assessment of what that potential problem is today and where it could grow into and if there are any actions that we in the congress should take in anticipation of getting a second hit in the economy. >> congressman t remains probably the biggest credit issue that we still have. yesterday chairman baer talked about an increase in problem banks and a great number of banks are in trouble because of their real estate positions. both because the fundamentals, shopping center and vacancies and things of that sort have been worsening and because of problems in financing there are a lot of troubled commercial real estate properties and they are causing problems for a lot of banks and particularly small to medium-sized banks and so we're watching them very carefully. the fed has done a couple of things here. we have issued with other agencies guidance on commercial real estate which gives a number of help -- ways of helping, for

example, instructing banks to try to restructure troubled commercial real estate loans and making the point that commercial real estate loans should not be marked down just because the collateral value has declined. it depends on the income of the property and not the collateral value. we also have had this program which has been trying to restart the cmbs and commercial securities market with limited success in quantities, but we have brought down the spreads and the financial situation is a bit better. so we are seeing a few rays of light in this area, but it does remain a very difficult category of credit, particularly for the small and medium-sized banks in our country. >> is there anything that you would suggest that the congress be involved with this committee now in anticipation of any problems that may occur? >> i don't have specific suggestions and i would take a look that the.

>> i yield back. >> the gentleman from texas. >> thank you, mr. chairman. congratulations to your reappointment. i want to go back to your testimony where you said the federal reserve was playing a key role to tighten capital in liquidity requirements and particularly systemically critical firms. can you kind of give me an idea of who you think the international systemically risky firms are? >> well, one of the issues that we'll have to address if we, for example, if the regulators agree, for example, that there should be additional capital on systemically risky firms, then the question will be how to identify those firms and presumably we will look at their size, their complexity and the interconnectedness and the complexity they provide to the financial system, but we haven't

addressed that question. we don't have a list or anything like that and it's also possible that we might want to do it in a grade ated way and that's protection for the system so we don't have the too big to fail problem that congressman paul was talking about. >> also, i heard you say that you are now going back internally and looking within your organization and what were the things we missed and what should we be looking at in moving forward? wan of the questions and i hear your former colleagues and i truly believe have -- if you want to regulate financial entities and capitalist is the primary way to do that. looking forward, what is going to be the appropriate leverage level that we should allow our large financial institutions to have so that they will have a shock absorber moving forward.

some of these were leveraged and 30, 40, big numbers. as the federal reserve chairman primary regulator, what is the appropriate leverage? >> congressman, everybody agrees with what you just said which is that more capital is needed. we at the federal reserve in the united states have been working with the boss you will committee in other contexts to try to develop new standards. we've immremed a few of them for example, with market trading and at this point we have not completed the whole process of developing higher more stringent capital standards for large firms and a proposal has put forward which is being tested. banks are being asked for how much capital they'll have to hold so we can get a sense of what the implications would be for the leverage ratio. we're trying to figure out what would be safe. it would department on the composition of the assets and the riskier the assets, the

higher the capital you should have. so we're working by the end of 2010 to have a very concrete proposal, that each country would have to decide whether to adopt or want. >> but you would agree the standards we had before, evidently they didn't work. >> they did not. the liquidity issue also that during the crisis, many banks were technically well capital e capitalized and they didn't have enough cash to meet the run that was coming on them. so higher liquidity is also a part of this. >> in some of these enterities i've seen some deleveraging and i wonder if it's not better sooner than later for the fed to develop these standards and start asking the entities that you're regulating to start ponying up more capital or deleveraging their balance sheets because certainly the american taxpayers don't want

another round of this. do you have a timeline in mind where we can anticipate hearing that the fed is taking action to increase the capital standards or setting new capital standards? >> think around the end of the year we'll have formal standards and we have been pushing banks to raise more capital. that was one of the outcomes of the stress test that we did last spring. the u.s. banks raised a substantial amount of capital and that has been help nfl restoring confidence for the banking system. >> are you concerned about what's going on in the european union right now with greece and some of the other countries within the euro, their levels of debt, those countries will have to step in and back them up and the implications of what the disruption within the european union might impact the u.s. >> there are very serious

challenges there involving not only fiscal issues, but competitive issues because of the single exchange rate, but we have talked to the european union leaders and they're very focused on getting this problem solved and they're working closely with greece who has proposed substantial fiscal consolidation. so, we are keeping an eye on it, but the europeans, of course, it's most relevant to them and they're most exposed to those problems and they're focused on trying to get them under control. >> the gentle woman from california. >> thank you very much. i would like to thank chairman bernanke for being here today. starting with your discussion on page 4, in addition to closing special facilities the federal reserve is normalizing its lending to commercial banks through the discount window and you go on to talk about your new federal funds rate and discussion about why you have done this and encouraging banks

to go to the private market for investment and you say further in this discussion that these adjustments are not expected to lead for higher financial conditions for households and businesses. the last thing i heard before i came here this morning was a prediction by some of the analysts on television that in about one month we can expect that there will be an increase in interest rates on mortgages and home loans and everybody that i've talked to really believes that this change that you have made in the federal funds rate is what's going to trigger that. is that true or did you give any thought to this? how can you guarantee that it won't? >> congresswoman, it's not the federal funds rate that we raised. it was the discount rate. >> the discount rate, which is the rate that we'd lend on a special overnight basis to banks. we cut that very low because of

the financial crisis. we wanted the banks to have liquidity in case there was a run on the banks. they don't need that kind of help anymore and we slightly reduced the subsidy we've given to banks and it has nothing to do with the federal funds rate. it has to do with normalizing our extraordinary support for the banks and the financial markets. >> let us be clear. the change that you have made, no matter how slight it is that the discount rate may have to increase the amount that they would have to pay for the loans, is that right? the banks? >> it's a very small amount in terms of the amount that they borrow. it is. it is. i understand that, but what i'm trying to understand is is there a connection between the increase in the amount of money that they have to pay in household interest rates? >> i don't think there's any material. >> can you -- can you assure us

that that will not happen? i think it's extremely unlikely and if it were to happen we'd look at it, but i don't think there's any connection. >> what i'm worried about is you still have a lot of mortgages out there, adjustable rate mortgages, with 3% margins on them, and if in fact, this will trigger an increase we will have more foreclosures because the interest rates are going to be higher. that's what i'm worried about and the predictions are that we have not seen the end to these foreclosures, that with the exotic loans that were extended, people are going to be more at risk. i don't want to see the interest rates increase on these adjustable rate morgue agency. >> there's no linkage between the adjustable rate mortgages and it's linked to the federal funds rate which will be at an unusually low level for an extended period. >> well, i want to be clear for this committee that the actions that you have taken have no

connection to the possibility of increase in the household interest rates. we don't have to worry about that, is that right? >> the reason we took the action is to increase the subsidy to a small number of banks -- >> when you reduce the subsidy that means they have to pay more money, is that right? >> i don't think there will be any effect on consumers. >> i beg your pardon? >> i don't expect any effect -- >> you don't expect them to pass on that cost to the consumer. >> no, because it's very small and i don't think it will affect it. >> lastly, let me just ask. you talked about the 10% unemployment rate. that does not really reflect what's happening in poor, rural community, in african-american communities and in latino communities where the unemployment rates are up as high as 16.9% and african-american communities and even higher in some of the poor rural communities.

when you describe this jobless recovery, i think it would be important to talk about these communities that do not represent -- or are not represented by the 10% description that you give. what do you have to say about that and is there anything that you can recommend that we could do to deal with this problem? >> you're absolutely right that minor the communities in particular have much higher unemployment rate than the national average and that's a terrible problem. monetary policy can't really do much about those distinctions. i think those are issues that congress needs to address if you're inclined to do so. i can only agree with you that it has not only short-term implications in terms of family income and so on. it has, as i talked about in my testimony, it has long-term implications for skills, for workforce attachment and wages and employablity. so it's a very long-term problem

and i can only agree with you 100% that that needs to be addressed. >> the gentlewoman from west virginia. >> thank you, mr. chairman and welcome, mr. chairman, back to the committee. >> someone has his or her mike on and we're getting the rumbling noises approximately would members shut their mike off unless they're speaking? sometimes it picks up these noises and give her five minutes and start from scratch. >> thank you. >> on page 3 of your testimony you talk about contrasting larger lending institutions with smaller lending institutions and you say bank lending continues to contract, reflecting both tightened lending standards and weak demand for credit in uncertain economic prospects. my question is that i've heard from our community bankers that they have the capital to lend, but that they are getting conflicting messages from regulators.

so how can we ensure prudent lending and capital levels by working with these institutions by expanding on the question, too, that they have the credit to len and credit-worthy customers are not the ones coming through the door looking for the expansion of their business because they lack confidence where the economy is now and where it will be a year from now so that's my first question, thank you. >> there are two separate issues there. it's true that because the economy is weak that some borrowers are not in the market for credit and that's one of the reasons why bank lending is down. the other issue, though, that i think you began with is in situations where there is a credit-worthy borrower who wants credit, we want to make sure they get credit and we've been very focussed on the issue. >> but haven't had the results that -- >> well, we have been working on it it very hard. we have, for example, increased substantially our information gathering so that we can make an assessment of, for example, you

know, how many loans it turned down and what is the rate of loss on small loans versus large loans. we've added questions to the survey asking small firms about their experience with borrowing and so on. we have our reserve banks are having a series of summit meet little with community leaders and development organizations and small bank -- small business lenders and small companies to try to figure out what the problems are. so we are actively going out and learning about the situation best we can. it is very difficult because there will be some cases where, you know, tighter standards are justified because of the weakness of the economy and the weakness of the borrower's condition. we just want to make sure that where there is a credit-worthy borrower they can have ed krity. >> thank you for addressing

that. it is extremely important in the smaller communities and more rural communities and states of that nature. my second question is a completely different question. we've lost 4 million jobs, but over the longer span of time we picked up 4 million jobs, government jobs and when i went on to the recovery.gov website to see where jobs were created or attained in that site, the largest zip code was the state capital implying, reasonably so, that these are state jobs that are being retained or created. my question to you is in a larger sense, how do you feel this will impact our economy if the trend continues and for me it's a source of concern because it seems like our private sector manufacturing jobs as they move down, our government jobs to me that says more government spending and more government obligations. >> actually, we've lost somewhere in the vicinity of 7 million to 8 million jobs on net including government jobs since

the beginning of the recession. the total employment is very significantly down. some of those government jobs are bureaucrats like you're thinking of those kinds of job, but two of the industries that have actually added jobs during the recession are health and education and many, for example, teachers are technically government employees. so some of that may be showing up from those particular areas which are growing very quickly, but certainly as a general proposition, we want the private sector to be healthy and to be supporting the overall economy and we don't want to create too much overhead of government jobs that are not productive in some direct sense. >> thank you. >> thank you. >> the gentleman from new york and the gentleman from the joint economic committee. >> thank you, mr. chairman. oh, i'm sorry.

>> the joint economic committee, i apologize. >> thank you. thank you so much, mr. -- thank you so much, mr. chairman. >> thank you very much, mr. chairman and congratulations on your renomination, and i believe we've been very important to have at the helm during this financial crisis, a scholar, a professor who has dedicated his life work primarily to studying the great depression, writing about it and i believe the fed came forward with many creative, unconventional responses to help us move out of this crisis. i also want to thank you for your leadership on many consumer issues that are important to

this committee and to this congress. the card act, the credit card holders' rule that helps consumers will put billions back into consumers' hands and the rule that came from the fed was incredibly helpful in putting a clear logic forward and helping us win passage in this house. also the rule on overdraft is very welcomed and very important to consumers. in the credit card bill of rights, one of the items that will be enacted in august the 22nd is the federal reserve's reaction and analysis about charges that may be too onerous and how you can make them fair. could you comment on what the work is in that area and when you intend to have that ready for us to see and how you intend to approach this challenge? >> we anticipate having those

rules out very shortly in a few weeks and you'll be able, obviously, to give us your views on them at that time. we wanted to be sure to get them into effect as congress dictated so there will be no delay in the implementation even though they were a couple of weeks later than expected in getting them out. so we are working to get a comprehensive set of rules to have a criteria, in particular, if someone's interest rate has been raised for some reason and six months later the condition has been corrected. we are looking at the rules under which the interest rate ought to be returned to the normal or previous level. that's one of the issues that we're considering, but we anticipate having those out very shortly and we don't expect any delay in the implementation. >> as we dig our way out of this recession and we are definitely

trending in the right direction, the month that president obama took office. the last month that the former president was in office we lost well over 770,000 jobs. this past month under president obama we lost 18,000 jobs and we are trending in the right direction. >> the fed is looking at ways to move back into a later economy. one article that i was reading last night felt that you should invest more in treasury notes as opposed to other actions that you're taking. can you comment on the steps you're taking to really move our financial institutions and total economy to the proper functioning, expanding economically in other ways to help the people of america? >> yes. we have two broad sets of policies, roughly speaking. one was a set of special facilities, lending facilities

that were intended to -- which were extremely disrupted by the crisis. those facilities have been quite successful. they have helped stabilize the commercial paper market and the repo market and many other important financial markets. with the improvement and stabilization of those markets we have been shutting those down and many of them were shut down february 1st and this was what congresswoman waters asked about and so on. so we believe as those financial markets are normalizing, we can begin to reduce that source of support. the other approach, the other policy, set of policies we have is monetary policies intended to support the recovery which includes the low interest rates and the purchases of mortgage-backed securities and treasurys. those remain at a very accommodative level. it is true that we will stop buying new mortgage-backed securities, and we will continue

to hold 1.25 million and that in taking it off the market will keep mortgage rates below what they otherwise would be. we believe there will be stimulus coming off of our holdings of securities as well as low interest rates. >> we think the economy as opposed to the money market still requires support for recovery. >> well, we are trending in the right direction. my time is up. thank you for your public service. >> the gentleman from california, mr. mccarthy. >> thank you, mr. chairman. mr. chairman,y believe across this country, everywhere you go, jobs is number one. you have referred to that and also to the deficit. i want to follow up on both those topics, but i want to go back to what my colleague from west virginia was talking about, how 4 million more jobs in government than in manufacturing. you talked about that, but you cannot sustain that if the taxpayers are paying for it and the lack of manufacturing and

how you would be able to grow. you talked in your testimony here of unemployment being at 10% in may state it's higher and there are places with 40% unemployme unemployment, but even a stronger telling there, you said 40% of the unemployed have been out of work six months or more, nearly double from a year ago. you did say these government jobs and there were some bureaucrats and the growth of the in education and in health care, but there's got to be some common sense because if you go down the road here, the department of education, there's more than 100,000 people who work there who make more than 1 $100,000. the money is probably better used inside the classroom, but i'm trying to find, where are some ways that we can create jobs quickly with low cost, rolling back regulations, but you said in your testimony, you talked about the international that the international was recovering, if i state it right,

you say international trade supported by the recovery and the economies of many of our trading partners is rebounding from its deep contraction of a year ago. there are three trade agreements that are sitting here. pan marx columbia and south korea. the president has said that if you increase u.s. exports by 1% it would create over 250,000 jobs and hence, change it from government to others. do you agree that 1% and they say with these three trade agreements it would give you 1%. would it create 250,000 new jobs? >> i don't know that number. vild to look at that number, but certainly opening up trade creates opportunities for us to export, and that ought to create jobs. i'm quite sure it would. >> it would not cost anything more, but it would create jobs that weren't government related? >> it ought to improve the division of labor between our different countries. each country should be more productive and raise the standard of living and i suspect

would create jobs as well. >> if i could just touch base on what the ranking member talked about earlier because we've had many discussions with you and your past profession, the study of former countries and the downfalls. you have told us time and time again that you cannot sustain a budget deficit over 3.5% of dpp and you stated that earlier, and i wrote down a few words that you refreshed. outside if you were able to get a fiscal exit of this, it would actually help the current recovery. is that right? >> yes. >> looking at the current budget that is proposed, does that reflect the commitment of changing the growth curve of our budget deficit or our national debt? >> well, as i said earlier, the projections of 4% to 7% deficits from 2013 to 2020 and increasing after that, i think everyone would agree, including the

president, everyone would agree that's not sustainable and we need to address those numbers and get them down in the out years. >> i heard you say that, and i'm trying to say here as a congressional member looking at a budget today, hearing your words that you have told us time and time again and every economist says that you cannot sustain this. watching our national debt of gdp go up almost to the highest level of world war ii to be 77%. what do we do today? you, quote, earlier said would help the current recovery if we were able to sustain that. so looking at the current budget doesn't give us the change needed in any shape or form. >> well, it's not sufficient to look at this year's budget, if that's what you mean, you'll have to look at the next ten years. we're sitting in a place where we vote and look today. we all see ten years and where this is going. this is putting us in a place that gives us great hardship.

>> your comment says it helps the current recovery if we take action as well. so the current budget does not give us that, and i'm asking you, do you see it in helping us in this fiscal crisis or does it expand it, the deficit further. i think it would be helpful if the congress and administration ask i'm not in any way minimizing how hard this is, could provide a plan which shows how the deficit will fall to this 2.5 to 3% level at least over the next ten years. i think -- i don't know exactly which programs, what taxes, and what changes you would make. that's certainly up to congress, but a concerted effort to do that would be even a strong effort would be good for confidence. >> it would be good for the future and it would be good for the recovery. >> it would decrease confidence and lower expected tax rates.

>> the gentleman's time has expired. >> i thank you, mr. chairman. >> we're trying to be fairly strict on the time because we have a vote coming up and i understand chairman bernanke needs to be -- we've assured him that he'll be out by 2:00. the gentleman from illinois. >> thank you. >> -- is recognized. >> congratulations on your re-election, mr. chairman. he was appointed but he had to be re-elected just like us. there was a vote count. mr. bernanke, bank lending in 2009 fell by 7.5% or $587 billion. $587 billion, the wall street journal's headline said it was epic, the decline. there is a chart behind it. why is bank lending falling so dramatically? it has fallen, i believe, because we're forcing to hold capital reserves given fallen

default rates on commercial real estate. up on the committee room tv now is a chart from the most recent congressional oversight panel report which shows the battle of delinquencies on loans has increased 700% since the first quarter of 2007. you'll notice from the chart behind you, mr. chairman, that if the trend turnings the rate of loans will soon be literally off that chart. the dramatic increase in delinquencies to me is really approaching a tsunami, threatening our local communities and banking system. it's estimated to peak between 2011 and 2012 with over $300 billion expected to mature each year. as you know, the market is huge. it's 3.5 trillion of the total debt, and it's about 1.7 trillion held by bank asks thrift. much of this debt is held by community banks across the country that has survived the first part of the tsunami, the

fault crisis and the fdic yesterday informed us that they're adding 450 banks to the troubled bank list, more than doubling the number from the start of 2009. i'm mary thompson at the breaking news desk. just an update on a story we brought you earlier. the sec, as expected voting by a 3-2 margin to adopt an alternative uptick role which is imposing curves on short selling. short selling will be restricted if the stock falls 10% in a certain session. at that time only short sales will be allowed to be executed if they are executed at a price that is above the highest bid in the market for that stock. again, newt rule will apply to all equities listed on exchanges and over the counter-exchanges and restrictions on the short sales will only last for days so they can go for the next day as well as the stock continues to drop 10% in the next session. the sec approving that

alternative uptick rule by a margin of 3-2 as expected and we turn back to the hearing with federal reserve chairman ben bernanke. >> at this point to the smaller and regional banks, as you point out, if those banks have their capital deplete order if they go out of business, that will affect the supply of credit so that affects our economy as well. so that's a very important problem. i think from the federal reserve's point of view, there are basically two kinds of things we can do. first of all, we can support the economy and that makes people go shopping in shopping malls or willing to new employment fills up office buildings and obviously we're trying to support the recovery. the other thing we can do is to work together in the market. we've done those things along those lines. we've had the program which has been successful in getting the interest rates on commercial mortgage-backed securities down

somewhat and reduced those spreads. we have issued guidance on commercial real estate loans where we tried to work with banks so that they can restructure troubled loans, so that they can continue to be performing perhaps at a reduced level, but continue to be providing income. so we're looking for those kinds of solutions and those supervisory approaches and monetary policy approaches, those are our main tools. >> the program that you mentioned will end in june. will you renew the program? >> we'll be evaluating the situation. there is progress being made in those markets. as i said, the spreads have come down quite a bit and some deals are being done outside of the federal reserve's program. >> i appreciate all that you're doing with the regulator, but, you know, the park national fwhafrng we referred to really lost its shirt with fannie and freddie. things like federal reserve and everyone said buy it. we'll give you extra credit if you do it and they did and now they're out of business because

they followed the recommendations of many of our government and financial regulatory institutions. so i really think that we shouldn't underestimate the coming tsunami of this debt in commercial real estate. i hope that the actions that we take are going to fill those office buildings, but i would like to have more discussion with you about the other steps that i think we take other than hoping that what we're doing will fill those office buildings. >> we're following it very closely. the gentleman's time has expired and the gentleman from delaware, mr. castle is recognized. >> i'm very concerned about the job situation in the united states and we can argue politically whether the stimulus program has worked well or not. mr. zandi, an economist yesterday indicated that the jobs were created and were probably to some degree temporary and that we funded governments so that they could

keep on employees for a period of time and various capital projects will expire at some point or another and we still have a continuing problem. i've had a couple of job fairs in my state that i've been surprised both at the number of people who have come out for that and the background of some of these people. it's people with college degrees and graduate degrees at this point. i see that the lending by banking institutions has fallen by some 7.5% in 2009. my question to you is is there anything that you as the head of the fed or the fed itself or us as members of congress could be doing to help with the employment circumstance? my further question is what is happening in this whole bank lending? we being, both the t.a.r.p. program and the federal reserve have put a lot of money into banking institutions, primarily

larger banking institutions and the theory was that they're the ones who were going to lend to the other commercial banks who would then lend to the business people throughout america and that somehow seems to have not connected. the lending is down for a lot of the reasons you mentioned. the commercial real estate issues and things like that which i understand, but what is it that we can do to make sure the lending does pick up so that jobs can be created and perhaps as an economist beyond the federal reserve, what else should we be doing differently or considering doing in terms of helping with employment and by we meaning congress and the federal reserve? >> just to comment quickly on the t.a.r.p. money. there were two objectives of the t.a.r.p. money. one was to stabilize the banks and the second was to give them capital to base their lending. unfortunately, the politics was very bad, as you know, and the public and the congress have

citiing mattized that money and the banks therefore have done the best they can to pay it back as quickly as possible. basically all of the big banks have paid back the t.a.r.p. money so it is no longer available to provide support for credit and that's unfortunate. another thing i would like to mention is ironically, one of the reasons that we lost so many jobs is that american firms were incredibly efficient at reducing their costs in the depth of the crisis. many other countries were not as effective in cutting costs and what we found here is we've had enormous increases in productivity which worked well for the long run, but in the short run it means there have been more job losses than would have otherwise been the case. it is hard to judge how quickly jobs will come back. it may be that firms may cut to the bone in that they can't get further reductions in their cost and as growth comes back as we're seeing they'll be forced to bring back workers more

quickly than we anticipate. that is something to be looking for. from the fed's point of view, i've already mentioned that our jobs program consists of support of monetary policy ask our supervisory policies to get credit flowing, from congress' point of view they arrange for possible fiscal actions and i hesitate to recommend specific ones, but i'm sure you know the menu of things that you could do which could create jobs but unfortunately there's no silver bullet here. >> i know there's no silver bullet, i want the fed to monitor the banking institutions with what they're doing with the money they get and either return on capital on the repayment of loans or the issuance of lending out to other banks. let me ask a different question. have fannie mae and freddie mac served their purpose? they are very, very expensive to this government at this point and the business of packaging mortgages and being able to sell

them off could be done perhaps differently than that and this goes back -- maybe this is a question i should have asked ten years ago, i suppose, but the bottom line is should we be looking at some different way of dealing with the financing of mortgage structures in this country or do you still believe that they serve that basic purpose and we should leave them intact even if they have the problems they seem to have? >> the federal reserve, i think, was one of the more vocal commenters on fannie and freddie for many years and we were concerned whether they had enough capital to support the large portfolios and it turned out they didn't and we're paying the cost of that right now. we would not support -- let me be careful. i think we were very cautious about supporting a return to the existing structure where you

this potential conflict between public shareholders and public objectives. i think there are alternatives and i provided them in a speech i gave a year and a half ago that i would be happy to provide you which would be a more stable long-term solution including either a privatization approach with government guarantees or a public utility approach. those are two options that we would consider. >> we were going to have a hearing on march 2nd on that very subject. i had to postpone it because there was a major hearing on the phishing industry in my industry and i'm going fishing. it turned out we a originally that would be a day in which there were votes the day before. it was not until that evening and members expressed it -- we will in the next available hearing will have a full hearing on exactly that topic and so, mr. chairman, we will be looking for an elaboration of those views, but we had the hearing set for march 2nd on precisely

the topic and not just freddie m mac so we'll get the rest of that answer within ten days at the latest. the gentlewoman from new york. >> we are listening to the question and answer session of ben bernanke's testimony before the house services committee. i want to bring in rick santelli who heard something interesting at the top. what was that, rick? >> there was cross-examination that was referencing why banks aren't lending and mr. bernanke said that the public so citiing mattized the t.a.r.p. program that the bank his to pay it back early and that's one of the reasons there's so little lending going and there were a lot of people on the floor scratching their heads because they didn't remember a whole lot of lending going on before the stag mattization occurred and they thought it was an swg point. >> he said elsewhere that they

were uncertain economic conditions and that there was low demand for it as well. steve liesman is over here and wants to get in on it as well. steve? >> this is a pretty well ingrained that if you look at the timing when the t.a.r.p. money was given and how quickly they put the compensation rules and essentially changed the rules. the money was never, ever used for lending because as soon as those rules came in and the t.a.r.p. money was stal citiing mattized and politicized the fed wanted nothing to do than give it bag. >> that's what clamped down on lending? i'm not sure i buy that. >> it's why the t.a.r.p. money was never used to supplement whatever lending the banks would have done because as soon as they got it they essentially put it aside to pay it back. >> let me jump in so long as we have you, steve and ask you about something he said earlier. bernanke said if we look at credible ways or find credible ways to reduce the deficits, medium and long-term deficits that will actually give us more

flexibility for some measures to take in the here and now with short-term actions. what potentially might he mean by that? >> you know, i think bernanke is a moderate on this when it comes to the medium and the long term which is to basically agree that entitlements will have to be reduced and agree that probably taxes to pay for the entitlements that those reduced entitlements will be higher. you make a medium and long-term agreement on that which is to say that you convince the markets that rick covers that in the future deficits will come down credibly, it probably gives you latitude right now to run slightly higher deficits as long as the market believes what you're going to do later on. >> he did say it's not just a long-term issue here because in the here and now we have a bond market that may grow increasingly nervous about these deficits. >> is that the case, rick? >> that's probably what mr. santelli is seeing. >> well, that is true. there is a lot of disingenuous

talk about spending and deficits. we saw the chairman, mr. frank, early on say we had mr. greenspan in here many times when he said let's cut taxes and that's a good idea to grow the economy and jobs and his comment was, it never happened in our life time, but the chairman never repeated what mr. greenspan always said. he'd say cutting tax is a good thing as long as it's paired with spending cuts and mr. frank left that part off and that is one of the big problems. he's been there a long time and he never remembers that part. >> alt all right. on that note let's send it back into the testimony. >> there are things that you could look and the we will continue to look at it from the perspective of supervision. >> mr. chairman, you mentioned your concern about real estate loss losses, and my question to you is if you're the central bank currently in the process of

winding down the t.a.r.p. facility and without the t.a.r.p., what will the fed do in the event that instability returns in the cre or small business lending markets? >> well, the purpose of the talf was to not solve the cre problem. its purpose was to get the commercial mortgage-backed securities market going again. i guess it's a little bit of an overstatement to say that it's going again, but we are getting deals there and the spreads have come in and so that issue has been somewhat reduced in terms of the concern. the real concern at this point is that the fundament aals for hotels and office buildings and malls and so on are quite weak. and that's why the loans are going bad and the only solution there is first to strengthen the economy overall and secondly to help banks deal with those problems and work them out. >> mr. chairman, today has been

reported that 25% of all mortgage borrowers were under water, 11 million families in this country. what is the fed doing to encourage stability in the housing sector that is so tied to economic recovery in the long term? >> well, we -- this is a little bit out of our ballpark, but we did work with congress and the treasury and developing the hope for homeowners program which, for example, has really not met expectations at this point. the structure of that program was to give principle reductions and principle forgiveness so the main program right now, the program is about affordability as opposed to principle reductions. so right now there's not a major program. i think the treasurys, mortgage program is considering some pilot programs that would

include principal reductions. >> we would like to answer in writing and that's a topic to which we'll be returning and if you want to elaborate in writing we will ask you to do that, but the gentleman from california, mr. roadways is now recognized. >> thank you, mr. chairman and mr. bernanke. i watched and listened with interest to the opening statements here and let me explain one thing. since january of 2007, since every spending bill originates in the house, since january 2007 we've had democratic majorities in the house and in the senate and i was a critic, as you might recall, of republican spending in '05 and in '06, but since 2007 it has been explosive, and because every spending bill originates in the house, i think

there is some confusion on the part of the public in terms of where the spending comes from and how it a ridge nates. to me when i first reviewed the administration proposal, something that struck me was the fact that at no point anywhere in the future does the administration expect our nation to have a balanced budget. as we look forward on this graph, at no point according to its own numbers and presuming an economic recovery do they expect this to change. as a matter of fact, the deficits are expected to spike dramatically in 2020. it goes up dramatically in this budget, and i think the failure to operate within our means is plunging our nation deeper and deeper into debt and something which you see when you talk about the interest expense quadrupling to 840 million by

2020. it will be the fourth largest budget item. so as you've said, chairman bernanke, budget deficits, when you're speaking of this magnitude as far as the eye can see, is simply unsustainable. i think that eventually it occurs to those of us who have been a part of this process that the window to address this problem before it spirals out of control is closing very quickly. i'm afraid there is a lack of urgency and here's what i wanted to ask you. first, would you agree that this plan put forward by the administration is not sustainable and second, would you concur that in the past the federal reserve has stepped forward, has tried to give direction to congress very forcefully. i remember with respect to fannie mae and freddie mac, the warnings that came from the fed where congress was told you are risking a systemic collapse of

the financial system if you don't do something about the overleveraging and the arbitrage that's going there, and the 100 to 1 leverage, the fact that you've put mandates, congress has put mandates on these institutions to buy subprime and loans, this is a systemic risk. congress ignored that, but the fact that you forcefully did that did at least alert a lot of people that otherwise wouldn't have been aware of it. what can you do now in your capacity in order to call it and this is my second question, in order to call attention to the severity of this. i say this because honing with the kansas city fed recently said that the most dire of the three options is for the fed simply to print more money in the speech he gave, knocking on the fed's door. that threatens hyperinflation. so what can be done to really get this point across.

thank you, chairman bernanke. >> first let me say that we're not going to be monetizing the debt, but i think everyone understands that basic a rith nett mettic that if deficit goes on at 3%, 4%, 5% of gdp and that picture would probably get worse because entitlement spending and aging society and so on that you'll get increasing interest payments and we'll spiral out of control and the cbo will give you the same results. again, i -- it's very easy for me to say this because i don't have to grapple with these difficult problems, but it is very, very important for congress and the administration to come to some kind of program, some kind of plan that will credibly show how the united states government is going to bring itself back to a sustainable position. >> and this plan is not it, i take it. >> assuming that those numbers are appropriate. i mean, the forecasts are very difficult to make, but assuming they're appropriate, no, it is

not. >> the cbo numbers, as you said earlier, it just is not going to pencil out. >> that's right. so it's a very difficult challenge, but it is, as you point out, it's not something that's ten years away because it affects the markets today and the longer you wait the harder it's going to be to change -- >> can you take that message on the road. >> we don't have time for another question. thank you. we have a vote. i think we can get two more in, and i now recognize the gentleman from california for five minutes and then there will be one more and then we'll go vote. those who want to go vote can vote now. >> the gentleman from california mr. mccarthy talks about trade agreements and i would agree with him that if we had genuine free trade that might produce job, but so far the trade agreements have given us malignantly unbalanced trade, and i don't think that helps our job situation. chairman bernanke, i'm going to lay out a few reasons that have

been put forward why you might want an easier monetary policy both short term and long term and get your response. the first of these is that monetary easing short term can help stimulate the economy to our national debt and it reduces our borrowing cost whereas we in congress are considering fiscal stimulus which of course, does increase the national debt. the second is that there is a stickiness in cutting certain nominal payments, particularly wages and so if we had a modest, 3%, 4 e even 5% inflation rate and that in effect solves this problem or results in the solution for the problem without cutting a nominal amount. the third is that your predecessor used to come to congress and say that the cpi was overstating the inflation rate. so if you were targeting for a 2% inflation rate as measured by

the cpi you were really targeting for a 1% inflation rate as he thought it ought to be calculated and finally you have the recent imf economist report saying that central bankers ought to aim for a higher inflation rate so that in bad times they had more monetary tools when you start with low interest rate and low inflation and when you try to stimulate the economy you can't go below zero. so the first question is are you currently pedal to the metal? i see the statements coming out that talk about increasing the discount rate and those very statements can have a slight effect -- more than a slight effect of reducing monetary easing, taking the -- i notice there are a lot of talks about the accelerator in another room

here, but easing off the accelerator a bit and the clear statement that you're not going to monetize the debt and there is absolute pedal to the metal. so short-term, are you or should you be pedal to the metal? longer term, should we be aiming for a somewhat higher inflation rate given the report of the imf? >> well, we were clear that the higher discount rate was not intended for a tight monetary policy and if you look at the market there is no expected increase in monetary tightness, so that was successful in that regard. we do have a stimulative monetary policy, as you know. we will continue to evaluate that. it's a committee decision. if the recovery begins to falter we will have to look at that very seriously. with respect to the inflation rate, i understand the argument and it's not without its appeal,

but it carries certain risks, obviously, if the federal reserve says we're going to raise inflation to 4%, how do we know that later it won't go to five or six or seven? it took a long time to get inflation to 2%. >> i'll squeeze in one more question. if you say two, shoot a are e r that's a slippery slope. we for a circumstance where we have taken taxpayer money and injected it to the capital of the banks, but as a matter of the federal government we have prohibited, the federal government's prohibited credit unions from raising alternative capital in the private market and not taxpayer money. we're begging the banks to make loans, particularly of under $250,000. the credit unions are begging for the right to make loans of under $250,000 and not count it against their limit on business

lending. they're telling me that they could make another $10 billion in small business loans and create 100,000 jobs and no cost to the federal treasury at all and with high capital standards and even higher capital standards if we help them raise alternative capital. should we be relying more on credit unions, giving them the tools to get us out of this recession, than the this one thing would get us out. >> as you know, credit unions are tax favored because they have certain restrictions on the activities and the banks would complain that if they're allowed to do everything banks can do why are they tax favorites? that's the tradeoff that congress has. >> the gentleman's time has expired and there's only time for the witness. if the members will ask complicated questions with more than 15 minute, don't expect a lot of back and forth. the witness has to complete its answer? >> just the issue about the tax treatment of credit unions. >> the gentleman from illinois,

will be our last witness. we will break and come back promptly and the chairman has agreed to stay until 2:00. the gentleman from illinois. >> thank you, mr. chairman. chairman bernanke, the district i represent has somewhere between 1500 and 2,000 factories and it's highly industrialized and the institute for supply management is up for the seventh month in a row. as i talk to my manufacturers it's the same choke point. i talked to the regulators and they say that the regulatory standards have not been tightened and i talk to the banks and they can't lend because of the regulators. if we want to create jobs as stated in nam's new study with the milken institute, the president said that the new report makes a powerful case

that manufacturing can lead the u.s. to a renewed era of growth. it's critical that we accelerate our economic recovery and create jobs for the benefit of manufacturers. i have manufacturers that are ready, willing and able to hire employe employees. they have orders, substantial orders and they can't get capital in order to make their new product and in some cases the buyers are going overseas to buy the product. i mean, we have a choke point in credit. it's super, super crisis. these are existing borrowers and they're people with very, very low debt to equity ratio. they are prime borrowers. many in the food processing industry which has seen an uptick in this economy, begging for credit and they come to me and say why has the government created more