and i clear, in response to mr. doris questions, you said that if we were to extend all of the 2001 in 2003 tax cuts that were passed on a temporary basis, under the guise of being able to do that fiscally responsibly, for those who want to extend all of those permanently, did i understand there was a $4.5 trillion cost over 10 years? i was there a different number there? >> yes. so if we were to extend expiring tax provisions that you say from 2001 and 2003 at also index the amt for inflation, those together would add about $4.5 trillion to deficits over the next 10 years. >> okay. >> including the debt service that would result. >> okay. dr. elmendorf, you said earlier is your opinion that no single step, either on the entitlement

side or the discretionary side of spending or the tax side, no single step is going to bring us back into a balanced budget, is that correct? >> i think it's very unlikely that a single step would do that because of the magnitude of the gap between spending and revenues is so large that to try to close that gap, if that were your goal, only through one component of spending or of revenues, would require radical changes. >> would you agree that the proposal that was ever made or passed under republican leadership in the congress over the last decade or so, the proposal that president obama has put forward now to have a three-year spending freeze on nondefense, non-security defense spending, discretionary spending, would you agree that that is a significant substantive step forward toward reducing the national deficit?

>> so as i said before, it's a step in the direction of reducing the deficit, according to the newspaper accounts it is a small step relative to the overall deficit that we project over the next 10 years. but beyond that we just need to wait to see the actual proposal and to do our analysis of it. >> do you think it could also, i think it's a very significant step forward, i can understand you in your position being hesitant to add adjectives to the steps because you're in your position on a nonpartisan basis. and i respect that. but don't you think there's some benefit to their could be some significant benefits to the private markets and the capital markets if they were to begin tuesday congress taking and the president together on a bipartisan basis, taking significant steps, real steps, meaningful steps, to get the deficit under control? >> i certainly think that bipartisan steps that would

change the trajectory of the federal deficit could have a very positive effect on financial markets. concerns about where the deficit is headed. >> okay, good. i want to thank you for answering my questions, and the other questions i would just look forward in writing. in fact, if your staff could look at any of the major tax cut proposals that have been proposed by democrats or republicans over the last six to eight months, if you could put a 10 year cost on those and include that in your answer, i would welcome it. >> we will provide as many answers as we can as quickly as again, congressman. >> thank you, dr. elmendorf. at this time i would like to have the committee recessed subject to call of the chair. >> thank you. [inaudible conversations] [inaudible conversations]

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[inaudible conversations] >> the congressional budget office director douglas elmendorf testified before the committee. they took a bit of a break. they should gavel back in shortly for more testimony and questions from members. we want to let you know about the hearing we're going to show you coming up after this one. by the weeks in the u.s. and is expected to cast a vote a procedural vote for a second term for federal reserve chairman ben bernanke, whose appointment expires on sunday, the 31st that the senate banking committee approved his nomination in the simpered by a vote of 16-7.

so that will be coming up next here on c-span2. just a reminder about our state of the union coverage, president obama delivering his first state of union address, he is a third before congress. our preview coverage gets underway at 8 p.m. eastern over on c-span or the speech itself at 9 p.m. eastern, both on c-span and he on c-span you can also follow it online at c-span.org. and on c-span radio as well. after this speech here on c-span2, we will be showing you comments from members and statuary hall up on capitol hill, and then on c-span they will be taking phone calls from viewers and also get the republican response as well. that will all be tonight on c-span and c-span2. [inaudible conversations] [inaudible conversations]

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>> the house budget committee continued to take a break for house votes. members have been looking at the $1.35 trillion budget deficit indicated in the congressional budget office report released just yesterday. cbo director douglas elmendorf responding for questions on those findings. while we wait for members to return, here's a preview of tonight's state of the union message. >> joins on the the phone is linda feldman. can obama get his mojo back? that's a headline this morning mist open. what were you writing here? what will be the tenor of tonight's speech? >> i think the first thing the president needs to do is to reassure the american people that he hears them, that he got the message from not only the massachusetts senate election but the overall decline in his popular in the last year. and then he needs to pivot

forward towards what he does plan to do, that he does know that the economy and jobs are the number one issue, and that he is prepared to basically do whatever it takes to improve the situation with jobs. >> host: what happens after tonight's speech when he delivers this message on jobs and the economy? where does he go next and how does he keep up that message? >> guest: he needs to keep pounding away. he has had now two trips on his main street tour, going out into the country. we expect a lot more domestic travel this year than last year. you know, topping into that populism he start to engage in, telling people he's going to fight for them and he's focused on the middle class. that he's not giving up on health care. i think this is key. the congress might have other ideas, but he does not want to give up on his agenda, and he has said as much that he

believes that the problem is really and how the policies were sold and he takes responsibility for that. >> host: on health care there are pulls out showing the americans do want the president and congress to stop focusing on health care and put more focus on jobs and the economy. how will he square that? >> guest: well, i think is going to have to see to that. i mean, you know, the congress has been meeting and essentially said they're going to slow this way down on health care. but they just can't politically afford to keep pushing full steam ahead and try to push this over the finish line. so now they're saying the earliest it will get something done is late february. but the closer we get to the election, the harder it will be to get anything passed at all. the president has hinted that he would perhaps try to do a scaled back version of health care, but then he kind of backed away from that and said he wasn't giving up on comprehensive health care. but i think the handwriting is

on the wall. >> host: as we sit at the top, this is the first eight of the union address for the present. he has addressed congress in joint sessions three times before this. is this a bigger speech for him tonight, and has he been practicing? who has been involved in the speechwriting of his comments tonight? >> guest: this is by far the most important speech. he gave a speech to the joint session of congress. than he did his joint session speech on health care. but this comes at such a critical time, you know, the election in massachusetts last week was just a real wakeup call for this administration that they were really off course and that they had really just taken way too long on health care. it bit them terribly. the speech, he is working very hard on it that they have been working on it for months. they always do. q. have you speechwriting teen and his top aides are weighing in, but the president himself is

very active in what exactly will say. as is usual, the provisions will be taken up until the last minute. >> host: did the white house give you any indication of who will be sitting with the first lady in her box? that's a tradition, and often the president points out who those people be. >> guest: exactly. i state yesterday with the first lady. she was giving a speech to the wives club of the joint chiefs officers out of billing air force base. this has been one of her big issues is support for military families. and one of the points that came out in discussion with some white house aides, that she will have six military sitting with her in the first lady's box tonight. including the two police officers who stopped the shooter at fort hood last year. >> host: do we know from the

rest of the administration part of the cabinet, who will not be there this evening? >> guest: i'm afraid i don't know that, sorry. >> host: what about members of congress and the tradition of those members lining up early? can you talk a bit about that pomp and circumstance before the actual speech? >> guest: absolutely. the present is in a real tough patch in his presidency, but you know the members will still be lining up for that party handshake and for the, unit, the kind of hi-fi, i don't know it is literally a hi-fi. but it is a big televised event that a lot of americans will be tuning in. everybody wants that moment tv with the president of the united states. >> host: linda chavez with the christian science monitor. thank you for your time this 40. >> guest: thank you. >> and a programming note as we wait for the house budget committee to come back on house votes to continue looking at the trillion dollar budget deficit.

tonight c-span live coverage of the state of the union will start at 8 p.m. with a historical look at presidents in their first year in office. and that's all by the president's address at 9 p.m. eastern. then the republican response by virginia governor bob mcdonnell, and their reaction. here on c-span2, we will simulcast the president's speech and offer live reaction from members of congress from a statutory holiday in the u.s. capital. >> the committee will reconvene, called to order. doctor elmendorf, we will continue with question and answer period, and i would now like to turn to my colleague from virginia, mr. scott, for his questions. >> thank you.

dr. elmendorf, i would like to pull up the first chart. it's this one that you are looking at as you can see, this is a chart of the deficit going back to 1980. and you will notice the blue bar shows the deficit, significant deficit was inherited, eliminated, and we went up to surplus. the projected 10 year surplus after the year, starting in 2001, 10 year surplus was about $5.5 trillion. what happened in 1991 to create that chart, the blue part of the chart? in 1993, i'm sorry. >> as you know, congressman, during the 1990s there were significant policy actions taken

to narrow the deficit. there was also an economic recovery and boom that increase revenues and reduce spending which further narrowed the deficit. >> those were taken in 1993, did the votes in 1993 helped create that chart? >> yes, they did, congressman. >> what happened in 2001? >> well, so as you know, the economy was in recession and also there were legislative actions taken that widen the deficit. >> 2001? >> excuse me? >> wended the recession in 2001 started? >> well, i actually have it. the recession started in march of 2001. that the county a basis. these are probably fiscal year. >> after the bush administration came in, then the recession started. the bush administration did not quote in here and recession, is that right?

>> the national bureau of economic search date business cycle. they dated investing in march i think analysts would agree. >> and instead of a 10 year $5.5 trillion surplus, we ended up with, what, a 3.5% or deficit, additional debt for those just? >> yes. i don't have the numbers in hand but there was, as you know, and as the picture shows,deficits is age. >> and not standing the fact the bush administration overspent the budget $9 trillion, can you present the next chart -- the jobs created under the bush administration were about the worst sense when? >> i don't have those facts, but it is i believe true that net job creation over the past decade has now been essentially zero. >> and that's the worst since the great depression, a.q.

>> that very well may be, i'm not sure, congressman. >> we are always in a very challenging situation where we are trying to create jobs. what impact does the fact over the last eight years we've overspent the budget a trillion dollars, and in addition states are cutting back significantly, what does that do to the challenge we have in trying to stimulate the economy to create jobs and? >> makes it harder. there's no doubt that in the late 1990s, there was discussion about the importance of budget surpluses. partly because they put the country in a better position to deal with future needs. and by coming into this financial crisis in a recession with a budget that was already in deficit, with a substantial amount of outstanding debt, we were not in as good a position to deal with the needs that people felt then as we would have been if there had been less

debt than a human in the preceding year's. >> and if we spend part of the stimulus package, was as several hundred billion dollars to the states, in addition to that, they've cut back. as a true that we would almost have to spend $500 billion just to offset what the states have cut back in just to get back up to zero? >> i don't have a specific number, congressman, but certain estimates have been budget shortfalls of the state during this period of several years would be in the hundreds of billions of dollars. this for 20102010 alone, the report states make changes in their budgets, took budget tightening efforts exceeding $100 billion just in that fiscal year. >> so in the first 100 billion which is get us back up to zero in terms of stimulus? >> so, what happens in the recession as you know is government revenues decline,

spending on certain programs tends to go up. that widens budget deficits as his habit at the federal level. at the state level, because the balanced budget rules they can't persist in that way and they take actions to offset the. so essentially, they are forced to take legislative actions that offset a good deal of the automatic stabilizers that would otherwise rise from their budgets. and then that seamless effect is quite small. but the federal government does not have those restrictions. it can run a larger deficits, and we think that one of the channels at which the stimulus package strengthened economic activity was by providing funds to states that they reduced their need to raise other taxes or cut other spending. . .

interesting statistic i would like to share with you, and, your level of knowledge and your acuety with numbers is reknowned but i'm going, i think i will stump you on this one. >> as you've seen, congressman, it is all too easy to stump me. >> you have a moving train. take prettirage size of about 150 freight cars on this train, traveling at a

pretty average speed of about 50 miles an hour. how long does that train travel from the point where the engineer pumps the brakes and says we need to do an emergency stop of this 50 mile-an-hour moving train? >> so stumped me, congressman, so i think it would take some distance. >> by some distance, do you have a sense of measurement? >> i wanted to be a train engineer when i was a kid, but never got to the point figuring out how good the brakes were. it would are as you're saying congressman, it is u.s. government and u.s. economy are, have substantial amount of momentum in what they do and how they perform and to use policy decisions to turn the government or to turn the economy is very difficult because of the size and momentum they have.

>> so the reality is, in good times, we could actually make a few mistakes and still be in pretty good shape because the economy, as a robust engine, will drive that train at 50 miles an hour, whether we want to brake it, or, if we happen to enact policies that would actually take it in the wrong direction? >> yes, that's right. >> would it surprise you know takes about a mile and a half to stop that 50 mile-an-hour traveling train that has about 150 cars loaded on it? >> i didn't know it was that far, interesting. >> a mile and a half. and so, if that 50 mile-an-hour train we call the u.s. economy, is doing very well, as it was in the 1990s when we were creating 22 million jobs, even some mistakes done bysy makers, that economy could absorb. and so, in the year 2000, at

the end of the year 2000, had you been sitting as the director of the aggressional budget office, you would have been telling us, we're looking at budget surpluses for as far as eye can seeing something over 5 trillion dollars, correct? >> yes. i think that's right. >> so with the inauguration of new president in 2001, would you have been advisinging that president, mr. president, looking at 5 trillion dollar deficit over next 10 years. >> surplus. >> that is the train moving in that direction. unfortunately you were not the budget director in the year 2001. you're the budget director in 2010 and rather than looking at a budget surplus, you're advising this congress and the president we're all looking at massive budget deficits. but those deficits, that are massive, weren't created last night, or even last year, correct? >> that's right. as i said in my remarks

there is an effect of the financial crisis and recession and recent policies. there is also very important effect of underlying policies built over a period of many years. >> so, this fast-moving train is now moving in the wrong direction, on the economy and deficits. but somehow we went from a train eight years ago that was heading in the right direction with.$6 trillion in surpluses for 10 years -- 5.6 trillion. to a deficit or budgets looking at deficits that are close to a trillion 1/2 strong in a year, and, somehow that train turned with some bad policies and obviously bad economic conditions along the way. do you think we're beginning to brake that downfall, the stuck in the ditch situation that we've been in the economy for the last several years? >> certainly, we think that the economy has begun to

grow again. the data for the second half of last year show expansion of production, as i said, we think that expansion will be slow, and that, traditionally, employment lags, and we think that will mean a particularly weak performance of the labor market for some time. but the direction we believe, of economic activity is up. and we expect that, at some point in year unemployment rate will start to turn down. number of jobs will turn up. >> when you talk about the labor market, which should concern us perhaps more than anything else if we're serious economists, obviously we all talk about interest rates and gdp but the most important thing beyond, interest rates, gdp, should job and that's what an american wants to know is that he or she has a job that will bring us in revenues, tax payments so we could have a robust budget. if i could have chart 6

added to, put on the screens. we were seeing massive job loss. a year ago, we were receiving word from you and others we were going to be losing jobs. we found out it was close to 750 or so thousand jobs we lost in a month. that is 24,000 jobs a day americans were losing in this country. we're still losing some jobs. we actually had job growth in november of this past year, couple months ago, but still on the whole we're still losing but nowhere near that number. as the chart reflects, we're beginning to see the end of this trough that, we were in this massive ditch, that we were in which is good, with you we have to generate more economic activity to really see us to break into the plus, when it comes to jobs, when it comes to our budgets and their deficits turning into surpluses. so it will take some time

for us to get out of that ditch, is it not? >> that's right. the crucial point, getting back to zero is not enough because there is very large pool of people who are currently unemployed. >> right. >> other people who are not measured unemployed because they given up looking for work right now and are not counted in the labor force. it will take a tremendous amount of job creation to put everyone back to work, who is look would like to have a job. >> to sort of put graphically, what you just said, if we take a look at the chart, essentially, we saw how were just going deeper and deeper into a ditch. president takes office. 741,000 jobs lost. enough has been done, probably by this big economic engine we call the economy, with or without policy initiatives, to start to turn around on its own but hopefully some policy initiatives begun to help to turn that around. but whether you're liking the blue bars leading to

less job loss and hopefully at some point job gain, those are still jobs lost. so you have to add every single bar, red and blue together to calculate the number of americans who are out of work or who have lost a job, and not until we past that zero line, we break that zero line, we can say we offset one of those americans that part of that, any of those bars before we can say we're putting people back to work net? >> i think that is exactly right official statistics more than seven million people have lost jobs. bureau of labor statistics already announced there will be a benchmark revision will add more loss. shortly they will measure 8 million lost jobs. normally in a growing economy with a growing population the number of jobs, increases over time. so the short fall relative to what would have occurred without this recession is more than eight million lost. it is maybe, or 11 million is the shortfall will need be to made up. >> so we essentially are

applying the brakes on that economic train, that was taking us further and further down into that ditch. we have begun to see those policies, brake that fall but it is going to take mile and a half to stop that train. it is not going to happen in one day, one year or in 100 yards. it will take a mile and a half to stop that economic engine we call the u.s. economy that was traveling 50 miles an hour with 150 cars on it, straight to the bottom. now, if i could get chart 4, up. we're seeing changes. we see the job numbers getting better. and we see the, economic numbers getting better for the gdp. now, let's talk mack economics, the economists numbers, not the american workers numbers and letters. the gdp is getting better, which simply that we're seeing more economic activity, which then means that there is more, there are more companies in

america who are, businesses willing to hire because i'm selling more. i need to produce more. if we continue to see the blue bars showing economic growth,o start to break that line where we're losing jobs and actually start creating jobs, correct? >> yes that's right. we think that might happen soon. >> how soon? if you had, based an estimate. sorry for. >> i think within a few months one might see some positive numbers. as you note in november, has actually been revised to be a very small positive change in employment. i think it is possible within a few months. >> so there are some brakes in breaks in the cloud, reason to be hopeful. obviously if you're an american who lost their job you will not be hopeful until you have something in front of you. but given, numbers, acronyms

up here, economists use, gdp, interest rates, really we can start talking pretty postively about jobs, j, o, about, jobs in the future if we continue in the right direction and get us out of that ditch, break that train that was going fast downward, and start to see the economy, which has its own locomation -- loco motion, apart from what any congress does or president does, let business community and businessmen and women and hard work of productivity of our american workers take hold? >> yes. we think the direction is for improvement. the concerns that i have expressed, i think they're shared by many analysts are the pace of improvement may be slow enough that many people who will be looking for work will still be looking for work for some time but the direction seems to us to be positive at this point. >> can i have chart 8 as my last chart and i will conclude with this.

to me, there's, there's reason for to us try to do whatever we can policiwise to try to move usirection. the last thing we need to do is bicker over what happened in the past. we need to remember what happened in the past. it informs what we do into the future and certainly if that train hadn't been moving at 50 miles an hour with 150 cars on it wouldn't have taken a mile and a half to break that downfall into that economic ditch we were on. but it is important for us to be fiscally responsible as we make policies for the economy, and for americans who wish to work. when you inherit a $1.2 trillion deficit, that's what president barack obama received when he got the keys to the white house, when you, are sworn in, in january 2009 and are told,

that 741,000 americans will lose their job or have lost their job in that month of january 2009, when americans saw 2.7 trillion dollars of their retirement savings erased, when we saw the debt, national debt more than double in eight years we're talking about the great recession for the 21st century. we are now trying to pull ourselves out of that ditch which is the great recession of the 21st century. had we had not some of safety net provisions in place that franklin delano roosevelt helped institute we might have been in a great recession or a great depression of the 21st century. dr. elmendorf, we'll be looking for your wise council over next several months as we formulate the budget for 2011 in this country. we look forward to working with you and appreciate your patience responding to some of my question. i see the gentleman from virginia, mr. connolly is

here, so i will turn to him for his questions. >> thank you congressman. >> here we go. thank you, mr. chairman. and, sorry i'm late, mr. elmendorf. i was at the oversight and government reform committee hearing, listening to secretary geithner, and, you should be glad you're here, not there. i'm going to ask just, some, series of questions, real quickly if i can. first of all, i worked in the senate from 1979 to 1989 for a committee and those were the gramm-rudman hollings days, because we were so concerned about the deficit, growing debt. in retrospect in your opinion, is there empirical evidence that gramm-rudma gramm-rudman-hollings ultimately led to a balanced budget? >> actually did a little work on, congressman. i was a researcher in economics. i think the evidence is

mixed. i think there is a, as you know, of course the particular numerical targets that were chosen proved to be unreachable, political matter. so the particular targets, not just the first version but the second version were not actually adhered to. i think many analysts would say that experience did focus people's attention on the issue. it kept it on front burner of the political discussion. in the end the larger steps were taken in 1990 and 1993 and later. but i wouldn't want to, but i do think there, most analysts say there was value focusing the attention on the issue even though it was not followed exactly. >> paygo was adopted in 1998, paygo legislation and allowed to laps in 2002? >> the original paygo legislation was adopted as part of 1990 budget

agreement. as i mentioned earlier, you were interrogating secretary geithner, was, is viewed by analysts as having helped prevent fiscal actions that would have made the budget situation worse well let me ask the same question about paygo of i just asked about gramm-rudman-hollings. is there empirical evidence that paygo made a difference, empier evidence. >> there is a judgment call which would be the best kind of empirical evidence. most people's assessment, this is position of number of my predecessors of cbo in it did help to restrain policy actions that might have worsened the deficit during a period when people were very focused on deficits at end of 1990s. as the economy was booming, deficits turned into surpluses then those constraints were widely ignored. but during the period of concern and attention on that problem, most analysts believe that that, those,

the paygo rules, did help to restrain policy actions. >> a bipartisan commission with some enforcement mechanism to make decision or recommendations stick, could do you think it could make a difference? and do you believe, i know this is dicey, do you believe this body has the historically, looking at it from a historical point of view the discipline to abide by it? >> i really can't and shouldn't speculate on the actions that you and your colleagues would take, congressman. >> you're no fun at all, mr. elmendorf. >> in another context but i don't think hearings are quite the way to display, that side of me. you know, i think the, having a commission does not avoid the need for difficult decisions. that ultimately you and your colleagues will have to make. the question, i think the crucial question is whether it creates an environment that encourages such decisions to be put before

you and to be made. >> and could, such a commission, again be efficacious in effecting postively the debt, long-term debt only focused on the spending side? >> it is harder to make changes that, it is harder to fix this fundamental disconnect between the level of spending that we're becoming accustomed to and level of taxes that we're paying, if one focuses on only one piece of the budget because the magnitude of the gap that we see ahead is so large, that to close that through one piece of the budget alone, would require radical changes in that particular piece. but again, it is not our place to say whether, what the combination of changes should be and it's not, there is no economic reason why one can't focus on one piece or another. i just think it is a common judgment that the changes that would be required in a

particular piece alone would be very dramatic. >> we had a hearing here last with a panel on the long-term debt and what to do about it and, three out of four witnesses for sure felt you couldn't just do one side of the ledger and not the other. you had to do both if you were going to have meaningful reduction in the long-term debt. thank you so much, mr. elmendorf and thank you, mr. chairman for your indulgence. >> thank the gentleman for his questions. dr. elmendorf you've been gracious as usual with the time. we appreciate that. we will look to you in the future for further testimony and guidance. we look forward to hearing from you, and unless you wish to add anything for the record we will close this hearing. >> thank you very much, congressman. >> i'm being reminded i want to make sure that we have provide for any members who were here or did not have opportunity to attend who did wish to ask you some questions the opportunity to do so. so without objection, members who did not have the opportunity to ask questions

of dr. elmendorf, will be given seven days to submit questions for the record. with that. >> thank you. >> director elmendorf, we appreciate your testimony and we will close the hearing. so this committee now stands adjourned and we'll be looking forward to seeing you in the future. >> thank you. [inaudible conversations]

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>> in the nation's capital and across the country listen to c-span radio. in washington at 90.1 f mtelle .

and free applica for your iphone. c-span radio covering washington like no other. >> the u.s. senate is expected to cast a procedural vote on a second term for fal reserve chairman ben bernanke whose appointment expired sunday. the senate banking committee approved his nomination in december voting 16-7, two weeks after his confirmation hearing which we will show you now. it is about four hours and 10 minutes. >> the committee will come to order. my colleagues and our friends in the media.

you ok? we had a train wreck. >> all set? the committee will come to order to consider the nomination of ben bernanke to chairman of the federal reserve. i begin by welcoming you once again to the senate banking committee. you have been before us on numerous occasions over the past couple of years and we welcome your participation. we thank you for joining us again today. we are faced with as i see it two questions. let me for the purposes of remembers information we are going to have a series of folks on the floor of the senate. my intention would be to go to 11:45 p to adjourn at 11:45 and come back at 1:00 p.m.. a series of folks and rather be disjointed by going back and forth we will have two parts and get as much done as we can.

a opening statements by senator shelby and i and a statement by the chairman and have eight minutes to ten minutes for questions. i will put the yellow light on at 8:00. i have never been rigid about banging a gavel but keep your questions in the timeframe so we can get to as many as our colleagues as possible. if you want a second round we will do that as well. i don't want to deprive anyone of the opportunity. that is the way we will proceed. we are faced with two questions. first, should ben bernanke stay on as chairman of the federal reserve? as this committee works to create a financial regulatory structure, what should be the role of the institution that our chairman here and the nominee will receive? existing structure of the federal reserve deserves to be

maintained. that has been dominated by the personality of the fed chairman. this is not about the nominee or the chairman or the members of this committee. it is about the institution that will be around long after the nominee or members of this committee are gone. what makes the most success for the success of the institution, the federal reserve. let me address the nomination for chairman of the federal reserve. this is an important job during a crucial time in our nation's history. over the last year our nation has been rocked by a devastating economic crisis. this committee has met dozens of times to talk about its impact on our constituents who lost their jobs. families have lost their homes and welfare has evaporated as home values dropped and investments were wiped out. under your leadership the federal reserve has taken

extraordinary actions to provide liquidity, sustain commercial paper market, working with the united states treasury to restart the asset backed securities market and providing critical support to the housing market. these efforts have played a very significant role in arresting the financial crisis and financial markets have begun to recover. you and the federal reserve deserves praise and gratitude in preserving a far worse outcome that we might have otherwise have seen and i believe you deserve another term as chairman of the federal reserve and i intend to vote for your nomination on the floor of the united states senate because you are the right leader on our nation's economic history and this send the right signal to markets. i congratulate you for these efforts but i remain concerned about the weaknesses in the regulatory system that allows the financial collapse to occur

in the first place which brings me to the second question. does the structure of the institution you are overseeing deserve to be maintained as presently constituted? today we have a regulatory structure created by historic action and the government reacted to problems and piecemeal solutions over nearly a century. we agree the federal reserve should be strong and very independent and i feel strongly about the second word to perform its core functions. the monetary policy, supervising payment systems and acting as a lender of last resort. i worry that over the years loading up the federal reserve with too many piecemeal responsibilities has left important duties without proper attention and exposed the fed to dangerous political as asian that threaten the very independence of this -- congress gave the fed the authority to protect consumers in 1994.

we talked about this many times in this committee but for many years, many of us were frustrated in our efforts to get the fed to address predatory lending. the cutter reserve failed to develop mortgage guidelines and regulations until the housing bubble burst. there have been other lapses in consumer protection over the years to protect users of credit cards and checking accounts and company practices. they failed to rein in extensive risktaking by the largest holding companies which is supervised. many of the firm's use irresponsible actions contributed to the crisis ultimately required a taxpayer funded bailout, did so under the fed's watch. the lesson we can learn from these mistakes is the country is best served by a strong, focused central bank, not one that is saddled with too many diverse

missions and competing responsibilities. that is called into question. it is propose the fed assumes another role regarding threats to financial stability but i fear these responsibilities will further distract from the fed's core mission leaving it open to dangers, political is asian, undermining it to its critical independence. as congress takes over the financial reform this year i propose new entities outside the federal reserve to focus responsibilities for bank regulation, consumer protection and systemic risks so these important duties will not compete for the federal reserve's attention. appreciating the effect of monetary policy requires will access information. my proposal, our proposal deserves and expands the fed's involvement and ability to access information directly from financial institutions and the new bank regulators, the ability

to participate in banking and new authority for financial utilities and hit on the board the systemic risk agency. what i am proposing does not exclude the fed from involvement in these issues expands the participants in this effort. we share the goal of strong, focused, independent federal reserve that can operate as part of the regulatory framework that will restore our nation's economic security. i look forward to working with you on this important task. there are many important issues that my colleagues want to discuss as they consider your nomination. you are deserving of renomination and confirmation by the senate. i believe you have done a very good job in helping us avoid a catastrophe that could have occurred in this country but we bear a responsibility to consider the institution beyond the role of your tenure or federal reserve and that is why i raise these issues as part of

the financial regulatory structure that has been the desire of many people. i suspect we would not be dealing with it. i welcome your participation today. congratulations on what you have done. we will hear from you and proceed with questions. >> we all know that chairman ben bernanke rejoined the board of governors as a member and -- you get the nation's leading scholars on the right direction. the expertise on this area has served him well during our current crisis. it is important to note that every crisis has a beginning, middle and end. we learned a great deal about crisis management in the great depression it appears we have learned precious little about how to avoid the situation in

the first place. prior to the recent financial crisis the federal reserve kept interest rates too low too long, encouraging a housing bubble and risk taking. the fed failed to use its available power to mitigate those risks. congress bears some responsibility. often over my objections we enacted housing policies that encourage home ownership to levels we now know were unsustainable. we also failed to curtail -- fannie mae and freddie mac. my record on that topic is well-known. after the recession ended in 2001 preceded by a bursting of the.com bubble president was concerned about the specter of deflation. given those concerns the fed chose to hold interest rates remarkably low over the years. the effect of the federal funds

rate was well below 2% from 2001 to 2004. in most of that period the chairman served as a member of the board of governors as federal reserve and supported the low interest rate balances. in 2002 ben bernanke weren't of deflationary in the state he now quote. the fed should take seriously its responsibility to ensure financial stability in the economy. irving fisher in 1933 was the first economist to emphasize the potential connections between violent financial crises which lead to the sales of falling asset prices with general declines in aggregate demand in price levels. a healthy well-capitalized banking system and smoothly functioning capital markets are important line of defense against deflationary stocks. i believe the fed should and does use its powers to ensure

the financial system will remain resilient if financial conditions change rapidly. governor's warning was clear. deflation is a potential danger which could ignite a financial crisis. the policy descriptions seems equally clear. keep interest rates low and liquidity flows high and lean against deflationary pressure. keeping interest rates low for a protracted period. the fed was remarkably unconcerned about the possibility of igniting the financial crisis by inflating the housing price level which ironically led to the same result, a violent financial crisis and sale of assets. housing prices sword and risktaking escalated investors pressed on as if it was a short. the notion was in adverse market conditions the fed would observe assets and flood the market with

liquidity. ben bernanke a short markets that the fed stood ready to use the discount window and other tools to protect the financial system. a reassurance the fed was in place. in 2004/2005 ben bernanke and other members of the board of governors focus the possibility of great moderation involving potential permanent reduction in macroeconomic volatility and risk no doubt a result of adept monetary policy. in retrospect this left market participants leaving. the large risk had been mitigated opening the door for greater risktaking. in the face of rising home prices and risk did -- risky mortgage underwriting the fed chose not to use its rulemaking authority to arrest the

underwriting practices. numerous taxes--the equal credit opportunity act and home mortgage disclosure act gave the fed the authority to act, nothing more was done. the fed made major context in the recent crisis. after the housing market bubble began to burst in 2006 the fed was slow to entertain spillovers from the housing sector and the financial system. in response to the growing crisis it appeared to be at hoch and piecemeal. many of the fed's responses were my view with moral hazards. large financial institutions and their activities. in addition some fed actions were taken in concert with the treasury. learning the distinction between fiscal policy functions of the congress and treasury and central bank monetary policy and

lender of last resort functions. the federal reserve gradually expanding including the provision of funds to some institutions over which the fed had no oversight. the fed also created new lending facilities to channel liquidity and credit to market that were deemed most stressed. consequently the balance sheet has ballooned from the pre crisis level of $800 billion to $2.2 trillion to credit extension and purchase of g s c debt and treasury debt. many fed actions were innovative ways to provide liquidity to a wide variety of financial institutions and market participants. some actions amounted to bailout. when dealing with individual institutions deemed systemically important by the fed shareholders were wiped out and management replaced.

in many instances bondholders were made whole even low they were not legally entitled to such favorable treatment. using powers under section 13-3 of the federal reserve act, sir, institutions and activities would not be allowed to fail. recently fed governors stated the private risk of store by the fed involved only a small portion of its enormous assets and some suggested the government might make money on its risky bills. some of this might be true but i don't believe this is the appropriate metric for evaluating government support. taxpayers should not be subjected to possible losses from private risk. for many years i held the federal reserve in high regard. i had a great deal of respect for its critical role in the u.s. monetary policy and its role as a potential regulator.

i believe it to be the repository of financial expertise and over the years we have enacted a number of laws in your institution. we trust the fed to execute those laws which are deemed prudent and necessary. my confidence was misplaced in a lot of instances. the question now is what are we to do about it? as we are discussing, future of our regulatory system to the extent that we can identify weaknesseses that identified the crisis. not everything can be blamed on the system because it depends on people. those individuals need to be accountable for their actions. mr. chairman, i believe in accountability. the nation's suspends its constitutional authority to be a highly effective means by which

this body can hold individuals accountable. it is a process by which we can express our disapproval of past deeds or lack of confidence. we continue to face considerable challenges including financial markets and rising commercial real-estate loans and record high mortgages and double digit unemployment. and deficits in public debt and concerns about the size of the fed's balance sheet, the value of the dollar and the possibilities. we are deep in the woods. ben bernanke is the person best suited to lead us out and keep us out of trouble. >> thank you very much. welcome to the debate. >> members of the committee, thank you for the opportunity to appear before you today. i would like to express my gratitude to president obama for nominating me to a second term

as chairman of the board of governors and federal reserve system and his support for strong and independent federal reserve. my colleagues throughout the federal reserve system for the remarkable resourcefulness, dedication and stamina they have dedicated over the past few years under trying conditions. they never lost sight of the importance of the work of the federal reserve or the economic well-being of all americans. over the past two years our nation and the world has endorsed the most severe financial crisis since the great depression which triggered a sharp retraction in global economic activity. today most indicators suggest the financial markets are stabilizing and the economy is emerging from the recession yet our task is far from complete. too many americans are without jobs and unemployment remains high even if moderate economic growth continues. the federal reserve remains committed to its mission to help

restore prosperity to stimulate job creation while preserving price stability. if confirmed by will work to the utmost of my abilities in the pursuit of those objectives. as severe as the effects of the financial crisis have been the outcome could have been markedly worse. strong actions taken by the treasury department and federal reserve, federal deposit insurance corp. and other authorities here and abroad. for are part the federal reserve cut interest rates early and aggressively reducing our target for the federal funds rate to nearly zero. we played a central role in efforts to quell the financial turmoil. through joint efforts with other agencies and foreign authorities to avert a collapse of the global banking system last fall. by assuring financial access to short-term funding, private funding sources dried up. through leadership in the comprehensive assessment of large u.s. banks conducted this past spring and exercise public

confidence in the banking system. we created targeted lending programs to help start the flow of credit in critical markets including partial paper market and securities backed by loans and small businesses. we estimate one of the targeted programs, the term asset backed security, has financed 3.3 million loans per household excluding credit card accounts. 487 loans to small businesses and 100,000 -- our purchase of long-term security provided support in credit markets to reduce longer-term interest rates such as -- the federal reserve's actions contributed substantially to significant improvement in financial conditions in to what appears to be a turnaround in the foreign economys.

having acted promptly and forcibly as economic consequences, to ensure longer-term economic stability, we must withdraw the extraordinary policy support in a timely way. we are confident we have the necessary tools to do so. as is always the case even with monetary policies are conventional, determining the appropriate time and place will require careful analysis and judgment. my colleagues and i are committed to promoting our exit strategy in a manner that supports job creation and foster's continued price stability. the financial severity we have experienced less prompt financial institutions and regulators alike to undertake self assessment of their past performance. we have been actively engaged in

implementing improvements in our regulation and supervision of financial firms. in the realm of consumer protection in the past three years we have overhauled regulations aimed at ensuring fair treatment of mortgage borrowers and credit card users among numerous other initiatives. to promote safety and soundness we work with other domestic and foreign supervisors to require stronger capital, liquidity and risk management while taking steps to ensure the compensation packages to not provide incentives for risk-taking and focus on short-term results. drawing on our experience in the recent assessment of 19 of the largest u.s. banks we are expanding and improving our horizontal refuse of large institutions which will afford greater insight into industry practices and possibly merging risks. to complement on site supervisory reviews we are

creating an enhanced quantitative surveillance program that will make use of the skills of supervisors and economists, specialists and others in the federal reserve. we require large firms to provide supervisors with detailed information on operating performance and other key indicators and strengthening consolidated supervision to capture the wide risks faced by complex organizations. heating the lessons of the crisis we're committed to taking a comprehensive approach to oversight to ensure emerging problems are identified early and met with prompt supervisory responses. we have renewed and strengthen our commitment to transparency and accountability. in the making of monetary policy the federal reserve was highly transparent providing detailed minutes three weeks after each policy meeting.

quarterly economic projections, regular testimony to congress and other information. our financial statements are audited by an outside accounting firm. we published our balance sheet weekly and provide extensive information through monthly reports and on our web site of all the lending facilities developed including the collateral we take. to our financial activities are subject to review by the independent inspector general. and the congress to the accountability office can and does audits all parts of our operations except for monetary policy in related areas exempted by a 1978 provision. the congress created that exemption to protect monetary policy from short-term political pressures and support our ability to pursue our mandated objectives of maximum employment and price stability. navigating through the regional

structure established by the congress created the federal reserve in 1913. the 270 business people and nonprofit executives and academics and community agricultural and labor leaders who serve on the boards and 24 branches provide valuable insight into current economic and financial conditions. that statistics alone cannot. the structure of the federal reserve and shores our policymaking is informed by the washington perspective and wall street perspective and also main street perspective. if confirmed i look forward to working with this committee and the congress to achieve fundamental reform of our system of financial regulation and stronger, more effective supervision. it would be a tragedy if after all the hardships americans in jordan the past few years our nation fails to take the steps necessary to prevent a recurrence of the crisis of the magnitude we recently confronted. as we move forward we must take

care that the federal reserve remains effective to foster financial stability and peace support of a return to prosperity and economic opportunity in the context of price stability. thank you for the opportunity to appear before you today. >> i will ask the clerk to -- let me begin, in talking about systemic risk obligations -- supervisory authority, a piece of the washington post a few days ago in which you raised the concern that if you lack the supervisory capacity it will affect your ability to conduct monetary policy. we had witnesses before this committee for a number of months including the former vice chair and monetary affairs director

fins rinehart and along time scholar of the fed among others. their testimony says the bank's supervisor of 40 plays very little role in monetary policy. under the proposal we proposed before the committee the fed would not be a bank supervisor but would have access. is not necessarily reflected in your peace but it would have access to all the information on banks to participate in examinations of any bank or bake holding company and be part of the systemic risk regulator. would this information allow you to fit carry out the core functions? it is the access to the information that is critical to the conduct of monetary policy and the objections to the proposal are not as well funded as they might appear to be in the peace. >> i think taking the federal

reserve out would be a mistake for the country. it should be noted that the federal reserve has expertise that arises from its work in monetary policy. we have a great group of economists and financial experts and others who are unique in their ability to address these issues and as we go forward to supervise complex firms, as we try to look at the system as a whole, the perspective that involves looking at the interactions of companies and markets we need just -- we need financial market experts and economists who can create the context and analysis that will make this possible. we demonstrated this last year. the second argument that you alluded to has to do with the

benefits to the federal reserve of having the supervisory authorities. he mentioned monetary policy. i can given stances but the greater benefit is to our ability to maintain financial stability to be an effective lender of last resort. in the current crisis our ability to respond to the crisis and address problems to the banking system and stabilize the markets was critically dependent on our ability to see what was going on in the banking system and have the expertise in the federal reserve to evaluate what was happening. there is no way we could have been as involved in this crisis if we did not have the expertise and that information. if you go back into history there are many other examples. after 9/11 the federal reserve played a central role in restoring the financial system to operational capacity and our knowledge of what was happening

in the bank's, funding positions and the risks they faced operationally and otherwise was critical in our ability to do that and there were many other examples. monetary policy has benefited but financial stability is even more important in the ability of the fed to play a role in stabilizing the financial system, we need to be able to look at collateral to make loans as banks, requires a our involvement in bank supervision. my belief in looking at other countries where the trend is very much towards reversing regulatory powers of central banks, the trend is to go the opposite direction in europe and the united kingdom the personal political discourse leans toward increasing and adding the supervisory and provincial

responsibility to banks and that comes from the experience of the last couple years where the inability to have complete information greatly hampered the function of those central banks in addressing financial stability issues. having the ability to go along on an exam, the inability to go in, we believe -- i understand your objectives. is a very serious matter to take the fed out of 7 to 0 -- financial stability which would do. >> not my intent to take about all but to expand those looking at these situations. one of the problems with the supervisory role of bank holding companies is an abysmal failure. looking at systemic risk. we are examining ways to have resolution mechanisms that will avoid the moral hazards

associated with the implicit backing of the federal government should the institution become deeply troubled it seems it is in our interest to avoid that happening and the way they do that is having the supervisory function here that would allow a decision to be made where institution getting precariously close to causing systemic risk. my concern about institutional issues rather than the individuals involved in decisionmaking. we are looking back, all the signs were so blatantly clear. the fed failed terribly. giving us the kind of warnings we should have had as a country of where we were headed particularly in the bank holding company area. my concerns about this are based on recent history where there has been a failure performing that function and the concern that we should be looking at something different would

provide us with a greater warning and the ability to respond, not spending the last two years. i admire what you have done but it should never have gotten to that. we should have gone through for the last two years. had there been cops on the street doing their job at helping us avoid the problem why should i give an institution that failed in that responsibility the exclusive authority we are talking about? >> it is true there were weaknesses in that supervision and i describe the steps we are taking to strengthen it but the federal reserve was not the systemic regulator. it had a narrowly prescribed set of supervisory responsibilities. if you look at the firms and the markets and instruments that caused the problems, a great number of them. they were mostly outside the federal reserve's responsibility. there were failures across the system. in terms of chasing the structured-what we need is not

only to do a better job but make the structure where we're looking at the system as a whole not just individual be. we're looking at the whole system collectively. the changes that have been proposed that will create a public risk council would do that and help us independent of who is chairman or head of the fdic would help us have a better chance identifying those problems in advance. >> time is about up for me. i would like -- i am sure others will last about the jobs picture. i want to talk about where we are going with jobs. an economist who correctly predicted the global financial crisis we are now in and many economists are concerned about the world's central banks flooding financial institutions

with too much cash. another asset bubble burst. interest rates new zero. in the united states the dollar dropped against six major currencies. investors who worldwide are borrowing dollars including equities and commodities with huge bubbles that might spark another financial crisis. >> do you think this threat has legitimacy? >> it is something to pay attention to. let me distinguish between the united states and abroad. it is difficult to know that asset prices are correctly valued. we have been trying to do our best to look at valuation models and other metrics and we do not see at this point any extreme evaluation of assets in the united states. all of that is contingent on your beliefs about where the economy will go and if the

economy were to weaken tremendously prices would be overvalued where they are today but only in that case. there have been complaints about u.s. monetary policy abroad. it needs to be understood that united states monetary policy tended to address issues in the united states and countries concerned about that have their own tools to address bubbles in their own economy including their own monetary policy and fiscal policy and supervisory policy. it is not the united states's responsibility to make sure there are no misalignments where those countries have their own tools to address them. >> close contact with you and others, emerging --

>> i will stay on the point that senator dodd has raised. there are certain synergies with regulation of financial firms and the conduct of monetary policy and the last resort function. if we were to go back and review the minutes and transcripts of all the meetings between 2003, and 2008 i wonder what fraction of the time was devoted to the issues in supervision and regulation in the holding company's, was it half the time? was a fourth of the time? in other words give us your judgment on that. >> click me take that back. we talked about it quite a bit because of the financial crisis but it depends on the situation.

there are periods recently and in the early 90s when the banking system's problems, financial headwinds holding back growth where those issues were important and discussed. under normal circumstances they would be discussed but to reiterate what i said, although i do think the bank supervision is helpful in monetary policy it provides information we otherwise wouldn't have and academic studies show that there is a link between bank supervision information and monetary policy responses. i would put heavier weight on the financial stability functions so to be a lender of last resort and to know how to respond to an ongoing crisis we need to have the expertise, information and authority associated with being a bank supervisor. >> would it be safe to say that

before the crisis, not a lot of time was spent on regulatory supervision? >> the federal good market committee is -- the general economy, the primary issues. >> that would be foremost. >> the foremost issues. the board of governors is supposed to be able to see -- has responsibility for overseeing the bank's supervision activities. that activity is ongoing as we work hard to address the crisis and correct the problems. that is the priority of the federal reserve. >> you have been on the fed quite a while now. do you believe the federal

reserve under your tenure, before the crisis hit when you first went the first year, doing more than an adequate job of supervising and regulating the holding companies which subsequently got in such trouble not just -- that was all under your watch as a regulator? >> as i said before, there were failures through the system. this morning we heard bank of america was paying back its t.a.r.p.. >> when are they going to pay it back? >> immediately. >> any day. >> in its entirety. as we go through the bank holding company's we ran a stress test in the spring. of the 19 here was nine declared in good health and they paid back t.a.r.p. and the rest

raised capital. those firms in some sense have not been the crux of the crisis. the real problems were outside the bank holding company. >> 2005/6, early 2007. where was the fed as a regulator to try to prevent the crisis? you believe the federal reserve knew what was going on? and if so, why the debacle? they either knew or they didn't know. many believe senator dodd that the fed has done a horrible job as a regulator and you are wanting to continue as a regulator which is only part of your real job. >> was an extraordinary crisis which tested every single regulator here and abroad. did we do everything we could? absolutely not. i talked in my testimony about things we are doing to improve.

the question that lies before you, if you lose the battle, does that mean you never use an army again? you have to improve and fix the situation, not necessarily eliminate the institution. we did not a perfect job by any means but we don't stand out as doing a worse job than other regulators. many of the critical firms and markets that were worse problems were out side of our review. >> do you believe a bank should have a say in who their regulator might be? such as the reserve banks? >> i don't. >> c-span2 act should be changed? >> congress created that structure. the way it actually functions is

there is no connection. the banks who are members of the board's of the 12 reserve banks -- >> explain to the audience in the committee how the members of the reserve ban like the federal reserve in atlanta or richmond or new york -- tell us how they are selected to serve on the board. >> has provided by the federal reserve, each of the reserve banks has a board of directors. 12 at each bank are in three classes. one class is drawn from banks in the district. most our community banks. the second class are people who are technically elected by the banks. and the general public. >> elected by the banks who they

supervise? >> let me describe how the process works. the way the process actually works is the director's are chosen for the most part by the leadership of the reserve remained in order to be a wide representative cross section of economic and community leaders in the district. among the 70 or so directors there are three from financial services and many more from manufacturing agriculture and all kinds of areas. moreover, both directors and the reserve bank president must be approved by the board of governors in washington. >> we understand that but do you believe that anybody who is going to be supervised by the banking regulator should choose the regulator? it seems to me and others is an

inherent conflict of interest and an incestuous financial relationship that is not good for the federal reserve or for banks. shows conflict of interest. >> in terms of the way the law is written you might think that but the way it operates, the board of directors are drawn in practice from a cross-section of the public and in addition they are strong fire walls with no ability to influence or be performed about supervisory policy. >> my time is up but lastly, do you believe the federal reserve bank, the federal reserve in new york and richmond and san francisco, they are the regulator and you as the chairman of the board of governors have outsourced that? >> absolutely not. board of governors has the legal

responsibility to manage that supervision. the operational arms of the board of governors, we do the quality control and set the budgets so your earlier criticism, the buck stops here. we are responsible for that and we are continuing to strengthen and work to make sure that supervision is as strong as possible. >> senator johnson. >> welcome to the committee, chairman ben bernanke. i want to join chairman dodd hit in your support -- >> it is important. the ability to carry out institutions without intrusion

of congress. and the credibility to allow us to maximize price stability and economic stability. when you think about current proposals considered by congress to order the fed's decisions and to change the regional reserve banks by making them political appointees. changing the way the fed -- >> thank you for the question. at least among the public there is a misunderstanding of the word audit. it sound like a financial term. i believe the congress should have all the information it needs about the federal reserve's operational controls who have appropriate oversight of our use of taxpayer money.

we are transparent about financial operations and i listed some of these things in my testimony that we provide include audited balance sheet, regular reports and the like. we have the authority to audit every aspect of the federal reserve except for monetary policy and related options as provided by an exemption passed by the congress in 1978. and actively engaged -- 14 into agents of the consolidated supervision. senator shall be referred to. to be very clear i welcome transparency about the fed's financial position. i am concerned with the auditing

of monetary policy. what that means is being empowered to policy decision to look at all of the policy materials prepared by staff to interview members to second-guess the fed's decision in short order with few protections. my concern as you mentioned, the fed's credibility depends on the market's perception that we are independent and will not be influenced by short-term political considerations. if we were to take an unpopular step the congress would order an audit to apply pressure or be perceived as a way of applying pressure to our decisions so i would ask the congress to consider retaining the 1978

exemption which allows full access to almost every one of our policy activities but is the appropriate distance to monetary policy to maintain the credibility of that policy. >> i am very concerned about lending to small-business, we will not be able to create the jobs we need to create the nation's unemployment. what is the fed doing? >> i agree with you. i talked about this in a speech in new york. many of the credit markets are functioning better and larger firms are pretty well able to access credit as banc of america showed overnight. terms that are dependent on banks like small businesses are having much more difficult the and two small businesses are a

major source of job creation. they are being constrained by lack of access to credit and it is very significant. improving credit access to small business, we provide guidance to banks which emphasize that it is important that they be so conservative that they don't make loans to creditworthy borrowers including small businesses and we have backed up that guidance with trading programs for our examiners to make sure they understand the importance of taking a balanced perspective that when we want banks to be careful and prudent but we don't want them to fail to make loans such as small businesses. another piece of guidance which is relevant is we put out

guidance to banks on how to manage commercial real-estate. this is relevant because many small businesses borrow against real-estate collateral. in that guidance we showed in quite a bit of detail how examiners and banks should work together to make sure there's not undue pressure to make loans and good loans are not marked down in appropriately and loans are paid off as collateral value has declined and a small business that uses its store or place of business has collateral can still get credit. we continue to work with the bank's standard stemmed raise capital. the stress test of lead to an enormous amount of capital rates to overcome their ability to lend as well. even more directly, to increase

the flow of funds from investors to small businesses primarily through our health program which has been trying to restart the securitization market. as i mentioned in my testimony, improved the ability of the fda or loans to securitized to investors and has led to extensions of hundreds of thousands of small business loans. we are also helping to securitized commercial mortgage-backed securities which helps small businesses to frees up the commercial real-estate financing situation and allows them to borrow against their place of business for example. >> there has been much discussion of the effectiveness of the economic stimulus package that was enacted in february to create and save jobs.

and a similar package printing jobs similar to the economic crisis and the additional policy responses. >> it should first be noted that only 30% of the funds authorized last february dispersed and less than that were spent. in some sense it is rather early to make a judgment. the judgment is made more difficult by the fact that you had to ask where we would be without this package. that requires models and analysis which reasonable people can disagree about. it is early to make a strong judgment or decide whether or not to do additional fiscal actions. we will continue to analyze and

estimate the effects on the economy. >> thank you very much. >> welcome. i am not going to go down the same road as many of my colleagues. that ground will be kind of proud to mix two metaphors. i will discuss something somewhat different. let me set the stage. we all talk about the great depression. i was born during the great depression but have no memory of it. i was running a business during the great inflation and have a very clear memory. the speed with which the great inflation disappeared from our economy has removed the pain but my memory is very strong. in the carter years, one of your predecessors had to deal with

that. i remember going to a bank and begging -- that is the operative word -- for a loan to let me meet payroll after having maxed out my credit card because i was the ceo of that company. and being delayed when the bank finally gave it to me at 21% interest. with some assist -- the historians work out who gets most of the credit -- president reagan -- broke the back of the great inflation and set the stage for a long period of economic growth that came after that. we are now looking ahead in a circumstance that many economists say are laying the groundwork for the great inflation. let me quote from bob samuelson's column. the white house job summit will

try to revive economic growth but it will be a hard slog. job creation is a private sector process and the private economy has had a broad retreat from credit business extending. this astonishing figure, since last spring the number of bank credit cards has dropped 1 hundred million, twenty-five%. banks are tightening credit standards partly in reaction to new credit card legislation designed to protect rate increases and consumers are canceling cards. empty office buildings, shuddered retail stores and underutilized factories have depressed business investment spending. in the third quarter it was down 20% from its 2008 peak despite huge federal budget deficits. total borrowing dropped in the first half of this year. this hasn't happened in

statistics prior to 1952. he goes on in the short run. this will take me where i am going. he doesn't worry about the effect on the federal budget deficit because borrowing by consumers and companies is so weak but the perception that the administration will tolerate rhetoric to the contrary, permanently large deficits could rattle investors and lead to large increases in interest rates. there are risks in overaggressive government job creation programs that can be sustained by borrowing or taxes. as i look at the projections, we are getting out of the administration saying deficits are going to run 4.2% of gdp as far as the eye can see. i don't see the economy growing any faster than 2% at least in the foreseeable future. that to me is a recipe for the

japanese disease where this economy becomes like the japanese economy and ultimately for major inflation. if we confirm you, that is going to be on your plate. maybe not in the next six to 12 months but during your four year term. is inflation going to come back and if it comes back because of these federal deficits to which samuelson reefers', how will you deal with it and what do you see in your crystal ball? >> let be say that in terms of revenue in the 1970s, i remember those too.

it was corrosive. i won't go into detail but we are thinking the great deal about our exit strategy from current monetary policy actions including the side of our balance sheet. and our special programs. your reference to chairman booker. 1978 the congress passed this rule that made monetary policy independent of the a 0 audits. support of president carter and president reagan, their support to do what he has to do. the reason inflation was conquered and set the stage for many years of prosperity. it is a case study of why the federal reserve policy is so critical. we will affect the deficits. i agree very much that we cannot continue to feel deficits that make our debts rise in

definitely. we need to come down to deficits that are closer to 3% at most. not 4% or 5%. if we do that we can stabilize the amount of debt. >> let me interrupt. i am an appropriate which is not a good thing to do in this election year. the appropriations committee has influence over one third of the federal budget. the other two thirds is on automatic pilot. in mandatory spending for entitlement programs. we are discussing on floor of the senate the creation of another major entitlement program and the percentage that we have any control over keeps going down. half of that is the defense budget. in terms of discretionary spending on domestic -- not

entirely domestic but all our indices overseas. national parks and transportation and everything else is roughly one sixth of the federal budget. as you are commenting liege -- we need some fiscal discipline. the trajectory is entirely the other way. has mandatory spending takes over. i think you are looking at a situation where the congress will be unable to provide any fiscal discipline because of the mandatory spending. this year federal revenues projected at $2.2 trillion, mandatory spending at $2.2 trillion, everything we spend money on in the government either than mandatory spending we had to borrow every single time, i don't see that structural circumstance changing. i see it going the other direction. that puts an enormous burden on your plate.

>> i was about to address entitlements. you can't tackle this problem in the medium term without getting entitlements under control and reducing the cost of health-care. it is only mandatory if congress says it is not mandatory. we have no option to address those costs at some point or we will have an unsustainable situation. we will not monetize the debt. we will maintain priclity but we can't prevent interest rates going up if creditors lose conference -- confidence in the sustainability. it is very important, this is obvious but worse same, that we need federal the an exit strategy for monetary policy and we need an exit strategy from fiscal policy. we need to get back to having a plan, a program to get back to sustainable fiscal trajectory in the next few years..

>> we had economic growth and income growth across the spectrum at every level.

so what happened? >> well, going back to some of the themes that senator shelby raised, the stock market boom was not sustainable. it popped, and that contributed to the recession in 2001. and now of course with had a financial crisis and a deep recession, which has dragged down tax revenues and created needs for supporting people out of work and other important objectives. so a lot of what's happening right now, of course these enormous steps we have this year and nature are not permanent. they're reflecting the current situation. but some of it will be permanent and as we begin to address, particularly the entitlement issue and the aging issue. >> so you would concur that our effort today to pass health care reform is critical to our economic future? >> i'm not going to comment on the overall health care bill.

what i want to say is i think an essential element would be to try to reform health care in the way that controls costs going out. that's going to essential. >> that's what the cbo has concluded in your evaluation of the senate plan before us, is that correct? >> they've talked about some premiums. i don't think they have made a strong statement about the share of gdp devoted health care for several. >> they have indicated going forward there would be cost savings. and i think from my view, the faster we get this accomplished, we can move onto some of the other issues we have talked about today. but i recall because i was there, there were only two ways you can deflect this deficit. and that's either by cutting expenditures or raising income taxes. can you think of another one? >> to reduce deficits? >> yeah.

>> well, just logically there are other kinds of taxes beside income tax is. >> no, no. i can see that. >> and on the spending side, again, you know, willie sutton, robbed banks because that's where the money is as he put it. the money in this case is in entitlements. those other programs which are growing. at the rate we're going, in about 15 years the entire federal budget will be entitlements and interest and will not be any money left over for defense or any of the other activities. so clearly we're facing a very different hundred difficult structural problem. the government has very substantial obligations. i'm not in any way advocating unfair treatment of the elderly who have worked all their lives and surly deserve our support and help. but if there are ways to restructure or strengthen these programs that reduce costs, i

think that's extraordinary important for us to try to achieve. >> would you take taxes off the table? >> those decisions, i wouldn't do anything. those decisions are up to congress. >> well, your predecessor signal very strongly that tax cuts in 2000 were appropriate. >> i have not done that. i have done my best to leave that authorities where it belongs, with the congress. >> one of the most pressing issue that we face across the country is implemented, frankly. and you have made the point that you will begin to reduce the stimulus, the aide that the fed is provided at some point. that will be done, i hope, with recognition that and to we restore employment across the country, we have not brought back the economy. we have not restored confidence in the economy, and we've not

made it productive for the people, the working people in this country. is that your view? >> yes. i think jobs are the issue right now. and i think it's not just today's incomes, today's production. it's also about the future. we have a situation where 30 percent of african-american young people are unemployed. very high fractions of young people in general. people who begin their working careers without a job obviously, are going to be losing opportunities to gain on the job training, to learn skills. and it will affect them for many years down the road. so they are very severe long lasting also so she was unemployment rate at the level we're saying and with the duration of unemployment we are seeing. and it really is the biggest challenge, the most difficult problem we face right now. >> what do we do about it? i mean, i don't want to be glib,

but there's both fiscal and monetary consequences. and what we've seen is particularly in the last several months, the actions of the federal reserve, together with actions, fiscal actions, are effective, we hope, in some cases. so what would you propose to do about the unemployment situation? >> will, on the federal reserve side where i have -- i can speak, you know, obviously we have continued to keep interest rates close to zero to try to seemly growth, and we have now seen positive growth in output which will translate into jobs, we are hoping soon. i think a very important issue is credit. if there's not credit, then that affects the ability of people to buy odd and other goods and services. it affects the ability of small businesses to hire and maintain their inventories. so i discuss are some of the statements we're taking to try to unfreeze credit, including pushing banks to make credit

worthy borrowers, give credit where the bars access to loans, have banks raise capital, try to markets and other steps. so the fed has a program you're we are employing, which is focused on getting jobs created. now, on your side, on the fiscal side obviously there are a whole number of different options. and christina romer had an op-ed in "the wall street journal" i think yesterday where she listed some of the things the administration is thinking about. obviously, all of these issues will have fiscal consequences, and again, the congress will have to make those trade-offs. of. >> let me get to issue that's under your control. that's your supervisors responsibly with some of the largest financial institutions in the country, and some of the david i have seen suggest that local community banks are much more aggressive in terms of lending through this whole business administration, in lending to those small companies that are creating jobs, at least

maintaining jobs. and if you look at the bigger financial institutions, they are not doing enough. can you through your supervisory responsibilities get them to perform better, frankly? >> well, first on the small banks, that isn't uniform but it is true that for the most part the small banks didn't engage in some of the activities that got a big banks into trouble. they do have commercial real estate issues, many small banks do. but it's also true that in many cases where large banks have withdrawn, reduce their lending, small banks have stepped up and provided credit to small business. that's one of the reasons why community banks are such a valuable part of our banking system. we face a dilemma, which is we want banks to lend and we're encouraging them to lynn. but we certainly don't want them to make bad loans. because of course that's what got us in trouble in the first place. so as i described earlier, we are pushing banks to make loans to credit worthy borrowers. where mceachern examiners examiners are appropriate

rebalancing the needs of the borrowers against avoiding excessive risk aversion. we are pushing banks to raise capital, as the bank of america example shows. and we are done quite a bit to restore the church's asian market, which is very important and the united states. that's about one-third of our criticism. it was mostly shut down during the crisis, except for the government guaranteed mortgage markets. and our activities, both in small business lending and also in commercial real estate, have gotten those markets, look like they're in better shape and start to funky. that is very important because it provides a source of funding for the banks that they can then pass on into loans. >> thank you, mr. chairman. >> just 30 seconds, the bank of america you mention to senator shelby and again reference you. are you supportive of their decision to pay off these t.a.r.p. monies and you see any negative implications of them doing so? >> we as their supervisor, along

with occ and others evaluated their situation. and we felt it was safe and reasonable and appropriate for them to pay off the t.a.r.p. and we sign off on the. >> make a very much. >> thank you, mr. chairman. four years ago when he became -- when you came before the senate to be chairman of the federal reserve, i was the only senator to vote against you. in fact, i was the only senator to even raise serious concerns about you. i oppose you because i knew you would continue the legacy of alan greenspan, and i was right. but i did not know how right i would be. and could not imagine how wrong you would be in the following four years. greenspan legacy on monetary policy was breaking from the taylor rule to provide easy money, and thus, in place bubbles. not only did you continue that policy when you took control of the fed, but you supportive every greenspan rate decision

when you were on the fed earlier this decade. sometimes even want to go farther to provide easier money than chairman greenspan. a recent -- as recently as a letter you sent me two weeks ago, you still refuse to admit that action played any role in inflating the housing bubble, despite the overwhelming evidence and the consensus of economists to the contrary. and in your effort to keep fail -- keep filling the poncho, you crank up the printing presses to buy mortgage securities, treasury securities, commercial paper, and other assets from wall street. those purchases by the way led to some nice profits, before the wall street banks, and dealers who sold them to you, and the gse purchases seem to be illegal since the federal reserve act allows only the purchase of securities backed by the

government. on consumer protection, the greenspan policy was, don't do it. you went along with this policy before you were chairman, and you continued it after you were promoted. the most going example is, it took you two years to finally regulate subprime mortgages. after chairman greenspan did nothing for 12 years. even then you on the active after pressure from congress, and after it was clear, subprime mortgages were at the heart of the economic meltdown. on other consumer protection issues, you only acted as the time approached for your renomination to be fed chairman. how and greenspan refused to look for bubbles or to try to do anything other than create them. likewise, it is clear from your statements over the last four years that you failed to spot the housing bubble despite many

warnings. chairman greenspan's attitude toward regulating banks was much like his attitude to our consumer protection. instead of close supervision of the biggest and most dangerous banks, he ignored the growing balance sheets and increasing risk. you did know better. in fact, under your watch, every one of the major banks failed or would have failed if you have not bailed them out? on derivatives, chairman greenspan and other clinton administration officials attacked brooksley born when she dared to raise concerns about the growing risk. they succeeded in changing the law to prevent her or anyone else from effectively regulating derivatives. after taking over the fed, you did not see any need for more substantial regulation of derivatives and till it was

clear that they were headed to the financial meltdown, thanks in part to those products. the greenspan policy on transparency was talk a lot, is country and use plenty of numbers, but say nothing. things were so bad, one tv network even try to guess his thoughts by looking at the briefcase he carried to work. you promised congress more transparency when you came to the job. you promised more transparency when you came begging for t.a.r.p. to be fair, you have published more information than before, but those efforts are inadequate and you still you refuse to provide details on the fed to bail out last year on all the toxic waste that you have bought.

and chairman greenspan sold it to greenspan put. whenever wall street geared of bush, alan was there. but you went even farther than that. when you bow to political pressure of the bush and obama administrations come and turn to the fed into an arm of the treasury. under your watch, the bernanke put became a bailout for all large financial institutions, including many foreign banks. and you put the printing presses into overdrive to fund the government spending handout, cheap money to your masters on wall street. which they used to rake in record profits while ordinary americans and small businesses can't even get loans for their everyday needs. now i want to read a quote to you, mr. bernanke. that's a floating slip, believe

me. here's a quote. i believe that the tools available to the banking agencies including the ability to require adequate capital and ineffective banking receivership process are sufficient to allow the agencies to minimize the systemic risk associated with large banks. moreover, the agencies have made clear that no bank is too big to fail. so that bank management, shareholders, and uninsured debt holders understand that they will not escape the consequences of excessive risk-taking. in short, although the children's is necessary, i believe the systemic risk inherent in the banking system is well managed and well-controlled. that should sound familiar to you. since it was part of your response to a question i asked about the systemic risk of large

financial institutions at your last confirmation hearing. i'm going to ask that the full question and answer be included in today's hearing record. now if that statement were true and you had acted according to it, i might be supporting your nomination today. but since then, you have decide that just about every large bank, investment bank, insurance company, and even some international companies, are too big to fail. rather than making management, shareholders and debt holders feel the consequences of their risk-taking, you bailed them out. in short, you are the definition of a moral hazard. instead of taking that money and lending it to consumers and cleaning up their balance sheets, the banks started to pocket record profits and pay out billions of dollars in

bonuses to their management. because you bow to pressure from the banks, and refuse to resolve them, or force them to clean up their balance sheets, and clean up the management, you have created some be banks that are only enriching their traders and executives. you are repeating the same mistakes of japan, in the 1990s, on a much larger scale while sowing the seeds for the next bubble. in the same letter where you refuse to admit any responsibility, for inflating the housing bubble, you also admitted you do not have an exit strategy for all the money you have printed in the securities you have taught. that sounds to me that you intend to keep popping -- propping up the banks for as long as they want. even if that were not true, and

i'm a little over my time, but this is very important. the aig bailout alone is reason enough to send you back to princeton. first, you told us aig and its creditors had to be bailed out because they pose a systemic risk, largely because of the credit default swap portfolio. those credit default swaps by the way our over-the-counter derivatives that the fed did not want regulated. well, according to the t.a.r.p. inspector general, it turns out the fed was not concerned about the financial conditions of the credit default swap partners when you decide to pay them off at par. not at a discount, but at 100%. in fact, the inspector general makes it clear that no serious efforts were made to get the

partners to take haircuts. and one bank offered to take a haircut, and you declined it. i can only think of two possible reasons you would not make then new york president said geithner try to save the taxpayers some money by seriously negotiating, or at least taking up ubs on their offer of a haircut. sadly, those two reasons our incompetence or a desire to secretly funnel more money to a select few firms. notably, goldman sachs, merrill lynch, and a handful of large european banks. i cannot understand why you did not seek european governments contribution to this bailout of their banking system. for monetary policy to regulation, consumer protection transparency and independence,

your time as fed chairman has been a failure. you stated time and again during the housing bubble that there was no bubble. after the bubble bursting you repeatedly claimed the fallout would be small. and you clearly did not support the systemic risk that you claimed the fed was supposed to be looking out for. when i come -- where i come from, we punish failure, not reward it. that is certainly the way it was when i played baseball and it is the way across all of america, presently. judging by the current treasury secretary, some may think washington does reward failure, but that should not be the case. i will do everything i can to stop your nomination, and drag out this process as long as i can. we must put an end to your and

the feds failure, and there is no better time than now. your fed has become the creature from jekyll island. thank you. >> are you going to respond to that? [laughter] >> let me just correct one point. first, i'm not sure -- i think there was some misunderstanding, misinterpretation of the sigtarp report, but we absolutely believe that aig's failure would be an enormous systemic risk and would have imposed enormous damage, not just on the financial system, and this is the key point, on the entire u.s. economy and on every american. it is not reasonable to talk about letting large firms fail, as if that would have no effect on credit extension and on the broader economy. building an example should be enough for everybody. but with respect to the counterparty there's a long discussion there which i won't go into, but i'll just point out

one issue you raise. ubs offered a 2% discount, if and only if all the other counterparts would accept one. that was not the case. we did our best to get a reduction there, but given that aig was not bankrupt, and given that we're not going to abuse our supervisory power, we really had no way to create a substantial discount. >> mr. chairman, i don't want to take any more time, but the fact of the matter is, aig, aig was 80% owned at that time. by the federal government. >> i want to say, it let me say, and i disagreed with my friend and colleague from kentucky about the conclusion. but i've got to tell you, mr. chairman, going through that period at the time with all the headlines about $168 million in bonuses that went out to aig, and virtually no reporting whatsoever, the counterparty issue. and the fact of the matter we allowed $0.100 on the dollar,

with little or no negotiation, i have raised issue with others before. i don't understand that all. most americans don't. that was billions of dollars. and it's just hard to accept the notion that we couldn't negotiate with the counterparts at that time. >> we had no leverage. if we didn't pay off, they would say you're bankrupt. >> but we wrote a check to aig. if we hadn't done that they would've been a troubled. >> to aig but not the counterparty's. >> the counterparts would've been in trouble also. >> that's true, but most of the firms were born. we had no authority or leverage over them. >> the chairman of the federal reserve. >> i don't abuse my supervisor can't. >> apparently not in that case. senator biden? >> well, where to begin? i'm struck by the fact that senator bunning and senators

sanders find itself in agreement on this question. perhaps proving the old adage that ideology may be circular rather than linear. some of us however mr. chairman find herself, and i associate myself with the position of chairman dodd in a different position on the question of your nomination. i will support you. not because i think you didn't make mistakes as you've admitted here today. you did. not because i don't think we should hold everyone accountable for doing better. i think we should. because i think you're in the best place to improve the situation to maximize the chances that we do not have a recurrence of some of these things, including the aig situation that senator dodd mentioned. on you know, there's a lot of culpability go around. that had made mistakes, as you've indicated. the treasury made mistakes. virtually every other regulatory body made mistakes. congress made mistakes. those on the left made mistakes. those on the right made

mistakes. virtually every other government in their institutions make mistakes. virtually every institution of any magnitude in the private sector made mistakes. so sure that the accountability? absolutely. do we need to maintain a sense of urgency to change those things that led to the mistakes? you bet. but some degree of modesty i think is in or, perhaps even a good long look in the mirror before engaging in too much monday morning quarterbacking your clairvoyance is an attribute and in short supply here, all the way around. so my question to you is with the benefit of hindsight, what would you have done differently? >> well, i think there are two areas. senator dodd has alluded to both of them. first, i think and senator bunning, we were slow on some aspects of production. senator bunning was not exactly correct. we did have nontraditional

mortgage guidance and subprime guidance out very early in my term, and it took a year and that's why it took until 2008 for those to come out. but i think that's in anywhere if we had been more proactive, we the federal reserve, have been more procter, it would have been helpful because i believe, again responding to senator bunning that it was not monetary policy so much as problems in the mortgage market that led to the housing boom and bust. secondly, while again, as you kindly put it, there were mistakes made all around including other regulators, the private sector, congress and so on, in the area where we had responsibility in the bank holding companies. we should have done more. we should have required more capital, more liquidity. we should have required tougher

risk management controls. i think the summary is that, and to be quite frank, you talked about clairvoyance. i did not anticipate a crisis of this magnitude in the severity. but given that it happened, many of the base, but not all of them serta, but at least some of them were not adequately prepared in terms of their reserves, in terms of their liquidity, that is a mistake we won't make again. and i advocate not only strengthening regulation, and strengthening supervision, i to restructure the nation of our financial regulatory system in a way that it will provide a more holistic back up digital approach so that we are not reliant on each individual regulator in their own narrow sphere. that we have some broad interaction among regulars that allows us to assess problems that are rising in the system as a whole. >> i know you're concerned about the independence of the dead, and perhaps the risk that there

could be some politicized nation for lack of a better term, of some of the functions that you perform if we don't institute the appropriate reforms going forward. my own view is the last thing we want is the political branches of government getting more involved in setting these policies on a day-to-day basis. and at the same time we have to accountability. we have to have oversight. what is it about some of the proposals that have been made that you believe those too far in the direction of oversight that run the risk of politicizing the functions of the trade for? >> well, i would first try distinction between our supervisory functions and so on and our monetary policy functions that as a supervisor, we have exactly the same status as every other supervisor, which is that congress controls the regulatory environment. it controls the objectives. it's responsible for ensuring accountability, and the independence is at the level of making individual decisions

where you don't want politics there. but there we don't claim any special exemption or protection beyond what any supervisor or in fact, any regulatory agency which is. >> you are overseeing them is as a couple as anybody else. >> exactly. on monetary policy, there's a special case which monetary policy by its very nature has to look ahead over a longer print of time. where as political necessity sometimes push for a shorter horizon. and so there is a very, very strong finding, one of the major contribute is larry summers, i'm sure you know in another context, which shows that other countries that make monetary policy without political intervention have lower inflation, lower interest rates and a better performance than those in which the central bank is subject to considerable political control. now, the federal reserve is a

very transparent central bank with respective monetary policy. we are the only major central bank to my knowledge that provides detailed there's of each meeting three weeks after the meeting. we provide extensive quarterly projections, testimonies, all kinds of information which gives congress and the public all the opportunities that would reasonably be needed to evaluate what we're doing. what i'm concerned about is a set of policies that would create the right of congress essentially to send and investigators whenever a monetary policy decision potentially went against their short-term preferences. and i believe the signal that would send to the markets and to the public is that congress is no longer respecting that sewn up dependent and is making its well-known and it tends to influence into effect short-term monetary policy decisions, which

would not be constructed and again is very inconsistent with what we've learned about central banking around the world and the last 20, 25 years. >> might have the ironic consequence of making interest rates higher because there would be an additional element of risk in the market place. my final question, mr. chairman, has to do with your testimony regarding your role in both setting monetary policy and as the occasional lender of last resort and the importance of having not just theoretical models but some empirical evidence and understanding about what's going on in the market place in terms of performing those two functions. my concern would be that the fed would become if we just completed remove that authority, it becomes sort of an isolated entity completely divorced from an understanding of how your decisions were playing out in the real world. so my question to you would become too full, number one, how would you perform a function of as a last result if he did have some insight into the goings on in these institutions that you are being asked to perhaps support, number one? how would that be possible?

number two, how important is something. old data, a hands-on understanding of what's going on in the financial sector? how important is that to maximize the chances you get monetary policy right? >> well, on the discount window limit, i guess if we didn't have any examination of 40 we would have to rely on the goodwill of other supervisors. i think we much prefer to have our own information on our own knowledge of what's happening in those banks. more significantly, injuries of crisis or stress, as the fed uses lender of last resort authority to try to stabilize a couple financial system in order to do that accurately and effectively we need to know what the bunny positions are of individual banks, what's going on in those markets, what the solvency position is, i gave the example of 9/11 when the fed opened up its discount window to provide liquidity to help financial system begin to function again. we could not have done that

effectively without the information we got on the ground from our supervisors in the banks. the 1987 stockmarket crash is another example where information from the banking system helped us to address potential threats to the integrity of the clearinghouses that cleared futures contracts. recently, an example of this kind of problem in the u.k., over the past few years the government of britain removed from the bank of england most of its supervisory authorities and invested them in the financial supervisory authority, the fsa. but when the crisis hit, and folks up, wind northern rock came under stress the bank of england was completely in the dark and was unable to address effectively what turned into a very disruptive run and a problem for the british economy. so currently, the trends in the u.k. and elsewhere is quite the opposite.

to take away those authorities, it's to give the central bank the information and authorities it needs to know what's going on in the banking system. now, senator shelby asked me about the role in monetary policy, and i would say that the role of monetary policy is there. it's more unusual. it doesn't happen all the time. but for financial stability manus, i think it's a very, very important that the fed have that kind of information and insight into the banking system. >> thank you, mr. chairman. >> quickly before i turn -- on both of those points, we looked over the g-20, in more than half of our colleagues in the g-20 separate supervisory and monetary policy. in fact, the countries that have weathered the storm rather well over the last couple of years have been countries that have separated both. the british system, the fsa, didn't have deposit insurance so they had the problem there. in fact, they didn't have the information that they set up a system that they basically did

allow the central banking to get information. i think that contributed more to what happened in great britain. i say that, that's a legitimate debate and discussion but i don't think he can be said with absolute certainty that the other is to. >> thanthank you very much, mr. chairman. mr. chairman, i want to focus during my questions on how we should establish our financial regulatory system. as you know, this committee is working on financial regulatory reform right now. and one of the biggest concerns that i have is that as we move forward in that, that we do not institutionalize the too big to fail syndrome. i for one believe that we have allowed companies that should have been resolved to continue with the federal being propped up by the federal government or by the fed. and that has led to a moral hazard that we need to do with an hour structure of our system.

you the very often said that we need a new resolution authorities so that you and others can have the tools to deal with allowing large institutions to be wound down, or resolved. and yet, at the same time, i believe in your testimony you indicate that you believe that we need to have the ability, if you and others need to have the ability to provide liquidity at times of crisis. there's a problem there. and my question to you is, how do we make the determination of what systemic risk is? and maybe to put it a different way, how do we make the determination of when it is that we should provide liquidity as opposed to when it is that we should -- to sustain and maintain an institution as opposed to when we should wind down our resolve an institution? >> senator, first under the liquidity function, to be very sharply distinguished from bailouts.

liquidity provision is short-term credit which is fully collateralized and which is made only to sound institutions, and is meant only to provide a backstop wind sources of short-term funding for whatever reason does appear. in the old days when retail depositors ran to the bank, this was a way to prevent the collapse of the bank just because of lack of liquidity. >> let me interrupt for the. do you believe we could structure a resolution authority and a systemic risk regulation in such a way that we could achieve that kind of assurance that liquidity efforts would be limited in that way? >> i do. i do. i think it's very, very important that let me just say to be absolutely clear, the actions we took last fall to stabilize these firms were done extremely reluctantly, and only because we have no good mechanism to allow them to fail without having severe consequences for the financial system in the broader economy. it is imperative that the most important thing that congress can do is find a way to solve

the too big to fail problem. i think that is absolutely essential to the only way to do that is to find ways to let those firms fail. i do believe that can be done. it can be done in a way that also forces creditors to take losses, shareholders and other creditors to take losses. and done in a way that is sufficiently predictable that it will not cause as much disruption as the problems that we had, you know, last year. soy to believe it's possible, and i think the model we can use is the model we already have for resolving failing banks. the fdic has just applied to larger more complex institutions. >> what type of institution would you say should have that authority? would it be the fed or would it be a council of regulators, would be a new financial regulator that we should establish? >> i think the institution, with the most experience in these

kinds of resolutions, is the fdic pics i think the fdic should put a significant role. the treasury should play a significant role as well just to represent the political end of the decision-making. the fed is not interested in being part of this process, except insofar as congress views separate liquidity provision as part of the wind down process as being appropriate. let me just say this asked him as possible. we do not want any more aig's. we do not want any more lehman brothers. we want a well-established, well stated identified worked out a system that can be used to wind down his company's, allow them to fail, let creditors take losses, let counter parties like the edgy counterparties take losses. but without completely destabilizing the whole economy. as can happen. >> as a part of all this i'm concerned that we will not reestablish the kinds of proper

approaches and the principle of moral hazard. until we and t.a.r.p., and provide an exit strategy from the recent government guarante guarantees, and decide how they're going to proceed with fannie mae and freddie mac. would you agree with that? >> i do agree with that. fannie mae and freddie mac are particular problems, had to be addressed. but under the current situation, the t.a.r.p. was used about companies and make all creditors whole, except for the shareholders, under a well-designed resolution regime, you know, many creditors could, would, should lose money which would create market discipline going forward which is what is desperately need to of what the moral hazard problem you're referring to. >> the recent sigtarp quarterly report states that there is $317.3 billion of on obligated t.a.r.p. funds available right now. do you support allowing the t.a.r.p. of three to expire on

december 31, 2009? >> i think it's very appropriate to begin winding it down. you know, i think we should begin clarifying what additional need, if any, are still remaining to make sure the financial system is still stable and will not, you know, run into any new problems. but i certainly think the t.a.r.p. has mostly served its purpose, and that it's time to start thinking about how we're going to unwind, unwind that program. and in addition, as i have noticed several times, you know, many banks are paying back the t.a.r.p. and a lot of the money that was put out is now coming back to the treasury. >> do you believe that we will ultimately recover all the t.a.r.p. dollars? >> i think if we look -- i won't speak about the automobile, those sorts of things that if you look at the money that was put into financial institutions specifically, i think overall we're going to end up pretty close to breakeven. maybe someone in the red, but

not too much. and considering what was achieved in terms of stabilizing the u.s. financial system and avoiding the collapse of our system, i think that outcome would be a good outcome. so i do think unlike some of the scare stores about $700 billion being thrown away, i do believe that financial institutions collectively will in the end, that they will be something close to a breakeven there. >> think you. for my last question i would like to ship to derivatives. and i appreciate the fact that recently got back to me with a progress report on our efforts to strengthen the infrastructure for over-the-counter derivatives markets. and that response, you stated from the perspective of the end users, there'll always be occasions when he end user's risk management needs cannot be met by clear of assisi product or by exchange traded products. thus, an important issue is to preserve the ability of counterpacounter parties to the contract, to contract customize

deals while properly managing the risk of these deals. end user's have not typically created the largest bush is to counterparties that are the focus of efforts to reduce systemic risk through broader claim. the question i have is, do you believe that, again, as we try to structure how we're going to approach our financial regulatory system, that we can effectively avoid that aig type issues and concerns that we need to do with in that context from the legitimate need for and users to have the flexibility to hedge their unique business and risks to customize derivatives? >> i think we can. i think we need some scope for customize derivatives for a certain users. those derivatives that can be standardized should be trade on exchanges, and i think that's the plan. but i would add that unlike aig, which didn't have significant oversight at all of their derivatives business, that we should be very clear that between the sec, and the bank

regulators, that banks, for example, who create customized derivatives will also be, you know, be carefully watched to make sure they have adequate capital and risk management for those positions. we don't get something like the aig situation where they had an enormous one way debt with no capital behind it. >> senator crapo, thank you very much. good questions. there is a vote that is starting it, and we will come back at 1 p.m. rather than having this back and forth. we have a series of votes, mr. chairman, and i don't want it to be so disjointed, so we will go to senator schumer for his line of questioniquestioning and in the committee will reconvene at 1 p.m. senator schumer? >> thank you, mr. chairman, and thank you mr. chairman. first of all i want to say i sat in the room with many other, senator dodd and senator shelby i believe and some others in this room when we were told about the imminent collapse of

the financial system. and panic was in the air. we have lots of problems. this economy is not moving well enough, for my purposes or think anybody here. but we're not in the great depression, which we might have been. and in a sense, you're a victim. in this society when you solve a problem, you're better off than when you avoid a problem even though society is better off than the problem was avoided. and i think people forget how important that is, and easy to criticize, easy to say could have been done a different way. but at that moment, action was needed and needed quickly or we would have had financial collapse. and you did act quickly, and i think, you know, well, i talked to warren buffett. he said the government deserves a high grade for its efforts to prevent the collapse of the financial system and to rescue the economy from imminent freefalling. you played a major role there,

and i hope my colleagues will remember that. my question is on -- my first question is on something that i've been very critical of the fed in the past, and that is consumer protection. as you know, i think the fed dropped the ball on consumer protection issues. i support the creation senator dodd has proposed of a strong independent consumer financial protection agency. now we're finding, every day we find a new way, banks are in trouble. we know that. many of them, their profits are being squeezed here and there. and their action is to raise all kinds of these and recouped on the backs of consumers. there has been a new report that's come out on at&t's release by bank rate.com. and according to that report, the average atm fees rose 12.6 percent in 2009 to $2.22. that's a heckuva lot. plus not only will the bank that owns the atm charge, your own

bank down charges you a fee for withdrawing these. the average cost of the fee for using someone else's atm is a dollar 32. over 70 percent of banks charge customers this the. together with massive increases in credit or interest-rate and other fees like these overdraft fees that we're seeing, consumers are bearing a disproportionate burden in maintaining the health of the bank's balance sheet. so i believe the fed should conduct a thorough review of atm fees to ensure that consumers are protected from excessive atm fees, especially the double whammy fee for using another banks atm. what's your opinion on this? you probably saw the study. and will the fed agreed to conduct its own study and get us some answers on it pretty quickly? >> first, senator, as you know we just put out some rules on overdraft protection in general

as it applies to atms and debit cards. and it will require banks to get and opt in from the consumer before they can charge them for an overdraft. and i will address one of those issues that we will definitely take a look at atm fees, and just at least try to verify what's happening and what the patterns are. and we will get back to you with that information. >> could you make some suggestions at least as to what could be done if you can do them yourself? >> we will look at it and see what we learn. >> okay. just in a preliminary look at the report, do you think what's happening in at&t's is similar to what's happening with credit cards and others, that fees are going up at a much greater rate than they did in the past? >> i'd like to get back to you on the numbers. i certainly find it plausible. i believe that the fees are going up. ihink banks are trying to find ways to make revenue basically. but we will look at it.

>> second question relates to the next bubble. senator dodd talked about the international bubbles and what's happened in dubai, but i'd like to talk about the bubbles, the potential bubbles here in this country. this last crisis was a result of a massive bubble focus probably on real estate. and there's been a lot of attention laid on the feds of zero interest rate policy and whether it's creating new bubbles. the we of course is isn't going to be an instant replay, different actors, different script, same horrible outcomes in terms of the movie, the horror movie we just went through. raising interest rates is one answer to deal with the bubble, but that's obviously tricky. i would be worried about raising interest rates because it would hurt getting people back to work, which should be our number one concern. so could you talk a little bit about what can be done to deal with these potential bubbles before they burst, given that

you don't have a tool of interest rates as easily available because of the difficult economic situation? and then give us a little bit of good thinking on whether interest -- whether and when interest rates should be risen to do with these potential bubbles. >> well, ideally, the way we should do with bubbles at least the first line of defense ought to be supervision and regulation. if we have appropriate risk controls that force banks to not to pile in to overcrowded positions, for example. or to take excessive risks, or if we have a system -- systemic risk council which looks at emerging asset price increases or concentration of risk across the banking system. i think that's the first best way to try to address bubbles. and it's something in my very first speech as a governor in 2002, i said the first line of

defense ought to be regulation and supervision. and that has the benefit that they can help protect the system, even if you're not sure if the increase in asset prices is a bubble or not. unfortunately we do not now have that system. and i therefore think monetary policy has to pay some attention to this situation. we are looking at it. fortunately, well, let me be very careful. i have said in the past, and they continue to believe, it is extraordinary difficult to know in real time if an asset price is appropriate or not. but given that caveat, we are doing our best to try to look at the major credit and stock markets used the view asian models we have, use the standard indicators that we have and try to look for misalignments. >> grades at my work? >> well, in some countries, they

had special measures, for example, where there have been house price increases. there have been things like mandatory increases in down payments, things of that sort. so i suppose of those ideas that could address specific types of problems, but for a general bubble, i think basically that supervision of a collection of the financial system is the strongest most effective approach. and i do not rule out using monetary policy as necessary, if that situation does become worrisome and threatening to our mandate which is growth and inflation. >> thank you very much, senator. and i appreciate your indulgence, as esther bernanke, but i thought it would better serve your interest and ours as well to have some contrary to it. we will take a break. we'll see you back here in about an hour. we will stand in recess until 1 p.m.

[inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] >> this committee will come to order. senator carper? >> thank you, mr. chairman. get my thoughts together.

apologize, just came from another meeting. mr. chairman, thank you for being here for your service, and for always being available at the other end of the phone when questions arise that i appreciate that very much. i'm going to spend most of my time today trying to understand more on a go forward basis, what needs to happen from a regulatory process. i know that many of us here on the committee are trying to work through appropriate reg reform. and obviously the fed, that has been playing a big role in the. let me just start with the regular you issue. paul volcker recently has been quoted as saying that, you know, banks have been engaged in risky behavior. we had people in our offices saying that -- and if mr. volcker is listening, this is not me saying it. i am just repeating it, okay, that he is not really saying the

way things are. let me put it that way. and yet, we look back, you know, i know senator warner and i have spent a lot of time on the resolution issue. and the problem that occurs with a resolution which you are dealing with at the time of year ago, was the fact that commercial bank inside a highly complex bank holding company is very hard to sort of take out. and yet, the 23 a and b. regulations, which basically say that a bank deposit cannot be used, that depositors money cannot be used to engage in other things with their affiliates that might pose risk. there's also been some statements made that maybe you listen that activity over the last year or so, a couple of years. and the fact is that bank deposits have been used more aggressively with affiliates than they had in the past.

and the reason it's important, it's important to know, number one, but it's also important as we look at resolution, if banks are doing this, and they are highly involved with other entities, it's difficult to unwind one of these organizations. if in fact the bank's depositors money has been used in other activities than the bank itself. so that's a very long winded question. if you could give a very short answer since i just have eight minutes, i would appreciate it. >> i will try. the 23 a. exemptions allow the holding company to put assets down into the bank. to be financed by deposits. we don't grant those very often. generally consult with the fdic to make sure they're comfortable. when that's done, it's done in a way that makes you the bank is not taking additional risk, that it's all. so it's not i think a general issue. it's something that we've done in some of the mergers are some

of the things that have happened in version two bank holding status. those sorts of things. but it's not something that happens often. i don't think it's going to be generally an issue with resolution. there are lots of ways which holding company and banks are intertwined. or risk controls or all kinds of other things. and in that respect, both operationally but in some ways financially, there are linkages that make it more complicated. the basic back which i'm sure you appreciate, is the fdic law applies only to banks. whereas a bank holding company does not have the resolution mechanism and losing the bank of the company can be a very strict problem. >> and i realized the management issue in the i.t., and just low, the reasons these organizations are put together so they can work together in a more synergistic way. let's face it, but should we draw a stiffer line, if you will, between those? and shouldn't be any

flexibility, should we eliminate that so there's not even the perception or the substance behind the fact that some of those deposits may be used for more risky behavior than most people thought they otherwise would have been? >> now i think we're in a reasonable place right now. again, whatever assets are transferred down to the bank, there have to be guarantees, protection, backstabbed to make sure the bank is not at risk of taking losses. and the purpose of those things is to segregate the bank, and the purpose of protecting the fdic is an insurance on for example. if we go forward and have a resolution regime that addresses the whole company, i think these issues are still there, but less of a concern because the whole company will be addressed. >> you've talked a great deal about, well, you've talked a great deal about the fed maintaining supervision over some of the larger entities in the country. and some people have put theories out that, you know, the fed are to look at the whole how

to supervise the top 25 entities in america. that's been a number that's been thrown out. as we look back at citi, and the fact that citi was under corrective action until 2003, and then the fed basically lifted that, the fed was watching citi. i mean, that was like jaime, you do, the prime example of what the fed is supposed to show potential regulation. and yet, citi, let's face it, turned out by all accounts to be an absolute disaster, okay, from the standpoint of the activities they got involved in. it was the primary type of institution that the fed should be supervising. and i don't say this to beat a dead horse, but it does make one wonder, i know a lot of people talk about the fed being the adult in the room and all those kinds of things, but it does

make one wonder, you know, why that happens to be a good idea. and i wonder if you might expand on that. . .

>> it was created to stop panics. it's what caused the fed to be set up in the first place. we are the breath of expertise. so i think that -- assuming that we and other regulators that can correct the problems that we have discovered. the appropriate structure should be one where the fed is involved. without being involved, we won't have the exper tease, information, insight that will let us be effective in addressing systemic issues. >> i want to talk to you some more about that. my time is about to end. i know you've stated you're going to quick buying the mortgage-backed security from fannie and freddie in march.

a lot of people say home mortgage is going to go up a couple hundred basis points. i think it would be good for all of us to know if you are going to do that. i think it's going to be appropriate if you stated it's going to end in march. i think it would be appropriate so people can make other plans. i think it is going to have a huge impact on the markets. i think a lot of people question where that's within the section 14 of the fed's charter of the first place. but i'd love to have a response to that. secondedly if we could, my time is out and i'm kind of filibusters. one the things that you and i have talked a great deal about is political involvement and monetary policy. and i'm concerned about people like us getting involved in monetary policy. i've stated that all the way through. i think most people in the

committee are concerned about us getting involved in monetary policy. on the other hand, i wonder if it should go both ways. what i mean is when the bush administration touted the stimulus back in may of last year, which was most people saw in the service was ridiculous. we're going to spend $160 billion and drop it out of the helicopters. most people -- i won't say most people, a lot of people thought it was a pretty silly idea. and yet you championed that. that effects people here. because the chairman of the fed is thought to be an intelligent, important person. of course, you are. the same thing happened with the last stimulus, which in my opinion was absolutely not a stimulus. it didn't -- it's proven now, it didn't do what it was supposed to do. again, when you speak and say it ought to happen, people up here vote that way. so i guess i would just ask, if

we're not to be involved in monetary policy, should you be used as a tool by whether it's republican or democratic administration called an agenda to come forth that, you know, is really a political agenda and not something that's necessary good for our country. mr. chairman, i thank you for the generosity of letting me go a little longer. >> let me just say just quickly. >> i'd like for you more than quickly. >> on the mortgage-back securitied we have a long-standing authorization to do that. i don't think there's any legal issue. we have said the current program is going to come to the end at the end of the first quarter. the committee will -- it's a monetary policy decision. the committee will have to see how the economy is evolving and whether or not we need to do more. the several hundred basis points, there's a lot the of uncertainty. that's very much at the high end of what estimates are. we'll have to see how that plays out. on the fiscal part -- >> so people involved in home

marges will just know when they know? >> well, we don't know. we don't know exactly what the effect. >> so saying it's going to end in march, it's like saying we're going to withdraw troops why afghanistan? 18 months. just kind of saying it. >> in order to mitigate the effects, we have been tapered it off. we will see how it evolves. and the committee is prepared to respond if necessary. on the other thing, i think you're right. as a general matter, i have tried to stay out of fiscal policy. i don't make specific recommendation, i didn't about the size or compensation of any of other things. but you are absolutely right. and i will continue my practice of leaveing fiscal decisions to the congress. >> senator menendez. >> thank you, mr. chairman. chairman bernanke, i just want to start for purposes of memory

because we often have short-term member here. november of 2008 and the time, and i think you referred to it some degree if your opening statement. november 2008, after those presidential elections, you and secretary paulson came before the members of the committee and basically said we have an set of circumstances. we need you to act to do so boldly. and in the absence of doing that, that we would have a global financial meltdown. so i want to start there, because it's the beginning of what has been transcended since then. is that a fair statement? >> yes, sir.

expect that was october. >> october. okay. and then the actions took place thereof. i often get from my constituents, you know, senator, when i make a mistake i have to pay for it. when the financial institutions make a mistake, i have to pay for it too. and i think the difficulty is creating the correction between why we acted based upon the exper teal of yourself and others who said we needed to do so because otherwise there'd be a global financial meltdown. that has real-life consequences to main street or for that fact, across the country. is that a fair statement? >> of course. >> now which brings me to where we are today. and i want to get a sense from you, do you believe that the american economy is recovering? >> it's beginning to grow again. we'd like it to grow faster.

we'd like jobs to come back faster. we avoided, i do believe we avoided an even far worse situation by avoiding the collapse of the financial situation, as you indicated. >> all right. to give us a sense, when we say we, i think senator bayh mentioned or maybe senator shoerman mentioned, give us a sense of what would have happened, let the markets do it on their own. let them figure it out. >> well, my professional career were i came to the fed was scholar of academics studying financial crisis on the effects and the economy, including the great depression. there's a lot of evidence, not just in the united states, but many other countries than when the financial system collapses or melts down that it has very, very serious affects on the broad economy. and i think just the fact that the lehman brothers and the associated instability around that period contributed to a

global recession as evidence for that point. it's my belief that if we had not acted, if congress had not supported our actions, to stabilize the system. if we and are partners at other countries had not worked together in those weeks in october to prevent what in my view would have been a collapse and meltdown of many of the major banks in the world that we could very well be in a depressionlike situation with much higher unemployment than today. very deep decline in output, and no immediate prospects for recovery, unlike the situation we have today. where we do see the economy growing. so i think it -- the risks of allowing that meltdown were enormous. and the costs to the economy, to the taxpayer, to the average worker, to the average person of allowing the financial system collapse, the financial system is like the nervous system of the economy. if it breaks down, you get much

broader consequences. it's been hard to explain. but it's important to understand that i did not intervene because i care about wall street. i'm not a wall street person, i'm an academic. i come from a small town. i did it because i knew from my studies the collapse would have bad consequences for main street. that's what we did what we did. i firmly believe we did the right thing. >> so now november and december in 2009, i asked you whether the economy is recovering, you said it's growing. growth doesn't necessary mean recovery. >> it's technically in a recovery because it's growing of we're not declining. but it's certainly not satisfactory. >> we agree on that. what do you believe is the most significant threat to the economic expansion in the short term and in the long term. >> well, there are multiple concerns. certainly one of them is that it still remains difficult to get

credit. particularly for bank-dependent firms. that's preventing small businesses from hiring and expanding. the high unemployment rate is a major concern. because we're seeing not just 10% of the unemployment, but long duration, a lot of people on part-time work or short hours. that has implications, not just for the short term but for the skills and labor market attachment of workers going forward. it's going to affect people for many, many years. there are additional issues like our external trade deficit, fiscal deficit that we do need to address. in terms of the immediate recovery, as i talked about in the speech in new york a couple of weeks ago, i think the two issues we need to watch most closely are the return -- the healing of the credit system, particularly for smaller borrowers. and the labor market which is,

of course, still in great stress. >> we seem not to have succeededded at dealing with the credit market in a way that meets some of our goals that are critical to also deal with our unemployment consequences. and, you know, i look at where some of the major institutions are getting credit, they are getting credit, you know, easily two points lower than some strong regional entities. and that's probably what's keeping them largely afloat. but the question is as you do that of the fed, where is the movement here, the hammer for lack of a better to get them to losen up the credit. what can the fed do to move it in a direction that also is going to begin to make a real significant impact on unemployment. the two things that you saw are critical. >> well, in unemployment, we have a range of policies, including low interest rates and

mortgage-back securitied and other things. on credit, it's a difficult thing. i think it's a mistake to tell banks you must lend such and lend. we got in trouble with bad loans. we want to make good loans to credit the and borrowers. the fed and other banking agency have been working with the banks to make sure they are not by examiners or on their own account failing to make loans to credit. we have trained our examiners to look at both sides to make sure that they -- that banks are giving full weight to the importance of continuing relationships that they have with, for example, small business borrowers. we have issued guidance with detailed examples for how to deal with a borrower who maybe making payments but the collateral or business has declined in value. it's still important to keep lending to that person or business. in addition, we have been trying

to strengthen what's called the shadow banking system through our program to increase securitization of small business loans, commercial real estate loans at the like. we're addressing this, we did the stress test to get banks to raise capital. we understand it's not going to be a quick improvement. but i do think we are seeing some improvement as the economy strengthen, so be it. a mutually beneficial improvement in the economy and credit markets. >> this is clearly the singular most important. >> i agree. >> i know there are many other issues that the fed deals with. this is the singular most important issue that your chairmanship is going to be critical over. in terms of helping us smooth this country forward in a way that the economy is recoverying with more robusting than unemployment is being reduced and that we give people back the dignity of work which is

ultimately the opportunity to sustain their hopes and dreams and aspirations. i'm going to be looking at what you're doing in that respect. my time is up. i do want to visit with you about the consumers financial protection agency. when you came to see me, we had some original conversations about that. one my criticism, i think you've done a lot of hard work in difficult times. my one criticism, which really proceeded your time even but continued during your time, is that the fed has broad powers in consumer financial protection. it just didn't use it in a timely fashion. and so there are many of us who question that leaveing that there and -- is not necessarily in the best interest of the country. so i'll look forward to having a discussion with you on that. >> senator, just quickly. i don't disagree we relate in using those powers. over the past three years, we have actually been very active

in a wide variety of areas of consumer protection. >> senator demint. >> thank you, mr. chairman. and thank you, mr. chairman for being here today and for your service. when congress created the federal reserve, they created the most powerful institution in the whole world. our whole economy, all of our prosperity, wealth, rest on the soundness of the dollar. as does much of the economic systems all around the world. so as we consider your renomination, it's important that we ask some difficult questions. not just of you, but to ourselves. because no one can say that there haven't been major failures. i think a lot of us have to admit to the federal government, the federal reserve let down the american people. and a lot of people having hurt. i will take exception to one of the arguments that i've heard today and heard often about what we heard last october and what actually happened. we were told if we did not

appropriate nearly $1 trillion that the whole worldwide economy or economic system was likely to collapse. we appropriated nearerly $1 federal and we never bought one tockic asset and the world system did not collapse. now we can make a case and debate all we want about whether or not twisting banks arms and forcing more money into the banking system actually helped us. we can talk about that all day. but the premise that we used to create this t.a.r.p. program was never followed through on. it's difficult for me to find creditability in the arguments that we saved our economy. but i'd like to ask a few questions. mr. chairman, i appreciate short answers. i want to cover some territory today. but we don't know a lot about the operation of the federal reserve. for that reason, i think the way to judgment of prosecutor -- performance is to look at outcomes p in your confirmation hearing in 2005, you listed four

duties of the federal reserve. i'd like to mention those and ask you how you think we've done. one of them the fostering the stability of the financial system and containing system ecuries risk. has the federal reserve under your leadership accomplished that goal? >> no, but we also have lots of other coconspirators in that problem. >> you listed supervising a system to promote the safe and soundness of the banking and financial system. has the federal reserve under your leadership accomplished that goal? >> we've found some mistakes and tried to improve them. >> i appreciate your short answers. another duty was conducting the nation's monitor policy in pursuit of the statutory objective maximum employment. do you feel the federal reserve has accomplished that goal? >> we've moved monetary policy, but 10% is not very

satisfactorily. >> again, i appreciate your answers. for me perhaps the biggest failure in the federal reserve in the political side here in washington is that amid all of these failures, the politicians, the folks in the administration and federal reserve have blamed credit for saving the system, while blaming capitalism and understrained free markets for our problems. that is justified the positions that are now being taken here in congress in many ways to come back and even extent the control, the intrusion of the federal government further into the private sector. i think you've been a big part of orchestrating that. and shifting the blame on to the private sector. no one is arguing that there's not blame to go on everywhere. but the biggest blame i've seen is the figure for us to recognize the roll and the lack that we played who create add

lot of these tockic assets and sold them around the world. the lose monetary policy that created chronically low unemployment rates across the economy. but not taking some of the blame and making sure the public is aware of that. we've undermined the system that made this country prosperous. i think that is egregious error. what you say, the predictions you make are critically important. because we act on them, the whole world acts on them. i'd like to mention a couple of these. march 28, 2007, when asked about the subprime market and i quote the, you said the impact of the broader economy and financial markets of the problems in the subprime markets seems likely to be contained. a little later, may 17, 2007, you said, we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. a little later, february 28,

2008, on the potential bank failures. i quote, among the largest banks capital ratios remain good. i don't expect them to be the large banks that make up a large part of our banking system. on june 9, 2008, i quote, the risk that the economy is entering a substantial downturn appeared to have diminished other the past month or so. on july 16, right before our crash, 2008, speaking of fannie mae and freddie mac, they are capitalized and no danger of failing. to a large degree, we are responsible here in the congress we did not accomplish because of the assurance that we'd gotten over the years from your predecessor and from your yourself. by doing that, i think we failed the american system. let me mention a few things here as i run out of time.

capitalism depends on capital. and i'd like to ask a couple of questions about the federal reserve in capital. is the federal reserve an instrument of the government? >> it's an agency of the government, yes. >> do you believe money is an instrument of government to be manipulated as necessary to cab bait the collective -- calibrate the collective economic to proceed with the government? >> the monetary policy is to follow the mandate to achieve maximum employment and stability. >> do you believe the employment should be a mission of the federal reserve? >> yes, i think the federal reserve can assist keeping employment close to it's maximum level through moll tear policies. >> should the government or agency established by the government have the power to distort the purchasing power of money?

>> the federal reserve is mandated to achieve price stability. and the one thing you didn't mention in your list was inflation. inflation has been low. and in that respect, the purchasing power of the dollarer has been good. it's been stable. >> in a free market economy, you would think that the cost of capital would flux wait based on supply and demand. yet a big part of the role of the federal reserve is to try to fix those interest rates. is that a function that has been employed properly? or is that something that needs to be reconsidered? >> well, we always need to improve our execution, but i think that as evidenced by the fact that every major country in the world has a central bank and uses monetary policy, i think that's the system that we have determine second-degree the most effective at this point. >> i appreciate your testimony. i would again as you and i have

talked personally, ask you to consider the need to make the federal reserve more transparent. there's no reason that independence needs to means secrecy. the confidence in the federal reserve, the mistrust around this country, has reached new heights. and we need to do something to restore the faith that the american people have in their monetary system, their financial system, and that responsibility is at federal reserve as well as in the congress. but i want to encourage you again to considerer what type of openness or audit as you and i have talked about would be appropriate in order to reassure the american people that we're not looking at another fannie mae situation that over years we were told not to worry, not to worry, everything is okay. and now we saw what it did. we can't allow that to happen with the federal reserve. again, mr. chairman, thank you very much.

and i yield back. >> may i quickly respond to that? >> yes, please. >> senator on fannie and freddie, the federal reserve has been raised concerns about many, many years. we were on the side of the concerns about that. on terms of transparency, i think the congress should have access to all of our financial information and operation, and we have made every effort, whatever remains to be done, we want to work with you to do that. our main concern is about the moll tear policy itself. we are very much committed to transparency on all aspects of the federal reserve. >> thank you, mr. chairman. >> senator akaka. >> thank you very much. chairman bernanke, i want to add my welcome to you and your family to the committee today. i feel you have demonstrated tremendous skill in addressing the extraordinary economic crisis and challenges that we

have. as, you know, i've always greatly appreciated your capacity and dedicated efforts to improve the financial literacy of students and consumers. the true cost of financial illiteracy have been made all too apparent by this financial crisis. one of the causes of the crisis was that families were steered into mortgages with risk and cost that could not afford to even understand. and that has already expressed. we share a firm commitment to trying to better educate, protect, and empower consumers. i appreciate your advocacy. and the efforts of the federal

reserve to promote the use of financial institution for lower cost remittances. now we have many families of portions that send wages to family members living in the philippines or the countries. unfortunately, too often, consumers fail to take advantage of the low cost remittance services found at banks and credit unions. what must be done about consumers about the cost of sending money? and two, encourage mainstream financial institutions to provide low-cost remittances? >> senator, first let me just agree with you wholeheartedly about financial literacy. we have been working on that for a long time, as you know.

the recent crisis illustrated abundantly how important it is that people understand the contracts, the financial instruments that they are taking on. so we will continue to work with that and we will continue to also try to provide consumers protection that is provide the information, the disclosures, the protections that help people get into the right product. which is very important. i agree with you about remittances. it's been a interest for some time. the federal reserve has been working on that. we work with some other countries to try to reduce the cost of sending money to home countries. i think one of the valuable lessons here is that, you know, many of the remyths mitt dance service that is people have are quite expensive. they may have cost involved with the exchange rate and the like. we have encouraged institutions where possible to reach out. because if we can persuade immigrants to use mainstream financial institutions for

remittances, they may become interested in having a checking account or savings account or taking out a loan if necessary. so it's a way of introducing people who may not be that familiar with the banking system into the mainstream banking system. and in many cases, reducing the cost that they face dealing with, you know, payday lenders and the like. so we do encourage that. i think i would encourage financial institutions to use that tool as a way of attracting new customers from immigrant communities. >> chairman bush than key, there are too many unbanked individuals that lack a formal relationship with a bank or credit union. as you mention, without access to mainstream financial institutions, working families miss out on opportunities for savings, borrowers, and low-cost

remittances. i personally understand this issue. because i grew up in a nonbank family. in addition to encouraging the use of banks and credit unions for lower cost remittances, can you tell me what else, what else must be done to bank on banks? >> well, the -- the government can provide various incentives, encouragements to banks, to do what in many cases is really in their own interest. which is to try to reach out to these communities, for example, the community reinvestment act, which gives credit to banks for providing services, including branches in low to moderate-income communities is one way to encourage banks to take those sort of actions. we encourage banks to have multilingual employees, to again establish those relationships. but i would hope that banks

would see that expanding those services into immigrant areas, low and moderate income communities is really a way of expanding their customer base and increasing deposits. it's really profitable business strategy. so that, i think, fundamentally is the motivation for banks to go beyond the narrow groups that they are serving now and try to branch out more broadly. >> you did mention about the predatory lenders. working families are having trouble accessing affordable credit the. unfortunately, many working families, of course, turn to predatory payday lenders for small loans. my question is, what must be done to protect consumers? from high-cost payday loans to

encourage the development of affordable alternatives. >> well, the federal reserve doesn't directly, you know, regulate payday lenders. i think in most cases, they are regulated by states who set requirements in terms of the information they provide. it's very important for people to understand what the cost actually is. you know, if you're paying a certain number of dollars until payday, you mean i realize as an interest rate, that may be many hundreds of a p or more. so regulatory work at state level or whenever the appropriate level is, to make sure that customers understand the cost of the credit they are obtaining. and learn about the alternatives. i think it is a pretty positive direction. and in general, as we were discussing earlier, to the extent that mainstream banks can come in and provide the alternatives and the competition

to check cashing and payday lending and the like. the better the chance that families will have good access to credit and responsible terms. >> thank you very much. for your responses. thank you, mr. chairman. >> senator vitter. >> thank you, mr. chairman very much for being here. the feds current policy of extremely low, near-zero interest rates is certainly helping banks recover in certain ways. they can use money to recapitalize through buying long-term government bonds. but at the same time, that is -- that scenario is discouraging in many ways getting credit out to businesses, to citizens that need it, to the recovery.

what's your concern about that? and how do you balance those objectives? >> well, as i've discussed earlier in the testimony, we've seen a lot of improvement in the broad credit markets in the corporate bond markets and stock market and the like. which means that larger firms have pretty good access now to credit. but there's still a big problem for who are bank dependent, small businesses and consumers and the like. it's not an easy problem. because we don't want to tell banks to make bad loans. we want them to make good loans, and loans to credit for the borrowers. we have, however, done everything we can or at least we are trying very hard to encourage banks to do that. in particular, by telling our examiners, training or examiners to work with bank to take a balanced perspective. that is we don't want you to

make a risky, imprudent loan. if you have a long-standing relationship with a customer who's been paying, if you have a credit worthy borrowers, you should make the loan. it's good for you, the economy, and the borrowers. we are supporting that with with our examination, our guidance. we recently providing some commercial real estate guidance which gave examples for a small business who wants to borrow against their place of business and the value of the store has gone down. but they can still make the payments, why that should be considered still a good loan. and why you should make that loan. on top of that, we have certainly pushed the banks to add capital. since our stress test in the spring, there has been a increase in the amount of private capital raised by the banking system. we have, as, you know, increased and supported their funding through -- to the discount window through -- and through our efforts to get the

securitization market running again, in particular our program to provide investor funds, help investors link up with small business lenders, credit can card, and other consumers type loans. we're attacks this from a number of dimensions. we're not where we want to be. but we expect things to get better as the economy improved. >> i guess my more focused question was isn't having extremely near-zero interest rates, in fact, an impediment to banks putting more money out to small business and others? >> no, i don't think so. to the extent that they use -- the banks use the money to buy treasuries. it's because they don't see a good lending alternatives. we want them to look at the lending alternatives to put out the money. the low interest rate stimulate the demand for credit. part of the reason that bank

credit is contracting is that there are, you know, the demand for automobiles and houses and furnitures and other things has fallen in the recession. and lower interest rates make it more attractive for people to buy a car, for example, and that increases the demand for credit and brings people to the bank to take out a loan. so the purpose of the low interest rates is to strengthen the economy, to support employment, to get us going again. as the economy strengthens, that'll improve the credit situation. that'll make credit risk lower. that should make banks more willing to lend. i do think it's constructive. >> okay. we've talked about the following before. but as i've told you before, months ago, it seems to me, and it still seems to me, unfortunately, there's a huge disconnect between a lot of the discussions we have here and a lot of the discussions you have and other have at the fed in terms of trying to within, you

know, strong safety and soundness parameters trying to get credit out of the door and what the regulators down on the ground and folks visiting particular institutions are doing in terms of really moving an exactly the opposite direction by being so caution and reaction to what's happening in the last year, that they are making virtually impossible for our community banks to loan new money. just my anecdotal experience that that hasn't changed or got then any better since we talked about it several months ago. what more can any of us here or the fed do to bridge that divide? >> well, we should provide you, senator, with a description of all of the various measures we're taking in turns of regular conference calls, meetings,

manuals, instructions to the examiners about how they should be proceeding. i think one useful step that we have taken, for example, in the latest commercial real estate guidance is to give lots of examples. here's an example of what a loan might look like. it hes people how to deal with a loan that may not be perfect but still is worth making. we are making very hard effort to do it. i'm sure there's some slip between washington and the grassroots. but we understand that issue. and the fed actually has over a long period of time, because of our macroeconomic responsibility and our attention to the broad economy, has had a pretty good record, i believe. so i don't know which regulators were bankers are talking about. we've had a good record of trying to balance the need for the economy and the needs for safety and soundness. >> right. again this is all and the doal. but the experience in lose,

particularly in community banks is at the regulators on the ground are actually dealing bank by bank are given almost all'signals in the opposite direction. and they are all often reacting to hole categories of loans like anything to do with real estate and just saying, no, you're book is above the line we're drawing now. so don't consider anything new without getting to the merits of the loan, even when there are portfolio is solid and not falling apart. so i just make that comment again in the same vein that we had that discussion several months ago. >> i appreciate that. >> as i'm sure you know, the wall street journal has criticized you for being part of the mistake of too much liquidity and credit around

2003, 2005, and has doubted that you'll have the ability or the discipline to reign that in at appropriate time. how do you respond to that criticism and what factor is going forward whether you be particularly focused on in terms of changing that monetary policy over time? >> well, senator, there's really two issues. let me talk about first going forward, clearly we have -- and we put a lot of stimulus in the economy in order to try and get growth back and jobs created and get credit flowing. but we understand that there's another side to it. and that includes making sure that we keep prices stable. and we don't have inflation issues. and even though ideally the financial regulatory system should be the first line of defense against doubles or other

misalignments in asset markets, given that we do not have currently a financial regulatory structure that is really designed to prevent those misalignments. i think monetary policy has to pay attention to those issues. as i mentioned earlier, we are following evaluations using standard models and metrics to see if we see anything that's particularly out of line. it's very difficult to know if asset prices are appropriate or not. but we are factoring that into our discussion. on the retrospective issue, it remained controversial. you know, my own view that the conventional wisdom in some quarters, that the federal reserve monetary policy in 2003, 2005 was a principal or major source of the housing bubble. i just don't think the evidence is that clear. there are a lot of very good economists on the other side of

that. one example is robert shiller, what pressed the housing bubble. it had more to do with mortgage financialing and psychology. the imf just did a study. there's no correlation between this period and housing prices. canada had similar monetary policy to the u.s. as did germany. but neither candidate nor germany had the housing bubble. that's not to say that's not an interesting issue. but i wanted to raise some doubt to your mind. they had the responsibility to understand the role of monetary policy in bubbles, and to think about how we can identify those, as difficult as it is. and try to get in the consideration where we can in making monetary policy.

>> okay. in in terms of regulatory reform and in particular resolution authority, that we're considering, if we have an appropriate in your mind, resolution regime, new resolution regime otherwise, would you support taking away 13.3 and other type authority to send taxpayer dollars to specific firms? >> yes, i would. >> and would there be any subcategory of that sort of authority which would send from either the fed or other entities to send dollars to individual firms that you think we should accept and retain? >> well, currently if the fdic resolves a failing bank, there may be rare circumstances under

which the fed would assist by providing short-term liquidity. it's perceivable that under circumstances the fed would lend to the entity. but that's the decision for congress to make. you want to figure out the best way to reck struck the resolution authority. i think if the resolution authority is there, to go back to your original question, the fed does not want to be involved in bailouts. we got involved in it only because there was no a good legal structure for dealing with the firms. in the future we have no interest in doing that. we think there may be some value in having lending program that is apply to the economy generally under emergency circumstances. but not to individual firms. >> okay. well again my concern is i try to say is individual firms. doing back -- >> senator leave the home questions to second round? >> sure. >> thank you.

>> senator chester? >> thank you. we referenced a key role in job creation. last week i spent two days visiting five of montana's bigger cities to discuss the economy and jobs. i heard one message consistently in each town. and that is we need to allow our local banks the opportunity to lend. an issue that others have brought up. at the same time, i'm hearing that fed regulators are sending mixed messages. from d.c., lend, from the field office, build up capital, don't consider loans. i've heard from several banks that fed examiners are overzealous and over reaching demanding writedowns and

reclassifications of loans and assets. you made claims here today and before that you're pushing banks to lend. the folks on the ground are seeing, for the most part, the exact opposite. i believe that congressman sent you a letter at the end of the october talking about common sense regulation on the ground in these economic times. you've talked about conference calls, you've talked about meetings, you've talked about what you are doing. i guess the question is there anything more you can do? because what i'm hearing, it's not working. >> well, i appreciate the feedback. all i can say is we'll take another look at it and step it up. it's important to have a balanced perspective. >> but you do agree that these local banks play a critical role in the capital they provide play

a critical role in the job creation. and if they are bound up and a do not loan money because regulators are butting the boots to them, economic recovery is going to be slow in coming. >> that's true. we do have to make sure that they are making good loans. we don't want to go back into the situation where they are making bad loans and then they end up costing money for the deposit insurance fund. but subject to that, obviously we want them to make good loans. >> i would agree. what's the definition of a good loan? >> one that gets paid back. >> okay. so what determine that is? >> well, a set of criteria about -- >> and have those criteria changed? >> the criteria haven't changed. what's changed is the economic environment. you have people who have -- who's business have deteriorated ors asset values have designed.

that makes them less credit worthy. we have tried to identify the key issue which is the ability to repay. which may not be the same as the collateral value. so we want to identify criteria that will help banks make loans to people who will repay and can repay. but be careful obviously about not making loans that are not likely to be good. >> there's about the perspective out there that the playing field is tilted to the big guys. could you comment on that? i'm talking about the big financial institutions. the little guys who didn't really create the problem are doing all of the suffering. the big guys are back making profits. the playing field is tilted towards them. could you talk about that? >> i will. we have an enormous too-big too-big-to-fail problem. all of the problems, the bonuses, unfair playing field,

government-backed stops, all moral hazard. all of that falls in too-big-to-fail. all of that we can do to create market discipline is through regulatory reform that will address too-big-to fail. i don't want to take your time but it has two components. >> no. >> one component is tougher regulation, higher capital requirements, tougher liquidity and supervision and risk management requirements. but on the over hand, going back to senator vitter's comments and others, a resolution regime that will allow the government inform a situation of crisis to wind down, allow to firm to fail, and allow creditors to take losses without having all of the collateral damage to the financial system and the economy that we saw last fall. >> okay. if you've already stated an answer, i apologize. but i don't know this. the chairman of the committee

butt a regulatory reform big. does it deal a with the too-big-to-fail issues? >> i believe it addresses the resolution issues. senator dodd knows that i disagree about the federal reserve role on the regulatory side. we think we both have the appropriate expertise and the need to know so to speak that we should be involved in oversight of the banking system. >> okay. so taking the turf issue out, if you can do that. i know you are looking to be confirmed for the job. taking that issue off the table, does that bill address it? >> well, it's not address issue. it's fundamental issue about soundness of the plan. putting that aside, at least on one side, which is the resolution regime, i don't want to -- to be frank, i haven't read the latest versions. right now we're in discussions and so on. but broadly speaking, it had the features that a firm would be

able to be wound down, that losses could be opposed, if i understand that correctly, then that's where we should be heading. in that general direction. >> i take that as a wild endorsement. >> it is a strong endorsement, senator. >> just trying to help you out, chairman. while some of the folks in congress recommend using t.a.r.p. funds to spur lending, montana is only one of two states that received no capital-purchase program funds. our banks don't want t.a.r.p. funds. so what are the recommendations would you propose to spur small business, small business lending rather than t.a.r.p.? and -- >> well, i think we have to address the regulatory issue that you raised. we are trying to strengthen the secondary market so that banks that make a small business loan can then package it and sell it, use the fda.

we have made a lot of progress in restoring the secondary market in fda and commercial real estate loans. those are the main suggestions that i have. >> all right. i just need to know your thoughts on an idea that has bounced around here a bit. it was bounced around in montana, the new ploy tax credit the, providing business a credit if they bring on a new employee for two to three years or whatever that arbitrary figure might be. it's been done before. what's your perspective on it? >> well, i don't think we have, you know, a clear answer to that question, unfortunately. the historical record is mixed. some have been proceeded success, some not so successful. so it's not a clear enough consensus that i would want to make a recommendation. particularly, since i just promised i wasn't going to make policy recommendation.

>> but we're talking jobs. >> yes, i know. there are a lot of different ways to approach jobs. i'm sure you've scene the list that i've mentioned earlier. well, of the journal that listed the five or six item that is people are looking at, i would have to say that some of the others see mentioned are more straightforward. we'd have a better sense of what the effect would be. but the jobs task created -- i think one the drawbacks is we don't know, we don't have a good sense of how strong an effect or how permanent the effect would be. >> how is it structured? >> it would depend a lot on how it's structured. that's part of the reason -- >> with we had a more concrete proposal you could? >> we could help you analyze it. i'm reluctant to make a clear recommendation. >> ippons of sounds good. thank you very much. >> thank you, very, very much. senator johanns. >> mr. chairman, thank you for being here.

i'm bias to start out. less government, lower taxes helps create jobs is what i believe. let me pursue something with you. i think the biggest challenge that you face in your job is maybe not what you have been through, although that was significant. it's what you do from here. because at some point, there has to be a very artful exit strategy. and you've done some things, the fed has done some things that have really, really been unpres dented. it's gotten a lot of debate. a lot of concern. some have agreed with you, some have disagreed with you. i think that's reflective of what's happened with the committee today. i would like you to just walk us through the things that the fed has in place. everything from your policy which treasuries to interest

rates and talk to us about the exit strategy. number one. and what timing, and i'm not necessarily looking for by june 1st we'll do this. what i'm looking for is what economic signals will cause you to reach a conclusion that we can pull back from this or we can do that? so talk to us a little bit about that. >> certainly. well, first as, you know, the federal reserve created a number of special programs to try to address problems in specific markets like the commercial paper market, the inner bank market and so on. money market funds, variety where there were stresses. we created facility to try to reduce those stresses. as things have improved, the demand for fundingm

programs has dropped significantly. we are down now about 85, we're down to about 15% of the peak in terms of the dollars outstanding. so we've made a lot of progress just through the fact that demand for these things has gone away as the markets have improved in reducing all of these a programs. and, you know, we will be cutting back the size and close ing them as first as market conditions normalize. as they continue to do. and in a particular, those programs are justified only under so-called unusual circumstances and as market normalize, we will need to be anything about closing them down. we've made a lot of progress in direction at this point. beyond that, our major programs has been asset purchases. we had a treasury purchase program which brought our holding of treasury bonds about back to where it is before the crisis. so we really haven't increased

the holdings. we've also had a pretty big, very big program purchasing fannie mae and freddie mac. we have announced that the current program will be wound down, tapered off through the first quarter of next year. this is currently on schedule. so what we have is a -- we will roll the exit process. :

>> we have good means now of reversing them and unwind in, as the time comes. >> as we look out to just in next year, let's take the next

12 months, we already have unemployment that is now gone over 10%. probably -- well, not probably. it's much higher than that if you cannot people just getting a. that number is in the 17, 17.5% range from what i understand. for consumer driven economy. so if you have a bunch of consumers are much on the sidelines trying to keep things together, as best they can, you've got a whole bunch of other consumers worried about losing their job. as you look out there over the next 12 months, what's your expectation when it comes to unemployment numbers? and is this going to get worse before it gets better, is kind of the bottom line where i'm headed with that question. >> well, the unemployment rate is very high, and it's a

tremendous problem and obviously needs a lot of hardship for a lot of people. some very long-term scars in the labor market. the rate at which the unemployment rate comes doubt is going to essentially depend on how fast the economy grows. and then also how much confidence in players have to bring more workers on. we have unemployment number tomorrow, we will get a near-term reading of what's happening. we don't expect -- i do not know what the number is, but the more sport has right now are for job loss. but as the economy continues to grow we should continue to turn the corner and start to see job creation. however, because we have people come in the labor market all the time, you need of a certain amount of growth just to absorb the new entrance into labor market. so you probably need something like to .5% growth in the economy, just to absorb those new entrance into the unemployment more or less stable.

right now the fomc expects growth next year to be fairly moderate, somewhere in the three and a half% range. what message is is over next you will see the unemployment rate declined but unfortunately slower than we would like. it depends also in part again on employers. employers have been very effective in increasing productivity, reducing the amount of labor that they need to produce output. our sense is they can't keep up, you know, that kind of cost-saving and definitely. at some point they will have to bring back some workers. but to the extent that cost savings and those kinds of labor reduction continue, that will be another drag. so the bottom line is, we don't really know. our forecasting is far from precise, but if in fact they economy grows at a moderate pace, it should peak and then come not only slowly. >> one of, and i'm not -- one last question, one of the things i hear as i talk to the business community, not only in my home

state of nebraska, but those who come into my office, is they just feel there is a tremendous amount of uncertainty that is causing anxiety about decision-making, in terms of investment, capital expansion, even when they see the business. up, they are very, very reluctant to add people. and here's the uncertainty that they talk to me about. they talk to me about climate change legislation, and the impact that will have. they talk to me about car check and the impact that would have on their business, the impact of regulatory reform. the impact of health care reform, and that has a real financial impact on them. how big a problem is that in terms of our economy started to find its equilibrium, stabilize

itself, with all of those, you know, really absorb it things going on out there impacting that psychology of the marketplace? >> well, we've heard the same thing in our discussions. unit, the fomc has reserve bank presidents from around the country. i talk to business people as well, and they bring that message to us and they've heard a lot of concerns about uncertainty. one place where it's particularly relevant to the federal reserve is, as we think about financial regulatory reform and capital requirements and so on, one reason why banks may be a little reluctant to lend is that they don't know what the capital standard is going to be. they don't know what the regulatory standard will be. that create some uncertainty for them as well. it is an issue. i don't think -- i don't have any real way of, you know, measured in percentage points how big and it practices that it is certainly something we have a lot. my guess is it will not be a reason in itself the economy

cannot grow, but it does probably mean that firms will wait a bit longer to hire. maybe they will start with temporary workers that maybe they will start by bringing part-time workers back. maybe use some overtime. i think it may contribute somewhat to the slowness to firms make new capital investment and to bring workers back, you know, that they have let go. >> thank you, mr. chairman. >> senator bennett? >> thank you, mr. chairman. and welcome, mr. chairman. thank you for hanging in there with us today. i'm a little under the weather. one of the great benefits of being at the end of this war sure is that you could hear everybody else's questions, and your answers. one of the enormous frustrations to me over the last months and weeks, and i'm sure it's frustrating to you to is to sit and listen to senator after senator, myself included, talk about what we are hearing anecdotally on the ground about lending to small business, to

hear the stories of small businesses that are maxing out their credit cards because they can't get access to capital of the banks, to hear from community banks that they are unable to live because they believe the examiners are not giving them the headroom they need to lend. and every time we have this conversation, you answer it, and welcome is that you say we are doing training, we have guidelines. and of course, we don't want people to lend more loads. i know he wants that either. i guess my question for you is, is there a way we can move beyond this conversation took place where we can actually acquire evidence of whether or not lending is going on in our communities? is the tightness of the credit related to the fact that we don't have good credit risks? or is it that we are overcautious? i mean, how will you evaluate that? how do you know your training has worked? how do you know sure guidelines have worked hard how do you know

what's actually going on in the state of colorado, or the other states that are here? because what i don't want to do is go through another hearing and another one where we don't know what the evidence really is, of what's going on in the ground. >> well, it's intrinsically very different -- difficult of statistics on how many good loans were not made because obviously, if we knew which of those were good we could just instruct the banks to make them. it to their credit judgments which are so difficult. what we do -- one metric -- >> i will agree with you, prospect of a, but even retroactively, if we could look at what has happened. your choice on the period of time, so we could get -- we could take the anecdotal evidence that we have, and the efforts that you have made and try to see whether those efforts are successful or not. because if it hasn't been successful, if people go to the trainings and then come back and

don't follow the guidelines that you have given them. or if we are being too conservative, and believe me, i would not stipulate to the view that we shouldn't do bad loans. how are we going to know that or not? and the reason it's so important to me is, i don't see any reason to get this unemployment rate down without having our small businesses having access to credit. i think you've heard that universally today. >> i've heard it and i will give it some more thought. i think one statistic that we have is we do survey the loan office -- senior loan officers of a large number of banks on a quarterly basis. we ask them a whole bunch of questions about demand for loans and what they are saying and so on. and one thing that's been very clear is that the tightness of lending standards imposed by the banks themselves are at record

high levels. so it isn't just the regulators. >> so here's what i -- first of all, i for one would be very willing to work with you and your staff on this, because we have got to move past this he said, she said aspect of what's going on. you know, you have the regular or the examiners saying one thing is true. we have an observation like the one you just made about banks holding on to capital, saying that that is the issue. i just feel like we're being guided by sort of vague impressions of what might be going on out there, when the people that actually cannot keep their doors open and feel that they are good credit, and that they are able to they can't get access to credit. and they may be wrong, nor to their credit may not be good. but i can say there is an avalanche of that feeling that is out of. and i would like to be a better position to say, here's what's really going on. or at least to be able to say the examiners and the banks and

the people in washington have somehow convened together to try to diagnose the issue so that a month from now we can say, things are getting better, or we can say things are getting worse, or we haven't moved off dead center. but we have no -- the frustration is we have no measuring stick at all, really. other than people's impressions. >> other than surveys and data on the kind of loans being made, the fed staff did work -- >> but we wouldn't run our business that way. it wouldn't be just based on survey data. survey data is useful, -- >> i was just going to add, the fed staff did work with a treasure kind developed measures for the t.a.r.p. program to the extent our capital to what extent did it lead to higher lending. it was i think some progress made there. but your point is very well taken. i've heard this many times as you can imagine. and i will take us back to our staff and see if we can figure

out some more useful metrics or ways of thinking about this problem. >> i think again is because of the cosmos of my sitting here at the end that i can hear the same conversation over and over and over again. spirit as you can imagine i've heard it many times. >> i know. and i think would be useful for everybody if we were able to agree upon a set of metrics going forward. and again, i would offer to help. you mentioned something earlier in your testimony this morning about the importance of withdrawing from this economy in a way that creates jobs. i may be putting language in your, i think i wrote down, in a manner that promotes job creation, something like that. can you talk a little bit about that? >> the policy accommodation, using? >> i just want to know -- know, draw your balance sheet from our economy. >> right. so as part of a normalization monetary policy, right now monetary policy is quite

supportive of economic growth. we have near zero interest rates it would've a large balance sheet. we have a number programs to try to keep interest rates to improve functioning and create credit markets. as i was describing to senator johanns we will have to unwind those programs, and we have a set of ways of doing that. but basically, the trade off is the same one we usually face when we come out of a recession, which is at a certain point we have to begin to scale back the amount of stimulus we are provided for the economy so that we don't overshoot and create inflation or other problems down the road. and that's a judgment call because monetary policy takes some time to work. so all i was saying there was that we have to find sort of the right moment, the reiki meditation so that we can begin the withdrawal of stimulus, or continue -- we are already in some sense started that progress. how to withdraw the statement and a way that will avoid any side effects like inflation or asset bubbles or any other

problem. but at the same time be consistent with a sustainable and increasing expansion. that's the challenge we always faced at this stage. >> thank you, mr. chairman. appreciated as always. >> senator bennett, thank you very much. senator gregg? >> actually i think senator hutchins was here earlier, québec. >> i apologize. you're correct. senator hutchison, i apologize to. senator hutchison's, my apologies? >> thank you, mr. chairman. and senator gregg, i appreciate that no. thank you, mr. bernanke, for coming to be with us and what is obvious a been a long hearing, and i appreciate that you're here. during your appearance before the committee in july, we spoke about the effect of the proposed health care reform that it would have on our fiscal policy and the economy as a whole. at that time, you said that when

considering health care reform, cost must be an issue. must be the issue. the democrats proposal has now come to the floor. and we see that it has a $2.5 trillion price tag over the 10 years from when it starts, 2014 to 2023. yet, according to cbo, the huge government takeover of health care is not going to lower health care costs. and in fact, insurance premiums for every individual and family will go up. and i think if we're going to look at how we can change that cost curve, we need to have the ability to determine, not only have to do it, but what is going to be the long-term effect of the $2.5 trillion price tag that is going to be on it, on our long-term economic situation? i would like to ask you what you think it would be.

>> sender, as i said last time, i think the real issue is health care costs, not just the total bill, some sense, what does it do to the industry, what does it do to the cost of care per person. and what we've seen over the last 30 years or so is that health care costs per person are rising about 2.5% a year faster than income. that's sustainable. obvious as somewhat health care would become the entire economy. so what i consider to be the key issue, given that the government has exposure to medicaid, medicare, and other costs and is finding ways over perhaps not even elite but over a number of years to bring down the cost per person health care. i have not read the cbo study. i know enough to know that health care economists have differed quite a bit about implications of different proposals and different measures. so i'm not going to weigh in with a number. i don't have a good number to

give you. only to repeat what i've said before, which is as part of this process, it's very, very important that we do our best, not to reduce the quality of care or reduce coverage or to make health care worse here this is a very inefficient system and there must be ways to reduce the cost of delivering that health care, and there have been many ideas suggested, ranging from information technology, to various incentive payments, to experimental or evidence-based medicine. i just want to reiterate that because it is critical that we get a stable and sustainable fiscal trajectory going forward, we do need to address this issue. and i don't think we can get a sustainable fiscal situation without addressing the issue. but again, in terms of the specifics, you know, there's a

lot of disagreement about exactly how much effect on individual health care costs this bill will have. but i would just urge congress to continue to looks savings in ways of reducing that cost. >> if i understand what you're saying, you have a look at the numbers yourself, but if it is, in fact, going to increase the costs of the premiums to every family and the overall cost to every individual, every business, as well as to the government, then that would have a harmful effect on our economy long-term? >> if that's the case that higher cost of the private sector increase the cost of doing business, reduced wages, higher cost to the government means a higher fiscal deficit, all else equal. that has potentials significant consequences for industry and capital formation. and for the help of the economy. clearly, it's a very, very critical -- crucial issue that we try to address the cost issue in health care. >> thank you. we share your concern. let me move to the financial

regulatory policies that chairman dodd has put a bill forward, a bill has also come out of the house. and one of the issues is the to the to fail issue. and i think everyone of us are concerned about a. we have different approaches to that issue, but let me ask you this. in chairman dodd's proposal, there is a systematic risk resolution mechanism that would allocate the risk, attempt to allocate the risk, and it would exempt community banks at a 10 billion-dollar or below level. i have concerns about using the asset test, because at $10 billion you could include funds that are highly leveraged

and inherently risky to our financial system. but you would also exclude asset heavy midmarket committee banks that pose no threat. do you have a recommendation as we are working through this, for how you could measure a financial institutions risk so that we ensure that it is not a safe and sound community bank that is paying for the too big to fail policy risk that it will not have a part in producing, nor profiting from? because i don't think any of us want another taxpayer bailout. many of us are very concerned about the one that is before us know, and not being used the way we were told it would be used. but secondly, i am very concerned about putting any more burden on our community banks, which are trying to lend and trying to have an impact for

business that would give them liquidity. and so i want to protect those community banks from having to pay for the risk of the too big to fail so the taxpayer doesn't have to do it, nor do they. what would you suggest is the best measure to determine who should pay for the risk so that taxpayers will not? >> well, a relatively simple thing to do, and this is just one suggestion, would be to exempt all insured deposits. that is, don't make people do a liability test, but excluding deposits for which, you know, the premiums are paid for the fdic, which seems fair, and beyond that, it would in

practice exempt most community banks that have primarily deposit base funding. and perhaps some additional exemption a bug that. so that would be one approach. a more difficult approach would be to try to do the analogy what the fdic does now which is to make the premiums risk-based in some way. habit deep end on some estimate of how the firm would be ineffective if the financial crisis did hit the system. that would depend on things like the riskiness of the positions that the bank takes, which affects the fdic premium. it might affect its funding. might be affected by its funding mix. it might be affected by its -- the complexity of his operations of a variety of things. as you can see by the answer, i think it would be a very complicated thing to do. so my first guess would be to try to find a formula that exempts deposit funded or community size banks, cuba, for

the most part, and puts most of the weight on firms that do a lot of proprietary trading and a lot of riskier types of activities. doing it based on a insured deposits would be one, first cut at the. >> my time is up but i thank you very much. >> thank you, senator very much. let me turn to senator gregg. >> am i in? >> well, i think you made your. my colleague from alabama may have another question or two. you're not the last person. >> mr. chairman, first i want to say thank you. thank you on behalf of the people that live on main street in new hampshire. the simple fact is if you hadn't been there and then went to take extraordinary action, last fall and into last winter and even the early spring, along with secretary paulson, secretary geithner, this country would be in a catastrophic financial situation right now. and it's very likely would be

experiencing a depression, or potentially a depression, but certainly a recession which would be radically more severe than what we experience. and terrible for a lot of people. the way i described is, it's like people driving over a bridge that was about to fall down that they didn't know there was somebody under there to fix it so didn't get they don't give you credit, but the fact is you did take the action that was necessary. and it was a very aggressive and creative action. and as you acknowledged, it looks like to me from your portfolio went into try to make sure our financial institutions were made liquid during this difficult time. so i respect what you did. obvious a, don't agree with 100 percent of the. would have done something differently but i don't hold the magic wand, nor does anyone at this table. we are coming out of this recession. and the world didn't evolve into chaos, fiscal chaos if you have not taken a type of initiative.

there are a lot of big issues now pinning as a result of that as we try to reorder the way that we approach the structure of our financial institutions in this country. what i think is critical and i've said before is that what as we do that we not undermine what is our great and unique strength as a nation, which is that we are able to create credit. we're able to create capital, and we are able to advance credit and capital to entrepreneurs in a manner which no other nation has done. as a result, people have ideas and are willing to go out and take chances and create jobs, can't find the resources to do it. and as we advance this effort in the area of financial regulation, we've got to be careful we don't create an unintended consequences of limiting that advantage that we have against the rest of the world. the rest of the world has some advantages over us. that's one of our biggest advantages over them. so how the fed is poshard in this is critical because you are at the epicenter of the structure of our financial

institutions, of our credit institutions and of our monetary policy, obviously. and thus, i am concerned, deeply concerned about this, i call it pandering populist movement out there to basically step onto monetary policy. had the political entities of this country step on the monetary policy. you've already spoken out against it will and eloquently. i just want to second what you said. i know secretary summers did study on this that you study his. but i can't think of a nation where the thigh of its currency was turned over or even marginally lower significantly influence or even marginally influenced by a left officials that that nation has prospered. usually, an absolute recipe for inflation. and an absolute recipe for other nations looking at the nation that allows its political process to set the body of its money as risky, if not

detrimental. and we are too big and too important for the rest of the will to allow that happen here. and i think it's an easy political vote. go out and beat up on the trade for pick your that mr. is even. you could be in a dan brown novel i guess. but the simple fact is, that you're there because we recognize early as a nation in this last entry, it was important to keep monetary policy separate from fiscal policy and monetary policy independent. so that's a long explanation of support for your position. and two stepping into this. you are as you said audited in every area in a very open and aggressive way, and we have access to those audits that everybody has access to those audits, except on the issue of monetary policy. that's the way it should be. i want to get into this too big to fill issue, because i haven't figured out how we addressed this yet, but there is a proposal that came out of the house banking committee that

said that healthy, well capitalized, vibrant, energize institutions, which have no definable risk to them, will be subject to the potential breakup, and that break up will be determined by an independent group of politically appointed people are maybe even members of congress for all i know under the structure, arbitrarily. i mean, that to me is a european model of governance that is very threatening. because their biggest is not necessary that. in many instances it makes for a competitive advantage. and if these institutions are solvent and they are structured well and they are competing, they give us an economic advantage. and it would be incredible, industrial policy, for a group of politicians to come in and say, well, you're too big and we don't like you because you're too big so we will break you. where does that stop?

doesn't stop with wal-mart because they are not unionized? doesn't stop with coca-cola because they produce a problem some people think as to obesity? where does it stop when you get on that slippery slope of functioning strong companies that are big, but represent no risk because they are functioning and they are strong? so i guess i would ask you, obvious he too big to fail is a big issue for us and it's got to be addressed. but shouldn't be addressed on the issue of the institution being a risk as versus the institution just plain being big? >> so my preferred approach to too big to fail, which i agree with you, is perhaps the central issue in financial reform, certainly one of the biggest ones. has two or two and have components depend on how you count. one is to offset some of the incentives to become too big to fail, and to take into account the additional risks that a very

large firm may pose to the system. >> by raising their capital requirements? >> are making sure they are say. >> which is a function of making them sick. >> yes deregulatory approach. i think that should be part of it. the other part is to have market discipline and the wake of market discipline, is to have the ability to fail. we've talked about this several times today, but it's absolutely crucial that when people lend money to a large financial institution, that they are looking, that they are doing due diligence in looking at the riskiness and activities and the possibility of the institution. and not making their loan based on the government support of the institution. . .

it where financial institutions and cannot demonstrating that it can safely managed to the risks of a type of activity were example of that it could be scaled back or otherwise addressed by the regulator or circumstances but i think those of the elements that would solve the problem, particularly the tougher regulation and the resolution regime. >> well, i will take your comments then as saying simply because the company is large is not a reason for politicians to

break it up. >> no, i do recognize i think we should recognize that size and complexity often have economic benefits and we should as much as possible that the market decide and one of the advantages of getting rid of too big to fail is that ability to obtain funding and sell shares etc. depends on not the government's backstop for the economic value of the operation. >> in ibm tools for a second, not to imply the chairman's proposal falls in the category what i'm concerned about is language of that came out of the house, how do feel about requiring large institutions having a living will? does that create -- is that this situation where you almost by saying you have to have a living will whether you are given too big to fail or give the

opportunity to say that that's not the case? >> i think a living will was not a panacea can be useful adjunct to supervision but to put a living will is describes how the bank or financial institution with on-line is often the reason that could be important as we found out with lehman brothers and others in the case is for tax reasons or international reasons for initial editions are complicated and a legal perspective and it's complicated to unwind them when the time comes. so it would be helpful even in a planning sense for us to understand how the structure of the illegal connections and in situations where extra very complex legal structures are there for tax avoidance or other less economic reasons maybe there would be a case of looking for a simpler structure in some cases but i think it would be a useful tool not only in the actual prices or the actual wind

down but in the process of understanding of how the firm works and whether or not simplification in terms of the structure of my beneficial. >> thank you. >> thank you very much and just for the purpose of the public we are not talking about death paddles and "living well", it's a separate hearing that deals with issues. senator miracle. >> thank you very much mr. chairman and thank you for your testimony chairman bernanke and several times today when you have been asked about too big to fail you have emphasized the power to unwind the institution. you mentioned in passing in one of your replies the issue of risk that goes from one company to another but i don't thank you specifically talked about it in terms of the role of derivas. into big to fail because and that's why we intervene, not to say this want financial restitution but because through

derivatives there are consequences of the failure transported to so many other institutions so i was wondering if you could elaborate on that piece of the puzzle, the role of derivatives in too big to fail and i think that we reduce that risk. >> i don't think that derivatives are by any means the only issue and one example would be that we have had very destructive financial crisis in the 1930's and other contexts where derivatives weren't much of an issue at that point but in this crisis they were a big issue and one of the main problems was they weren't up properly overseen which many cases they were protected by capital reserves in classic case with aig riss had one way directional bets but because even though it was an insurance mirror selling because it was unregulated they didn't have reserves or capital behind that

and then when the bad went wrong then of the company came under pressure. one thing that the aig example illustrates by the way is that derivatives have not only the risk associated with the outcome of the underlying security but also counterparty risks of data those people who are holding aig insurance face of only the possibility of loss because of the underlying but also because of the possibility that they could not pay. so clearly making derivative safer both in terms of operational sense of the way they're treated but also in protecting against counterparty risk is very important part of this reform and i agreed with proposals made that derivatives and that can be standardized and that's quite a few of them, and are accepted by central counterparties or exchanges and

clearing houses for clearing of those institutions, should be treated on in central counterparty which would be an organization and which by taking marcian and holing capital of essentially insurance against counterparty risk to protect participants. and also by having its trading clearing house would be a chance pants situation ever know what outstanding positions look like. here would be no problems as we had with credit defaults swaps with transactions which are not clear in a timely way so there's confusion about who owes what to whom. so i do think that strengthening the infrastructure generally settlement, payments and clearing and in particular making sure derivatives are traded where possible on a central counterparty or exchange is an important step to making the system stronger and ties into too big to fail in a couple of ways. if you get rid of the

counterparty risk to reduce the contagion so in the case of aig if they had failed implications for the counterparties would have been less because the counterparty risk would have been eliminated. and secondly, you should be regulating those derivatives to make sure that you don't have a situation where a company is essentially betting the bank of saying bad to -- saying that if the coin comes up heads we make a lot of money and put comes up tails the government tells us out. façade situation we want to have so good regulation of derivative positions including and customized derivatives would be part of a new regime of. >> if i could summarize what you said, you supported moving to him in exchange and as you put her all the troops that could be standardized. >> of course, we have the

challenge of the siding to what degree they can be standardized. we have a lot of end users who are very resistant to the idea of going to the exchange because they feel that the margin costs would impede their ability to hedge and that might be an argument that's coming forward regardless of ability to standardize. any thoughts about that issue? >> well, i think the case for exceptions is not the margin cost, that's an appropriate cost of a just protecting against the counter party risk. the case for not putting everything on the exchange's data some risks are not visible through standard software this and could be that i is misspelled you want to hedge against complicated set of events that might occur and there is no way that adds to evidence can be written that would be standardize of both that would need to -- meet my needs of our going to be

circumstances where derivative aswoon are not customizable and are still providing useful hedging service. there are a couple of practical issues that come up and one of them is what exceptions to give of the end user side and i think the main goal there is to avoid getting around the regulations of been through indirect means of setting apathy's deals for legitimate end users who have -- to our nonfinancial companies and to hedge specific risk. we ought to make it possible for them but on the other side if there transacting for example with a bank or a dealer the banker and the dealer should face regulations are capital requirements of both to make sure that they are safe and the positions they are taking all so to internalize the cost of wood to the system. there is a risk associated with these derivatives not traded on central counterparties.

if a big nose and pass to hold a certain amount of capital against its nonstandard nuys positions that will increase its director of the costs of offering the positions and that will in some sense balance the scales so is not an artificial incentive to create on customized derivatives so it's a balancing act but we do want to leave space for derivatives that are specialized for individual names of. >> so the challenge of trying that line who began was customize and running the opportunity to address it also the challenge i think this is what you're saying and i will repeat and make sure i understand is how bad he want to have a appropriate boundaries to prevent that exception from being something that the entire jury to a market is driven through. >> that's, right. >> were you saying that there needs to be three's based on the otc derivatives as part of that inherent risk to the system?

>> not necessarily freeze but to the extent you have a non standardized otc derivatives there should be sufficient to capital behind them when insufficient oversight of their positions so that the institution is not being put into mortal danger by is positions it's taken in have the extra capital is a kind of cost and that would tend to even the playing field between customized and not customized derivatives. >> can i put in one more question gripes. >> we have a vote here. >> a quick question, you referred earlier to the pride that in one you didn't feel in the a i.t. situation that you have much leverage in terms of asking institutions to take a hair cut and it was hard for a ordinary americans and some of us myself included to get my

hands around because of the risk that folks might have a tremendous loss. it seems they be ready to come to the table and say we will mitigate that by taking some share, but let's just say that and that prices, that moment the need to move past that wasn't possible, are other things that we should do in structuring the spell that in the future when there is that situation that gives this region that would make sense to enable all the fed to drive a better deal if you will? >> absolutely, i didn't want to convey that we didn't want to get the hair cut, we did and tried it. the problem of an existing system is the only way to get the hair cut is two have a credible threat that if you don't take it we will go bankrupt and lose everything but, of course, since we had to intervene to prevent aig from going bankrupt and everybody knew that collapse would have catastrophic publications for

the financial system it was incredible that we would let that happen so we didn't have the leverage. it was a bad outcome absolutely i agree but we didn't have much choice given the legal structure by all means of the reform ought to fix that and in particular when the government comes in the treasury comes in to unwind a systemically critical financial firm now it should be using a special bankruptcy procedure, which allows the government to either specified rules in advance to take hear cats -- here quds not to protect the equity holders for example of at the same time they were still having is a fine down so if you structure in this resolution of the ornate one of the benefits of it will be that the government will be able to put the cost on the creditors and,

be able to renegotiate contracts including bonuses and things of that sort. those of the sense we needed but didn't have. >> thank you very much. >> thank you and we will briefly turn to my colleague from alabama but then senator corker wants to come back, he has a question as wow mr. chairman. >> i will try to be brief mr. chairman. chairman bernanke, i believe that the last few years have provided us with ample evidence to conclude that the current regulatory structure we have in which the fed serves the regulatory body requires considerable restructured and i believe to american people realize that and i also believe that the fed's military policy is crucial and must be preserved to the central bank. fortunately the regulatory reform process gives us here i think a chance to develop a better more accountable regulatory structure and enhance their real and perceived

independence of the federal reserve as a monetary policy setting entity. very important. but to achieve these ends i think the fed would have to give up some of the regulatory authority senator dodd proposed. i would hope that you as the chairman in the interests of achieving better regulation and battered monetary policy and the independence of the fed would put the monetary policy ahead of your interest or the fed's interest in protecting turf. mr. chairman, i have a short letter and i want to share them like it be made part of the record. this is a letter in washington post today and some of you probably read this but it was written her by vinson's reinhardt, resident scholar at american enterprise institute's and it has to do with proposals to this. regarding federal reserve with chairman bernanke and senate opinion commentary, the right to

reform the the fed that you wrote, and a result of legislative convenience pierre craddock comparative and historical happenstance a variety of responsibility to the fed of the years. in addition to conducting monetary policy the fed this jim his currency cameron's the system etheridge banks transfer funds, supervise financial holding companies and some banks and it breaks rules to protect financial transactions. he argues that preserving this is not only efficient but crucial to protecting the fed's independence. apparently the letter goes on the argument runs there are hidden synergies that make expertise in examining banks and writing consumer protection regulations useful in setting monetary policy. in practice for letting whoever is responsibilities in one institution fundamentally violates the principle of comparative it planted, it can to asking a plumber to check the wiring in your basement.

is easily verifiable testy rights, the arm of a the fed that sets monetary policy the federal open market committee has scrupulously kept transcripts of its meetings over the decades and this man riding says i should note, as the fomc secretary for a time and then after a lag of five years for the record release of the public. if the fomc may materially better decisions because of its be natural and supervision, there would be instances of informed description of the linkages. anyone making the case of beneficial spillover should be asked to produce numerous relevant excerpts from the historical resources. i don't think there will be able to do so he rise further, the biggest threat to the the fed's independence is doubt about his competence. the more the congress expects the fed to do the more likely will such doubts blemishes reputation. i ask this letter be put in the

record. >> without objection. >> mr. chairman, senator quarter will close up and i want to thank senator shelby for his comments about the effort we're making. i want to thank you and your staff, you been tremendously constructive. i was one of those in my room the night of september 18th when you and hank paulson came into the room and there's a lot of people going back and i will go to my grave believing that which you.com what we did over those two --, or those to raise the economic equivalent of 9/11, that evening very straightforward and a moderate tone of voice i will never forget your words, will go down as the right thing to have done. he's not here now but judd gregg, bob parker, chuck schumer, bob bridge, mad along with others and work with you and others in putting that proposed it together. you deserve and i knew who president and creative ideas that kept us out of the

difficulty, bring in -- is hard and obviously we don't want to be in this situation to prove that but we did by the actions taken. i want to say about the idea of something big is bad. that's a bad idea and we will include ads. the idea how you requires capital standards to make sure that you don't have an institution be at risk makes sense and the door is open. we are in a dynamic process. i strongly support your confirmation and i believe they're the right person have the right time to do this job. but i wanted to know the door is open as we're trying to evaluate how best to do this and all of us here are very much appreciate it, this is a unique moment and there have been many before us to talk about doing this but there was never the will to do it and if there's any silver lining in what we've been through and we had 32 hearings on the subject alone in this committee is because we are in this moment.

every way to law and the moment passes and people say things are going well why bother. if we acted to early we might have overreacted and that would have been bad as wow so there is a sweet spot where we have a chance and i believe there is a common determination by everyone in this committee democrat or republican not seen this ideologically but what works and what is right and wrong and we invite you and your staff and others to be at that table with us as we go through this. not to suggest we will agree on everything but we will have the door open. >> i agree with senator dodd, big is not necessarily bad but i do believe big is bad when has an implicit he responds out there and with the marketplace that the government is backing into. >> i agree with. senator corker, you are up. >> when you come back you'll never know what may have happened to this place but i will try to behave like a gentleman. thank you.

mr. chairman, thank you for being with us so long and i thank you know that i was happy with that the administration decided to renominate two. and i thank you coming into this confirmation unless something really strange happened had i was going to support you and i have very of kaye, -- i am becoming slightly frustrated though and i know that you're probably going to be confirmed and i don't know when that's going to happen. maybe held off until after or before a, you are the fed chairman regardless, i think i the fed chairman until another chairman is dominated and approved and i think that's the case. you're staff is nodding now but that is debatable i guess. but i do, i have work to merge closely with you over the last year which i appreciate, a.

half. we have talked about a lot of importance to our country things and i have appreciated the about chip and absolutely do not believe you have a political sali in your body as i've said publicly many times and i believe you wake up every day trying to do with you think is best for our country. but i am concerned and i am coming -- becoming frustrated with it, and that the activity -- you have worked closely with both the administration's. this is a partisan. though i think much of that has richer credibility simon. in north and it just as you mentioned it as we talked in the last exchange on the fiscal side, i do think that you end up getting used as a tool for administrations to advance policies that they think is good, it's outside the monetary

policy issues and i would caution you i think that hurts you. the bush stimulus was ridiculous, it was silly and sophomoric and had not packed and you supported it. when you supported what happens on the senate floor when ben bernanke says that he supports something because of their respects not the only a few but the position that has, in fact,. the same thing with the obama standard -- stimulus. regardless of which you say when people say, it did not accomplish what they said it would do and i think it was certainly less than a stimulus -- it doesn't batted. that's not what matters, what matters to me is that you weighed in and when you weigh in on something it's like it gets the moody's rating out of that matters much anymore but that is what it does. i think the same thing is happening right now in financial regulation and. as i said way back when the long

before this, six or eight months ago, maybe the last humphrey-hawkins meeting, i think to the extent that the fed continues to thrusts itself in the middle of things being the systemic regulator which again we are going to have another systemic risk, going to have another failure, and i don't care with event chairman is or what kind of regulation we pass, it's going to happen and it seems to me that the more you thrust herself in the middle of those things outside of monetary policy, and outside of been a lender of last resort, the more you do things that damaged a institution. and i say that because i respect this institution and just like judd gregg said and in my comments, i don't want us involved in monetary policy. i think that would be a disaster not only for our country but for every country that does business which is every country, so i am just becoming -- i know you're

are lobbying s heavily right now as far as what the fed role should be in regulation and on a private basis i want to hear that. just a minute ago i know that you alluded to chairman dodd's bill and i can just say and everyone on his staff knows this, i very much appreciate the what he is doing to try to work out a bipartisan bill and i think we're going to do that or at least i will say i think we will until i think we are not. but just like princeton saying a minute ago that you think his bill absolutely saul's to big to fail. enlist that is what was reported to me. please clarify that because as much as i respect him i think there is some frailty in the legislation. >> i only talked about general fell lithosphere and i certainly didn't endorse the bill.

>> good, i've got a piano for a if i just a thing as i have the respect if. the position is highly respected if. i think the more the fed for those itself and of the vaudeville things -- foot is itself a new low of things that aref charged a flat to do with the next person down the road speed and independence and of being undermined and there's no question that the average by congressman paul and others to do the things that are occurring right now, if this longer term goal by anderson and physical center person and there are other goals behind that but i do think that much of what has happened recently in the hyper activity some of the 133 issues with aig, that is kind of questionable and ends up being equity and i don't mean that again to poke jabs. but that type of activity ends

up hurting the fed, an institution that like judd gregg and others i respect, you i respect and i guess over the last 45 days or so i have become very nervous about that activity and i just want to tell you that and i'm nervous about us and what we might do but also beginning to be nervous about the powers that you add the fed want to take on it, that treasury is encouraging to take on it and i wondered if he might respond to that knowing that i'm somebody who unless the sky falls in, i'm going to support your nomination and. and i respect your abilities and intellect and i appreciate what you have tried to do on behalf of our country but i am concerned about what has actually doing to the fed itself. >> i don't know if i'm expressing myself. >> alan like to respond briefly

if i could and, first of all, i thank you for the conversations we've had a, it's been good to work with you. first, your point on this policy, i have tried to stay at a fiscal policy. i will be more vigilant in the future. i think there is a appropriate division of labor, the congress, fiscal policy, federal reserve, monetary policy and i will try to do that although i should say that i think there are some broad general issues like the deficit, for example where that federal reserve chairman has responsibility to speak up and i will continue to do that. >> i am speaking to specific policy proposals and i think -- >> even in the cases you sight i never said anything more than a maybe it's time to think about this general thing, i never endorse a particular