>> there's been a lot 0 of wailing and nashing of teeth about how terrible freddie and fannie is, about i have seen positive things this country allowing people to buy homes. in general, would you submit or would you suggest that we end fannie and freddie and go back to private mortgage, or do you think, with the tweaks and fixes, some may be extreme -- but the concept of government involvement in the mortgage industry is a good concept or

bad one? >> i would go book to the status quo, but i think -- i gave a speech on this a couple years ago where i laid out alternatives. i think there's some areas where a backstop government guarantee which is fully paid for mortgages would be a reasonable strategy. >> thank you, mr. chairman. i yield. >> the gentleman from north carolina, mr. mchenry. >> thank you, chairman bernanke for being here today. i appreciate your leadership at fed and trying to get our economy back on track. as well know, and as you discussed before, there are two houses in terms of monetary policy, which you and the federal control, and fiscal policy, which congress as the authority. so, it's certain lay challenge for you -- certainly a challenge for you to control your dual mandates, being only able to control half of the quotient of

this. so, the budget deficit, being over 10% last year, 10% of gdp last year, this year, next year, and only subsiding just barely the following year. is this price -- this high def sit and the long-term view of where the deficits are going under this president's budget, is that priced into federal policy and outlook? >> well, it's priced in -- it affects fed policy in several ways. in the short-term, is affects activity and affects our monetary policy strategy to some extent. i think the risk -- maybe this is what you're looking for -- is if there is a loss of confidence about the ability of the government in the medium and longer term to achieve a sustain

able fiscal balance, then the risk, which we have seen a little bit, i think, once -- even yesterday there was just a bit of concern -- is that interest rates might rise because of a lack of confidence by creditors in the long term fiscal stability of the government, and that, in turn, would tend to endanger the recovery, because high interest rates tend to slow the economy. so, it would certainly be good for the feds and for the country, for the economy, again, as i said before, i think it's not a practical goal to achieve a balanced budget this year or next year. but certainly there needs to be some plan for exiting from the current very high def deficit process to get something that is

more sustainable over over the medium term. >> so, in terms of major legislation, just signed into law two days ago, the health care policy and the cost of that. was that priced into the federal's outlook over the medium and long-term? >> i know it's very controversial exactly what the fiscal implications of that are and i'm not going to try to second-guess the c.b.o. and others who priced it. but clearly everyone agrees that overall fiscal outlook for the u.s. government is somewhat dark over the medium term, and it would be, again, very useful if there would be a bipartisan concerted effort to explain, demonstrate, and decide how the

government is going achieve a more sustainable fiscal trajectory. >> would the big negatively or positively changed the fed's outlock on the economy in the medium or long term? >> i couldn't say. as you know, the c.b.o. and others have come up with a wide variety of estimates. >> what about the expiration at the end of this year of a whole variety of tax puts -- cuts put in place and '01 and '03. are the expiration of this tax cuts fact you'red into the federal's outlook on the economy? >> to some extent. we tried to make forecasts, and our forecasts are typically 18

months ahead. and we try to factor in our expectations of fiscal policy the best we can. but of course we recognize that there's a lot of uncertainty about what the implications will be for the economy and where the economy will be 18 months from now. but we try to factor in all the aspects of fiscal policy to the -- >> so you're trying to unwind with the fiscal policy as well. >> part of the difficulties in forecasting the economy. >> the gentlemen's time is expired. mr. lynch is recognized. >> thank you, mr. chairman. thank you, mr. chairman. i certainly appreciate the difficulty we're in. i know a lot of the members will recall that the federal balance sheet before the crisis was 800 billion, and now it's somewhere in 2.1 trillion. i generally agree and understand

what the idea of the term deposit facility and also the reverse repurchase agreements to soak up all this liquidity that's sloshing around in the economy and which makes the economy less responsive to your interest rate decisions, as you say, pushing on a string. do you think that those two mechanisms will be sufficient to re-attach or make the economy more responsive to interest rate controls that are traditionally used? >> yes, i think so. we have really dealt in two pairs of suspenders. we have the interest we pay on reserves to banks, which by itself ought to move the whole complex of interest rates up as we raise that rate. there could be some slippage

between that separate general market rates, and those tools will be able to drain reserves and tighten up the relationship. so that will be a second tool that assists us in managing interest rates. but then if it were absolutely necessary, we could sell some of our securities, and that would certainly tight -- >> that's what i want to talk about. that part, i guess i'm less confident in. do we get into trouble here in selling assets, you -- i know these are all government-issued so the risk part of this is already there. but for some time now, the whole market has been fed by -- the mortgage-backed security market has been fed by the gses and the federal home loan banks. i don't know if you included that as well.

but i'm just concerned about selling assets into a very poor economy, with a very poor market, and whether we might sustain considerable losses in those sales and then have the compounding insult of having others, who might buy those at stressed rates, and do very well with a similar argument we had during the sale of assets after the savings and loan bailout where folks came in afterwards and capitalized greatly on the timing. when i first read your remarks surrounding the purchase office these assets, i thought it was clear that this was going to be passive ownership and investment, and we were going to hold this long-term. and that was last march. so, is it something that has changed our position on this? can you explain that?

>> well, only that i think the -- we have had a good bit of time to discuss all the aspects of the savings strategy, and i think the fmc is not comfortable with holding securities until they mature, some of which are 30 years, and we want to move more quickly than that to a balance -- precrisis balance sheet. but sales would be slow, gradual, announced and advanced, and would not have market impacts. you mentioned adding insult by selling into a weak market. the situation we would be selling is one where we're trying to tighten because the economy is back. so we wouldn't be doing not a really week economy. >> i appreciate that that's the only mechanism of the three that actually shrinks the size of the

fed's balance sheet. i'm very concerned about the timing of this and what the end result might be. i appreciate you comments. thank you: thank thaw -- than, mr. chairman. >> the gentleman from new jersey. >> thank you very much, mr. chairman. mr. chairman, good morning to you. thank you for being here. my principle concern on many occasions in this committee, with many different witnesses, continues to be levels of federal spending and the overall federal debt, now at $12 trillion and rising rapidly. as i understand it, mr. chairman, the ratio of national debt to gdp has shot up to 37% before the crisis to approximately 60% in fiscal year 2010, and the president's budget

indicates it may be headed towards 77% of gdp by the end of the decade. as you well know, better than almost anyone in america, except for world war ii, the debt had never been higher as a gdp. what does the growth rate have to be in order to pay the federal debt over the course of the next generation, perhaps the next 25 or 30 years? >> well, the 77% doesn't capture the entire problem in that there's an awful lot of, what you might call offbalance sheet obligations, future medicare and social security and so on and other obligations not fully accounted for in our debt. so, in some sense the burden is greater than what you describe,

and recognizing that we're an aging society and those costs are coming down the pike, i don't think there's a realistic growth rate. i don't know what number to tell you. it would be a very high number. probably not realistic. so i don't think just growing out of this will be a solution. >> nor do i, and since that is clearly not the solution, your thoughts on what the solution would be? presumably it is somehow to reign in levels -- rein in spending and get our national expenditures as a part of gdp back to an historic average. since world war ii the average has been 20%, it's now 25%. i'm one of the cosponsors of a constitutional amendment sponsored by mr. pence and mr. henson that would address the constitutionally. your thoughts as to what level

you would suggest long-term, given the historic average being 20% for the last 60 years? >> well, there are tradeoffs there that really it's up to the elected representatives to make. the only thing i would say is that we need to enforce some sense of consistent perspectives. so those folks who believe that low tax burdens are very important need to also specify how they're going to cut spending. and those who see much benefit in spending need to sort of specify what their revenue source is going to be. so we can force people to recognize there are two sides to this. that's the way to ultimately bring down the deficits. >> what would you suggest, based upon your obvious extensive knowledge of the area, what would you think would be a good range as a percentage of dgm? and based upon your experience as an historian of these subjects, particularly related

to the depression. >> well, there's quite a range of debt to gdp across the developed world, and a lot of that depends on what decisions are made about what parts of in the economy will function through the government and which is private. about health care, for example. so those are very broad decisions how you want to structure your society, and i don't feel well-placed to make those decisions for the american people or for the congress. with that being said, obviously we're going to have to make some tough decisions. there's this tendency that nobody wants to cut and nobody wants to raise taxes. at some point we have to take some unattractive and tough decisions, and i don't envy members of congress who have to grapple with this problem. but the -- one way or another

there needs to be some greater balance between revenues and expenditures. >> thank you, mr. chairman. my own view is it's the fundmental issue of our time, and whether or not america will continue to be a preeminent society in the world in this century is based upon whether or not we can get our fiscal house in out. >> the gentleman from north carolina, mr. miller. >> thank you, mr. chairman. i'm also concerned about the def and it long-term debt. at the beginning of the decade your predecessor worried that we might spend the debt down too quickly and might be disruptive in the economy. that proved not to be so much of a problem in the last decade. it appears that a couple of my best folks here were against bush tax cuts and against the prescription drug plan which was more of a giveaway to the insurance industry and the

pharmaceutical industry than for seniors on meds care -- medicare and was not made for. what is the kind of distribution of the current deficit? how much of it is structural? the extent to which our revenues do not match up and would not match up even if we were growing at 3 or 4% a year and had unemployment at 3 or 4%? the existing programs not anything new. how much is a result of the recession itself, that declining revenues, and the additional expenditures required for unemployment, for medicaid, for child health insurance, entitlement programs, and to what extent is it because of what we're doing in response to the recession. i hear it roughly 50-4, 40-10? >> the way i think about it

is -- again, if you look out from, say three-quarters years -- three years from now out to 2020 where the forecasters are assuming something like more normal economy, the estimates of deficit to g.d.p. are four or five, six percent, that kind of range. so, since that would be something where the economy is close to its potential. that 5% would the structural component. >> say that again? how much of the deficit of that? >> deficit is 5% of gdp. today it's 10% of gdp. and looking at the prospective deficit five years from now, that suggests of that 10 percent today, # 5% is recession and 5's

to structural issues. it's going to get worse because of the aging increase and increased medical costs and so on. so we're looking, even in the medium term, we need to heal a -- have a goal of improvement in the structural deficit to get to something more sustainable, at least over the next decade. >> the most important thing we can do to address the deficit is to get the economy going, to put america back to work. do you agree with that? >> in the short term, that's absolutely correct. the share of revenues of shared gdp has fallen down to 15% so just getting tax revenues back up to historical norms would take a good chunk out of the deficit. so that's absolutely correct. that doesn't solve the long-term issues as you know. >> sure.

as to mortgages, there's been a good deal of discussion about the conflicts of interested and interests were different, and especially if the different interests between first and seconds. i understand about two-thirds of all servicing of mortgages is controlled by the four biggest banks, and those same four banks also hold 4 -- 477 billion in second mortgages. do you see a conflict of interest there and is that something we should allow going forward? >> there is a problem there, which is that under current rules, and under current practices, the same bank might hold the second and the first and not be aware that those two go together. so, for example, if -- it's not

uncommon for a homeowner to pay their second and be delinquent on their first. so, the bank would, therefore, count the second as fully current even though the first is delinquent. efforts to restructure mortgages and keep people out of foreclosure would be facilitated if the first and the seconds were linked together and perhaps negotiated jointly rather than separately. so that there would be one solution to the whole problem. the treasury is working on that. there's a program call the 2mb program, and the basic premise

of the program is to try to look at the -- inc. up the first and the -- link up the first and seconds, and when dog mortgage restructuring to do them jointly rather than separately. >> the gentleman's time is expired. the gentleman from texas, mr. ream, is recognized. >> thank you for appearing today. i would like to take a moment, if i may, and thank bank of america, if what i'm reading in the newspaper is correct -- i'd like to thank them for producing a principal reduction program, and i'm referencing this because we have not yet resolved the question of foreclosures. it's a serious question, and it's one that i think we have to get handle on before we can conclude we're out of the woods to borrow a phrase. my question, mr. bernanke, is

this. how important is it for us to resolve the question of forecloses that just the usual number -- that actually have now gone into persons who are not blessed with, or cursed with, with adjustable rate mortgages. we have persons who clearly qualified for the homes they had but their homes are under water. so how important is it for us to get a handle on this to a void a double-dip recession. >> it's a risk to the economy. in recent periods as much as 30 or 40% of new housing coming on the market is foreclosed housing, so foreclosures generate a supply of housing, and drives down prices in the housing market, lowers the wealth of consumers, homeowners,

increased the rates of delinquencies and losses in banks, and weakens the incentives to build new homes. so, for all those reasons, foreclosure, beside being obviously a tragedy for homeowners who would like to stay in their homes, has negative effects for the economy and the financial system more broadly. so, i certainly encourage efforts to avoid preventible foreclosures. having said that, of course, it's a very difficult problem, and a lot of people have been working on it, and unfortunately we still are looking for i think very significant number of foreclosure in 2010 and 2011 as well. >> mr. chairman, you said you encourage, and i'm going to ask, are you permitted to encourage other institutions comparable to b of a to do a similar thing? i ask because i'm not sure what the protocols are with reference

to your office. i know you try as best as you can to make sure that you don't encroach upon the problems of congress and others, but are you permitted to, and can you encourage other institutions to take similar action? >> well, i think the way to proceed is to try -- first of all, is in general, as we have done for some time now, to encourage banks to be in touch with troubled borrowers and work out some solution, whether it's a principal reduction or other solution. that's something we very much encourage. more specifically we encourage banks to participate in the government programs like the hamp and so on. as you know, the hamp program has been focused on payment -- on the monthly payment as opposed to principal reduction,

but they are -- i know that they are looking at alternative ways of addressing foreclosures through principal reduction, through assisting unemployed homeowners and so on, and if they develop these programs, we would certainly encourage banks, particularly servicing banks, to fully participate in those programs. we can't tell them to participate in something that doesn't quite exist yet so we're hoping the treasury and congress will develop some viable programs that will be attractive to the servicers to participate in, and we will encourage that. >> thank you. i will say this. i think that we will do what we can and we should, but i would also hope that other institutions will, of their own volition, decide that they, too, have a role to play in this. this is why i compliment b of a,

because they, of their own volition, is appears -- unless there's something else going on. >> reducing interest rates, it's a great thing to do but principal reduction based upon payments made is an inducement to a person to keep your home and also know that you will not be under wait. thank -- under water. >> the gentleman's time has expired. i will remind him that that's the bank based in my congressional district. maybe there's some causal connection. >> mr. chairman, i know that good things happen whenever you sew up. >> gentleman from mississippi, already cleaver, is recognized for something good to happen. >> thank you, mr. chairman. i have no questions.

>> you yielded back or deferred? the gentleman from illinois, mr. foster, is recognized for five minutes. >> i won't deal with that. ed. let's see. i would like to follow up on the line of questioning having to do with unemployment and of the offer of analytic and technical help. >> let me apologize. i thought we went to the other end. >> just got trampled on. >> all right. i will proceed. >> yes. >> there is some discussion in the world of economists about the breaking of the law that may have happened in 2009, and this is very troubling to us, because we had all the pretickses -- predictions that the gdp would

recover and unemployment would recover, and if you look, roughly speaking,gdp did recover and unemployment did not. it's my impression, though i'm not an expert, it uses changes in gdp and then that calculates what the change in unemployment should have been. all right? and those -- if that link broke in the last year, that means that we no longer have a predictive policy tools, and it's a painful way to break, having unemployment. so your take on this, appears in your text book, and i presume i can get expert at advice on how to good forward if our models on employment are no longer protect dis? predictive? >> the unemployment increase was