some of the rules are complex and important to get comment and input and to do a good job. >> so as a follow up -- >> the time of the gentleman has expired. >> thank you. >> the gentleman from my my mr. clay is now recognized for five minutes. >> thank you, mr. chairman. thank you, chairman bernanke for your return to the committee. unemployment is declining and is now the lowest in three years. and we can get pretty technical in these hearings. but my constituents in st. louis would like to know what we in congress and you at the federal reserve can do to put americans back to work in ways that, perhaps, we can all understand. what do you suggest? >> well, from the federal reserve's point of view, as you

know, we have been keeping interest rates low and trying to create financial conditions that will foster investment and entrepreneurship and demand on the part of consumers and that should help bring the economy back to a more normal level of functioning. but as i said earlier, again, the fed cannot affect the long run health prosperity and productivity of the economy. that is really up to congress. there is a whole range of policies there starting with fiscal, i would say. having a fiscal program that on the one hand achieves fiscal sustainability and on the other hand is protective of the recovery which is still not complete. we need to talk about skills. we need to talk about the tax code. infrastructure that allows our economy to function at the best levels. there is a lot to be done. but i guess i would put the fiscal thing first from

congress' point of view. from the fed's point of view, we're going to pursue our duel mandate. >> speaking of interest rates, it has been suggested by the house budget chair that if interest rates remain low until 2014 this will hurt the dollar. do you think that's accurate? and would it risk fueling asset bubbles? >> well, i like to make a distinction that is not often made. when people say hurt the dollar, this tl are two definitions of the dollar. one is the buying power that is the inflation rate in the united states. does the dollar buy more today than it did yesterday? the other definition is the dollar versus other currencies, the foreign exchange value. those are two separate concepts. now, in fact, our policies have been accommodative since 2008 and on both counts i think we're doing okay. inflation over my tenure as

chairman has been 2% which is lower than previous chairmen. the dollar has been -- if a foreign exchange sense, has been up and down. but it's roughly where it was three years ago. i don't think that's really a big problem. although, i think it's important to distinguish those two components. you asked about interest rates on -- the second part of your question? >> will it risk fueling asset bubbles? >> obviously, that is something we have to pay attention to. we have greatly expanded our ability at the fed to monitor the financial system broadly to take a so-called macro approach. and, you know, right now we don't see any obvious bubbles in the economy. but certainly there is something we need to look at and continue to monitor. >> thank you for your responses. mr. chairman, many citizens in the nation are concerned about the rise in gasoline prices at the pump.

especially the working class. what measures can the federal reserve take to stabilize the recent rise in gas prices? >> well, we're concerned about it as well. i mean it has a direct affect on inflation and it also is bad for growth. it takes away buying power from households. so there's a real concern for us. on the other hand, overall inflation is low and stable. so it's really a question of this particular product becoming more expensive relative to other products. and, again, as i mentioned earlier, the main reason for it is the higher price of crude which in turn relates to a number of factors, among them, uncertainty about supply in iran and in the strait and in africa. so i don't think the fed can do too much about price of gas. i think more important that we try to establish security of supply and also take measures to

continue to reduce demand. i think it's important to note that the united states has been reducing its dispense because we're producing more energy and we're using -- importing less. >> if i ask, you would suggest tapping into the reserves? >> that's really for administration to decide. the reserves are typically used for disruptive situations where there's been some breakdown in supply chains like during katrina, for example. there is less of assistance during a situation where there is a long term supply/demand problem. again that, is an administration decision. >> thank you, my time is up. >> the gentleman from ohio is now recognized for five minutes. >> thank you, mr. chairman. and, thank you to the chairman for coming to testify before us. i appreciate the job you do and you have a hard job. i want to ask you about one big picture question and then talk about some things that are important in my district. the big picture question is i've been here 13 months.

i pretty quickly realized that the only things that happen in this town are the things that have to happen. and you've heard some really robust debate in this committee about how we might solve our fiscal crisis. you've admitted it is the thing we should stay focused on. and i believe the best way to fix it is to require it to happen through a balanced budget amendment. that doesn't say that what we will -- how we will balance the budget, it just requires it to happen. i do believe we can do that in a thoughtful way with some relief for natural disaster time of war for only that spending related to those activities. and usually you punt these questions. i'm going to ask you anyway. what do you think about a balanced budget amendment as a technique for solving our fiscal crisis long term and forcing it to be one of the things that has to happen in this town? >> in general, i think rules or structures are helpful in getting better fiscal outcomes.

for example, offsets and things of that sort. i think one year might be too short of time, you know, to demand balancement but over a longer period of time with appropriate provisions, some kind of rule, i don't know whether you want to go the amendment route or not. i think some kind of rule for the congress to provide a guide post both to its own deliberations and for the public's awareness, you know, could be a helpful structure to make things happen. >> thanks for that thoughtful answer. i do want to follow up on a question that mr. clay asked. i asked you this last year. i know that the bureau of labor statistics does both of your measures that you measure yourself against, unemployment and inflation. i just want to ask you to continue to pay attention to the way they measure things. the unemployment number does not count the people who have dropped out and are no longer

looking for work. it also does not account for underemployed folks. as we go through structural changes in our economy, i'm not asking you to comment. i know you don't do these. but i am worried about the way that they count. i'm also worried about the way they count inflation because when they put together the consumer basket for inflation, the reduction in the prices of housing is masking the massive increases in commodity prices including oil and gas and including food stuffs that people buy at the grocery store. and if you think about the way that people in my district and the rest of this country manage their finances, they lock in long-term rates on their housing through a mortgage or a long-term lease and they have a known amount that they're going to pay which changes only a minor amount. the thing that changes their real inflation they see commodity prices, price of gas at the pump, price of food stuffs at the grocery store. so i know that the bureau of labor statistics does that work for you. but i learned a long time ago in the military, you know, what you

measure is what counts and how you measure it counts. so i would remind you again to always review the way those things are measured. i'm not asking you to comment. i know it's not yours. i would like you to pay attention. >> i would comment. the bls does provide alternative measures, u-5 and u-6 which does take into account discouraged workers and so on. >> so i ask you to keep looking at those. the last thing want to talk about is community banks. you mentioned it in your testimony. i think we all recognize that community banks weren't the inner connected cause of the crisis in 2008 an that they also bear an impact of many of the regulations because of their size and the fact that they don't have big compliance departments. and, you know, i'll tell you a story and then remind you to talk to your friends at the fdic and occ. i'll tell you, i've not heard a bad story about fed regulators from community banks. but i've heard several horror stories about the fdic. i'll tell you a new one i heard

since last time we talked. there's a community bank that recognized a borrower was in a deteriorating position. they asked him to put money in an account, signed an agreement with them, a forbearance agreement. they got a year of principle and interest in a restricted account that the consumer can't touch. so they know that loan is good for a year. and the fdic came in and asked them to put all that money toward principle and write the loan down and violate their forbearance agreement with the customer. you know, then downgrade the loan. well, they know that loan is going to be good for a year. and the gentleman's financial condition may change in that year. they taken responsible action and the fdic forced them to do things that i think are irresponsible. my time expired. i would ask you to go back to the regulators at the fdic and occ and ask them to please not encourage our community banks to do things that actually hurt borrowing and hurt our economy.

thank you. >> the gentleman from california is now recognized for five minutes. >> thank you, mr. chairman. i want to commend you on everything you've done to keep short and long interest rates as low as possible. we face a difficult circumstance. the fed is doing more than any other agency of government to try to get us out of it. i'll have a question for the record for you on the voelker rule and applying it to international situations. and my first question is about the society for worldwide interbank financial telecommunications, swift. i'm the lead democrat here in the house on a bill designed to in effect expel iran from swift. do you agree that allowing iranian access to twist undermines u.s. national

security objectives and our objectives in preventing money laundering and the financing of terrorism and proliferation? and do you think that we can successfully exclude all iranian banks from swift rather than just those iranian bank that's are under eu sanction? >> well, i shouldn't make national security judgments. and i won't. but on swift, i will say that the fed is one of the supervisors of swift. we work with the bank of belgium and other international supervisors. and my understanding is that it would be feasible. and it's a very important system because it's part of almost every international money transfer that occurs. so, you know, it's -- it could be a real problem for iranian financial markets or financial institutions if it were -- if they were banned from using it, yes. >> let me assure that you every institution of the federal government that is involved

typically in national security policy would like to see iran as financially isolated as possible. and so while i don't have a national security staff, whether it's the foreign affairs committee in the house, full house, the senate, the state department, i think you should use your position at swift to achieve what is already the national security policy. >> we'll do whatever congress instructs us to do. >> and turning to another issue, i want to commend you for your white paper on the u.s. housing market. and i think it's appropriate for the fed to comment on the housing sector. there is this program of going reo to rental. and i think it's important that we not sell these homes in such large packages that only huge wall street firms are likely to

bid. i think it's important that you sell packages of homes in the same area so that the same management company could administer 20, 50, 100 homes. and i think it's important that you deal with local investors that have a real stake in the local community. i don't know if you have any comment about all that. >> well, only that the fhfa is running a pilot program. the tradeoff is you need to have enough homes that it's economic for the management company to, you know, maintain them. but otherwise, you know, i think it makes sense to not overconcentrate ownership. >> and i think whatever package you have ought to be in the same area. >> certainly. >> now, we've seen adjustments to the llpa from the fannie and freddie, gses and congress

needed to fund a couple of months of the lower social security tax. so we hit another 10 basis points for the next ten years. do you see us hurting the housing market if we go back to that well again and increase the llpa or increase the guarantee fee that is put on top of what home buyers and home refinancers have to pay when they get a home mortgage? >> here's the tradeoff. the benefits of a higher fee are first the fiscal benefits and reducing increasing the profits of the gses and reducing the call on the treasury. another benefit is that by raising those fees gradually, you may eventually begin to bring in private competitors into the market. that's part of the strategy. on the other side, i should point out if you make more

costly to get a mort goth that in the short term that will hurt the demand for housing which is already pretty weak. >> i would think another decline in housing prices or a failure to stabilize them and get them inching upward would be very bad for the economy, at least for the people i represent. and i yield back. >> gentleman from california, mr. royce is now recognized for five minutes. >> thank you, mr. chairman. i'd like to go back to that chart, government spending as a share of the economy and have that posted. the congressional budget office puts this together every year. and they project, mr. chairman, the point at which the general fund transer ifers to the total revenue for the federal government. i would just ask you, is this projection sustainable? is this situation sustainable? >> no, i don't think it is.

>> and what impact might continuing on this trajectory have in terms of interest rates? say, for a minute, that the bond vigilantes start to turn on us the way they did on europe based upon the projections. i mean what potential impact could that have on costs of borrowing? >> well, if market participants are not persuaded that united states is on a sustainable fiscal course, then eventually something will give. and that could be a financial crisis. it could be something else. >> since this is a projected budget, what do we do? what responsibility do we have in order to elevate this issue and get americans and get the congress to realize the necessity of dealing with reform on this front? >> it's one of the most

fundamental responsibilities of the congress and administration to manage our finances. but as i indicated in an earlier question, it's obviously very politically difficult. that's what you have to confront. part of the problem i think is that public may not fully understand all the issues. they need to be further educated. >> that's why i think part of the responsibility lies with congress also lies with central bank. also lies with federal reserve in terms of demonstratebly explaining the consequences of this. and your colleague, the head of the ecb, he made headlines just last week. he had some very harsh words for member countries of the ecb. he said "there is no feasible tradeoff between economic overhauls and fiscal bill typing." he had some very damming words for the future of the european

state. i'd like to get your thoughts about his comments and also in light of the 2012 projected deficit for the united states, 8 8.5% of gdp, i'm looking at these numbers for the pig nations. it's comparable. maybe a little worse in some cases. so looking at what you describe as the sizable structural budget gap under current policies and looking -- and beginning to compare that, i'd ask structurally, is there any material difference between us and these nations or is it simply the markets turned on europe? the markets have turned there. but they haven't turned yet on us. let me get your thoughts on that front. >> well, there is an important structural difference in europe in that they have a common monetary policy. they don't have a common fiscal policy. in the united states, if a

single state is in fiscal stress, social security, medicare payments still get made because they're done by the federal government. there's no equivalent of federal government in europe. and so part of their reform process is seeing what extent they should be greater fiscal union. overall, it's true that europe doesn't have a bigger deficit than we do. so that's certainly true. all i can say is that mr. draggy certainly is right for the peripheral countries like greece and portugal and ireland which really no alternative but to tighten belt immediately. there may be more flexibility in other countries. >> okay. i understand that. but with our debt to gdp now over 100%, with these comparable short term manual deficits when we look at europe, with comparable structural deficits, at what point do our general calls for debt reduction become more in line with the comments that your counterpart is making?

at what point do we ring that bell and say the long term structural adjustments have to be made? >> you mentioned 8.5%. part of that is cyclical. part of that can be addressed by having the economy recover. part of it is structurastructur. in other words, it's not better once the economy gets back to full employment. so i think you have to pay attention to the recovery in the very short run. you can't ignore that. but it's important to create a credible plan for long-run sustain act as soon as possible. and that would remove a risk to our economy. >> i agree. but to the extent that you explained this to the public and explained it loudly and more demonstratebly, i think they can then understand the need for the structural reforms. at this point i don't think it's understood. >> the time of the gentleman has expired. the chair now recognizes the gentleman from massachusetts for five minutes. >> thank you, mr. chairman.

thank you, mr. chairman, for your willingness to help this committee with its work. in your remarks i think on page four you cited the concern regarding the down side risk to the economy outlook that is due o stresses in the european banking system and the euro zone in general. and i note that at least simply those in agreement between the greek government and private bond holders where the greek government will impose a hair cut of about a little over 50% on those bond holders. but i'm trying to understand the agreement itself. it looks like there's a collective action clause that says once a certain amount of the old bonds are redeemed, then the government will impose a collective hair cut across all those bond holders. and there's a question here. well, i guess you could say that charitably, at least, there's a

default here. and i guess there's -- a controlled default. and what remains is unclear is whether the bond swaps will constitute a credit event for some of our default protection derivatives. and whether it will trigger a payout on a credit default swaps on greek debt. and i guess what i'm concerned about, even though the amount is fairly small, three plus billion is still a small number relatively speaking, is what that means to u.s. banks exposure to greek debt and whether or not -- whether or not credit default swaps are still a mechanism for protecting against that event and does this make you concerned about what those balance sheets look like if there's a rather loose definition now of what a default

really is and whether or not that protection is actually there? >> well, there's a body that private sector body that determines whether a credit event has happened. and i don't know what they will determine. my guess would be if they invoke the cacs and enforce the writedown in all private lenders, i think there is a high probability that that body would invoke the cds, you know, contracts. so that would be my guess. in terms of u.s. banks, exposure is hedged or unhedged to greek debt is very small. so i don't expect any direct impact. but it is important to maintain market confidence more broadly in the cds contract and also in the idea that whatever happens in greece, so to speak, stays in greece and doesn't spread to other countries. and that's why i talked before

about the need for financial fire walls or other protections that will prevent contagion from greece to other vulnerable countries. >> okay. so i guess -- what if the decision goes the other way? what if they say default has not occurred and there's no payout? i mean, i know that's hypothetical. i know that the derivatives association probably won't come out that way. but what if we ended up with that scenario? would that undermine the whole idea of this protection? >> in some people's minds, i'm sure it would, yes. but, again, it's up to this group which obviously is interested in maintaining confidence in those contracts to make that determination. >> all right. i yield back. thank you. >> the chair now recognizes the chairman of the capital markets subcommittee from new jersey for

five minutes. >> i'm perhaps your last questioner, perhaps. appreciate your stamina for being here this time. i'd like to talk to you about what's necessary as economists view to get the economy broadening and that is dealing with the money multiplier effect and for the need for that to expand. it would appear, at least what some economists i read about, say the decline in the multiplayer effect is directly related to or has some correlation to the fact that the fed pays interest on reserves. you know where i'm heading on this. so the purpose of doing that is to pay interest on the reserves is to do what? create a floor, if you will, right? you've already sort of created that floor where interest rates now are set in the zero bound range. so can you elaborate as to why the fed continues to see the need under the power that it has

to prepair the oir? >> yes. we've looked at the possibility of not paying that 25 basis points, one fourth of 1% that we currently pay as the perspective of would it be beneficial to the economy? >> okay. >> the federal funds rate is currently around 10, 12 basis points. so eliminating that might lower it still further. but obviously not below zero. >> right. >> so the stimulatiive effect o the effect on credit extension is quite small. on the other side, the -- we have some concerns about the effects of the almost zero rates on various financial institutions like money market mutual funds, also on the functioning of the federal funds market itself. we have a weaker guidance from the market in terms of what the

funds rate actually is because the participants are so -- there are fewer participants than there used to be. the rates are so low because it doesn't cover the cost to making to market. there are side effects that are negative. the benefits of the economy are very small. and for that reason, we haven't reduced the -- >> am i correct to understand like what you're actually doing by this is incentivizing the banks for the reasons why you just said, right, incentivizing the banks to keep the excess reserves at the fed and that contracts then their ability and the multiplier effect or incentive to lend. isn't that sort of counter to what your policy should be? if you did away with it, i understand some of the other ramifications you talked about. but if you did away with it, there is less incentive for me as a bank to lend to business. >> no. analytically, you're correct.

quantitati quantitatively, it's trivial. against the 25 basis points, the banks also have to pay an fdic assessment. so they're basically getting .1% return to hold that money with us. that is certainly not going to prevent them from making good loans. >> is that a better bet? if i'm a bank, right now, say that's still a better bet than what i'm getting elsewhere? and if you did away with that entirely, then would i have incentive to try to find that better investment elsewhere? >> it would be a ten basis point incentive. that is pretty small. that is just the overnight rate. >> so if that's the case, that would run counter then to what your opening statement is as far as incentive and effect on the money market funds and the rest since it's only de minimus amount. >> no. remember, bank loans are typically a year or more. whereas money market funds are mostly under 30-day