oversight. he did not take the bait when the congressman tried to lure him into conceding that what's wrong with a little bit more oversight. >> i just would point out i wonder if the op-ed and the general talking about exit strategies might have diffused some members of congress and that's one of the reasons we're not hearing some of the fireworks. >> oh, clearly. clearly it did. i mean, he stole his own thunder. i'm sure we can speculate for days as to why he would do that. certainly makes it less exciting for all of us watching. but, you know, the q and a part is always what makes this interesting. you always get some off the wall questions. >> and on that note, jared, we have had had a number of commentators, david co, and dennis gartman saying his testimony today was crucial, because if he did not do well, it would risk his reappointmen . has he satisfied those concerns? >> well, he almost always does well on the hill. so he certainly hasn't put his reappointment in danger. but i think there is still a

strong likelihood that larry summers is going to get the nod over ben bernanke when we get to this fall. i don't think that equation has changed. >> don't move. we're going to have you listen throughout the testimony and help us dip in, whenever there is news. in the meantime, let's show you what's going on with the markets. dow jones industrial turned negative after being in positive territory earlier this morning. a lot of people bolstered or investors bolstered by the words coming out of caterpillar and how they felt there was stabilization. and while caterpillar is still higher by more than 2 points, at this point the rest of the market has gone negative. a lot of the financials are weaker. let's head back to ben bernanke testifying on capitol hill. >> you could require greater down payments. and so even if you don't know there is a bubble or not, that still might be a prudent thing to do. so i do think that looking at asset price fluctuations in a supervisory context could be very helpful. >> okay. thank you. yield back. >> the gentleman would yield to me -- i did then want to continue. a couple points. one, i would ask you, mr.

chairman, on page 16, you mention that the emergency unemployment that we adopted last year has ironically contributed to a higher unemployment number in terms of the rate, because it's increased the participation rate. i think people ought to be clear about that. the unemployment rate is -- goes up when more people are trying to find jobs. would it be possible to get an estimate to the extent to which that was statistically a factor? >> we can send it to you. my recollection is about a half a percentage point. >> right. that's interesting. that half a percent of the 9.5. secondly, i did just want to reiterate, our friend from texas said that in two cases i said that -- there were marginal improvements. the word marginal doesn't appear even in the margins here, certainly not in the text. so on page 1 in the first column, there's an unqualified statement that consumer spending has been supported by the 2009 stimulus.

on page 13, it says interest rates have declined because investors concerned about credit quality are eased with the passage of the stimulus plan. it then did say that in addition to that, it aided the finances somewhat. so would the gentleman -- the gentleman from illinois. you told me it's time. so -- those are both cases. i also remember that in response to a question from the gentleman from texas, sometimes you get answers you don't want. the chairman said that the passage of the stimulus bill had reduced unemployment. so obviously it's not totally the answer. but i don't think it's trivial to object to the insertion of marginal when it was never there in the interest point. the other point i want to make is this. the chairman talked about the recommendations for preparing executive compensation. i would just note those will

dove tail with the legislation i hope this committee will be adopting next week, because we will be empowering the s.e.c. statutorily to enact certain rules. and so the information and the recommendations of the federal reserve, frankly, my sense is that absent our statute, there wouldn't be the statutory authority to put all those into effect. so these work very well together. we will be giving the s.e.c. the statutory authority, i hope, before the end of the year to incorporate those recommendations. the gentleman from new jersey. >> before begin, let the record reflect there is a significant difference between the definition of marginal and somewhat. as a take-away from that. thank you, mr. chairman. we have some charts which sort of go to this point as far as looking at the economic issues and the stimulus issues and how you sort of judge these things. as you know, the president's economic policy advisor suggested that as soon as this passed that, quote, we'll start adding jobs rather than losing them. the majority leader huer said there will be an immediate jolt. so if you look up, and i know

it's hard from where you're sitting -- you've got one, great. that's even easier. this is what the original projections were, with the recovery plan, the dark line on the bottom. but if you don't do anything, things would be worse. it's the top line above there. and that's why, of course, we borrowed $800 plus billion to try to fix it. now, the next slide, slide two, shows what really happened. the two other lines are still there, but now you see where the unemployment numbers actually were in march of '09 and april of '09. and we don't have this on a little screen, but we do have it on a board to show where it went after march, april. i guess it goes up to may and june, if i'm not mistaken. i don't see it here. basically, what that tells me, not as an economist, just as a layman, that they -- well, as vice president said, misread the economy and their projections with regard to where things would happen if we did nothing or if we spent $800 billion and things were actually worse than they projected. and we would have been better

off if the original charts were right to have that done absolutely nothing. so your comment on that. and also, i understand your earlier comment, when i just stepped out of the room was it's too early to tell. when will we be able to tell, and if their focus was on job creation, and that was the entire focus in all their comments on this was job creation, isn't that an indicator that we can be -- should be able to look at here approximately a half dozen months later? >> well, mr. chairman, as frank mentioned earlier, the economists' fall back is always counter factual, where would we be without the program? and it's difficult to know. clearly, the forecast that was made in january of this year was too optimistic, and then the question is, where would we be without the program, it's very hard to know. some sense of the uncertainty giving by the cwo's estimate has at the end of 2010, the impact of the program being anywhere 6/10 of percent to 9/10 percent

of of unemployment. and it's hard to scale. and we should know better next year, but it's very early at this point. >> yeah. i fear then that that argument of the counter factual will always be the argument that will be thrown up to us, to suggest that maybe there was a better way. and even a year from now, or a year-and-a-half from now, when we get into the last dollar going out the door, they'll always say it could have been worse. so how would you retort to that argument? >> you would have to use the best analysis that you can get. to the extent that you're seeing outcomes unrelated to employment that are worse than you expected, that's indicative of the whole economy is worse than you expected. but i'm sympathetic to the fact that it's very hard to know what the impact is. >> so any discussion right now as far as going forward with additional spending or additional stimulus would also therefore be too early to make those suggestions, as well. >> that's right.

>> let's go to the issue of monetary policy. i know in your report today and your op-ed, as well, and you previously stated you have concerns about independence of the fed, both on monetary policy and your other regulatory roles, as well, and therefore you do not like the idea of audits and what have you, intrusive audits on various other aspects of the fed than it has right now. i would just suggest that in two areas that maybe the fed over its history has not been as independent as some would suggest. in the area of monetary policy, i know we've had this chairman on at least a half dozen occasions, courage that the fed, both the current fed and the previous chair, lower interest rates to keep the economy going and what have you. and, of course, you've heard a number of economists who make the argument that it was the low interest rates that helped either cause or at least exacerbate the problem. so there is one area where congress and at least the chairman is trying to weigh in and influence the fed. and certainly the other area is in -- on the regulatory role and the consumer protection area.

>> welcome back. as the stock market is sold off just a bit under chairman bernanke's testimony today, i think it's important to take a look at the rally in the bond market. yields are down anywhere from 12 do 14 points across the board here. let me just find my screen. 13 points on the ten-year. 14 on the seven-year. a little less on the front end. so it's a bit of a flattener right now. bernanke indicating it's going to be a slower recovery, unemployment will be high for some time, but most importantly, the accommodating policies of the fed of zero percent interest rates will remain around for a while. >> twice he said extended period, right, within the written remarks, suggesting how long the accommodation was going to stick around and that's when we started to see the impact in treasuries. >> this is the effect he wants. he wants to say i'm fighting inflation now, but i'm going to handle it later on. and that's the talk of the exit strategies and that has a benefit right now if the market believes him in bringing down

rates. >> i was going to say, the reaction you see in rates is this confirmation belief in the bond market that he can handle an exit strategy. >> i think so. if they're worried about inflation down the road, the very thing they're bidding up are tenure, rising and selling off in prices. let's go back to testimony. >> if the federal reserve is given the authority to oversee systematically significant firms, what additional powers would it need to completely and successfully carry out those duties? for example, what about the authority to review accounting policies, particularly those that have direct and potentially pro cyclical implications on banks, and what about enhanced authority that they examine the safety and soundness of nonbank subsidiaries with the bank holding company, and what about oversight of credit rating agencies? >> the fed would need some authority, perhaps in conjunction with the council, to add capital liquidity and other requirements to make sure that the institutions were not only

safe and sound, but did not pose a risk to the broader financial system. as part of that, the fed would need some enhanced authority to look at nonbank subs, as you mentioned. the other things you mention, like accounting policy and credit rating agencies would not be part of this. those are the kind of things that the council would be responsible for looking at. >> okay. i introduced a bill that would give the federal reserve oversight over credit rating agencies when they analyze the rate and structured financial products. this authority would build upon powers that the fed has already assumed as part of the administration of the talf program. do you have any reaction to that? >> well, currently, the s.e.c. has those authorities, and i guess i would like to get your judgment about why you would want to transfer them. >> well, because they have an important -- the fed does have -- is looking to perhaps

take on some responsibility of systemic risk, and clearly credit rating agencies have an important role to play in that regard. so my thought would be if we're going to address -- if we're going to confer this authority with the fed, don't they need all the tools that would be -- that would be necessary to achieve the ends? >> well, as i indicated earlier, we're not asking for, the administration is not asking for, broad-based, you know authority over the entire system. it's a very specific to limited set of of authorities over the systematically critical firms, which is similar to our current umbrella supervision authority. >> yeah. >> so the broad issues that you're referring to, i think, would be better served by being looked at by a council of regulators. >> all right. oh. do you believe that inflation concerns are misguided, given the large quantity of assets reserves in the banking industry? >> i think they're misguided in

the sense that i have described today and various other contexts, the federal reserve is able to draw those reserves out and raise interest rates and in an appropriate time to make sure we don't have an inflation problem. >> should congress consider setting a leverage ratio? >> that's something we should look at. i think there is room here for the -- the regulators, the treasury and others, the congress, that -- to think about our capital regulation plan and see what changes might be made. but i wouldn't want to give an offhand comment on that. of course we already have a ratio, but the question is whether to change it in some way. >> now i would like to ask about consumer protection issues. ed beginel ling indicated that consumer protection and safety and soundness are two sides of the same coin. but i wonder sometimes if that coin sometimes is at odds within

itself, because, you know, it seems to me that if you would take, for example, and i've used this example before, overdraft fees. i think a safety and soundness regulator might not be distressed about what i would call excessive overdraft fees, because that means profitablibility and a stream of income for the bank which would make the bank more safe and sound. but from a consumer standpoint, it could present real issues. $35 for a bounced check i think some consumer advocates might find that excessive. and so this is an example, and i know there are many others, in which the consumer -- a consumer advocate and a prudential regulator might see things very differently. in your -- do you see a conflict between, say -- whether a consumer advocate -- consumer advocate might look at and feel is important and that of a

safety and soundness regulator. >> on that particular example, the fed has taken a number of actions on overdraft fees. i think there are also examples where consumer protection and safety and soundness are complimentary. underwriting standards, good under i didn't go standards, well documented, making sure there is enough income. that's safety and soundness and also good for the consumer. so there are also situations -- >> excuse me. the red light means times up. judge the gentleman from illinois. >> thank you, mr. chairman. thank you for being here, mr. chairman. you talked a little bit about the talf program, and said that it was off to a slow start. what are your -- what are the expectations and the benchmarks with the talf facility? is it will it be sufficient and timely enough to facilitate private investing and lending, or are you considering other

programs? >> the amount loaned is lower than we expected. but i wouldn't say it's off to a slow star, because it has been very effective. we have got consumer asset-backed securitizations at almost the same level as they were before the crisis, and considerable improvement in the spreads in those securities. we've just begun the commercial mortgage-backed security program, so it's a little early to judge there. but we have seen even in that category, we have seen the spreads come in, the rates come down. so i do think that even though the amounts loaned are not that enormous, there have been benefits in the market. so i think we'll continue to focus on that instrument. >> i think that with the securitized lending, how do you plan to address the reality? i think that there have been some that have flagged that the -- the market experts and some of the participants that the markets need to know now, and not at year's end whether

the programs will be extended in order to see any usefulness in the next several months. would you agree with that statement? >> well, we'll certainly want to give the markets plenty of advance warning, you're absolutely right there. and we're looking at that and making a judgment. >> okay. and how do you address the commercial real estate? you talked about that as being the -- >> well, one of the main problems with commercial real estate finance is that commercial mortgage-backed securities -- securitizations, was an important source of funding for that commercial real estate, and that has completely shut down. our talf program is now accepting both new and legacy cmbs. it takes a bit of time to put those deals together, and so we haven't quite yet seen the scale that we anticipate. but we are hopeful that that will be at least one contributing factor to improving the commercial real estate market. >> so have you contemplated extending the talf program? >> we are looking at some

alternative assets. but they are very complex, many of them. once you get beyond the categories we've already included. >> so if you -- if you go to that, then will you not extend the travel program, if you go to these other -- >> we may not. it depends on our judgments on some of the alternative asset classes that we're currently reviewing. >> okay. thank you. then it's my understanding that, you know, we talked so much about small businesses as being the basis of jobs, and about 60 to 80% of the net new jobs, according to this cb a's website. if this is the case, what's going to be the effect of requiring small businesses to pay for this -- the health care program? in other words, if they pay as individuals the rates, how is this going to affect the health

care for small businesses, and shouldn't we be providing incentives for small businesses to grow, rather than to have to have a tax increase, in effect? >> if you raise taxes on a particular kind of firm that, will be detrimental to the firm. but i think in fairness, you have to look at the overall issue, which is how to provide broad-based health care. and there's a problem which is that a lot of small firms don't offer health care, and then the question is, how do you provide that. so there is an issue of financing that, maybe alternative ways to do it. >> but isn't it going to be that the small businesses would actually have much less chance to do it if they're having to increase taxes to pay if they're, you know, the amount of money they're paying over -- i don't know what it is now. it's either between 250,000 or a million, whatever it's going to be the amount. >> if there's extra cost, that would be obviously a cut into

profits. >> all right. thank you for being here. yield back. >> the gentlewoman from california, miss spear. >> thank you, mr. chairman. mr. chairman, thank you for your service. i know you have spent a lot of time up here in the number of hearings and government oversight among others, and we have been tough on you. and i want you to know that even though we've been tough, i truly respect what you have done over the last 12 months. i think you're a man of goodwill, and good faith, and we are indebted to you as the american people. let me ask you this question. are we enduring the greatest world depression right now? >> this is the worst global recession in the post war period. it's not as great as the '30s, but since world war ii, yes. >> the $700 billion of t.a.r.p. money, you indicated that we're under water with aig and bear stearns. how much can the taxpayers

expect to have returned to them of the $700 billion? >> i was referring to the fed loans and not to the t.a.r.p., but t.a.r.p. is also under water, probably, and aig. i don't know the answer. we've got, of course, $70 billion just paid back. it's much more complicated now, because as you know, the t.a.r.p. money is being used for a number of different purposes, including foreclosure avoidance and the auto companies and so on. so it's hard for me to make the judgment. i would say that of the money put into as capital into banks, particularly through the capital purchase program, which is money given out to healthy banks, i would say that virtually all of that money will come back. for troubled firms like aig, it depends on how markets evolve and how the firm does going forward. >> you said earlier that you didn't really think the glass-steagall -- if it were in place, would have protected us from all that took place. however, it would have protected

us from the debacle at aig, and the taxpayers would not have had to put up $200 billion. that's true, is it not? >> i don't think so. the glass-steagall separates commercial banking and investment banking. i don't think it would have prevented aig from doing -- >> well, aig is an insurance company. and the only way it was able then to move into credit default swaps was by purchasing a thrift in delaware that then gave it the opportunity to play in that marketplace. so -- >> i would have to check into the legalalities. they were treating -- they were call credit default swaps a form of insurance, so maybe they would have argued it was a type of insurance. >> but it wasn't regulated by insurance commissioners around the country. it was really regulated, with thrift supervision, so therefore it was the banking entity that was really the regulator for it. there's a hearing we're going to have this afternoon on what's too big to fail. and one of the individuals who

is going to testify makes the statement that for companies that are under $100 billion as a rough threshold, that we can allow them to fail without it creating havoc in our financial services industry. would you agree with that? >> i wouldn't to give us a single number. i think it depends also on the complexity and interconnectedness of the firm. and it also depends on what's happening in the broader markets. there may be times of stability when a firm can fail, and wouldn't cause broad problems, but during a period of intense, you know, instability, letting the firm fail would be a problem. so i hesitate to give a single number. >> but is that around the threshold, would you say? >> again, i don't want to give a single number. i think it's a multidimensional question. depends on a number of different things. >> now, bank of america's $2.3 trillion in assets now, it's too

big to fail. isn't it? >> well, we -- the government intervened, provided t.a.r.p. money in january. >> well, it's the definition of a company that's too big to fail because we have injected so much money into it, correct? >> yes. and, again, i think it's very important for us to have a resolution regime that will avoid that problem in the future. >> so how do we make these financial institutions, because there is a handful of them now, because there has been concentration in the marketplace, because of the failures. how do we make these companies smaller? >> if you impose both the consolidated supervision of the fed or another authority over these firms, and make them bear the cost of their size through extra capital liquidity and risk management requirements first, and secondly, if you have a resolution regime which allows the possibility that creditors could lose money if the company

failed, then both of those things would tend to make it -- being big less attractive. because on the one hand, you have to barrymore capital requirements, and on the other hand you can you don't get the cheap financing you get from being too big to fail. so those things would tend to make firms choose to be smaller. and in addition, supervisors could choose to tell firms that they needed to limit certain activities if they thought it was a danger to the broad system. >> my tame has expired. >> the gentleman from texas, mr. marchon. >> thank you, mr. chairman. we have had a interesting phenomena, where we had several investment banks, and broker/dealers that decided to become bank holding companies in banks. is there a possibility that these bank holding companies and banks can make another decision to go back to be only broker/dealers, and investment banks? and does the fed have any

control over their decision to do that? and what would be the implications of that? >> they could do that. and if they did, the fed would no longer be their supervisor. one of the benefits of the idea of determining that a certain set of firms are so-called tier one firms is that if you were one of those firms, you couldn't escape. you would still be supervised by the fed, no matter what your charter was. >> that would be a very important part of the reform package. >> that's right. to avoid that problem, yes. >> okay. with the savings rate at 8%, and going possibly to 10, and the strong demand for treasuries, is it possible that fed could make the decision to divest itself of the treasuries and the government securities that it's been buying, as long as that savings rate and that demand for

treasuries remains high? >> we don't have any near-term -- we don't have any near-term plans to divest ourselves. the fed normally has on its balance sheet a considerable amount of treasuries, and as i mentioned, the purchases we're making right now will only bring us back to somewhere where we were a few years ago. >> is it possible that we would have a -- a treasury rates low and interest rates low and inflation raise its head, and we could actually be in the place of having to raise interest rates without there being any employment gains? >> well, one concern that we always have to pay attention to is that if there were for some reason a loss of credibility, which might come about because of loss of independence of the fed, and inflation expectations rose for no reason connected to the economy, but just because of

investors thinking inflation is going to be higher, that would pose a serious problem for the fed, because it would require us to respond to that, to avoid it being transmitted into actual inflation, and that could be happening at a time when the economy was not yet recovered. so inflation expectations, the credibility of the fed are actually very important. >> is there a time in financial history since the great depression where you actually had consumer spending and the savings rate go up simultaneously? >> that's unusual, but it's not impossible. if income is rising fast enough, then you can both save more and consume more. but normally, when savings rates go up, people are obviously cutting back on their spending. >> okay. thank you. >> gentleman from idaho. mr. mennic. >> mr. chairman, i wanted to return to the next shoe to drop,

and the chairman's concern about commercial real estate. would it be possible to provide a new -- assist providing liquidity for lenders and a floor to deteriorating market values by having -- giving authority, statutory authority, to freddie, fannie, or perhaps a new agency to guarantee loans of developed property, perhaps at 75% of the lower of today's active market, fair market value, or today's replacement value, using today's real estate and construction costs? and perhaps a similar guarantee for yet to be developed property at perhaps 50% of the lower of those two values. the advantage of this would be to prevent bankruptcy of commercial developers and commercial property owners who are unable to secure takeout financing or to get development loan renewals, to reduce the

downward pressure on rental rates of commercial property by reducing the number of price of distressed property sales, and to reduce failure rates of banks and commercial lenders by reducing the size and number of problem nonperforming commercial loans. i would like your opinion with respect to whether this is something we in the congress should pursue. >> well, the congress could certainly do that, and i think you would have to make the balance between helping out this market and the fact that that would probably -- >> welcome back to "power lunch." we want to highlight the headlines at the bottom. the treasury department has sent an 18-page draft of a bill to capitol hill for tougher credit rating agency rules. one of the items they include in there is if you rate a company, you can't consult for them either. so that would definitely cut into the revenue streams of the companies we are so familiar with, standard & poor's, moody's. and if you are familiar, this is what happened with the accounting agencies. if it you did the auditing of the company, you were no longer in the wake of the enron scandal

allowed to do consulting as well. tougher rules for the agencies. >> the s.e.c. would have powers to regulate the industry, according to reuters, and this happens when they go rating shopping, looking for another company to rate them. so that would be something that i think would be of interest to creditors. >> because they would be looking for a better -- rating. yes. let's get back to capitol hill, where ben bernanke continues his testimony. >> and i understand truly. i heard people say there are signs of stabilization. you didn't mention that you think there has been a peak in unemployment. i guess a peak has gone from 680,000 a month down to $500,000 a month, we're losing jobs. that's significant, and i think as time goes on, you're going to lose fewer and fewer jobs each month, because fewer and fewer people are able to be laid off. but we've gone from the subprime debacle, and it seems like now we're going through a second round in the residential. and that's individuals who had good loans, they're losing their jobs or business people, or

basically running out of reserves and they're losing their homes also. but it's an unusual situation. banks aren't making loans. and we can say some are, but when you talk to people in the private sector, they're having a very difficult time getting loans. and i see a different situation, and banks also don't want deposits. you go to them with large cds, and they really don't want to take them. i think they'll accept the liability. savings have increased, and i think it's because people realize they can't replace the money today if they spend it. i think there is a very cautious economy going out there, and people look at that and they're afraid to basically spend their money. and i think certain amount of money are being forced into the stoths, because you can't go to the bank and get anything for your savings. but there's been a comment about a perfect storm. and there's been some mention about what the commercial real estate market is going to be doing. i think i stress saying that about a year ago. you look at a $6 trillion market out there with loans in the commercial sector, and default rates about a quarter of 1%.

today they're about 2%. i think in the next 30 days, and i know you probably don't to talk about this, there is going to be a spike in the next three years between 12 and 15%. i don't know any lenders out there today who want to make loans on commercial real estate. now, commercial mortgage-backed securities were about $240 billion in 2007, sold last year was about $12 billion. and i think today they're flat. zero mortgage-backed securities, and there isn't a credit flow. this year, there's about $400 billion worth of commercial real estate that is due. by 2012, that increase is about a trillion dollars. what honest projection do you see for this commercial real estate market? now, the economy has really been hit hard with the residential, especially on the subprime. of the second round, i think is hit. you can see it right now. now, this is going to be dumped on the back of the economy. and we've kind of glossed over. but i think this is more severe than most people are giving credibility to.

could you address that a little? >> no, i agree, it's a sector we're paying a lot of attention to. the fundamentals are weakening, and the financial situation is very tough. so we'll see some problems there, i'm sure. we are seeing some banks, if not making new loans, working out old ones and trying to extend, for example, the terms of those loans. and we also, as i've mentioned, have added the commercial mortgage-backed securities to our talf program. and it's too early to say how affected that will be, but we have had some success in other types of securitizations. so we're making some efforts in that direction. but again, i think that scenario we need to pay close attention to. >> and what you said there is very important. they're trying to work out loans. by february of last year, i introduced an amendment on the bill on to -- required the federal reserve and the s.e.c. to revise mark to market, to try to deal with that. the problem i think we're going to see in the banking industry, especially with regulators is the cap rate has gone from 7% in 2006 to about 10 today.

how are you going to deal with a builder or an individual loans commercial center who lost $14 million on his first and based on mark to market, it's worth 7 and they end with 5. how do you deal with that? >> it's the same principle as with a borrower. if it's cheaper to reduce the payments, and it keeps the money coming in it, as opposed to getting a foreclosure, then it might be worth working it out. so it really depends if the borrower can maintain a lower level of payments than might be in the bank's interest to do it. >> are the regulators going to allow that bank to extend the five-year call when that note is due to extend a loan when the loan is $14 million, based on current value, the loan should be 5? >> well, you take a loss on it. but we're working with the banks in the residential context to try to not create accounting incentives to foreclose as opposed to work out. and the same principle ought to apply in commercial real estate. >> but we're not starting where we did with the banks where they had adequate liquidity originally and when they started to get hit with defaults.

we're talking about banks today that don't want to lend money, trying to keep the reserves and they don't have the reserves. >> i agree it's a problem. >> thank you. >> the gentleman from new jersey. >> thank you, mr. chairman. chairman, welcome back. >> let me say, we will be able to accommodate everybody who is here. and the staff is encouraged to bar any member to tries to come in, besides those who are here. the gentleman from new jersey. >> thank you, mr. chairman. first i want to commend you for your work with talf, i think has been ingenious, and very helpful in if creating markets where there was an absence of credit. so i really give you enormous credit for trying to provide credit to the federal government. i know you've spoken with a couple members this morning about federal spending, and the potential looming threat it pose to say our economy longer term. i'm hearing from many of my constituents in ocean county, new jersey that they're greatly concerned about that spending pattern, the trajectory of

spending we're on as a country and may create deficits and federal debt that's unsustainable long-term, that raises interest rates inevitably, as the cost of government financing becomes unbearable. can you revisit this topic with me? i know you've talked to some other people about it, but maybe you could allay my concerns if that's not a looming crisis facing our country. >> i don't think i can allay your concerns. we are going from about a 40% debt to gdp ratio before the crisis to somewhere 60 or above by next year. and it will continue to rise probably further. butting aside all the issues being discussed now about health care reform and so on, just on the prior scenario, the congressional budget office shows an unsustainable fiscal path going out, because there are, under current law, there is something in the order of $40 trillion of unfunded health care

liabilities for the u.s. government, and a significant amount also for pensions. so as i was saying earlier, reform is important. we need to think about different ways we want to deliver health care and so on. but we do need to think hard about finding ways to control the costs, because the cost of health care is the single-most important determinant of the long-term fiscal situation, and we really need to address that. otherwise, we are already in an unsustainable situation. forget about additional things we might want to do. >> would you agree with that cost containment concept applies not just in the health care context, but in the overall government spending? >> well, the new york stock exchange here. stocks up 80 points on the dow a little over an hour and a half ago and have since deteriorated. traders are interested in knowing what's going on here. if you want to blame it on mr. bernanke, i think you'll have to look elsewhere. most traders feel the reason we came off our highs is the caterpillar conference call did not go particularly well. here's some of the comments that came out of there. they're saying their third quarter will be, quote, very

tough for sales and profits. they're talking about the possibility they could even lose money in the third quarter. analysts were examining a gain of 17 cents there. they're also planning significant rolling shutdowns of its factories during the third quarter here. so issues overall with caterpillar i think are the main problems. michelle, back to you. >> and bob pi san see, looking at financials getting weaker. let's bring up the ten year yields here. much as we see the ten year yield dropping because of bernanke's comments, the yield curve is less steep which makes it hard for the financials to earn money which they have been doing the last quarter. do you think that's why? >> today is something -- is a flattening trade that's out there. for example, the two-year, is nine basis points lower. the 10-year is 13 basis points lower. but when the yield curve does flatten, more pressure on financials. i would say to bob's comment, it

is not a very helpful thing what bernanke is saying today. he has nothing like a rosy outlook at all, rather glum on the economy. yeah, it's going to turn around, but there is new juice in the outlook of the fed chairman. >> steve, you are there? >> yeah, i'm here. >> what i would do is take a look at regions financial here, and that's the reason the financials are weak. regions, a big regional bank came out with earnings much worse than anticipated, and there was significant credit quality deterioration, which is again raising this spector that we're not seeing improving trends in credit quality. if you look at regions, you see them down about 12% right now. >> all right. so three reasons why the market has turned. thank you so much bob pisani at the nyc. let's get back to the hearings on capitol hill with ben bernanke. >> news to me. and i wonder if you tell me what you think causes inflation. >> well, let's be clear what's going on. the federal reserve is not putting money out into the economy. what we're doing is, we're

creating bank reserves. that's money the banks hold with the fed. so it's just sitting there idly. it's not chasing any goods. okay? so as long as those bank reserves are sitting idly, broad reserves -- >> but it won't sit there idly forever. the purpose is not to sit there idly forever. >> right. >> and while there may be a time lapse, certainly, unless that money gets sucked back in, out of circulation, it's going cousin inflation. there is no denying it. >> it is not sucked in, but as i was describing, we have ways of sucking it back in. >> how? >> well, one way to do it is by raising the interest rate we pay on those reserves, which induces banks to keep money with us, instead of lending it out or circulating through the economy. another way to do it is through various open market operations that we can do that essentially pull those reserves out and bring them back into the fed. so we do have a number of tools to do it. and we are quite aware of this issue. and we will not allow the broad measures of money circulating in the economy to rise at a rate

rapid enough that would cousin inflation eventually. >> i would appreciate it if maybe you could give the memos of this committee a memo and more extensive explanation how you plan to do that without damaging the economy now. >> the policy report covers it. >> thank you. the second question was in response to the audit of the fed. as you know, the statutes are this thick of exemptions of audit to the fed. every agency just about can be audited. >> want to break in quickly and show you this live picture from the rose garden where president obama is once again going to speak about health care reform. we want to see if he is going to talk about a timetable. yesterday, he seemed to suggest that he could wait until the end of the yeesh. but now hearing from members of congress they're going to try to get it done before the august recess. we are waiting for the president as soon as he comes out. we'll bring it to you live. and let's go back to capitol hill with ben bernanke testifying. >> and i think really the public does have a right to know, historically, how we determined the monetary policy of this

country, for better or for worse. don't expect it to be 100% on target all of the time. but i think it's a matter of transparency. i think it's a matter of accountability, and like your thoughts on that. >> well, first of all, things outside of monetary policy, we're open and very willing to work with you. the gao right now is doing an audit of our annual financial statement, it's doing an audit of our information security controls, it's doing an audit of our assistance to aig. >> i -- >> and many other things. so let me turn -- >> this is the policy-making decisions, the minutes of the meetings that any government body might want to have off the record, while they're making critical decisions, but eventually should be open to the public. >> eventually. well, we put out a whole transcript in five years. but i think that's fine. but if it's done within days or even weeks of the decision, it's going to look like the congress is saying we disagree with that decision. >> i agree with that. it shouldn't interfere with daily decision making, but i don't know how after the fact auditing and all of the exemptions that are there being

eliminated for a period of time and could say six months a year or afterwards, i don't see why there shouldn't be 100% crystal clear transparency of every single function of the fed after the fact. >> because we have to be extraordinarily careful that the markets in the public don't think that congress is trying to influence monetary policy decisions. >> if we do it in a year -- in arrears, we don't know, really, whether the best decisions made a year ago or two years ago or five years ago or 20 years ago. we don't know if they're the best decisions. we don't know who the fed picked to be winners and losers. and i think the public really has a right to know that. someday. >> on issues relating to our 13-3 authority, we're putting out money and lending money and so on. we can work that out. i agree with you that we're putting out taxpayer money. there should be ways for the government to be -- for congress to be assured we're doing it in a safe way that is -- has appropriate financial controls and so on and so on.

so i agree with that part. monetary policy is a very specific element, though, of that. >> but that's the most critical. >> the gentleman's time has expired. the gentleman from ohio. >> thank you, mr. chairman and thank you chairman bernanke for being here. i had questions for you, as well, about the federal reserve's role, and the need for accountability and transparency versus the conflicting need for independence and to be free of political pressures. and if seems to me, what the public is more concerned about is not the federal reserves rule on monetary policy, but the federal reserve's role in bailing out certain entities like aig and bear stearns and questions about how decisions get made about who is saved or who is allowed to fail. so maybe you could help me with

what kind of transparency and accountability, the maximum that we can give our taxpayers that would still leave the federal reserve with the appropriate amount of insulation from political pressure, and the appropriate independence that you need to carry out your essential mission. >> on the issue you mentioned, congress has already acknowledged. congress passed and the president signed a law which allows the gao to audit all loans made to specific companies in rescue operations, including aig and bear stearns. that has been done, and we are quite open to discussing any kind of extraordinary lending that we do in terms of making sure the congress is comfortable that we are taking all of the steps necessary to protect the taxpayer and to do the appropriate thing with -- you know, with those loans. so that one area -- and to go back to our previous conversation, the one area where i particularly sensitive is about the congress second-guessing in the very shore period of time the

monetary policy decisions being made by the federal reserve with the sense that displeasure from the congress would, you know, put pressure on the fed, you know, to try to anticipate the political preference recognizes of the congress. >> there is other discussion this morning about when inflation might begin to rear its head, and some concerns about that. as i understand the answer, inflation is not presently a worry that you're concerned about. but -- and certainly i think housing and unemployment are much bigger worries for the greater economy right now than concern about inflation. but i was wondering what your judgment, whether fear of inflation is holding back banks, some of which have seem to be recovered. they want to give their t.a.r.p. money back. goldman sachs is showing profits, and bonuses are being

offered bonuses are being offero some players in the financial services market, but whether fear of inflation is keeping banks from making the kind of loans that are needed for small business and others to help us restore the economy, particularly out on main street, so to speak. >> i don't think that's a major factor. for one thing, if you look at the financial markets, interest rates like long-term government interest rates are still quite low. if the financial markets were worried about the inflation, rose rates would be much higher. i don't think they are indicating a great deal of concern about inflation and from the bank, they are concerned about credit worthiness and the losses they have taken than about inflation, i think. >> in terms of the state of the economy, what steps can the fed take to address the unemployment rates that we were seeing going

up? i certainly share your view that the recovery money has not fully had its impact in the greater economy and we will see gain there is. still we want to see places where americans can actually make things in this country and we can generate those kinds of jobs in our economy as well. >> the fed is being aggressive and trying to support the economy. we lowered interest rates to zero or have a set of markets working. we are doing our best to provide support to the economy much. >> do you think we have sufficiently addressed the issue of certain risky behaviors that do damage to the economy. the default swap. >> no, not yet. we have to do -- >> we interrupt bernanke's testimony because president obama is speaking on health care

reform. >> the progress we are making on health insurance reform and i want to talk about a vote that took place in congress. long before i took this office, i argued that meeting our greatest challenges would require changing policies in washington, but changing the way we do business in washington. i also promised that part of that change would be eliminating waste and inefficiency in the defense. reform that will better protect our nation and our troops and save taxpayers tens of billions of dollars. as commander in chief, i doll whatever it takes to defend the american people which is why we increased funding for military and always give our men and women in uniform the equipment and support they need to get the job done. i reject the notion that we have to waste billion was taxpayer dollars on outdated and unnecessary defense projects to keep the nation secure. that's why i have taken steps to

greatly reduce no bid defense contracts. that's why i signed overwhelmingly bipartisan legislation to eliminate cost overruns before they spiral out of control. i'm grateful that the senate just voted against an additional $1.75 billion to buy f 22 fighter jets that military experts and members of both parties say we do not need. at a time when we are fighting two wars and facing a serious deficit, this would have been an inexcusable waste of mone. every dollar of waste in our defense budget is a dollar we can't spend to support our troops or protect the american people. our budget is a zero sum gain and if our money goes to f 22s, our troops and citizens lose. i want to thank secretary gates for outspoken leadership on the issue and every member of congress who put politics aside

to do what's right for the military and the taxpayers and i want to thank senators levin and mccain for helping to make this happen. . now, you have said health care costs are the biggest drivers of our deficit. nobody disputes that. i'm looking forward to meeting with several members of congress who are working to pass health insurance reform that will bring down long-term costs, expand coverage and provide more choice. i know that there those in this town who openly declare an intention to block reform. the familiar washington script that we have seen many times before. they would rather score political points than see premiums double and cost grow three times faster than wages. they would maintain a system that works for the drug companies while becoming increasingly unaffordable for families and businesses. there many others working hard to address this growing crisis.

i know that there is a tendency in washington to accentuate the differences instead of underscoring common ground. we are closer than ever to the reform that the american people need and we will get the job done. i have urged congress to act and the health care reform bills through the respective committees in the house and the senate to reflect consensus on how to move forward. let me lay out the substantial common ground in the current bills. we agreed that our health reform bill will extend coverage and include unprecedented insurance protections for the american people. under each of these bills, you won't be denied coverage if you have a preexisting medical condition. if you change jobs you won't be denied if you lose jobs or start a business. you won't lose insurance if you get sick. we agreed that our health reform

bill will promote choice. americans will be able to compare the price and quality of different plans and pick the plan that they want. if you like your current plan, you will be able to keep it. let me repeat that. if you like your plan, you will be able to keep it. each bill provides for a public option that keeps insurance companies honest, ensuring the competition to make coverage affordable. we agreed that our bill will emphasize prevention and wellness by investing in program that help americans live lives to prevent illness and increase competitiveness of our country. we agreed that the bill will protect american families from financial catastrophe if they get sick. that's why each has out of pocket limits that will ensure that families don't go bankrupt because of illness. we agree that our bill will

include measures to cut costs while improving quality. each of these bills improvings oversight and helps reduce give aways to insurance couples in medicare. each of these bills will provide incentives so patients get the best care and not just the most expensive care. the consensus is not limited to congress. indeed we forged levels on health care that have never been reached in the history of this count reechlt health care providers agreed to do their part to reduce the rate of growth in health care spending. the pharmaceutical industry agreed to spending reductions that will make prescription drugs more affordable for seniors. hospitals have agreed to bring down costs and the american nurse's association and the american medical association who represent millions of nurses and doctors who know our health care system best have announced their support for reform. we have traveled long and hard

to reach this point. i know that we have further to go. i have to say that the american people are absolutely clear that this won't be easy, but that the road we have traveled doesn't just stretch back through the six months of my administration. it stretches back year after year, decade after decade through all the times that washington has failed to tackle this problem. time and again we heard excuses to delay and defeat reform. time and again the american people have suffered because people in washington played the politics at the moment instead of putting the interest of the american people first. that's how we ended up with premiums rising three times faster than wages and ended up with businesses choosing between shedding benefits and shutting their doors and we have been burdened with run away costs and huge gaps in coverage. that's the status quo.

what we super right now. the american people understand that is unacceptable. they don't care who is up and down in washington. they care about what's going on in their lives. they don't care about the latest political attack and weather their families will be crush bide rising premiums. whether the businesses they work for will have to cut jobs and whether their children will be saddled with debt. i understand that some will try to delay action until the special interest can kill it and others will focus on scoring political points. we have done that before. we can choose to follow that playbook jen and never get over the gold line and face an even greater crisis in the years to come. that's one path we can ralph. or come together and insist it will be different. we can choose action over inaction and progress over the politics of the moment and build on the extraordinary common ground that is forge and do the

hard work to finally pass the health insurance reform that the american people deserve. i can guarantee you that when we do pass this bill, history won't record the demands for endless delay or debates in the news cycle. it will record the hard work done by the members of congress to pass the bill and the fact that the people who sent us here to washington insisted upon change. that's the work that we have come here to do and i look forward to working with congress in the days ahead to getting the job done. thank you, everybody. >> discussing health care reform from the rose garden. he definitely said let's get this passed by the end of the year. we heard no such time table. he wants to try it again once again to get it through by the end of the session here and get it done by august 1st. he said there is common ground in all these bills to extend coverage to unprecedented

levels. he backed off it seemed on saying for every american. am i putting too fine of a point and is there too much nuance there? >> i don't know if it was his bottom line and what he was looking for or simply saying look how far we have come and the progress we have made. you are correct in saying extended coverage can include insurance protection and not for all americans. >> several coverage like we heard before. >> for may be a here's how we will declare victory and redefine our goals here as being much more limited. look how far we have come and how far we got in terms of the bills. you are right. it is not the university coverage. >> a look of acknowledgement for the comment that none of these bills control the costs. >> we have done very little to counter because they don't have a counter. >> let's bring in two members of congress and what's going on with ben bernanke on capitol

hill. the representative from new jersey, welcome to "power lunch." i don't know where to start here. we should start with health care or ben bernanke. we have the representative. let me start with you. for the first time in a long time. ben bernanke spoke outside the scope of what he normally does which is monetary policy and chide congress on fiscal policy and spending too much money. did you hear that? >> of course that's a corollary to monetary policy, but on that question, you can reflect back to what his message was. the message was we are succeeding in coming out of the depths of the recession and that things are looking good. they are not fully recovered, but on a positive path now. he anticipates by the end of the year or early next year, we will start recoveringing with a slow recovery of unemployment.

>> how serious is the proposal and bill that has a lot of sponsors when it comes to giving the ago audit power over the fed's monetary power? >> it's serious as a bipartisan piece of legislation. i don't know the number. last time i saw it was around 220 members that signed ochl they proposed the democrats and republicans because they are responding to what the american public is saying. you have this opaque organization accountable to no one. they set up and get involved with monetary policy and now into fiscal policy. the american public and members of congress just want to know can't you open your doings to us. >> what are about the chairman's remarks that this constitutes interference into the making of monetary policy? >> i question them on that. the fed needs to be independent on one hand, but there has been pressure with regard to the fed and monetary policy or the regulatory side.

you just saw the fed succumb to pressure from congress on regulation of credit cards and the like. on monetary policy, the report was done that said the current chairman pushed the fed about a half dozen times and keep the rates low, but there is always that pressure. >> still representative, this would raise it to unprecedented levels. are you comfortable with the gao second-guessing machine tear policy decisions? >> i haven't signed on myself. i am waiting to see. we have to make an analysis of whether or not we would be subjecting the federal reserve to a congressional or political control which has always been separate and successful without that control. i think we have to look at it carefully before we go to that extent. the importance of this bill and why it's getting so much support is the yet that many people are fostering putting the federal

reserve in charge of systemic risk as being the uba regulator. if that were to occur, we have to have other constraints in place that may interfere with the independence in monetary policy. >> let me stick with you and ask about president obama and health care. he talked about extending the coverage and all the bills extend coverage. he didn't say to all americans. is the white house redefining the goals of what it's after with health care having read the polls? >> i don't think we should be that exacting. the president is saying we will carry the ball down the line and we don't know whether to bring everybody with us and score a touchdown or get down to the one-yard line. that's what we should be happy for. we can't live in circumstances that we have now, but we can improve. it take a lot of leadership and governors to give them improvement and he is committed to that and i take him at his word. >> representative, we haven't heard any commentary out of the

white house and the democrats on the cbo coming out and saying the bills don't control costs and they don't necessarily extend to universal coverage. they don't seem to answer the mission of what you are trying to achieve and nobody addresses that. >> we're addressed that and you addressed that with the first question or point with regard to ben ber nank when he said he is getting into the area of fiscal restraint by congress. we passed this reform as proposed bied administration. it will be adding a trillion or two trillion according to the score to the bottom line of the taxpayers right now. we can't sustain that. >> i want to give you a chance to respond and tell viewers that the bernanke hearings returned and the chairman will be up on the hill. >> we have to be careful. i know my friend scott would not try to flavor this answer by suggesting this is the administration's proposal.

this is one proposal of five out of committees of the congress we are now talk bchlth the president to my knowledge hasn't made an absolute health care proposal and that's what we are working through. let's not try to saturate the president with the responsibility of whatever proposals are being debated. >> speaking of cost, the fed chairman was explicit about the need to control future out lying deficits, particularly after the first couple of years. will there be changes at all for the fed chairman's testimony or business as usual? >> i think i agree with scott. we will have a coming together here and we should. both republicans and democrats and the congress to work with the president to get control of our fiscal policy in this country and the budgetary problems in the country. if we don't, the whole system is going down. in a way health care doesn't matter. if we go towards the self

destruction because we are incapable of operating under a balanced budget, that's our fault and the republic will suffer. i don't think that will be the case. >> one of the ways is the proposal to millionaires and tax people who make more than $350,000. where does that stand in representative pelosi backed off on people making a million? is that going to happen or dead in the water? what's the story when it comes to taxing the wealth to pay for welfare. >> worry regard to proposals, there is no indication for fiscal restraint and every proposal and the house has been spending more and more. we have not addressed the issue of how to pay for it except to say we will tack more. everyone is talking about twice that money being needed.

we know the best system and although she may be backing off, she is not backing off on the idea of saying we will get this money by taxing the american public. there is no cost savings in any proposal and if the bill in the house is no cost savings and only spending increases. >> sorry this done by august 1st? >> i hope not. it's too important. >> definitively no. both sides of the aisle saying it can't be done. when does it get done by. the longer it goes, the less likely it is to get done? >> i think we can get it done by the end of the year and should work for that and come up with a workable problem and a solution. we should listen to the ideas of the other side. they should listen to the ideas of our side and most of all, the ideas of health care reform being necessary. let's get it done. >> leave it there.

two of our favorite guys. garrett? >> take a break and pay bills and get ready for the fast money halftime report after this. undefeated professional boxer floyd "money" mayweather has the fastest hands boxing has ever seen. so i've come to this ring to see who's faster... on the internet. i'll be using the 3g at&t laptopconnect card. he won't. so i can browse the web faster, email business plans faster. all on the go. i'm bill kurtis and i'm faster than floyd mayweather. (announcer) switch to the nation's fastest 3g network

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welcome to the fast money report. reversals in caterpillar and morgan stanley leading the way. let's get to the word on the street.

the governor joins us from the stock exchange. let's start off with you. what was the reaction on the floor to ben bernanke's commends and tentative signs that rates will in fact stay low. >> everyone was basically stymied by the fact that he was speaking. everyone used it as a morning to take the day off. >> you can't -- >> what we are looking at is the comments on unemployment. when he was gauge together between 9% and 10%. people think that that's light. the government is light on their unemployment numbers. >> good catch on the mike there, governor. >> great point. unemployment has been a concern. he brings up unemployment and deficits. that is key if you want to drive the economy higher. >> he did say the consumer was a

bit of a risk and i totally agree with that. >> we are seeing softness in the consumer shares. couple that with the report out today from america's research group saying 30% of households plan to spend less on back to school. are there any buys on weakness? >> back to school is the second most important season for retail. i think you look to the discounters and a wal-mart and a tjs and a target. >> let's talk about caterpillar. the results beat expectations, but people got a chance to chew over results and not too great. q3 will be challenging and the outlook for' 09 is so wide. you can drive one of those tractors through. we see them about 5%. is this an opportunity and are people putting too much into this one name? >> forget about putting too much, but the fact that people bought into this rally and we

are looking at 944. that was the '09 high. we got ahead of ourselves. >> the market went up 7-10% over the last two weeks and we are getting profit-taking here. caterpillar on a technical play is between 4150 and 4050. that broke through the 4050 and fast money you could have made there. it's trading now down to $30. >> obviously people are playing from the short side, but when we were at 870, 850 was on the horizon. it comes out of nowhere and angered a lot of people on the short side. do they buy and cover and get to 1,000? that's the major bet, but a lot of money is still short. >> and a lot of money on the sidelines. people were trying to chase the market.

>> let's move on to the markets and chasing the marks lower. about 3.7% and the bkx is down about 4%. morgan stanley is interesting. if you look at how it fared against the rally post goldman sacks t didn't do as well. jeff, what do you make of this move here? there a lot of expectations at morgan stanley. they will post a decent quarter. >> he liked morgan stanley and sometimes stocks get tired. they are waiting to see and especially in the financials. from the march lows, financials were the key. they drove the market higher because morgan stanley didn't rally and still doesn't mean it's not a buy. wait for them to report and see the price action with the volume on that. >> what do you make that they didn't participate. investors are not skeptical about the quarter? >> i don't know if you can do it

being about morgan stanley's quarter, but in general they have run so far and while it's not as far as goldman has run, it's far. they are getting tired. >> basically it was an article in the "wall street journal" today about the negative exposure in the commercial market. we have to look at the real estate as being a factor here. >> they could have exposure of $250 billion. apple and yao ya hoo to report earnings after the bell. do you buy here? joe, are you with us? >> i'm with you, melissa. how are you? >> i'm good. what do you make of the action with yahoo and apple. are you buying ahead of the earnings? >> on apple i think you will see five million iphone being sold and they will obviously look forward in terms of guidance and not give you the greatest guidance, but they will clearly be the question, is apple setting up for a mean trade?

the stock itself got so far ahead of it, it has to pull back after earnings. >> a great point that he brings up to be careful about signing into apple. there is so much speculation and people have been so excited about the stock. if they miss or something is said, they will sell it off hard. >> that are does it for us. i will see you tomorrow. on tonight's fast money, do not miss instant analysis from the conference call and the trade heading into tomorrow. up next on "power lunch," a budget deal in california. stay tuned. >> after hours action rolls on with the biggest techs reporting after the bell. they give you the realtime trade. while wall street might be on the way back. is your local bank in trouble? plus the maestro man started it, but is america back to blowing bubbles again? a cautionary tale from a top strategist you can't afford to

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the weather here is much better and the sun is shining on this state. they reached the budget deal. will it get passed? we don't know. tonight we are going to take a special look at california's fiscal crisis and the ramifications for the entire u.s. economy. even though governor schwarzenegger and state legislative leaders struck a budget agreement, a new set of problems could loom for california. jane wells is here with more on

that part of the story. interesting times to say the least. >> i hate to be a party popper, but they closed this $26 billion hole with $15 billion in cuts. the other 11 billion is borrowing from cities and have to pay that back. much of the $15 billion they cut back and pushing off cost to next year and also assumptions about the economy. >> kicking the can down the road. with a dozen addressed is what they call the usual suspects that everyone points to where we go down the list. one is a legislature and governor. calpers reported a 23% drop of a $56 billion drop. if they can't fund that, the government has to up contributions. a 2/3 majority that gives the

minority veto power. a siren goes by. we have a budget! a tax code that relies on income tax meaning california's revenues are tied to wall street in an estate of 38 million to 134,000 wealthy californians paying nearly half. finally a proposition system where frustrated voters force conflicting priorities on the legislature. they make their own decisions and end up cancelling out and getting the legislature in a corner. we will talk about that and this budget deal with no new taxes and there two radio guys who take credit for that. although the governor will point out they are not always right. we will look at how over the last 30 years it has come to this. why the enterprisial spirit of california does one thing and in sacramento they do something completely different.

>> this is not the first time the state has been in crisis. we have these situations and my question is whether or not the local municipalities will be forced to raise taxes. sacramento will be borrowing from the local towns and there may not be any new tax increases in the budget per se, but that doesn't mean the downtown the road will not have to raise taxes. >> by law the state can borrow from local governments. they have to repay it in years with interest. if the money is not there, they will have to come up with it. >> they will have to borrow, but in this environment, will they do that? there a lost questions in this deal. we had people walking around this morning coming to see the show. they are just moving money around once again. business as usual in sacramento. a lot of dissatisfaction with the deal. >> we will see if it gets voted through. >> they hope to do that thursday. whether or not that happens, we will find out. you will join me tone, all right sf join us tonight.

we will be anchoring the report, california in crisis joined by a number of colleagues. jane is one, jim goldman and julia. tune in at 6 p.m. pacific time right here on cnbc. back to our colleague. steve leesman, over to you. >> a quick question. do you evaluate this and is this a real fix or smoke in mirrors with pushing money around? >> it's pushing money around. i don't know what you think, but -- they are real cuts. you have state workers to take three days off a month without pay. >> everyone had to take a cut. some got cut more than others, but in terms of -- they are pushing expenses into fiscal years. that part of it i think looks like smoke and mirrors and that's where it comes from. >> they have to come up with it at some point and say we overpromised on so many front when is it comes to pensions and health care.

it doesn't seem like they tackled the hard issues. they have to cut spending over the long run. >> michelle, by the way, many unions are seeking authorization to strike over this. the real issue is the tax structure here and the solution possibly may come later this summer when the special commission to try to reform the code comes back with this. >> about a flat tax. >> this may be the environment where that could fly. >> we have to wrap, but i was out there and somebody said the solution to the california problem is to split the state up into four different states and that would help them actually solve the problems. they could agree on balanced budgets in the four states. >> here's the problem. in the south, we need the water. you split the state up and it causes southern california to never allow that. they won't take away that water.

it would cost too much. >> oil is in the north and the people in the south want it. no different. >> comparing california to iraq. that's michelle caruso cabrera. i will give you her e-mail directly. looking forward to that special if anyone can unravel that problem, it will be you guys. straight ahead, plenty of companies beating earnings estimates. coming up short on revenue. are they cutting cost too much and is that bad for the economy and markets? >> in a few minutes, airline turbulence and more job cuts than freezes. united trying to dodge bankruptcy. are we on the brink of a big shake-up? is on the case. d#: 1-800-345-250 "i'm rethinking everything...

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at earnings central blue chip stocks are taking center stage. we had five dow components reporting and we want to show you which we reported right here. they are trading mixed. caterpillar reported profits of 72 cents a share and 50 cents ahead of estimates. coca-cola at 92 cents and du pont at 61 cents a share.

merck five cents and 83 cents a share and united technologies beat the results by a penny. all five respecting declines in profits from a year ago. most reporting double-digit percentage declines on a percentage basis. what you see right here is a board that will tell you what components have report and beaten the estimates. the green being the companies of course that have beaten estimates and if you take a look, we have caterpillar, the first time with this. be patient with me. coca-cola, du pont, merck, and this is like vana white. these are the five. all of them beating the results today. that was supposed to clear t. second quarter revenue for all of these companies. down from last year and reflecking continued weakness and merck was the only who reported better than expected revenues. the dow components beating on the bottom line and the top line

from last year and only merck beating there. >> thank you very much. for more on the market moves, let's go down to the new york stock exchange. bob dasani is there from boston. managing director at may flower advisors from california. what happened? we had a solid move on the back of caterpillar and raised their outlook. >> a couple of things happened. bond prices move up and mr. bernanke was emphasizing the soft recovery. bond prices competing and i think the caterpillar call was the most important reason. you are right. on the earnings report with the press release and everyone seized on that. in the conference call that began at 11:00 a.m. eastern time, they talked about how tough the third quarter would be and for sales and earnings and talked about the fact that they

could lose money and expecting to make 17 cents. that was a bit of a head turner. that's the main reason we came off the highs. >> there were a lot of reasons why we are off the highs. one thing we haven't talked about is cit. after waiting to put out the release of the finance for example the bond holders and they came out this morning saying bankruptcy a possibility. how much is that weighing on the market? . >> we diddy isry leaf and cit may not be systemic, but to main street has almost a domino effect. ask any retailer and it's a powerful force. not well-known to the public, but again to small mom and pop businesses. this is the financing. if cit were to go away, the system funks. many businesses fail and it will be a slow death. we don't want to see a bankruptcy there. >> i have one area of concern. this recent rally, take the 40%

from the bottom or so that we are up. it really passed the individual investor buy. how much concern do you have that the investor gets in in time to get hurt again? >> you make a good point. we have seen 17 weeks of stock market equity inflows. money is coming back, but the volume is very, very light. for an individual investor or retirement participant, this is a challenge on the evidence that suggest that is the economy is not improving. unemployment is getting worse. the data on main continues to get worse. it is a challenge in the macroenvironment, yet we see few alternatives for investors. where are you going to put your money to get the return? few places. you are compelled to take a level of risk. reluctant is what we are seeing. >> let's get sue in here. >> i was interested in the comment about caterpillar and the down drop we are seeing is

spilling into the other stocks in the success sector. given the exposure to the international market and especially the emerging markets, the play is not as strong and not coming back the way a lot of people thought it was linked to the commodities. >> that's what happened. as caterpillar was making the comments and saw the big names on the u.s. steel or coal names for example coming off of the highs and they are trading down 4% to 6%. it was the caterpillar comments. >> bob dasani and it's looking great out here. looking awful here. >> it's gorgeous. it's not so good back there, but i will bring sacramento weather back for you. >> please do. see the special on california in crisis. >> apple. it ranks number on the s&p and number two on nasdaq.

they beat estimates 12 quarters in a row. what will they do to dazzle investor when is they report after the bell? stay tuned and find out. >> the bar is very high and here's a look at how the smart phone wars are going. how they are doing so far and when we come back, what is going on with lockheed martin about the decision from the senate. welcome to the now network. population 49 million. right now, 1.5 million people are on a conference call. 750,000 wish they weren't. - ( phones chirping ) - construction workers are making 244,000 nextel direct connect calls. 1 million people are responding to an email. - 151 accidentally hit "reply all." - ( foghorn blows ) that's happening now. america's most dependable 3g network bringing you the first wireless 4g network. - sprint. the now network. - ( whoosh sound ) deaf, hard of hearing and people with speech disabilities access www.sprintrelay.com.

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to strip the defense budget with a lockheed for lockheed martin. a lot of members wanted to keep the program to keep people employed even though they think the f 22 would be abandoned. we have to get through the house decision, but the senate voting against the f 22 and lockheed martin is lower by 8%. >> they say this is a victory for obama in trying to get this because he wants the f 35. we don't know who is going to be the winner of that if that ends up being the additional funding. here the stories we are following at this hour. shares of graw hill and moody's losses on news the white house is seeking tighter oversight rules for credit rating agencies. shares are plunging 20% with the company falling sharply missing analyst estimates and the house financial services committee with chief ben ber nank to get rid of the business at the top of the hour looking into whether they are too big to fail.

if so, what we should do about it. >> for day two of his testimony. we will carry that q&a and shares ever apple up more than 75% year to date as they brace for the company's after the bell earnings. what can we expect from the i phone and ipod? jim goldman joins us with the preview. jim? >> apple certainly is not immune to the recession and feel together a lot less than its contemporaries. it was apple's best quarter ever and could measure up to loftier expectations tonight. the headline numbers are 1.16 and over $8 billion in revenue. whisper numbers they are important in apple's case that are higher. better than five million iphone higher and suggest a quarter of over 2.4 million units and 10 or 11 million ipods sold. gross margins are key to the

story. apple thinks something above 30% is likely though analysts expect up to 34%. does steve jobs make a rare appearance on the conference call? he doesn't normally, but now that he is back in charge, there will be a chance. i will be logging that at 5:00 eastern. the release should come at around 4:30 tonight. >> let's bring in roger kay with end point technologies. the shares are up 77% year to date. they are expecting a lot of good news out of the company, but can it meet expectations or is this priced into it? >> hi, michelle. that's part of the issue. the whis terred numbers keep crawling higher and higher and the street is discounting all the upside news. today the shares are off a little. it looks to me as if everybody is expecting a blowout, but a blowout on a blowout. that seems to be a little bit

much. they will do their best to pair up. >> where are we in the competition? it was a month or two ago that all the news was about the competitors rolling out for apple. it was blackberry had one and who else had one. there were a bunch of competitors out there. palm had one. where are we now? have they beaten them back and is this old news to apple. >> it depends on which market data you believe. the fact is the blackberry has research in motion and have a stuck pipeline regularly coming out with new innovations and received very well. the palm prehad a good first weekend depending on who you talk to. since then you wonder about market traction and everything i have been reading indicates there isn't much. that is part of the downloaded applications that apple has been a huge leader in with a billion

and a half downloads. others are trying to nobody seems to be able to staunch that and apple maintains that. >> that's new forran apple product. for microsoft, that gives the ipod a big advantage in the competition. >> exactly. >> apple has a tremendous amount of stickiness with the customer base. you can't overestimate how important that is. it will keep apple in the game for a long time to come. this is a company that has more legs than a cent paid. >> do you still buy the shares and what do you recommend after that huge gain and what can they do to keep up the momentum? >> a triquarter. that's what it needs, right, roj sner. >> what they have to do is be even more on the gross margins and have to be 40% instead of 37 which was the highest number. the revenues have to hit 8.5

billion instead of 8.25. for them to be what everybody thinks is behind the numbers, it's a cat and mouse game. they are low balling their own numbers and everybody else is trying to figure out what will happen. >> quickly on one as far as apple stock is concerned. >> go ahead, sorry. it's coming. >> if we can see an i triquarter, that would be neat. i was going to say watch apple stock and expectations are just astronomically high here. it would not surprise me if apple beats and meets some of these whisper numbers. if we see the stock pull back the sell on the news action on the day of earnings. when people start to digest the fact. look at where the momentum is going. >> what are do we need to hear about steve jobs sf. >> revenue. >> it's okay if steve doesn't show up. most people realize this is a guy who is recovering and

doesn't really need a lot of extra energy they have to spend. we really don't need to see steve. it will be okay and it will be out of character. i don't know why they would bother him with that. >> got it. thank you. >> i got in trouble. >> again? >> with the ipod? >> i bought my 11-year-old one. i went to buy my 9 yore old 1 and they improved it. i didn't know. my older couldn't stand the fact that the 9-year-old had the better one. >> don't get me started. two months. soft earnings lay offs and job freezes and united on the brink of bankruptcy. is it time for the airline to fasten their seatbelts? phil has the latest on the severe turbulence for the sector. undefeated professional boxer floyd "money" mayweather

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democrats and the house are willing to stay beyond july 31st to get health care passed for some form of the bill that seems to represent the two we had. >> the main story we need to know is phil is in the house as it drives. you are the man. tell us about airline earnings. >> we're haven't talked about the airlines. we talked about earnings and a couple of things. we will talk about unite and they are not on the brink of bankruptcy. there has been discussion that has been floating out there that they are struggling a bit. we will talk more about it, but united not on the brink of bankruptcy. let's start with southwest beating the street by's penny and posting 8 cents a share. let's talk about united and better than expected numbers from united and that's the reason this stock has gotten a bit of a pop. up 4.5%. united doing person expected.

continental is a story where the eps is one cent below and a loss of 1.36. that's what people are focused on. talk about tumbling 18%. we will hear this across the board. things are starting to tighten up in terms of traffic. we will report a combined second quarter loss of $1.2 billion, but this morning gary kelly said business travel remains weak. put it all together and we are looking at a repeat of what we saw a few years ago from the airlines. >> the industry environment right now does a have a certain groundhog day feel to it with the downturn of 9/11. the losses are mounding and airlines are in survival mode. >> when you take a look at the airlines and in terms of investing in these stocks, right now they are beaten down largely because people are expecting the

next two to three, even four quarters to be very weak. a combination of things and we don't know what will happen with fuel and travel and fares, they are not picking up at all. >> tough times. >> that gives the best margins to the airline. >> it's and it's weak right now. >> let's get to charlie gasparino with a special guest. >> my special guest is mike mayor. mayo. a guy who calls it straight and got a lot of this right. mike, you have been telling me, you are pessimistic about the industry and making a lot of money. goldman sax blowout quarter. you still have problems with the industry. give us a background on why. >> we put out a 200 page report a little more than a week ago. the main point of this report -- >> a nice promotion there. >> you can see the charts. you see the wheel barrel that is filled up, but there problems on

the pile that need to be put into the wheel barrels. one is filled up with the mortgages, but you have a lot of problem assets with commercials and commercial real estate and other consumer assets. >> we will see them tomorrow. we will see them materialize and with morgan stanley. give us a background and what do you see happen something it's interesting to me that it's the timing is everything. this is a perfect example. they became much more risk-adverse at a time where it right now pays to take risk and make it $3 billion a quarter from rolling the dies in the bond markets. they went into risk at the height of the market where they lost a lot of money. what do you see happening tomorrow? >> morgan stanley should have decent results. a lot of one hch time items. they should report a profit. having said that, what was good at goldman sacks may not be

quite as good at morgan stan low in terms of the trading revenues. and in terms of what was bad at gold nun sacks. they had a write down on commercial real estate and should be worse at morgan stanley. decent, but not as good as goldman sacks. to some degree the commercial real estate problems are microcosm for the financial industry at large. what you will see here, you have seen it at a lot of regional bank earnings and smt at the money set of earnings. commercial real estate is at an inflection point and the losses are going higher. you will see some down at morgan stanley, we think you see that in spades. >> let me ask you this. that's a good point. you talk about higher real estate losses. you know that's running into the fact that mark to market is not necessarily the way people account for stuff anymore. there is a certain mark to a model with a lot of leeway. you are not predictioning a

2007-2008 scenario. that may be overstaying it, but not losses in the magnitudes of the past. quite simply the rules don't call for them to be stringent. >> timing is everything, but over the next couple of years, loan losses to the banking industry will surpass the level of the great depression. we think the length of time to go back to more normalized earnings is over three years and one other factor is the leverage or deleveraging of the industry will take a couple of years to work through. people say what's different this cycle versus past. in past cycles, you weren't going through a debt bust like we have right now. >> how do you not make money with the yield curve the way it is. even citigroup made money. the bozos of the market. i hate to put it that way.

it has been miscalculating everything and even they made money in the last quarter. >> in the early 90s, you would give a trading of one. it's not so sustainable as i think a lot of people are making it out to be. the bigger issue is the $7 trillion of loans on bank balance sheets. you have seen about 1/4 to 1/3 get hit and that's consistent with the one wheel barrel, but you have two minutes yet to be fill and as those problems continue to increase and the trading falls off, i think you see more earnings issues. >> thanks for coming with us. i'm up against a heart break. michelle, back to you. >> great interview. stick around and we will go back to sue herrera after the break. we need to send an expert. a walking, talking...

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this is the world record for longevity and endurance. and one of the most technologically advanced automobiles on the planet. this is the 9th generation e-class. this is mercedes-benz. welcome. we are on the east coast with sue herrera in sunny california and the weather here is miserable. let me ask you if it's better in the bond marks after the california fiscal deal.

>> the clouds have cleared considerably in the municipal bond market when it pertains to california. the fact that they came to the budget agreement triggered a big move and the question is whether or not that is sustainable because they are pushing 2.7 billion in cost down into other fiscal years. it remains to be seen whether or not that is going to affect the bond rating or not. we will talk about all of that tonight on our special report, california in crisis. back from the brink right now, we will see whether or not it lasts. back to you. >> looking forward to it. "street signs" with mark begins in 30 seconds. >> fed chair said the home values are likely to limit gains and pension fund calpers said assets declined 23% in value for the latest fiscal year, the worst one-year decline ever and a new pressury department

proposal prevends credit rating agencies prevents from providing to companies they currently rate. i'm rebecca jarvis. >> i'm mark haynes for erin burnett. they listen closely to big ben. to find out what's happening in the economy. we have our own look at the economy and take you to the frontlines to see whether your tax dollars are creating jobs. three states, three stories and then from main street back to wall street, one manager is back in the black, posting the first profit since '07. does that mean the bad stuff is over? we will have an exclusive and a new indicator for us. find out what we can learn from a $25,000 handbag. that's our show and it starts right now.

let's check the markets for you now. the best performing sector on a day when health care reform seems to be moving forward. the worst performers, financials and a series of rough bank earnings. here now is the take center the trading floor. our own bob dasani from the floor and sick santelli from the pits in chicago. robert, let's start with you. >> we were up 70, almost 80 points in the dow. we sort of rolled over a little bit and maybe mr. bernanke is a factor. caterpillar was it. we were talking about this and the story is simple. they were talk talking about price stabilization and a similar thing. markets were strong and we moved down to have that and they were caus