apartment in 2007. i am still working at age 76 because our family savings were ravaged in the stock market collapses of 2000 and 2006. having recovered much of our losses from the previous week to downturns there is talk of another successive bear market as many big money investors have recently taken their profits. at age 76 is very stressful to into the fed's easy money policy. ..76 it is very stressful to endure the fed's easy money policies. our retirement savings will not be restored until i am age 83 assuming i can continue contributing to our retirement accounts. perhaps then i can retire. chair yellen, many seniors who are living on fixed incomes are suffering. when chairman bernanke was asked about these concerns, he always

changed the subject to talk about younger workers or home prices. what will you do to address our concerns and will you commit today to attend a town hall meeting of retired seniors later this year to hear from folks >> i can ask it any better. >> well, that was very well expressed. and, of course, they are very valid concerns, and i would like to see retirees that are more on their safe investments. i believe that if we get the economy back on track after all, interest comes from returns on investments, even in the bank, the bank tends to pay more for deposits and pay higher interest when its investments are faring better. and and a stronger economy that will be more possible. so i would very much like to see

interest rates go up. he did note however that he has a daughter who lost her job, and i think it's also important to remember that an individual who is retiring also has children and grandchildren, lost a job. we're trying to make it possible for his daughter to reach eight employment -- to regain employment. when the grandchildren when they graduate, to enter a healthy job market. he also noted -- >> can i reclaim my time? in the meantime, focusing specifically on seniors who depend on fixed income instruments, is the harm caused an unnecessary byproduct of the federal reserve's monetary policy? >> well, congress has assigned us to be objective of maximum employment and price stability. we are not at maximum employment. inflation is running below our

2% longer an objective. so i would say that those conditions -- >> thank you. and to follow up on a town hall invitation, they would love to have you in hot springs, arkansas, and i would love to host you. >> thanks for the invitation. >> the gentleman's time has expired. now recognize the gentleman from washington. >> thank you, mr. chair. chair yellen, thank you so much for being here. >> my pleasure. >> i for several adjutants attached to you today, intelligence, -- an exciting, to which i would like to add an extraordinary amount of stamina. >> thank you. >> the gratitude is all ours. as has been noted, your current policy is to purchase both treasuries and mortgage-backed securities. and that's been going on for a while. in your report i note that you

even call out the fact that mortgage rates are probably lower than they would have otherwise been as result of this policy. >> yes, i think so. >> so are you considering targeting other sectors of our economy? >> i wouldn't say that we are targeting. housing is a sector of the economy. it is an important sector. in the past it has contributed a good deal to recoveries, and it would be nice to see housing get back on its the. it would contribute to the recovery. but generally, i'd say our policies are designed to lower longer-term interest rates on a broad range of private assets. mortgages, yes -- >> that begs a couple of observations and questions.

one, why would you call it out in your report if you were not targeting? secondly, are you saying that it would not have been possible to lower overall interest rates are just lowering or just by purchasing treasuries? >> i would say that by purchasing treasuries we would bring down interest rates throughout the economy, not only on treasuries, on mortgages as well. >> okay. then -- >> probably we would have a bigger impact on mortgage rates by buying or which backed securities. >> with all due respect, if it walks like a duck and quacks like a duck, that seems to me that there some targeting going on. here's where i'm going. >> okay. >> i have long wondered why it is the fed couldn't target another sector of our economy that cries out for it, and that's investment and infrastructure. in fact, in the 1970s as has been noted in this committee,

the fed purchased the bonds that helped build metro. so i know there is a precedent for that having occurred, and -- look out for help, true statement, madam chair. and the fact of the matter is the evidence about our infrastructure deficit, the evidence about what kinds increase in both short-term and long-term jobs would be created, it seems to me is at least as strong a case as it is for targeting mortgage-backed securities and the effect on housing industry. what would you need in order for the fed to positively consider doing this again, as occurred in the 1970s? >> well, our desire is to stimulate interest sensitive sectors of the economy, pushing down interest rates does that. our authority, at the best of my knowledge, the federal reserve is to buy government and agency

backed debt and nothing else. >> so if we had -- >> i'm not aware of any authority that we would have to buy, you know, for example, i'm not sure what kinds of bonds you're talking about, but we buy government and agency debt in the open market. and we are not allowed to buy a broader range of assets, to the best of my knowledge. >> if you're dual mandate, which i support wholeheartedly, in fact i'm not going to have time to ask the question what the world would look like if they took away the key unemployment down mandate which i find frankly unfathomable, but if your mandate is to reduce unemployment and the evidence is so empirically overwhelmingly strong in favor of the role of improved infrastructure, both short-term and long-term, why would you put one of these large

number of people to work at, what would we have to do in order to be able to purchase bonds? would it require a national infrastructure bank? could you just work with banks in some kind of direct way where you back their purchase of infrastructure on? >> i'm not aware of any authority we would have under existing law to pursue that avenue, but if congress is interested in doing that, that's something we could certainly think about. but i'm not aware of any authority that we have. >> the gentleman's time has expired. if there are any members who are not presently in the hearing room for listening, not withstanding the chairs generous offer to stay, it has been quite some time after votes on the floor, it is my intention to excuse the chair of the fed at

4:00. the children from minnesota got in under the wire, perhaps one of the. picture now recognizes the gentleman from minnesota for five minutes. >> chair yellin, thank you so much. congratulations. >> thank you. >> i only have one question for you. and the question is this. you've made the point that there are limitations to what monetary policy can do to help put americans back to work and improve the economy. but if you had, you could prescribe what you could do to lower the unemployment rate, to put our economy on healthy trajectory, what would it be? >> you are asking what more broadly could be done? >> yes. >> well, i think congress can certainly consider any number of measures that -- >> like what? >> well, training measures,

jobs, you know, job creation measures, you know, a number of measures to deal with the skills gap and other factors that are related to stagnant real wages, especially in the lower part of the income distribution. >> what about public investment? >> it's a possibility, this could consider as well. >> would that help stimulate the economy in a way that maybe monetary policy can't reach? >> you know, certainly we have a set of tools. they are limited, and there's much more that congress can do depending on what congress' priorities are. >> thank you. >> gentleman yields back his time. i want to thank chair yellen for cooperation, her generous cooperation with this committee today.

as other members, chair, we also thank you for your stamina. you may have to use it on thursday as well as i understand you'll be appearing before the other body. again, we thank you for your testimony. we will excuse you at this time. that chair will declare a five minute recess pending proceeding of the next panel. the committee stands in recess [inaudible conversations] >> the committee will come to order -- [inaudible] professor of economics at stanford university. and 1983 paper dr. taylor proposed what is now commonly referred to as they taylor rule. a rules-based approach to determining now more interest rates. dr. tilton ph.d from stanford in economics. dr. mark calabria is director of

financial regulation studies at the cato institute. prior to his senior at cato he spent six years as professional staff on the senate banking committee. regrettably, again, not as prestigious as the house financial services committee. dr. calabria holds a ph.d in economics from george mason. after mccloskey is the program director of economic policy at the american enterprise institute before joining aei she was director of research for the financial services roundtable. she did a tour of duty on the hill, regrettably yet again, on the other side of the capital. she received her bachelor's degree from wheaton college at last but not least, dr. donald kohn is a senior fellow and economic studies at the brookings institution. dr. kohn also serves on the advisory committee of the office of financial research, he bravely served as the vice chair of the fed board of governors

from 2006-2010, and we're beginning to wonder if all former chairman and vice chairman of the fed end up at brookings. dr. koh held a ph.d in economics from the university of michigan. without objection each of their written statements will be made part of the record after your oral remarks. each of you believe has testified before. you are familiar with our system. please bring the microphones close to you and you know about the green, yellow, red lighting system. i would ask each of you to observe the five minute rule. dr. taylor, you are now recognized. >> thank you, mr. chairman. thanks for inviting me to this eating. i'd like to use my opening remarks refer back to the initial set of questions and answers to chairman yellen that you begin with. they had to do with the rule of policy rules informally of monetary policy. it seems to me as a case can be made that monetary policy would

have been far better the last few years had it been based on a predictable set of policy rules. moreover, i think a policy move in a direction which we would move more quickly to a more sustainable higher growth rate. there has been a continuous amount of research, the historical work on policy rules. there continues to be interest in what you refer to as the taylor rule. based on research of many people over many years, not just me. this research has indicated that when the fed has followed rules close to that, performance has been very good. historian allan meltzer in particular notes a period from 1985-2003 as one where the performance of the u.s. economy was extraordinarily good, historical comparisons, and thosthatwas a period when the fd adhered pretty closely to one of these rules.

i think in the last 10 years policy have been guided his way, the performance would've been much better. if during 2003, 200 2004 and 205 the fed had followed a role like this, we would not have had the excess risk-taking. we would not have had the search for yield. we would not have as much of a housing boom as we had come and, therefore, the financial crisis and the great recession would have been much less of a year. if during the period since the financial crisis th that fed had adhered to this kind of a policy rule we would not have had to of had a quantitative easing that has been a questionable. we would not have had the full guidance that has been so debatable and its effects. the predictability of the economy i think would've been much better and, therefore, economic growth would have been better in those circumstances. i want to emphasize such a rule would certainly not preclude the very important actions the fed took during the panic of 2008.

it's classic, lender of last resort rule which helps stabilize the financial markets. it's because of the success of policy rules that i recommend that legislation he put in place to require the fed to report on its policy rules. it would be a rule of its own choosing. that's the responsibility of the fed. but if they deviated, the fed threw the chair would be required to report to this committee and to the senate banking committee about the reasons why. we are not close to that right now. some argue that could be done on a procedural way rather than legislation. i think there's some promising signs that we could be going in that direction. number one, the fed recently adopted a 2% inflation target. that is exactly what the taylor rule recommended four years ago. moreover, of the european central bank, the make of england, the bank of japan have also adopted that target. there's an international

congruence which adds durability to the. number two, the forecast of the current fomc long-term forecast for the interest rate is 4%. combine that with the 2% inflation target, 2% real interest rate, that is exactly what the rove recommended 20 years ago. there's a consensus now that the reaction of the central bank and the fed in particular should be greater than one when inflation picks up. there is debate about what the reaction should be in the case of a recession. some argue it should be larger, some smaller. that is a difference of opinion. it before the reason why i think we are in a position to move in this direction more so in the past is statements of chair yellen herself. she has indicated that policy rules like this are sensible, good, they work well. she emphasizes that in normal times. these are not yet normal times.

there's debate about when we will get back to normal, or whether we all are already back to normal but it seems to me therefore that the debate is not over whether we should follow a policy role like this, it's about when. thank you, mr. chairman. >> dr. calabria, you are now recognized. >> chairman hensarling, members of the committee, i want to thank you for the invitation to appear at today supportinsupportin g. before you begin let me first commend the chairman of the establishment of the federal reserve's continued oversight project. certainly the opinion every government program should be reviewed regularly the subject of vigorous oversight, the american people deserve nothing less. quite frankly i can think of no part of the federal government more deserving of oversight right now than the federal reserve. had vigorous oversight of the federal reserve been done in the past we may very well have been able to avoid the creation of a massive housing bubble. i will not repeat chairman does

assessment of the economy as i agree with much of it, but will highlight a few issues, touch upon the monetary policy and wrap up with a few comments on regulatory policy. the release last week of january's associate survey revealed continued weakness in the job market. the one of 13,000 jobs number was cancer but below expectations. the consensus was 189. the results are below the monthly average for 2003 at 149,000. dipped slightly to 6.6%. despite these trends there are some bright spots in january's labor market. participation rate rose to 63%, unemployment population ratio increased to 58.8, but we witness importantly a decline in the long-term unemployed by 232000. the marginally attached labor force including discouraged workers remained essentially flat. so the point i would emphasize with these numbers are while the improvement of the labor market

was modest it was quite real. we did not see these improvements driven i people leaving the labor market. so i do want to emphasize the broad agreement with the emphasis on the job situation. however, where i will depart witwith some other remarks markf chairman john and others is i think our current monetary fiscal and trade of tory policies have not been conducive to job creation. in fact, i would be -- those policies have job creation and unemployment growth we have seen has been in spite of policies coming out of washington, not because of them. for instance, the federal reserve's policies have driven up asset prices without adding significant to job grecian. they are transferred from savers to bar was. low interest rates may have increase the incentive for firms to replace labor with capital. low rates reduce the penalty for holding cash balances which reduces the velocity of money, weakening the impact of the fed's own provision of liquidity. i think the fed's policies over

the last years have delivered little in terms of improving our labor market and broader econo economy. this would be bad enough have not these policies also placed the federal reserve in a very prepares position. it lacks credibility. once we start to see increase in interest rates i think we'll see a reversal in inflation and asset prices that that has toshiba did. i think the our number of distortions in a financial markets we have yet to see that will only become clear once we remove these policies. i usually try to go buy a good rule of thumb which is that if you of long periods of time where you pay people to take money, that is can have a negative interest rate, i think it's are certain they will do some dumb things with it and that will come back to haunt us at some point. turning to regulatory policy. i believe there is probably no bigger force pushing the passage of dodd-frank act of the public's anger. much is driven by the public's surprise that the federal

reserve can essential rescue anyone almost any terms it deems. title 11 of dodd-frank act intends to address these concerns by limiting federal reserve's ability to engage in arbitrary bailouts. while i believe the correct solution is an altogether repeal of paragraph 13, dodd-frank's title offers bailouts. the federal reserve was late and i'm getting a will to intimate these provisions as the chairman is where. and notice of proposed rulemaking was released just days before christmas last year. let me briefly mention a couple of issues that i have with the rule. the foremost is the determination of insolvency. i find the rules definition exceedingly narrow and does nothing to limit the federal reserve discretion beyond what is already included in title ii of dodd-frank. the notion that a firm is only insolvent once it is already in bankruptcy or receivership contradicts historical practice. i think we need to be concerned

about the fed's ability to provide assistance to insolvent firms by passing that assistance to solve and firms as with the purchase of bear stearns by jpmorgan. the final issue i have with the rule, final top level asia have with the rule, a number of other minor issues of the is the definition of broad-based. while i am personal against any bailouts, individual or broad-based, i believe the intent of dodd-frank is critical you're only supposed to assist in classes of firms, not individual firms, i believe the language falls short of that. i will say it is a notice of proposed rulemaking the fed has offered to take him and so i would point be optimistic that hopefully these issues will be addressed in the rulemaking process. thank you. >> ms. mccloskey, you are now recognized for five minutes. >> chairman hensarling, members of the committee, thank you for the opportunity testified today. i will lead with my conclusion. the dodd-frank act substantial increase the regulatory authority of the federal

reserve. as such has never been more important for the fed to be transparent and accountable in its rule writing. the federal reserve is one of the primary implementers of dodd-frank. it is involved in over 50 will makings, the volcker rule and determined enemy. the federal reserve's house in this newly created consumer financial protection bureau and has taken a prominent place in the financial stability oversight council. perhaps most significantly the fed is charged with regulation and supervision of some of the largest banks and non-banks in the country. the new rules promulgated by the federal reserve will no doubt have an impact on the economy and businesses and consumers. yet the fed has no requirements to disclose cost-benefit analysis on its rules nor are the feds rules and subject to challenge on the basis of their economic impact. former chairman bernanke, and today chair yellen, have promised the fed consider the economic costs of regulation, but the gao and board inspector

general have found otherwise. in 2011 they reported economic analysis is not standard or routine at the federal reserve. the need for such analysis is especially poignant when examining the impact of recent rules on low income americans. i detailed literature and empirical evidence for this in my written testimony but i will go over it briefly now. since the dodd-frank act was passed, the cost of a basic bank account has increased considerably as banks offset decreased revenue and increase costs. banks these reached record heights in 2012 and a portion of bank accounts qualified for free checking, declined from 76% in 2009, to 39% in 2012. credit cards have become more difficult and expensive to access. 40% of low and middle income americans reported tighter credit conditions over the last three years. hundreds of community banks which are often the most convenient banking option for low income, rural consumers have closed their doors in part due

to the growing compliance costs. as a result many low and middle income families have been shut out of mainstream banking or a turn to alternative financial products such as payday loans or check caches which can be more expensive. these trends are clearly an unattended consequences of the dodd-frank act which set out to protect consumers. so the question is what can we do about it. some a proposed capping fees which is what the cfpb appears to want to do with overdraft and payday loans at others they want to subsidize credit for low income households. but history shows us these options may end up doing more harm than good i raising fees elsewhere or by saddling households with the debt they can't repay as we witnessed during the 2008 housing crash. i propose considering impact on consumers during the rule writing process and addressing the final rule of courting the to maximize consumer choice and opportunity. this could be accomplished through a statutory requirement

for cost-benefit analysis of the federal reserve. the analysis among other things should examine if the rules of disproportionate impact traditionally underserved populations such as low income consumers. i proposed a retrospective evaluation for major rules. people may raise any number of concerns of economic analysis. that is really does well or it may slow down the regulatory process. but cost-benefit analysis is routine in most other parts of the federal government. federal agencies have been required to disclose cost-benefit analysis for more than 30 years under executive order. the omb has developed detailed guidance on what good record for analysis entails. cost-benefit analysis is also an effective check on regulatory overreach. the d.c. court of appeals struck down the first rule promulgated under dodd-frank because the fcc failed to consider economic consequences. the risk of not requiring a

cost-benefit assessment is that the impact of the federal reserve's new rules on the economy and consumers will go unaccounted for. this is especially troubling for low income households which traditional have borne the brunt of credit regulation and appear to be doing so again. to include i'm reminded of the saying, much is given, much will be expected. the federal reserve regular authority grew tremendously under the dodd-frank act, and this has increased the need for statutory cost-benefit analysis. thank you for your time. >> dr. koh, you are now recognized for five minutes. >> i'm not sure your mic is on. could you pull it closer to you, please. >> i don't think it was on. although economic growth has picked up, federal fiscal policy will be much less of a drag on growth next year. the u.s. economy is still very far from where it can and should be. the unemployment rate is a little over six over 6.5%. that's still well above the 5.5% level that many economists

estimate to be at a sustainable level. utilization and u.s. industries as a percentage point below its long-term average. unemployed labor and capital are wasted resources that can be utilized to raise standards of living, especially but not only for the workers and business owners involved. slack in labor and capital uses resulted in very competitive conditions for businesses and workers, and visit the reflected in very low inflation rates well below the 2% target set by the federal reserve. we are in a risky zone for inflation. expectations start to decline. real short-term interest rates will rise. a downward surprise in demand could push us into a close to a destructive zone of deflation. with unemployment of labor and capital to high and inflation to low, monetary policy seemed to be called for for some time to come. federal reserve has decided it and i'll back its security

purchases but it has chosen also to strengthen its articulation of its defense to keep short-term rates close to their into the unemployment rate and inflation are closer to their objective. this seems about the right policy mix to me. said cases considerable settable challenges and execution of monetary policy over coming years but the most important challenge will be deciding when to begin raising interest rates and at what pace they should rise. unfortunately, there are no reliable formulas for making this decision. we are in uncharted waters with respect to economic circumstances and policy responses. when the economy behaves in unprecedented ways, policy must respond in unprecedented ways. the financial crisis resulting in -- cell recovery were unprecedented in postwar u.s. economic history. in the circumstances there is no substitute for judgment and flexibility in the conduct of policy.

the most importantly the federal reserve can reduce uncertainty used by achieving its congressional mandate for employment and prices. households and businesses in planning for the future care far more about the prospective income sales and the rate of inflation than they do about the size of the fed's portfolio or the level of interest rates. the fed should be as predictable as possible, but it and weep as outside observers should recognize the limits of predictability under current circumstances. that brings me to the second challenge which is communication about policy. the short-term rates about future rates, future inflation and economic activity are among the few ways the federal reserve has to accomplish its objectives. communication must recognize the uncertainty in policymaking, and the mighty it didn't end this last summer. but it tried to get too much certainty.

and its interest rate guidance, the federal certain is that what it would be looking at to judge when to raise rates after the unemployment rate falls from 6.5% to our economy is a complex mechanism, state is not readily summarized in one or two variables and policy needs to react to the whole array of indicators pointing to the abolition of economic activity and prices. this complex it presents challenges for communication and guidance about interest rates, but it is a reality. the third challenge is associate in part with monetary policy, maintaining financial stability. unconventional policy by driving down yields on save assets does encourage people to take more risks than they might otherwise have done. the issue is what problems might ensue executive purchases come to an end and interest rates are raised. the fed is clearly monitoring these risks as we heard this morning, and closely using a variety of methods and

regulations supervision of discovering and dealing with this potential source of instability your i agree with this approach of safeguarding financial stability under the current circumstance but i think it is a very to one in which interest rates are raised because raising interest rates would keep unemployment high. and elevate the risk of deflation to the final challenge that is really for this committee as well as the federal reserve is preserving a short run operational independence for monetary policy. congress has set the overall goals, hold the fed accountable for achieving these goals, should be acquired to explain how its policies actions would lead to achieving those objectives, and if they don't, why they haven't. this committee's intention to revisit whether the congress has set the appropriate goals for the federal reserve, whether the structure of the fed is best suited for meeting those goals is appropriate and welcomes. but we need to be very careful

to safeguard the arms length relationship of the federal reserve to the political process when it comes to setting the instruments of policy. much evidence over time and across country strong indicator that leaving to setting a policy to technical experts with some separation from day-to-day political pressures produces much better outcomes than when elected officials focuses on the next election cycle can influence how policies conducted in the pursuit of these tools. thank you, mr. chairman. >> thank you. i think all the panels to the chair now recognizes himself for five minutes for questioning. dr. taylor, among other things we heard from chair yellen today her concern over the unsustainable level of entitlement spending. i have heard the president say he was concerned. most economists are concerned. i just can't find anybody really to say we should begin to reform

it today. so i hear her also say, in some respects, she supports the taylor rule, but these are extraordinary times. so when is the right time to employ the taylor rule? i remind you, i think there was a sunken everybody wants to go to heaven, just nobody wants to go today. so what is the day that we take up the taylor rule? i believe i saw in an exchange with you and chairman greenspan not long ago where he said that the taylor rule, i think, would've gone negative after the crisis. i think i heard chairman yellen say something similar. so would have been appropriate then and isn't appropriate now? please elaborate. >> the first part of your question, i think that if we had stuck, if the fed stuck to a rule like that, as it was

following party closely for a long period, that we would have had a much better performance. and so my view is we should have stuck with this long ago. i indicate that in my opening remarks and in my written testimony. with respect to go negative, that refers to situation where a policy rule like that would suggest a negative interest rate. it's certain he doesn't suggest that now. it would be closer to 1.25%. so we can't really rationalize all the extraordinary other activity of the fed based on that. with it ever have gone negative during this period? perhaps, depending on how you measure it a little bit in 2000. i think by a small amount. but certainly not by enough to justify this extraordinary action. beyond 2009, 2012, 2013, and

2014. moreover, it's not like all this research i refer to a policy rules never considered a negative rate. although the word consider that for many, many years, and the main specification is when that happened, keep money growth study. do the kind of things that economists have recommended for a long time. not to go to these extraordinary interventions, unprecedented that we had never seen before. >> i know you listened, i assumed all of you listened to chair yellen's testimony, perhaps the first few hours of it. but she -- i asked her to comment in my own question to her concerning the current state our guidance adequate a recent piece from "the wall street journal," and i would like to put it to you again. quote perhaps the open market committee should have called it the evans suggestion. the mistake was telling markets there was a fixed rule when the

only sure thing, there is more improvisation. now that you have heard chair yellen's response, dr. taylor, what side you come down on? do we have more improvisation, or as chairman bernanke said, current our guidance is taylor rule like? >> well, the current forward guidance and forward guidance that has been used thus far has a problem as it keeps changing. originally it was somewhat vague. in fact, it began really 2003, 2004, 2005 with a doctorate measurable pace for a long period as forward guidance. and then the more recent period there was a fixed date like 2012. then there was unemployment rate, 6.5. now kind of, a little bit more than 6.5, we will have to wait longer. so i think the problem with this has been the changes in fourth. it is hard to do forward guidance. i think anyone recognizes that,

even the people who support it recognize that. what you've seen here and i think demonstrated a candidate is a moving concept. it's not a rule in the sense you stick to it. best you can. you always have to change and adapt, but this would seem to me particularly erratic, if you like. >> the time i have remaining, dr. calabria, you have advocated jettisoning the fed's 13-3 exigent powers. so how would you define, or if you had our jobs you could write the law, how should the lender of last resort function for the fed? what would you see as its purpose? >> let me preface with, i'm also skeptical, even having lender of last resort function but i would limited to discount window lending to commercial bank members of the federal reserve system, based on good collater

collateral, penalty rates, sufficient haircut, deviations of that have been the problem. >> may i comment? >> yes. dr. koh. >> so when they wrote about this in the late, middle, late 19th century, he viewed lending not only to commercial banks but all elements in the money market and financial status uncertain once again, could you bring your microphone a little closer to you? >> when people thought about commercial banking as far back as the 19th century, badges and sal said that lending should be to this man and that man, not just to commercial banks but to all the key elements in the money market. because at that time in the uk, there wasn't just banks that were key elements of the money market. so many other brokers and things like that. so as the u.s. financial markets has developed, and these other

elements of our market, the strength of a market that is not just a commercial market 10 of the way the european banks are, but as these other outlets become more integral into the market, it's important that a central bank be able to support their liquidity in the emergency, in emergency circumstances. so i would be very reticent -- i would be opposed to spending 13-3. i think it's right that the fed needs to think about how it's going to implement it here maybe these rules aren't sufficient. they should work on them but i think they have to be part of preventing a run, and liquidity, a panic in the financial markets from bringing down the financial system. >> i have long since exhausted my own time. the chair now recognizes the gentleman from michigan, mr. huizenga. >> i'll just point out it's good to have the capital and give yourself as much time as you would like. and i appreciate your time and

patience as well today. i know it's been a long day for everybody, but dr. taylor -- i guess can for everybody. we talked about the taylor rule. i am kind of curious about the 10 billion, forgot i was in washington, not back in lansing when i was in the state legislature. 10 billion per month paper -- paper that has been proposed and it appears the fomc is going to continuing that basically said i was reading the tea leaves with the chairwoman today. seems a little too neat and tidy up with a bow to me. it's kind of like betting that the next powerball winner will be one, two, three, four, five, six. to have them be able to predict this will be taken down in 10 billion-dollar increments. i wonder if anybody wants to comment on that? then i want to get, ms. mccloskey, the impact on low and moderate income.

and dr. calabria, ma if we get onto a couple of other issues. >> that is their strategy and i think it's good to have a strategy. you saw what happened last may and june when it was a much of a strategy for the tapering. you could quarrel whether that is too specific. i congratulate them on moving ahead with some kind of strategy. >> you would rather have a strategy laid out like that than having -- >> yes. much better for the market. you've seen the market, better reaction than last may and june, absolutely spent anybody else care to comment? >> i would prefer to see tapering at a faster rate by think the fact that they have laid out a series, you got expectations of how much you'll get, those are helpful. >> i agree. i think a gradual taper

withdrawal that extra caps that portfolio very slowly gives the market something to anticipate that's already built in. >> the market seemed surprised. spent i think you are a little surprise in december when it was announced, but not that surprised. and then in january when the next tranche came there was no surprise. so think of dr. taylor is right. >> people have been trying to tie do that as we've seen some dips in the market, but i'm not convinced either. if they're not paying attention to our friends in new york, pay attention. >> i think those emerging market economies is lots of challenges, and the taper is a small part of the problem. >> okay. ms. mccloskey, let's talk about the impact on low and moderate income households. i wish there was a single colleague over o on the other se of the aisle that was here right now that could partake in this conversation as well. this is something that my side

of the aisle gets accused of often, not caring. but i can to represent one of the 10 poorest counties in the nation, lake county michigan, this is very high on my list and i'm very concerned having a background in real estate and developing myself but i'm very concerned about what's happening to those hard-working, working-class families that feel like they're just getting the short end of the stick time and time and time again. it ago, community banks are getting harder and harder to work with. the big guys frankly don't want to work within. they are turning to the credit union's, and now frankly now other alternatives. so if you could talk little bit about that. >> there's been a lot of discussion in washington about income inequality and economic mobility, and we know that access to savings and credit opportunities are really important for economic advancement for families.

what concerns me is that as an unintended consequence of new rules that we put into place, albeit with perhaps good intentions following this financial crisis is that those opportunities are becoming more expensive or more rare for low income families. this could end up exacerbating the inequality and the lack of mobility that we are seeing. and so i think having some sort of economic analysis of the federal reserve comes from requirement, impact consideration would be a first step of improving mobility. >> what would you identify as the most egregious? >> certainly -- reduced free checking and higher bank fees commuter bridge in chicago has suggested the turbine and them alone has resulted in $25 billion in higher fees and reduced services for consumers. but i think the danger with just point out one or two rules is that we missed the broader impact of 400 new rules on companies and on consumers and

we can't overlook the impact that's going to have in decreasing credit and savings opportunities. >> two wrongs don't make a right. or maybe in this case 400 wrongs don't make a right. i see my time has expired. thank you. >> at the moment we have a look at of a supply of time, but at this time the chair now recognizes the gentleman from indiana, mr. stutzman. >> thank you, mr. chairman. and thank you to the panel for being here, here dr. taylor, i'd like to follow up a little bit. you mentioned the comment that caught my ear today from chair yellen, and that was we are facing, what we are facing today is very unusual. the economy goes through changes, and we could all say they are unusual. i guess what is normal times,

looking at what we have today, i'm not sure that the economy is necessarily abnormal as much as washington is abnormal. you look at obamacare, dodd-frank, the durbin amendment, qb, regulation on regulations. would you like to comment on that? are we overreacting and causing more problems than we are fixing problems? >> i very much agree that a major problem in the u.s. economy is policy. we've talked about monetary policy year and indicated that. fiscal policy, the chairman mentioned getting entitlements under control. regulatory policy, a great deal of uncertainty, and an increase in intervention. if i look at all those things, it's quite remarkable how much

they are and think they are significant drag on the economy. i think that's really what we've had this week recovery. and in that sense it doesn't need to be normal. we can change it i if the policy is the problem, we can change policy. that's what i believe. and so the idea that the economy itself is not normal doesn't add up to me. first of all the financial crisis is in the past quite a bit done. it was a problem, serious problem, but we are going away the. we can argue forever that the economy is not ready for good kind of normal policy. so i very much think we're ready to go with improved policy. i hope we can do that. >> with almost $2 trillion on balance sheet, and the private sector, i mean, people are just waiting. i've talked to small businesses in northeast indiana and they are waiting to know what the rules are, letting the dust

settle a bit before they can move forward. i like to talk about the dual mandate. how does the fed respond to the current conditions that we are facing? with the dual mandate. we see unemployment numbers dropping, but i tell you, you get outside of the beltway, we are hurting. we are seeing more people out of the workforce. what should the fed give? dr. calabria, maybe you would like to respond. ms. mccloskey or any three of you would like to respond to that. >> let me first emphasize something asked in the earthquake which i do think policy has been a tremendous drag. chair yellen mentioned earlier the tax increases, where the timber company we've seen in the fiscal cliff. i think it's important to keep them on all the talk about austerity. almost all of the deficit reduction has come from revenue raisers, not spending cuts, been quite modest i think that's been a mistake.

certainly on the regulatory side, i also think it's been a mistake as well so i think we need to fix policy that is outside the realm of the fed and we need to recognize that you can only do so much. as you alluded to, there's a tremendous amount of cash on the corporate balance sheets, over 2 trillion. about 1.7 in cash on bank balance sheets so it's not a deficit. so i will repeat something that chair yellen said, earlier which is monetary policy is not a panacea. i think that's what we need to recognize and delete it can't fix a number of things. said to go back to question of what would i have the fed do? i would have the fed follow something like the taylor rule where our short-term federal funds rate was something like 1.25., somewhere around the. i don't think it was suggested we go to three, four, 5% federal funds rate. we would still be highly a comment if. sort it would not be tied by a

stretch of imagination and begin to taper in a much quicker way. >> ms. mccloskey, i have 30 seconds. would you like to comment? >> sure. i do think there's a burden on congress to address the 11 million people were unemployed, 4 million of them have been unemployed for over six most. aside from providing some level of stability we've seen the fed is a limited in its ability to encourage is a systemwide. and so i am in favor of more solutions from congress such as cash bonuses to people who get a job. i think programs like this our best hope in moving the long-term unemployed back to work. >> so i believe this kurd or a comedy the policy the federal reserve is appropriate and will be appropriate at least for a little while longer, as long as the policy issue has been not only increase in taxes but the decline in federal spending which took about a point and have off of growth last year.

i asked myself, what with the economy look like or what would our financial markets look like if the fed funds rate was 1.25 instead of essentially zero right now. and i've got to think that the stock market would be lower. that housing starts would be slow because interest rates would be higher. we saw the result of a modest increase in interest rates come percentage point from 1.7 to 2.7 this summer. and it slowed the recovery in the housing market. automobile sales would be less because the ability to borrow very inexpensively to buy a car must be encouraging sales. so i think higher interest rates would have produced slower, and even slower economic recovery. this is a very difficult discussion about the counterfactual. the federal reserve is saying, we are not satisfied, we haven't been satisfied with the

recovery. we think it would have been worse without it. other people say no. if you have had higher interest rates it would've been better. i am myself convinced that by and large higher interest rates associated with less demand, not more demand. and that's a pretty robust empirical finding. >> if i could make a point. i want to agree. i think there are a lot of points here that we don't know but i think there's a lot of uncertainties. what i would say, take the housing market, for instance. stars are about one-third as they were at the peak. so it seems to me that the data suggest that most of the boom for the buck we've gotten housing market has been refinancing, and it's been higher prices. but we refinancing, which i have, like a taken care that but it doesn't put construction workers back to work by me right financing. great for mortgage lenders but not essential to good for the overall economy so it is yet in my opinion to see the actual

construction market turnaround in a very big way from the. so i do think it's important to keep in mind that that lenny doesn't seem to be getting out there. and ultimately having that move is far more important than pushing housing prices up spent thank you. i guess i would say as we see families across the country with dollars being taken away from, to put towards insurance, health insurance, cost of banking, they just have less money to spend to be buying new cars and new homes. thank you, mr. chairman. i will yield back. >> pitcher would like to alert the members in her room and those who may be listening in their offices, votes are expected on the floor anytime within the next 15 minutes. it would be the chairs intention to keep this under questioning going until we need to go to the floor to vote. and at that time we would excuse the panel and adjourn the hearing. now i would like to recognize the gentleman from south carolina, mr. mulvaney.

>> thank you. but stay right there on a couple of different topics. dr. kohn, i hear what you're saying about how if interest rates were higher, if we were at 1.25, the taylor rule my call for right now that we be selling fewer cars and fewer houses. but doesn't that imply that the recovery that we have to a certain extent illusory anyway? isn't the fed artificially depressing the price of interest, the cost of money right now anyway? >> it is certainly keeping it lower than anyone thinks it will be over the long run. >> the equilibrium rate right now for the cost of money is higher than what the market is charging? >> by equilibrium rate you mean what might prevail over 15 or 20 years to? >> no. i talk about prevailing without the active intervention of quantitative easing. >> the federal reserve has to set the short-term rate and has to establish in this --

>> and it said it had zero. >> it said it that one, two, three, four, five, whatever it wanted to set it at. so it's not -- there isn't a mechanism here given the central bank and the kind of money facility we have. we are not on a gold standard. there isn't a natural way to establish a natural rate. >> let me ask it this way. if tomorrow janet yellen says that quantitative easing is going to zero, what would the prevailing rate of interest be on a ten-year treasury? >> it would go up, i don't know, 50, 150 basis points. >> i think it's subject to a bunch of different interpretations. but that's my point when i say that the equilibrium rate, organic, i don't care what you call it, if the fed was not actively intervening in the markets, interest rates would be higher. that means to me that the

equilibrium rate of car sales would be lower than it is today. housing sales would be lower. along with saying this is where grading asset bubbles in housing, in stocks, in automotive is. would you agree or not? >> i think it's something to be watchful and careful about i don't see evidence of it. so i think we're leaning against some of the forces that are holding back the economy. last year it was increases in taxes and decreases in spending. and problems in europe and other places. some of it we don't understand. mark was actually correct. our understanding of the economy is rudimentary. people like dr. taylor keep pushing back the frontier, but it's a long way to go. >> let me go to another line of questioning. i apologize for cutting you off. about the dual mandate. one of the things i heard from chair yellen was her support for the domain it.

i think that that was different that what we heard out of her predecessor. i had a chance to ask them about the dual mandate through a four times in the last several years and while he played lipservice to it, every single time i asked him about it he also said, but i acknowledge that in the long run monetary policy cannot influence the long term unemployment rate. so i guess my question is, dr. kohn, if that is economic orthodoxy right now, why are you in ms. yellen saying such, putting such a dramatic faith in the dual mandate? if it is orthodoxy that we cannot influence the labor market in the long run with monetary policy. >> so i agree about the long run. that is influenced by the structure labor market competitive conditions and labor market, matching skills to jobs, et cetera. in the short to intermediate run, monetary policy can influence the labor market. >> has its?

>> and the federal reserve recognizes this and the policy statement they put out in january of every year recognizes that they don't have control over the longer run but they do have influence over the short run. >> you talk about counterfactual. we have been doing this now for five years. has the zero interest rate policy of quantitative easing added jobs in the short-term? >> yes. >> you wouldn't agree with me that most if not all of the decline in the unemployment rate we see is people losing -- leaving the job market? >> i think we've had some of both. depends on which survey you look at. .. of both. on the survey of businesses they have added many jobs 200,000 a month. >> no no no 200,000 a month i think we have done maybe five of six times over the last year. >> it was 130 last month and 75

on an adjusted basis the month before that. >> no, i think we have added to employment so as she noted 7.5 or 8 million jobs in the recession and unemployment is still very high i agree and the federal reserve wouldn't have n engaged >> in fairness to her and dr. bernanke, even if he had a single mandate, his would not be demonstrative week has a take the same policies towards writing deflation. i appreciate that. i'm looking at my time, waiting for the chairman to bang down on the gavel. several of my colleagues have come in, i will get a chance to ask. >> the gentleman from kaus carolina got it. the chair now recognizes --

[inaudible] pajama men for mr. pennsylvania, mr. rothfus. >> thank you, mr. chairman. thank you for being with us this afternoon. sherry allen appeared comfortable with the stress testing. do you have an opinion on that studying whether it was adequate to do a stress test of what the fed has been doing? >> i have not followed the attic, so i don't want to pass judgment. i will say a bit skeptical of the rounds of stress testing here and in the e.u. much of them have not been on that stressful, but again i will emphasize. >> what will you look for in a stress test? what kind of variables? >> one of the things i'm most concerned about is we are on agreements rates will go up at some point. i do worry it is necessary to encourage funding, that you're encouraging a man of mismatch

within the banking system that i worry about. so we do need to keep an eye when rates go up. after all, that's it for the savings and loan crisis. that degree of mismatch in assets and liabilities is to be observed quite closely. i also think we need to be a bit more stressful about sovereign risk. certainly it's more of a case in the e.u., but the treatment here is worth noting there still is no federal statutory guarantee of fannie and freddie, said the treatment of bank regulators of fannie and freddie debt has been far too generous and certainly hasn't added the risk in the system. we also need to get municipal debt on its balance sheet as well. this credit risk from interest rate risk across the board we really need to take seriously. >> what would you consider if interest rates did go up 100 basis points, 150 basis points and what that would do with the value of the securities the fed is holding right now?

>> well, we certainly know that increases in interest rates will lower the value of long dated assets on a balance sheets of the federal reserve allergies. i think that's a real concern for me in terms of monetary policy. the entire exit strategy seems to assume you'll not have to conduct open market operations where you saw the long dated assets in the federal reserve's position so far has been will let those assets mature and i think that is a feasible strategy if we don't see any inflation. the fallback is of course the desired to raise interest on reserves. this is where the little more skip the goal. not in a mechanical sense because you can rate interest on reserves and constraint binding. my back of the envelope is the 2.4 reserves will probably pay in somewhere around 6 billion a year to the banks of the federal reserve and inflationary environment i can easily see that approach 30, 40 billion it strikes me as politically unsustainable for the federal

reserve to cut a 30 to $40 billion check to banking and is tree. i do worry that open market operations might be at the table because you can't tell the assets apart. i might be worried the rich earnest observes is not politically. >> would you consider broader rates on the stock market? we had this experience a month ago it was so a correction in the market after whether it was related at all to pull back on step three. any thoughts there? >> we certainly see rates go. we talked about 100, 150 basis points. were going to start to see long-term rates go up a full sister to see the kurds deepen, which is an important aspect as well. i think it's going to moderate stock market and prices in the real estate archaic all else equal. we do hope you start to read economic recovery so fundamental start to drive markets rather than liquidity. >> and historical press for the

last four years and to have an environment to do a proper stress test? >> i don't want to push the comparison too much because i don't think qe plays into this. i worry that we are in a 2003 to 2004 status situation. we saw tremendous amount of refinance being as that one away when interest rates started to go up. i worry we start to see that psycho play out again. it's also worth remembering we had a movement rests in the housing market at the beginning and end of the 80s. i do think we are situation that the housing market represents the best again. certainly two to three years out of something that used to be taken seriously. >> thank you. if i can quickly go to ms. mccloskey. we've heard a cost benefit analysis done with respect to the volker role. you have a cost benefit analysis that was done with respect to

the volker role are the preamble to the volker role? >> there is no economic analysis , which is grievous considering the fact that the volker rule could have on why having a requirement a statutory cost benefit analysis would be an important step forward for the fed. >> thank you, mr. chairman. >> the chair recognizes the gentleman from north carolina, mr. pittenger. >> thank you, mr. chairman. thank you all for being here today. how deeply the volker role will affect mainstream america and is there anything the five regulators can do to calm the fears of the financial industry? >> we can start with you if you like. >> one of the issues i don't think discussed enough in the volker rule is you combine that with the liquidity coverage

requirement in the new capital rose received under basel, i worry we are putting our thumb highly on the scale towards essentially government debt towards the year. one of the things we need to do is quite interesting. if you took a balance sheet and craft went into to businessperson funding to government, they also mirror each other. i have a soft landing. the change to their lending to appear in my opinion they went to the whispered sectors of society. i think we need to keep that in mind in terms of long-term growth that we don't want to push the financial system away from lending to the private sector. we have not had financial crisis caused by small business lending. we've had financial crisis caused by lending and governments. >> anybody else want to comment on that? >> i haven't seen any studies that specifically look at the impact of the volcker rule. that theory would suggest that things could seek higher yield elsewhere and also invest in riskier assets, which might make

the system more unstable or that they may offset reduced revenue from volker are raising consumers. so while there's no economic analysis before volcker, there's also bratcher relative analysis to consider how it's impacting the economy. >> well, the annapurna retraining our committee but this is an indication of the strong economy or do you believe the rate is indicative of a deeply misleading labor force? any of you like to comment on that? >> well, i will note that the january number has really been driven not by people leaving the labor force. it is a weak number. i wouldn't use of her strong, but it is a real number in this modest improvement. using a previous months were declines in the unemployment rate has been driven by departures for labor market. the point that emphasizes we are in a recovery. i just don't believe we are in a strong recovery.

>> yeah, the significant part of the unemployment reduction in labor force participation declining. one way to think about that is projections of participation before this recession and are much higher than what is termed out. the demographics can't explain a lot of the decline. a major part of it must be the recession itself and people dropping out of the labor force and the unemployment rate higher than what is reported. >> one thing i will note, we saw the declines of unemployment may pretty much broad categories december, january with one glaring exception to me, which is teenagers, the unemployment rate significantly increased african-american teenagers almost 40% in january, which to me is quite shocking. one of the really bad policy mistakes he made was going into this recession and is worth recognizing under president bush who put in place minimum wage

increases and i think it hurt the teenage labor market and a very serious manner and i should be considered in the current debates. >> i'll try and do that again. yes. >> pardon, i didn't hear your question. >> no, i just made a comment in the same hoeksema made that the venture today makes it more difficult for teenagers to get jobs, raising the minimum wage. fed policies over the past two years, and like to get your opinion on how this has affect the current fiscal issues facing our country. >> current fiscal issues? >> so i think as has been said before on this panel and was discussed by kerry yellen, it faces long-term issues in terms of the demographics interacting with the promises that past congresses and presidents have made and that it into law.

>> you think policies have exacerbated the problem? >> now, i don't think fed policies exacerbated the problem. >> we have 20 seconds. t. think policies have been held? >> the federal reserve policies have made it easier for the government of our money at a cheaper rate. i think politicians have shown up privity regardless of the price of bartering. >> 10 seconds, keep going. >> i think the fed has facilitated. >> thank you very much. i yield back the balance of my time. >> the chair recognizes from kentucky, mr. barr. >> just a follow-up mr. pitt jersey last question, this was a subject i was exploring with chair yellen a little bit that i'd like your thoughts on this. obviously as the fed begins to

taper continues to taper the asset purchase program and as interest rates begin to normalize and elevate, the cost of bartering to the government is going to rise. what counsel do you have to congress in terms of the urgency and the time sensitivity of getting our fiscal house in order in light of fed monetary policy and tapering and the impact that will have uncovered the cost of borrowing. >> so i think this is more a medium to longer term problem, but it is important to act soon because this is a problem having to do with what people are going to count on in terms of support for their health care, support their income when they retire. so in order to do with a problem that is coming and 10, 15, 20

years, if you're going to reduce the trajectory of the support of me got to do it now. it's not fair to do to people who are going to retire in five years. >> i would add there is a tendency to kick the can down the road especially because the most astounding numbers of gdp don't come for 25 years based on current projections. there are substantial economic literature, including the imf process countries as levels of debt to gdp that the u.s. currently has right now experience slower growth and less job creation as a crowding out of investment. when you look at it through that lens, it's an urgent requirement for congress to fix the debt. >> you know, i would emphasizes well and i agree and i will emphasizes well, we can address long-term fiscal issues now without having any -- without having an executive impact on short-term stabilization goals.

but i'm skeptical on our ability to stabilize the short run can be chilling long-term entitlement program will be a positive, not a negative. >> it would be a positive to address it sooner rather than later. as part of the uncertainty about the debt. it is still lingering around. the cbo's projection areas pessimistic as they were four or five years ago. the sooner this can be addressed, it is mainly looking down the road, but the sinner can be addressed, the sooner the economy will respond positively. >> ms. mccloskey, i was reading with interest your testimony about the impact financial regulation has some low income american. there have been some voices in washington that has been pretty vociferous and aggressive recently in advocating an increase in the minimum wage. i'd be interested to hear and they noted your testimony about

how the consolidation and banking is forcing low income consumers to be under banked or on banked and moving into alternative outlet. and while at the same time they are being forced into alternative services like payday lenders or check cashers, the same time we are anticipating the consumer financial protection bureau clamping down on that industry as well, leaving a lot of low income folks with no other alternatives to access credit. can you speak to the netiquette of impact that has relative to a 7-dollar minimum wage? >> sure. i'll take your questions one at a time. first there's a lot of debate about the employment effects are minimum wage. what we do know is the minimum age, even if the work purposely come an ineffective way to let

the poor out of poverty because people impoverished don't have a job at all and the proportion of people who are low income, very few are in the minimum wage. minimum wage is predominantly given to part-time workers coming younger workers and workers three of four times above the poverty line. so the minimum wage i don't think it's the best answer we could have for the challenges facing the wind and people. her its new rules on alternative credit projects such as payday loans, if they see fpv goes forward with that, the goal should be to maximize options for low-income consumers have and not to limit them and that would eat a great guiding principle going forward. >> thank you. >> thank you. i yield back. >> pitcher is going to take the privilege of asking last question. we are both on the floor now. dr. taylor, i am under the impression you have traveled the greatest distance. like it or not you're good in the last question. it leaves one of the things i've

heard from chair yellen and this panel that there is consensus that there's limits to what monetary policy can achieve in our economy. and so we know that banks are sitting on trillion six, trillion seven of excess reserves. so i am trying to figure out what further realms of quantitative easing achieve for us today. i mean, but his $2 trillion in excess reserves going to do for us 1.7 hasn't done? dr. taylor, what there hasn't been as a discussion today about what is it going to take to unwind this balance sheet and even if we taper each and every month. i am not leaving this hearing today with the clear understanding of where chair yellen intends to take us. maybe there will be further tapering. maybe not.

even if there is, we are adding to the balance sheet. i know you and my mentor, senator phil graham have for it about the subject in the past. what are the risks associated if she and the other members of the fomc choose not to taper had what is the risk associated with unwinding the balance sheet? if you have the job, how would you go about it? >> i've been warning about the unwinding since the wind did not begin. it is one of the big concerns i've had about it. so the only thing i can say is the unwinding has to be done as strategically as predict the boat way as possible. i don't think it should be posed on. i don't think the purchases are doing much good. look at qe three as a program. when i began come and attend your rate was 1.7. it is now 2.7. how can you say that program

were? you can say was the problem of unwinding. there is always the problem of unwinding. i think ultimately that's going to be inflationary. that's a two edge sword we've always worried about. you can be a risk on the down day. if you're tapering too much. we've experienced that downside of ready. that's one of the reasons the economy is growing more slowly. but there's always the other side. it has to unwind at some point. the strategy is going to involve her while paying higher interest on reserves. markets quite right that tired for the fed itself. there's the question of capital losses, how that's going to be treated. ultimately, as a answer to mr. his finger, at least they are getting on with it. that's a positive thing. >> i want to thank each of our witnesses for coming to testify today.

that objection, all members will have five legislative days to submit additional written questions for the week seems to be chaired to be forwarded to the witnesses and i would ask each of you to please respond is probably to these questions as you are able. without objection, all members will have five legislative days in which to submit materials for inclusion in the record. this hearing stands adjourned. [inaudible conversations]

defendant wrapped up its work yesterday, but not before approving new committee assignments. the resignation of max baucus is becoming a new ambassador to china caused a bit of a shakeup in the leadership of senator bob white and replacing on finance with louisiana senator mary landrieu takes over the gavel on the energy committee. senator maria cantwell and jon tester of montana leading up small business and indian affairs committees. on that energy committee assignment, the "washington post" write the headline says new offense and energy committee has environmental seeing rad. they read the senator landrieu will bring a sharply different

outlook for the senate energy and natural resources committee now that she's taking the gavel from senator ron wyden, they say senator landrieu favors building a keystone xl pipeline, protecting tax breaks for and sent his for oil drilling in placing limits on the power of federal agencies to set up her career carbon dioxide guidelines for coal-fired power plants. wyden takes the opposite position on all these issues. that is from "washington post".com.

>> former israeli ambassador to the u.s., michael oren spoke monday about the future of the middle east and the perception that the u.s. is recoiling from the region. he also discussed the israeli-palestinian peace talks, the fallout from the arab spring and what is next for u.s. policy in the region from the atlantic council, this is an hour and 20 minutes. [inaudible conversations]

>> it's a great pleasure to welcome you all this afternoon to the atlantic council. and fred camper, president and ceo. this event marks the beginning of an important new initiative that the council, the introduction of the first public events around our first ambassador resident of the briscoe cosigner on security council. there are a lot of reasons why the atlantic council was delighted to have been able to bring on board israel's former ambassador to the u.s., michael oren, starting february 1st. so we are getting him here shortly after he began the atlantic council. in the press release recirculated late in january, i said the following. quote, ambassador oren brings to the council of the powerful mixture of a top historians knowledge, the highest level of diplomatic experience and a

best-selling authors skill. and i think you will see a taste of all of that in his opening comments in the q&a today. he is a person who not only knows how diplomacy is done and sometimes how diplomacy should be done, but not by him of course, but in general trying to solve problems of the middle east. he also knows the historical context more richly than any ambassador i've ever known. we face a crucial moment in the history of the middle east. as i think you will hear today, ambassador oren is a creative, sometimes provocative out-of-the-box thinker. during his year at the council, ambassador oren will address topics concerning america's future role in the middle east, along with cutting-edge research on israel's relationship with other regional partners. first and foremost, please join me in welcoming ambassador oren.

[applause] >> sakic, before he turned to the podium to him coming trainee in thinking adrian ours, out-of-the-box speakers the issues about a donor for a new center at the atlantic council, to adrian ours latin american center. it was her idea to pioneer the idea of ambassadors and residents of the council and she has supported two of them. capricious marshall at her economist center and michael warned that the scope of center. she could be here today, but she sends her greetings. finally, thanks to barry pavel, the briscoe craft center will support the ambassadors work during his time here with us. there are far too many people in this audience to call attention to all of them. we've got ambassadors, senior officials to the u.s. government, officials from many of the embassies around town here thank you so much for being here. so now to the program,

ambassador oren will pick us up with some opening remarks after which i will tee up a couple initial questions and then turn to the audience. michael. [applause] >> thank you, fred. thank you for crediting me with the ability to solve all the middle east diplomatic problems. i don't think my weatherhead i've done that. kevin rader credit. good afternoon, everybody. thank you for coming out. into the briscoe craft committee and the atlantic council. i am delighted to be a part of your extraordinary organization. the director here in the comparable to adrian ours his nokia with the great visionary and outstanding human being. michael galvan and my former colleague at the israeli embassy, welcome to our distinguished colleagues in the diplomatic community. well, you have heard icom as an

historian, so i'll start with a little bit of history for you. .. >> and the define those nebulous as between the near and far east, man devised a new term, the middle east. and its most distinct characteristic of this area from

the perspective of a geostrategic strategist was its most, almost total absence of strategic significance. indeed, the only strategic value of the middle east lay in its location. it was an area one had to cross while steaming from one area of importance to another area of importance. and it would take another decade before the british navy, realizing the affordability and abundance of middle east oil, decided to convert their swire swire -- entire fleet from coal to oil. it took another 40 years, until the height of world war ii, until the american navy began to look to the middle east to quench its thirst for energy. america's growing postwar dependence on middle eastern oil coincided with the collapse of the british and french empires in the middle east. the process through which

america replaced its, these former colonial powers took place over a very short period of time. you could trace it from the enunciation of the truman doctrine in 1947 to the suez crisis in 1956, and that period also coincided with the advent of the cold war in the middle east. and just as britain and france back in the 1850s joined to stave off russian encroachments into the middle east, so, too, did the united states a century later labor to prevent soviet encroachment from the middle east. but the lines in the middle east cold war were never completely and fully drawn. on one level there were the pro-american, mostly traditional monarchies versus the radical states of egypt, iraq, syria, algeria, yemen and libya. but at any given time, the monarchies were also at loggerheads. sometimes the saudis with jordan

and the radicals themselves were divided by bitter rivalries. the arab-israeli conflict also cut across these lines, though in theory it was a proxy war between the united states and the soviet union with the united states supporting israel, the soviet union supporting the arab side. at different points it pitted a pro-american israel versus a pro-american jordan and a pro-american saudi arabia. so the lines were never completely drawn. and yet, and yet it was the arab-israeli war of 1973 that enabled secretary of state henry kissinger with singular vision and drive to lay the foundations of what we can today call in retrospect the pax-americana. and the keystone to kissinger's efforts was egypt. it was sadat's move from the soviet to the american sphere. it signaled the rapid decline of

the soviet union as a serious challenger to american hegemony in the middle east. the pax-americana officially began with the 1979 peace treaty between egypt and israel. this treaty established the precedent for later peace treaties between israel and jr. can as well as for the -- jordan as well as for the 1993 oslo accords between israel and the palestine liberation organization. it also set the precedent for later peace conferences whether it be in madrid or annapolis. the people of the middle east became accustomed to the assumption that only the united states could play the role of effective mediator. and even pro-soviet states like syria would host over 30 visits by secretary of state warren christopher in the 1990s. extraordinary. and as the soviet union disintegrated, so, too, did its military presence in the middle east.

remember that great blue water fleet of the soviet union back in 1973 that went eyeball to eyeball with the american fleet? well, that virtually disappeared, and between the sixth fleet in the eastern mediterranean and the fifth fleet in the persian gulf, american military power went virtually unchallenged. with the exception of the ubiquitous accomplish that cover -- accomplish no cover rifle, american arms replace russian arms, and american investments predominated. paradoxically, though pax-americana ushered in decades of almost uninterrupted american influence in the middle east, it wasn't very much of a pax. it also, it also inaugurated decades of american military conflict in the middle east, something of what you can call a 30-year war beginning in 1979 with the takeover of the u.s. embassy in tehran, and it continued with the ill-fated

american intervention in lebanon in the 1980s, the reagan administration's armed confrontations with both libya and iran, terrorist attacks against american targets, kidnapping of american nationals, often their execution. american missile attacks on iraq and the sudan, a approximate key war in afghanistan -- a proxy war in afghanistan followed by a real war in afghanistan which is enroute to becoming america's longest con applicant in the region after -- conflict in the region after the barbary wars of the late 18th and early 19th centuries. this is all apart from the middle eastern wars in which the united states had various degrees of involvement including israel's 1982 invasion of lebanon and the iraq/iran war. pax-americana, ip teed. now -- indeed. now, these conflicts exacted an immense price both in terms of morale and material from the united states, and much like the british and the french before

them, americans began to lose their stomach for mawp taping -- maintaining their middle east hegemony. middle east enemies were hardly passive. since 9/11 middle eastern terrorists have tried to carry out some 16 major terrorist attacks on american soil, one of them not far from here at the café milano. and, of course, there was nerve itself which -- there was 9/11 itself which as a military historian you could make a case could be the most effective in terms of its cost benefits, most effective military operation in modern military history. with little training and four hijacked planes, 19 terrorists from the middle east succeeded in killing 3,000 civilians and dragging america into two wars that cost the united states well over 10,000 dead and over a trillion dollars and left the american people very war weary. benefits. a case could also be made for

citing 9/11 as the high water mark of the pax-americana. a year later, a year later president bush created the quartet comprised of the united states, the u.n., the -- russia and the european union, the quartet, which effectively ended america's 30-year monopoly over middle east peacemaking. indeed, america's repeated inability to achieve peace between israel and the palestinians first under bush and later under the obama administration was both a symptom and a cause of the waning of the pax-americana. the other milestone in the deterioration of america's preeminence in this region are well known. it begins with the rather ignominious retreat from iraq, the looming withdrawal from afghanistan, the reluctance to aid syrian rebels trying to

topple bashar al assad, the inability thus far to remove chemical weapons from syria. about 94% of those weapons remain in place. the zigzagging of american policy toward egypt hastening and then celebrating the downfall of hosni mubarak, a close american friend of 30 years. the perceived embrace of morsi and the egyptian brotherhood followed by a recoil from the military regime in egypt. the eagerness of the obama administration to reach a negotiated solution to the iranian nuclear issue, to the great consternation of israel and other pro-american governments in the region. the effects of sequestration on america's ability to project power in the middle east, the withdrawal of the uss truman from the area. the coldness toward traditional allies such as bahrain and a willingness to show distance with saudi arabia all the while flouting america's newfound

independence from middle east oil sources. the refusal to take a leading role in the toppling of quaff my in libya or -- gadhafi in libya or repelling al-qaeda's libyan allies. the fading of president obama's intensely close relationship with turkish prime minister erdogan. i could go on. i won't, but i will say that like in nature geopolitics abhors a vacuum. and middle east power vacuum has left by measuring's wake -- by america's wake has been filled or tried to have been filled by other cups. now, the cornerstone of the pax-americana, though it's widely thought tock the u.s./israel relationship -- something i've had some familiarity with -- but i'll tell you the cornerstone was the u.s./egyptian relationship. and that egypt has now in recent times been hosting military

delegations from the russians. but chinese delegations have also been circulating around the middle east. people have sensed a vacuum. the french have stepped up to what they see as a vacant home plate in the middle east. now, impressions in the middle east are absolutely cardinal, and the people, peoples of the region if we were to poll them, they're not going to agree on anything. but i'm willing to wager that if you were to ask sunnis, shiites, iranians, israelis, they would overwhelmingly agree with the proposition that america's power in the middle east is on the wane and that the age of american preeminence is over. the house that henry built is tottering. but can we distinguish then between an impression and a reality? is america's sun in the middle east, indeed, setting? and here the answer has to be

far more nuanced. now, the key to the future is technology. i apologize, but it's true. and with all due respect to russia, china and france, american technology remains regnant throughout the middle east. russia can send a couple of old destroyers, but their naval presence pales beside that of the united states in the middle east still. secretary of state kerry is meeting, is mediating between israelis and palestinians and taking the diplomatic lead vis-a-vis syria and iran. keeping if mind that the pax-americana was always heavy on americana and light on pax, little has changed in the middle east except for the fact that today more middle easterners are killing more of each other and killing fewer americans. in fact, with fewer boots on the

ground or even ships at sea, the u.s. is killing numbers of middle easterners by remote means, which you know. and for all of their war weariness, it would be a big mistake, i believe, for any party in the middle east to bin to target americans. in short, it is surely premature to speak of a post-pax-americana in the middle east, but it is not too early, i think, to speak of a post-middle east america. distinguish between the two. an america that will seek to streamline its commitments in the region, to revisit old alliances while seeking new ones, an america that will balk at acting as the middle east east exclusive or even primary policeman and fireman. that much has changed. but here, too, we may have to wait. that judgment also may prove premature. those of us of a certain

generation, fred, may remember 1975 and the american withdrawal from vietnam and the iconic image of those helicopters being pushed off into the sea. back in 1975 america could withdraw its forces from vietnam and be pretty confident that viet cong weren't going to follow americans down to l street in washington, d.c.. there's a sense and perhaps in america i encountered during the time of my service here that america could go home from the middle east and turn its back or even pivot away there the middle east. and that belief may prove illusory because the middle east is not like vietnam, and the middle east can follow america to here. and i do not believe that disengagement entirely is possible. pax-americana. fred? thank you.

[applause] >> wonderful introductory remarks, a lot of meat to dig into and follow up on. i will come back to post-pax-americana and post- middle east america and come back to that. before i do that, however, as much as you've gone into history in your remarks, some people in the audience might not know that you've gone even further back in history of the united states in the middle east going back to 1776. and you provide an overview in your most recent book, "power, faith and fantasy: u.s. involvement in the middle east." i wonder if you can go into that in sort of a cliff notes version

here -- >> it's 700 pages. >> yeah. that's why -- >> cliff notes would be 200. [laughter] >> that's why i asked for the cliff notes version. maybe even the cliff notes of the cliff notes. but this comparison of the an cyst between the middle east and the united states and how the u.s. development has influenced the middle east development, and at some point i hi we'll also get into what that has to do with the civil war and the statue of liberty, but let's start with the overview first. >> the overview is america and the middle east have had profound impacts on, in shaping one another. the middle east was fundamentally involved in the founding of the american constitution. i knew that would get you. >> [inaudible] >> it's actually very simple. i mentioned the barbary wars. they were america's first foreign wars, the first foreign wars that america fought outside of its own shores after the american revolution were against middle easterners, against the

pirates of what is today tunisia, libya, morocco and algeria. america didn't have a navy, and they couldn't unless they had a central government to collect taxes to make the navy. so the question how to fight the pirates became integral over the debate of whether or not to have a constitution. this every state the barbary wars are there page after page. extraordinary. because we don't have a navy, and is we're going the lose our foreign trade. the middle east fired the imaginations of american authors like herman melville and mark twain, freedom fighters like frederick doug has and john f. kennedy -- frederick douglass and john f. kennedy. a huge influence on cultural and economic interests in the middle east well before the advent of middle eastern oil. in fact, during the 19th century, the united states was the main exporter of oil to the middle east. mostly in the form offer kerose. but the united states also had a

no less transformative impact on the middle east. and mostly not through, not through economics, not through oil, but through education. america built the universities in the middle east. and universities in turkey, cairo through which american educators imparted american ideas. and perhaps the most influential idea was the idea of nationalism and independence. and those ideas percolated through educated classes, first through, many through middle eastern christians, then into the military. and to understand that there's a direct link between america's educational involvement this the middle east and the emergence of an arab nationalist idea, the arab awakening and to use george's term, and the struggle for arab state independence throughout the curse of the 20th century -- the course of the 20th century.

nasserism can has a huge impact on the arab-israeli situation in the 1967 wars, and we're still trying to dig ourselves out of it. [laughter] so america, much can be traced back to america's involvement in the piddle east, and i believe -- in the middle easts, and i believe it's underappreciated. >> i want to, we had as nateing conversation before -- fascinating conversation before we came in here, and because i'm a great lover of historical anecdotes, you really have to share two of them with this audience, if you would. first of all, the impact of the civil war on the history of egypt. and then after that perhaps the history of egypt's impact on the statue of liberty. [laughter] >> well, at the risk of sounding reducktive, the middle east would not look like the middle east today if it weren't for the american civil war. the north blockaded the south, and egyptian -- southern cotton, which was vital to the economies of britain and france, was cut off. and it was the only other place in the world that had cotton of a similar quality was egypt.

so the price of egyptian cotton went up 800 fold. they started to build a thing called the suez canal. but in 1869 southern cotton came back, and the egyptian economy went bankrupt. and they went into arrears, and it led to the british occupation of egypt in 1882. and which ended in 1956 with the suez crisis. nasser emerges as the great hero of the suez crisis, so much so that nine years later he tries to take on israel in the 1967 war, and we're still -- as i said earlier, we're dealing with the outcome of that war, whether the final disposition of the west bank, gaza, jerusalem, all this can be traced back, of course, to the civil war. [laughter] the parallel, of course, to that has to do with a military delegation that was sent by bill tecumseh sherman of civil war fame who was chief of the u.s.

military in the late 1860s. egypt wanted to modernize its armies and break away from the ottoman empire, so they turned to the united states, a nice neutral power back then. and tecumseh sherman sent a group of his buddies, some of whom he had known from west point, to egypt pause they needed a job -- because they needed a job. they modernized the egyptian army, but at the same time they created schools, and they imparted american ideas; nationalism, patriotism, democracy to egyptian officers. and not by accident the people who lead the first great revolt against the british in 1882 are the egyptian military. they're still doing it today. i'll probably distush people by saying -- disdisturb people. talk about reductionism. but egypt went bankrupt, as i said, in 1869 because of the return of southern cotton. today had planned not only to open the suez canal, but to put

a beautiful statue at its entrance. and the statue showed a veiled arab woman holding a torch. you can see the designs from it, they took on a brilliant french sculptor to do this, and then they ran out of money. and bartoli still had the design, so he was able to sell it to some frenchmen who gave it to the united states, and they brought it to new york to an island out at the entrance to new york harbor, but they didn't have anybody to put it together because it was built by identify -- identify l, and it came in parts. these former civil war officers met in egypt, he brought them back to to put together the statue of liberty. so the statute of liberty's concept and its construction were both related to america's involvement in the middle east. >> so i just want to give you, i i just wanted to give you a little bit of a taste of what we've opened up the atlantic council to in terms of -- [laughter]

for -- >> and now i can hawk my own books. so available at fabulously-reduced rates. >> numbers are going up even as we speak. [laughter] i wouldn't mind fast forwarding a little bit now to your comments on post-middle east america. and let's, i have a couple questions, and i'll go to the audience, and maybe we'll go back and forth between the audience and myself a little bit. you talk some about energy, but perhaps you could go a little bit more teachly. in the role -- deeply. in the role of oil and energy in the picture that you are painting of pax-americana in the middle east, but also now the impact or potential impact as you see it of the u.s. energy revolution. as you said, the u.s. was exporting to the region, then imbolterred from the region. we're now facing another change

in terms of our energy relationship with the region. and i was wondering if you could talk a little bit about how you think this might influence the issues you were talking about. >> if you look back at the history of presidential doctrines about the middle east and an inordinate percentage of all presidential doctrines issued since truman have to do with the middle east. up through the carter doctrine, had to do with the free flow of protecting -- protecting the free flow of oil from the middle east, specifically from the persian gulf region whether it be from the threat of soviet encroachments, later from iran and even some of america's military engagements. people forget the flagging operations through the latter part of the reagan administration where american, american warships were actually firing on iranian boats and even on iranian coastal installations. forgotten. this had to do with protecting

american energy sources. but over the course of the subsequent decades, you can actually trace it, the percentage of america's oil consumption that was imported from the middle east decreased. i me that by the time i came -- i know that by the time i came on my job in 2009 as ambassador it was down to about 11%. very small. today it is almost negligible. and the notion that america might have to exert force to protect the free flow of energy out of, say, the persian gulf area today would be a far more remote assumption than it would be in the 1970s and 1980s. having said all that, that doesn't mean that the, that middle eastern oil is not vital to other countries in the middle east, in the world including a country like china -- >> increasingly. >> increasingly. and that america's economy is inextricably tied up with that of china. so albeit indirectly, the

american economy remains deeply attached to middle eastern oil even though they're not importing it. so maybe not the first step a strategic issue, but it's certainly a financial, a supreme financial interest. >> so you don't see that the energy boom in the united states or self-sufficiency is going to significantly shift u.s. approach to the middle east? >> request actually, on the contrary, i think it will shift it as less of a strategic issue and more of a financial interest. >> uh-huh, yep. president obama in his state of the union when talking about the middle east didn't talk much about the transitions that we were all focused on before the aaround awakening, talked more about nuclear iran, israeli-palestinian pass negotiations and, of course, syria -- peace negotiations. what is your view of how policy has evolved during the obama administration, and do you see

an underlying strategy behind this shift or how would you explain what we're watching? >> i think came out with a robust and highly specific outreach to the middle easts. if you look back at the cairo speech of 2009 which in many ways was the foundational document for the obama administration's outreach, it was perhaps the most suis-generous document in the annals of american foreign policy. it was the only instance that i know of in which the president of the united states addressed the adherence of a faith. world faith. you can't imagine the president getting up and addressing the world methodists or even going to catholics, but he went to cairo, and it was addressed to the muslim world. that in itself was highly

unusual. addressing a muslim world and not addressing the citizens of muslim states, i think, inadvertently conformed to an islamist notion of states being illegitimate, and there's only one truly legitimate state which is a univ.al muslim state -- universal muslim state. and that outreach in retrospect has proved less than successful. and you don't see many echoes of it in more recent statements by the president and by his administration. events in the middle east have simply outstripped the ability of just about anybody to formulate a cookie cutter, one-policy-fits-all situation. you can't. the events have transpired so rapidly and so radically in the middle east and so differently whether it be egypt or syria or bahrain, we talked about libya.

i would challenge just about anybody to try to come up with a single policy that's going to address all of these. having said that, you could -- there's points to criticize various aspects of the policy whether it be in syria or egypt. in retrospect, in terms of america's image in the middle east there probably should have been a deeper breath taken before pressing for mubarak's removal and try to do it in a more gradual way. i wonder whether today there's thinking back, well, if america had been involved in syria at an earlier stage, perhaps the jihadist imprint would have been preempted, would have been lessened. but all that is what they call -- not in the middle east, but in the united states -- monday morning quarterbacking. so -- >> well, let's do, it's monday, and we're looking to saturday, so let's look actually ahead.

what's at stake in our -- and then after this question i'll turn to the audience and pick up what people in the audience have on their mind. what's at stake in the negotiations with iran for the region, for the united states, for israel? and i know that's a big, broad question. i'll let you narrow it down. but i'm just wondering from your standpoint and with the view, your historical view, what's at stake in these talks? >> everything. everything. it's the future of the middle east. there is are we now at a at the tectonic shift point where, again, whether in a post-pax-americana mode is there, using negotiations

implicitly recognize a certain hegemonic role for iran in the region. and what would that hegemonic role look like from an israeli perspective, from the perspective of most gulf countries, and today there is a greater confluence of interest between israel and these gulf countries than at any time in the last six decades because we agree on, say, egypt. they agree on the peace process, the fundamentals of peace process, but most of all israel and the gulf countries agreen the iranian threat that an iran that maintains not a nuclear weapon, but the ability to to make a nuclear weapon in very short period of time presents an unsustainable threat to the region. and that it's a threat that has, that is multifaceted. it's not just a threat of iran being able to put