and mr. flores seemed to be pressing the notion that it is only private market incestments that we should have used to help the economy or a recession turn around, are there times when you think public investment like the recovery act is necessary? >> to answer your question directly, as you say, the cbo calculated some effects on gdp unemployment. obviously, that required some assumptions about the counter factual it would have happened otherwise. but the fed, in our analysis and our modelling, we're basically comfortable with the cbo's conclusions. we think it did have some positive effects on growth and employment. so yes. >> thank you. then just shifting gears. there's also been a raging debate over the course of the last year over what is the best

way to reduce the deficit? clearly we all share the goal of reducing the deficit as significantly and as quickly as possible. would you agree, though, because our friends on the other side of the aisle believe and have tried to enact only spending cuts that they deem wasteful as a strategy to -- towards deficit reduction. you would agree that wasteful spending also exists and is created in the tax code? >> well, i think you're pushing me into areas which are the province of congress. the law i support is the law of math. if you are -- if you believe that the government should be doing more and spending more, then you should be willing to collect the taxes to do that. and if you want to cut taxes and keep revenues low, then you have to find the spending cuts to match that. so what i think that balances with what's critical. people have different visions on what the role of government should play.

i don't think i'm the one to adjudicate that. clearly -- >> let me ask you -- i know. i'm not asking you to make a political judgment because that's our job. but cbo, would you agree with cbo who has said that tax cuts, like the 2001-2003 tax cuts for the wealthiest provide the least bang for our buck in terms of job creation and reducing unemployment? >> i think that's debatable point. they provide some demand from the point of view of putting more income in people's pockets. i think the other issue though is that's the question on how do they play into the long run efficiency of the tax code? i haven't talked about it much today. i think there will be a lot of benefit without much budget airy costs of thinking about our personal income tax codes and improving those, reducing -- you know, reducing inefficient

exemptions, broadsening the base and so on. so from a purely demand side perspective, you know, tax cuts do provide income, do provide sources spending. there may be less soin some cas. you also think about the role of the tax code and promoting growth in the long term. >> and just one other quick question before my time expires. you would say that deficit finance tax cuts tend to pay for themselves? >> no. except in very rare circumstances. i don't think many people including many good friends of mine and both sides of the aisle would argue that tax cuts fully pay for themselves. the question is whether or not they improve efficiency in growth, not whether they fully pay for themselves. >> thank you, mr. chairman. i yield back. >> thank you, mr. chairman. and thank you, dr. bernanke for visiting with us today.

clearly, this economic recovery has been long delayed. it remains fragile. my constituents are frustrated as are so many of us serving them that we're not doing some things on the fiscal side of the ledger to get the economy moving more quickly. private sector forecast indicate that in the coming year we're going to be at 2.2%. that is well below the 3% growth that trends recent history. we have a jobs deficit 8.6 million jobs lost in '08-'09 recession. less than a third recovered. i'm concerned about our country tipping back into a recession at this point maybe as a result of europe. we spent some time discussing europe here today. in your interaction with ecb officials and others, but what i'd like to hear from you,

doctor, is what preparation our fed has made for an orderly -- excuse my, a disorderly default by greece or the other countries within europe? i haven't heard any specifics there. you indicated that the fed is prepared to use all the different liefers that you have. so that is the general questionment but specifically, i'd also like you to speak to the money market mutual fund market. right after lehman, there was a bailout of the money market mutual funds because over panic over breaking the buck. that is the investment income wouldn't cover all operating expenses. it wouldn't cover all the investment losses. and so there was an intervention by the united states into that market. could that also be something that people begin demanding right here in washington? we bail out the money markets as a result of a disorderly default

in europe? >> so in terms of preparations, other than beyond the swaps which we just discussed, the federal reserve has been operating as in a supervisory capacity, work working with other supervisors to understand the exposures of banks to european nations, to european banks, european economies. trying to help reduce the risks wherever as possible. we've been doing that. the other set of tools that we have in the event of a crisis, if it was severe enough, would have very adverse effects for our economy and our financial system, no matter how well prepared we are is the modified 133 authorities that dodd/frank

left us. they come under pressure from funders. and if necessary, we could use the 133 authority to provide additional programs to lend to other institution that's are under funding pressure. so we would try to mitigate any resulting contagion from problems in the banking sector or in the economies of europe. we pay close attention to the money market mutual funds. the sec is the primary regulator there. they have been working to reduce the exposure to europe. they substantially reduced their exposure to the euro zone countries. and all that's to the good. >> if i could interject briefly. is there why a financial stability oversight council created by dodd/frank did not characterize, has not characterized money market mutual funds as a systemic ris

income th risk in this case. >> it did in july. it did point to them as an area that needed more work. you mentioned the bailout. the things that were done in 2008 such as the treasury using exchange stabilization fund to guarantee money market mutual fund deposits were outlawed by dodd/frank. so it's very important that money market mutual funds take the necessary actions to be safe in the event of some kind of problem. as i said, one thing they're doing is reducing the risk and their exposures. but the sec which has already imposed improvements in the regulation of these funds, is considering additional steps and consulting with the federal reserve and we're quite sympathetic to the idea that more might need to be done in order to insure that we don't see another run like we did in 2008. >> i'll yield back my remaining two seconds. >> mr. okita?

>> thank you, mr. chairman. mr. chairman, thanks for coming back again. it's good to talk to you. i said yesterday to the other witness, that's about this time in the day that we always seem to talk to each other. and trying to synthesize everything that's been said. i have a few questions. you may be repeating. if, so just say so. first of all, this discussion about the inflation and we talked about this the last time we talked via microphone here. when you say you're not worried about the increase in inflation, my way of looking at this is when you're printing money for quantitative easing and the money is piling up, the inflation may be measured by the lack of velocity or velocity when that money changes hands. and so it's my perception that

the banks are holding on to the money to make the sheets balance for regulators and fiscal soundness. people may be stuffing money in their mattress because they're so uncertain. they're not using the money. aren't you worried whether they start, when we get this government believing again, for example, in a true free market system and people start having confidence and the money starts picking up velocity, aren't you worried that you're got going to be able to stop that run away train? >> no, we're not worried. we have two sets of tools to remove the money at the appropriate time. one is to sell assets which extinguishes the money. the other is to sterilize or lock up or remove those excess reserves in the banking system. so at the time it come, we have to raise interest rates to fight inflation. we've made explicit what our inflation goal is now, 2%. the markets seem very confident

in our forecasts. private sector forecasters even surveys of consumer all feel that inflation is well controlled and will be well controlled. and we do have the tools to withdraw that money. >> thank you, mr. chairman. many babyboomers are retiring, 10,000 per day. traditionally has been the strategy to have the more elderly in our society be able to rely on the less risky investments. and it seems with the interest rates so low that we're -- we may be forcing our most vulnerable citizens into more riskier invest ams. do you have a comment on that? >> i did talk about it before. we do take that into account. we understand it's an issue for many people. a strong economy produces much better returns in general. there was a former federal

reserve governor. i'm sure you know. he wrote an article in "the wall street journal." if you don't mind, i'll quote from it and then have you comment on it. however well intentioned, the federal reserve's continued purchase of long term treasury securities risk catch flmouflage country's true cost of capital, the fed shows up as a large and powerful bidder. >> they have the best access to capital they've had in a long time. bond markets are open. i think the people that have trouble are small businesses and others who can't access bank credit to the extent that we would like. >> you mentioned canada earlier on. you indicated that they had less of a recession than we did. why is that? >> the main reason -- there were several reasons. the main reason, i think, is that they have a small number of large banks which has pluses and

minuses. but in this case, they had probably better regulation. the banks didn't get involved in subprime mortgages and the like. and so some of the things that created our housing boom and bust in our financial crisis were not as severe there. and that's why they didn't have as deep a recession. >> would you personally favor a model more like canadas in terms of better regulations? >> well, i don't think i want to go to just a small number of large banks. i think community banks and medium size banks play an important role in our economy. i think they were right in being tougher and making sure that banks were not taking excessive risks. i think our system is a plus here. canada has a less complicated financial system. >> finally, if you had to choose one of the mandates, which would

you rather per snu. >> pursue? please answer the question. >> you said you had subpoena power? >> ultimately, central banks only control inflation. so obviously price stability is a critical function of central banks. and that provides healthier economy in the long term. that being said in the short term, i think some benefits could be had in terms of supporting a weak recovery like the one we have now. >> i thank both the chairman. >> will you yield for just a moment? >> sure. you referenced specifically 5.2 to 6%. and then talk about focusing on deviations. we have incredible expansion in the monetary base. that's when paying higher interest on reserves must occur to sop up the money supply which

is your plan. i would argue this made more complicated now, less certain from us whether that's going to occur on time because what if the employment deviation is greter thgret greater? and with that monetary base running through a system with faster velocity, it's like putting a cruise missile through goal posts. i mean the question is, are you going to do this? i mean are you going to be able to mop it up on time now that you have more emphasis based on the employment? that's why they're made more ambiguous. >> i'm sure we can do it. we have the technical ability. as always, in any situation, there is always the question of whether or not you tighten too early or too late. that's a judgment you have to make. in terms of technically, we have no difficulty to doing it. i point out the bank of england and ecb which are singular mandate banks have larger balance sheets than we do. as a share of gdp.

>> miss black? >> thank you, mr. chairman. thank you, mr. bernanke for being here and giving us so much time. i want to turn to your testimony on page six. i did a little diagram here that helps me to work through what you're saying here. i think you make some very good points. you start out by saying in that second full paragraph having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences. so i start out here with increase debt. then i go down here what you say it is a crowd's out private capital. and then, therefore, reduces productivity growth. which then results in more borrowing, ie, from foreign governments, from abroad. which then increases our future income devoted to interest payments which then comes back full circle to increasing the amount of debt. so i think that cyclical piece

in a diagram would really help my constituents to see how this is so important that we take care of this issue. but i'm also intrigued by your results that you say here, impairs the ability of the policymakers to respond effectively to future shocks for adverse events which is our role and responsibility ultimately unsustainable deficits, increase the possibility of sudden fiscal crisis which, as we look at what's happening in europe, certainly can happen here. i think you've diagrammed that well for us. and then finally, my point is that you make here investors lose confidence in the ability of the government to manage the fiscal policy. so the fiscal policy piece of that is our role and responsibility. would you agree that the economic growth flows from investments and savings in the long term and not borrowing? we can agree with that? >> well, there's got to be --

sometimes you have savers who want to provide funds to -- if you're a firm and you start a firm and you don't have enough of your own money to invest and you've got savers over here, then borrowing could be part of the process by which the money from the savers goes to the investors. so i don't think you want to get rid of borrowing in general. mortgages help people own homes, et cetera. but certainly from the federal point of view, if borrowing is so large that deficit relative to the size of the economy continues to grow, then that feedback you were talking about, higher interest rates, bigger deficits, you know, bigger debt is a significant concern. and bond markets can bring that forward. anticipation of that can bring that forward. so if your question is should the federal government have a long term plan to keep its fiscal situation sustainable and stable, obviously the answer is yes. >> okay. so that given, then can you help

me with how do the policies of the fed on setting the interest rates affect the investors and the savers? >> well, my comment a moment ago about investors having access to capital, you know, currently the economy is, you know, is -- not in a recession but is far from full employment. and so there's plenty of unused resources available to be put to work by firms. and we're not seeing any evidence that either monetary or fiscal policy is crowding out private sector activity. to the contrary, to the extent that we can support growth and lower rates for borrowers, we can, you know, we can facilitate spending. deficits raise interest rates and therefore reduce investment.

monetary policy which is too easy distorts the economy and leads to inflation pressures. so clearly it's a function of where the economy is. >> and on the other hand, does a zero interest rate encourage savers to save? >> it may. because there's both what congress calls substitution he infection and income effects. you may need to save more in order to get the same return. but -- >> i'm not sure for me and maybe -- i'm just abnormal but i'm not sure putting my money into accounts where i'm going to get a zero return is probably what i want to do, especially in an economy that is so uncertain. >> let's think this through. suppose in order to solve savers problems, suppose the fed raised interest rates sharply. that would almost certainly throw the economy back into recession. it would mean the stock market would decline. it would mean returns on other

investments would go down. it might mean increased deficits might lead to more concerns about our federal government. so, you know, again, we understand the concern that savers have. but, you know, we're trying to deal with a bad situation. this is one of the tools we have to try to get the economy back to full employment. >> i know my time is out. i'm not advocating a sharp increase. i'm just saying that there is not an incentive there right now with 0% interest. >> there is a case for normalizing policy. >> chairman, thank you for being here, very much. and i also appreciate your open communication that you started, that you more press conferences, more communication any time you get the federal reserve ideas and thoughts out there, it's helpful. i appreciate you taking that on and bringing more sunshine into your thoughts and plans. you mentioned early better small business access to capital. that is a concern. that is something we talked about last time you were here. and the fact that you mentioned

banking examiners becoming more conservative in this time of instability and that is an is e issue. in the community banks i deal with, community bankers are still very concerned with the approach on compliance. safety and soundness, they have no issue w compliance becomes a big issue. especially with the number of rules coming down and the number of regulations. let me give you one example. the new volker rule, our community banks have to prove that they're exempt from it. and so you have a bank of 40 people total employees going through pages and pages and pages of documents to prove they don't apply to this. it is adding a tremendous amount of work load that is not into lending and is forcing them to second-guess. you said there is modest improvements on. that i'd like to follow up and swha improvements can we expect in the coming days? the community bankers that i talk to are not actively lending

and are still second guessing every bit of risk, not sure if someone is going to come in and second guess them. >> so i won't go into the safety and soundness part. your question is about compliance. so it is certainly true that 34 many of the provisions of dodd/frank are aimed towards the banks. they should be spared even the need to demonstrate that their small banks. >> they currently do have to demonstrate. >> what we're doing at the fed, we have a subcommittee of two governors, governor duke, a community banker and governor raskin, who was -- besides being a senate staff person -- was also the head of supervision in maryland. so they're both very knowledgeable about small banks. and their job working with staff is to try to first make sure that rules that don't apply to

small banks are not put in force and that in addition to that, that we provide as much clarity as we can to what the small banks need to worry about, what part they can just throw away. to help us on that, we created an advisory council of institutions we meet with. we get their feedback. so, you know, i appreciate your point. and i think it's progress in moving away from the safety and soundness issue. >> do you feel it's fweting better? the community bankers i'm talking to are getting more frustrated. to them, it's death by 1,000 paper clips. it's the frequency of how many small pieces are coming out and a bank of 35, 40 total employees cannot keep up with the frequency of things. >> we have already begun a process whereby we'll try to provide instructions, guidance to smaller banks about what part they can just throw away without looking at it. >> that will be very helpful to continue to press on. that obviously that, is the highest number of bank wez have out there, not the high neest i

systemic risk. this is a broader issue i struggle with and trying to watch across the world. we have so much sovereign debt worldwide. and we're continuing to add more and more sovereign debt worldwide. at what point do we reach the definition of unsustainable worldwide? that we reach a limit where we don't have enough liquid capital sitting out there for all the borrowing that is happening, not just us. obviously we're the largest of that. but there has to be some point that is defined as unsustainable. there is not enough liquid capital to manage this and we hit that cycle. >> at the moment, private borrowing is way down because of the weakness of the economy. so there's money out there. as we get the full employment, then you're going to start seeing the crowding out. people are going to have to pay higher rates. and that's going to have the adverse effects i discussed on capital formation and productivity. i do think that from our

perspective in the united states, i think we are the premier economy. we are the safe haven. we have a strong interest in maintaining that status. so i guess i worry less about the global supply of capital and just really think about managing our own need for capitol going forward. >> i understand that. but there is a limited amount of liquid capital at any moment and every country is competing for it at a higher rate. >> so there is supply and demand. so the money will be there in some sense. but if the rate is so high, that is bad forts fiscal borrowers. >> that would be the definition of unsustainable, that we suddenly cannot get the money at the rate we need it for and that affects us. >> that's right. >> and the contagion begins. the sense is, are we even close to that kind of point? i mean that is predicting -- that's crystal ball type stuff. but you have to be watching that as well. >> again, for countries like the

united states and uk and others, rates remain very low. government bond rates. again, a lot -- the bond market is very forward looking. a lot of the bonds are 30 years. so a lot of this depends on what the bond markets expect the southern financing needs to be over the next few decades. so once again, it's really to some extent a country by country issue. if we can take a strong set of policies to insure the sustainability of our fiscal situation, i'm sure that the funding for the united states will be there. >> thank you. i yield back. >> the last question. >> thank you, mr. chairman. dr. bernanke, i appreciate your time today. i remember our discussions last year. one thing i asked my staff in the last few days is to read through transpocripted of the committee meetings and looking

at those comments and the transcripts, is it fair to say the fed did not see the severity of the housing crisis coming in 2006? >> i think the mistake was a little different than that. house prices were already falling in 2006. and we were aware of that. what we didn't know was what was the impact going to be? and in particular, we didn't have the sufficient understanding of how the fall in house prices, resulting effects on mortgage quality and so on would affect the financial system. that was the linkage that we get to see in 2006. so, yes. we didn't -- obviously, we didn't see the crisis coming. we certainly were aware that the housing market was cooling. and we talked about that quite frequently. i talk about it in testimony. i have to emphasize that, you know, we learned a lot of less so sons from that experience and radically changed the way we do our supervision and also in particular we now focus very

much on the interactions between different parts of the system looking at it from a systemic point of view, not just from individual institutions. so while i can never promise that we won't have another financial crisis, i think we have made a lot of progress in our ability to monitor the situations. >> and mr. bernanke, looking at the economic projections for last january, if i have the right ones here, you rejected growth of 3.4% to 3.9% for gdp for this past year. it came in at 1.7%. what happened and why were you so far off? and what kind of expectations do you have that -- will you potentially be that far off in the coming year? >> i like to look at the numbers. i don't recall what our projection was. but i would say two classes of things. one is that there was some developments that were