a lot of this is agency mbs, a lot of it is clearly gic paper. as i understand your current strategy, the program to purchase the agency in bs is about to wind down or has wound down. >> at the end of march, yes. >> at the end of march. so in a matter of days. you have a lot of this on your balance sheet. as i understand it, your strategy is to retain most of its common to all the maturity although you hold open the option of perhaps telling coming up when market conditions improve. i understand the strategy correctly? >> would like to give back to knock treasury portfolio within a reasonable amount of time. the we are currently letting gse

paper that matures relating to roloff and i anticipate that at some point we will in fact have a gradual sales process so that we can begin to move our balance sheet actress priest crisis condition. i think there's an article in the american banker yesterday concerning your strategy outbreed from a portion of it. and it talks about when you announced that he was full your mbs purchases, c-span by the end of the first quarter that mortgage bankers win. they fear about the fed to prop up such securities would think having their yields relative to benchmarks that treasury bonds to soar, such an increase would in turn cause mortgage rate to jump, sapping demand for home loans and arty weak market. but it appears that the industries worst fears were unfounded. market participants point to several reasons for the relative stability. for one, their traditional mbs buyers that were pushed to the sidelines when the fed came in are ready and waiting for their chance to get out into the

market. would you agree with the assessment of that american banker article? >> broadly speaking, yes. >> let me ask you this, mr. chairman. as you're where the administration has not put forth a plan in dealing with the long-term future of the gse is. neither has congress. i personally have introduced my own bill to deal with the gse is that over a five-year period would essentially send them back to a competitive marketplace by slowly ratcheting down their portfolio holdings, they're conforming loan limits, raising the capital standards to that of insured depository duchenne, it's at least a plan. i guess my question for you, mr. chairman, is i don't believe any believes we can deal without the aldrin in the short-term but it's important for us to so a sustainable fiscal path for the

future. how important is that the future of the gses be included in unsustainable fiscal path? and if we don't do it, what is the implication for you unwinding your balance sheet? >> well, i think as i said last, i think if we can begin to map out a future for the gses sooner rather than later, even if we don't execute that immediately, and it will remove some uncertainty from the mortgage market and it will also help give confidence about the future of the federal budget because it will give clarity about what obligations implicit or explicit the federal government is taking on. >> mr. chairman, if they could. i hate to be rude but i see my time is winding down. i'm going to attempt to slip in one more question. in the next panel, we're going to be hearing from economist, dr. taylor. i've read part of his testimony and if i could quote from it.

whether one believes that these programs worked or not alluding to the federal reserve programs, their reasons to believe their consequent going forward or negative. first they raise questions about that independence. the programs are not monetary policies conventionally defined the rather fiscal policy were credit allocation policy or my best real policy, a word that has not been loosely in my vocabulary because they try to help some firms or sectors and not others and to finance her money creation rather than taxes or borrowing. perhaps you could comment upon it in writing and whether or not you agree with that assessment, thank you. >> the gentleman's time is expired and we will allow subsequent written responses. so, the gentleman from kansas, mr. moore is recognized. >> thank you, mr. chairman. look at how debt and leverage have been used in the past

decade by financial firms, nonfinancial businesses, consumers and the government we have a healthy independent on the use of credit cards, overleveraged balance sheet and matching deficits to seek economic growth and policy. an analysis by morgan stanley shows that total credit outstanding including households, financial firms, businesses and governments amounted to roughly 350% of gdp at the end of 2008. clearly, this is unsustainable and the mckinsey global institute noted deleveraging can last a painful 67 years after a financial crisis. do you believe that we're too dependent on debt and leverage, mr. chairman, and if so how should we encourage and restore fiscal responsibility and restraint in the use of credit and debt across the board? most importantly for the financial sector, but also for government, businesses and individuals and families. >> i think there are debt concerns and the effect of protectors differently. for the banking sector, for example, there was too much

leverage. that's part of the reason why we have the financial crisis. no reserve and other agencies are working internationally to try to develop higher more rigorous capital standards, which would portray two-phase and chloe so not to disrupt too much the recovery. but going for there needs to be higher capital, lower-level general financial system. more generally waning to have a better balanced economy. we need more saving by consumers and we need a better fiscal situation as we've discussed already several times. and in both cases, that would involve less that by the public and private sectors. on the other hand, we need to make sure that their sources of growth going forward. and if it's not consumer spending, then what's it going to be? one area certainly a scuttlebutt that which increases productivity and leads to long-term growth. and another is net exports.

we have a current account deficit trade deficit and we are very to finance that. that's another format. we would like to have an economy that has a better balance in our trade so that exports would be a source of demand, a source of growth for economy. so yes, debt and lack of savings is an important issue. it's a different issue for financial sector, private sector, government and the trade sector. but in each of those areas i think we need to work towards a more balanced situation. >> thank you. mr. chairman, am interested in learning about the repose of reverse repos that the fed is using to see if and when the emergency programs have to deal the crisis. in particular, i feel like we have not given enough but attention to what others have depended on for their financing in addition to the remote market and forget about the commercial paper and money markets as well. when we learned about lehman using the power 105 to conceal

it leverage, i'm using at the short-term financing market is another shadow market where there's not a lot of transparency by its very nature and provides an opportunity for more shady financial activity in the future. would you explain, mr. chairman, how the fed itself uses these repose and share any thoughts you have an improving financial stability in terms of the short-term debt and equity markets function, especially in a crisis. >> i like particularly to address the functioning of the tri-part we go market which is a short-term market that allows money markets funds, pension funds and others to put their money for short periods. it's a huge market, it's $2.5 trillion or so. and the federal reserve has been premature engaged in trying to make the market stronger, more resilient. we were very concerned back in the crisis. one of the reasons we were so worried about the failures of bear stearns and lehman brothers was that we thought it might lead to a collapse of this

critical market. and so in recent quarters, the fed, the private sector and others have been working together to try to improve how those markets function and in particular that we would have a set of protocols that we could've used in case a major player field, a major firm were to fail. so we want to make those market stronger. that's indirectly helps with the too big to fail problem because if we feel the system is strong enough, there's less need for danger in allowing a firm to fail. so we're very much interested in strengthening those markets. the fed -- it's very active in the repo market now, but in order to help reduce reserves in the system, we are looking to broaden the people we trade with to include not just the primary dealers we deal with on a daily basis, but also a wide range of other short-term money providers

like money market mutual funds we party worked with. so, you know, we are expanding that the we will be able to drain reserves effectively as they come to the point where we need to tighten monetary policy. >> thank you, chairman bernanke. >> the time is expired. the general and from new jersey, mr. garrett is. >> thank you, mr. chairman. everyone agrees you want to shine back the debt she to the prior day whichever it agrees to be a good thing. but the economy was really big fan. since that time things have changed. you bust out of the shadow banking system that's really not there anymore, the huge multiplier effect that out there in the money supply, that's not there anymore for the leverage ratios we've had in the past, they're not there anymore. so with all that gone, which are really make an economy grow at a good pace, with those things gone now and if you do a good

thing and go back to the smaller balance sheet, it won't that have negative impact or see the economy shrink because of that, or not shrink, but not go to the level we saw before and won't that play into your decision-making as far as how soon you want to shrink your balance sheet? and is there some sort of magic such are going to have to use enough force -- in that sense of setting a timeline for establishing your balance sheet shrinkage cracks the magyar, anything but you're right. the shrinkage of the balance sheet is akin to a monetary timeline. you're going to tend to raise mortgage rates for example and that will tend to tighten the housing market and so the economy. >> there's other taking going on. >> you're absolutely right. so i think the key here is we certainly don't want to hold the stuff for 30 years. said the key here i think is due

when we do scum to apply to want to sell assets is to do it in a gradual and predictable way so it has amenable impact. even when they get back to the precrisis balance sheet, we'll still built to manage the short-term interest rate much as we have in the past. so if the economy needs stimulus will still be able to do that, but we just won't be doing it through the ballot sheets. >> so do target the size of the balance sheet sort of the same way you target the funds >> you can think about it as a two-step procedure. first, bring the funds rate down as far as i can go up and we can't do that anymore. and then the balance sheet is a secondary tool. when i get back to normal we get the balance sheet back to normal and will be going back to where we were before which is used in the short-term interest-rate of a toll. >> you'll be where you work because those multiplier effects? >> i think the economy will be able to recover as long as we make these adjustments and a gradual way. >> okay.

second question. they throw some numbers before. he tried to do get interest on reserves here, i picked up a number of a trillion dollars on reserves and if interest rates go up as a lot of people expect them to tuesday 5%, this row numbers in my head, that's $50 billion shall be paid now. that's an offense a capsule version of how this works. >> yes. >> so then if you do that starting tomorrow, let's say, how long can the side do that? how long can the faculty chilean dollars you're on your books, pay a $50 billion in interest payments, can you do that this year and the next year and the next year? >> you can for the following reason, there's two sides to the balance sheet. the reverse repos come in the reserves, whatever our financing on the other side agency mbs, which pay about 4.5%. so from the point of view of the senior or the revenue we get to

the treasury, but many were paid to banks from state interest on reserves, is more than compensated by the income received on the mortgage-backed securities. and so on fact and the next few years, we anticipate every birdie sameness of the fed will be sent into the treasury an unusually large amount of money because the returns on the mortgages so much things cost to fund the fed. said because of the two sides of the balance sheet and will not be costing the taxpayer any money. >> okay, and it's not just costing the taxpayer but it could go on to perpetuity, but she could do it indefinitely as we say. >> half our balance sheet is where pain right now 12 basis points in the other half are paying zero because it's just casters with very little cost to fund and so obviously we can go a long time. >> was just a short time, what is the technical term -- what are the technical indicators you look for inflationary rates or otherwise as far as your taking policy? >> welcome we look obviously at

current inflation numbers gritting a variety of indicators as trimmings and poor means -- core measures and overall measures and so on, but we also look at things like the breakeven rate in the inflation protected securities market, survey numbers because expectations are as important as the level of inflation itself because people think inflation is high they will pay higher wages prices and novel retreat and inflation. we look at both expectations and current prices. >> there's a red light, so thank you, mr. chairman. >> the gentleman from california, mr. sherman is recognized. >> i listened carefully to the ranking members opening statement. indeed there's been an enormous and controversial multi-trillion dollar expansion of the fed balance sheet and this has been part of an overall process called bailout. as lawmakers, we ask under what law was this done back then the

answer is 133 of the federal reserve act which gives the federal reserve board unlimited authority, which they abused to the tune of trillions of dollars and i remember last year asking the chairman whether he would accept a $12 trillion limit, be a man of modesty he agreed to that. and then this committee adopted unvoiced boat a $4 trillion limit and no other than it was proposed. i proposed it for chilean dollars limit, nobody else had white not three or two or six. and i'd like the acting ranking member to indicate whether he thinks it's better that we have a $4 trillion limit on section 13 read or no limits at all. i yield to the gentleman. and i realized there other things like that. >> the gemini fielding and my choices are 4 trillion or

indefinite i prefer 4 trillion. >> thank you. would hope that the senior leadership on the republican side would correct some of the misleading press releases that have gone out from some republican members, attacking those who voted for a $4 trillion limit in implying that a $4 trillion limit was a grant of $4 trillion of power to the ever modest chairman bernanke would in fact that was indeed our choice, 4 trillion is well within my amendment come of the alternative is to stick with the present statute which is absolutely unlimited. those who propose limits should not be attacked as those who are calling for the removal of limits. with that in mind, we have a little problem in the ten biggest real estate markets in the country, including especially los angeles. right now the conforming loan on it and the fha limit is 729750. at the end of this year it

dropped the gse limit drops in l.a. and most of these other markets to 417,000, a precipitous drop. this country is still dependent for its wealth, its consumer confidence on home prices and is still dependent on the gse for supporting the mortgage market. chairman bernanke, what do you think would have a bad effect on home prices in those ten markets in the national economy if we were to see a sudden precipitous and massive drop in the gse limit? >> well, there is now, at this point there's really no private language mortgage market are browned and the availability of credit for so-called jumbo loans and so on is very restricted so it would certainly reduce the availability of mortgages and increase the rate paid for mortgages about that new limit.

now i think people should be concerned and make sure they're comfortable with a cost that might imply for the gses given the money that the government is using to support the gses right now. i think asserting merely clear that if that happens it will raise interest costs and reduce prices in those areas. >> and i would point out for the record that the gses actually make a profit on those phones between 417 and 729 and i move on to my next question. it's often said that you're supposed to take with the punch pulling the party gets going. this is the dullest party i've ever been to and i am an accountant. we don't need to be talking about how to make this party getting more dull or adding that going at least in the foreseeable future. we do however need to look upon what flavor of punch. you've mentioned that you've lowered the interest rates.

you've expanded your balance sheet not so much by buying treasuries is buying private sector debt. the question is, why should taxpayers, assuming you should have the expanded balance sheet and i think that's a good assumption for the president. why should we expose taxpayers to the relatively small risk of the high-quality private sector that you've purchased? was your balance sheet not all treasuries rather than the various other investments you pay? >> everything we've bought -- let me just say you begin about bailouts. so you know, at this point about $100 billion out of 2.3 trillion is related to bailouts. and given aig's recent sales, we hope that will soon be down to 50 billion. we're moving down on that. so this is not really about bailouts. it's about buying primarily mortgage-backed securities. and from our perspective, the fed's perspective, these are fannie, freddie and ginny and bs which are explicitly or

implicitly guaranteed by the u.s. government and so we are not adding any credit risk. whether we are holding it or somebody else, it's the liability of u.s. treasury and were not adding to the taxpayers risk by buying them. >> the gentleman's time has expired. gentleman from texas, mr. marchant. >> thank you, mr. chairman. mr. bernanke, banks are also experiencing a historically low cost funds, are they not waxed >> yes. >> in the recent praise from a quarter point to a half a point actually many banks -- their cost of deposits is much less than that. at what point will the banks decided that they will -- that they're better off turning back to loans van keeping their money

liquid and placing it perhaps in short-term treasuries where there are making not a risk-free, but a relatively risk-free yield? at what point does the fed have a plan or an idea at what point? or is that an object is to wean the banks of the lower cost at least for the fed and begin to put that liquidity, which is massive back into traditional loans? and then the economy will come up with it. >> so, we are supplying liquidity. we're not, you know, blocking its use in any way. our increase in the discount window rate applies to a very small amount of money. i mean, basically the cost of

funds in the markets for banks remains very, very low. so we're not doing anything to prevent them from lending. the reason they're not lending to see that they're concerned about their capital or they don't believe they have good lending opportunities. and our view is that we provide continued support to the economy with lower interest rates to the economy will begin to grow. we'll see more strengths and yields remain low and that in turn, you know, should make increased opportunities for banks to make profitable loves. when i say possible loans to banks, they will go head and make them. again, we're just simply supporting a low cost of funds for banks, which makes everything else being equal in easier for them to raise cash to make loans. there is a little bit of pushing on a stranger and unless banks feel there are good opportunities and right now were still recovering from this very

deep recession, they're going to be very cautious and they are very cautious. but going forward, they think i'm safe to say were already beginning to see some improvement in banks, how they look in their willingness to make loans and i suspect will see improvements going forward. >> the other thing i hear from constituents at town hall meetings other than health care, there are a few other concerns is that a large portion of our population depends on their cd rate for the amount of money they've been saving all these years for part of their income. and now that that income is not there, they are not spending. and so, another part of the economic is all is that if the rights that they can get for

their money comes back, they will begin to spend again. and so, at what point do you feel like the banks will not rely on this increased liquidity or providing? and they will begin to put the loans out, raise their rates and put the money back in the economy? >> well, you're right that favors are hurt by situation like this and that the deals they can get our lower. and there's no question about it. the reason we have kept yields low is because we're actually trying to encourage investment and spending that will get the economy moving again. and there is a trade-off there, i agree. as i said before, we want the banks to have access to liquidity. we have worked with the banks,

for example, to stress test to try and increase the capital they have. that gives them the run materials to make phones so to speak and when they see opportunities in the economy strengthening, they should be able to make loans at that point it will be safe for the fed to consider raising rates as the economy strengthens and will try to get back to more normal situation. >> thank you, mr. chairman. >> the gentleman from massachusetts, and mr. capuano. >> thank you, mr. chairman. mr. chairman, you've only said one thing this morning that really gets me concerned and i wanted make sure i understand it. you said something about the asset-backed securities market returning to normal. my definition of the word normal is not a good hang in the abs and i just want to make sure that your definition of normal is the new normal, not the old normal. >> yes, it's the new normal. i'm talking about personal bs by credit card securitization, not structured credit products and all the things that got us into

trouble. >> that's what i hope you did come i just needed to hear. i did want to get all worked up over nothing. i do want to talk a little bit about the gradual sales process he talked about at the securities you to hold. and i'm just curious, have you started me to make decisions as to where you're going to start or going to start with federal agency paper, are you going to use an iphone method? whichever one has the biggest losses? any decisions about? >> no, we're continuing to discuss it. we've met, with a specific plan. the only thing we've done so far as to agree to allow to allow both agency debt and agency mbs had a mature to replace it, were not rolling it over. that and of itself will reduce the portfolio over time. >> because it might be wrong, but as i see it, the sales when they start taking place i really the first time between the whole financial crisis that this country might be come a realized

or recognize a loss. up until now we may plusses on paper that we recognized a realized, but this might be the first opportunity, the first situation we experience one. is that a fair reading of the situation? >> that's possible. but on the other hand as i discussed earlier were making an awful lot of income right now and i should be set against any losses that we might take in the future. >> okay, i appreciate that. another see as you go for a girl interested in decisions you make. last thing i want to talk about is actually something that the secretary geithner said the other day and understanding and friday. as i read the december report that you have, roughly about 1.8 trillion give or take and secured assets. roughly how much of that and i have the numbers here. i'm not playing games. i want to make sure and reading it right. how much of that is danny fretted asset. am i read that right that it's 1,200,000,000,000? >> let's see, we have about -- i even have the numbers if you'd

like. >> i'm not trying to get you. i'm trained to make sure i'm reading it right. >> so we have about 1.3 trillion or so and agency debt and securities roughly of which about 175 a debt and the rest of mbs. i think the biggest chunk is from fannie and manfredi and then finally ginny. the reason i ask is obviously because i'll justly wary come from. i come from the position that fannie and freddie might have been engaged in some inappropriate activity over the last several years, but no more so for the most part than private entities. ..