from ben bernanke as he tries to reassure congress on monetary policy. >> there's a lot of reassuring here necessary, not only questions about what the fed sees as far as the second half of the year but is inflation going to be a surprise for our economy coming un? we'll bring you ben's testimony and q an a live. it's going to be right here on the "squawk on the street."

>> all right, welcome back, everyone. you're taking a look at the live picture of the futures board. indications are pointing higher. of course, big day ahead farce bernanke testimony goes. on top of that, a number of earnings stories before the bell, we got ten minutes to go before it rings. word on the street, joining me on the floor is bernie mcsherry with cutone and company. the earnings sounds a little bit more of the same. beats on the bottom line, that's looking good but the top line continues to be light which indicates a lot of these companies just aren't making the sales we would hope they would be making. >> yeah. that's a real concern. the top line number we've been looking for t you know, they're coming better. we're beating four out of five

of the s&p companies, beating estimates, which were low to begin with. so people are taking it with a grain of salt. looking forward to after the close market, the announcements. yahoo! and apple we'll be focused on next. hopefully we'll get some action there. >> do you think it's going to be the same out of those companies? >> everybody is looking for apple in particular, a can't assu assumer company. one of the only that's been able to brand technology the way they have and looking for clues in both segments there. >> i want to get to bernanke, because you had an article in the sp a couple of days ago, talking be o'our government and trust in our government. how much trust do we have in terms of what bernanke says today, exit strategy, timing? >> people are going to listen very carefully and believe he's going to do what he presents to do. but it's the past numbers people are worried about. if you spent much time with the wall straight traders as we both do, they're paranoid. they're up there with joseph stalin when it comes to paranoia.

they don't take things at face value and there is speculation the numbers may have been modified. i'm not saying i personally believe that, but it's out there in the community. >> mark, back to you. let's get the buzz beyond the big board now. from chicago, at the cbode, dan demme, trader with stock equities. we've had a great run. >> on the way this morning i heard "don't stop believing" it seems like the market has not stopped believing. great run, yesterday, 3:1 advancers over declines. we saw an intraday high in june 11 at 956, let's see if we can take that out. but right now, the trend is higher. >> what will you listen iing fo when bernanke takes the stand today? >> we'll be focused on the fact like you said like bernie also

ugh talked about, the exit strael. he an article in the "the wall street journal" this morning that indicated thoughts there. he's going to be under heavy scrutiny but that's going to play in the market intraday but the theme is earnings, yahoo! apple after the close. not to mention bigger tech names later this week. >> let me interrupt you about the earnings. i'm surprised a little bit that there isn't more skepticism given what we are seeing on the top lines. >> well, actually, mark, i'm not because i think that was the expectation really in the marketplace over the last couple of months is that the revenue numbers were going to be weak. but look at like these tech companies, like they've done some tremendous things over the last six months. streamlined, cost cut, raised cash. they put themselves fundamentally in a great position for an economic upswing and there are some areas out r there, if you don't want to play individual names, look at etfs

or slk or mnh. of. these exploded last week. i like the trends there. fundamentally it's the most solid sector out there right now. >> thank you, dan. demming. final countdown to the opening bell just on the other side of the break. again, the futures pointing to a nicely higher open. one four sta.

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plus get $100 cash when you open an account. you are watching cnbc's "squawk on the street" live from the financial capital of the world. the opening bell, in 20 seconds. >> an important thing to note here, mark. obviously we're looking at stocks but the euro is rally against the dollar. oil prices to the up side right now. so obviously bernanke's testimony coming up here very important in terms of the monetary policy. >> i hadn't noticed that oil is up another $1. we're at $66 and change. whoa. that's loud.

here at the big board. dan harris host of "dancing with the stars." give me a close up. >> samantha harris. >> oh, samantha harris. it's the lady on the left. >> and why is chicago over her head? is she in chicago? i don't know. all they told me is she hosts "dancing with the stars." at the nasdaq. igate. outsourcing services. >> our reporters are standing by. let's begin with bob pisani on the floor. good to see you. >> you know the story, folks. we've got top line -- bottom line is beating, the top line is generally below expectation but the market is moving ahead on this news. there's two major reason, the most important reason is

earnings, guidance and commentary is either in line or above expectations for most of the major companies. number two, they are using the magic word that is stabilization. united technologies and caterpillar both used the word stabilization with respect to top line. here's united technologies, year over year rate of decline across businesses appears to have stabilized. there's your key word. caterpillar just opened a moment ago up 10%. $3.89. up 11% here. here's what's important here. beat opt bottom line, top line was light. guidance was raised here, $1.15 through $2.25. you could drive a backhoe through t cat ceo, you know jim owens, we are seeing signs of stabilization. get it? there's your key word here. we also have cost control offsetting. some of the weakness in sales. noting kmenlts on china and latin america showing signs of

recovery. financial services did not show any signs of deterioration so credit is holding up for them as well. let's move on, the same situations with united technology, bottom line great, top line light. full year guidance here. close to the consensus here. dupont, same situation, bottom line beat, top line on the light side. cost reduction again, a lot of the discussion with dupont is paying off. coca-cola, same situation. beat bottom, top line light. we're waiting for citigroup just opened up 1 cent. merck beating on top and bottom line. finally ben bernanke is going to be the big story this morning. tradertalk.cnbc.com. how are we log at the nasdaq? >> positive by just 0.2 of a%. we're up more than 50% since the march lows. we closed yesterday at the highest close since early october. so really off to the races here right now. slightly positive. the biggest earnings stories in the nasdaq after the close.

we get apple expectations extremely high. reuters look for 8.25 billion. you know apple low balls. at $1 so it looks like they're going to beat but but well see by how much. yahoo! is launching a new home page. carol bart is pushing them to get that in ahead of schedule. uaua. i know you're going to talk about southwest. lost a little money, a little light on the top line but 33 cents less of a loss than expected. brocade was initiate bead ubs. i want to talk about expediainitiated by deutsche bank. the one note on research in motion, they say they're being blocked out of buying nortel's assets. investors not happy either. down 1.8%. td ameritrade hitting records in terms of trading within their customers on a daily basis up

36% on their daily trading. that's it from the nasdaq. sharon, i spent one date on there it's quiet. you go back and it's crazy and the bulls are in command. >> bulls are in command and the buyers are coming back both here and london. crude oil prices up over $67 a barrel. here at the nymex futures over $1. keep in mind the dollar index has stabilized a bit today. it's really about what's happening in the equities markets around the globe. we're seeing petroleum prices being fueled by some of these corporate earnings reports. >> caterpillar seen as one of the bellwethers for the kpa and the fact that they're seeing signs of stabilization, that is helping. particularly heating oiled. why heating oil is a proxy for diesel since we don't have diesel futures here at the nymex. so that is really leading the energy complex higher right now. heating oil, keep your eye on those futures today. meanwhile though we are going to

get that inventory report from the department of energy tomorrow. the expectation is that we have seen another week of increases in refined fuels including heating oil or distilled fuel supplies an they're already pat 25-year highs. rick santelli, to you in chicago. >> thank you, sharon. you know, the treasury complex is bunkering down awaiting mr. bernanke, and of course trying to assimilate how next week's supply and some of the data yet to come is going to alter expectations, but we have a parallel shift today. alma churties i'm looking at are up about 3 basis points in yield. ing see that on this two-day chart we're visiting amid 360s. sometimes when you get these parallel shifts along the curve, it's like a holding spot. traders take a breather and maybe that's exactly what's occurring in front of mr. bernanke. the dollar continues its slide. but in a very boring and methodical fashion. we're down about a quarter of a cent as you can see on this two-day chart but what's interesting today is that we are

not making any progress against the commodity currencies. those are the currencies hurting the dollar index today. the canadian delay, the aussie dollar. we need to pay attentions to that. it has ramifications in this we weaker dollar environment in the next several sessions according to tladers. mark haines, back to you. >> rick santelli, thank you very much. it's another blockbuster week. so far investors like what their see, but dig deeper, you'll find while companies are beating earnings estimates left and right, more and more are missing revenues. which leads to the question, are companies cutting too deep? and what does that really say about the economy and recovery? joining us now david gers of highmark capital and den shreves. the issue here of missing revenues first? >> coming out of last year, we had a very significant credit crisis. so volume are down significantly

but companies move very quickly to try and preserve cash. theytoried to get away from dependence on commercial paper market a. in so doing, they set themselves up to try and be more efficient and preserve cash. as volume start to increase, we expect profit margins to accelerate from here. that's very important through the next two quarters and the rest of this year that nonfinancial earnings are expected to be down quite significantly this year and yet we're at the early stages of a possible changing of the tide. >> so you're not worried about the revenue miss? >> well, we are. but we understand that the demand is down a lot and we expect an inflection point. it will be important to drive exports. it will be important for the industrial and the investment side of the economy to again pick up now as businesses start to feel more comfortable about the future. so i think we're at a very interesting point in time where there's a lot of opportunity as a result of the correlations that we saw last year all going to one and then we've got to

sort through the good from the bad. >> i want to talk to you about this question of sorting through the good or the bad. what companies are positioned to rather than just deal with the a stabilizing environment, actually in a position to grow themselves going forward? >> right now the story in the market is large cap tech t gives us reason to be optimistic about this recent market rally. it started last week with a really strong earnings report from ibm, good technical breakout in that name. then other large cap techs continue to trade beautifully. apple, amazon.com. we're interested to hear what apple has to say. they've made a habit of beating earnings estimates by 20, 25% over the past two quarters so they're going to come in their in a $1.45 level. but the story right now is large cap earnings. >> dave, does it it concern are you at all that what we're

hearing is stablizing, in a there isn't enough idea of growth, that companies aren't pushing ahead and thinking about the future? and perhaps what when he we will see is a flat line growth. >> we've got an incredible amount of stimulus in the pipeline, interest rates are very low. so as we move forward, the bottom line is going to be important for companies to invest back into their business. they don't see the bottom line doing well, then they won't have the cash to invest going forward. consume ever sentiment, business sentiment are all going to become important from this point forward an that's what we're focused on. >> ken, are you satisfied that we are getting enough institutional money into this market? >> mark, that's a great point. we really believe the market's face changed quite a bit. last week on monday and wednesday, we saw heavier volume gains in the index, that's a subtle sign of accumulation, there's a lot of talk about money being on the sideline but i think it gives reason to be optimisting about this market

rally. we continue to see signs that institutional money is being put to work and a market uptrend needs to sustain itself. so market face trends changed last week. i can't speak enough about the action in large cap tech stocks, we're seeing a lot of good solid technical breakouts. that's another thing you want to see during a market uptrend. one to see institutional quality stocks asserting strength and we are seeing a lot of that right now. then it may be small and mid cap stocks that follow the lead of large caps. >> dave, you think emerging markets are going to do better? >> yes, die. they didn't have quite the credit overhang that we had the rest of the developed markets, so the stimulus that came into china. we're starting to see china really starting to grow. india is doing well, latin america. this is the engine of the urbanization of industrialization. the theme isn't gone, the decoupling is coming. they're going to become more inwardly focused as they build

their economies. it isn't all about exports thr fem but it is for us into that development. >> all right, thank you both very much for sharing your thoughts. up next, stocks on the move including lexmark and comerica. >> plus posting a profit after three straight quarters of losses we'll talk to the senior airline analyst at jpmorgan. you are watching "squawk on the street" on cnbc, first in business worldwide. at 155 miles per hour, andy roddick

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welcome back to "squawk on the street." i'm mary thompson with your real time flash. a number trading down after reports. lexmark reporting weaker than expected second quarter profits. earnings of 55 cents a share,

missing estimates by 6 cents. also lowering third quarter outlook. amok mong the regional bank, the largest regional financials down 12%. took a hit from bad loans primarily in florida, posting a wider than expected loss. another regional, comerica, also hurt by loans to resident real estate develop, however loss was less than expect. still down 7%. among the airlines continental lost 36 excludeing items, that was less than last year with stock up 4%. lastly, the low cost carrier southwest earned 8 credibilities a share once you take out items. rils were a penny ahead of estimates even as revenues fell just about 4%. rebecca, of course, you have jamie baker of jpmorgan standing by for more on southwest. back to you. >> thanks, mary. southwest as mary just told you was able to make a small profit despite the downturn in travel. it lured travelers with lower

fares. joining us to go inside the number is jamie bake, eastern airline analyst at jpmorgan. >> hi, rebecca. >> the airline here luring travelers by lowering fares. can they do more cuts and still be profitable going forward or is this company going to are to find a new we to make money? >> it's not all that unusual that they were able to post a profit in the second quarter. this is the seasonally strongest period for air travel demand going into the summer months. but you raise a good point, the guidance that they give or appeared to give in relags to the third quarter is worrisome, their failure to endorse a profit expectation stands in sharp contrast to what we and others were looking for. >> they can cannot though to be in your opinion one of the few airlines ever to to be consistently profitable? >> yeah, that's just it. >> all right. >> this goes to show you it's a

good thing right now to not have a large international network that's dependent on lie flat seats in business class, the environment a little bit stronger than international. >> but they have been expanding aggressively in terms of adding new destinations and things like that but they've managed to handle it well? >> i've been surprise and pleased they haven't been more gres nif that soens. traditionally, southwest's business model is one that i don't want to say enjoys a downturn but certainly looks to seize share and push weaker players aside. this is a different downturn both if terms of magnitude of the downturn and also the enact south southwest pacting differently by shrinking for the first time in its history. >> can they capitalize on business travelers? or what are the new growth venues for for this company beyond being one of the less expensive airline providers out there? >> sure. i think that answer is going to be determined by what happens to many of southwest's competitors. my colleague mark streeter and i put out a report earlier this

week that identifies a need for certain carriers to raise incrementalal liquidity and may have to turn to washington. depending on that response and efforts of the competition, i he that will determine the competitive landscape and to the tent that any vac kunls are created through service cutbacks or potential liquidation, southwest could move to backfill some of those markets. >> what do you think in terms of price cutting. what can this company do to cut prices and not hurt profitability? how much room on the down side is there? >> i don't believe they need to cut prices further. they need to convey a sense of value. consumers have to be ka joiled into believing their gaiting a good deal if they're buying an airline seat or a car. if you see the word sale, internet specials, if the profit value is good, people get on board. >> wiment, we're out of time,

but a little something here in your note about possible airline bailouts this winter. >> yeah, that's an idea that we just introduced this week. i think airline analysts are really liquidity analysts these days. it's not so much demand and oil it's about the ability of weaker players to access liquidity and plug the holes in their balance sheets. one potential source in fact be washington. nobody has made any formal approaches. >> hey, why not? line up. >> line up at the soup kitchen. there you go. >> here's my wallet right here, i'll sign over my paychecks from now on. all right, jamie baker, thanks very much. bernanke not the only one testifying on the hill today. >> yeah, peter wallison who is head of the american enterprise institute is going to talk to the house financial services committee for its other hearing entitled systemic risk, are some institutions too big to fail?

and if so, what should we do about it? we'll talk to him first on cnbc next. today there's a way to save more for retirement,

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we're back. besides bernanke, there's barney. barn every frank's house financial services committee, we'll look at systemic risk this afternoon. hearing focused on the so-called too big to fail institutions. joining us first on cnbc, peter wallison resident fellow with the american enterprise institute as well as a member of the congressional financial crisis inquiry commission. peter, thanks very much for being with us. >> pleasure to be here. >> is there such a thing as too big to fail? >> yeah, i think there actually is something like. >> that all right. why -- then what do we do about it? >> first of all, the institutions that are too big to fail are only commercial banks and that's because commercial banks are the places where people put their payrolls, people rely on immediate funds to pay for their mortgages an their living skpenlss and so forth. so when a commercial bank fails, a large commercial bank fail it

is conceivable that it will set off through the economy a cat skad of loss cascade of losses that would amount it a systemic loss. but beyond that i don't think institutions of any size create systemic risk. >> let me ask you this -- has the crisis changed your mind because if you've been consistent with this, then you wouldn't have build a out aig, you wouldn't have build a out anybody on wall street, is that correct? >> yeah, that's correct. i think the fed panicked on aig. it's cost the taxpayers about $150 billion to $170 billion so far and probably cost more. >> but aig, in my opinion, the way i view it and i could be wrong, aig seems to me to be the linchpin because ultimately, they were the ones that issued all the insurance and didn't have any way of paying off claims. >> there weren't any claims.

what happened with aig was that they didn't have the collateral that was necessary to support the credit default swaps they had issued, right. >> right. >> but tlmp no claims on credit default swaps, you really have to remember this. it's as though you had homeowners insurance and your insurance company failed but you hadn't had a fire in your home and no loss in your home. and under those circumstances, what you do is you go out and you get a new insurer, and the idea that because aig failed and couldn't pay off on insurance on which there were no claims is not a crisis. in adigts, when goldman sachs was asked what would have happened to them if aig had been allowed to fail, they were the largest counterparty with aig. >> peter, getting -- >> goldman sachs said nothing works have been negligible, we were fully protected.

that's how people were. >> what size is too big to pail? >> i don't think anyone has any idea what size is too big to fail. >> will we ever have any idea? >> no, of course not, no one knows. small institutions failing. when a market is in a certain condition could cause a lot of turmoil in the market. >> so your panel will define those elements, those criteria for too big to fail and make them public information? >> which panel are you talking about? if if you're talking about the financial crisis inquiry commission, i hope that's one of the things we will talk about, but we will never be able to define when an institution is too big to fail. we will, i hope, get into the question of why we had such a weak market and such a fragile market so that when an institution like lehman failed, there was a freezeup throughout the world but i didn't think it's going to be possible for anyone to define when something is in fact too big to fail. >> all right, peter, thank you very much. i'd like to say one more thing. >> very quickly.

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welcome back to "squawk on the street," i'm hampton pearson reporting live on capitol hill where in just a few minutes, federal reserve chairman ben bernanke will tell the house financial services committee, quote, aggressive policy actions around the world last fall may have averted the collapse the financial system. the downturn appear tons abating. the pace of decline appears to slowed significantly however the labor market continued to weaken. job insecurity dedplins home values and tight credit are likely to limit consumer spending and the fed chairman says the current stabilization of consumer spending may prove france gent that is a possible down side risk. the fed envisions a grasp recovery in 2010, accelerating in 2011, however unemployment is

expected to peak at the end of this year, remain high in 2010 and 2011 but uninflation will remain subdued for the next two years. and the fed says the highly accommodative monetary policy will be appropriate for an extended period of time. on to the notion of an exit strategy. quote, we have the necessary tool to implement an exit strategy when appropriate. our policy measures will unwind automatically as the economy recovers and financial strains ease. should conditions warrant a tightening of monetary policy before that unwinding is complete, quote, we have the tools to raise market interest rates as needed. on the question of regulatory reform, fed chairman make no, sir comments on the fed becoming possibly the primary systemic risk regulator but urges congress to balance its desire for more fed transparency versus possible threats to the fed's independence were it comes to

m monetary policy. specifically the fed chairman ant fed are opposed to legislation for expand gao audits inside the fed. we should hear from the chairman in about 20 minutes. back to you. >> all right, thank you, hampton pearson. you're seeing barney frank's committee room. she holding a hearing on the too big to fail thing. >> yes. >> don't want to confuse anybody b. the it sounds like they're not going to define what too big to fail is. >> right. so that's what barney frank's committee is doing. then there's the committee hearing that's listening to chairman bernanke. then there was something interesting in what hampton outlined in his remarks, bernanke apparently is saying that the exit strategy mechanisms will work automatically. >> automatic unwind. >> what was that about? >> we're going stro to understand better the mechanism by which it triggers an automatic unwind if there is some kind of mechanism they're building into the system that triggers that. i also thought the unemployment, the commentary about unemployment stabilizing but

remaining high through 2010 and 2011, that's a little ner nerve-racking because if you know there are a limited number of jobs out there and there will be a limited number of jobs out there as a consumer for the next couple of years, definitely, i mean psychologically speaking, you're probably going to change your habits a little bit. also the current stabilization may prove transient that also caught my attention. >> that caught my attention, too. because that's what happens to a lot of guests. we're coming to the earned, why? because the rate of decline is decelerating. all right, but that does not mean it can't accelerate again. bernanke, i don't think he believes it's that gg to happen, but at least he's saying, you know what? that's not automatic, you know? yeah, we're slowing down but we could pick up more. >> this does not seem to be, however, a fed that a is concerned with inflation at this point in time. that seems to be a very clear

point in the commentary that inflation isn't a near-term concern. >> all right. let's get right to the markets, kick thing off with bob at the big board. >> let's look at the earnings for big companies. caterpillar, utx, dupont. generally beat or exceeding expe expectations. it's all about stabilization in sales. so caterpillar beat and their guidance above expectedations for the full year. same situation with united technology, a little more subdued here. again, top line growth is below expectation for the major companies. same with dupont. i want to move on to the regional banks. regions financial very disappointing metrics, stocks getting hit, suntrust, dzions, comerica, they're all getting hit here, we'll talk about that in the next hour. cit moved nicely to the down

side. there were comments saying if their tender offer failinged, they may not able to make the august debt payment. citigroup dropping. tra trader talk. brian schacht mash, how wir looking at the nasdaq? >> we lost about another 0.3 of a percent while that bernanke commentary was being discussed. i want it point out one good story right now is dell up 1.2%, but both microsoft and oracle were positive announcements in a negative territory. the biggest stories on the nasdaq. apple will report after the close. expected to beat. the question is by how much. what do they do with their forward guidance, they tend to low ball and go forward from there. yahoo! under more pressure. down 3%. carol warts really pushing things at yahoo!. launching a new home page. google, research in motion, also down. i want to point out inland

pharmaceuticals. a positive diabetes test and amblin reports after the bell as well. >> i don't want to negts natural gas. it's been nexted by the energy complex pretty much all year. down almost $3 from where it was last december and it's lost about 34% so far this year. mild wealth and a lot of inventory part of the reason why, but when we look at what has happened with the -- >> but the question is very much on people's minds. the united states government including the federal reserve indeed, but the federal reserve in the lead for right of reason, mostly not of its choosing. the federal government was deeply engaged in increasing liquidity, i.e., putting money out into the economy particularly to rye place a constriction of credit. and there are people who are concerned that this will be inflationary. i think the chairman has shown consistently as have secretary

to the treasury paulson and geithner that there was an awareness of this and they were prepared to deal with but it's an important question because when you're talking about inflation it's not just reality but a perception f people think there's going to be inflation, that's inflation aemplt it's very important that the chairman address as he has been doing in a very straight forward way these concerns. i am persuaded by the chairman and others that we are able in an orderly way to undo what we had to do so there will not be that inflationary impact. i also believe that inflation danger is not the current most important one. but it is, i think, a very good opportunity for the chairman to address it. but i also want to talk about another matter here. i want it take a confession. apparently of the ravages of age. apparently, my vision is deteriorating more rapidly than i hoped it would be. i have looked carefully at the

deliberations we have seen about the bank of america/merrill lynch issue. and our colleagues on the government reform committee have had a number of hearings on that. i must say one of the most interesting and potentially instructive things that came out of it was secretary paulson's explaining that he could not produce e-mails because he had never sent them. that is a practice i recommend to many others, myself. but as i studied all this, here is my problem -- i cannot find a villain. now many of my colleagues have found various villains. they tend to be private sector or public sector depending on the ideology of the finder. but as i look at what happened, what i see is a very difficult situation that threatened further severe damage to an economy already damaged.

a repetition of the attack on the credit system which is so central to the functioning of our economy, which we had seen in earlier failures. and i believe we had people faced with a difficult situation. i have to say to some of my democratic friends who have been critical of the bank of america as i have done in other areas, they have not done what they should in modifying mortgages, i have plenty of criticism to make of our friends in the financial industry and the rest of them as well, but people said well, why was he not focused entirely on the shareholders? well, many of my colleagues who made ma criticism don't want private sector people looking only at the narrowest interest of the shareholders but want them to take into account the broader impact of what they do. probably because a credit crunch would hurt shareholders. as to the federal reserve,

treasury of the secretary, i would like to not see a, that would have been very negative consequences. i think there was one thing people need to remember. solutions cannot be qualitatively more elegant than the problems they seek to resolve. swlu a terrible mess, it is unlikely that those who try to' leave yate the danger of that mess will come out looking clean. not for the first time as an elected official i econonvy economists. they have available to them the counterfactual. economists can explain that a given decision was the best one that could be made because they can show what would have happened in the counterfactual situation. they can contrast what happened to what would have happened. no one has ever gotten re-elected with a bumper sticker said it would have been worse without me.

you probably can get tenure with that, but you can't win office. i understand that reality but we should not let it distort us. and it would not, i think, hurt us every so often to admit that not every action by every public officials were a bad thing and sometimes we should give people credit for trying to cope with an unpleasant reality the best they can. the gentleman from alabama. >> thank you, mr. chairman. chairman bernanke, thank you for appearing before the committee today for your professionalism and your service to our country. all of us in congress appreciate your willingness to make yourself available on countless numbers of occasions both to congressional committees and to individual members as we confronted this crisis. so i thank you. over the past year, we witnessed unprecedented government involvement in the financial markets for some times

republicans have expressed a growing unease over the magnitude of federal government involvement and manipulations of our economy. trillions of dollars of capital commitments guarantees, loans have been extended. what started out last year as a large but temporarily stabilization effort to prevent a financial collapse has evolved month by month into seemingly a permanent government intervention regime. this included ad hoc bail outs of institutions deemed too big to fail. many of the competitors of those too big to fail corporations deemed too small to save are no longer in business. today i read with interest your op ed in the "the wall street journal" acknowledging the need for an extra travesty, something republicans have called for

since last fall. simultaneously the obama administration has been spending a staggering amount of money to fund an economic recovery and stimulus that is slow in coming. it's been almost half a year since congress passed a $787 billion so-called stimulus bill and yet we continue to see record job losses. unemployment has spiked to 9.5%. and seems headed higher. your testimony predicts that the elevated unemployment will last through not only this year but next year confirming that and that's despite the administration's assurances that if we pass the stimulus package, unemployment would peak at 8%. other federal government interventions have failed as well. the administration's $75 billion foreclosure initiative intended to keep 3 to 4 million homeowners in their homes has so

far offered only 220 trial loan modifications. at the same time, the private sector and private efforts have their efforts have resulted in millions of homeowners staying in their home. the american people can be forgiven for increasingly asking tough questions about these enormous government outlays and interventions because so far, mr. chairman, there has been very little bang for the taxpayer's buck. it's not only these past expenditures that give us pause but it's the multitude of new proposals coming from the obama administration and their allies in congress calling for more government control and management. from health care to energy to financial services. one of the central questions the committee needs to answer as it considers reforms or financial regulatory system is whether

regulatory powers should be centralized in the federal reserve at a time when our country is facing unparalleled fiscal and monetary policy challenges. the fed's made some big mistakes about historically the board has done a poor job of identifying and addressing systemic risk before they become crisis. a prime example of this is troubled lend ever cit which was allowed to convert to a bank holding company last september and placed under the fed supervision. only after the fed declared it was adequately capitalized. this inability to assess risk once again threatens to undermine a fragile economy and erase the $2.5 billion in taxpayer funds provided cit under t.a.r.p. the obama administration has proposed a regulatory restructuring plan that would make the fed first responsible for identifying and regulating those firms that are

systemically significant and preventing systemic shock. republicans believe that the fed's core mission, the conduct of monetary policy will be seriously undermined if the regulatory responsibilities are expand aed in this way. let me conclude by saying that at a time when our economic economy faces serious structural problems and the threat of inflation if we maintain our current physical course and spending pattern, a disstrakts apd and overextended central bank subject to potential interference is a luxury we cannot afford. republicans believe that releaving the federal reserve of its current regulatory responsibilities and focusing it on the core monetary policy mission would enhance the fed's ability to execute an effective exit strategy and ensure it sets interest rates that are greatly -- affect both

individuals and small businesses with the single goal in mind, sound monetary policy. the proper conduct of sound monetary policy is the best way the fed can serve the american people. asking the fed to serve as a systemic regulator is inviting a false sense of security that will inevitably will be shattered at the expense of the taxpayer. thank you, mr. chairman. >> the gentleman from -- three minutes. >> chairman bernanke. >> we've been listening to opening statements in ben bernanke's testimony today on the hill. those statements will continue during this commercial break. we will be back when bernanke is beginning his speaking. stay with us.

california governor arnold schwarzenegger and the state's legislative leaders closing the budget shortfall. as she prepares for tonight's special report, sue herera joins us live from sacramento. what great timing, sue. >> well, you know what, rebecca? they are back from the brink i guess is the best way to put it. but whether or not this passes is another thing. they needed two-thirds of the majority of the legislators to do that and they hoped to vote on this on thursday. this is a budget that basically cuts broadly across all of the government's services. it hits public education, the

elderly, welfare. everybody got cut, just some got cut less than others. some of the winners are the state parks and education perhaps eventually. there have been broad cuts in education in the past, the state has promised to repay those. they have not. the question is whether or not this time they will. one of the key issues is this $15 billion worth of cuts contains a lot of kicking the can down the road, if you will. some of these cuts will be put into the future and paid for in the future and they are relying on the fact that the economy out here will improve, that remains a to be seen, of course, but that's what they're betting on here in california, the governor promised not to raise taxes, he did not raise taxes in this particular budget however, because counties and municipalities will have to probably raise taxes costs will be put on municipalities and that's going to be a problem out here in california. because some of those are already suffering. soy did reach a deal it will probably allow the state to quit

issuing ious but the question is clornt long term this really solves the state's budget crisis and that remains to be seen, rebecca. >> thank you so much, sue herera, we will be watching later this evening when you come to us live from there with that report. of course, we're waiting on bernanke's testimony. we already got the notes, the idea of what he's going to say. we read his op-ed piece in "the wall street journal." a lot of talk about the strategy, the exit strategy from our tax dollars, our government investment in a lot of companies, but less decisive in terms of timing. it had been in the comments, they said there would be an automatic unwind of our investments. and werpd wondering what that might actually look like, what would actually trigger such a thing. >> is congressman ron paul. during the q&a, you want to pay attention when paul gets to the microphone because he has been harshly critical of bernanke and the fed. >> government securities last

week indicate -- >> i'm sure his opening statement is full of the same kind of remarks, but paul has been a real thorn in bernanke's side, so it will be interesting when they get to his questions. >> also interesting you know, that there will be the commentary today on the too big to fail question. and trying to get to a better idea. >> that's at 2:00. >> that's later on today but trying to get to a better sense of what that is especially in light of cit group which was deemed at least initially as not too big to fail. today, it was closed. it reopened, it reopened lower. a couple minutes ago, mark. and on top of that the company has now come out and said that bankruptcy is maybe not out of the question here. >> and the republican -- are we going to take this now? yes. okay. >> other members of the committee, i'm pleased to present the semiannual monetary

report to the congress. aggressive policy actions taken around the world last fall may well have averted the collapse of the global financial system, an event that would have had extremely adverse and protracteded consequence for the world economy. even association the financial shocks that hit the global economy in september and october were the worst since the 1930s and helped push the global economy into the deepest recession since world war ii. the u.s. economy contracted sarply in the fourth quarter of last year and the first quarter of this yore. more recently, the pace of decline appears to have slowed significantly and final demand and production have shown tentative signs of stabilization. the labor market however has continued to weaken. consumer price inflation which fell to low levels late last year remained subdued in the first six months of 2009. to promote economic recovery and foster price stability, the committee last year brought its target for the federal funds rate to a historically low range

of 0 to 0.25% where it remains today. the fomc recommends it is likely to warrant maintain the funds rate at exceptionally low levels for an extended period. at the time of our february report, markets at home and abroad were under intense tense strains with risk spreads at elevated levels and some important financial markets essentially shut. today, financial conditions remain stressed and many households and businesses are finding credit difficult to obtain. nevertheless on that, the past few months have seen some notable improvenments. for example interest rate spreads and short-term money markets such as the interbank market and commercial paper market have continued to narrow. the extreme risk aversion of last fall has eased somewhat and investors are returning to private credit markets chlgts reflecting this greater receptivity corporate bond issues have been strong.

more markets are functioning normal normally with increased liquidity and lower bid/ask spreads. equity prices have recovered to roughly their levels at the end of the last year and banks have raised significant amounts of new capital. many of the improvements in financial conditions can be traced in part to policy actions taken by the federal reserve to encourage the flow of credit. for example, the decline to interbank lending rateds and 13reds was facilitated by the action of the federal reserve and other banks to ensure that financial institutions have adequate access to short-term liquidity which in turn has increased the stability of the banking stimg and the ability of the banks to lend. interest rates and spreads on commercial paper dropped significantly as a result of the backstop liquidity facilities that the federal reserve introduced last fall for that market. our purchases of agency mortgage backed securities and other longer term assets have helped to lower confirming fixed lower mortgage rates and the term

asset backed loan security facility or talf which was implemented this year has helped to start securitization markets for various class of consumer and small business credit. earlier this year, the federal reserve and other federal banking regulatory agencies undertook the supervisory capital assessment program proply known as the stress test to determine the capital needs of our largest financial institutions. the results of the skap were reported in may and they feared increase investor confidence in the u.s. banking system. scently the large majority of institutions have raised equity in public market answer the on june 17th, ten of the largest u.s. bank holding company, all b but one of participated would be paid a total of nearly $70 billion to the treasury. better condition and financial markets have been accompanied by financial prospects. consumer spending has been relatively stable so far this year and the decline in housing activity appears to have

moderated. businesses have continued to cut capital spending and like with tate date inventories but the likely showdown in the face of inventory liquidation in coming quarters represents another factor that may support a turnaround in activity. although the recession in the rest of the world led to a steep drop in the demand for u.s. export, this drag on our economy also appears to be waning as many of our trading partners are also seeing signs of stabilization. despite these positive signs, the rate of john loss remains high and unemployment rate has continue its steep rise. job insecurity together with declines in home values and tight credit is likely to limit gains in consumer spending. it's a possibility that the recent stabilization in household spending plurv transient is an important downside risk to the outlook. in conjunction with the june fomc meeting board men's an reserve bank presidents prepared economic pro-skbrekzs 2009 to

2011. fomc participants generally expect that after declining in the first half of this year, output will increase slightly over the remainder of 2009. the recovery is expected to be gradual in 2010 with acceleration in activity in 2011. although the unemployment rate is projected to peak at the end of this year, the projected declines in 2011 and to 11 would still leave unemployment well above fomc's participants' views over the longer run sustainable rate. all participants expect inflation will be lower this year than in recent years an most expect it to be remain subdued over the next two years. in light of the substantial economic slack and limited inflation pressures monetary policy remains focuses on fo fostering economic recovery. accordingly, the fomc believes a highly moderated stance will be appropriate for an extended period. however we also believe it is

important to assure the public and the marks that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed therefore thereby avoiding the risk that policy stimulus could lead to a future rice in inflation. the fomc han devoting considerable attention to the exit strategy and we are of the confident we have the necessary tools to implement that strategy when appropriate. to some extent our policy measures will unwind automatically as the economy recovers and financial strains ease because most of our extraordinary liquidity facilities are priced as a premium over normal interest rate spreads. indeed, total federal reserve credit extended to market participants has declined from from 2008 to less than $600 billion reflecting the improvement in financial systems that has already occurred. in addition, bank reserves held at the fed will decline as the

longer term assets mature are prepaid. nevertheless, should economic conditions warrant a tightening of the policy before this unwinding is complete, we have a number of tools that enable us to raise market interest rates as needed. perhaps the most such tool is the authority of the congress granted the federal reserve last fall to pay interest on balances held at the fed by depository institutions giving us substantial lever amp over the fund rates and market interest rates because generally will not supply funds to the market at a rate lower than they could earn risk free by holding balance at the federal reserve. indeed many foreign banks set a floor. the attraction for the federal reserve can be further increased by offering banks a choice of maturities for their deposits. but interest on reserves is by no means the only tool we have

to influence market interest rates. for example, we can drain liquidity from the system buy reverse purchase agreements in which we sell agreements from our portfolio with an agreement to buy them back at a later date. reverse agreements can be with a range of other counterparties to marcus baghdatis bank reserves. if necessary, another means of tightening policy is outright sales of our holdings of longer term securities. not only will it raise short-term interest rates but also put upward pressure on longer term interest rates by expanding the supply of longer term assets. if in, we are confident that we have the tools to raise interest rates when that becomes necessary to achieve our objectives of maximum employment and price stability. our economy and financial markets have faced extraordinary near-term challenges and strong and timely actions have been necessary and appropriate.

i've discussed some of the measures taken by the federal reserve to promote economic growth and financial stability. the congress also has taken substantial actions including the passage of a fiscal stimulus pack a nevertheless, even as important steps have been taken to address the recession and the threats to financial stability, maintaining the confidence of the public and financial markets requires the policy makers begin planning now for the restoration of fiscal balance, prompt attention to questions of fiscal sustainability is particularly critical because of budgetary and economic challenges associated with retirement of the baby boom generation and continued increases in the cost of medicare and medicaid. addressing the country's fiscal problems will require difficult choices but postponing those choices will only make them more difficult. moreover agreeing on sustainable long run fiscal path now could yield near term benefits in the form of lower long-term interest rates and increase consumer

confidence. unless we demonstrate a strong commitment to fiscal sustainability, were risk neither financial stability nor durable economic growth. a clear lesson of the recent financial turmoils that we must make our system more effective both in the united states and abroad, in my view comprehensive reform should include at least the following key elements -- a prudential approach that focuses on the stability of the financial system as a whole and not just the safety and soundness of financial institutions and that includes formal mechanisms for dealing with emerging systemic risks. stronger capital and liquidity standards for financial firms with more stringent standard force large, complex and financial financially interconnected firms. the extension and enhancement of supervisory oversight including effective consolidated superare vision to all financial organizations that could pose a significant risk to the overall financial system. enhanced bankruptcy or

resolution regime modeleded on current system for depository institutions that would allow financially troubled systemically important nonbank financial institutions to be bound down without broad disruptions to the financial institution's to the economy. enhanced protection for consumers and investors in their financial dealings. measures to ensure that critical payment clearing and settlement aranchments are resilient financial shocks and that practices related to the trading and clearing of derivatives an other financial instruments do not pose risks to the financial system as a whole. finally improve coordination across countries in the development of internationally active firms. the federal reserve has taken and will continue to take important steps to strengthen supervision, improve the resiliency of the financial system and to increase the macro prudential orientation of our oversight. for example, we are expanding our use of horizontal reviews of financial firm, provide a more comprehensive understanding of

practices and risks in the financial system. the federal reserve also remains strongly committed to effectively carrying out our responsibility for consumer protection. over the past three years, the federal reserve has written rules for strong protection for mortgage borrowers and credit card users among other substantive actions. p. later this week, the board will use the truth in lending act to include more consumer tested disclosures as well as rule changes applying to mortgages and home ec with the lines of credit. in addition, it includes new results regarding the compensation of mortgage original aters. we are expanding to include risk foc focused reviews of nonbasic subsidiaries of holding companies. we have provided support and assistance for organization special size ing ing in foreclo mitigation and have worked with nonprofit groups and strategies for neighborhood stabilization. the federal reserve's

combination of expertise and financial markets, palt systems and supervision pigs us well to protect consumers in their financial transactions, we look forward to discussing with congress ways to formalized our institutions strong commitment to consumer protection. the congress and the american people have a right to know how the federal reserve is carrying out its responsibilities and how we're using taxpayer resources. the federal reserve is committed to transparency and accountability in its operations. we report on our activities in a variety of ways including reports like the one i am presenting to congress today, other testimonies and speeches. the fomc releases a statement immediately after each regularly scheduled meeting and detailed minutes of each meeting on a timely basis we have. increased the freak and scope of the published forecast of fomc participants, we provide the public with detailed financial reports on the federal reserve system that are audited by an independent public accounting firm.

we also publish a complete balance sheet each week. we have vee rently taken additional steps to better inform the public about programs we've instituted to combat the financial crisis. we've expanded our website to bring together already available information as well as considerable new information on our policy programs and financial activities. in june, we initiated a monthly report to the congress that provides even more information on federal reserve liquidity programs including breakdowns of our lenning, associated collateral and other facets of programs established to address the financial crisis. these steps should help the public understand the efforts that we have taken to protect the taxpayer as we supply liquidity to the financial system and support the functioning of key credit markets. the congress has recently discussed proposals to discuss the audit short of the gao over the federal reserve. as you know, the federal reserve has already subjected to frequent reslews by the gao. the gao has brought authority to

audit our operations an functions. the congress recently the gao new authority to conduct audits of the credit facilities extended by the federal reserve to single and specific companies under the authority provided by section 13.3 of the federal reserve act including the loan facilities provided to or created for aig or bear stearns. the gao and inspector general have the right to audit our talf program which uses funds from the troubled assets relief program. the congress however purposef purposefully and for good reason excluded from the scope of potential gao review highly sensitive areas including policy deliberations and open market operations. in doing so the congress carefully balanced the need for public accountability with a strong public policy benefits that flow from maintaining an appropriate degree of independence from the central bank in the making and execution of monetary policy. financial markets in particular likely would see a grant of review authority in these areas to the gao as a serious

weakening of monetary policy independence. because gao reviews may be nishtsed at the request of members of congress, reviews or the threat of reviews their these areas could be seen as efforts to try and influence monetary policy decision it's. a perceived loss of monetary policy independence could raise fears about future inflation and lead to higher long-term interest rates an economic stability. we will continue to work with the congress to provide the information it needs to oversee our activities effectively yet in a way that does not compromise monetary policy independence. thank you, mr. chairman. >> thank you. mr. chairman, let me begin with one question, because i am pleased that you have, as i said, responded to the fears of inflation because i think you are well capable of holding them under control. and i also think it's important they not be invoked prematurely when the greater problem i believe the federal reserve

economists think is still further on the negative side. an one looming threat which we hear about a lot is the commercial real estate issue. there was a great deal of fear that there will be in commercial real estate, a series of failures that some of the economic bumps of the home mortgage will be reproduced. we've discussed this. what's your current posture? do you expect there to be problems an how are you and other elements of the government ready to pond to them? >> mr. chairman, we are watching that situation very carefully. there are a lot of cre loans coming up for refinance and the capacity to refinance them is limited which poses the possibilities of foreclosures in the commercial space much as in the residential situation. we are urging banks to continue to make lons to credit worthy borrowers and our examiners are presenting a balanced view in their discussions with banks.

the other step we've taken to try to address this problem, mr. chairman,that we have recently added to our talf program both new and legacy commercial mortgage backed securities by doing that we hope to open up the mortgage backed security market which is an important source of funding and finance for the cr market. >> i know there are some who are critical you've been doing too much. i don't share that, but on the other hand, some of those same people say what about commercial real estate? and fact is you are ready there to do some work. let me ask you now, i was interested in reading the report, on page 1, you note that consumer spending has been supported recently by the boost of disposable income of the tax cuts and increases in benefit payment part of the 2009 fiscal stimulus pack a. with regard to state and local borrowing you know interest rates on long-term municipality bonds declined in april as investors concerned about the credit quality appeared to ease

somewhat with the passage of the fiscal stimulus plan which included a substantial increase in the amount of federal grants to states and localities. then a discussion of the labor market, there was reference to the fact that ironically one of the things that makes it look is that the participation rate has gotten higher, that's a good thing in part because you know the emerging unemployment insurance last july have contributed toyer participation rates. i'm pleased these are three references by you to the positive impact of reference to the intervening economy in terms of boosting consumer spenlding and helping state and local governments both direct lie by revenue and then by keeping down their costs. so i do want to ask you, one of those counterfactuals you get to have fun with and i want to share a little bit of it. we have problems and i think as i said it's good to know that you can unwind, i think a premature unwinding would be a great mistake but the

counterfactuals, had we not passed the economic recovery plan in february of this year, would the economy be better or worse? >> mr. chairman, as you described, we think that income has affected consumer sums and the revenues to state local authorities may have improved their situation somewhat. so in in a that respect, there's been positive impact. but i would withhold an overall judgment since we've only seen a quarter or less of the money being disbursed. >> to were have a positive effect in this current pattate months fear. >> you would expect it would raise consumption, yes. >> so i appreciate those two points you have mentioned. let me just ask one last question, if the resolving authority, resolve does appear to mean dissolve, if that authority were vested in the appropriate agencies of the federal government, would the aig and lehman brothers and

merrill lynch situations have come out differently? >> would they have -- >> have come out differently. >> yes, of course. >> would the financial authorities have responded differently? >> it would not have been necessary for the fed or even the treasury and t.a.r.p. to intervene in those situations with a good resolution authority we could wound down those companies, had the creditors take losses to reduce the too big to fail problem while at the same time avoiding the very destructive effects, particularly of the case of the lehman on the broader financial system. >> thank you. gentleman from alabama. >> thank you. chairman bernanke, the chairman frank asked you about the commercial real estate market. you mentioned that the talf programs for the new and legacy program. the new program has been in operation about a month, is that right, taking loans and -- >> yes, that's right. >> and the legacy just about a

week, is that right? >> yes, sir. >> i notice you're going to cut those off december 31st. >> the program right now is slated to end at the end of the year, but we will be reviewing those programs and others to assess whether or not there needed beyond that time. >> i noticed several others run through the end of 2010 so it's sort of -- >> we had extended several, sir, to i think february 2010, not to the end of 2010. >> what is the state of the commercial real estate market? >> well, for a good bit of the recent years, the commercial real estate market was actually pretty strong even as the resident market was weakening, but as recession has gotten worse in the last six months or so, we're seeing increased vacancy, declining rent, falling prices so more pressure on commercial real estate, which is raising the risk of lending to commercial real estate. so that is certainly a negative.

and as ice was mentioning to the chairman, the facilities for refinancing commercial real estate either through banks or the securities market seem more limited sew we're concerned about that sector and paying close attention to it. we're taking the steps we can through the banking system and through the securitization markets to troy to address it. >> i definitely think that might be the wild card. i know deutsche bank this week came out with a report and smith barney last week that obviously raised concerns. you have talked about a resolution authority for nonbank financial institutions. and you've referred to as expedited bankruptcy. would it be within the bankruptcy code? would it be part of the bankruptcy regime? >> it would be especially a special regime that would be invoked only under circumstances

of financial stress and would be analogous to the laws we currently have for resolving failing banks which allow the regulators to intervene before the actual bankruptcy occurs to a void the negative impact of a bankruptcy on the market. so it could be in the broader bankruptcy regime but it would be a special category of bankruptcy that would be invoked only during financial crisis. >> you know, enron, worldsocom, drexel, worked very well, the bankruptcy regime. do you agree that it's very important that you force creditors to internalize the cost of their credit decisions? >> absolutely. otherwise you ever a too big to fail institution which doesn't have any discipline other than the regulatory oversight. >> so this regime would totally reject the too big to fail?

i mean you would not be asking taxpayers to guarantee or back stop losses? >> absolutely. i think too big to fail is an enormous problem, if we don't do anything else, we need to solve that problem. this is a critical element in solving it because it means that creditors would take losses f there are resolution costs, the presumption is they would be paid by assessments by other financial companies. >> republicans have proposed our financial services regulatory reform proposals includes an expedited bankruptcy within the bankruptcy code. and i would ask you to pay a particular attention to that. one thing that i'm also concerned about is even having the financial system take those losses or the tax payers. and we would hope that we would preserve a true, if we call it expedited bankruptcy it is in fact expedited bankruptcy.

i thank testimony. >> the gentleman from north carolina. >> thank you, mr. chairman. chairman bernanke, let me inquire into two areas that i just need a little clarification on. on page 8 of your testimony this morning, you say that we are expanding our supervisory activities to include risk-focus reviews of consumer compliance in nonbank subsidiaries of holding companies. what's the authority for that, and i had been under the impression that one of the reasons that was not done previously is that the fed didn't have that authority. is there new authority, or what -- under what authority are you acting there? >> well, the law is a bit vague. there is a presumption that you

will defer to the functional regulator in dealing with nonbank subs. in many cases, the functional regulator would be either a state regulator or the ftc. and we have done this in collaboration with those bodies, particularly the state regulators. the pilot program we ran to do examinations of nonbank subs was done in collaboration with these other bodies. and we believe that in the cooperative spirit and in looking at our responsibility to enforce these consumer laws, we believe a somewhat more proactive stance is justified. that being said, i think that congress ought to clarify the presumption of the ability of the consolidated supervisor to look into the subs. >> but it's clear that the fed had not been real proactive in that area prior to this crisis, is that right? >> for nonbank subs, that's right. >> okay. all right. on page 5 of your testimony, you

talk about the payment of interest on reserve balances, which we authorized last fall. had the fed not had that authority prior to last fall at all? >> no, we did not. >> okay. that seems to me to be a -- perhaps even more powerful tool than the adjustment of the fed fund interest rates. and to -- i guess i'm a little surprised at why some central banks had had that authority previously, and the fed had not. can you just give us a little history lesson on that? >> certainly. most central banks do have this authority, and they set a fed funds equivalent rate in the open market, but they use the interest on reserves rate as sort of a floor or backstop.

the feds' authorities go back to the '30s, and we are actually somewhat more limited on a number of these areas than other central banks. other central banks have somewhat broader powers to buy assets, to pay interest on reserves, and to lend to financial institutions. for example, we had to invoke the 13-3 authority to lend to the primary dealers, and the investment banks, whereas in europe, for example, any financial institution can borrow from the central bank. >> am i overstating the power of that as a potential tool for the fed to use, or do you perceive it in much the same way? >> many central banks around the world use what's called a corridor system, where they have an interest rate on reserves as the floor, and then a lending rate like the discount window rate, as the ceiling. and that keeps the market interest rate between those two levels. a lot of banks use that. so, yes, it is a very powerful tool. and we would not have been able to expand our balance sheet had

we not had that tool to help us with the exit. >> so you're saying until last fall, actually the fed -- the extent of the fed's power before we granted this authority was actually substantially less than a lot of federal -- a lot of central banks around the world. >> yes, that's right. of okay. well, i guess that's a double-edged sword from some of my colleagues on -- that the -- it gives the fed more authority that they would likely fear. your assessment is that as we wind down these positions, that would be as important or more important than the fed fund rate? >> well, the -- that interest on

reserves rate will help us control the fed funds rate. they should be very closely together. so they should both -- they should be closely tied, and they should both affect longer-term interest rates. so they'll be working together. >> thank you, mr. chairman. >> let me say, if i do understand for 30 seconds the gentleman from alabama reminded me, that decision to grant the fed that power was wholly bipartisan, and in fact first passed the house when the republicans were in the majority. the gentleman from alabama was in the subcommittee. it did not pass the senate. many there's a lot of that going around. and then it came up again and it was again passed. so that has been broadly supported on this committee, although not unanimously. which brings me to the gentleman from texas. mr. pahl. >> thank you, mr. chairman. in the past, most members of the federal reserve board, including your predecessor, when they come before the committee, they endorse in general, you know, the -- the idea of transparency. they don't just say we're

against transparency, it's the the definition that really counts. most members then would also argue for independence, which generally means that they don't want the congress to know it's actually what they're doing. but i saw the article today "the wall street journal," and there were a few quotes there that i wanted to ask you about. and i do know that all of us can get misquoted in the newspaper. but i want to clarify this, because it's either misleading or somebody is confused, and i want to see if i can figure this out. and the first one had to do with you saying that mr. pahl's bill, which is 1207, the transparency bill, would interfere with the fed's interest rates decision. and since i wrote the bill, and the intention, and i know what the intentions are, it has nothing to do with interference with monetary policy or interest

rates manipulations. there's nobody in the congress going to be monitoring the federal open market committee. it's after the fact that an audit can occur and find out what transpired. it -- there's no management. so is that your position that this bill, if it were to be passed, would interfere directly with interest rates -- setting interest rates? >> well, congressman pahl, at some point, as you know, we're going to have to start raising interest rates to avoid inflation. and people have talked about the politics of that and how whether the fed will be able to do that without intervention or interference. if we were to raise interest rates at a meeting, and someone in the congress didn't like that and said i want the gao to ought that decision, wouldn't that be viewed as an interference or at least expose -- >> i wouldn't think so. this is just reviewing it. and you can do what you want.

what about today? interest rates are artificially low. could there be any political pressure to keep interest rates artificially low? historically, that's been well-known. it's been documented and written about how other federal reserve chairmen, you know, they're on the verge of reappointment, and they know the president and all of a sudden -- so it's not like it's not politicized now. it's just the fact they can issue a lot of loans and special privileges to banks and corporations. that's political. this idea that it would be political because we know what happened afterwards, just doesn't seem to add up. since time is short, i want to go on to the next quote, which i find fascinating, because hopefully i can agree with you on this one. because you are -- this is -- in actual quotes. it says we absolutely will not monetize the debt. well, that's one of the major reform sometime in the distant future that would be beautiful, because that would stop all this chaotic monetary policy, inflations and depressions and

recessions and all of the mess that we have. but you say you will not. at the same time, you know, i quoted the $38 billion that was bought last week, and the plans to buy $300 billion of u.s. securities. these securities are bought by dollars you create, and if you're buying u.s. securities, what is that if it's not? and besides, if the markets really believed that, that you would absolutely not monetize debt, i think the markets would get hysterical. so it seems to me i would like to understand what you mean by that. >> well, the purpose of our limited program was to address private credit markets, congressman. when we complete the $300 billion program that we announced, we will have less treasuries on our balance sheet than we did two years ago, because we sawed of off a lot of treasuries to make room for other things we were doing. secondly, after we complete that $300 billion, our share of

outstanding treasuries will be at one of the lowest points in the post-war period. so we are not taking a significant portion of u.s. treasuries. all right. welcome to "the call" i'm melissa francis with larry kudlow. and ben bernanke is discussing the state of the economy before the house financial services committee. let's listen back in. >> the true definition of inflation is when you increase the money supply, and the immediate consequence is it sends out false bad information to the marketplace, so whether it's when the bubble is being formed or afterwards, all you're doing is inplating constantly, doubled the money supply, interest rates are artificial, people make mistakes. so it seems to me that you're in the midst of massive inflation, but i guess you have a different definition when you double the money supply, that's not inflation itself? or are you looking at only prices? >> may i respond? >> briefly. >> inflation is the change in the consumer price level, which is very stable right now.

and the various measures of money, as you know, and the broad measures of money, the measures that -- the measures of money in circulation like m1 and m2 are not growing quickly. >> the gentleman from california, mr. backa. >> thank you, very much, mr. chairman. i want to thank you and i want to thank the ranking member for convening this hearing, and i want to thank chairman bernanke tore taking the time to be here once again. my first question is in reference to the reform plan put forth by the obama administration, puts a lot of faith in the federal reserve's ability to oversee the largest, most interconnected firm in the marketplace to prevent against systemic failures. i have a question related to the financial oversight council that participated in this task. how do you envision the role of the financial oversight council taking shape, which is one of the questions, and then it's my understanding that the council will play a purely advisory role, having no real power or wait in our regulatory