approach the counterfactual economists can explain that the given decision was the best one that could be made because they could show what would have happeneb'6 z&ú úá##z&) á) for your professionalism and service to the country.

all of of us in congress appreciate your willingness to make yourself available on countless numbers of cases both to congressional committees as we confronted this crisis. so why thank you. over the past year we have witnessed unprecedented government involvement in the financial rackets. for sometimes republicans on this committee have expressed a growing unease over the magnitude of federal government involvement and manipulations of our economy. trillions of dollars of capital commitments guarantees, loans have been extended. what started out last year is a large but temporary stabilization effort to prevent a financial collapse has evolved month by month into seemingly permanent government intervention gratian. this included ad hoc bailouts of

institutions deemed too big to fail. many of the competitors of those too big to fail corporations deemed too small to save are no longer in business. today i read with interest your op-ed in "the wall street journal" acknowledging the need for an exit strategy. something republicans have called on since last fall. simultaneously the obama administration has been spending a staggering amount of money to fund an economic recovery and stimulus that is slow on coming. it's been almost half of the year since congress passed a $787 billion so-called stimulus bill and yet we continue to see record job losses. on the planet has spiked 9.5% and seems headed higher. your testimony predicts the elevated on and went well last

through not only this year but next year confirming that and that is despite the assurances that if we pass the stimulus package the unemployment would peak at 8%. other federal government interventions have failed as well. the administration's $75 billion for closure prevention initiatives intended to keep three to 4 million homeowners and their home as are offered only 220 try all loan modifications. at the same time the private sector and private efforts have their efforts have resulted in millions of homeowners staying in their homes. the american people can be forgiven for increasingly asking tough questions about these enormous government outlays and interventions because so far, mr. chairman, they're has been very little bang for the

taxpayer's buck. it's not only these, but the multitude of new proposals coming from the obama administration and their allies in congress calling for more government control and management, from health care to energy to financial services. one of the central questions the committee needs to answer as it considers reforms or a financial regulatory system is whether regulatory power should be centralized in the federal reserve at a time when our country is facing unparalleled fiscal and monetary policy challenges. the fed has made big mistakes and historic leave the board has reports of identifying and addressing systemic risk before they become crises. a prime example of this is troubled linder c. i.t. allowed to convert to a bank holding company last december and placed under the fed supervision. only after the fed declared it was adequately capitalized.

this inability to access risk once again threatens to undermine the fragile economy and erase the 2.5 billion in tax payer funds provided cit under t.a.r.p.. they would make the fed responsible for identifying and regulating those findings that in the fred's you are systemically significant and preventing systemic shock. republicans believe the fed's core mission and conduct of monetary policy seriously undermined its regulatory responsibilities or expanded in this way. let me conclude by saying at a time when our economic economy faces serious structural problems and threat of inflation if we maintain our current course on spending patterns it distracted and overextended central bank subject to potential political interference is a luxury we cannot afford.

republicans believe really think the federal reserve cut its current regulatory responsibilities and focusing on the core monetary policy mission would enhance the fed ability to execute an effective exit strategy and ensure interest rates that are greatly -- affect both individuals and small businesses with a single goal in mind, sound monetary policy. the proper conduct of monetary policy is the best way the fed can serve the american people. asking the fed to serve is a systemic regulator is just in fighting a false sense of security that inevitably will be shattered at the expense of the tax payer. thank you, mr. chairman. >> the gentleman from north carolina is recognized for three minutes. >> chairman bernanke, look forward to your discussion on the status of monetary policy and the economy. it is good news that many

experts say and that the economy has improved since the last time your before this committee in feb to the extent that is true the federal reserve certainly deserves some of the credit. unfortunately my constituents are not yet feeling it. growing unemployment, foreclosure all are around and the like of much if any rebound in the value of their investments contained delete continue to feed their and sunday and uncertainty whether we have in fact turned the corner but the fed has been a sturdy methodical hand. more public exposure with the fed does has also stimulated discussion about some other things a lot of people had taken for granted. the level of independence from political influence by the legislative and executive branches of government that is appropriate for the fed to have in order to achieve its

long-term policy goals. the extent to which the fed's operation is even monetary policy discussions and decisions should be subject to regular audit. the extent to which the various parts of an operation of the fed should be subject to more transparency. whether the fed having a field along with other financial regulators to pay the equivalent attention to the consumer protection responsibilities as it did to other responsibilities should be stripped of these responsibilities in favor of a new consumer protection agency focused solely on consumer protection. and whether as proposed by the obama administration the fed should be delegated even more power and responsibilities for systemic risk regulation. this certainly is a critical juncture for the fed and i want to assure my colleagues on the

committee that our subcommittee on domestic monetary policy, which i chair with the knowledgeable input a ranking member ron paul has been grappling seriously and consistently with all of these issues. for a change we have even had some members who are not on our subcommittee showing up at our were subcommittee hearings. imagine that three it in the wake of the great depression, concrescence drafted rules that served us well for 75 years. we are facing another once in a generation opportunity to fashion of rules that should serve well for the next 75 years. and chairman bernanke's testimony today is yet another step and harming us with the knowledge and information we need to address these important issues. i welcome the chairman and yield back the balance of my time. >> the gentleman from texas, the two minutes remaining on the republican side, we will make it

two and a half. >> thank you mr. chairman and good morning chairman bernanke. the federal reserve in collaboration with the banks has created the greatest financial crisis the world has ever seen. the notion of limited amounts of money and credit created out of than error has delivered this crisis. instead of economic growth and stable prices it has given a system of government and finance that threatens the world financial and political institutions. real unemployment is now 20% and there has not been economic growth since the onset in the year 2000 according to an on government statistics. permitting debt and credit expansion past 38 years has come to an abrupt end as predicted by free-market economists. pursuing the same policy of excessive spending, debt expansion and monetary inflation can only compound the problems and prevent the required corrections. doubling the money supply didn't work, quadrupling to 12 were either. the problem with debt must be

addressed. expanding debt when it was a principal cause of the crisis is foolhardy. excessive government and private debt is a consequence of louis federal reserve monetary policy. once a debt crisis hit the solution must be paying it off or liquidating we are doing neither. u.s. it is now 273 present of gdp and the crisis of the 1930's it peaked at 1.5%. household debt service is required disposable income and historic high. between 2000 and 2007 correct it expanded five times as fast as gdp with no restriction on spending raising taxes will be present to the economy. by teeing up the bad debt of privileged institutions and dumping of worthless assets on the american people is morally wrong and economically futile. monetizing government debt is as the fed is currently doing is destined to do great harm and in

the past 12 months the national debt has risen over $2 trillion. future entitlement obligations are now reaching 100 to william dollars. u.s. foreign debt is $6 trillion. for and purchase of u.s. securities in may were $7.4 billion down from a monthly peak of $95 billion in 2006. the fact the fed had to buy $30 billion worth of government security last week indicates it will continue its complicity but congress to monetize the expanding deficit. the policy is used to pay for this those lusatian of america and maintenance on wise policy and make up for the diminished appetite of foreigners for our debt since the attack on the dollar will continue i suggest the problems we faced so far are nothing compared to what it will be like with the world not only reject other debt but our dollar as well. that is when we will witness political turmoil which will be to no one's benefit.

>> the time for opening statements has expired and for once, i think not before the patience of the audience. the chairman of the federal reserve is now recognized for his statement. >> chairman frank, mean the delete kringen number bachus and other members and pleased to present the annual policy report to the aggressive policy actions taken around the world last fall way to becoming have averted the collapse of the system and even that would have had extreme adverse consequences for the world economy. even so the financial shock it hit the global economy in september and october were the worst since the 1930's and helped push the global economy to the deepest recession since world war ii. the u.s. economy contracted sharply in the fourth quarter of last year and first quarter of this year. more recently the pace of the decline appears to have slowed significantly and final demand

and production have shown signs of stabilization. to labor market however has continued to weaken. consumer price inflation which fell to levels late last year remained subdued the first six months of 2009. to promote economic recovery and foster price stability the committee last year brought its target for the federal fund rate to historic the low range of 02 a quarter% where it remains today. the excelencia purchase of its conditions are likely to warrant maintaining federal fund rate at exceptionally low levels for an extended period. at the time of the february report financial markets at home and abroad were under intense strained with equity prices at multi-year los riss spreads for private borrowers at elevated levels and some important financial markets essentially shot today financial conditions remain stressed and many households and businesses are finding credit difficult to obtain. nevertheless on that the past

few months have seen notable improvements. for example@@@@@@@ "r) federal reserve to encourage the flow of credit for example the decline in the rates and spreads was facilitated by the actions of the federal reserve and other banks to ensure financial institutions have adequate

access to short-term liquidity which in turn increased stability of the banking system and the ability of banks to lend. interest rates and spreads on commercial paper dropped significantly as a result of the liquidity facilities the federal reserve introduced last fall for that market. quote purchases of mortgage backed securities and other long-term assets helped lower conforming fixed mortgage rates and asset backed securities loan facility or to talf help restart the markets for various causes of consumer and small-business credit. earlier this year the federal reserve and other federal banking regulatory agencies undertook the supervisory capital assessment program popularly known as the stress test to determine the capitol needs of the largest financial institutions. the results were reported in may and appear to have increased investor confidence in the banking system. subsequently the great majority of institutions that underwent

the assessment raise equity in public markets and june 17th 10 of the largest u.s. bank holding companies all but one of which participated paid a total of nearly $70 billion to the treasury. better conditions in financial markets have been accompanied by improvements in economic prospects. consumer spending has been relatively stable so far this year and the decline in housing activity appears to have moderated. businesses continued to cut capital spending and liquidate inventories but a likely slowdown in the case of inventory liquidation in the coming quarters represents another factor that may support a turnaround in activity. although the recession and the rest of the world led to a steep drop for exports the drag in the economy appears to be winning as many trading partners are also seeking signs of stabilization. despite these positive signs the rate of job loss remains high and unemployment rate continued a steep rise.

job insecurity together with the declines in home values and tight credit is likely to limit gains on consumer spending. the cost stability the recent stabilization household spending will prove transient is an important downside risk to the outlook. in conjunction with the fomc meeting board members and presidents prepare economic projections covering the year 2009 through 2011. fomc participants generally expect that after the declining in the first half of this year output will increase slightly over the remainder of 2009. the recovery is expected to be gradual in 2010 with acceleration in activity in 2011. although the employee rate is projected to pique the end of this year the projected decline in 2010 and 2011 would still leave on employment well above fomc purpose of the views of the longer run sustainable rate. all participants expect inflation will be lower this

year in recent years and most expect to remain subdued over the next two years. in light of the substantial economic lack monetary policy remains focused on fostering economic recovery. accordingly as i mentioned earlier the fomc believes a highly accommodative stance of monetary policy will be appropriate for an extended period. however we believe it is important to assure the public and markets that the extraordinary policy measures we've taken in response to the financial crisis and recession can be withdrawn in a smooth and timely manner as needed thereby avoiding the risk policy stimulus could lead to a future rise in inflation. the fomc has been devoting considerable attention to issues relating to the strategy and we are confident we have the necessary tools to implement the strategy when appropriate. to some extent our policy measures will on wide automatically as the economy recovers and financial strains ease because most extraordinary

liquidity facilities are priced at a premium over orland tristani spreads. indeed total federal reserve credit extended to banks and other participants has declined from one of roughly 1.5 trillion at the end of 2008 to less than $600 billion reflecting improvement and financial conditions already occurred. in addition bank reserves held up the fed will decline as the longer-term assets we don't mature or are prepaid. nevertheless should economic conditions warrant a tightening monetary policy before the process of unwinding is complete we have a number of tools that would enable us to raise market interest rates has needed. perhaps the most important such tools is the authority that congress granted the reserve last fall to pay interest on balances held up the fed by depository institutions. raising the rate of interest paid on reserve balances will get substantial leverage over the federal funds rate and other short-term market interest rates. because banks generally will of supply funds to the market at an

interest rate sycophant ehlers a tichenor risk free by calling balad balances of the reserve. indeed many banks use ability to pay interest on reserves to help set a floor on market interest rates. the attractiveness to banks leading the excess reserve balance with federal reserve can be further increased by offering banks the choice of maturities for their deposits. but interest on reserves is by no means the only tool we have to influence market interest rates. for example we can drain liquidity from the system by conducting purchase agreements in which we sell securities from the portfolio with an agreement to buy them back at later dates. reversed purchase agreements which can be executed at the primary dealers and sponsored enterprises and a range of other counterparties are a traditional and well understood that of managing the level of bank reserves. if necessary another means of a tightening policy is outright sales of holdings of longer-term securities not only such sales trade reserves and raise short-term interest rates also

put upward pressure on longer-term rates by expanding the supply of longer-term assets. in some we are confident we have the tools to raise interest rates when that becomes necessary to achieve the objectives of maximum employment and price stability. our economy and financial markets face extraordinary near-term challenges and strong and timely actions to respond have been necessary and appropriate. i've discussed with financial stability the congress also has taken substantial actions including the passage of a fiscal stimulus package nevertheless even as important steps have been taken to address the recession and intense threats to financial stability maintaining the confidence of public and financial markets requires policy makers begin planning now for the restoration of the fiscal balance. prompt attention to questions of fiscal stability is particularly critical because of the coming budget and economic challenges

associated with retirement of the baby boom generation and continued increases in the cost of medicare and medicaid. addressing the country's fiscal problems will require difficult races but postponing the choices will only make them more difficult. moreover agreeing on sustainable long-term fiscal term path now could yield considerable near-term economic benefits in the form of lower long-term interest rates and increased consumer business confidence. unless we demonstrate a strong commitment to fiscal sustainability we risk having the financial stability for durable economic growth. a clear lesson of recent financial turmoil is we must make the system of financial supervision and regulation more effective in the united states and abroad. in my view comprehensive reform should include at least the following elements. a provincial approach that focuses on the stability of the financial system as a whole and not just safety and soundness of institutional once and that includes mechanisms for identifying and dealing with

risks. stronger capital liquidity standards for financial firms with more stringent standards for large complex and financially interconnected firms. the extension enhancement of supervisory oversight including effective consolidated supervision to all financial organizations that pose a risk to the system. enhanced bankruptcy resolution regime model on the chrysostom for depository institutions would allow financially troubled eckert and non-bank financial institutions to be wound down without disruption to the financial institutions a system and the economy. enhanced protection for consumers and investors and financial dealings. measures to ensure payment arrangements are to shocks and practices relating to the trading and clearing of derivatives and other financial instruments do not pose risk to the financial system as a whole and finally improved

coordination of cross-country's in the development of regulation and supervision of internationally active firms. the federal reserve has taken and will continue to take important steps to strengthen supervision, and prove resiliency of the financial system and increase the macroprovincial orientation of oversight. for example we are expanding the use of reviews of the financial firms to provide more capri and some understanding of practices and risks in the financial system. the federal reserve also remains strongly committed to carry out the responsibilities for consumer protection. over the past three years the federal reserve has written rules providing strong protection for mortgage borrowers and credit card users among many other actions. later this week the board will issue a proposal using authority under the truth and lending act which will include new consumer tested disclosures as well as rule changes applying to mortgages and home-equity lines of credit. in addition the proposal includes new rules governing

compensation of mortgage originators. we are expending supervisory activities to include risk focused reviews of consumer compliance and on bank subsidiaries of holding companies. our community affairs and research areas provided support and assistance for organizations specializing in for closer mitigation and we've worked with nonprofit groups on strategies for neighborhood stabilization. the federal reserve combination of expertise and financial markets payment systems and supervision positions us well to protect the interest of consumers and their financial transactions. we look for to discussing with congress ways to further formalize our institutions strong commitment to consumer protection. the congress and american people have the right to know how the federal reserve is carrying its responsibilities and how we are using taxpayer resources. the federal reserve is committed to transparency and accountability and its operations degette we report on activities in a variety of ways including like the one i'm presenting to the congress today

other testimonies and speeches. the fomc releases a statement immediately after each scheduled meeting and detailed minutes on a timely basis we've increased the frequency and scope of the published economic forecast of fomc participants. we provide the public with details annual reports on the financial activities of the federal reserve system audited by independent public accounting firm. we also published a balance sheet each week. we've recently taken additional steps to better inform the public about the programs we instituted to combat the financial crisis. we expanded the website this year to bring together already available information as well as considerable new information on policy programs and financial activities. in june we issued a report to the congress that provides even more information on federal reserve programs including breakdowns of lending a seceded collateral and other programs a established to address the

crisis. these steps should help the public understand the steps taken to protect the taxpayer as we supply liquidity and the key to financial markets. the concourse recently discussed proposals to expand the gao over the federal reserve. as you know the federal reserve has aubrey subject to reviews by the gao. the gao has brought authority to the operations and functions. the congress recently granted the gao the new authority to conduct extended by the federal reserve to single and specific companies under the authority provided by section 13 the federal protection act including lunesta but does provide to work. for aig or bear stearns. the gao and in special inspector general have the right to audit our t.a.l.f. program which uses funds from the troubled asset relief program. the congress however purposefully and for good reason to exclude from the scope of giglio reviews erie is notably

monetary policy durations and operations including open market and discount window operations. in doing so the congress carefully balanced the need for public accountability with strong public policy benefits that flow for maintaining appropriate degree of independence for the central bank in the making and execution of monetary policy financial markets and in particular likely proceed guarantee authority in these reviews to the gao as a serious weakening of monetary policy independence. because the gao reviews may be initiated members of conagra's review or the threat of reviews in these areas can be seen to try to influence monetary policy decisions. a perceived loss of monetary policy independence could raise your about future inflation and lead to higher long-term interest rates and reduced economic financial stability. we will continue to work with congress to provide information it needs to oversee activities effectively yet in a way that is not compromised, terry policy

independence. thank you, mr. chairman. >> thank you. let me begin with one question because i am pleased that as@@ & ld be in commercial real estate issue a series of failures that some of the economic problems of the home mortgage would be reproduced. we've discussed this. what is your current posture? do you expect there to be problems, and how were you and other elements of the government ready to respond? >> mr. chairman we are watching

the situation very carefully. there's a lot of loans coming up for refinance and the capacity is limited which opposes the possibility of foreclosure and commercial space. much as in the residential situation. we are urging banks to continue to make loans to creditworthy borrowers and examiners are presenting a balanced view in their discussions with banks. the others that we've taken to address this problem is that we have recently added to the t.a.l.f. program both new and legacy commercial mortgage-backed securities by doing that we hope to open up the mortgage-backed securities market which is an important source and finance for the crc market. >> i know there's been some who have been critical. i don't share that on the other hand in some cases but some people said what about commercial real estate? and the fact is they had to do some work. let me ask you now i was interested in reading the report

on page one you note consumer spending has been supported by the boost to dispose from the tax cuts and increases in benefit payments that were part of the 2009 fiscal stimulus package. with regard to state and local borrowing you know interest rates on long-term bonds declined in april as compared to the credit quality with the fiscal stimulus plan which included substantial increase of the federal grants and state and locality and in the discussion of the labour market there was reference to the fact that ironically one of the things that makes is the participation rate has gotten higher and that is a good thing because you know the emergency unemployment insurance from last july contributed to the participation. i am pleased these are three references by you to the positive impact to intervene in the economy in terms of boosting consumer spending in helping

state and local governments directly by revenue and than by keeping down their interest cost one of those counterfactual as you get to have fun with. we have problems and i think as i said it's good to know that you can on wind. i think a premature on winding would be a great mistake about the counterfactual is had we not passed the economic recovery plan in february of this year with the economy be better or worse? >> mr. chairman as you describe reading the and affected consumers and state and local authorities to have improved the situation so in that respect there's been positive impact but i would withhold the overall judgment since we've only seen about a quarter or less of the money being dispersed and i think there is some time to wait and see how significant the impact will be. >> the impact would have a

positive impact -- >> you would so it would tend to raise consumption, yes. >> i appreciate those points you have mentioned. let me just ask one last question. if the resulting authority resolve does appear to be dissolved, if that authority were vested in the appropriate agencies of the federal government would be aig and lehman brothers and merrill lynch situations have come out differently? >> what they have -- >> come out differently? >> of course it wouldn't have been necessary for the fed or even the treasury of t.a.r.p. to intervene in the situations with a good resolution of 40 we could have wound down the company's and the creditors take loss to eliminate or reduce the too big to fail problem. at the same time of waiting the very destructive effects particularly in the case of lehman on the world financial system. >> thank you. the gentleman from alabama.

>> chairman bernanke, the chairman frank asked about the commercial real-estate market. you mentioned t.a.l.f. programs for the new and legacy program. the new program has been in an operation about a month, is that right, taking loans -- >> yes, that's right. >> and the legacy just about a week, is that right? >> yes, sir. >> i noticed you were going to cut those of december 31st? >> the program right now is slated to end at the end of the year bill we will be reviewing those programs and others to assess whether or not they are needed beyond that time. >> i noticed several others on through the end of 2010. >> be extended several through february, not to the end. >> what is the state of the commercial real-estate market?

>> well, for a good bit of the recent years the commercial real estate market was pretty strong even as the residential market was weakening. but as the recessions have gotten worse the last six months or so we are seeing increased vacancy, falling prices and more pressure on commercial real estate which is raising the risk of lending to commercial real-estate so that is a negative and as it was mentioning to the chairman, the facilities for the refinancing commercial real-estate either through banks or the commercial real debate coke market seemed more limited so we are somewhat concerned about that and paying very close attention to it. we are taking the steps we can to the banking system and through the securitization markets to try to address it. >> i think that may be the wild card and i know the way to think this week came out with a report and barney last week obviously raised concerns.

you have talked about a resolution of 40 to veto authority for non-bank financial institutions. and you have referred to that as expedited bankruptcy. would it be within the bankruptcy code? would it be part of the bankruptcy regime? >> it would be a specially -- a special regime invoked only under circumstances of financial stress and it would be analogous to the law we currently have resulting failing banks which allows the regulators to intervene before the actual bankruptcy occurs to avoid the negative impact of bankruptcy on the market. so yes it could be a broad bankruptcy regime but there would be a special category of bankruptcy invoked only during financial crisis. >> enron, world,, drexel works very well, the bankruptcy regime and do you agree that it's very

important that you force creditors to internalize the cost of their credit decisions? >> absolutely otherwise you have it too big to fail institution which doesn't have any discipline other than the regulatory oversight. >> so this regime would totally reject the too big to fail? you wouldn't be asking taxpayers to guarantee or backstop losses. >> absolutely. too big to fail is an enormous problem. if we don't do anything else we need to solve that problem. this is critical because it would mean creditors would take losses if there are resolution costs the presumption is they would be paid by assessments on the other financial companies. >> with the republicans have proposed our financial services regulatory reform proposal includes an expedited bankruptcy within the bankruptcy code and i would ask you to particular

attention to that. one thing that i am also concerned about is even having the financial system take those losses or the taxpayers and i would hope that we would preserve a true if we call it expedited bankruptcy it is in fact expedited bankruptcy. thank the chairman for his testimony. >> the gentleman from north carolina. >> thank you mr. chairman. chairman bernanke, let me inquire into two areas i need a little clarification on. on page eight of your testimony this morning, you say that we are expanding our supervisory activities to include risk focused reviews of consumer complaints in non-bank subsidiaries of holding companies. what's the authority for that,

and i've been under the impression that one of the reasons that was not done previously is the fed didn't have that authority. is there a new authority or what, under what authority argue acting? >> well, the gramm-leach-bliley, that he would defer to the regulator in dealing with nonbanks, in any case the regulator would be either a state regulator or the ftc, and we've done this in collaboration with those bodies particularly the state regulators, the pilot program that we ran to the examinations of nonbanks was done in collaboration with these other bodies and we believe that in the cooperative spirit and looking at our responsibility to enforce these walls of a somewhat protective stance is

justified. that being said i think that congress ought to clarify the presumption of the ability of the supervisor to look into these subs. >> but it's clear that the fed hadn't been for real proactive in that area prior to this crisis is that right? >> for non-banks of that's right. >> on page five of your testimony you talk a payment of interest only reserve balances which we authorized last fall. had the fed not had that authority prior to last fall at all? >> no, we did not. >> that seems to me to be perhaps even more powerful tool than the adjustment of the fed for interest rates.

and i guess i mean little surprised why some central banks had had that authority previously and the fed had not. can you give a little history lesson on that? >> certainly most banks do have this authority and they set the funds equivalent rate on the open market. the year's interest on reserve rate as a sort of four or backstop. the fed authorities the back to the 30's and we are actually somewhat more limited on these areas than other central banks. other central banks have broad powers to buy assets to pay interest on reserves and land to financial institutions for example we invoked the 14th three authority to lend to our primary dealers and the investment bank's whereas in europe for example any financial institution can borrow from the central bank. >> am i overstating the power that is a potential tool for the

fed to use or do you perceive it in much the same way? >> many central banks around the world use what is called the carter system where they have an interest rate on reserves as the floor and then a lending rate like the discount window rate as the ceiling and that keeps the interest rate market interest rate between the two levels. a lot of banks use that so yes it is a very powerful tool and we wouldn't have been able to expand the balance sheet as we had if we hadn't had that tool to help with the exit. -- in your singing until last fall actually the fed extended the fed power before we granted this authority was actually substantially less than a lot of central banks around the world? >> that's right. >> okay. well, i guess that is a double-edged sword from some of

my colleagues. it gives the fed more authority they would likely future. your assessment is that as we wind down these positions that would be as important or more important than the fed funds rate? >> that interest on reserve rate will help control the fund. they should be closely together so they should be closely tied and both affect longer-term interest rates. so they will be working together. >> thank you, mr. chairman. >> the gentleman reminded me that decision to grant the fed that power was bipartisan, and in fact it first passed the house when the republicans were in the majority, the gentleman was the chairman of the subcommittee, did not pass the

senate, there was a lot of that going around, and it then came >m r@ ú4rr >m r@ ú4rr independence, which generally means that they don't want congress to el xm ackley what they are doing -- i saw an article in "the wall street journal" and there are a few quotes i wanted to ask you about, and i do know that all of us can get misquoted in the newspaper, but i want to clarify this because it is either

misleading or somebody is confused. and i want to see if i can figure this one out. and the first had to do with you saying that mr. paul's bill, 1207, the transparency bill, would interfere with the fed's interest rates decision and since i wrote the bill and the intention, and i know the intention has nothing to do with interference with monetary policy or interest rates manipulation there's nobody in the concourse going to be monitoring the federal open market committee. it is after the fact and all it can occur and find out what transpired. there is no management. so, is that your position that this bill if it were to be passed would interfere directly with interest rates, setting interest rates? >> welcome conagra's and paul, as you know at some point we are

going to have to start raising interest rates to avoid inflation and people talked about the politics of that and how whether the fed will be able to do that without intervention or interference. if we were to raise interest rates in a meeting and someone in the columbus didn't like them and said of the gao to audit the decision wouldn't that be viewed as interference or at least that exposed -- >> i wouldn't think so. this is just reviewing it and you can do what you want. what about today? interest rates are artificially low. could there be rates to keep interest rates low? it has been documented and written about how other federal reserve chairman, you know, they are on the verge of reappointment and they know the president and all of a sudden, so it's not like it isn't politicized now. it's just fact they can issue a low of loans and special privileges to banks and corporations that is political, this idea that it would be political because we know what

happened afterwards. it just doesn't seem to add up. since the time is short of want to go on to the next quote which i find fascinating because hopefully i can agree with you on this one because in actual quotes this says we absolutely will not monetize the debt. that's one of the major reforms in the distant future there would be beautiful because it would stop all of this chaotic monetary policy inflation and depression and recession and all the mess we have. but you say you will laugh at the same time i quoted the $38 billion that was bought last week and the plan to buy $300 billion of u.s. securities, these securities are bought by dollars you create, if you're buying u.s. securities, what is that if it's not, and besides, if the markets really believe that, that you would absolutely not monetize the debt i think the markets would get hysterical so it seems to me like i would

understand exactly what you mean by that. .. the true definition of inflation is when you increase the money supply in the immediate consequence is, it sends out false, that information to the marketplace so whether it is when the bubble is being formed

or afterwards, all you are doing is inflating constantly, doubling the money supply. interest rates are artificial and people make mistakes so it seems to me that you are in the midst of the massive inflation but i guess you have a different definition, when you double the money supply that is not inflation itself? or are you looking only at prices? >> may i respond? inflation is the change of the consumer price level which is very stable right now in their various measures of money and the broad measures of money, the measures of money in circulation like m-1 and m-2 are not going quickly. >> the gentlemen from california, mr. baucus. >> first of all i want to thank you and the ranking member for computing this hearing and i want to thank chairman bernanke for taking the time to be here once again. by first question is in reference to the derogatory reform plan put forth by the obama administration that puts a lot of faith in the federal reserve's ability to oversee the

largest most interconnected firm in the marketplace to prevent against failures. i have a question related to the financial oversight relate in this test. how you envision the role of the financial oversight council taking shape, just one of the questions and then it is my understanding that the council will play a purely advisory role have been no real power or wait in our regulatory issues and can you describe how the federal reserve would work with the federal consul under this proposed plan? >> yes sir. there is i think, of a misapprehension that somehow this plan makes the federal reserve a super regulator with powers to go wherever it likes. in fact there is a multiple part plan, multiple plants as you point out. a critical component is the council which will oversee the overall strategy and will look for emerging risks and advise regulators on what steps to take so in particular this issue about which large institutions

that that would oversee i think that would be prepared for the council to make that determination and not the federal reserve. the federal reserve will work closely with this council which again will have broadbased ability to gather information and look for gaps and problems in the regulatory system. and other major portion by the way is the resolution resume which would not be the fed be there. that would be the treasury of the fdic. that is critical to winding down firms. the feds role as envisioned by the administration is a modest three irritation of our current system. under our current system the federal reserve is the umbrella supervisor of all financial holding company so we are already the supervisor of essentially all the firms that would like to be identified is tier 1 terms-- firms under the administrations proposal, said the main differences would be we would have some additional authority to add capital liquidity it requirements based on-- and stromer ability to look

it nonbanks of says we were discussing before, vis-a-vis. the biggest challenge would be to take a provincial approach rather than looking at each firm intellectually the intellectual challenge would be to us the question is this not only is this from safe in its own situation, but does its failure threaten other firms, other markets ended so how should you adjust capital and other requirements to accommodate that so the challenging thing for us to do but it does not radically reorient our senate powers. >> as a follow-up question, would you then be in favor of increasing the authority of the council or are you confident the collaboration of the fed and the council would work as stated in the white paper? >> i am very open to discussing the role of the council. i think it is a very important role, to coordinate regulators to oversee the system to identify risks and so on but there may be situations, where

the counsel could have authority to harmonize different practices or to identify problems and to take action, so i think we should discuss you the congress, should discuss of the council should, what powers that should have. >> i hope we do in congress here, but let me refer back to an article that appeared in the "wall street journal." this is july 20th, and in their the death of a global recession has required a highly accommodative monetary policies and you go on and on. bennett says we have greatly expanded the size of the fed balance sheet to the purchase of long-term security through targeted lending programs aimed at restarting the flow of credit. what do you mean by this? >> congressmen, our policy is using our balance sheet to try to improve the functioning of credit markets which been disrupted by the financial crisis over example we have been purchasing mortgage-backed securities which has lowered mortgage rates for every day

american down to 5%. we have opened up a program that is called the talf, which has helped increase funding in reduced rates on consumer loans like ata loans, steve loans and small business loans. we have taken actions to improve the function of the commercial paper markets of these various steps have tried to address the fact that during the crisis many markets have become disrupted and our actions have been trying to stimulate improvements and we have been fairly successful what doing that. >> in the second paragraph , you state that these actions have soften the financial crisis and have also approved a functioning key credits including the market for interbank lending, commercial papers, consumers, small business residential mortgages. how does that impact those in foreclosure right now? >> your time is expiring is not a good time to ask a question. mr. chairman will have a few minutes to answer, but we can't just extend it that way because in fairness to the other representatives.

>> the mortgage market, consumer markets come interbank markets we have brought down interest rates, increased availability and improve the functioning of the markets in those areas. >> how will it help those in foreclosure? >> the gentleman's time has expired. the gentleman from texas. >> thank you mr. chairman, chairman bernanke, way over here on the far right, your left. there we go. thank you. one of the things you mentioned in your testimony was about regulatory reform, and you had a bullet point there. one of those bullet points was enhanced protection for consumers and investors in financial dealings. then, on page 8 he said we are expanding our supervisory activities to include the risks focused reviews of consumer compliance and non-bank subsidiaries of holding companies. as you are aware the administration has laid out a blueprint for regulatory reform in the chairman also has a bill. one of the pieces of that is an

interesting concept of separating the consumer compliance from the regulatory primary regulators and having a separate entity. the first question i would have is, what you think about that structure? >> i understand the rationale and why people would like to have that and i'm not going to criticize it but i want to say my remarks the point with the fed has been doing a good job for the past three years or so and we are committed to doing it and if we allow this to work in that area we would be interested in doing so. >> are there dangers of bifurcating the regulatory process where you have got one entity looking at consumer products in determining what products financial institutions can offer and in endorsing those and then having another regulatory agency looking at the safety and soundness and how does that work? >> there are some costs to it in that he would have doubled the

exams and there wouldn't be as much coordination between the safety and soundness and consumer protection issues so there would be some issues related to that separation. >> so, at a time when i guess we are all feeling it is time to tighten up the regulatory structure, make sure we plug the holes and that's moving forward if we had some places where we weren't actually able to have the ability to or in fact doing our jobs, the separating those make sense? >> well, the argument for doing it i think is that those who believe that you need a separate agency that will be committed to consumer protection will have the institutional commitment outweighs some of these other costs and i simply noting the federal reserve is also committed in wants to be committed to that goal. >> if you were writing the regulatory reform would you keep them the same and not separate them? >> if i were writing it, i would keep the consumer protection which the federal banking

agencies with additional measures to ensure a strong commitment. >> thank you for that. the second thing is, some of your projections in looking forward, what you think the economy is going to be like in 2009 and 2010 in relationship to jobs for example. when you were using the numbers and assumptions you were using, did you assume that congress would not continue this huge deficit spending, where we are on track to literally double the national debt? are your assumptions based on performance going to get better if congress has a better fiscal policy or are your job assumptions based on continuing to spend money like drunken sailors? >> our forecast were based on our best projections of what government spending is likely to be and in particular includes the fiscal stimulus package.