particularly, the ways in which these policies have fundamentally altered the relationship, also contributing to a growing polarization of society between the winners and losers from economic reform. at the forefront with agriculture, among the first was the new tendency measure, the notorious law of 1996 that brought the end to guarantees and read ceilings for farmers. the government argued reforming would lead to greater agricultural productivity. in reality such measures would have been motivated by the desire to open the sector far as to market forcess and reverse the policy. when the law came into effect it jumped significantly. sometimes as much as 400% and became a relatively high for most of them. as the agricultural sector has

been according to market forces rather than state management there have been no significant improvements in productivity nor have such reforms resulted in lower unemployment or poverty. .. fundamental reason as too why they exist macroeconomic growth alongside growing rates

of poverty and unemployment is because of the staunch marketization and privatization and the abrupt removal from state movement. that has been the goal of economic reform. it has not been -- it has been -- it has not been the elevation of poverty or improvement through egypt's quality of life but rather than the transformation of the economy according to certain standards that don't necessarily benefit egyptians or people in the developing countries. to understand why economic reform has resulted in polarization rather than poverty reduction it's helpful to apply. in the case of egypt we see that neither of these policies were being promoted in a way that would reduce poverty or alleviate social polarization. it has been land holdings but concentrated them in the hands

of landowners while possessing many small scale farmers we see today as part is happening in egypt. similarly, there is no evidence of aggregate growth at all in egypt. sectors responsible for macroeconomic growth have been those with low employment such as oil and gas extraction, tumor and services all benefiting a very small handful of people that are now -- we hear about them in the news. like from others. although, azzaz has become a cliche. high employment sectors have seen the contribution to economic growth decline considerably. the benefits of macroeconomic growth have not positively affected workers or society as a whole. but have been concentrated -- but have been concentrated amongst small economic sectors in terms of power. poverty has not been alleviated either. instead it has increased from

17% of the population in 2000 to at least 20% in 2005 and it's actually probably a few percentage points higher at this point by conservative standards. so living standards, or whether the constant supply where it comes from. although social polarization are deteriorating results from economic reforms and means also accompanying by standards that result from economic reforms that have -- with regards to

consumer spending ersap policies have had a multipronged effect. the immediate cost of food to consumers to every single egyptian grows considerably. cuts to oil subsidies increase transportation and production costs that in turn increase the cost to the consumer of commodities. the evaluation of the egypt fund raised energy prices which led to an increase of imported commodities and high inflation which was is not in the alleviated by reform. further eroded consumer purchasing power dramatically. added to this is the rise of private sector employment whose workers receive conservatively lower wages and benefits. the reform measures and the unintended side effect was subsidy cuts and riseing in commodity prices and raising in

inflation has been with the egyptians. we've gotten to a point in 2005 as i conclude in a couple minutes where it became almost unbearable to most egyptians in 2005 so we're talking five years after that kind of threshold and these things cannot be measured and that's why revolutions cannot be predicted. ersap have not increased the cost consumers have to pay on existing goods but have added new costs as a result of state budget cuts to public services, costs that affect every single egyptian family especially the disadvantaged ones economically. after the '52 revolution education became free and universal while health care was expanded to benefit all citizens. however, beginning as early as the 1980s, the world bank began advocating cost recovery measures to reduce budgetary waste and had efficiently and encouraged reinvestment and

improved services. in practice, this meant charging user fees for education as a means of discouraging not so serious students and i quote from wasting precious resources and putting pressure on the educational administrators and teachers to improve the internal running of the educational system. the result was a regressive -- was regressive as the -- the result was regressive as the poor paid considerable burden for private education. private tuexecution accounts for 20% of the poor household budget. there's also a secondary issue of mandatory tutoring whereby teachers as a way to add to their meager income pressure their students while taking lessons and pay for repeats and the examination itself all which further increase costs as strained family budgets. similar situations is occurring with regards to health care as

user fees have increased the burden on poor families or discouraged them from seeking treatment. something that we see the effect of in egyptian public culture in terms of films or sitcoms and so on. in the rural areas land reforms and abrupt of introduction of market forces that have raised the cost of land, rents and inputs combined with the fall in commodity prices have led to highly rural indebtness and this has led many families to remove children from excuse in order to reduce expenses as early as the 1990s. this in turn have made families -- removed children from school and sell off family assets such as jewelry and more importantly livestock. while such steps may be -- may alleviate short-term problems in the long run the effects were self-defeating. without education, young people have virtually no chance of improving the status while selling off livestock puts

farmers at a significant disadvantage. many resort to sharing livestock but the result in decreased productivity and a host of other outcomes. lacking the help of state support mechanisms these farmers are left with few options but to strategize for the long-term -- for the short term. they simply cannot plan for the future and this also produces its own effects that are dilltary for the economy and so on. >> because economic reforms were implemented with the primary goal of transforming egypt into a free market economy, quote-unquote, vital state functions were abandoned or curtailed and have had a profound impact upon society which i have discussed a bit but it's actually much more severe than that if you look at the forest. macroeconomic conditions may have improved a bit in terms of some indicators and egypt was considered one of the best places to business just in 2008. it just gives you a sense of how

this bifurcation between what's happening on the ground and what certain institutions are interested in in terms of numbers and quantifiable things. macroeconomic conditions may have improved but for society as a whole the situation remains precarious. or remains precarious while in the prereform era living conditions may have been strained there still existed a social safety net that could alleviate social poverty and mitigate polarization. i'm skipping a lot because i would like to conclude and leave some time for q & a, because of the deterioration of the social safety neither and the social welfare resources, workers are much more vulnerable to shocks such as unemployment resulting from privatization policies, business, disability, or death from budget cuts to public health care. enough people in egypt have experienced all of the above by 2005, which is a very scary

prospect and between 2005 or 2005 or 2006 and last year when the the numbers were calculated, more than 6 to 7,000 protests have taken place depending on how you would basically identify a protest, workers protest. all over egypt at various levels at different times and, of course, what we are seeing today for us is new, you know, we're watching this really fascinating picture but i was in egypt last year and many of have been following probably this a combination of various sort of microcosms of protests throughout egypt. economic reform sought to transform the egyptian economy from a state run to a free market. absent from the agenda was economic development which would have sought improvements to agriculture and manufacturing productivity, alleviation of poverty, unemployment and broad

based economic growth that benefits most egyptians. as a result, economic gains resulting from reform measures have not benefited society or even any significant portions of it. rather, reform has diminished living standards considerably for the average citizen and has failed to address chronic problems of poverty and unemployment leading to social polarization and massive gaps between haves and have nots. a cliche but also seeing something on the tv set that it might also be a cliche so i'm not sure if it's good enough to dismiss things as cliche when it comes to these things such as gaps between rich and poor. it's also lessen a creation of a huge gap leading to the social polarization that produces deep and widespread instability one day. but, you know, the day has come at least in a couple of places

in the region. so i'll conclude -- though economic factors do not in and of themselves explain the outcome we are witnessing, as it used to say in class and in the books and in class down here just a few feet, we cannot adequately understand this outcome without paying a good deal of attention to such factors. my concern is that what i just described might not be part of the lessons learned, whatever the outcome of the uprising, thank you. [applause] >> okay. i'll introduce myself. i'm elliott cola from the

department of arabic here at georgetown university. i need to raise the microphone just a little bit. i want to begin my comments thinking about matthew arnold, a 19th century english poet and literary critic who -- who watched as new social classes began to exert themselves in the english polity and began to reflect on this. this is precisely the same process that e.p. thompson was reflecting on in his work. for arnold, this process was alarming. it was a potential threat to what it meant to be english. and for him, culture could be used as a weapon. he used the word "culture" as a weapon to fight this new class war. the title of this book "culture

and anarchy" was exactly that, posing a very stark choice on one hand, culture and on the other hand anarchy. the order that people had known as what england was and the new anarchy posed by new classes of english men to be there. and the same bifurcation in things like civilization and barbarism. in egypt it has reared its head in very interesting ways and i want to talk about those today. culture is really not the issue of the revolutionary movements we are watching in tunisia and egypt but culture is much a right pa of how these movements are unfolding in two ways. first, even if the state promotion of official culture in authoritarian regimes in the rob world is not the explicit issue

of this revolutionary moment it does have something to do with what is happening right now. and i'll come back to that in a bit. but if you've been watching, algie algiea al-jazeera, you've been listening to poetry, they rhyme and they're fun to listen to as well. the second point i want to make, that i'm going to begin with tonight, from that the very beginning people with a little understanding of the movements and very little sympathy for them have often decided to shift discussion away from what the protesters are saying and toward vague conversations about culture. egyptian culture, arab culture, the culture of islam and so on. now, while often meaningless, this outpouring of culture-talk is by no means without significance or usefulness. let me show one use. the demands of the revolutions in tunisia and egypt have been

pretty straightforward first of all, an immediate end to the tyrannic regime and to an end to one-party rule and to an end to police brutality and official corruption, more transparency and accountability and increased meaningful participation of ordinary citizens in the process of governance. obviously, the details of the demanded changes might be more -- might be complicated if we can get into that. but there's nothing ambiguous about the demands themselves. they don't need to be translated even though an op-ed piece today in the "new york times" attempted to translate it as freedom as if somehow we didn't know what people were talking about. no one can say that these demands are culturally specific. it doesn't mean they're universal but the important thing they are not culturally specific. it also seems that culture in

other words would have very little explanatory for the situation. but surprisingly -- or not really to me, since i study this, culture was front and center in mubarak's english language response to the revolt and those who told christina ampoor, if i reassign now there will be chaos and i'm afraid the muslim brotherhood would take over. i said to obama, you do not understand the egyptian culture and you do not understand what would happen if i resign today. culture or anarchy? civilization or barbarism. we've seen this before. now, the mention of egyptian culture in this interview figured as a way to change the channel from the issues at hand, issues which are crystal clear. we shouldn't miss the fact that mubarak has been talking exactly this way for 30 years now. telling egyptians and the world that with his regime they'll get

stability. and with the existing alternative, his coword for the muslim brotherhood they would be chaos. it's fearmongering and incidentally this is the same message that has always been at the core of the regime's cultural policies that i'll get to soon. it is also worth noting that this choice between stability and chaos has roots in a very old colonial habit of talking about egypt. and directly links the attitudes of lord chromer, egypt's colonial viceroy under british rule who used to talk about the unruly natives who only understands the whip it's that attitude that leads to the many commentators here who talk about the muslim brotherhood as if it's a nefarious monster that had suddenly gotten loose in some bad neighborhood. mubarak's arrogant remarks about the demonic culture of egyptians were carefully chosen to resonate with this old tradition of islamophobia in the west and it has to a certain extent but

mubarak's words were also intended to resonate with an old tradition of state paternalism within egypt. now, this goes back to what james was talking about, the state and the republic, that the state -- in some instances in egypt has put itself forward as the strong father certainly throughout the 19th century colonial period and even before under mohammed ali but even with the post-independence period behind nasr. by this i'm referring to the way in which there circulates a belief that the egyptian people need a powerful state to get things done. the egyptian state or the idea that the egyptian state takes care of its citizens and provides for them or that the egyptians really cannot be expected to run their own society. unlike previous eras of authoritarian rule, under

mubarak, only a very small fraction of egyptians have benefited from the role that the state plays in the economy. many of them, these who have benefited have been taking their money out of the country as fast as they can in recent weeks. fixing up their houses in dubai and perhaps even contacting sfs for positions. [laughter] >> but the fast majority of egyptians would not be mistaken to believe that they benefit very little from the state. and here this goes back to what bassam was talking about the reforms of the liberal plans starting in the 1990s. in terms of public education, just to list some things we might associate with state -- with benefits that might accrue from a state, in terms of public education and health care, state services have been abysmal for decades. the salaries of doctors and teachers working in the public sector are at the subsistence

level and most public schools and hospitals are a risk to public health. it's not for nothing that egyptians joke about the arabic word for hospital and call it, you won't get better. and with some of the highest pollution rates in the globe, it's not also not a surprise that egyptians suffer huge rates of cancer and kidney disease, some of the highest in the world. the transportation structure is in at that timers and road fatalities is a the leading cause of death for egyptians. so to say that egypt's infrastructure has been crumbling under mubarak is not

really a metaphor. it is literally the case. egypt has been collapsing since the late 1980s and since the early 1990s. to give an event that really brought this home, 5.9-degree earthquake hit cairo in 1952. 370 people were killed and roughly 10 times that people badly injured. while the cause of the event was natural, the disaster in many ways was manmade. an inept and corrupt system of building permits and inspection meant hundreds if not thousands of subpar large scale buildings in urban egypt had been built. and so when the earthquake happened, i remembered it vividly. it was terrifying. the state had virtually no ability to respond to it at all. most of the first responders were citizen volunteers. medical and humanitarian aid was provided largely but ngos

including many run by the muslim brothers. many egyptians would never forget that lesson that month. when disaster struck, the muslim brothers and other groups were there. the state was almost nowhere to be seen. promises to rebuild the damage especially in the heritage districts in cairo have been slow and coming. 19 years later many buildings in the area remains in dangerous disrepair and because of lack of governmental oversight for building and maintenance, egypt does not need earthquakes for this to happen. so i'm just going to give you some highlights of this. 2003, in the last slide, 2004, 2007. every few months a building falls down in egypt leading to the deaths of many. the cause invariably is connected to contractors having bribed their way around

state-building codes. in this history of slow collapse, though, the 2008 landslide that damaged the area is most telling. the disaster left 119 people dead and thousands of people homeless. what was not immediately apparent from this building, from the beginning is that once again this disaster was likely manmade. here on the right and the slum of dumayqua stand at the front of the hills. in recent years the empty bluffs, the site of the development projects sponsored by the imf and other international economic actors encouraged fierce real estate speculation and development for elite housing.

new homes for elites were -- who were seeking to flee the crowded city began to be built. new gated communities went up along with all the trappings of good life. local residents had complained that water seepages through the cliffs began soon after the development began weakening the soil and rocks in the neighborhoods -- above the neighborhood of dumayqua and when the neighborhood caught international attention even amnesty international got involved because it was clear to them that some of this had to do with buildings schemes sponsored by the government which is to say some of the ruling cronies, the government finally initiated an investigation. the cause they later determined was fate. all of this raised the important points, what benefits has the

state brought most egyptians under mubarak's rule? the historian of egypt, a colleague of ours at george mason university has reflected powerfully with me and i want to share them, she writes one of the achievements of the protest has been to show the irrelevance of the mubarak state itself. over the last two weeks, egyptians have shown incredible degree of self-reliance, a renewed sense of community and nation. streets have been patrolled, food and medicine have been distributed. garbage collected have all been undertaken without the police, the army or any other state institution. in particular, tahere square itself has taken the attributes of an independent and sovereign state. the people within it have established their own borders, involved their own army and arsenal for their own defense, their own foreign policy with regard to those outside, their own police for the maintenance of law and order and detention of enemies within it, a system

for the distribution of food, shelter and medical care and their own fora for public inspection given for the paternalist state. the egyptian people have clearly shown they don't need it. this is actually quite remarkable. in fact, the violence -- the need for protection wasn't -- the egyptians got together -- banded together to protect themselves from the state. they didn't need it. in fact, the state clearly here has been the problem. now, i want to argue in what follows is that what developed was, in the last couple weeks, is really a do it yourself spirit. i want to quote one of my favorite twitters that came out of the twitter feed, from a human rights activist. twittering -- he writes from the rare -- from the interesting

anecdotes of the square, he writes seeing a boy who says, i'm a poor street kid. my pants are falling down. we just made a revolution here. what have you done. this is the attitude you're seeing springing up all over the place. now, i want to say a couple of words about state and culture that i began with. i want to ask you to consider something slightly remarkable in my opinion. on friday -- i'm sorry, a week ago friday, mubarak fired his previous cabinet and filled a few one. he has a former ambassador and a crony -- one of his close businessman friends, or a business associate his then

while 30 other key ministry posts remained vacant, mubarak appointed a new minister of culture and also created a new ministry of antiquities headed by the media celebrity and one-time egyptologist. the politization of the ministry of culture is nothing new. during the early 1990s the mubarak regime began to face serious threats to its rule by an islamist insurgency fueled by the kind of social divisions that bassam was talking about. and it suddenly discovered the glories of secular and enlightenment cultures it began to seek new allies with writers and artists. it was an unlikely marriage considering the censorship that of artists by mubarak and the two military dictators preceded before him. there were carrots and sticks. these same intellectuals were targets by a campaign launchid

by islamists who faulted them for their god secularism. during this time one intellectual was asassesnated. another barely survived an attempt on his life and other leading intellectuals also faced serious threats to their life, while many others, filmmakers and artists suffered serious harassment, legal harassment, personal harassment, career harassment, abuse and worse. the response of the mubarak regime to the crisis then was deliberately ambiguous. on the one hand it waged a deliberate and nasty low level war against the islamists in the urban slums and in rural southern egypt. it also increased investment in the official state religious institutions most especially presenting itself as a true representative of moderate islam. while attempting to co-op and outflank the moral positions held by islamist critics. and on the other hand, it opened

new investments in the ministry of culture. headed for many years by the colorful and devievicivisivdivi. and there were other institutions like the cairo book fair and the cairo opera. once important theaters fell into disrepair and the eminent museum like the cairo museum began to molder and libraries nearly collapsed, the ministry busiyed itself with flashy new projects that range from the sublime like the new alexandria library to the banal like mubarak's reading of cheap paper backs. and besides these activities there were opportunity for employment and reward for many. in the literary sector, the one i know best, the ministry's agencies developed new publishing venues and prize competitions. in this, egypt is not alone.

this is precisely what ministries of culture have done across the arab world and the example i'm giving you about egypt is one that could -- that actually is quite close to many other situations from the gulf to morocco. many other writers who might otherwise have been unemployed or employed elsewhere were brought into a subsistence relationship to their new government patrons and thus within a decade, the state went from being one of the chief obstacles to cultural production to one of its chief protectors and subsidizers. and this would have profound effect in terms of buying and o cooptico -- co-opping artists into the fold. it's really unclear whether or not they were ever working from a single strategic plan. however, whatever they were doing, there was a single

rhetoric and that was this. that the egyptian nation was engaged in a battle for its life and that on one side, the forces of religious ignorance and on the other the forces of secular enlightenment. right? and osama was talking about the bifurcation of the secular authoritarianism versus religious threat on the other. now, as i said, this tale of the egyptian ministry of culture is not significantly different from the way other ministries have not only weaponized -- not only politicized knowledge and expressed culture and weaponized it. the ministries of culture and other aua tore theron world in intelligence to been them in change. in this sense we can say the division of culture and anarchy that proposed by matthew arnold in light of the kind of state violence brought to bear in the way in which the state brought

culture into that war simply doesn't hold. if anything, state culture at least was part a significant part of the state program which is one of violence even anarchy. to conclude, i want to say a couple of pieces of good news. first of all, state culture was never really a deep culture in these places. and there has always existed outside and alongside it a very vibrant popular culture, some of it classical, some of it colloquial. and this is, in fact, what is coming to the fore right now from the protesters marching in the streets of tunisia and egypt. and they are mobilizing old and new forms of expressive culture. i've mentioned the slogans that are being chanted are really poetry. there are bands playing right now in the square as we some. and this is happening all over egypt from what i understand.

in other words, there's good reason to think that after -- after this movement, the relationship of egyptians towards culture is one that is going to probably be characterized by this very same do it yourself spirit. we don't need a ministry of culture to tell us what good poetry is. we don't need to believe in a bifurcated role of culture versus anarchy. and that this poetry of the revolution itself, in fact, is a good and beautiful thing. i'm going to stop there and leave us room for questions and answers. thank you. [applause] >> okay. questions? >> okay.

i had a question for professor haddad. for bassam, we had revolt against colonialism. can this be seen as a revolt against neocolonialism? and to the professor, of the different paradigms you give us, how should we take stock of the post-world war ii american discourse on human rights? where is the place in what is going on in egypt? >> well, i mean, i think part of the dichotomy we've been mentioning at the level of academia policymaking is not entirely driven simply by a world view but by hard political calculations and it's obviously

been one of the great tensions in american foreign policy, that when it comes to certain strategic areas, it's not certainly a question of shah shapes policymaking but of hard calculated interests so i don't necessarily see this as an essential nature that cannot change over time and we're witnessing over here at the level of the administration depending on how you interpret or the day before whether this was -- this was a personal freelance opinion or an inert diplomat. and this is how the region is interpreted but how these interpretations can freed into policymaking and there's this tension obviously between the value of the rhetoric and the policy itself, which is based as i said on political expedience

and i think it will feed very nicely into, you know, professor haddad's answer and whether this is a neocolonial war since these -- these calculations obviously are there at the height of the colonial period when we talk about the rhetoric of the civilizing mission versus what was being practiced on the ground in terms of measures of discrimination, exclusion, et cetera. so there's always this disconnect. >> most of us know what colonialism is or what are the components of the colonialism but i don't think most of us would put the same components under the title of neocolonialism. so i don't know exactly how to answer that. it depends on what you mean by neocolonialism. but i just want to point attention to a literature that actually is very important in recognizing what is happening in the developing countries. the masses of the marginalized

have been studied by historians and scientists and so on. and i think the work, life after politics and his notion of the concept of quiet encroachment is a fantastic way to first of all debunk a lot of arguments that to try to impose or put a meaning of what they're not even aware of. are these people revolting against neocolonialism or even neoliberalism or anything of that sort? i personally do not think so. not because these don't have effects that are problematic and are affecting people's lives. i think most of these people are fed up with the life conditions which they found themselves. and there is something to -- the fact that -- what we are seeing today as a result of a series of

small uprisings and various kinds of instigations that have taken place over the past five years. the tunisian example is the last of which, of course, but it's a big one. so i really do not know if we can characterize this as a revolt against neocolonialism despite the fact that, you know, whatever one might put on that category might actually explain the deteriorating conditions of these people, of people. >> next question. >> one of the things i've noticed in a lot of the media coverage of these events taking place across the region is the comparison with either, you know, is it 1979 or is it 1989? is the the iranian revolution or the fall of the berlin wall?

i think that kind of juxtaposition says that on the one hand either it can open up more to the west or it can go more the opposite way. but i think maybe -- can we are say there's also a comparison also with 1968 one of france with there being a cultural revolution that seems to kind of go in a different direction than either one of these? that is my first point and also the second one is, is it the role of twitter overplays? i think, you know, considering january 28th, all communication was off. because of that, that forced people into the street. nothing challenges, you know, like people in the street that won't move. [inaudible] >> i mean, if there's nothing

else, that would get people out. >> i'll take on that one in a completely different way than maybe you had anticipated. if we look at lots of different historical revolutions and get away from the american fixation on recent events always, so it's got to be '79 or '89, a lot of what we've seen and osama can tell you we've been emailing back and forth about this for the last couple of weeks, there's very close resemblance of patterns, for example, of 1848 or 1830 or 1789 or one of the things we talked about at the start would the egyptian army shoot its own people? historically most of the time armies don't like to shoot their own people. it's against their professional ethos. it's few to shoot a few striking workers, call out the national guard and call out the coal minors. we did that in america. but shooting people in the street. police will do it and armies

will do it but most of the time i thought they won't. i thought it would be very surprising the egyptian army would shoot its own people which has been the case and what's more dubious is the police did shoot people and that made perfect sense. the kind of response we predicted before it happened, that drugs would be used on the demonstrators, government folks, that we were in the accurate in the beginning that a lot of the looting was done by government agents and hired thugs. and as soon as i saw the footage of the antiquities museum, it looked to me like deliberate vandalism by police thugs because nobody stole anything. i mean, if you're a poor guy breaking into a museum with stuff that's really, really valuable, you'd probably take it. if you're there as some kind of vicious looter, right, it just would seem to me to make sense. some of the kinds of things that are very dangerous, this kind of

stuff where you bring in a few apparently legitimate figures from outside. louis blanc and the famous worker of 1848 and everything sort of calms down and you hold elections back to your 1968. what happened in france is all the demonstrations in the streets, the students and the workers they don't get together very well. the government talks about chaos and calls an election who wins the election. the right sweeps the power. it crushed the left. elections held immediately after events like this are going to fade to the right. it also happened in 1848. and in 1848 after the elections you have riots in the streets of paris in june '48 and they shoot about 3,000 workers. now, to me the most logical outcome about to what that is with a broker deal of suleiman and elections as quickly as possible because it gives the government forces the greatest possible advantage in the elections. the americans are happy because

we have, quote, elections which is our sort of fetish of democracy no matter illegitimate they may and in may and june you start argue people. they've all been on television. lots of them named themselves. a number of people in the square have talked about the fact that this is going to happen to them. and some ended up in prison, louis blanc fled to england and other leading people were shot. that's a very likely outcome and so i don't look so much to '89 or, you know -- there's another islamic revolution around the corner. i look to something like that. it's fascinating financial markets have that take on that. back to your points of the social economic. one of the ways i as a historian look at this. why didn't the louis xvi shoot his own people in july of 1789? because a lot of them were the children of the middle class, you know, the middle class doesn't really like you shoot your people in the street. they won't lend the government money anymore if you shoot their kids in the street and louis

couldn't shoot the demonstrators in paris and still float loans. what's happening on egypt, the government's borrowing rate jumped to 7.2%. it's now back down to 6.2% today. moody's and the others lowered the government's credit rating. in one case, some was at junk bond status and now the credit rating is going to bounce back. maybe some of the saudis bought some of their bonds. this tells you that the financial markets think that a deal is in the works, one of the key guys negotiating the deal is one of the biggest businessmen in egypt who's a billionaire, who's got close ties to suleiman, knowing what happened in other movements that is what's going on behind the scenes. east loop not going to say it's going to happen but the, you know, the parallels is very strong. so i look more to those early things except in the case of '68 the elections. i think that's very much likely

to be the case, if there are quick elections, the forces of order right after chaos -- even if they created the chaos tend to be the beneficiaries most of the time historically. i'm not saying it will happen. it's a frightening -- it's what the americans are counting on. that's what wizner made last week. that's what they're trying to do. >> and on that point, if you want to look at the comparison between '79 and '89, the position of the international community was relatively unequivocal in both instances. there was very little ambiguity in the u.s. message in '89 or in '79 but this is not exactly what you're seeing today in the case of egypt. there's a lot of ambiguity and that has impact and your comment at twitter is not necessarily look at twitter as a form of social media but simply to start thinking about how governments must now renegotiate the way they control, disseminate and

present information. and i was simply referring to it as being controlled it's more than taking control of tv and radio stations and managing this explosion and virtual communication is going to radically change the way governments interact with their citizens in the arab world. that's what i was trying to say. >> one sort of point on information. the egyptian government today announced a 15% wage increase for all state employees. so this ties right into the kind of package of things that is very typically done. there are other early revolutionary -- you buy off a significant morgue if you have a big state sector as you just described to us, that affects a lot of people and they want to get paid. >> but that's only at the price of one -- [inaudible] >> yeah, right. [laughter] >> next question.

yes. >> the comment about it being a bifurcated world order versus anarchy, do you think that's an overly optimistic analysis of the situation because it's one thing for a society to be unified in the state of a commonly recognized enemy but once that enemy disappears, then there are differing interests. there are competing ideas manifest themselves and then without some type of institution that can prioritize and have those interests then there becomes warring factions and the anarchy again appears. so when the anarchy appears without the ability to sort out these interests then there needs

to be another dominant, suppressive organization like the process of society? >> well, i will leave james to talk about -- or to address the 18th century political philosophy that's informing the question. i will say that there's no reason for us to be optimistic. in other words, there is no reason to think that this -- at no moment was there clear reason to think that this would succeed. and, in fact, since maybe the 28th there have been signs that whatever momentum the movement had, had already been coopted and deflected by large players even outside of egypt. but -- i am -- i would take

seriously the notion that without a state, people must necessarily fall into chaos. that simply isn't the case in egypt and what i was trying to show and i just it's actually -- it's not really a stretch the history of the last 20 years in egypt shows that by and large, there hasn't been an effective rule -- there hasn't been an effective state for most -- in most people's lives in egypt in the sense of a state that would provide any benefits. there has been a very strong state in the sense of a state that will wield violence either for a perceived enemy or in the case of egypt indiscriminately. but i guess i would say that the people -- no matter what happens in the coming weeks and months, i think people know quite clearly and understand quite clearly or at least a significant number of egyptians know that the state is not their

friend. the state is the enemy in this case. and they're trying to give exception with that without being overly optimistic although i would say i wouldn't buy into that view of the world. would you say anything about hobbs? >> well, you know, i mean, hobbs obviously has had a huge influence on american foreign policy in the last 20 years. people like john bolton talking about how you shouldn't keep international agreements because in this world there's no impartial arbiter to enforce them otherwise they are not worth the paper they're written on. it ignores the fact that we have not lost historic evidence that the existence of norms modifies people's behavior. and that doesn't mean he's going to follow the norms completely god forbid but it does, in fact, modify international states' behaviors as well and the approach is strictly as we were talking about, the state to

state. it's not about republic to republic. i mean, to me -- osama and i talked about this many times, and many, many times i talked about it with my dear friend and former colleague talking about in the '90s and the early 2000's there's no two-state solution between the palestinian and the israeli on a purely intellectual level and one could argue there's a two-republic solution but there is no two-state solution and one of the reasons that the negotiations fail all the time is that they're trying to achieve something that's intellectual impossible. and so i think some of these ideas actually matter on the ground a great deal when you start dealing with it. >> next question. i really thought your presentation on the republic was fascinating. and i'm curious if in some

likely or unlikely case, a coalition of it comes to power in some news coalition or whatever it may, if a profound, i think, anti-american or antiwestern or anticolonial sentiment in egypt will -- i mean, i think there's a general attitude of sort of we need to search for some nativism, whether that would be islamic, egyptian, arab in egypt. and i'm wondering if that may produce a backlash or if that's some hindrance to the eventual emergence of republican ideals in egypt? >> well, it always in this cases -- there's lots of hindrances. one of the first hindrances in a place like egypt with respect to its relations say to the west or to the united states as a couple of other people pointed out

without using the term essentially races take on this of the west that, you know, the egyptians really aren't up to that sort of thing. they can't rule themselves. the assumption is partly about islam but partly, in essence, about race, i would say. but the other problem that you face when you create a republic -- and i might say it's been very clear that he does not think quick elections are a good idea. he has said publicly there's no possible way to have a free and fair election in anything less than a year. he's no dummy. he understands what would happen. but if you look at the french example, if you look at the american examples in the 18th century, creating a new republic was a very complicated thing. you have these different groups back to the question -- or back there these differing ideas come to the fore. everybody is united against but being in favor of different things afterwards. then you have the issue of how do we deal with oppositional politics when your politics is

where no opposition has been tolerated and with the revolution chopping off the heads of his allies never mind his enemies and we end up with a civil war -- it's not the united states immediately traggid to this wonderful republic. we fought this brutal, ghastly civil war 85 years later to work out some of the problems. so the idea that republics, you know, kind of easily transition, a system like this easily transitions into a republic, that's kind of a mythology that we have about america but i also think -- for instance, when we look at africa, why are african states that became states in the '60s having so many problems? where was america 50 years after 1787? right? it's not like everything was all wonderful and they were all united. they were pretty divided about slavery. and they were about to start slaughtering each other over it. yes, the modern world moves

faster i'll go along with that but some of these problems are very significant problems. what's the idea of a loyal opposition? and as you may know in the united states there were the alien sedition acts. just think about the duel between hamilton and burr. these two guys can't figure out how to deal with political opposition and the secretary and the vice president goes out and have a duel and the other kills the other one. there's politics for you at least it was personal. so i don't think we should say what these people will do not simply in egypt but in a larger fwrieshgs almost everywhere. it has not been an easy thing to do. [inaudible] >> my question is, since you already have recognized do you have any plans to put it on the internet, your talks. >> are with you talk about the for-paper?

we have considered it but we will. >> we can put it on the center website. >> yes, stay tuned to the center's website and there will be information. >> i didn't think mine was worth it but thank you. [laughter] >> well, if there's no more questions, i'd like -- oh, there is one more question. >> i just have one about the kind of optics of the movement. from our perspective, it's so focused on the square and you're not seeing other parts of the country maybe because of media like media coverage there and central centers are protesting and things like that. why is that? and -- i mean, i mean, are there things going in those substantial movements outside of cairo? >> i can say a couple of words but it's really as somebody who's obsessively trying to

follow this. one thing is that the financial times seems to be reporting far more outside of cairo than everybody else. that just points again -- and the egyptian daily is reporting far more widely than just square and telling slightly different stories. the story that i think is really going to emerge as one of the most important ones actually is in the city of suez, which i simply don't know much about. the details, but that has been the site of some of the fiercest confrontations and the most steadfast sort of resolve on the part of the movement. would you all have anything to add? ..

>> like you go to the center, this is where you congregate. so you'll have, you hear about coming here about everything, the one in alexandria, i think i'm looking at the wrong person. hi. so you'll see a -- >> we will leave this program. you can see the remainder of it in its entirety on our website, c-span.org. going to capitol hill now as the

researcher ben bernanke is going to offer testimony this morning on the u.s. economic outlook for the house budget committee. last friday mr. bodek italy national press club audience that the u.s. economy should grow at a rapid pace this year but it will take several years before unemployment falls to normal levels. budget committee is chaired by wisconsin republican member paul ryan who this past tuesday told cnbc he is concerned that their policies have been nation on track for higher inflation. mr. bernanke on your screen, the only one testifying today. this is live coverage on c-span2. we expected to get underway in just a moment. >> now we can see you at least. before we begin to want to welcome representative rob will from georgia to the house budget committee. with a number of caucus and congresses -- confidence coming in. mr. woodall will be officially on board this afternoon with the

adoption of the house resolute and. i ask unanimous consent that representative woodall participate in this morning's board hearing. he as our new member. without objection, it shall be done. thank you, therefore, to talk about the state of our economy. the u.s. economy continued to suffer from slow growth and unemployment remains unacceptably high. continued uncertainty about our economic future is a good job creation today. washington is creating much of this uncertainty. all one has to do is go home and talk to a businessman, businesswoman, and that is exactly what you hear. the explosive growth in our federal debt is by far the biggest source of this uncertainty. by sowing doubt of future taxes, interest rate and price stability government -- creating a drag on economic growth today. the purpose of today's hearing is to discuss the fiscal and monetary policies that have led

us here. on the fiscal side cbo projects a $1.5 trillion deficit this year with publicly held debt raising to 69% of gdp by the end of the event that is up from 40% in 2008. in a few short years the cbo projects government spending to drive our debt to crisis levels. overwhelming the entire economy and drowning the next generation in reading. endless borrowing is not a strategy. we must restore the foundation of economic growth. low taxes, spending restraint, reasonable regulations and sound money. to help restore the engines of economic growth and job creation that is so essential. we must not neglect the sound money part of the equation. the federal reserve has undertaken another round of quantitative easing. purchasing treasury bonds in attempt to lower borrowing costs to stimulate the economy. my concern is the cost of the fed current monetary policy, the money creation and massive

balance sheet expansion will come to outweigh the perceived short-term benefits. i hope that's not the case. these caused me come in the form of asset bubbles and price pressures. we are witnessing a sharp rise in a variety of key global commodity and basic material prices and we know that some producers and manufacturers here in the united states are starting to feel the cost pressure as a result. according to the core price index is the fed post watches, these cost pressures have not been yet passed along to consumers but the inflation dynamic will be quick to materialize and painful to eradicate once it takes hold. the yield curve this week adds to these concerns and fuels some of the speculation. i'm concerned that normalizing monetary policy when the time comes may be difficult. not only for the pure technical challenges, issuing to the feds vowed she'd, but also for political reasons. it's hard to overstate the consequences of getting this wrong. the dollar is the worlds reserve currency and this is given us

tremendous benefits in the global economy. for the sake of our economy in particular and the global recovery as a whole, it is vital we focus on dollar stability if we're to prevent that could ultimately destroy a worldwide economic recovery. our currency should provide a reliable store of value to it should be guided by the rule of law, not the rule of man. there is nothing more than that a country can do to his people than to deface its currency. chairman bernanke, we know that you know this. we know that you're focused and concerned about is that the feds exit strategy in its future policy will determine how all of this is. many of us here that are monetary policy is on a difficult track your we are very concerned about our fiscal policy here, and we know that it is on a very, very dangerous track. that is a very, very well established fact. i firmly believe that a course correction here in washington is sorely needed to help us get

back on the right path. while it won't be easy americans have risen to the challenge and we have prevailed in the past. thank you for your indulgence, thank you for your time in coming here. we understand that you have to be a firm by about 12:30 p.m. so we will ask our members to stick within the time limit. at this time i would like to yield to our ranking member, mr. van allen. >> thank you mr. chairman. and thank you, chairman bernanke. i want to thank you for your service to our country during a period of great economic turmoil, and i think we been fortunate as a nation to have a student of great depression and your position to help us avoid a second great depression. when you appear before this committee two years ago, president obama had just recently been sworn. he had inherited a terrible situation. the economy was in freefall, spiraling downward at a negative growth rate of 6%. americans were losing their jobs at the rate of 700,000 every month. two years later things have

improved substantially. the economy grew at an annual rate of 3.2% in the last quarter, and more than 143 million private sector jobs have been created since the start of 2010. as you indicated in testimony before this committee last year, the measures taken by the federal reserve, the t.a.r.p. solicitation by the bush administration and the recovery act by the obama administration, an extraordinary severe downturn perhaps a great depression, uncle. that we know while the economy has improved, millions of americans are still out of work and the unemployment rate while coming down slightly remain stubbornly at unacceptably high. we must use all the tools at our disposal to help businesses put people back to work, and i hope at some point this congress through its legislative agenda will stop stop relitigate health care reform and start focusing on jobs. i commend you and your colleagues at the fed for using various forms of monetary policy to promote maximum employment,

and stable prices. i find it astounding at a time when millions of americans are out of work some of our republican colleagues have introduced legislation to strip the federal reserve of that part of its mandate that focuses on full employment and putting people back to work. the fed must not waver in his commitment to price stability, but to deprive you of the tools necessary to grow the economy would be a huge mistake. people need to pay attention to these proposals and people need to know at a time when millions of americans out of work, some are proposing that the fed it nor the unemployment rate part of its mandate. that would be taking us backwards, not forwards on a jobs agenda. i also commend you for speaking out about the need to put our country on a fiscally sustainable path. the president's bipartisan fiscal commission and the bipartisan commission have demonstrated that such plans are difficult but achievable.

and in his state of union address the president indicated that his budget would include cuts of 400 billion in nonsecurity discretionary spending as a down payment on that effort. clearly other measures must be taken, including i believe a comprehensive pass reform. but both bipartisan commissions also indicated it would be a big mistake to put our fragile recovery at risk by slashing outlays to early in the short term when millions of americans are still out of work, and the demand for goods and services is still relatively weak. that commission indicated, and i quote, nor to avoid shocking the fragile economy the commission recommends waiting until 2012 to begin an acting programmatic spending goes. the commission then gave us the same advice. mr. bernanke, this congress left to make difficult decisions to put our nation on a fiscally sustainable path. we must make those decisions in a responsible manner. one upcoming decision involves

do with the nation's debt ceiling. nobody, nobody in this congress should be playing political games when it comes to the full faith and credit of the united states. as speaker boehner observed recently, the debt ceiling vote requires an adult moment, uncle. chairman bernanke, you stated last week that the applications of not raising the debt limit would be quote catastrophic for our financial system and our economy. you urged congress not to focus on the debt limit in this discussion. i hope our colleagues heed your advice and don't engage in a reckless conduct a pussy and tight economy at risk. i have been surprised by the number of proposals being for that would -- would extend the full faith and credit of the united states government to china and other foreign countries not to american businesses and our servicemen and women. let's not gamble with the full faith and credit of our nation.

that would be a recipe for financial and economic chaos and would destroy any hope of putting americans back to work. they give mr. chairman and thank you chairman bernanke. >> chairman reilly, ranking member van hollen -- >> can you pull your mic closer to? >> how is that? >> that's better. >> thank you for inviting me. i'm pleased that this opportunity to offer my views on the economic outlook on monetary policy and issues pertaining to the federal budget. the economic recovery that began in the 2009 appears to have strengthened in the past few months. although the unemployment rate remains high. initial phases of the recovery which occurred in the second half of 2009 in early 2010 was in large part a tribute both to the stabilization of the financial system, the ethics of expansionary monetary and fiscal

policies and a strong boost to production from businesses rebuilding their depleted inventories. but economic growth slowed significantly last spring and concerns about our ability of the recovery intensified as the impetus from inventory building and stimulus diminished and as europe's fiscal and banking problems broiled into financial markets but more recently we have seen evidence that a self-sustaining recovery in consumer and business spending may be taking hold. notably real consumer spending rose at an annual rate of more than 4% in the fourth quarter. although strong sales of motor vehicles account for significant portion of this pickup, the recent gains of consumer spending at. reasonably broad-based. business investment in new equipment and software increased robustly throughout much of last year as firms replace aging equipment, and as the demand for their products and services expanded. construction remains weak though reflecting an overhang of bacon and foreclosed homes, and

continued poor fundamentals for most types of commercial real estate. overall, improving household and business confidence, and more supportive financial conditions, including an apparently increasingly willingness of banks to lend seem likely to result in a more rapid pace of economic recovery in 2011 than we saw last year. while indicators of production have been encouraging on balance, the job market has improved only slowly. following the loss of about eight points 75 jobs from 2008-2009 private sector would expand by little more than 1 million in 2010. however this game was barely sufficient to accommodate the info of recent graduates to the labor force, and, therefore, not enough to significantly a road a wide margin of slack that remains in the labor market. notably declines of the unemployment rate in december

and january, together with improvement in indicators of job openings and firms hiring plans, to provide some grounds for optimism on the employment front. even so without the growth likely to be moderate for a while and employers reportedly still reluctant to add to payrolls, it will be several years before the unemployment rate is returned to a more normal level. until we see a sustained period of stronger job creation we cannot consider the recovery to be truly established. on the inflation front we've recently seen increases in some highly visible prices, notably gasoline. indeed, prices in many agricultural products have risen lately large as a result of the very strong demand from fast-growing emerging market economies coupled in some cases with constraints on supply. nonetheless overall inflation is still quite low and longer-term inflation expectations have remained stable. over the 12 months ending in december prices for all the

business services consumed by households increased by only one point to present, down from 2.4% over the previous 12 months. to assess underlying trends in inflation congress also followed alternative measures of inflation. one is called core inflation which excludes the more volatile food and energy components and, therefore, can be a better predictor of where overall inflation is headed. core inflation was on 0.7% in 2010 compared with about 2.5% 2007 the year before the recession began. wage growth has slowed as well with average hourly earnings increasing only 1.7% last year. these downward trends in wage and price inflation are not surprising given the substantial slack in the economy. although the growth rate of economic activity appears likely to pick up issue the unemployment rate probably will remain elevated for some time. in addition inflation is expected to persist below the

levels of the federal reserve policymakers have judged to be consistent over the longer-term with a statutory mandate to foster maximum employment and price stability. under such conditions the federal reserve would typically ease monetary policy by reducing its target for the federal funds rate. however the target range for the federal funds rate has been near zero since december 2008 leaving essentially no room for further reductions. as a consequence they have been using alternative tool to provide additional monetary accommodation. in particular over the past two years the federal reserve has further ease monetary conditions by purchasing longer-term securities, specifically treasury, agency and agency mortgage-backed securities on the open market. these purchases are settled through the banking system with a result of depository institutions now hold a very high level of reserve balances with the federal reserve. although large-scale purchases and longer-term securities are a different monetary policy tool

than the more familiar approach of targeting the federal funds rate, the two types of policies affect the economy in similar ways. conventional monetary policy easing works by lowering market expectations to future path to future rate which in turn reduces the current level of longer-term interest rates and contribute to an easing in conditions. these changes by reducing bobbling costs and raising asset prices bolster household and business spending and increase economic activity. by comparison the federal reserve purchases of longer-term security do not affect short-term interest rates which remain close to zero, but instead put downward pressure direct on longer-term interest rates. by easing conditions and credit at financial markets these actions encourage spending by households and businesses through essentially the same channels as conventional monetary policy thereby strengthening the economic recovery. indeed, a wide range of market indicators suggest the federal

reserve's security purchases have been effective in easing financial conditions lending that these actions are providing significant support to job creation and economic growth. my colleagues and i have said that we will review the asset purchase program regularly in light of incoming information and well adjusted as needed to promote maximum employment and stable prices. in particular we remain unwaveringly committed to price stability and we are confident that we have the tools to be able to smoothly and effectively exit from the current highly accommodative policy stands at the appropriate time. our ability to pay interest on balances held federal reserve bank will allow us to put upward pressure on short-term market rates and tighten monetary policy when needed even if bank reserves remain high. moreover, we have developed additional tools that will allow us to drink or and mobilize bank reserves as needed to facilitate the smooth withdrawal of policy accommodation when conditions warrant.

if necessary we could also tighten the policy by redeeming or selling securities. as the imaging before the budget committee it is worth emphasizing that the fed's purchase of a longer-term securities are not comparable to ordinary government spending. in executing these transactions the federal reserve requires financial assets, not goods and services. these purchases do not add to the government's deficit or debt. ultimately, at the appropriate time the federal reserve will normalize its balance sheet by selling these assets back into the market or allowing them to run off. in the interim the interest that the federal reserve earns from its securities holdings as to the feds. in 2009 and 2010 those totaled about $125 million. fiscal policymakers also faced significant challenges. our position is determined a presciently since the onset of the financial crisis and the recession. to a significant extent this

decoration is the result of the effects of the weak economy on revenues and outlays, along with the actions the administration and congress took to ease the recession and steady financial markets. however, even after economic and financial conditions return to normal the federal budget will remain on an unsustainable path with the budget gap become an increasingly large over time unless the congress and ask significant in fiscal programs. for example, under plausible assumptions about fiscal policies might evolve in the absence of major legislative changes, the cbo projects the deficit to fall from its current level of about 9% of gdp to 5% of gdp by 2015, and enterprise to about 6.5% of gdp by the end of the decade. in subsequent years the budget situation is projected to deteriorate even more rapidly with federal debt held by the public reaching almost 90% of gdp by 2020 and 150% by 2030, up from about 60% at the end of

fiscal year 2010. the long-term fiscal challenge is confronting the nation are especially daunting because they're mostly the product a powerful underlying trends, not short-term or temporary factors. the two most important driving forces behind the budget deficit are the aging of the population and rapidly rising health care costs. indeed, the cbo projects that federal health spending will roughly double as a percentage of gdp over the next 25 years. the ability to control health care spending while providing high quality care to those who need it will be critical for bringing the federal budget onto a sustainable path. the cbo's long-term budget projections by design did not account for the likely adverse economic effects of such high debt and deficit. but if government debt and deficits were to grow at a pace envisioned the economic and financial effects would be severe. sustained high rates of government borrowing would both drain funds away from private

investment and increase our debt to foreigners with adverse long run fx and u.s. output incomes as standards of living. moreover, diminishing investor confidence the deficit will be brought under control would ultimately lead to sharply rising interest rates and government debt and potentially to broader financial turmoil. in a vicious circle high and rising interest rates would cause debt service payments on the federal debt to grow even faster resulting in further increases of debt to gdp ratios and making fiscal adjustment all the more difficult. in thinking about achieving fiscal sustainability it's useful to apply the concept of the primary budget deficit which is a government budget deficit excluding interest payments on the national debt. to stabilize the ration of federal debt to gdp a useful benchmark for assessing fiscal sustainability of the primary budget deficit must be reduced to zero. under the cbo projection that i noted earlier the primary budget

deficit is expected to be 2% of gdp in 2015, and rise to almost 3% of gdp in 2020 and 6% in 2030. these projections provide a gauge of the adjustments that will be necessary to attain fiscal sustainability. to put the budget on a sustainable trajectory, either -- some combination will have to be taken to eventually close these primary budget gaps. by definition the unsustainable trajectory of deficit to debt that the cbo outlines cannot actually happen because creditors will never be willing to lend to a government with debt relative to national income that is rising without limit. one way or the other fiscal adjustment to stabilize the federal budget must occur at some point. the question is whether these are just as will take place through a careful and deliberative process, that gives people adequate time to adjust to change into government

programs and tax policies. or whether new fiscal adjustment will come instead as a rapid and painful response to a looming or actual fiscal crisis. acting now to develop a credible program to reduce future deficit 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 increase consumer and business confidence. plans recently put forward by the president's national commission of fiscal responsibility and reform and other prominent groups provide useful starting point for a much-needed national conversation there although these proposals differ on many details they demonstrate that realistic solutions to our fiscal problems still exist to of course economic growth is affected not only by the levels of taxes and spending, but also by the composition and structure. i hope that in addressing our long-term fiscal challenges the congress and administration will undertake these forms of the government tax policies and spending priorities than serving

on to reduce the deficit, but also to enhance the long-term growth potential of our economy. for example, by reducing disincentives to work and save, by encouraging investment in the skills over workforce as well as machinery and equipment, by promoting research and development, and by providing necessary public infrastructure. our nation can't recently expect to grow its way out of our fiscal imbalances. but a more productive economy will ease the trade-offs that we face. thank you, mr. chairman, ranking member. i would be very pleased to take a question. >> thank you, mr. chairman. first let me lead off with what you concluded. just to summarize, you do believe that one of the best things we can do for short-term economic growth is to put out a plan that actually stabilizes our fiscal picture, but actually gets our liabilities under control and shows with confidence that we have the right trajectory because we have addressed the programs which are spending programs that are

getting out of control, is that the case? >> that's correct. >> i want to talk to you about qe2. last time you came to the committee to testify you said that qe2 is not an exercise in monetizing the debt. now, the question basically is this. i understand from your perspective use a qe2 is not monetizing the debt because it is not causing runaway inflation because the money you are creating is not yet circulate in a broader economy come is being held as bank reserves. but isn't this sort of a distinction without a difference? it seems to me the argument here is that the intention of qe2 is what we are to be focusing on because the intention is to bring rates down and economic growth. and, therefore, the intention is what should matter here, but this is debt monetization. so isn't that a distinction without a different? >> no, sir. is monetization would involve a permanent increase in the money

supply to basically pay the government's bills to money creation, what we're doing here is a temporary measure which will be reversed so that at the end of this process the money supply will be normalized, the amount of fed's balance sheet will be normalized and there'll be no permanent increase either in money outstanding in the fed balance sheet or in inflation spent if we get this wrong and credibility is diminished because of these moves and expectations for around price increases than we do have a big interest rate problem. if you look to our fiscal side of it, just raising interest rates under a normal average predictions will just be vicious to our balance sheet. the interest payment alone in the current budget window which assumes an extremely low interest rates through the decade go from -- to a trillion at the end of the budget bill. if interest rates move up from the current projections, which i think long bonds are about four to 5% of the budget window, that's about one to anywhere

from six to $10 in extra interest payments. basically this is all based on confidence that what you're doing and saying the be done. in confidence and credibility is critical in all of us. what i'm trying to get at is, just take a look at today's "wall street journal." inflation worries spread. you've got basically inflation jitters spread to emerging markets. in brazil, the government reported tuesday it wishes accelerating. we've got my inflation popping up in other parts of the world. after all, many countries tightened the county to the u.s. dollar. my basic question is, what extent do you think the fed's monetary policy stance has contributed to these global inflationary pressures? has this contribute to the hot money flows abroad that have led to some of these imbalances that are not fully appreciated when we examine the cost of benefits under current qe2 monetary policy stance? >> mr. chairman, your first sentence under the headline was very revealing. the inflation is taking place in emerging markets because that's

where the growth is. that's where the demand is and that's where some cases the economy are overheating. it's the responsibly of the emerging markets to emerging markets to set the monetary and exchange rate policies in a way that will keep their economies on a stable path. the increases in oil prices, for example, are entirely due according to international energy agency to increases in demand coming from emerging markets. they are not coming from the united states. so the bulk of the increase in commodity prices is a global phenomenon in the united states, inflation made here in the u.s. is very, very low. of course, that's a serious problem but monetary policy can't do anything about bad weather in russia or increase in demand for oil in brazil and china. what we can do is try to get stable prices and growth here in the united states. >> so as you look at some of the leading indicators, the yield curve for instance, commodity prices, it does not send you a warning that inflation is building in america? or are you still looking at core

inflation as your main guidepost measuring whether or not monetary policy is keeping prices in check? my basic question is, my concern is using your model, my fear is you're going to catch it before the cow is out of the bar. he was a inflation after it's been launched, and given that you have a huge balance sheet, given that we're basically in uncharted territory with respect to the great recession and the responses that you put out there, that we're going to catch this after it's too late. could you please give us a sense of what else you're looking at to gauge inflation in america, other than core inflation which as you know there's a big debate as to whether that's a proper to use or not, even the ecb uses broader definitions of inflation. so where are you looking outside of your core inflation to give you a gauge as to how to set monetary policy to prevent inflation from actually being unhinged here in america's? >> mr. chairman, let me say first that there'll be no doubt that we are unwittingly

committed to maintaining price stability that is a very, very strong goal and objective. we will do so. in terms of what we're looking at first of all, overall inflation including food energy is still very low, about 1%. but looking forward to that the but credibility in the yield curve if you look for example, at inflation break evens which are a measure in the inflation index on market of what the markets think inflation is going to be, the five your breakeven is about 2%, to .1% the last i looked. there's not really indication in financial markets that in the united states, there's an expectation of inflation. that being said we will look very carefully not only at output gap and those things that you mention, but also at commodity prices, interest rates and all the other indicators that will help us assess when inflation is becoming a problem. it is always an issue as you know, mr. chairman, that in the recovery did you have to pick

the right moment to begin removing accommodation, taking away the punch bowl. and we face that problem as the central bank always does. we are committed to making sure that we do it at the right time. >> when you see this yield curve that is taking place recently, do you see that as market participants showing some concerns about future inflation, or do you see that as signs that economic recovery is beginning to take root? >> the inflation break evens have risen since we began the qe2 program in august but it was a very low levels to about normal levels. the bulk of the increase has been in the real side of the interest rate which means that like the stock market the bond market is expecting greater future growth and is more optimistic about the u.s. economy, and i think that's a good thing and i think our policies have contributed to that. >> we have a bigger punch bowl that would normally have in these times, and if we're in a cyclical situation, i don't think concerns would be as great

as they are right now but part of our pop as you mentioned on fiscal policies it is structural. we have a tidal wave debt we're running into, interest rates begin to leave, we have a serious problem on our hands. and it just gets to a vicious cycle like you described. the punch bowl, your assets, your balance sheets, had he done a stress test on the fed's balance sheet assets as an exit strategy occurs with higher interest rates that perhaps result from what's been going on? so had he done a stress test on your balance sheet? and what level of losses do you think are acceptable as you withdraw? >> we have done multiple stress tests. under most likely scenarios, the fiscal implications of the balance sheet are positive, that we've are returned in in the last two years $125 billion to the treasury, and given our low level of costs, low cost of

financing, under those plausible scenarios we will continue to be, the policy will continue to be possible. that's not the main objective of the. the objective is to strengthen the economy. if short-term interest rates were to rise exceptionally high, much more than we anticipate, then it could be that the remittances to the treasury will go down for a time. but in that case it probably also be the case of the economy was much stronger than expected and tax revenues would more than compensate for the loss. so our sense is that on the net expectation from the fiscal side is that this will be constructive and reduce the federal deficit. >> it could go on for a long time but want to be fair to my colleagues. mr. van haute? >> thank you for tesla. obviously deny states is part of the global marketplace but your job, your mandate at the fed is to watch out for the american economy, is that right? >> yes, sir. >> your testimony is that you are vigilant about looking out

for inflation pressures but your assessment right now is that we do not have inflation problem in the united states, is that direct? >> we do not now have a problem but i want to repeat that we are extending vigilant and will be careful to make sure that we don't wait too long. >> and your policy known as qe2 and qe1, qe2 was referenced. by your assessment, how many american jobs has that saved or created? >> it's very difficult to know precisely. there has been a number of studies which have tried to assess using macroeconomic models and so on. a very careful study done by federal system reserve economist just the total job impact of all of the key we programmed including qe1, including the reinvestment, including qe2 could be up to 3 million jobs. it could be less, it could be more. but the important thing to understand is that it is not insignificant. it is an important contribution

to growth and job creation, and we are at a situation would have almost half of the unemployed being out of work for more than six months. and the longer the people stay out of work the more difficult it's going to be for them to come back and rejoin the labor force at a decent wage and to return to the previous employment. >> as i understand that was a credible study in your view. >> it is and have been other studies as well which are comparable. >> just focusing on qe2, my understanding is that just with respect to that, those monetary decisions that that create or save between 60,700,000 jobs come is that correct? >> the same study, prospectively in part to the $600 billion qe2 about 700,000 jobs. let me just emphasize that these are simulation studies, but they do indicate that the potential impact is significant. >> mr. chairman, simulation studies of what the fed and we

all do, right? >> correct. >> with respect to that policy come if you did not have those tools at your disposal and are not able to use them, i assumed that would mean that you would not be able to take action to save or create 3 million jobs, is that correct? >> correct because her interest rate is basically down to zero. >> i want to return to debt ceiling because of this congress will face a very important decision coming up. at last week at the national press club you indicated the failure to raise the debt ceiling would be quote catastrophic for our economy and financial system. i assume you have the same opinion to take? >> yes, sir. >> you also indicated at the national press club that it would be a mistake for in your view, for the congress to use the debt ceiling as a quote bargaining chip with respect to decisions on spending and tax, that we should address those as

part of our normal discussion but not hold the debt ceiling hostage to that. i assume you still have that view to take? >> to be clear it's very important to address these issues, but the risks of not raising the debt ceiling is that interest would not be paid on outstanding government debt. and if the tranny defaulted it would have extraordinarily bad consequences for our financial system and it would mean that we would face higher interest rates indefinitely because creditors wouldn't trust us to make our interest payments. >> i mean, it would be reckless from an economic and financial perspective to allow, to essentially -- default on our debts and question the credit worthiness and full faith and credit of the united states, correct? >> we do not want to default on our debts. >> had had an opportunity look at some of the legislative proposals that have been introduced on the senate and house side that would purport to try and delay those payments? have you seen secretary

geithner's comments in response of? >> we have just begun to look at the issue of whether or not you could reorder, prioritize payments so that the debt interest would be paid but other things not be paid. this has not been done before, and our early assessment is they would be some difficulties in just a purely operational point of view. for example, you would have to differentiate between social security payments which would not be going out versus interest payments to individuals holding savings bonds which would be going out, and that might cause some operational issues. so we do have concerns on that score. >> some of these proposals would actually allow the full faith and credit of the united states to extend to some of our foreign creditors like china and other governments, but not the u.s. businesses and american citizens. let me ask you a quick question on the fiscal policy.

because i think we all agree that the congress should act now to put in place a plan to get our deficit and debt under control. we need to come up with a plan to put this country on a sustainable is the path. and as you indicated, you referenced the bipartisan commission, the president's commission and your remarks. the office of the plant observed adequate innertube -- the commission recommends waiting until 2012 and enacting a problematic spending cuts. let me just ask you this, mr. chairman. if you were to take a lot of investment out of the economy at this particular point when it is fragile, could that create a drag on the economy and have an impact on jobs and? >> if it were large enough a good, but on the other side i just want to emphasize that the deficit reductions approach

should be one to take a long-term perspective, that you're looking at a long-term window and addressing the whole trajectory of spending rather than looking only at the very short-term. >> okay, and i agree with that, mr. chairman. i was pleased to see new testimony that you believe that certain investments, national investments in our economy in fact lead to productivity and growth. although some are trying to turn investments into a dirty word, but as you indicate here, investment in our public infrastructure, investments in education and investments in science and research can, in fact, have a positive productive impact on economic growth, is that correct? >> if they are well done, yes. >> something tells me we'll have a big debate over the definition of investment over the next two years. mr. garrett. >> thank you, mr. chairman. falling on a couple of those questions before you hit other

ones, so, mr. ryan was asking initial questions and your response back to monetary policy, whether monetary, monetizing the debt and like your actions have been short-term in nature. as opposed to permanent actions which could if i understood you would be effectively monetizing the debt. it is in the question becomes if you had implemented permanent, there's nothing that would preclude the fed somewhere down the road to undo the action later on if you are not bound by your decisions today. so anything that is permanent is also changeable by the fed, correct? is nothing permit you to do today that you could not undo the? >> the key here is expectations and the markets don't expect inflation which means they expect us to undo this process at the appropriate time. >> to what you have is a definition between, difference between one's interpretation of what is permanent and that is

temporary. i would imagine no fed chairman would ever come to this table and say i am engaging permanent monetizing of the debt. that no might how they would describe to us they would describe it as i've only taken a temporary action to get over to this period that we're in right now, isn't that right? >> that's what we're doing is a temperate action but, of course, the fed always buy securities for various reasons. that's how we create the currency that americans use everyday. >> but this is outside of the norm as far as your balance sheet. >> that's right. >> part of your opening comments, one of the good signs right now is consumer spending is going along which is the economy going forward, right bucks isn't that part because that's exactly what you're doing, whether we can't permanent or temporary because of that cheap money that is after that is encouraging all of us to say that it is cheaper to bar right now so i can actually increase my consumer spending. >> that's how monetary policy works all the time, not just now. >> in the area of housing, you said the age-old question of

what caused us to get into a situation, and it was only monetary policy, paraphrasing here, that got us into this situation under the old line that he did three comments in a room you will come up with four different debt and -- four different definitions. when you were saying that about three quarters of economists in the opposite of that. it was a cheap money, cheap monetary policy that was bringing us into this situation. so you disagree on that point with a number of other economists, the low cost of money that exacerbate the housing problem, right? >> right. >> but you are using on the other hand to say we'll use that exact same post a basically cheap money to do what? to try to drive up the cost of the housing in order to pull us out of this economic mess, right? >> right, but housing isn't responding at all to the policy. >> but that's her ultimate goal here. people will be up to start buying houses again and we will hit the bottom and housing prices will go back up again. >> again, that's how monetary

policy works. >> i am in this quantity. on one hand using in the past, it didn't cause the problem because monetary policy wasn't driving the cost of the housing and causing a problem that we have here. you are going to use that exact same point a to say it does have a significant or should we hope so have a significant impact on monetary policy. so i'm at a quandary as to which is that? will have an impact in the future? why giving us could have impact now? >> it should have an effect that is proportionate to the interest-interest rate change now i'm in the housing bubble we saw earlier in the decade was far greater that could explain by the monetary policies at the time which is one the reasons why i don't because monetary policy was a major source of that bubble. >> very quickly, last minute and 15 seconds. significant reductions for addressing the short-term spending aspects be good for the market and economy despite some of the critics on the other side

that say it may be detrimental to overall growth? >> again, i think it's really a question of the long-term plan. to the extent does a long-term plan it could be helpful, yes. >> moody's is looking at us at what we're doing in washington. i suppose are optimistic because they cannot a month ago with a report looking at the fiscal health, looking of three categories. the debt, revenue and interest payment revenue. they said if you succeed, they conclude it would expect to say both constructive efforts to reduce the current deficit as well as constructive effort and control long-term growth and entitlement spending. i guess they're optimistic that's what washington does. are you optimistic that we'll be up to make those hard choices even if they make some significant cuts in spending right now? >> i'm not certain and that's why i'm making this case, that i hope people, that takes is a the responsibility to address this problem. >> i yield back.

>> thank you very much for your service, mr. chairman. while that may be true that there are only two certainties in life, death and taxes, i would think that a close third would be gigantic bonuses for many at gigantic wall street financial enterprises. when you were here to testify last, you responded to my question about that by indicating that the federal reserve under your direction was preparing a public report to the american people on bank compensation structures that would be available at the end of last year or early this year. about four months ago your general counsel testified here in the house also about the importance of making that report public to the american people. when can we expect to see the report? >> i believe that will be soon. we survey are working in that direction. as you know we put guidance out

in 2010 and we're working to follow the requirements of the dodd-frank act to put out additional restrictions. >> i know there have been some discussion that that public report that you testify to us about and your general counsel testified about would now be kept secret. but it is your intent to make it fully public to the american people? >> that's my understanding, yes. >> and you think that will happen very soon? >> i believe so but i would like to get back to you if i might on the exact date. >> please do, especially if any part of it will be kept secret as some have suggested. i think that would be, that kind of reversal would be very troubling. and judo. moving to the issue of consumer financial protection bureau, created in the wall street reform law, you're very for me with it to on the american people with information that they need to make informed financial decisions.

many question whether that euro should be located within the federal reserve, and given concern about independence of the bureau and ability to fulfill its mandate. with it set to begin operations shortly in july, and with no consumer financial protections bureau director yet nominated, can you provide us assurances that it will be sufficiently strong and independent to fulfill its mandate to offer consumer protection to the american people for the many credit abuses that they have faced in the past? >> congressman, the cfpb is located in the federal reserve on in a narrow sense that the federal reserve pays the bills. we have no oversight or control, the controller is coming coming from the treasury and i think they are the ones who would be most appropriate to respond to

you about the nature of the bureau. >> you have no -- and the fed has no involvement in the operation of the bureau? you were just kind of the landlord and the paymaster? >> we're doing our best to help them get set up. there's a lot to be done in terms of just hiring people in setting up an i.t. system and so on, but in terms of policy making and so on, they are completely independent of the federal reserve. we have no say whatsoever. >> you were making no recommendations about who the director should be or how the bureau will operate in any way from a policy standpoint? >> no, sir. that's not part of our responsibly under dodd-frank. >> another major issue that perhaps involves the treasury some and involves to some is the future of freddie mac and fannie mae. some concern that perhaps most, if not all of their functions would again be turned over to a new large financial enterprise.

what is your general approach to the future of these two institutions and? >> well, as you know, the treasury as promising as a set of proposals very soon and it will be interesting to see what they provide. there are various possibilities that we could do, including making them a government utility or privatizing them which would be to alternatives. one suggestion which i have made in previous remarks is that if the government is involved in providing credit guarantees, it should do so only as a deep backstop. that is, the first losses should be borne by the originators of the mortgages or by the securitizers. the government if it does provide backstop insurance should do so for an actuarial fair fee, premium. and that would be essentially allowed the government to provide a backstop in situations

like we had the last few years where the housing market comes under enormous stress. >> thank you. thank you, mr. chairman. >> mr. campbell. >> thank you chairman ryan and chairman bernanke. something's economics are typical ends somethings are structural. you mentioned earlier today that you thought that unemployment are. no, the other point would remain elevated for an extended period of time. how much of our current high unemployment in your view is cyclical and how much is structural? >> i don't have a precise number but we have done a lot of work looking at this and i would say that the bulk of it is still cyclical. risk is that if it goes on long enough and it will start becoming structural as people lose their skills and their connection to the labor force. >> is it fair to say that you control only over monetary policy, not fiscal policy and government policy, and that it to the extent that unemployment is structural and that is something truly out of your per day to deal with, qe2 or any other form of monetary policy? >> that's correct.

>> i'd like to talk what mr. ryan refer to a minute ago about this spending and investing a lot of talk these days about what we need to grow the economy is spending, government spending, spending by individuals, spending by consumers but to me there's a great distinction, the term investors thrown around a great deal but an investment means that someone puts money to work expecting a monetary return, and that's very different from spending. in order to achieve long-term growth, stable employment growth, don't we need -- isn't investment from a true definition and saving where we should be trying to hit rather than just focusing on consumer spending? or government spending. you mentioned earlier today that we should remove the disincentive to saving and should we be removing disincentives to saving and investment to get us long-term growth on both private and

public sectors because i mentioned the tax code to reduce incentives for productive activity, it's very important for both individuals and for businesses and for investment. the government does have some role in providing infrastructure and education and so on. obvious a, but the way that done and the level it is done as a matter for congress to decide. >> do you believe that we currently, you mention mentioned disincentives, savings. do we have disincentives in place to block saving or investment from the private sector that could add to growth? >> i think to be a lot of agreement that our tax code is very complex and is not conducive to the most productive activities in many cases. >> switching to qe2, the flavor of the day as it were. had a full and limited qe2 get? >> no, sir. we announced an intention to

purpose 600 billion between november and june, and so we are, you know, about halfway through. >> halfway through. what are the metrics -- when qe2 finishes, in june and you mentioned you could reverse or whatever, what are the metrics that you are following that lead you either to believe you should have qe three are that you should reverse qe2 of? >> well, first is the question of efficacy and we are seeing the intended result in terms of financial markets, in terms of financial conditions. so in that respect we think is being successful. 's intense looking forward we'll be trying to assess whether the recovery is on a sustainable track and things have moved in that direction, which is encouraging, and will be trying to assess whether inflation is low and stable at around 2% are a bit less which we think is about the right level and most of the central banks think is

about the right level. and looking forward if that appears to be the director we are on, and additional action would not be necessary. we are still in a situation where the recovery does not seem to established and deflation risk remains a concern then we would have to think about additional measures. >> once the trigger that causes reversal of? >> if the economy begins to grow very quickly and inflation risk begins to rise, then we would reverse it. >> okay. the final question i think, mr. ryan alluded to this article, there's been fairly significant moves in the tenure and 30 year treasury yields just recently. what do you think is causing that and does it, and are you concerned? >> no, i'm not concerned. i think, i think it reflects primarily increasing optimism about the u.s. economy and its natural for the term structure to move in that way when investors become more optimistic about growth.

>> thank you. >> mr. blumenauer. >> thank you for joining us again. you come in -- you come at a time when there are lots of people including in congress who are very interested in helping you do your job better, critiquing it may be, may be undertaking some things that would constrain direct control. but i got from your message that there are a couple of things that congress should be focusing on that is our primary job. one, because we're all in the business of making sure that confidence in the united states government, meeting its obligations, not putting an undue clout over it, and then he referenced the aging population and health care, which again is within our purview. there have been, no secret, a lot of suggestions that as we

approach the debt ceiling, and there is widely acknowledged, no one disputes the need to extend it, there are discussions about conditions and terms under which some of it might have a change of schedule debt repayment, has this been your experience both as head of the federal reserve and as an economist and a scholar, has this been the routine? has congress done this regularly in the past? >> well, there have been in the past political battles. both parties have done this over whether not to raise the debt limit. >> i'm talking has congress ever in the past establish conditions on limitations on the debt ceiling, or the sequencing, changing the order of business

so we do not just honor our obligations to make sure that there is adequate speed is your talk about prioritization of payment. know, that hasn't. that's not happen to my knowledge. >> hasn't been conditions attached to debt ceiling increases in the past? >> i don't know if there've been direct conditions. there has been negotiations about budgetary matters which have preceded those conditions. >> setting that aside, we will always do that. that's our job. i think that is appropriate and when we will get down to cases in terms of cutting and i think there may be some bipartisan initiatives that would implement some of the recommendations. ..

>> i think that's critical. >> i think it's clear -- well, i'll just say, i appreciate you have some limitations in terms what you say, but i think it's obvious, if we're playing games with something as routine as this, holding out the prospect, that we're not actually going to meet our obligations, and even if it's seriously considered, not negotiations, not disagreeing about elements, but considering that as the nuclear weapon, that has got to shape that confidence. you mentioned health care, and that is something in our

purview. there are some differences of opinion. some are not interested particularly in advancing the reforms that are in place as opposed to perhaps an opportunity to accelerate, to actually put teeth into what we're doing and get down to cases who actually change that health care curve. from your perspective, are we better off actually following through on the commitment to deal with health care reform and dealing with long term costs, or making this just one of these areas that we continually talk about push back and forth and make no progress? >> it's out of my purview to support or not support a specific plan, but i do think it's very important and essential to the long term fiscal situation that we address the cost for the private economy and also for the federal budget

that are going to be increasingly a dominant part of our spending. >> thank you, sir. >> thank you, very much. you said in february, the federal reserve would not bail out state and local governments. is that because you have no intention of bailing out local governments or you can't physically do it because of the law? >> i would say both. [laughter] >> you mentioned at the very end of your testimony that enhancing long term growth potential of our economy, "by reducing disincentives to work." what are the disincentives you mentioned? >> i'm speaking on the tax code and transfer programs that create essentially very high tax

rates on earned income to the extent that we can simplify our tax code, reduce rates, broaden the base, eliminate complexity, ect., in ways that will make it more financially attractive for people to work, save, invest, and so on. it's good for the economy. >> anything beyond the tax treatment that falls into that category from your perspective? >> again, tax and transfer policies would be ones. i don't know what else you're thinking of, but those are the two i would focus on. >> thank you. cbo reports fannie and freddie uses fair budgets accounting to measure the financial impact of the two gse's. more yofer, are that federal entities, but treats the mortgages they guarantees as obligations of the government scoring them on a market risk present value basis. do you agree with this budgetary

treatment? >> it's important that we take into account in our budgetary planning the perspective costs of fannie and freddie. now, there are different ways to do thatment as i understand it, fannie and freddie are not fully consolidated with the federal budget, and the decision is made to make separation between the two institutions. as we think about the situation, the cost being incurred are obviously something important to keep in mind. >> the feds are the biggest treasuries over the last several months and report ised fetes passed china. does that distort the bond markets and create dependency and something the fed should be worried about? >> we've been very careful not to distort the bond market. we've paid attention to that issue. we monitored functions, made

sure we don't own too high of fractions of any particular issue of any government bonds, and our clear sense is that the treasury markets are functioning very normally, very liquid, and that we don't see our policy, which again, is a temporary policy as creating any particular problems for the market itself. >> there have -- mr. chairman, there have been discussions out there in the newspapers and whatnot, other countries pegging oil and whatnot to something other than the dollar. what type of concern do you have about this? do you see this as a reality or just -- >> there's not -- the price -- sorry, the currency in which is invoiced is not of much consequence. another question, though, a broader question is what currency is the reserve currency, the currency countries

hold their international reserves in, and the fact the u.s. dollar share of 50%-plus is stable, and i really don't see any likely change in that. in fact, seeing the problems of euro, ect., the growth and dollar have been looking attractive more than the other currencies of the world. >> thank you, mr. chairman, i yield back. >> mr. mccullen. >> thank you for being here, mr. beer -- mr. beer -- i look forward to hearing some of your advice, suggestions, and ideas on how we move forward with getting out of the great recession, and i want to be part of a solution, and we hear a lot

of talk here in congress about spending, but i'm also concerned about a lot of tax perks that lobbyists have been very successful in getting for special interests in our tax code, and i think that we need to put everything on the table, but having said that, today, we focus on spending quite a bit as questions have come through. in fact, i'm going to para phrase a tea party slogan, the department doesn't have a revenue problem, but a spending problem. chairman ryan put forward his best budget that cuts from the budget. the republican target reduces the fy11 projected deficit by about 2.5%. that leaves 97.5% of the deficit in tact. now, in an extreme scenario if

all 176 republicans study committee members would have their way and take control, they would be allowed to cut four times what chairman ryan's best effort is, but that only still represents 10% of the federal budget deficit for fy11 still leaving more than 1.3 trillion. it seems clear to me that the deficit is not just a spending problem. is it possible to reduce the federal deficit to responsible levels without capping or cutting defense spending and without looking at the tax perks that many corporations and lobbyists have been successful in getting? now, my second question is with the types of cuts being discussed, do you think that we need to be insightful when making these spending decisions on what to cut on the impact of jobs as well as u.s. competitiveness and the global

economy? i think we need to be careful of gutting investments in education, infrastructure, and r and d. they may put us at a disadvantage. >> on your second question, obviously it's important that the deficits be brought under control, but it's not a matter of total spending and revenue. it's also how smart is the spending and the tax code? is it a way that's constructive for growth and competitiveness? i urge the congress not only to take about total budget numbers, but think about the various programs and tax provisions to make sure they are growth friendly, and that's a very important part of your job. in particular, you mentioned perks, ect.. i think one direction that at least should be considered would be in the corporate tax code, for example, to reduce a lot of loopholes to broaden the base

and therefore be able to lower the tax rate which is now soon going to be the highest in the industrial world so that the decisions made by corporations are based, you know, not on tax distortions, but rather on the economics of where, for example, they should locate their plants and so on, so i do think that growth friendliness is a very important part of this, and that lower rates and broader base is something that most economists agree is a good direction to go in the tax code. on short run versus long run, again, i understand there's a lot of focus on this year's budget. without commenting directly on that i do think in order to be credible given that the budgetary problems get worse over time, that is as the baby boomers retire and health care

costs rise and so on, given the perspective deficits are rising over a long period of time, i would hope that a good bit of your discussion will be about the long term over the 10-20 year horizon to the extent that you can change programs that will have long term effects on spending and revenues. that will be a more effective and credible program and one that focuses. >> thank you, mr. chairman. as you know, we're setting the subject, we setting the spending in ways that issues with the tax code and addresses any tax perks, but i can't make a decision in isolation, so i look to all of us to put everything on the table so that we make a well-rounded decision as we move forward with the budget. mr. chairman, i look forward to working with you. >> our budget is the first effort of getting fiscal control in this place.

>> thank you, chairperson ryan, and thank you for coming in today. i'm one of the new freshman members. i worked in the private sector owning my own business. my questions today relate to two central areas. one is the debt ceiling, to hopefully get understanding there, and then also your take on lending to small business and medium sized businesses. first of all, in order to better understand -- it might be reckless for the u.s. government to default on debt. would you agree that's a true statement? >> certainly. >> is it not also reckless to have the level of uncontrolled spending that the american people are witnessing by this congress in the last 20 years or so? >> absolutely, and i don't mean to imply you shouldn't be addressing that, just do it in a separate measure. >> okay, understood. as a business owner, often the

lenders would impose their own debt limit on many companies if we were reckless in the spending and balance sheets didn't look very good. at some point, they impose their own debt limits. is it not likely at some point that lenders to the u.s. government will impose a debt ceiling of their own? >> the bankers definitely, but it's really a spending limit, saying you can't spend anymore. you already made decisions about what the government will spend and what revenues it will collect. that implies a deficit that has to be financed. if you set a limit that's too low, that means you can't borrow money you already spent, so it's really extraneous thing. once you set spending and taxes, you are essentially defining how much you have to borrow. if you don't allow the government to borrow that, then,

again, the only out way to do that is not to make the required interest payments which your banker wouldn't like that i'm sure. >> correct, sure. or the other alternative is increase revenue or decrease spending so you don't exceed debt; correct? >> sure, sure. >> you just mentioned moments ago it's important to look at a 10 or 20 year horizon. the american people are cynical we're able to do that in such a way that 20 years from now we're still having this same discussion over again, and i think the fear that the american people have is that at some point lenders will say to us that's all we're lending or price this at a place that's so catastrophic to the economy. >> that's a risk. >> a legitimate risk over the next decade? >> yes. >> as do i. thank you for that comment. it is almost a con straint

stream of constituents coming in my office since i arrived in dc discussing the difficulty they're having finding financing and lending. their ability to borrow has been restricted in the last 24 months. can you talk about what it might take for local medium banks to once again loan money? what's causing the restriction? >> well, first, part of it came from the fact that banks after the crisis were deleveraging and cutting back themselves. part was from the economy being weak and borrowers didn't look attractive and their cash flows were less attractive than they were before the crisis. there's supply and demand elements of that. beth of those things i think are looking better. banks have increased their

capital. they are feeling much more stable, much more liquid, and our sense, and we do surveys, is that banks are, while they have tight standard, are at least beginning to ease the standards and looking more actively to find good borrowers. i think that's improving somewhat, and likewise, as the economy strengthens, and seeing increase z in commercial real estate that small businesses use as collateral, there will be more small businesses that can qualify for credit. things are getting better slowly. the federal reserve is working very hard with banks and small businesses to make sure from the regulatory point of view we are not preventing banks from making loans they should make. we want them to make good loans and we have been clear about that in our instructions to banks and training of our examiners.

>> thank you very much. thank you, chairman ryan. >> thank you, mr. chairman. welcome, mr. chairman. on your speech to the national press club on february 3, you noted unemployment, the key indicator for the well-being of the american people, will remain high and these conditions will only improve grat #* gradually. you noted the debt is unsustainable. you went off to state that among the course corrections needed to address these problems are investments in the skills of the work force which i'm going to simply call education and policy changes to reduce our deficits and debt. two questions. my first question is record to the latter. the current rules of the house have taken the war on terror off budget meaning the cost of our conflicts in the middle east associated with the war on terror can be financed with debt.

afghanistan alone represents a cost of approximately $10 million per hour or $235 a day. this is our country's largest long term investment. would the savings resulted from ending combat operations associated with the war on terror reduce deficits? >> if those expenditures were not necessary, they would reduce deficits. i'm not qualified to comment on whether or not, you know, we should be engaging in that conflict. >> but the budgetary action that was taken that we put it aside in the past called supplement, what impact does that have on our debt and our deficit? >> clearly, additional spending for military or any other purpose all else equal adds to the deficit. >> so if there's no revenue to sustain in it, we take it off

budget. we're essentially creating an automatic deficit and then a debt. >> that's right. >> thank you. my second question, mr. chairman, is i think it's very important to note among other up vestments -- investments in machinery, promoting r and d and rebuilding public infrastructure, you think allows education as an area of public investment to promote economic growth. would you explain to the committee how public investment education promotes economic growth? >> well, one of the key elements in economic growth and a lot of economists have identified is the skills of the work force, and i would like to say that there are a lot of ways to inpart skills. there's k-12 education and college certainly, but there's junior college, technical

schools, on the job training, a variety of ways, and that's always been a strength of the united states. we have a diverse set of ways to help people get training, but i think that should be something we should be paying close attention to. it may or may not be a matter of money, but a matter of spending more wisely, but clearly, one of the concerns we have about our society is the increase in inequality between the richest and the poorest, and there are many reasons for that, but no doubt the largest reason is that there's a part of our society which is not receiving the training that they need to get good paying jobs, and that's going to be a problem for us, and it's a problem for our economy. >> was education, i'll probably call that an investment, and making that investment in education would be something that we can count upon as far as a return on our investments, and

if we have an education system, what kind of impact do you think it would have on our return on investments relative to the entire picture that we have before us today? >> well, it's very important to have a good education system, and we're not doing well on that count and to help people get skills. there's a lot of dispute about exactly how to accomplish that, and, you know, we could talk about that for quite a long time. i think we need to think as the country about how we can both increase the quality of our training and also make sure that it's broadly spread, that everyone has a chance to get the skills they need. >> okay, and i understand that education comes in a lot of forms in our investment in r and d, and the other programs we have, but the system of education and the department of

education seems to be one place where we can focus on this very complex problem of equity and equal distribution of resources. would you agree on that or do you have other comments on that? >> well, department of education is certainly one place to help review and understand what's working and what's not working. i think as a country we're having a crisis in confidence that we know how to provide broad based skills, so i think that's really part of the problem. it's not just resources, but also how do we do this better? it's not clear that our models are working very well right now. >> i appreciate your comments. thank you, mr. chairman. >> thank you, mr. chairman, i appreciate the children being here today, and i have questions particularly on the issue of job creation, and i'm a little confused from the testimony. on the one hand you do indicate we're in a period of economic

recovery; is that correct? >> yes. >> on the other hand, you do indicate that the unemployment rate is apparently not where you'd like it to be. what is the targeted unemployment rate that you would be comfortable with? >> well, the fmoc, federal market committee makes sense of what the long term unemployment rate, and those projections are between 5%-6%. that would be a more normal level. i want to be clear that doesn't mean we maintain maximum monetary policy accommodation. we have to withdrawal that accommodation at some point before we get there. that would be the area we hope to get back to. >> 5%-6%? is there a projected time period where that might occur?

>> at the rate we're going, it takes 2.5% real growth just to keep even because you need that much growth just to make jobs for the new entrance to the labor force. if we were to average hypothetically 4.5% growth, which is quite ambitious, it would still take us another four years or so to get down to the 5%-6% range. it would take a long time. >> how long would it take at 2.5%? >> it would very, very slow. >> our current rate of growth is what? >> in the last quarter it was 3.2%, and we're looking for 2011 to be between 3%-4%. that should bring unemployment down for the year, but not quickly. >> how long would it take at 3% to reach the 5% goal? >> that would lower unemployment

by about three to four tenths a year. that would be about ten years. >> ten years and you still think your policies are promoting success, that we're still projecting 10 years until we reach the levels? >> not projecting, you asked about the 4th quarter. we think it will pick up in 2011 and further in 2012 depending on a variety of circumstances. >> mr. chairman, and i appreciate that, and we're all hopeful it does that, but one thing you note is ultimately at the appropriate time the federal reserve will normalize the sheets back into the market. a couple questions about that. if you believe in a thriverring economic recovery, can you believe information why you believe a sell off would not have the opposite effect? >> well, it's the same pattern

that we always see with monetary policy is that low interest rates stimulate the economy. one the economy has a self-sustaining, you know, once it sort of reached escaped velocity so to speak, then that monetary fuel can be withdrawn and usually out with raising short term interest rates, and in this case, it raises short term interest rates and reduces the size the balance sheet. as the economy gets stronger and develops moe money temperature, it needs less monetary support, and we have to withdrawal it other we risk inflation as chairman ryan was concern the about. >> so even though we're kind of looking at 4% growth, maybe 3%, and you're comfortable it won't take long to return to normal employment levels, you're not for certain, but could it be

five years to reach normal levels? >> could be five years, i hope it's less than that. >> i do too. my concern is that on the one hand you claim the policy is driving economic growth even though it's very, very slow from what would be the target, my fear would be that the reverse policy would potentially have that other effect. last thing, quick question. i know you picked $600 billion. why did you pick that versus 500 or $750 billion for the target in >> we tried to make an assessment of asking the hypothetical question if we could lower the federal funds rate, how much would we lower it? a powerful monetary policy action in normal times is a 75 point basis cut in the federal funds rate. we estimate that the impact on

the whole structure of interest rates is equivalent to a 75 point basis cut. on that criteria, it seemed it was about enough to be a significant boost, but not one that was successive. >> thank you, thrch. >> ms. moore is next. >> thank you. i've seen you several times on the the committees, but i've had low ranking, it's hard to get the opportunity to actually ask you a question. i want to thank you for the last question because that was curious about how you say in your testimony on page four that exit from the current highly accommodative policy at an appropriate time would be very easy, and i think you may have answered my question when you spoke with him. qe1 and qe2 have been very important i think in terms of

preventing a financial catastrophe, and qe-2 is supported by a lot of economists, chamber of commerce endorsed it, chairman of manufacturing, and as a matter of fact, the manufacturer if my district, harley davidson, is really grateful for qe-2 in terms of boosting their exports, but you have been accused of everything from creating an environment for invasion with this qe-2 policy, everything from that to causing the riots in egypt, so i can't -- i would like for you, you know, because it's, you know, commodities are traded on dollars. they say that food prizes,

commodities have gone up and speculation on commodities have risen, and so this qe2 policy really has been very imflammatory respect to destabilizing the region. can you please respond to that? >> i'd be glad to. first of all, it doesn't matter what commodities are priced in. what matters is the currency of the country making the purchases, and they don't ewe dollars in egypt, but egyptian pounds. when the dollar weakens, that makes the pounds stronger. the real issue in egypt is the fact that egypt is the world's leading importer of wheat, and we've just seen very bad harvests in russia and eastern europe, their primary sources of wheat. that's what's really happening

on the agriculture side there's been droughts and other problems around the world that have affected crops. monetary policy can't add one bushel of corn to the world. that's determined by agriculture productivity and weather and other factors. we've seen on the agriculture said that a combination of the plight issues like weather, crops, and increased demand for the rapidly growing emerging markets have put pressure on those supplies, and that's where that's coming from. i think monetary policy in the united states has really very little to do with the price of wheat in egypt. >> good. with respect to your creating environment for the increased inflation with qe2 in creating an inflation bubble here in the united states, i guess my -- and traders being weary over the inflation threats, i'm wondering

what your response is to qe2 because you say that you can exit this monetary accommodation. can you talk about what, you know, because eventually you have to raise interest rates. walk us through how you will exit this without creating inflation. >> well, first actual inflation and current inflation are low in the unite. before, the five year hips break even, the measure of market expectations of inflation, is a little over 2% which is where we'd like to be. obviously, we can't continue this level of monetary situations because it would create inflation concerns, and we have to unwind some of this stimulus. in terms of how we do it, of course, the difficult question is choosing the right moment. when we decided when to do that,

we can raise interest rates as normal. raise interest rates paid to banks that in turn make them unwilling to lend and short term money masks below that rate. we raise the short term interest rate pretty much as we always do when tightening monetary policy. in addition, we have a number of tools that i've talked about in great detail before and that can help us drain federal reserves. we've been testing a time deposit program where by banks lock up their loans with the fed for a period of time instead of having them available whenever they want them. we have the tools to do it. as always, we have to make the right call as of when the balance of risk is starting to shift and we think the economy is strong enough and the inflation has risen and it's time to take action to avoid problems down the road. it's really not all that different from normal monetary

policy in that respect. >> thank you very much, sir. >> turns out i'm next. mr. chairman, thank you for being here. earlier today you testified before the committee that not raising the debt ceiling would be a very bad thing because you specifically singled out it would mean that interest would not be paid on the debt. in january, you told the senate budget committee that we're not seeing extraordinary express in the markets that suggests investors are still reasonably confident there's not default among major boar roars. one reason they believe that is because most states have rules that put debt repayment and interest payments at a high priority among many other obligations of the state and localities. would it be a good idea if the federal government did the staple thing? >> well, it would reduce the debt limit. that's for sure. you haven't done that yet, of course. i would like to just comment

that it would take some time to change our systems and computers and so on to change that prioritization in the appropriate way, but that would change the risks sorted with debt limit. again, let me be clear, you would need notice to make that practical. >> but would yowl recommend -- you recommend it as a long term reform? >> frankly, again, i would just prefer you put the debt limit issue aside and address directly the long term fiscal props which i admit and agree are serious and need to be address. i'm not saying you don't need to address the problems, but that particular device, you know, at least under current law has some risks in terms of the possibility that we would default on debt. >> what's the percentage of the

u.s. debt held by the public and american investors? >> less than half i think, roughly half, yeah, yeah. >> what's the percentage of the u.s. debt held by china? >> about a quarter. >> a quarter of the total debt held by the public is about 9.5%. >> maybe, if you -- as numbers you may be right. i think they hold more than $2 trillion of u.s. treasury, and that would be closer to 20%-25%. >> oh, okay. nevertheless, giving priority to debt repayment, we are favoring american investors? >> well, certainly, more importantly the financial markets globally are where we borrow. if investors lose confidence in us, they won't lend to us and we'll have a fiscal crisis immediately.

>> which means guaranteeing our debt service provides greater confidence to the investors, would it not? >> subject to the ability to make that eskive in a -- effective in a short time. >> you testified as the economy begins to grow rapidly and inflation rises, the federal reserve would then resers the easing, -- reverse the easing. how does the fed intend to train $1 trillion in excess reserves? >> well, first, we can raise interest rates without draining reserves. as i mention, raising the interest rate to banks, but we have at least three other tools. >> if i can pause there, how much would you have to increase? >> we want to raise the -- say we wanted to raise the short term interest rate to 1%, then if we paid 1% on excess reserves to banks, they would not be

willing to lend money to the money market at less than 1%, and that achieves our octoberive right -- objective right there. there are other tools including time deposits, reverse repos, asset sales, and perhaps others. >> as you do that, what's the impact on the economy? >> it will be a tightening of monetary policy. again, interest rates go up. that slows the economy, but that is what monetary policy, that's what taking away the punch bowl always does, the accommodation is no longer needed, the economy can move forward on its own. the point is to normalize financial conditions so that you can get back to a healthy growth path without inflation. >> there are some of us who are here long enough to remember a day when we had not only double digit unemployment, but double digit inflation. what can you tell us to relay our fears?

>> well, i can also mention that since the early 80s, between the early 80s and 2007 when central banks began to understand the critical importance of keeping inflation low, the u.s. economy had low inflation, and a stable economy. that was a 25 year experience. the difference is that we have no illusions about it being not so bad to let inflation rise. we are strongly committed to keeping inflation low and stable, and we will do so. >> next is ms. caskill. >> thank you very much. not like many countries in the country, my home state of florida was hit by the great recession. it seemed like it started earlier in florida in 2007 because the housing bubble burst, and we were so tied to

real estate development, and the job losses happened so quickly. at the end of 2008 and early 2009, and we're still in the double digits in florida. in your testimony, you say there's some optimism on the unemployment front, but we need more. i think folks at home look at the economic indicators, and they see there's plenty of hope out there, corporate profits are way up, consumer spending is up, we've had six great quarters of economic growth, but the bottom line for families is that job. they need the twister job growth. the economic drivers in my area support the airport, the universities and research centers, the public schools, small businesses and tourism, and businesses, and all of them

benefited by the recovery act investments. those are coming to an end now, and business owners and others in the community are torn. they are hearing this schizophrenic message from washington. they understand that we've all got to live within our means, and they do it every day, but they also understand that those infrastructure investments and phening the -- keeping the colleges and universities healthy and able to do the research simply attracts private investment and allows them to hire in the long run. they are hearing a lot of talk of we've got to cut spending, cut spending, cut spending, but they are also at the same time clam moriing for -- clammoring for government help. they need all the private

businesses to continue there. what can you share with them on this schizophrenia between investment and living within our means and where we should be heading there in future budget years? >> it's not an easy problem. you know, the reason the federal reserve is doing what we're doing is to promote job creation that we any is a very serious concern, but florida, like california and nevada and a few other states, were particularly hard hit because of the real estate decline. we do have to live within our means, but the congress needs to find ways to make sure that over the longer term that our revenues and our expenditures are close enough that debt does not grow without limit. you know, we don't have any

choice about that. that's just something we have to do. as i tried to indicate in my remarks in the end, that doesn't mean we can't think about the money that we are spending. can we do it better? can we use the money more affectively? can we use the money in ways that are more growth promoting? we need to think hard about health care costs that are so very high and see if there's savings there for example that can be put into more growth friendly type of investments. i appreciate your quandary. you know, we'd like to be able to undertake all these different projects, but in the longer term, we have to have a budget that is reasonably in balance. >> so it would be helpful for me and others to explain what you've said in your testimony regarding the long term fiscal challenges confronting the nation are the two most important driving forces behind

the deficit are the aging of the population and rapidly rising health care costs, and this cbo projections of federal spending on health care programs will double as a percentage of gdp over the next 25 years and maybe explain to business owners there that rely on certain infrastructure investments, investments in education and innovation that the strategy is working together to continue to make those strategic investments, but look at the long term issues surrounding health care and the aging population. >> yes. >> thank you very much. i yield. >> mr. forrest. >> thank you, mr. chairman. thank you for joining us today and i appreciate your service to the federal reserve. the first principle is there's a national debt level for any organization, be it a country, a company, a family, whatever that

cannot be exceeded without substantial turmoil. i think you talked about that in the past, the turmoil our country will face if we continue to live beyond our means. the second principle is that interest rates are made up of two components. the first component is expected inflation. the second component is a risk premium that investors want to receive for the per perceived risk of the instrument. treasury rates have gone up quite a bit in the last few months. your testimony today says that expected inflation is going to be low. well, that implies a substantial increase in risk premium which further implies we are getting close to a national debt limit. my question for you is what is the natural debt limit of the united states government, and you can answer with an absolute number that means you should be in las vegas gambling, or is a percentage of gdp, so i'd like

help with that, please. >> first on interest rates is a third component also which is the expectation of future short rates which in turn is tied to growth. one important reason that rates have gone up so much and stock market has gone up so much is markets are becoming more on the mystic about growth in the u.s. economy. that's a good thing. there could be part of the growth that is related to concerns about government fiscal policy which is the other part of your question. there's no magic number for what ratio to debt gdp is the limit. if we look around the world we see that countries in the 60-70 range, which is where we are now, are generally comfortable or greese that is at 1 -- greece that is at 100 and japan at 200 is concerning. you want space for a recession or war or another emergency, but

i hope that we can stabilize the debt to gdp ratio somewhere not too much higher than we are now would be the ideal thing, but i don't think there's a magic number. the higher it gets, the more of our annual appropriations are going to pay the interest on the debt, and that's in a way, a drain to what government could otherwise be doing. >> thank you. question number two is you said today that we are on an unsustainable path, but in testimony or in interviews you gave back in june of last year, you indicated that you felt like it was inappropriate to reduce spending or increase taxes at that point in time, but still, you want a deficit to reduce, so you put us -- let me rephrase that. if you're in our seat, there's no many tools left. what direction do you go first? reduce spending, raise taxes, what's the recommended approach? >> well, spending versus tax or

the composition of spending and taxes is a congressional prerogative and congressional speedometer, but what i think is the -- responsibility, but what i think is the right way to do this which on the one hand doesn't put too much pressure on recovery, but at the same time makes cred l progress in the budget in a sustainable fiscal trajectory is to talk about longer term windows and talk about the 10 year window, for example, and take actions that are credible to cut spending perhaps in the near term, but cuts spending more as you go forward in time or raise taxes if that's the decision congress makes, so this is a long term problem. you know, the numbers that we look at go out to 2035 and 2050. that's when the problem really gets basically just unbearable, so anything that can be done now to change that path, change that

trajectory going forward in the next one or two decades, those are the things that will be affective and have a good impact on the current economy and current interest rates and restore confidence in the current fiscal policy. >> thank you. i yield back. >> thank you, mr. chairman. thank you for your expertise that you lend to this economic recovery. when you came before this committee last june, you predicted that the economic growth rate or gdp would rise to an annual rate of just over 3% for the last month of 2010, and that it very well could increase over the course of 2011. that's fairly a double digit turn around from the 6% downturn we witnessed at the end of president bush's administration. has your forecast in your opinion proven accurate in terms

of how you calculated it and it's baht lome line result -- bottom line results? >> well, we were disappointed last summer as the economy slowed down, and that's why in august, essential, we basically, you know, began to take the steps towards this second round of so-called quantitative easing. since we've done that, the markets have stengthenned again, and the outlook has improved, and so it does look at the numbers you gave k you know, the fourth quarter was 3.2 percent, and looking forward in 2011, most forecasters think between 2%-4% is about right. these things are very uncertain, but that does seem to be about where we at this point were predicting. now, we hear on the hill here in

washington and in congress and certainly within the microcosm of a budget committee in the house different philosophical approaches or responses to best grow the recovery of our economy. that being said, some of our colleagues from, you know, friends across the ail have been -- aisle have been very enthusiastic about the numbers and the growth is directly related to the outcome of the november elections. i would ask is there, within your calculations of the projections, was there a result in the november election that goided whatever your forecast would be? in other words, did you need to know who would win the elections? >> we don't take election results into account in our forecasting, but i couldn't really make a judgment on that. i agree with you it's more policy driven than politics, and so can you cite for us what did

go into your calculation, your forecast on growth and employment and specifically can you emphasize the main elements that we need to focus on in other words to best drive numbers to help the economy improve and become more stable? >> well, in terms of what happened since the late summer, there have been two policy initiatives. the federal reserves, the qe2 which real came into effect in august which is when we began to reinvest our maturing securities and we indicated we were seriously thinking of security purchases, and the other is the agreement that took place in the lame duck session about extending tax cuts and creating a payroll tax rebate and so on, so those two things, i think, have been positive in terms of

near term growth. going forward, it's much more difficult because the fiscal space and monetary space and both sets of policies have less room to operate than they would have under normal circumstances, so as i was saying for ms. castor, i think it's important to think about the composition of what you're doing. is it growth friendly? is it going to increase confidence? look for things that will, you know, increase productivity for example. >> thank you. i appreciate your expertise and hope in the spirit of bipartisan and the growth of consumer and investor confidence we can move forward with a progressive policy that will bolster this economic recovery and lead to the best way to move forward. final question on the meanian annual wage for american workers

falling to some $26,000. that means about half of our work force is making less than $26,000. at the end of 2010, we okayed a plan that raised taxes on those individuals who make under $20,000 a year while relieving the tax burden on the wealthiest families. the first payments came home in mid-january. i've been hearing from dismayed and outwaged constituents on that outcome. if we continue to finance tax breaks for the top 1% at the expense of the bottom 50% of wage earners, how will that impact on the consumer spending out that that you noted is necessary to help lead us out of the economic woes? >> the distributional aspects of taxes are con contentious. i can't give you the answer you want because i think ultimately

both disci'ses about equity and decisions also about efficiency that go into those tax code decisions, so i'm going it leave that particular decision to the congress only note that you have to pay attention to the overall revenue collection as part of the plan for restoring budget balance over time. sorry. >> thank you very much. >> mr. langford. >> thank you for coming. i'm sure it's your favorite day of the week every time you get to come to the hill and spend time with us. thank you for doing that. in oklahoma where i represent, there's a large number of community banks i chatted with that are frustrated with the regulatory environment that's coming down. they feel like some of the largest banks in america made mistakes, and they are blamed for it. lending slowed down dramatically. personal perspective for you.

where do you think the community banks stand as far as a need to circle around their capital requirements and change rules from discretionary now which is what the rule is now. how do we free up the flow of money in lend k in smaller community banks and rural communities? >> well, first, community banks have shown their worth in this lending crisis. as many larger banks withdrew from small communities or small business lending, a lot of community banks stepped up and began to make more loans, and that just shows the value of their personal connections and knowledge of the local community and so on. i absolutely agree with you that small banks should not bear and can want bear the same burden of regulations that the largest banks bear. they don't pose the same risk to the financial system for example. >> right. >> so what the federal reserve is doing there are several parts. first, we have added new

committees and advisory groups to our regular routine where the board meets with outside committees to create special roles for community banks, so we have a new subcommittee on community banking. we have a counsel of community bankers that meet with the board and talk about their issues, and we want to make particularly sure as we implement the dodd-frank implications, for example, aimed at large systemically critical banks, that rewith attentive to small banks, and we do want to do that. this is for all banks, you know, that we recognize in some cases after a crisis that bank examiners can become conservative because they don't want their bank to fail and be responsible for that, and as a result they put pressure on banks to make what would otherwise be good loans. we have done all we can to fite against that by issuing guidance to our examiners and to the banks that we want loans to be

made for credit worthy borrowers, by training examiners with meeting all across the country. we are focused on that issue. i think we've made progress. what i'm hearing and there's been surveys is modest improvement in the terms of the lending environment for smaller business and some growth among community banks. >> well, let me say from the oklahoma perspective there's been growth in the area, but it's modest. there's continued frustration with individuals who say i need to lept and i have -- lend, and there's folks who want to borrow, but i'm tapped out. regulators tell me this, and i'm stuck. people want to expand and hiver people and currently the bank is hiring more compliance officers and doing less lending. that's a bad formula for what is functional for us. >> i agree with you. >> d