organization, training and tactics is our next task. the reviewal concluded that thes u.k. should retain its nuclear deterrent based on the try dent submarine -- trident submarine.u we will make changes, but themm toil of continuous at-sea deterrence remains n. an uncertain world, the governmentn saw no case for giving up our ultimate guarantor of u.k. sovereignty. we went into the review aiming to remain a full spectrum military updated for the longern or term, and i contend that this is where we have come out. delivering the future force within available resources will not be easy, and now that theure sdsr is complete, one of the big challenges for the m.a.d. is what we're calling the ce fence reform -- defense reform reviewr we're taking a long, hard look at how we're organized. it's too early to say what the results will be, but thiss exercise is all aboutal prioritizing resources,p including strategic planning ano command structures.

..tures. future for 2020 is only available with big savings in other parts of the defense. the u.k. i know is not alone in doing this. when resources are tied it's incumbent upon all of us to squeeze every last drop of military capabilities from the taxpayers' money. i know in exercise like that has been underway for some months now and reporting it this afternoon and hearing about the results. looking ahead, i actually expect the defense reform to be a major challenge to both of our allies come with us and our allies in soon after the review of, the prime minister and president nicolas sarkozy assigned two in france one on jointly developing nuclear technology and another on the defense corporation. these are ambitious documents and we're trying to do will make

arguably capable european nations much more intractable and national defense program should become better aligned to deliver more capability and i go in a few weeks time to see my french counterpart to maintain this activity. we have agreed to develop an ability to form a combined joined expeditionary force. by nearly 2020s to develop and deploy uk/france strike group to cooperate on developing technology for the next generation of nuclear attack submarines, working on the next generation of you a fees and cooperate on cybersecurity and counter-terrorism. in some ways it is a big deal and in other ways it is not remarkable. we do this type of cooperation

phar-mor with the u.s. armed forces everyday of the year. because of the success of our arrangements we recognize more with our closest neighbor. this is an objective in the u.k. and france of a different kind for many years but we aligned to make peace treaties possible and it will take hard work on both sides of the english channel or should i say -- to turn the ambition in to reality. but i am confident the net result will be more defense capability than we would have without these treaties. perhaps they will pave the way for others to take a look at what they can deliver collectively as well as individually. the arrangements in france caught the imagination of the u.k. but unlike to remind this audience what our review said about the u. n.. describes the relationship as

deeply rooted, strategically important and mutually supportive. in some ways it is so obvious that it goes without saying but it is important and we don't take the relationship for granted. both the u.k. and the u.s. must continue to be updated for the times. within defense we plan to do more on cyber, war on cd and capacity building and counterproliferation and arms control. unlike to see our as part of an integrated strategy we should work more visibly and aggressively to prevent future conflict. some in britain described it as phase zero operations catching on here. for all of these reasons it is essential before 2020 is compatible with similar forces better than outcomes in the united states.

finally a few words. one of the reasons people might think future relationship is taken for granted is because we operate so closely together to date. nowhere is that more apparent than in afghanistan. as the prime minister said that the nato summit in november british troops and u.s. marines working hand in hand, side by side fighting effectively, the americans know that the british forces are capable of taking the fight to the end of closing with the enemy. no caviar and equally as effective as any troops anywhere in the world. to route the defense review one thing was always clear. afghanistan is and will remain the main effort for defense of long as necessary. all of the decisions we took retested for their impact on afghanistan. the review is about preparing for the future but we must

prioritize for today's operations and be ready for tomorrow for the battles we are fighting today. so changes to our structures will have to work for the end of the decade after our combat role in afghanistan is over and some equipment provision their deferred for the same reason. the government couldn't have been clearer. our mission in afghanistan is vital for short and long-term national security of our country. it forces us ultimately to keep our name public and safe. consequences of failure in afghanistan, 5 extremists who would make the region their base and save from the operations terrorists trained for and plan from those haitians. dozens of other governments have reached the same conclusion. that is why together we form a coalition of 49 countries with 36 when i -- determined to bring

civility to afghanistan and prevent it being used as a base for terrorists. i have been to afghanistan twice. it change from what i commanded there in 2006. could not be more apparent. today people gov. mandel is driving around and officials are traveling alone did is a busy road with people and traffic. it was unimaginable. the right equipment on our delivering, what we knew then was the right strategy but seemed unobtainable. the strategy that general david petraeus achieved by focusing on the people and political sentiments. there remain significant challenges. we have no illusions to that fact. there is genuine cause for

cautious optimism which is a good term to use. we are operating from a position of increasing strength as the position of the insurgency has begun to deteriorate. in pakistan, safe havens have been squeezed by pakistani security forces the we must all do more to understand and incentivize the pakistani. the insurgency is under unprecedented pressure and lost significant ground in their heartland including depopulation sanders. we have been successfully targeting their bombmaking networks and command structure as their senior leadership is isolated and training becoming deficient and supplies disrupted. the afghan national security force being developed by a very good friend of mine as most american general are, who are referred this year far exceeding the agreed targets. they are increasingly effective

and beginning to lead operations which along with political our reach is key for homegrown security. i am well aware that the u.s. just conducted an annual review of the mission and i don't want to get involved in domestic political debate but we share all the same judgments. the vital nato conference in lisbon and according to the wishes of the afghan government, take the lead on security from the end of 2014. this is why as prime minister david cameron said, british troops will not be in combat roles. we intend that the u.k. relationship with afghanistan will continue for many years to come including a highly supportive defense relationship. issues that we have in common with the u.s. should come as no

surprise that we have a common strategy. i am sure it is really important. let me be quite clear by what i mean by that. with india, pakistan and bangladesh, we have a history longer in some ways than with a kab kabul. we held trade officials, exchange information and provide development assistance. we will do the same in afghanistan. british trainers sentimentalists will stay in afghanistan and their efforts will continue alongside those of aid workers and diplomats. diplomatic defense and development relationships under 10 our partnership and we look forward to that of prison years ahead. afghanistan will contribute to the network of allies the u.k.

has developed over the centuries and having longer term inspection this respect is a very important resolve. i expect that will also be true of the u.s. nato and many of the other nations. we have common interests with your country so it should come as no surprise that we have a common strategy. these common interests extend far beyond afghanistan. our strategic reviews have shown our nations face the same threat and the mansions solutions. our shared perfection means we will approach many challenges that threatened stability in a similar way. the uk's contribution will be balanced against economic constraints the nation is facing. we are under no illusion. britain's are forces continued to be the most robust,

well-trained and effective allies liu as could hope for and we will continue to defend our shared interests over the coming decades. thank you very much for listening and i look forward to your questions. [applause] >> a lot of questions i have scribbled down here for the presentation. a hard the parter and in so we have 18 minutes or so, 20 minutes to take some questions. let me go straight to the audience. our former supreme allied commander and vice joint chiefs chairman -- please. if you wait for a microphone.

>> welcome to washington. it is good to see you. thank you for taking on this very serious challenge at a tough time in the u.k. and around the world economically. i don't envy your task every day but i respect very much would you have done. let me ask a quick question. this is more not at the strategic level but with these force reductions and other things coming up, where do you see the u.k. exchange engagement, made a staffing and the rest. i don't know if you have gotten into this but you have a sizable amount of uk personnel working with u.s. forces today in the united states and deployed. obviously the combat formations are easy to discuss but i am talking about those they to they staff decisions where we get

such an integrated effort. have you thought much about that and can you give us a few comments? >> this is very important. that guinea pig on your pinnacle. i owe much of this to you. there was a day when i got the job. so with the big one. it is in very important issue. somewhere -- we're talking about it today. we are going to go through period in the next five years, as we reorient towards what we call force 2020. we go through a challenging time before we get in particular that twenty-fifth the spending.

being a very minor historian i'm reminded but the german armies did in the 1920s. they kept the kind of things you were talking about so they have the capacity to grow and look at what they did by the 1930s. it is not a bad model for us and there may be a case for reducing even further for structure in order to keep those things go in which otherwise is on the front line. we will virtually lose and probably never get that back. para am very alert to the issue, a very important one and we have to find a way for a but we are on the case. >> heavy hitters showed up for you, general richard, general

walt also. >> i applaud you on your efforts with france. is a good idea. a little concerned i would have is how do you maintain the ability to decide to use the asset yourself as you point out? >> at the moment, has not been integrated except potentially the case of the carrier strike but there is a french aircraft carrier and will be a british aircraft carrier. 75% or maybe all if we get this right, we don't have to borrow each other if that is right. there was that period when invariably in this case that we still got to work through, making sure the right conventions are in place to allow us to use it at a critical time for us, a thought of work

that i'm getting into detail with my french counterpart later this month. we are alert to the risk. what we should be looking at, we have two aircraft carriers for the price of one if we get this right rather than overpay all of that when we get out of the problem. we need to find a way through that. in other respects, there is no replacement of each other's capability. in the case of the navy and air force they do this anyway. in the case of the army, we have done a lot of it. we now need and it gear up for the 2015 period. what we did is we did quite spontaneously and naturally but

we rather lost a nickel. that would be my response. one niche area, the rest is actually doing what we ought to do. >> thank you. >> a great privilege to be associated with the council and sponsor this event. i listened to you at national public radio this morning and had the same impression now what you are saying about afghanistan is very encouraging. i have my parochial interest and noticed the british secretary of defense was in november this year said something that -- britain would like to see some

strategic partnership with denmark and norway. that will enhance the national security of great britain and these countries. could you expand on this? >> since we are in afghanistan let me -- it was a relatively rosy picture. nevertheless compared to some, on top of henry's question, what part of this concerns you? just an assassination in pakistan or afghanistan and pakistan is right there. as you look at the picture, even in an improved situation. >> started off on november, and scandinavia.

the secretary of state has done a lot of work before he took over, identified one of the better terms, an area we are not talking about becoming an area of conflict but we need to face more, as a climate change results, the icecap moving, possibility -- all of these things need mutual understanding and better guard. the first thing we entify we should do is have that -- from which this e merges. that was the background. and the automation is central to that and directly interested in it than others and the secretary of state felt he might have some catalytic role generating understanding and debate. he is proud of the fact that the

secretary of defense could do this in 23 years which says a bit about our relationship with some important nations. and admiral of the british yacht club i sail a lot and share that view. i was knocking on doors. on afghanistan, i suppose people who really understand afghanistan will talk about that. they really understand it is more -- you have to place it in the context of the region. india is a factory, highly wrong but for too long we looked at it through the perspective of afghanistan itself. i think things are going very

well. the law don't want to be accused of looking at this through rose spectacles but having been involved for some time i am better qualified with one or two exceptions than the u.s. armed forces to tell you that things are much better on the ground. people talk to you in a way whenever possible and say it wasn't the case unless it was a secure environment. i remember carl used to say you have to look at this for a two year or three year prison rather than one week. i promise you even five years is a big difference. i'll only wish the sort of resources were available to me in 2006 that he will be the first to acknowledge that thinking -- you can press it up a bit.

what was required, to dave a call security bubble and we were going to link the -- they do not completely do it. we have been able to do it. there were some long term lessons. one is that people think you can't do these things. i don't buy that. the way we have rewritten history is rubbish. we will be required to do these things in the future. the key is to learn the lessons quickly rather than say that is not possible. i can complicate rouyn the -- it would be a shame if we learn the wrong lesson from

afghanistan because they took so long to get the formula right. at the tactical level we are very far. the real issue, i said this repeatedly, candy dimension of what we are doing now match what the military is starting to do. things like government and so on and justice. it is great to be back alongside hamid karzai, knows more about this than me. [talking over each other] i have a huge regard. but things are not quite as easy as one might sink.

in the case of afghanistan and pakistan and think they have horrendous problems and we need to emphasize more with them. it is too easy to criticize. i said at a joint press conference with david cameron when i was very few weeks ago, the review, made this point, very complex. a review of hamid karzai, really understand they're not that difficult to take. then you begin to realize how difficult this is. even mr. cameron would have a problem being the president of afghanistan. what really worries me, it is too easy for the non-military and even the military should

know better, could do more and should do more. they should do more but i can do you having spoken to them, it is one hell of a problem to keep one man on the border requires two more people and this ammunition gets up. to most inhospitable terrain. and you have to control your own face the whole time because they are now operating against them as much as they are against us. it is more doable but i suggest we need to be a little more understanding of the difficulties and pressures and there's obviously more to it. >> we are down to the last four minutes so i am going to ask -- i have seen three other people, 5 can keep them to faherty seconds or longer. there are a couple minutes at the end for general richards to

answer or cherry pick one. and identify yourself. >> i am walter stadler and my background is farm service. it was a wonderful year, 1979. without the national guard and the reserves it would not have been possible to do what we have been able to accomplish in iraq and afghanistan. my question is i wonder how seriously you work with the british equivalent of the national guard. how are you using them and what resources are you putting into them? >> thank you so much. reducing cost efficiency. you mentioned those initiatives.

do you anticipate quick cutting to -- cost cutting addressed to increase efficiency and cost? >> thank you for being so disciplined in your question. >> all nato nations are going through the united states went through. how can we be certain about budget cuts, major gaps, much of this has been done and the national level without a lot of regard. how we orchestrate this at the alliance? >> it is not exactly the equivalent of the national guard to the naval air force

equivalence. it is a very good point. we actually did take them out to a degree, restructuring the biggest of our reserve forces, on this moment, i think there's no doubt that what we are aiming for is an integrated force. it actually wasn't one army but two. we want an integrated force where you can dial in to reserve from certain conditions and contracts for certain areas of activity. in particular i am very key on

using military context. things we can do in that area. and terms of efficiency can be cheaper. some of what we do his training and there is no way that a reserve is going to cope -- when we deploy military operations we have a duty of care with a lawyer constantly monitoring which means we got a lot of training. that means in some respects people use a regular soldier. we are on the case and the duke of westminster is watching

closely. the defense reform unit aims to do everything that you hinted at in your question. i think it is going to be a neat trick to deliver the efficiencies that we have of that work. my guidance and this is beyond the secretary of state himself and the prime minister to take an interest that we must be genuinely radical. and how that translates into being able to tackle very traditional -- >> ben bernanke making his first appearance before the new congress. live coverage now. ben bernanke's testimony before the senate budget committee on the u. s economic outlook and monetary policy. ..

>> i was in the meetings with the former secretary of the treasury, and with you when you warned us of how serious a financial circumstances were in late 2008. those moments will be forever riveted in my memory. i'm sure in yours as well. i personally believe you and secretary of the treasury hank paulson followed by this administration have taken steps that were critically important to of urging a financial collapse. not only here but globally as

well. still, our nation faces very serious challenges. we know we are on an unsustainable course with the budget, borrowing about 40 cents of every dollar that we spend. clearly that cannot continue for very long. on the other hand, we also face a fragile economy. with one in every six workers in this country either unemployed or underemployed, that requires our immediate attention as well. my own belief is that we need to put in place a plan this year to get our fiscal house back in order. and that plan needs to be phased in over a period of time, along the lines of what the fiscal commission proposed. finca we also understand -- i think we also understand where we have. this has been an extraordinary period in the country's economic

history. i'd like to just go over a brief history of what we have experienced. i personally believe the federal response didn't avert what could have been a financial collapse. i believe it was that serious. in the meetings i was and with the then secretary of the treasury hank paulson and you, mr. chairman, risks were very clear. we have seen some progress made. in fact, important progress made, private sector job growth has returned, although not as much as we would have liked. we heard the numbers this morning, something over 100,000 jobs created in the private sector. a dramatic improvement from where we were back in january of 2009 when we were losing 800,000 private sector jobs a month. now we have had 12 consecutive months of private sector job growth. and economic growth, the pattern

is the same although actually somewhat better. in the fourth quarter 2008, the economy actually contracted, actually shrunk by 6.8%. more recently in the third quarter of 2010, we saw positive growth of 2.6%. again, a dramatic improvement while not as strong as we hoped. we have now had five consecutive quarters of growth. we've also seen a dramatic rebound in the stock market, after falling to a low of just about 6500 in march 2009. now the dow is now over 11,500. and two of the most respected economists in the country, mark zandi who is a consultant to the mccain campaign, and alan blinder, a former deputy chairman of the federal reserve, did an analysis that measure the impact of federal actions, the t.a.r.p. stimulus, and also

included the fed's monetary policy actions. and they concluded as follows. we find that its effects on real gdp, jobs and inflation, are huge. and probably a bird what could have been called great depression 2.0. when all is said and done the financial and fiscal policies will have cost taxpayers a substantial sum. but not nearly as much as most had feared, and not nearly as much as if policymakers have not acted at all. if the comprehensive policy responses say the economy from another depression as we estimate, they were well worth the cost. this next chart shows doctor blinder and dr. zandi's estimate to the number of jobs we would have without the senate -- the federal response. it shows we would've had 8 million fewer jobs in the second quarter of 2010 if we had

not had the federal response, the t.a.r.p. and the stimulus. we see a similar picture with the unemployment rate. unemployment rate averaged 9.7% in the second quarter. according to dr. blinder and dr. zandi, if we have not had the federal response, the unemployment rate would have been 15% in the second quarter, and would've continued rising to over 16% in the fourth quarter of 2010. so clearly the federal response to the economic crisis has had and continues to have a significant positive impact on the economy. but we are not out of the woods. we can't forget that as i mentioned before, one in every six of our fellow citizens are either unemployed or underemployed. the unemployment rate in december which was also announced this morning was 9.4%. this is still far too high.

the federal reserve projections show the rate is likely to come down only slowly, averaging still in the height eight percentage point range by the fourth quarter of 2012. but as i noted, we must now also pivot to addressing the long-term fiscal imbalances that the country confronts. i believe we are at a critical juncture. we have been borrowing as i mentioned earlier, 40 cents of every dollar that we spend. that cannot continue much longer. spending is at the highest level as a share of our national income in 60 years. revenue is at its lowest level as a share of our national income in 60 years. i believe that indicates you've got to work both sides of that equation if we are to make progress. gross federal debt is already

expected to reach 100% of gdp this year, well above the 90% threshold that many economists see as the danger zone. a leading economist who came before our commission and has come before this committee, doctor reinhard, who have studied 200 years of fiscal crises around the world, she concluded that when government debt as a share of the economy exceeds 90%, and she is referring here to gross federal debt, that economic growth tends to be about one percentage point lower than it would be if debt levels were not so high. if that associations were applied to united states today, it would translate into the potential economic loss of hundreds of billions of dollars and substantially fewer jobs for americans. so i believe the deficit and debt reduction plan assembled by the fiscal commission could provide a blueprint and a way

forward. the plan would stabilize publicly held debt by 2014 and then lower it to 60% of gdp by 2023. and roughly 30% by 2040. i emphasize that's the publicly held debt, not the gross debt. the bipartisan commission who voted for the plan, 60% of us supported either interestingly enough five republicans and five democrats and one independent. i think that demonstrates that we can reach across the aisle to do things that are critically important for the country, facing up to the debt threat is something we must deal and we must do it together. with that we will turn to senator sessions for his opening remarks. and again, i want to welcome him as ranking member of the budget committee. >> thank you, chairman conrad. it's an honor to be here, to be with you.

i respect you very much, and value our friendship and enjoy being ribbed by you. and i look forward to working with you to help make our country better. we have some real serious challenges ahead of us. i also want to note how much i have admired our former ranking member, judd gregg. i know you and he had a great relationship. i think his leadership was particularly valuable. people listen to it. they trusted his judgment, and i hope that i can come close to being as effective as he has been in this position. i'd like to share some thoughts and concerns. i know that when the mortgage crisis hit and the economy was whacked, a lot of people got together and tried to make some decisions. mr. chairman, it would've been better i think had we seen the mortgage crisis two years in advance and taken action, it

would have made the crisis less real. and i say that -- i say that because we are to be humble about where we are today. i don't think anyone fully understand this magnificent world economy we are a part of. i don't think anyone or is it, whether the fed reserve, secretary of treasury, even congress, can have a little meeting and be sure that the action we take is going to have certain impacts on this massive economy of which we are a part, when you're confused in the and you need to return to the fundamental's of blocking and tackling, the fundamentals of paying your bills on time in creating some confidence in the economy. so today is our committee's first hearing of the 112th congress. we need on the heels of a

historic election. it's important, that election. the american people rebelled against wasteful washington spending, and a government that has grown too large and too intrusive. the american people also rebelled against a political establishment that has placed our country on a path of fiscal decline. solving our nation's economic and debt crisis is about more than economics. it's about protecting our way of life, at home, and our standing abroad as a great nation. and it's about honest and moral. our goal is not an era of austerity but an era of prosperity. restoring fiscal discipline and strengthening the private sector is the only way to create growth and opportunity for every hard-working american, and it is the only way to protect our country's greatness and its vital role in the world. to solve our problems we must speak about this candidly. our nation's debt will soon be

equal the size of our entire economy, 40% of our budget relies on borrowed funds. in 2009 the interest on our debt alone cost $187 billion. and the congressional budget office projects that under the president's budget the interest payment will climb to $916 billion in 2020. that exceeds any other part of our budget and is growing faster than any other part of our budget. vastly superior to defense budget. we are on a path that is unsustainable. the only real question is how much, how much will it is between us and the edge of the cliff. the american people understand the situation. they understand that years of unchecked federal spending has squandered our nation's wealth and threaten our children's future.

the american people understand that a leak in washington seems to forget and that is you can only live beyond your means for so long. eventually the bill comes due. fundamentally it is immoral to take from my children their wealth. so, so we spent unearned wealth today. there are other problems. considering the housing bubble, for years congress delayed action to address ready and favorite of federal reserve was asleep at the switch and fail to sound the alarm. then one day the bubble burst and the whole world changed. no one knows exactly what will happen if we continue our spending on the current course, but we must not find out. a recent piece in the "washington times" describing some of the works of potential consequences and, we need to be more specific about what the

consequences will be. he said quote, one day the treasury will hold an auction and it won't be buyers. the federal reserve will step in as a buyer of last resort. conjuring money from the ether, by bonds. the injection of massive liquidity into the financial system will trigger fears of hyperinflation caused the dollar to plunge and interest rates to rise if the resources of the european union and international monetary fund our stretch to rescue the finances of tiny greece and ireland. the united states will not only be too big to fail, but too big to bailout. absent the emergency action by the government, the economy will plunge into a depression roughly three times more acute than the recession we just experienced. i don't know if it would happen like that, but parents also had an editorial by an experienced wall street of 45 years warning of a hyperinflationary spiral.

the writer explained that while the federal reserve could monetize the debt, historically they quote breakpoint occurs when a government borrows an amount equal to 40% of its expenditures for an extended -- extended period of time. in a recent interview, chairman bernanke, you said you were 100% confident the fed could prevent such inflation, but i'm not sure the masses of the universe, you being maybe the master master, how confident you can be about that. been wrong before. and while we can debate just how great an imminent the risk is, there is no debating what the american people have declared in poll after poll. we are on the wrong track. but where is the leadership from our administration? just last december the president would only agree to maintain current tax rates if congress agreed to new spending, all

borrowed, that would add another $250 billion. instead of slowing down, president obama accelerated. but simply easing off the pedal won't solve the problem. when you are driving toward a cliff at 90 miles an hour, you can't just slow down to 60. you need to hit the brakes and steer on to the right road. for too long congress, washington compromise, has changed only the pace and not the direction that we are going. last november the american people said enough. that's precisely what they said, i believe. they sent congress a new freshman class with a clear set of instructions. those instructions include the budget that changes our trajectory and genuinely reduces the size, cost, and burden of government. we can learn from those who

aren't setting a strong example. in new jersey governor chris christie has a plan to close his state funding gap without raising taxes. in britain, the new conservative government has taken strong action and has a plan to reduce the deficit from 10 to 4% of gdp in just four years. as britain's chancellor of the exchequer said, it's a hard road, but it leads to a better future. yet some would argue that reducing government spending, even a small amount, will reduce the quality of our life, but the surest way to lower the quality of life in america is to continue on our current course. spending without restraint, crushing private enterprise, and mortgaging the inheritance of our children. the challenges ahead may be difficult, but the choices we face are not. we need to limit government,

control spending and create an environment where the free market can thrive and flourish it's a roadmap our founders laid out more than two centuries ago. there's no doubt it will work again. america's progress is not a thing of the past. we can do this. to achieve this progress we can no longer compromise our nation's founding principles. instead we must fight for, and in so doing hope to find common grounds in doing so. chairman bernanke, i look forward to discussing these and other issues with you today. i look forward to getting your thoughts on how you and the administration, you're working together, with the plan for strengthening our future. thank you, mr. chairman,. >> thank you so much, senator sessions. i just want to say i welcome your analysis. we may not agree on every solution. i think the one thing we are

agreed on is that we are on an unsustainable course, and we've got an obligation. we've got a very specific, serious and somber obligation to come up with a plan and to do it sooner rather than later. and i look very much forward to working with you on that. >> thank you. i value those comments. >> thank you that you so much for coming. i want to tell the committee that chairman bernanke is also offered to come up here in a closed session with committee members to discuss what he sees with respect to the economy. we very much welcome you being here as our first witness as we embark on the challenge of putting together a budget for this year and succeeding years. welcome. >> thank you. thank you chairman conrad, senator sessions and other members of the committee. i want to thank you for this opportunity to offer my views on current economic conditions, recent monetary policy ask, and issues related to the federal

budget. the economic recovery that began a year and half ago is continuing, although to date at a pace that has been insufficient to reduce the rate of unemployment significantly. the initial stages of the recovery, the second half of 2009 in early 2010, were largely attributable to the stabilization of the financial system, expansionary monetary fiscal policies and a powerful inventory cycle. gross -- growth slowed some this past spring as it went and its european sovereign debt problems lead to increased volatility in financial markets. more recently however we've seen increased evidence a self-sustaining recovery in consumer and business spending may be taking hold. in particular real consumer spending rose at an annual rate of 2.5% in the third quarter of 2010, and at able indicator suggested it likely expanded at a somewhat faster pace in the fourth quarter. business investment and new equipment and software has grown

robustly in recent quarters albeit from a surely low level. as firms replace aging equipment and made investments that had been delayed during the downturn. however, the housing sector remains depressed as the opening of vacant houses continue to weigh heavily on both home prices and construction, and non-residential construction is also quite week. over all the pace of economic recovery seems likely to be my resolve or in 2011 than it was in 2010. although recent indicators of spending and production have generally been encouraging, conditions in the labor market have improved only modestly at best. after the loss of nearly a .5 million jobs in 2008-2009, private payrolls expanded at an average of only about 100,000 per month in 2010. of pace barely enough to accommodate the normal increase in the labor force and, therefore, insufficient to materially reduce the unemployment rate. on a more positive note a number

of indicators of job openings and hiring plans have looked stronger in recent months and initial claims for unemployment insurance declined through november and december. notwithstanding these hopeful signs, the output growth is likely to be moderate in the next few quarters and employers reportedly still reluctant to add to payrolls. considerable time likely will be required before the unemployment rate is returned to a more normal level. persistently high unemployment by dampening household income in confidence could threaten the strength of sustainability of the recovery. moreover, roughly 40% of the unemployed have been out of work for six months or more. long-term unemployment not only opposes the exceptional hardships on the jobless and their families, but also erodes the skills of those workers and may inflict lasting damage on the employment and earnings prospects. recent data show consumer price inflation continued to trend

downward. the 12 months ending in november prices for personal consumption expenditures rose 1.0%. and inflation excluding the relatively volatile food and components which tends to be a better gauge of underlying inflation trends was only 0.8%, down from 1.7% a year earlier from about 2.5% in 2007, the year before the recession began. the downward trend in inflation over the past two years is no surprise given the low rates of resource utilization that has prevailed over that time. indeed as a result of the weak job market, wage growth has slowed along with inflation. over the 12 months ending in november average hourly earnings have risen only 1.6%. despite the decline in inflation, expectations have remained stable. for example, the rate of inflation households expect over the next five to 10 years has measured by the thomson reuters university of michigan surveyed

of consumers has remained at a narrow range over the past few years. with inflation expectations stable, those levels of resource utilization expected to remain low, inflation is likely to be subdued for some time. although it is likely economic growth will pick up this year and the unemployment rate will decline somewhat, progress toward the federal reserve statutory objectives of maximum employment and stable prices is expected to remain slow. the projections submitted by the adult market committee or of all in see, showed that notwithstanding growth in 2011 and 2012, most participants expect the unemployment rate to be close to 8% two years from now. at this rate of improvement they could take four to five more years for the job market to normalize fully. fomc participants also predicted inflation to be at historically low levels for some time. very low rates of inflation raised several concerns.

first very low inflation increases the risk that new adverse shocks pushed the economy into deflation. that is, a situation involving ongoing declines in crisis. experience showed deflation induced by economic slack can lead to extended periods of poor economic performance. indeed, even a significant proceeds risk of deflation may lead firms to be more cautious about investment and hiring. second, with short-term nominal interest rates already close to zero, declines in actual and expected inflation increase respectfully, both the real cost of certain existing debt and the expected real cost of new borrowing. by raising effective debt burdens and by inhibiting new household spending and business investment, higher real borrowing costs create a further drag on growth. finally it is important to recognize that carries a very low inflation generally involve very slow growth in nominal wages of incomes as well as in

prices. i have already alluded to the recent deceleration in average hourly earnings. in circumstances like those we face now, very low inflation or deflation does not necessarily imply any increase in household purchasing power. rather because of the associated deterioration of economic performance, very low inflation or deflation, arising from economic slack is generally lead to reductions rather than gains of living standards. in a situation which unemployment is high, expected great to remain so and inflation is unusually low, that fomc would normally respond by reducing its target for the federal funds rate. however the federal reserve target for the federal funds rate has been close to zero since december 2008 leading essentially no scope for further reductions. consequently for the past two years that fomc has been using alternative tools to provide additional monetary accommodation. notably between december 2008 and march 2010 that fomc

purchased about $1.7 trillion in longer-term treasury and agency backed securities in the open market. the proceeds of these purchases ultimately find a way to the banking system with a result of the depository institutions to hold a high level of reserve balances with the federal reserve. although longer-term securities purchasers are different tool for conducting monetary policy than the more familiar approach of managing the overnight interest rate, the goals and transmission mechanisms of the two approaches are similar. conventional monetary policy works by changing market expectations for the future path of short-term interest rates which in turn influences the current level of longer-term interest rates and other financial conditions. these changes in financial conditions and affect household and business spending. by contrast security purchases by the federal reserve put downward pressure direct on longer-term interest rates by reducing the longer-term securities held by private investors.

these actions affect private sector spending in the same channels as conventional monetary policy. in particular the federal reserve earlier program of asset purchases appeared to be successful in influencing longer-term interest rates, raising the prices of equities and other assets, and improving conditions more broadly. thereby helping stabilizing the economy and support the recovery. in light of this expense and with the economic outlook still unsatisfactory, late last summer the fomc began to signal to financial markets it was considering providing additional monetary policy accommodation by conducting further asset purchases. at its meeting in early november the appleton city formally announce its intention to purchase an additional $600 billion in treasury securities by the end of the second quarter of 2011, or about one-third the fight of securities purchased in earlier programs. the fomc also maintained its policy adopted at its august meeting of reinvesting principal received on the federal

reserve's holdings of securities. that fomc stated it will review its asset purchase program regularly invited income information and will adjust the program as needed to meet its objectives. importantly the committee remains unwavering passion and we fully committed to price stability any particular to maintaining inflation at a level consistent with the federal reserve's mandate for the congress. in that regard it bears emphasizing the federal reserve has all the tools it needs to ensure that he'll be able to smoothly and effectively exit from this program at the appropriate time. importantly the federal reserve's ability to pay interest on reserve balances held in federal reserve banks will allow it to put upward pressure on short-term market interest rates and dust tight monetary policy we needed can't even if bank reserves remain high. moreover, the fed has invested effort into developing methods to drain or immobilize bank reserves as needed to facilitate the schools -- when conditions

warrant. if necessary the committee could also tightened policy by redeeming or selling securities on the open market. as i met him before the budget committee is worth emphasizing defense purchases of longer-term security are not comparable to ordinary government spending. in executing these transactions the federal reserve requires financial assets, not goods and services. ultimately at the appropriate time the federal reserve will normalize a balance sheet by selling these assets back into the market, or by allowing them to mature. in the interim the interest of the federal reserve earns from the securities holdings as to the feds assistance to the treasury. in 2009, 2010, those remittances totaled about $120 billion. fiscal policymakers also face a challenging environment. our nation's fiscal position is deteriorated since the onset of the financial crisis and recession. to a significant extent this

deterioration is the result of the effects of the weak economy, along with the actions that were taken to these through sessions of steady financial markets but in the planning for the near-term, fiscal policymakers will need to continue to take into account the low level of economic activity and the still fragile nature of the economic recovery. however, in an important part of the federal budget deficit appears to be structural rather than cyclical. that is, the deficit is expected to be unsustainably elevated even after economic conditions have returned to normal. for example, under the cbo's so-called alternative fiscal scenario, which assumes that most of the tax cuts enacted in 2001 and 2003 on a permanent and that discretion as spending rises at the same rate as the gdp, the deficit is projected to fall from its current level of about 9% of gdp to 5% of gdp by 2015. rise to about 6.5 a set of gdp by the end of the decade.

in subsequent years the budget outlook is projected to deteriorate even more rapidly as the aging of the population and continued growth in health spending. under this scenario federal debt held by the public is projected to reach 185% of the gdp by 2035. up from about 60% at the end of fiscal year 2010. the cbo projections by design and ignore the adverse effects of such high debt and deficits would likely have on our economy. but if government debt and deficits were to grow at the pace and vision in this scenario, the economic and financial effects would be severe. diminishing confidence in the part of investors and deficits will be brought under control would likely lead to sharply rising interest rates on government debt and potentially to broader financial turmoil. moreover, high rates of government borrowing would drain

funds with adverse long run affects the u.s. output incomes and standards of living. it is widely understood that the federal government is on unsustainable fiscal path, yet as a nation we have done little to address this critical threat to our economy. doing nothing will not be an option. the longer we wait to act, the greater the risks and the more wrenching the inevitable changes to the budget will be. by contrast the prompt adoption of a credible program to reduce future deficits would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence. plans recently put forward by the president national commission on fiscal responsibility and reform, and other prominent groups, provide useful starting point for a much-needed national conversation about our medium and long-term fiscal situation. although these are his proposals differ on many details, each

gives a sobering perspective on the size of the problem, and offers some potential solutions. of course economic growth is affected not on by the levels of spending but also by the composition and structure. i hope that in addressing our long-term fiscal challenges, the congress will seek reforms for the government tax policies and spending priorities that serve it on to reduce the deficit, but also to enhance the long-term growth potential of our economy. for example, by encouraging investment in visit passion in fiscal and human capital, by providing necessary infrastructure and by reducing disincentives to work into safe. we cannot grow out of our fiscal imbalances, but a more productive economy would ease the trade-offs we face. thank you, mr. chairman. senator sessions. i look forward to taking a question. >> thank you for your testimony. i want to go to your final point. that is the budget committee. we have of our colleagues, and

the country to propose a fiscal policy going forward. but i hear you saying is it is quickly important that we adopt a credible plan, longer-term plan to deal with our deficits and debt. is that an accurate understanding of what you're saying to us? >> that's correct, mr. chairman. our fiscal issues are very long-term in nature. they increase the difficulties increase over time. merely addressing this your spinning is not going to solve the problem. we need to develop a plan, an incredible player, won the markets will accept as plausible to address the longer-term structural deficits that we face. >> the fiscal commission proposed a plan that would reduce the debt over time by $4 trillion, which was stabilize the debt in the short term. but importantly bring the debt down as a share of the economy

to roughly publicly held debt to 30% of gdp. that's over an extended period of time. is that about the magnitude, besides a plan that is necessary to? >> senator, no one knows exactly what the desirable debt-to-gdp ratio is in the long run. you mentioned a 90% number as an upper level of comfort. i think in the near term i think we need to focus on stabilizing the debt-to-gdp ratio. under the alternate scenario of the cbo, it just rises indefinitely and that certainly is not sustainable. if we could achieve in the next decade, two or 3% reduction, that would be sufficient to bring the primary deficit close to zero and was stabilize over the next decade. we need additional steps after that. i think stability is the first up, bring it down as a bonus if we can do that.

>> that was really the conclusion of the commission. the conclusion of the commission was, job one is to stabilize the debt. we talk about these different measures of debt. publicly held debt is currently roughly 60%. the gross debt is currently about 90%. and most of the advice to the commission was you've got to stabilize it, publicly held debt at 60%, gross debt at 90%. but over time you really need to bring it down. you shouldn't stabilize it and consider that you finish the job. because you'd need to have a margin to deal with future shocks. is that your judgment as well? >> yes, mr. chairman, but stabilize would be a very important first step. >> job one, stabilize. second question is the timing of imposing the tough choices that need to be made here on both the

spending side of equation and the commission proposed roughly to point to $2 trillion of spending cuts, propose nearly $1 trillion of new revenue. the rest of the savings was savings of interest. in terms of when you pet it that is a critical question. the commission's conclusion was you ought not to take the really tough steps that need to be taken for the next several years. you need to begin picking a to a drop -- you need to adopt a plan to cut the tough medicine needs to wait until the economy is on stronger ground. what would your recommendation be to us? >> mr. chairman, i think the issue is credibility. if we can come is not sufficient to say we are not doing anything now because of the recession. we will do something later.

not specify what that is. i think if we could adopt a credible plan that is specific enough and credible enough, to address the long run situation, that would be the most positive thing that we could do. and in doing so we could get really all the benefits without having to take actions that would endanger the very near-term recovery, which is still somewhat fragile. >> that was very much the conclusion of the commission. it's not enough to say we will do something in the sweet bye and bye. you've got to adopt a plan. you've got to put in place. you've got to put in place legislatively so people know, yeah, we are going to cut spending. we are going to improve the revenue base. we are going to shave savings of interest costs. and it's got to be credibly scored. it's got to be real. but it shouldn't, shouldn't have the bite, a curve too soon or you endanger this fragile

recovery. you made another set of comments i've that was very important. and that was the composition of the spending reductions, the composition of the revenue is also critically important for future economic growth. you are saying look, you have to pay attention to human capital, education. you've got to pay attention to infrastructure because that improves the economic competitive position of the united states. but when you are imposing the spending cuts you got to go after things that are superfluous. and goodness knows as we look across federal spending there are places that we are not doing things that enhance economic growth. there are things that constitute waste. although the idea that just cutting waste audit abuse is going to solve this problem is, i wish it were the case, but it's necessary but not sufficient. on the revenue side, where the

best things we could do is broaden the tax base, lending some of the tax expenditures. but simultaneously reducing rates to make america more competitive. is that what you had in mind when you talk about paying attention to the composition of the changes that are made? >> yes, mr. chairman. on the first point, the national income accounts don't distinguish between government consumption and investment very sharply. there is a technical distinction. we need to think about making investments for the future as opposed to simply spending our seed corn on current needs. so thinking about government programs, we should ask the question will this provide benefits in the future, provide more productive competitive economy in the future. on the attack site i don't think it's controversial among economists that rising rates combined with multiplication of extension, productions, credits and so on leads to a tax cut which is very complex and can distort economic decisions. i think all of the major deficit

reduction committees have taken the opportunity to talk about the need to lower rates but a low, close the loophole so as not lose revenue. so i think that is something i hope the congress will talk about. if not at all, to address the long-term deficit issues but also to think about making our tax code and our spending priorities more friendly. >> i will take, there's nobody that can participate in this process that didn't include this tax system that we have is just completely outdated. you know, it does not take account of the world that we live in today. the other conclusion of the commission was that you've got to everything on the table. spending, revenue, and every part of federal spending has to be dealt with.

and you know, even defense. one of the most startling, i received my colleagues, one of the most startling pieces of information that came to the commission was 51% of the federal workforce, is the department of defense. that does not count contractors. when we asked the defense analysts who came before the commission how many contractors does the department of defense have, they told us they couldn't tell us. not because it was secret. it's because they did not know. when we asked them what was the range. they said between one and 9 million. that's a pretty broad range. so we've got issues throughout the federal government that we will have to address. i very much appreciate the good advice that you've given us. senator sessions. >> by the way, we're going with eight minute rounds. a little bit longer than usual because of the numbers who are

here. and i've tried to respect that in my time, and help others as well. >> thank you, mr. chairman. first, mr. bernanke, let me pursue the question that revolves around your confidence about being able to prevent inflation. you note that you remain unwavering committed to price stability in your statement. and in particular maintain inflation at a level consistent with the federal reserve's mandate. in that regard it bears emphasizing that the federal reserve is all the tool it needs to ensure that it will be smoothly and effectively exit from this program at the appropriate time. well, forgive me if i am less confident. that you know precisely when and how to exit. and if you can do so smoothly. and i noted that the bond market

and the comment seems almost in consensus view now around wall street and investors. bonds are bad investment, that presumably because they can affect a realistic reality of an increase in interest rates in the future, as a result of quantitative easing, deficit and the like. can you assure us? it looks to me like, wouldn't you agree, that investors are getting nervous already. >> senator, first on your earlier comment about the 100% certainty, what i was talking about there wasn't that we would know exactly with certainty the right moment. what i was trying to convey was i thought i was certain that we have the tools we need. it's always the case that we are reversing monetary policy in a period of growth that it's a

matter of judgment you can be too early, too late. that is to for normal monetary policy as those unusual monetary policy. so i'm not try to claim our missions. and, of course, it does possible that we'll be either a little too slow or a little too quick, and we would do are very, very best to move at the right time. as far as inflation is concerned though, again and the actual inflation rate is at essentially a postwar low. and inflation expectations look very stable. >> what about ,-comthem is their difference between interest rates on the federal debt and inflation? >> the interest rates on the federal debt are also quite low, of course. in the index bond market the breakeven inflation rates are about what you think they want to be if people expect that over the next five to 10 years the fed will keep inflation at about 2% which is about where we think we got to be aiming. we will pay close attention to the inflation situation, and we take that very, very seriously.

>> but tell me just, trying to be, bring a little common sense to an honest question to you, it does seem that the bond market is nervous. it does seem to me that the quantitative easing plan continued and they continue again. and that the deficit continues. at an unsustainable rate. why shouldn't people be worried that eventually there could be a tipping point reached in a rather dramatic surge in our interest rates would occur? >> on the monetary policy side, as i said we are in a situation similar to where we always are, which is we need to find the right moment to begin tightening. you mentioned the bond market is expected short-term rates to rise in the future. that would be corresponding to the fed tightening and reversing the easy money policies. on terms of fiscal side, there i agree with you.

i think that if congress and the administration don't find a credible plan for controlling new long-term structural deficits, there could be very serious problems in financial markets, and inflation. that's the history of many, many situations in the past. so i do very much urge this committee to look forward strong and credible actions to control the federal debt. if that is done, then i don't think that inflation will be a long-term problem and what we are trying to do i think in the short term is to create an appropriate balance between the risks of inflation and the risks of deflation which have not yet gone. >> with regard to unemployment i think you made clear in your statement, but it's important for us to understand and even though the rate dropped three tens, four-tenths, 9.4, the

100,000 jobs, 103,000 jobs added is really sort of treading water about what you have to have to just maintain the current employment rate, is that not right, and that's not really a number that we can celebrate today? >> it's about what we expected, but as you say it's not a number that is going to come if we continue at this pace we will not see sustained decline in the unemployment rate. >> my predictions were as much as 275,000 jobs being added. >> i was serving on our prediction and certainly not most wall street predictions. there was a number that came out of so-called adp number which was very high. but that is only loosely connected with the actual numb number. >> i think the american people are deeply concerned about we -- about where we're headed

economically. their jobs are at stake. i believe that's a legitimate concern. to what extent do you have, a plan, and to what extent do you have does the administration, the president have a plan that sees into the future and it says we're going to do a b. c. and d., and those things will bring us out of this? and is it written, can we see at? >> center, first of all, -- senator, first of all it was concerned about the failure of unemployment to decline that motivated us back in august and september to adopt more monetary accommodation. in my view is we've already had some benefits from that. we have seen some improvements in the outlook. we've seen some improvements in the financial markets. that is part of what we're trying to do is try to keep this recovery going. in addition of course we are working very hard and our role as a regular to try to improve the availability of credit to

small businesses and to other borrowers. senator warner i know is interested in that issue. we are working very hard. that's our top priority. >> well, we've got a changeover in the white house. mr. summers is gone. peter orszag left. we've got a new chief of staff. i hear today. but i don't sense anywhere in our government that we have the kind of clarity of leadership we had under mr. volcker, when we had a crisis in the late '70s and early '80s your one of the fed members said we knew we were doing the right thing. they were protesting mr. volcker. some called for his resignation. we had a plan and we were staying with it. the american people have

confidence that you and the administration on the same page. we have a plan other than reacting ever -- every month or two to some new changing condition. >> the federal reserve is independent of the administration. we tried to coordinate with the administration, tried to courtney with congress. the federal reserve is independent. so the administrations plan and the congress this plan, those are not our province. that's what the administration and congress to decide. in our case we do have a plan, and i have tremendous respect for chairman volcker. one of the things he did as you say is he did what he thought was right even though there is a lot of criticism. i think that's the importance of independent monetary policy is eric at the federal reserve we recognize that there are different views, but we are trying to do the best thing we can for the american economy. that's the beauty of having an independent central bank's. thank you much.

mr. volcker, history records i think was correct in his plan. i hope history will record the same for your leadership. >> thanks, senator sessions. let me just indicate that on our side, senator wyden, senator manchin, senator stabenow, senator merkley. republican cited senator enzi, senator corker. senator wyden. >> thank you, mr. chairman. i too want to welcome the senator sessions as our ranking minority member. he is someone i greatly enjoyed working with, respect very much. i do want to note for the record that i don't believe the auburn tigers have a realistic chance of keeping up with the university of oregon's fast-moving, innovative offense in the championship game at but we will say that for another discussion. i just want to welcome my good friend. >> you're correct in that i would be pleased to wear that

tie you have on, for a few days perhaps. >> we have an agreement and i will reciprocate. senator conrad, thank you very much. thank you we are so glad to have you here. and i especially, because you and i share similar views, this big idea for economic growth in our country is fundamental tax reform, where you go in there and clean out this job killing, thoroughly discredited mess. and you address that i thought very well on 60 minutes discussion that you had back in december. here's my first question. it was clear at the end of the year that you had to take some steps with respect to the tax code in the short term. so that people wouldn't be clobbered at the beginning of the year, the middle-class folks, small businesses and

others. but what i'm concerned about is when you look at the overall structure of what was done in december, it's contributed once again to tax uncertainty. all of the two-year provisions, the one year provisions, phase ends, phaseouts. as you know, the tax code has tripled in just the number of words in the last decade, and that has been fueled once again by what was done in december. i want to make sure for the record is clear, that when you're talking about long-term economic growth, you want a different tax model than what the congress passed in december. you don't want to see more provisions, you know, added, and more exemptions, reductions. you think by and large we ought to be draining the swamp,

cleaning out a lot of the clutter, hold down some rates, keep and provide. you want a different model than what was passed in the sender for the long-term -- in december for the long-term. is that correct? >> yes. that was understandable. but i hope that the congress will think hard about what long run tax structure will be most beneficial in lowering rates and closing the holes as i think the best approach. >> the second question, there has been considerable discussion in the last few days, really the last week or so, about the idea of instead of the kind of tax reform you and i want, comprehensive reform, just going out and changing the corporate tax rate, i think that would be a big mistake. the reason why is that most

businesses in america, probably in the vicinity of 8%, pay taxes essentially of individuals. subchapter s., sole proprietors, partnerships, a whole host of firms who aren't in effect see corporations. isn't there a real danger if you go in and just make changes on the corporate side to have further distortions, further complications, and end up with yet more uncertainty than you would have if you went in and made a comprehensive overhaul, recognizing the connection between the individual provision of code in the business provision? >> as you know better than me or anyone, there are many interactions between the two coats including for example, the double taxation of dividends and

many other issues. .. portions of the code to just split one as some have been discussing i think could once again create a whole set of additional distortions in the american economy.

and i appreciate what you're saying, mr. chairman. one other points with respect to tax reform that i think that you have touched on a past but it would be important to have on the record. today it's very clear that people loathe the internal revenue system. i mean, it is just up there at the top of all of the federal agencies and functions of federal government. people are furious about. it seems to me if you got to the point where you had a one-page 1040 form, senator greg and i have that in our bill, as you know, chairman volcker has all but proposed that -- it was in the bush proposal for pete's sakes. you know, years and years ago, wouldn't having a one-page 1040 form where most people could complete taxes themselves, other than spending their whole spring on turbo tax and the like,

wouldn't that in and of itself be a public good in terms of simplicity and understanding and making people feel more confident that the american economy and the underpinning of the american economy were sound? >> well, as a general matter, simplicity besides being more -- less likely to be distortionary has compliance of lower compliance costs which are quite significant and less need for the irs and for accountants to adjudicate complex provisions in the code. so certainly simplicity is to be desired, and i think it would -- it would make people more comfortable with the tax code because it would be less of a burden and because they would feel more comfortable that there weren't all kinds of loopholes that other people were taking advantage of. >> one more question not from an

economic standpoint but looking back over the last quarter century on this is that a mistake in '86 was to know have some provisions to make it tougher to unravel fundamental tax reform when you got -- in other words, over the last 25 years after it was enacted, pretty much a few weeks later, the ink was dry on the bill and everybody went back to normal as usual. from an economic standpoint how useful would it be when the tax code is overhauled this time so there's more fairness for the middle class and take these steps to be globally competitive? how important from an economic standpoint is it to make it tougher to unravel it as soon as you get to reform? >> well, senator, as you say there are political and probably constitutional issues probably involved but everything else being equal, greater clarity and certainty is obviously

beneficial. and to the extent that you can create more certainty about whether the tax code is going to be over a number of years, that would be helpful. >> mr. chairman, thank you. and i look forward to following up with you on these matters. and the fact that you've been outspoken on this has really given a boost to reformers. and we are very appreciative. thank you, mr. chairman. >> thank you. senator enzi? >> thank you, mr. chairman and let me follow on what the senator said. our nation's fiscal policy is in at that timers. our projected level of federal spending growth is unsustainable. our tax code is a mess. the only constant is that the federal budget deficit is large and likely to remain that way. to what extent does the uncertainty that comes with these problems undermine the economic growth? >> it's hard to make a quantative judgment, senator, but i'm sure it's a negative. i do think that addressing our

long-term structural budget deficits would not only reduce the risks we face in the future but we probably will have near term benefits in terms of possibly of lower interest rates but also in terms of greater confidence and certainty. as you say, as it stands, the one thing we know about are long-term tax and spending commitments is that they're not feasible. they can't happen. they're not sustainable. so we don't know -- how things are going to change. so, yes, the more clarity we can achieve, the better off we'll be. >> thank you. i was cosponsor of the conrad-gregg deficit bill and was pleased that we got one one way or the other and that sheds light on what needs to be done by congress. i'm really concerned about the rapidly rising debt to gdp ratios. i've been watching over what's been happening in europe. they've enacted some programs to

rein in government spending. so they didn't act enough quickly and had to be bailed out by their neighbors. during the hearing before the house budget in june, representative henserling was asking you whether the united states was nearing a similar point given our comparable debt to gdp ratio and you responded that you don't exactly have know how much breathing space we have. rather than enact austerity cuts as the europeans have done, we've seen our gross national debt increase almost a trillion dollars since june. can you give us any kind of occasion how much breathing room we do have if we continue on this course before we reach that tipping point? anything more exact since june? >> you know, i just think it's inherently impossible to pinpoint the exact date or the exact level of debt that would create a crisis or a sharp increase in interest rates. that being said, it would be the better part of valor to take

action now to make sure that we don't -- we don't get too close to that point. i don't know what the number is, but i what do know and the cbo's projection shows this very clearly that absent any action, the debt to gdp ratio is going to be not only rising but rising at an increasing pace. it will be heading straight to heaven basically. and that's certainly not going to happen. that certainly -- that can't occur. so i don't know what point exactly but that point will come if we don't take appropriate habitation >> i also appreciate your meeting with some other groups, senator warner and chambliss started a group to review these things. and i appreciated your comments about the difference between our debt to gdp ratio and the japanese one where they have a lot of savings and we don't. just so many things that need to be taken into consideration. i know the fed took quantative

easing because of the fear of deflation yet other than housing prices americans are experiencing inflation in virtually every other major household outlay, i believe it when it comes to groceries and gasoline. america's economy runs to a large degree on motor fuel. some analysts predict gasoline prices are reach $4 a gallon this summer. won't this risk choking off the economic recovery? >> well, first, just the facts are that inflation is 1% including food and fuel and taking into accounting everything buy is quite low. now it's true people are he sensitive to the price of gasoline and we're watching that very carefully. i don't think that quality tatetive easing monetary policy is the main reason that oil prices are up in the last few months. the dollar after all has been quite stable and oil prices are up in essentially all

currencies. i think the main reason oil prices is up. the demand for energy from china and other fast-growing emerging market economies. that being said, we're watching it very carefully because as you point out, higher gas prices are like a tax on families. and if they get too high, then that will, in fact, be a negative for growth as well as for inflation. we'll pay very close attention to both energy prices and other commodity prices as well. >> there is discussion among policymakers about removing the federal reserves dual mandate of a stable monetary policy and full employment. some have suggested that it makes sense to remove your mandate for full employment so that you can focus only on monetary policy. do you have an opinion about this matter? >> senator, we're not seeking any change. we think the current mandate is workable. that being said, i think it's

entirely appropriate for the senate and the congress to consider what mandate they want to set. they are after all central banks around the world that do focuses around the world on price stability and whatever the decision congress makes, of course, we will honor that decision and pursue that mandate. >> thank you. i don't have any further questions. >> thank you so much, senator enzi. senator warner? >> thank you, mr. chairman. and i thank you for holding this hearing this morning. chairman bernanke, let me first of all acknowledge what my colleague senator enzi has already said and thank you for being willing to meet with a growing bipartisan group of senators, senator chambliss and i have been working along with senator wyden and others saying we need move forward on a real plan.

and compliments to senator conrad and gregg and others. and while imperfect and i particularly appreciate your comments and your testimony about the president's national commission on fiscal responsibility and reform, that we ought to go ahead and take that work product of the last year and use that as a starting point because i think it's both you and senator sessions have said in your testimonies that simply talking about deficit reduction doesn't get us any place. we got to have a real plan to work against. and it is the intention of senator chambliss and i to take that work and put it into legislative language. and introduce it. and i think again a point that both senator conrad and senator wyden have made is that if we are going to take on this issue, it is going to require dramatic cuts in government spending but it is also going to require

meaningful tax reform and i think again a lot of the earlier attention on the commission's work focused on the deficit reduction piece. it did not focus as much on the tax reform piece which both lowered corporate rates and individual rates actually add on the individual side led more progressivity and i think it's a good working document and i look forward to working with colleagues on both sides of the aisle to see if we can get as many cosponsors as possible to at least move forward on this discussion and it is my hope that we could actually see a plan put forward this year working off of the president's commission as i'm sure it will be amended. and actually get it voted on. because the way i hear you say -- now, i can -- you would never be as impolite as to use these terms so let me use these terms.

but you're basically saying to us, the congress and the policymakers, we've got to walk and chew gum at the same time so that we've got to continue to do short-term stimulus, you at the fed have done that through your quantative easing policies and we in certain tax policies that were taken in december. both in terms of short-term stimulus but that short-term stimulus then has to be morphed into long-term deficit reduction. going back to some of chairman conrad's earlier questions, you know, what should we look at as the metric or other indicators of when we should kind of ease off on the stimulus and ramp up the deficit reduction piece?

should that be based on a timeline? i think the president's commission, chairman conrad, you had a lot of your actions starting to click in about 2012, 2013, 2014. should it be on a kind of "dateline" process? should it be based on when growth hits at a certain level, unemployment falls to a certain level? what should be the indicators that even if we get a plan in place, that would trigger the kind of hard choices around deficit reduction that we're looking at? >> senator, first let me say that i enjoyed meeting with your group. you and senator chambliss and i commend you for the extra work you're doing on this issue. i think there's an important tradeoff. we need to -- we, the american people, the congress needs to demonstrate a credible commitment to solving the long-term fiscal problems.

the stronger and more credible the plan is that is put forward the less need there'll be to take short-term cuts in order to show your seriousness so a strong long-term plan that kicks in over a period of time will make it less necessary to take actions in the short term that would be counterproductive from the point of view of recovery. so that's why it's so important to be -- to develop a strong plan. so that's the tradeoff. the stronger the plan, the less near term down payment you have to make. >> and can i just interrupt for a second. and based upon your testimony today, by referencing the national commission on fiscal responsibility and reform, by referencing that effort, is that an endorsement that that would be viewed in your mind as a strong plan? >> yes. and, for example, it has the

feature that i believe that by 2015, there's a stabilization -- the debt to gdp ratio which requires, i think, about a 2 to 3 percentage point of gdp cut in the deficit starting in a couple of years through the rest of the decade. in terms of criteria, i think there's no magic number but what we need to see is a sense of momentum. a sense that there's enough forward movement and strength in the recovery that we can feel confident that it will continue and will not be knocked off-course by two precipitous retrenchment. >> i know you don't want to give me a set indicator, but should that -- should those indicators be time, growth rate, unemployment rate, combination of all of those -- what should be our markers if we pass this plan, whether the commission's

plan or a like-kind serious plan there's got to be some markers when we shift course from stimulative activities to serious deficit reduction? >> all those factors matter but i think a sustained growth rate above sort of the long-term average would be an indication that the recovery is proceeding and has some momentum. but again, the stronger and more credible the forward-looking plan, the less need there'll be to make short short-term adjustments that might risk the recovery. >> let me in my last moment follow up on senator enzi's comments. and i think he was looking for a percentage on when the markets will say no mas in terms of our

debt to gdp ratio. i guess my feeling is it's not a question of if we are going to do deficit reduction. it's going to happen. it's really only a question of when. and whether we're going to do this on our timetable in a way that is not disruptive to the economy. or whether it is going to be dictated by the markets in terms of their lack of faith in our ability to service our debt over the long term. and so what i guess i would ask you and i know my time has expired, mr. chairman, this will be my last question. you know, we can't predict that to a specific percentage or date certain. but what would be -- or what could be some of the warning signs that we're getting close to that precipice. could it not be some external

international, god forbid, terrorist incident that might put a shock wave across the economy? could it not be another economy in europe getting close to a failing point in an economy that would be larger than, say, ireland or greece? what are some of those warning signals? and would you also say that -- if we start going down this precipice it could happen very quickly once we get to that unforeseen point? >> so in terms of market signals, i think i would look at things like government financing interest rates, long-term bond yields, the dollar. indicators of confidence in the united states. i think it's important to understand, if i may, that nobody doubts the united states has the economic capacity to pay its bills. it's really a question, do we have the political will to do that? and demonstration of the political will, that's what the

markets are watching. is the congress and the public and the administration -- are they able to demonstrate that they are serious and that they have enough willingness to work together to make progress? at the point where confidence is lost in that, you could see a relatively quick deterioration in financial conditions as we saw in some cases in europe. where things change very quickly based on the change in sentiment about the prospects for those economies. >> thank you, mr. chairman. i look forward to working with you and senator sessions and all our colleagues in making sure we don't get to that point. >> we appreciate the effort that you've mounted along with senator chambliss. i just for the record want to point out that the proposal was stable the debt down in 2014 and starts bringing it on a sharp path after that. senator manchin?

>>from my state of west virginia i'm concerned about my state and all the states for the nga. what i would like to know about the future pension liabilities of both corporate and state governments, the recent reports of the financial crisis that many of our states are facing in the very near term future, have you all looked carefully at the possibility of a default on general obligation and municipal bonds by state and local governments and the budget strains that would present to the overall u.s. economy? if we're concerned about the stimulus runs out, june of this year, what happens? and if there's no more stimulus to come, and a federal buildout if you will and they have to work on a balanced budget amendment and they can't meet these long-term obligations,

have you all looked into that or been spending any time on it? >> to some extent, senator, yes. no question state and local governments are under a lot of pressure. they've been cutting spending and employment over the last couple of years. the federal assistance will continue in 2011 but after 2011 it's going to be pretty much zeroed out, i think, and so on the one hand, states are seeing some improvement in tax revenues as there has been some growth. on the other hand, they are going to be losing some of their federal assistance so that the pressure is on state budgets and local municipal budgets are going to continue for a while and that will be a head wind for the overall economy as well as for the individual states. it's also true -- this is more a long-run issue that like the federal government, the state and local governments have some long-term fiscal issues relating primarily both to pensions of

state employees but also to health care promises which in most cases are almost entirely unfunded. so those are long-term obligations that could be as much as collectively as much as $2 trillion for all the states together in the long run. now those long run obligations don't come in the near term some very serious long-term pressures. in terms of the municipal bond market, it currently seems to be functioning reasonably well. liquidity is fine. issuance has been very high including issuance of capital projects. so we're not seeing extraordinary stress in the municipal markets which means investors are still reasonably confident that there won't be defaults on major borrowers and the reason they believe that is most states have rules which put debt repayment and interest

repayment at a very high priority above the locations of the state and local locality. bottom line, the municipal markets, bond markets seems to be doing okay but clearly there's a lot of both near-term and long-term pressure on these governments and it's going to be something that's not going to be going away in the near term. >> another question i have, is that in west virginia, when families have problems whether it's families of single parents, they don't -- they can't really respond and kind of understand what we do here in washington or what government does. they don't sit down and think how much more money can they spend or how much money can they borrow to get themselves out of trouble. they start looking at cutting expenses. what expenses could the federal government cut that would have the longest -- or have the most effect on long-term stability in your recommendation? what should we be cutting? >> well, senator, i should just say first very strongly that these tough decisions about

taxes versus spending and the mix of spending are not mine. and i don't want to inject myself too much but i will say one thing which is just obvious from the arithmetic, which is that going forward, the costs of health-related programs, medicare and medicaid are rising prospectively very quickly. and on current trends, it's, you know, would be at some point between medicare and medicaid and the social security would essentially be what is now the entire budget of the united states. so i do think an important priority for us as a country and for the congress from a fiscal point of view is to think about what we can do it to achieve better cost efficiency in the health care area at the same time that we do all we can to maintain quality and access. so that's clearly an area we need to look at.

that being said, of course, we have military spending, other discretionary spending. we have the tax code the many other things that you will certainly want to look at. >> i know there have been some members of congress who have long advocated for a federal audit on the federal reserve system. would you oppose an independent audit of the federal reserve system? >> the dodd-frank act included an amendment sponsored by senator sanders and others that includes an exhaustive audit of all the financial aspects of the federal reserve. in fact, on december 1st it will be released all the lending programs, financial programs, credit programs that we undertook during the crisis so as far as our finances are concerned, we are an open book. and if there's any area where you or your colleagues are dissatisfied with the information, i'd be happy to

work with you to make sure you get what you need. so in terms of all aspects of our finances and operations, i think it's reasonable for congress to want to have that information. the one area where i have been concerned and this goes back to my earlier comment to senator sessions is that monetary policy independence is very important for the stability of our economy and our financial markets. and where fed audit is really a code for congressional intervention in monetary policy decisions, that is where i would be much less comfortable. >> and finally, is there -- is the federal reserve considering any policy changes that would negatively impact the financial viability of local community banks around the country? >> to the contrary. we are -- have a strong commitment to community banks. and we have, in fact, recently increased our schedule of direct

meetings with the board with representatives of community banks. there's obviously a lot of work to be done to implement dodd-frank and basil iii and other regulation. it's our objective -- i think the intent of both basil iii and the dodd-frank act is to focus on the largest so-called too big to fail banks and to make them too big to fail. that's where our focus is as well that not increase the regulatory burden that small banks play. and small planks bay an incredibly important role as large banks have cut down our that lending and they have in many cases stepped up and proven their worth to the u.s. economy. >> thank you, sir. >> thank you, senator. senator stabenow? >> well, thank you, mr. chairman. and welcome, mr. chairman. mr. chairman, thank you for your thoughtfulness and i think what

you laid out to us both in terms of where we have come from, and what we've done and where we need to go, i think, is very, very important. i feel as a member of this committee now for many, many years, though, that i have a need to make sure that we don't have a revisionist history whenever we're talking about how we got here. i think it's really important if we're not going to -- if we're not going to repeat mistakes that have been made before that got us here, i think it is important to just say once again for the record that when i had the opportunity to come in and serve with you, mr. chairman, the committee members in 2001, we had the biggest surpluses in history of the country. and so we've not always been in this situation and there were a number of decisions made on spending, frankly, without accountability that have gotten where we are. and i would argue that, unfortunately, the spending was -- in the eight years in the previous administration was not

focused on those things that create innovation, to create jobs, to compete in the global economy or focus on opportunity or security for middle class families. instead, it was very much focused on the benefit to a privileged few. and at the time in the last administration we were told deficits didn't matter when we were focusing things that would benefit the privileged few. now after two very, very tough years, very tough years, very slow years, we're turning it around. we've not gotten things back on track. people in michigan are still hurting although it's better but we've got to go a long way to go. my concern is that we're now hearing with the new majority in the house that again deficits only matter when it's things that affect middle class families in terms of opportunity, education, innovation. but that when it comes to the policies that got us in this

mess, of focusing on tax cuts for the privileged few, supply-side economics, hoping they'll trickle down, that doesn't count. and so we saw this week over a trillion dollars exempted from the budget rules. that will add over a trillion dollars in debt if we go forward with that. based on a way of looking at the economy that frankly didn't work and it got us in the last decade in my judgment into the hole that we're in. mr. chairman, i want to ask you about how we get that out of this hole, both short term and long term. and i agree we need a credible plan. and i very strongly share your view we have to be very careful in the short run. it's a very fragile situation. and i don't frankly see how we get out of this, with over 15 million people out of work. i mean, i don't know -- how do we get out of deficit?

if we don't first focus on jobs? one of the things that i'm proudest of is the fact that we didn't give up on american manufacturing two years ago. we didn't give up on the american automobile industry. and this year for the first time since 1999, all three companies are making a profit. they're actually bringing jobs back to this country. and because of our investments and innovation, we are going to go from 2% of the world's battery manufacturing advanced battery to 40%. in the next 40 years. but my question, mr. chairman, relates to the immediate situation for families that are not yet feeling this recovery. and the fact that we have tens of millions of people who are out of work. and frankly when we talk about 2008 budget numbers, i'd like to go back to 2008 jobs numbers and

focus on that to get us out of deficit. but how would you focus on job creation in the short run knowing that we have serious long-term issues that have to be addressed on the deficit, but at the same time, i guess i would like your reaction to the notion that we will not get out of debt if we have over 15 million americans out of work. >> senator, the -- you're absolutely right. that a large part of the deficit we currently have is what economists call a cyclical deficit. it rises because where unemployment is well above a normal level. and we need to address -- what we need to address is the structural component, the part that remains once the economy is back to a more normal level. again, i think that we need to think of fiscal policy as of a

piece. that is we can't think of short run or long run separately. you've got to think about them together. and the more credible and effective our plans are for addressing the long-term structural issues, structural deficits, the more scope we'll have and more flexibility we'll have to allow continued support for the recovery that we need now that the economy remains in a very still weakened and fridge fragile condition. so my advice for what it's worth is again not to focus only in the short term but also think of the long term to combine those two things. you mentioned things like innovation. again, as i talked about in my testimony, the composition and structure of government spending and tax code and so on is also very important. are we doing enough for

innovation? you know, we spent quite a bit of money on that. is it well directed. is it sufficient to keep our leadership position, you know, going forward? so those would be the themes i would note. long term structural deficits that need to be addressed and in doing so would help the short term would give us more flexibility in the short term and think hard what we need to think of longer term growth innovation to help people get better jobs and sustain higher incomes. so it's a tough set of problems and they are very much interconnected. >> well, i very much appreciate your comments and share your feeling that it is about bounds. it is putting in place the long-term plan but also understanding in a global economy we're in transition now as a country. that it's very, very important that we be investing in those

things, opportunity, education, innovation that allow us to move forward in terms of growing the economy. quickly before my time runs out, just one quick question to follow up on small businesses. we passed the small business jobs bill. we've talked about the importance of supporting community banks. i would just ask you, on one hand, we are saying to banks, lend more. regulators are saying, don't lend essentially or tighten up things. it's critical, i think, that other regulators help banks, community banks, take full advantage of the lending initiatives that we've placed into the small business jobs bill and i wonder what actions the federal reserve is doing or can do to help small business? >> senator, as it happens i'm going to be on a panel sponsored by the fdic. i think it's next week with sheila baird and senator warner where we'll be talking about small business credit and talking about all the initiative its that the congress has done,

the federal reserve has done and the other banking agencies have done. but just very briefly, we are very attuned to the need to have an appropriate balance. on the one hand we don't want banks making bad loans. that's how we got in trouble in the first place but on the other hand, credit-worthy borrowers need to have access to credit so that they can hire and they can expand and they can help the economy recover. and so we've been working very hard with the banks and with our examiners to try to get a balanced approach. and i think it's beginning to pay off. there is some improvement, in my view, in the availability of credit and i expect to see more lending this year. so there is -- the terms and standards have begun to ease a bit. so i think there's some progress on that side. we've also -- and i won't take too much of your time but we have also undertaken a series of meetings around the country, more than 40 meetings, where we've met with small businesses,

lenders, examiners, local officials, trade associations and the like and tried to identify technical problems and other issues that have blocked access to credit. and we found some very useful things and we're working -- we're moving forward on those, on the things we learned. >> thank you. thank you, mr. chairman. >> thank you very much, senator stabenow. senator cornyn is recognized for 30 seconds. >> mr. chairman, i can't clear my throat in 30 seconds. [laughter] >> we're doing -- seriously, we're doing 8-minute rounds. >> thank you. >> mr. chairman, thank you very much for your service in what is by all accounts a very challenging job but, of course, we're all volunteers here. and no one is holding a gun to our head and making us do these jobs. we volunteer to do them because we think we can contribute to doing things that are in the best interest of the country. and i appreciate very much your service in an admittedly very challenging job. it strikes me that there are

three events coming up which will really provide an opportunity for congress and the administration to demonstrate its seriousness at dealing with the run-away spending and the unsustainable debt problem that we have. one is the president's budget is going to be due the first monday in february. that will be, i think, one of the first indications perhaps of the president's response to the report of the fiscal commission. and i want to congratulate all of our colleagues who participated on that on a bipartisan basis who i think demonstrated great courage in voting for a plan albeit one that we all could find some differences with, but again, the time for talk is running out and now it's time for action. >> so the first -- it strikes me the first event that will provide the president an opportunity to respond to that in a meaningful way to set out his budget for the next fiscal

year will be the first monday in february or here it may slip by a week or so. the second it strikes me as the debt ceiling vote that's going to be coming up. and there's been a lot of talk and speculation about what might happen, whether there'll be some additional conditions that would be imposed as a -- on voting to extend the debt ceiling, which is obviously a very sensitive and important issue. and then it strikes me that the third sort of watershed that's coming up here that will demonstrate our collective seriousness of dealing with this particularly from a fiscal policy standpoint will be the expiration of a continuing resolution. but i want to ask you specifically about something that senator manchin alluded to briefly on in terms of not just the federal government's problems dealing with its debt but the states and municipalities.

and the analyst who correctly saw the mortgage crisis in 2008 now predicts that 50 to 100 sizeable u.s. cities could default in 2011. she said this could cause hundreds of billions of dollars of municipal bond defaults and warns that next to housing, this is the single most important issue in the united states and certainly the biggest threat to the u.s. economy. and i would note, obviously, many states are in deep fiscal trouble also. and there's the potential -- at least the potential maybe not the probability at least imminently but at least the potential we could see some defaults at the state level. i heard what you said about the mortgage -- the municipal bond market not showing any imminent signs of crisis. but do you agree that this is a very serious issue that needs to be confronted?

>> sorry, senator. i don't have a -- i don't have a forecast about default risk. i think that sounds like a somewhat pessimistic view but something we need to pay close attention to. clearly, a lot of cities are under -- certainly no one can question they are under a lot of financial stress. and it's something we need to pay attention to because it would have some spillover effects into other markets. we don't at this point see anything of that magnitude happening. that being said, i think cities and localities will need to take strong measures to avoid default. default is only at best a short-term solution for local governments because what they find is that it would be very difficult to get back into the market or if they do, they'll

have to pay a higher interest rate. so they would obviously be much in their interest to take the difficult measures to avoid default. so again, as i said earlier, while there's no question there's a lot of stress at state and local governments at this point the municipal market seems to be operating fairly normally but we'll watch that very carefully. >> that's fair enough. let me sort of drill down a little bit because i want to get -- this is a point i want to get to in particular. in 2002, you gave a speech before the national economist club in washington. and you said, quote, and i think this is a fair quote, tell me if it's not -- quote, the fed has the authority to buy foreign government debt as well as domestic government debt. and we know that under the qe2 plan that you are implementing at the fed you are buying u.s. government bonds.

but would that extend to state and local debt, that authority? >> only in a very, very limited way. so first of all, we have no intention of buying foreign debt. that's really a provision to allow us to hold foreign exchange reserves and we're not planning any policy in that direction. >> my answer is obviously really on the state -- >> on the state and local, we have very limited authority there. we do have the authority to buy very short-term municipal debt that is -- within certain categories. so we have very limited ability to buy state, local municipal debt and moreover, the dodd-frank legislation restricts our ability additionally not to lend to any insolvent borrower and not to lend to an individual borrower but only in terms of a broad program. so we have no expectation or intention to get involved in

state and local finance. i think to the extent that there's anyone to look at that, it would have to be congress to look at that. >> well, i don't have to tell you how a request for a bailout for a state or a municipality would be received here in washington. so let me ask you, under chapter 9 of the bankruptcy code, a municipality could go through a bankruptcy proceeding. but right now there is no provision in the bankruptcy code as i understand for a state to go through a bankruptcy-like proceeding, a chapter 11 where, of course, the secured creditors, the bond-hordes and others would maintain the highest priority. but there would be a procedure by which the state could wind its way out of this crisis situation and get back onto a

more sound fiscal basis. there's been some suggestion among commentators, others, that congress ought to look at a procedure that would allow that to happen as one alternative. would you think that would be a wise or a good thing for congress to do? >> i think it would be useful for congress to look at the situation broadly and try to identify what potential problems that might be there and what there might be in the bankruptcy law, et cetera. i think it would be very -- it would be extraordinarily unusual for a state to default. it hasn't really happened seriously for 160 years or so. and i think we ought to focus on states meeting their obligations which they do have the tools to do. and again, as i mentioned

before, in most states, the debt and interest payments are the top priority and they would come in front of provision of services and so on. so i think we should understand the situation. but i'm very, very hopeful and expect that we'll be able to avoid defaults of that level. >> and i share that hope but if i may conclude on this question, what would be the consequence of a large state like california or illinois defaulting on its debt? in terms of the national economy? >> well, it would -- it's difficult to know frankly because it hasn't happened for a long time. it would certainly be -- it would certainly create a lot of stress and volatility in the markets. there's no question about that. it also would mean that the state, when it came back into the market, would probably have to pay a much higher interest rate for a considerable period and, therefore, it would be, i think, a very much last resort for any state to do that. >> i thank you very much.

thank you, mr. chairman. >> i thank the senator. i thank the senator for asking the question because i think this is something we need to be paying close attention to. senators raised the question of a series of municipalities that may be under significant stress. we've also been told that there are a number of states -- i've been told as many as 20. governor manchin, maybe you have more recent information. >> i just cycled being out of the chair of the nga and we were concerned watching the fiscal viability watching everyone in the states. everything is back to 2008 levels is what we were based off and that's what you based off in congress when you set up the help that was given as far as in the aid to the states. that all goes away by june 30th. most of our fiscal budgets are done june 30th, 2011. >> and do you have a rough idea of how many states are -- >> i think it's upwards in the high 20s, low 30s that could be

in serious problems. we're concerned. we're very much concerned. >> we've got an analysis by the way underway on this question. this may be one of the things we would like to talk to you about if you have an opportunity to come up and meet with us in a session with all senators. we do have an effort underway based on the conversation i had with governor manchin earlier. >> if i could ask one question mr. chairman, and to mr. bernanke, i think what we were asking and the senator from texas is asking the same. is there any plan -- i know it hasn't happened -- we're seeing indications and concerns and states have done everything humanly possible because they have to meet a balanced budget, you know, every year and they cut to the bone if you will. and if the cash flow is just not there, with the amount of services they have to give out, is there any bailout or any other proposal that you all have and have been looking at and i think that's what we're saying.

is there any plan that's available that could help a state to prevent this from happening and falling into default or could you do that? >> i don't think the federal reserve has the authority. and i don't think it would be appropriate for us to do that. this is something that would take place over a period of time. it wouldn't happen in a day or two. and there would be plenty of time, i think, for congress and for the state legislature to, you know, look at alternative solutions. i think this is really a political fiscal issue. and we'll watch it very carefully because it has implications for the economy and for financial markets but i don't think the fed really has much that we can do about it. >> mr. chairman, i would recommend that maybe as a committee what we should do is check with the nga. they'll give you complete status of what they see and the real crisis. >> i think we better -- we better think about how we get input on this. you know, the more we look and senator cornyn has brought to our attention here -- what we heard earlier is the result of the information you shared with

us. that this is something that's out there on the horizon that we need to pay very close attention to. senator merkley, we apologize to you because we interceded on your time. we'll give you an additional minute. and you're recognized. >> thank you very much, mr. chair. i'll use a few seconds of that to say senator sessions, i'm happy to hear that you're will to wear senator wyden's tie if oregon wins. i have a pin right here that maybe you would be willing to wear this pin if oregon wins for a couple days. >> i would be glad to but i'm not going to lose over sleep. [laughter] >> will you be out there on sunday? >> having our auburn team and come in tuscaloosa and coming out victorious, i'm a little

confident. it's exciting and it's so much fun and people are so excited. i'm sure they are in oregon. and it's just one of the great things about america. that people can pick out something other than politics and have some fun with. >> absolutely. a little bit of an anecdote. well, let me turn to the business at hand and thank you very much for your testimony, mr. chairman. i wanted to start by asking a little bit around the qe2 policy. as i understand it, you could summarize it by saying that in buying these bonds, you are injecting more money into the economy. doing so reduces the interest that would be bourne on those bonds that would encourages more people to hold less of those bonds and invest more in either corporate bonds or perhaps stocks and there was a constitution effect to invest in american business. so that's kind of one category. another category would be that

in doing this, one also creates more pressure in terms of those economies such as trying to switch our our pegged exchange rate with the united states to try to reduce the impact of china's currency manipulation on our ability to sell our products abroad. do you see both of those as key components or one more important than the other or that helps us get our hands around these two pieces. >> first of all, i would say the federal reserve is neutral on the auburn-oregon issue. [laughter] >> i'm disappointed to hear that because there's two senators from oregon here and only one from alabama. [laughter] >> senator, your first part of your description, i think, was very accurate. that we are trying to ease financial conditions to

stimulate more economic activity. you know, defacto, this policy has been in effect since august. because in august we began to reinvest our securities and i began to talk about this in public and the markets began to anticipate these actions. and we've seen since august significant improvements in stock prices, in spreads, in volatility and a variety of areas. and i think we are having some positive benefits on financial conditions. and are contributing to a better outlook for the economy. it's not our intention to do anything particular on the internet front. our objectives are focused entirely on the u.s. economy, which is what our mandate tell us to do. it is true that to the extent that china or other countries undervalue their exchange rate or maintain a fixed exchange rate, they import u.s. monetary

policy which is appropriate for the united states. it is not i believe it appropriate for china given how quickly they're growth and the fact they are dealing with some inflation issues. so in fact it is forcing them to take some actions, letting their exchange rate appreciate somewhat would be helpful for them in this context because it would reduce the inflation pressures that they're otherwise going to experience. but that's -- but that's not the -- you know, that's not the key objective of the policy. the policy's objective is to try to meet our price stability and our employment goals. >> i understand that. but the employment goals also are impacted by the ability of us to sell our products overseas so there's kind of a complete picture that comes to play in that. and in that regard, let me turn then to manufacturing because one of the -- one of the challenges certainly for american products making them here and selling them abroad is the difference in labor rates.

but there's also been the argument that in our trade agreements we sometimes end up in a situation where foreign producers seem to have full access to american economy while both through currency manipulation and through nontariff barriers, american products don't seem to be able to get into the foreign markets as easily. and that differential has undermined manufacturing in america. there's also been a related conversation -- i just wanted to lay it out because i see it starting to appear here and there. and that is that one of the reasons we seem to be coming out on the short end of these trade agreements is because we also go into these negotiations with other goals that are not necessarily economic goals. that is goals related to access, military access, fight ago key ally to, say, as we did with -- in the markets in china when we

were involved in the wrestling with the soviet union, we take noneconomic goals into these agreements. and so i thought i'd just see if you'd like to comment a little bit on these challenges in terms of our ability to maintain a manufacturing base and some of the interrelated issues regarding trade negotiations? >> senator, of course, we remain an important manufacturing power. i think we still have the largest manufacturing sector in the world. employment has been declining very sharply because of productivity gains. but you're also correct, i think, that trade and currency issues are an important factor. on the currency side, i've been very clear that i believe that the policy of china and other emerging markets to undervalue their currencies is

counterproductive both for those countries and international imbalances and for global trade flows and i hope we can continue to work with china and those other countries to create a more flexible exchange rate regime. i think that's very important. i'm not deeply conversant with the details of trade negotiations. i think every country has multiple objectives when they engage in these negotiations. but i hope that we will be aggressive in pursuing wto remedies, et cetera, as needed to eliminate trade barriers in and both tariff barers and nontariff barriers and i like most economists that it works both ways, imports as well as exports to free freely. >> thank you. let them turn to another issue which is the impact on the high level foreclosures on house prices in america we had an

ongoing rate of about 300,000 foreclosure filings a month. not all of them will result in foreclosures but many will. and we still seem to be driving down the value of homes, which results in more families under water, more families that are in situation where they can't borrow against the house since the house is worth less than what they owe. how does -- how does this -- and i'll just note that our effort to intervene which was highly debated two years ago when i first came here to the senate, a decision to invest 50 to $100 billion to oregon -- not oregon, but oregon and the united states homeowners has resulted in the expenditure over these two years of less than a billion dollars. i think last i checked was about 500 million. so our intervention has been

modest at most. this remains both a huge factor affecting the quality of life for families and their ability to look positively on the future. and how does -- how does this play into our monetary policy or interrelate in ways that we should understand better? >> well, you said it very well. foreclosures continue to be very high. there have been sincere government efforts to try to address the problem but they run into lots of bureaucratic and other difficulties as well as the fact that in a weak friday with lots of unemployment there's a lot of folks for whom there's really no solution, a good alternative given the income has been lost through job loss. this is an important consequence -- has important consequences for the macrosituations as i alluded to in my testimony. the high levels of vacancies.

homes that are not only empty but are, in fact, reducing the value of the neighbors homes around them. are driving down prices which is affecting household wealth which is affecting consumer spending and confidence. it's affecting the whole residential industry. construction is very, very weak because with prices so low, new construction cannot recover its cost. ..

>> and it's one of the reasons that the recovery along with the problems in credit markets, one the reasons of the recovery is not as robust as it normally would be given how deep the recession was. >> my time has expired. i do have another question if it's appropriate. [inaudible comment] >> given the fact that we intruded on your time, go ahead. >> thank you. well, one the interesting developments is that families started saving substantial amount which recognizing that they needed to prepare for the possibility of a loss of a job or the drop in value of their home and so on and so forth. which, of course, on the spending side, that throws a wrench into the economy. but one thing that i have heard reference to, but i'm not sure

if it's right is that the amount of consumer debt has decreased by more than the amount that the national debt has increased. that is if you take the family debt and the national debt together, our total indebtedness has dropped. is that accurate? and does that -- how does that play into the macroeconomic picture in terms of the impact of our national debt? >> that is correct. one way to see that is that our current account deficit, which is our foreign borrowing has gone down. meaning the need for borrowing is lower than it was before the crisis. that's the opposite side of saying that aggregate demand to bring the economy to full employment. what you say is exactly right. and again, it is consistent with the need for continued at least speaking from the federal

reserves perspective, continued accommodative monetary policy to help support the economy's recovery. >> thank you. >> i thank the senator. let me go to a second round. let's reduce this to four minutes. so we don't impose too much on the chairman's time. let me just say, i've gotten an initial report now in the state's situation and i've asked senator manchin as former head of the national governor's association to get us the latest information that's able from that source. here's what i have an initial review since our conversation on the floor, i think it was last week, governor manchin. maybe a week ago or so. in looking at what's happened since enacting their 2011 budgets, 15 states had new budget gaps open by late november. totally $27 billion, nearly the

entire gap is accounted for by five states. illinois, half of it, roughly half; arizona about 10%; washington 7%, california roughly 7%; texas 5%. those are the new gaps that opened up in 2011 after they collectively had closed 84 billion of gaps in work on the 2011 budgets. what is, i think, a serious matter is looking at the 2012 budget gaps. ncsl survey, national committee on state legislatures projected a gap of roughly $97 billion in 2012. the committee on budget reports the gap stands at $113 billion, and is expected to go to $140 billion once all of the states have updated forecasts.

so we are talking about a significant problem here. with some 35 states projecting gaps in 2012. only 11 states reporting no budget gaps for 2012. i must say proudly, my state has no budget gap. i think governor manchin left his state in very good shape. i don't think they face a budget gap. but that -- now looking back in 2011, they closed 84 billion of budget gaps. so clearly there is capacity there to do significant budget gap closing looking at 2012. but i mean $140 billion is a big number. certainly for those individual states. and i think it is, you know, you look at illinois, for example, they are telling you about a 2012 budget gap of $15 billion

which represents 50% of their budget. that is a whopper. and i do think we need to be prepared with a plan in case we are approached by one or more states because clearly the problem is concentrated in a handful of states. as i indicated, five states where the significant majority of the 2011 gaps illinois, arizona, washington, california, and texas. we got to be ready with a plan if we are approached with respect to requests from any or all of those states. and i understand fully that's not your -- in your domain, but i think we can responsibly anticipate that we may have requests made to us. and i can tell you i don't think congress, the house or the

senate, are going to be very interested in bailouts to states. >> mr. chairman. >> senator manchin, if i may, and just open discussion here. the states are going to be in a situation where they are going to have to have the flexibility to refinance. to put their financial houses in order. everybody bet if we will, they worked out of '08 levels, the amount of stimulus that helped them get through a difficult time. we thought the economy would pick up. it hasn't. they are still story. they are making draconian cuts. we are aware of that. our bond ceilings that we have as states that we are able to go out to the market with, there might be some creative finance that's needed to be done here. we're going to be need all of the help that we can get. can they raise those ceilings to

see if there's a market to refinance a 0% bonds to go out and find out if they can create values within their states? i don't think the appetite is here in congress. here's more money to help you. can we help you help yourself? give you responsibility? restrictions that we can ease up on. that would be most appreciated. it's not if it was going to happen, it's when they are going to need our assistance and help. >> i think you make a good point. since our previous conversation, i immediately asked people to go out and do this survey. and i think it's something that committee is going to have to be prepared with an answer. and what you are saying, i think, makes eminent good sense. that is maybe there are ways of help with creative financing. i don't think going to be much appetite here to send truckloads

of money to states. i've about used my time on this four-minute round. other -- senator sessions would you like an additional? >> yeah. i would, mr. chairman. so much to ask you, chairman bernanke, i will submit some written questions to you with regard to the state situation. states are sovereign. they have issue on their own debt, and the people who loan money to states need to know their likelihood of being repaid is based on the financial condition of that state. there's a moral erosion of significant nature when we undertake and start bailing out now more. and i just think this whole bailout mentality has far more ramifications than a lot of us think. and a lot of people have

indicated. so i understand what you are saying, mr. bernanke, states need to get their house in order. they shouldn't expect lower interest loans from the fed if they get in trouble. is that correct? >> i -- they are not going to -- they should not expect loans from the feds. i think they -- the numbers that the chairman referred to are perspective gaps. obviously, they are a measure of how much spending cuts or tax increases are going to be needed to achieve balance. it's going to be difficult. but on the other hand, there is some improvement in the economy and tax revenues actually have picked up some. so it's a difficult situation. but i hope the states will be able to address it. >> i just got to tell you, places like california have been living beyond their means for a very long time. even when the economy was in good shape. and our state is very frugal, we

try to operate a good state. i think i'm not inclined to answer my constituents to rescue someone who's been in problems. i'll note with mr. christie is doing in new jersey. agriculture department, reduced 24%. banking, 12; community affairs reduced 35%; education, down 8%; human services, 4%; law and public safety, 7%; roads, 3%. now i suggest new jersey is not going to sink into the ocean. it's still going to be there. and this idea that cuts and even the deficit commission, bless your heart, i hope i would have been willing to support the commission's recommendation as about as good as anything that we've seen. it does not call for anything like reduction in federal spending like this.

actually doesn't call for any really and discretionary accounts of significant amount. so we can do better. the american people are telling us this. mr. bernanke, i criticize some of you folks, including president bush and mr. greenspan in it. i don't think you realize the political world we live in. the real world that we live in. you think that, well, we can in 2001 when we needed to stimulate the economy and run a deficit, well, we've had a surplus for a few years. we can ask the congress to spend money and then when they get to a certain point, we can tell congress to stop. but those of us who committed and were elected to try to balance the budget and participate in tough votes to balance the budget really had our legs chopped off. we weren't able then to warn against spending even the republicans, some of them. and the feds seem to be saying deficits don't matter.

and now see how hard it is to turn off the specket? maybe you in the fed can turn it off just like that within your power. for us politically it's not easy. so we got to get a consensus. i think the american people have a sense right now, don't you, mr. chairman, that they want us to do something now. and i want to ask you, are you telling us that you don't -- you think it's premature to start reducing some of our spending levels and some of the government accounts? because it might hurt the economy. the brits don't seem to think so. in a similar situation to ours, they are cutting now. >> what i said, senator, was that it's a long run issue. it has to do with, you know, the problems are not just this year or next year. the problems go out decades. and i think it's not too soon to have a strong set of measures that will bring down deficits

over time so that we have at some point a stabilized and declining debt to gdp ratio. i think action is needed. but you are not going to solve the problem by just making cuts for this year's budget. you need to think about the whole future path and all of the obligations both -- i mean the chairman talked about the debt held by the public and the gross debt and so on. all of those debt numbers don't include the unfunded obligations that we have for entitlements, for example. so the true debt is probably three or four times bigger than what the chairman is talking about. so we need to address that. but what i'm saying is we want to take -- we should take a long run perspective. that's what the markets are looking at and that's what economic stability requires. >> fair enough. i think -- but i do believe we an opportunity to eliminate waste and spending right now. it would not damage the economy and in the long run, we need to work together to try to figure

out how to create confidence in our economy as under control and our spends as under control. >> senator white. >> thank you, mr. chairman. chairman bernanke, i want to ask about china in a different way. i also chair the senate finance subcommittee on trade and competitiveness. and i want to take you through what i think is going on with china and get your reaction from the american economy and particularly the cause of creating more good paying jobs. a decade ago when china was admitted to the world trade organization, in effect, there was a commitment made to marketplace principals. that was essentially what their entry to the world trade organization was all about. in the last six months, and frankly we've seen this over a considerable period of time, seems to me we have seen considerable back flighting in china with respect to these marketplace principals.

in two areas i've been especially concerned about most recently are rare earth minerals which are so important for american, you know, manufacturing, green goods, and others. where the china in effect are saying, look, we are going to keep our railroads and minerals here. and if people in the united states want manufacturing, they got to come there. and we are also seeing it in what amounts to discrimination against american digital goods and services. which is another important area of good paying, you know, jobs for our country. my question to you is what's your sense about the implications of china back flighting on these marketplace principals that they in effect, you know, committed to? i'll tell you in my view, they are violating world trade organization principals in those two areas. the question of rare earth, you

know, minerals and digital goods. what are the implications of what they are doing there, and what is an appropriate, you know, role that our government ought to be taking? >> well, the wto agreements have specific rules and procedures and we've actually brought some actions under wto. i believe we've won a couple of them. within the rules that china has agreed to, the wto process looks like it's been working. i'm not so sure i would agree that china is backsliding. there's been issues all along with government property and government procurement, and a wide variety of access. >> those two areas most recently. >> yeah. >> and they are very important to the american, you know, economy. rare earth minerals and digital goods. this is a pretty new phenomenon. this is the last six months. that's why i am talking about the implications for the

economy. >> well, i -- on rare earths, you know, i agree that that's a strategic input. that's a strategic input. i don't believe the united states has any current capacity or very little capacity in that area. we might want to consider some strategic investments in that area. but this is just a number of -- there are a number of areas and the chinese would raise issues with us as well about exports and so on. the technological exports and so on. where i think ongoing engagement is really going to be important. the president of china is going to be here in a few days and i hope that'll be an opportunity for high level discussions. but this is part of the ongoing process that we have with china for a while which is to try to hold both sides to trade and investment obligations. and it's been a struggle at many cases. i'm not disagreeing with you. >> i thank you. i clearly come to these trade issues looking for ways to open

markets. that's why i think that we're at such a critical time. i have voted for every market opening agreement since i have been, you know, in public life. but i also think it's important to adhere to principals that ensure that in a global market place everybody has an opportunity to make markets work. i think we're seeing in a number of areas considerable back flighting from the chinese. and i look forward to following up with you in this as well. because we cannot -- we cannot meet our target of doubling exports as we have set out to do in this country, and substantially lowering the unemployment rate as our constituents are demanding unless we have an opportunity around the world to have fair access to markets and i think in an -- in a growing number of areas, that has not been the case.

i look toward to working with you in the days ahead. i thank you for your appearance. mr. chairman. >> thank you. senator manchin. >> just to follow us, in the state of vivers we've been blessed with some of the highest quality of coking in the world. i brought this to attention. we are concerned about most of our assets being purchased by foreign countries. we still have miners mining the coal. but as the senator just mention, most of this product is leaving this country. that's the ingredients of making the still that's needed to build industry, if you will. and i i don't know if we know the critical juncture that we are at. i can tell you i see it every day. the amount of money that they are pay for these reserves. with that being said, i know this is being talked about. i'm not new kid in town. the whole bill out in the banking system. in my area, we are very much

concerned small businesses don't have access to capital, having a hard time acquiring it, individuals, commercial, developers, building industry. the thing that's really lacking and throwing us back right now is the access to capital. we bailed out wall street, but not main street. when do we see relief or what you do think needs to be done, sir, for us to open up the banking industry so it can start taking some if you will, some calculated risk and putting money back in the market? >> well, just on the narrow question of t.a.r.p., of course, capital went out to smaller firms as well as larger firms. congress just recently passed the small business plan that has nont.a.r.p. capital going to small banks that are willing to make loans to businesses. some of it has gone to small firms, as well as large firms. it's a tough problem because you

have small businesses who are used to somewhat easier conditions before the crisis. conditions have terms and lending conditions have tightened up to some extent for understandable reasons given what happened during the crisis and given the losses that banks took. it's also a situation where the economy has been weak and where the value of collateral, the value of stores or factories, et cetera, has come down. which makes it more difficult to borrow as well. so there's some fundamental reasons why credit is harder to come by. that being said, i think there is a tendency to overreact. there's a tendency in a, after a crisis or in a weak period to tighten too much. to swing too far. the pendulum can swing too far. >> do you think that's been done? >> i think in some cases, that's been the case. as i've said, the federal reserve, we understand -- we

have a responsibility to keep banks safe and sound the best we can. on the other hand, we also have considerable interest in having the economy grow. and so we have been -- and i'd be happy to give you much more detail at a more convenient time and send you a letter or meet with you personally, however you'd like to do it. but we've taken a lot of actions to try to create a better balance for banks, to make sure that they can make good loans. that they are following safe and sound procedures, we will not criticize them for making a loan to a small business or even a business where the collateral value has declined. so we are very sympathetic to what you are saying. we have been working hard. i do think there's some progress and improvement. as the economy expands and credit needs go up, we are going to see more lending take place. we are very much aware of this issue and we are reaching out to small businesses, we are reaching out to banks, and if

you have any suggestions or you have anyone would like, we have an someone that will be happy to take any complaints or concerns. we do want to be responsive on this issue. >> i'll do that. i'll bring specifics if i may, and maybe you can help. >> of course. >> senator merkley. >> thank you, mr. chair. i appreciated the reference to the small business lending fund. which was a proposal that i developed in response to a problem that we saw in community banks in oregon, they were noting because of the fdic requirement on leverage being firmly applied that helped the community banks were unable to lend. we don't yet know the results of the program. but it was one way to try to get funds into main street banks to assist main street businesses. and we have in addition to banks that didn't have the capitalization to make additional loans, we have banks

that are not only healthy, but do have funds that are sitting on them to wait and see what happens with the economy. and so we look forward to continue to brainstorm with ways that we can get liquidity in the hands of small businesses. if they can't borrow money, they can't seize business opportunities. they are a job machine that we have to put fully to work in finding the right way to do that. that's important. i wanted to turn back to housing. oregon produces a lot of lumber. and many other states produce lots of products are aren't being consumed when the housing market is done. there are a series of ideas that are still being talked about again, 50 to $100 billion promise had turned into less than $1 billion of spending to assist homeowners. one of those concepts is to do a national short sale program in which families that have passed

an economic distress test or filter, if their home is being sold at a far lower value after being foreclosured on or shortly before being foreclosured on, the family itself might have a chance to buy it back using lending that is fully underwritten based on their ability to pay but maybe not the complete traditional score structure. a second approach being talked about is down payment grants to help first time home buyers. of course, we experimented with this program. to help the inventory of foreclosured homes. to have an empty home on the block. you have family that's in that home and help arrest the downward direction of house pricing. the third is another examination of bankruptcy reform as a way to kind of adjudicate the issues involved in home ownership where every other contract can be

adjudicated by a bankruptcy judge, home ownership, home contract cannot be. and when appropriate protocols that we've been alerted to in terms of being backward looking, not forward looking, it's great concern to the banking community. so as we look at this national housing challenge which i think you echoed the concern that it's a major factor in our economy getting back on track. if these are not the right ideas, what are the right ideas? what more can we do here in congress to take on one the really big domestic issues affecting the quality of life for our families and the strength of our economy? >> well, i'm afraid there are no simple solutions as you might imagine. the ones that you mention are all interesting ones. let me just offer in general that we'd be happy to work -- the staff would be happy to work with you on the details of any

of these ideas. if you'd like to take us up on that, we'd be happy to work with you. the short sale idea have been around, likely to the idea of having a principal reduction in the mortgage, which is something that the federal reserve actually advocated for a number of years which i've talked about in speeches for some time which is a way of creating greater incentives for the home owner to want to stay in the home. that is a program that is now currently in place. building on the program that was passed a couple of years ago. i don't know how far along that has gotten. but that's one approach. >> not very far. >> not very far. >> there is an important -- i'll just interject here on this. the challenge on the principal reduction is that as long as the family looks anywhere near a viable, financial institutions are very reluctant to write down the principal. th