the crisis, but as you can see from the red, the lsaps, we added about $2 trillion in new securities to the balance sheet during the period starting in early 2009, and then the top there, you have other assets, a variety of things that could be securities, reserves, physical assets, and other miscellaneous items. items. ..

if there's a smaller available supply securities they're willing to pay a higher price for securities, which is the inverse of the yield. so again, by purchasing securities can i bring it on the balance sheet, reducing available supply of treasuries, we affect the lowered the interest rate on longer-term treasuries and on gse securities as well. moreover, to the extent that the best no longer having available a treasuries and gse securities to hold an portfolios, the extent that they are induced to go to other kinds of security for corporate bonds, that raises the price of hours yields on securities and so the net effect of these actions was to lower

yield across a range of securities and of course as usual, lower interest rates have supported stimulative effects on the economy. so this is really monetary policy by another name. instead of focusing on the short term if we were focusing on longer-term. the basic logic of lowering rates stimulates the economy is really the same. now, you might ask a question from the fed is going out and buying $2 trillion of securities. how do we pay for that? and the answer is that we paid for those securities by crediting the bank account of the people who sold them to us and those accounts at the bank's showed up as reserves at the banks would hold with the feds. sudafed is the bang the bank for the banks. tanks can hold deposit accounts

and those are called reserve accounts. and so, to as the purchases of securities have occurred, the way we paid for them is basically by increasing the amount of reserves that they had in their accounts with the fad. so you can see this here. this is the liability side of the fed's balance sheet. of course that is the liabilities including capital has to be equal. so the liability side had also arrived near $3 trillion as you can see. now, take a look first. if you take a look, take a look at the light blue line. the light blue line is currency. federal reserve notes of currency. sometimes you see that fred is printing money to pay for securities we require. i talk about that and some conceptual examples.

but as a literal fact, it's not pretty money to acquire securities. you can see it from the balance sheet here. the light blue line is basically flat. the amount of currency in circulation has not been affect despite these activities. what has been affected as the purple area. those are the accounts that banks, commercial banks hold with the fed and their assets to the banking system and liabilities to the fed is basically how we pay for those securities. for the banking system has a large quantity of these reserves, but they are electronic entries fed. they basically just sit there. they are not in circulation. they are not part of any broad measures of money supply appeared they are part of what's called the monetary base. but again, they certainly are cached. then there are other

liabilities, including treasury accounts in a variety of other things that the fed does. we act as the fiscal agent for the treasury. but the two main items you can see are the notes in circulation and the reserves held by the banks. so what do the lsat, or quantitative easing, what does it do? well, we anticipate when i took actions we would be able to lower interest rates and that was generally successful. for example as you probably know, 30 year mortgage rates has fallen below 40%, which is an historically low level. other interest rates have fallen as well. corporate credit has fallen. the rates of interest that corporations have to pay on corporations have to pay on bonds, for example, have fallen to us because the underlying atrios have fallen, but also because the spread between corporate bond rates and treasury rates have fallen as well, reflecting greater confidence in the financial

markets about the economy. and lower long-term rates have, in my view, and in terms of the analysis we do at the fed has promoted growth and recovery. although as i will talk about comedy effect on housing was weaker than we had hoped. we've got mortgage rates down very low. you think that stimulate housing, but the housing market has not yet recovered. now, of course always we have a dual mandate. we always have to object is. one of them as maximum employment, which we interpret to mean escaping economy growing and using its full capacity and low interest rates are a way of stimulating growth and trying to get people back to work. but the other part of our mandate is low-inflation. we've been quite successful at keeping inflation low. i would say that both her coming

particular kind greenspan made it much easier for me because they had already persuaded our kids that the fed was committed to low-inflation and there's a lot of credibility the fed has built up over the last 30 years or so and as a result markets have been confident in the fed will keep inflation low and expectations have stayed low except for some swings up and down related to oil price is overall inflation has been quite low and stable. at the same time, while we've kept inflation low, we've made sure that inflation hasn't gone negative, particularly from the time it qe2 come november 2010 there was concern inflation had been falling and was well below normal levels in the concern was normal levels in the concern was to make it into a negative inflation or deflation. those of you for my with a japanese situation i spent the

problem in their economy for quite a few years. we certainly want to avoid deflation. in the context of the great depression, monetary ease also guarded against the risk of deflation by making sure that the economy didn't get to week. not just one more comment on large-scale asset purchases. a lot of people don't make a very good distinction between monetary fiscal policy. i'm sure you understand their very different tools. fiscal policy is the spending and taxation tools of the federal government. monetary policy has to do with defense management of interest rates. these are very different tools and in particular, when the fed buys assets as part of pinal staff or tv program, this is not the form of government spending. it does not show up as

government spending because we are not spending money. we buy assets purchased from point will be sold back to the market and so the value of those purchases will be earned back. in fact, because the fad catch interest were some of securities that we hold, we make a very nice profit on these. what we have done over the last three years is transferred $200 billion to the treasury. that money goes directly to reducing the deficit. to these actions are not deficit and increasing. aaron fixit became a deficit reducing. so a major tool we use when they ran out of room for short-term interest rates was lsat asset purchasing. the other told me it is to some extent as well as communication about monetary policy. to the extent we can clearly

communicate what we are trying to achieve how investors can better understand our object is an plant and can make monetary policy more effective. the fed has made a lot of steps to become more transparent about monetary policy to try to make sure people understand what we are trying to accomplish. here's one example. this is a picture of me giving a press conference. so four times a year now after two days meetings, i give a press conference and answer questions about the policy decision. so this is a new thing for the fad in terms of trying to explain what our policies are. another recent step we took in terms of communicating our policies more clearly was to put out a statement that described our basic approach to monetary policy and in particular gave for the first time a numerical definition of price stability

good many central banks around the world already have a numerical definition of price stability and we in our statement said that for our purposes were going to define price stability is 2% inflation. and so the markets will know that over the medium term, the fed will try to hit 2% inflation even as it also tries to hit it subject to his for growth and employment. finally, the fed has also begun to provide guidance to investors in the public about what we expected with federal funds rate in the future given how we currently see the economy. so given how we currently see the economy, we tell the market something about where we think the rates are going to go. to the extent that the market is better understand their plans, and that is going to help reduce uncertainty and financial market to the extent that our plan are

in some sense more aggressive than the market anticipated, we also tend to ease policy conditions. okay, so i can monetary policy has been used to try to help get the economy back on its feet. the recession, which is the period of contraction, which is very severe as of course i mentioned officially came to an end. there is a committee called the national bureau of economic research which officially designates the beginning and end dates of recessions. i was a member before he became a policymaker and they determined that this recession began in december 2007 and ended in june 2009. it was a long recession. this means things are back to normal and the economy is now growing again. we have going for us i described

we are back to normal. we don't mean things are great. we are now growing. so, here's a picture of the sluggish economic recovery we had. the path of real gdp. the gray bar shows the period of it begins in 2007 in real gdp begin to decline during that period. in may 2009, the recession is officially over and the blue lines are missing out. the real economy had been expanding. but you can also see though he

compares them here. but we did wesley said suppose that the economy had been recovering since mid-2009 at the same average pace as previous recoveries in the postwar period. and that average recovery shown by the red line and you can see by comparing that this recovery has been slow where than the average recovery in the post-world war ii period. it's actually been worse than not in a way because this was the most severe recession in the post-world war ii period. so, you would expect recovery may be quicker as the economy comes back to its normal levels, but in fact it's actually been slower on average in terms of growth than previous postwar recoveries. recoveries. now, the question -- sorry, so

one implication, of course, the sluggish recovery slow improvement is the employment rate rises sharply during the recession. , peaking around 10% am now coming slowly down to its current value of about 8.3%. that is still quite high, obviously. here's single-family housing starts as they disguise and the last lecture in the previous one, housing starts collapse even before the recession began. of course at the trigger of the recession. and you see how very sharply construction declined. but then if you look at the most recent year or two come you see there's been a few vehicles, but the housing market has not come back. so you know, this is one reason. if you ask a question, why has this recovery been more sluggish

than normal? one reason is certainly the housing market. a usual recovery, housing comes back. it's an important part of the recovery process. construction workers get put back to work. related industries like furniture and appliances begin to ask and and that is again part of the recovery process. but in this case we haven't seen it. now why not? well, there is still a lot of structural fact there is which are preventing more of a robust recovery. on the supply side, we still have a very high excess supply of housing, it hides vacancy rate which the graph shows you the percentage of housing units in the united dates, which are vacant. you can see that peaked at over 2.5% during the recession. it has come down some, but is still well above normal levels.

foreclosed homes, where the seller is unable to find a buyer. there's a lot of homes on the market and that produces excess supply and falling houses. on the demand side, and you might think that a lot of people would be buying houses these days because one thing is sure about the housing market is the houses are really affordable. prices are down. mortgage rates are low. and so if you're able to buy a house, you can get an awful lot of house for your meant to pay of house for your meant to pay me now from here to where he worked two years ago. but being able to take advantage of the affordability requires among other things that you get a mortgage. this graph shows what is happening in the mortgage market. the lines show, the bottom line shows the 10 percentile of the

90% of credit scores of people receiving mortgages. you can see before the crisis people with relatively low credit scores were able to get mortgages, but since the crisis you can see the whole bottom part of that yellow area has been cut away saying that people with lower credit scores and 700 is not a terrible credit score are unable to get mortgages. and just in general has been a match -- would be much tighter conditions in terms of trying to find a mortgage. so even though housing is very affordable monthly payments affordable, people are unable to get mortgages. implications were the economy with a lot of excess supply in the market and people unable to

get mortgage credit are afraid to get back into the housing market, house prices have been declining. that is shown by the picture on the right. recently we have seen some leveling out and flattening out, but so far of a pickup or declining house prices mean it's not profitable to build new houses and so construction has been quite weak. and more bradley come existing homeowners and they see their homeowners and they see their house prices down may mean that they can't get a home equity line of credit. it means that they just feel more. and so that affects not just their housing behavior, but also their willingness and ability to buy either services. so that is one of the reasons for decline in housing prices and to some extent stock prices and part of the reasons that consumers have been cautious and less willing to send. the other major turf course housing of the good reason for

this crisis and recession. the other major factor is the financial crisis and impact on credit our kids. that is another reason why the cauvery has been somewhat slower than we would've hoped. the u.s. has done is stronger than it was two years ago. the amount of capital in the banking system of the last three years has increased by something like $300 billion, very significant increase in generally speaking we are seeing credit turn getting a bit easier. we are seeing expansions in bank lending and a lot of categories. there's certainly some improvement in banking and credit. nevertheless, there are still some areas where credit remained tight. i have already talked about mortgages for a cf. anything less than perfect credit score, it's awfully hard to get a mortgage these days. other categories like small

businesses have found it difficult to get credit. it is fun to mall businesses are an important creator of jobs. so their inability to start a small business or get credit to expand to small business is one of the reasons why job creation has been relatively slow. another aspect is markets has been with the european situation which i haven't gotten into, but following on the financial crisis in europe which was very superior alongside a forest, there is now sort of a second stage, whereby the salton sea of a number of countries, concerns about whether or not countries like greece and portugal and ireland can pay their creditors have led to some stressed financial conditions in europe and those have affected the u.s. by creating risk aversion and by volatility in the financial

market. that has also been a negative factor. i think a less than withdrawing from this and one that i've cited in testimony housewares monetary policy is a powerful tool, but it can't solve all the problems there are. in particular what we see in recovery as the number of structural issues relating to the housing market and the mortgage market to banks, to credit extension and of course the european situation for other kinds of policies, fiscal policies are housing policies or whatever they may be are really needed to get the economy going again. so the fed can provide stimulus, low interest rates, but monetary policy by itself and other problems that affect the economy. all right, we'll doesn't

validate discouraging. again, taken a while to get where we are ever so long way from where would like to be. let me just say a couple words about the long-run. we did have a major trauma, the crisis is the ricci. we have a lot of people who have been unemployed for a long time. about 40% more for the unemployed have been unemployed for six months or more and if you're unemployed for six months or year or two years, your skills for start to atrophy and your ability to give reemployed will decline. so that is a problem, clearly and there's many other issues the united states is facing even before the crisis, like federal budget deficit. those have not gone away. in fact, they've got in so much worse through the process of the recession. so clearly, there has been the mill headwinds for our economy. that said, i think it's really

important our economy has a short-term shocks. some not so short-term, we have strengthen its economy between 20 and 25% and output in the united states even though there's something more like 6% of the world population and the reason we are so project to is a diverse set of industries we diverse set of industries we have. entrepreneurial culture and still the best in the world, flexibility and capital markets and technology cost remains one of our strongest point. increasingly, technology has been driving economic growth and for some of the finest universities in the world and

researched honors nsa macnet for talented people from around the world, the united states has been very successful in the research and development area. so that has also been a source of ongoing growth and innovation in our economy. now again, we've weakness in the financial crisis highlighted a few, but we've also tried of course to address that and i will come back to it by a strengthening our financial regulatory system. here is a picture i find interesting, just for perspective on what we've been talking about the last few lectures. the dashed line shows a great in real terms. so the straight-line mesic constant growth rate. and you can see that the united states economy, going back to 1900 has grown pretty consistently around 3% for more than a century. you can see in the 1930s the

big swing as the great depression pulls actual output below the trendline and you can see the movement about the dina cappiello during world war ii. we kind of went back to the trendline. there were expressions of the postwar period, but remain close to the trendline. if you look to the very far right coming to see where we are today. we are below the trendline. there are debates about whether or not that decline is in semipermanent. but i think there's a reasonable chance looking at the long run of history that u.s. economy will return to healthy growth somewhere in the 3% range. there are factors that take into account changes in population rate and aging of our population, but broadly speaking with our picture shows is over long periods of time, our economy has been successful in maintaining long-term economic

growth. just a few words about regulatory changes. you recall that i discussed in the last couple of lectures for vulnerabilities in both the private and public sector in the financial. on the public side, the crisis revealed many weaknesses in our regulatory system. we saw what happened with lehman brothers and aig and too big to fail problem, the effects they have on our system. and more generally, the problem of lack of any pretension to the broad stability of the system as opposed to individual parts of the system. so there has been a very substantial part of regulatory reform for the united states. the biggest piece of legislation is the so-called dodd-frank act. in the united states entry into legislation is after the chairmen of the committees. ernie frank was that of the

house financial services committee when the democrats controlled the house and 2010 and senator chris dodd was the head of the house -- i'm sorry, the senate banking committee. and so, this wall street reform consumer protection act passed summer 2010 with a comprehensive set of financial reforms addressing many vulnerabilities that type about earlier. now, but were vulnerabilities? let me remind you. one of them was the fact that there's nobody watching the whole system. nobody looking not the entire financial system to look for risks and threats to overall financial stability. one of the themes of the act try to create a systemic approach. one of the regulators for some individual components at the. some are doing not among the tools was the creation of a

council called the financial stability oversight council which the site is a member, which helps regulators coordinate. we may particularly on account o. and discuss economic and financial developments and talk about ways we can look at the whole system and try to avoid various kinds of problems. moreover, the dodd-frank act gave overregulate or is a responsibility take into account brought systemic implications of their own individual regulatory supervisory actions. in particular the federal reserve has greatly restructured our supervisory divisions so we are looking now very comprehensively at a whole range of financial markets and financial institutions. we have a big picture that we didn't have before the crisis. i mentioned in discussion of vulnerabilities than many gaps in this angels system. they were important firms.

like aig, for example, but others as well that really had no significant comprehensive oversight by any regulatory agency. agency. ..

>> the i approach to dealing with too big to fail or systemically critical institutions is two-pronged. on the one hand, under dodd-frank, large complex systemically important financial institutions face tougher supervision regulations than other firms. the federal reserve working with international regulators has established higher capital requirements that the firms are subject to including surcharges for the very largest and most systemic firms. rules like the volker rule preventing risky bets on their own account to reduce riskiness of large firms. stress tests i talked about will be conducted. dodd-frapping requires that large firms be stress tested

once a year and conduct their own stress tests once a year so we're comfortable or at least more comfortable that the firms can withstand a major shock to the financial system. now, one part of too big to fail is bringing large complex terms under scrutiny, more supervision, more capital, more stress tests, and restrictions on activities. the other side of too big to fail is, well, failing. in the crisis, the feds and other financial agencies faced a very bad choice of either trying to prevent some large firms like aig from failing, which is a bad choice because it ratified too big to fail, and it meant that the firm was not really punished for -- adequately punished for the risk that it took, but the alternative is to let it fail

with huge consequences for the financial system in the economy so that's a too big to fail problem. the only way to solve that problem in the end is to make it safe for a big firm to fail, and one of the main elements of the dodd-frank act is what's called the orderly lick dation authority given to the fdic. the fdic already has the authority to shut a failing bank, and it can do that quickly and first timely over the weekend -- efficiently over the the weekend essentially and the depositors are made whole, and they avoid panics and bank runs since the 1930s. well, the idea here is fdic will do something similar, but instead, it'll do it for large complex firms, which obviously, is much tougher, but in cooperation with the fed and with regulators from other countries where in the case of

multinational firms worked underway to prepare should it happen that a large firm comes to the brink of insolvency and can't find an answer and has to find new capital, for example, that the ability of the feds to intervene the way we did in 2008 has been taken away. we can't do it legally anymore, and the only option we have is to work with the fdic to safely wind down the firm, and that will ultimately reduce or, we hope, eliminate the too big to fail problem. many other aspects of the dodd-frank act. remember i talk about another vulnerability which was the exotic financial instruments, derivatives and so on that concentrated risk. there's a whole set of new rules that require more transparency about the ruinous positions, trading of derivatives through

third parties called central counter parties with the idea to take derivatives and those transactions out of the shadows k make them available and visible to regulators and to the markets to avoid a situation like we saw during the crisis. one of the shortcomings and, again, here at the federal rereceiver, did not do as good a job as it should have in protecting consumers on the mortgage front so the dodd-frank creates the consumer financial protection bureau meant to protect consumers in their financial dealings including things like protections on the firms and mortgages for example. there's quite a variety of these -- of aspects of dodd-frank. it's a large and complex bill with complaining about the fact that it is large and complex. the regulators are doing their

best to implement rules to be effective and at the same time minimize the costs to the industry and the economy. that's difficult, but it's an ongoing process. we do that through an extensive process of putting out proposed rules, gathering comments from the public, looking at the comments, making changes to the rules and so on, so it's a process in which we develop to put into place in these regulatory standards, and, again, it's still very much under way. finally, let me just conclude by saying just a couple things about the future. central banks, obviously, not just the united states, but around the world have been through a very difficult and dramatic period, and it's required a lot of rethinking about how we manage policy, how

we manage our responsibilities with respect to the financial system. in particular, during much of the world war ii period, because things were relatively stable, because financial crisis were something that happened in emerging markets, and not in developed countries, many central banks began to view financial stability policy as a partner to monetary policy, not as important, something that was paid attention to, but it was not something that an up sane amount of resources and attention was paid to. based on the cry ace and what happened and based on the effects we're still feeling, it's clear feign tanning financial -- maintaining financial stability is just as important as maintaining economic state, and indeed, this is, you know, very much a return to the fed from

the beginning. the reason the fed was created was to try to reduce the incidence of financial panics, and so financial stability was the original goal of creation of the fed, so now we kind of come full circle. financial crisis will always be with us, but that is probably unavoid l. we had financial crisis for 600 years in the western world. periodically, they're going to be troubles or other instabilities in the financial system, but given what the potential for damage is now, as we've seen, it's really important for central banks and other regulators to do all we can first to try to anticipate or prevent a crisis, but if a crisis happens, to mitigate it and make sure the system is

strong enough to make it through the crisis in tact. again, we noted the two principle tools of central banks, serving as last resort, to mitigate financial crisis or monetary policy for economic stability. in the great depression, as i described, those tools were not used appropriately, but in this episode, the fed and other central banks, and i should say that there's been a great convergence that other major central banks have followed or op their own have followed very similar policies to that of the fed. these tools have been used actively and in my belief, in any case, we have avoided by doing that and avoided much worse outcomes in terms of the financial crisis and the severity of the resulting

recession. new regulatory framework will be helpful, but, again, it's not going to solve the problem. the only solution in the end is for us regulators and our successors to continue to monitor the entire financial system and to try to identify problems and to respond to them using the tools that we have. okay. so that's -- those are my comments. we have some time, and i'd be happy to take your questions. kelly? >> [inaudible] in the first class, you talked about the wall street and main street divide, and it's been in the back of my mind throughout the series, and you talked about educating the public on monetary policy, and although the series definitely demystified the fed for me, i think it's really wall street and not main street tuning in, so given how

unpopular bank bailouts were among many americans struggling to pay their mortgages who don't really understand the importance of financial stability, do you ever see americans reconciling these differences? >> well, you're right because some of the same conflicts that we saw in the 19th century, you know, you see echoes of them today as well. i don't have a simple answer to that question. as you know, the fed has done more outreach, the press conferences and other kinds of tools, to try to explain what we did and what we're doing. clearly, the fed is very accountable. we testify frequently, not just myself, but other members of the board or reserve bank presidents. we give speeches. we, you know, we hear and are at various events and so on. it's inherently difficult because the fed is a complicated institution, and you've seen the last four lectures these are not

simple issues, but all we can do, i think, is do our best and hope that our educators, media, and so on will get into carrying the story and help people understand better. it is a difficult challenge. it is a difficult challenge, and it does reflect an attention that's been in the u.s. american feelings about central banks ever since the beginning. >> thank you, mr. chairman. earlier, you mentioned that the fed had several ways to undermind the large purchases of scales and efforts including funneling them back into the market. what guarantees investors are willing to buy back from them in the future? >> uh-huh. well, again, first of all, we have essentially three different

types of tools we can use, any of which by themselves allows us to unwind our policies, but together, give us comfort. first of all, we have the ability to pay interest on reserves that banks hold with us. whenever the time comes for the fed to raise interest rates, we can do so by raising the rate of interests we pay to banks and the reserves. banks are not going to lend out reserves rated lower than what they earn at the fed, so that locks up rereceivers, raises interest rates, and receivers to tighten monetary policy. that tool by itself, even if the balance sheet is large, can tighten monetary policy. the second tool we have is draining tool, and i won't get much into this, but we have various ways to drain reserves from the banking system and replace them with other kinds of liabilities, even as, again, total amount of assets on our balance sheet is unchanged. the third and final option is

either to let the assets run off as they mature or to sell them, and these are securities, and it's certainly possible that the interest rate that will prevail when we sail the securities will be higher than it is today. in other words, we have to pay higher interest rates to have investors inquire them, but that's a part of the process, trying to raise interest rates to reverse what we did when we bought them, and at a point, we'll be trying to raise interest rates to ease from the policy that allows the economy to grow in a low inflation their way. i don't think there's danger that investors won't buy the assets. they'll buy them at a highest interest rate, and that in a way is part of the objective of reducing the balance sheet to tighten financial conditions so

as to avoid inflation concerns in the future. >> thank you. so i read an article, i don't remember the exact source, outlaying a plan to allow homeowners who have been on time with their mortgage payments to refinance at the current lower rates, sort of as a way to protect them from their housing prices dropping, so i was wondering whether you heard of plans like that and what involvement the fed has or whether it falls to the consumer protection agency. >> so there are some programs like that. one in participate is called harp, h-a-r-p program, and that's run by the gses, fannie and freddie, and their regulator, fhfa, and by the program, if you are underwater

with your mortgage, in other words, if you owe more on your mortgage than your house is worth, you still may be able, under the program if your mortgage is held by fannie or freddie, may be able to pay with lower interest rates. that program is underway and being expanded. it doesn't necessarily work if your mortgage is being held by a bank because they are not part of the program, but may choose voluntarily to do it, but you may be out of luck if your mortgage is not held by fannie and freddie. there's programs like that. the fed is not involved with that, but our job is to keep interest rates low to help homeowners, but programs that allow people to get lower payments are helpful to those people because they'll face less financial stress and a small

chance that they wille deling -- late on their mortgage. >> hi, i'm michael fineberg, thank you very much, mr. chairman. you mentioned in your lecture the dangers of deflation from the great depression and more recently 234 japan, and one of the arguments being on target is to have cushion against possibility of deflation. in the last two recessions in the united states, there's been significant fear of deflation causing the fed to keep mop tear policy very accommodative in the beginning of the last decade, and more so at this point. do you think that 2% is enough of a cushion to prevent deflation, and have you considered higher inflation target rates? thank you. >> well, that's a great question, and there's been a lot of research on it. it seems like international consensus is around it. almost all central banks that have a target have a 2% target or 1-3% target or something like

that, and there's a tradeoff here because on the one hand, you want to have it a zero as you say in order to avoid or reduce deflation risk, but on the other hand, inflation's too high, that creates problems for markets that makes the economy less efficient, and so there's a tradeoff. you know, what level of inflation gives you some reasonable buffer against reasonable buffer against deflation, but not so high that it makes markets work less well. again, the international consensus is around 2%, and that's sort of where the fed has been informally for quite a while. that's what we announce, and that's what, you know, foreseeable future, that's where we plan to say, but that's an issue researchers continue to look at and continue to address and look at the tradeoff that you're referring.

yeah, you. yeah, you. >> thank you, chairman. you mentioned one of the biggest lessons you learned from the recent financial crisis is mandatory policy is powerful, but cannot solve all problems especially like the structure problems so what do you think are the exact tools that can be used to solve the structural problems in the housing and financial credit markets? thank you. >> depends on the particular set of problems. in the case of housing, the federal reserve wrote a white paper to analyze issues talking about not just foreclosures, but issues like what do you do with empty houses? talked about issues of how you get more appropriate mortgage origination conditions, things of that sort. we didn't come down with a list of actual recommendations because that's really up to congress and to other agencies to determine, but we went

through a whole list of possible approaches, which i guess i won't try to do here, but housing is a very complex problem, and there's many different things that can be done to make it work better, and indeed, looking forward, given the problems of fannie and freddie, we have big decisions in the country to decide what our housing finance system is to look like in the longer term so a lot of issues there. on europe, for example, you know, it's a complex problem. we've been in close discussions with our european colleagues. they've taken a number of steps there right now talking about so-called fire wall and what to contribute to provide as protection against the possibility of con -- contagion if a country defaults. each has its own approach. the labor market we have the problem of people who have been

out of work for a long time. obviously, one of the best ways to deal with that is through various forms of training, increasing skills so if you just go down the list and basically anything that makes the economy more productive and efficient dealing with long term issues related to the fiscal problems, those are all things that would help and the fact that the fed is doing what we can to try to support the recovery, you know, shouldn't mean that no other policies are undertaken, but important to look across the entire government and ask what constructive steps can we take to make the economy stronger in order to make the economy more sustainable. yeah? >> thank you, chairman. you mentioned the fed is doing what it can to, you know, sustain the recovery, but with unemployment at, you know, 8.3% and the housing issues that you

mentioned very sluggish, and the problems in europe, what other tools do you think the fed has to potentially fight off other issues that we're going to have in the future? >> give me an example. >> i mean, that's -- i guess, you know -- like just other issues that, let's say unemployment decides to rise or housing recovery gets worse or, you know, portugal, spain, and italy, you know, all three of those issues. >> cost me a night's sleep now. [laughter] well, i described today was basically, and in these lectures, basically what the tool kit is for the federal reserve and other banks. we have lender of last resort authority. we still have that. it's been modified in some ways by dodd-frank, but strengthened in some ways and reduced in other ways so between that and

our financial regulatory authorities, we want to make sure our financial system's strong, and we worked hard to make sure we do everything we can to protect our financial system and our economy from anything that might happen in europe, you know, so that whole set of tools is still very much available and should there be new problems in financial markets, and object on -- on the monetary side, we don't have any completely new monetary tools, but we have the tools we've used, and our interest rate policies, and, you know, we can continue to use monetary policy as appropriate as the outlook changes to try to achieve the possible recovery to maintain price stability which is the other half of the federal reserve's mandate so we have these two basic sets of tools. we have to continue to use them, and continue to evaluate where the economy's going and use them appropriately. we don't have, you know, a lot of other tool, and that's why i

was saying earlier that we really need an effort across different parts of the government because, indeed, the private sector to get back on its feet. max? i think this has to be the last question. >> thank you, dr. chairman. >> thank you, dr. chairman. you spoke about the economic recovery and how it's painfully slow. the recovery is happening. my question is what are the key indicators that you and the federal reserve are looking at that suggest the private sector has began self-sustaining the second economic recovery and the fed may begin to tighten monetary policy? >> that's a great question. so first one set of indicators that has been moving better lately and paying a lot of attention to is developments in the labor market. you know, jobs, unemployment

rate, unemployment insurance claims, hours of work, all of those indicators suggest labor market is strengthening, and up -- indeed, employment is one of the two objectives so clearly that's something we'd like to see sustained and continued improvements in the labor market. as we talked about the speech monday, it's much more likely that will be sustained that we also see increases in overall demand and overall growth so we'll continue to look at indicators of consumer spending and consumer sentiment, capital plans, capital expendtures, indicators of optimism on the part of firms, those kinds of things to see where production and demand are going to go, and, of course, as always, we have to look at the inflation side, and be comfortable that price stability will be maintained and that inflation will be low and stability so those are the things we'll be looking at, and

there's no simple formula, but as the economy strengthens and becomes more self-sustaining, then at some point the need for support from the fed will begin to diminish. i really want to express my appreciation for the, you know, for this class. i think you guys have been, you know, really, obviously engaged, and your questions have been terrific, and thanks for giving me this chance. thank you. [applause] >> just a couple things i'd like to say before we run off, and first of all, i want to acknowledge the special guest here today. in early december, i had an e-mail from susan phillips about the federal reserve's interest of having chairman bernanke come over to gw and have a presentation which was as specific as we were at the time. she's the former dean of the

business school and former federal reserve governor, and she's the match maker, the one who made this happen. welcome here, and we thank you very much for the work you did. thank you so much. [applause] second, obviously, i have to thank the chairman and also the chairman's staff. at every turn over the last three months, i kept getting the same message from them which was pretend this is your class, and i think that's extraordinary. i mean, when you get into this, agreeing to do this kind of a program, frankly you wonder whether a powerful organization like that might run over you. they never did. maybe it's because as a professor himself, but i could not possibly have asked for a better group of people who are more respectful of the educational process in all of the mapping that went into this, capped by four very stimulating lectures that the chairman gave, and so i'd like to thank the federal reserve and the chairman for all of that as well. third, there's a lot of people

at gw that did a heck of a lot of work for this from information technology to media relations and everybody in between, so thank you, all, for that. finally, by the way, students and faculty, remember, we are going next door for a small gathering with the chairman, but i know there's people in the back row here, and also some people who are watching here who have been enjoying this, and i want to let you know that class has just gup. we're going to be having an engaged dialogue next week on the chairman's remarks, and then we're going to be looking at other issues pertaining to the fed's constitutionality, its independence from the political sector, from the banking sector, china, europe, sociology of finance, consumer protection bureau, and even whether the fed and central banking might have an impact on reducing violation in the world. we have a full agenda here. [laughter] i welcome you to come back. you won't be live streamed on

the side, but we'll record them and post them on the gw website to watch afterwards. this has been a fabulous start as any class could possibly imagine to begin. we got a lot to go, some of the findest professors around the university to come in. i encourage you to hang around. it's going to be a great ride. again, thank you, mr. chairman, thank you, all, for coming, and i look forward to the rest of the class. [applause] [inaudible conversations]