back at the prices, it was not particularly helpful. investment banks obviously. the goal of the volcker rule is to reduce risk taking by institutions, and we're trying to do that in a way that will permit hedging and market making. >> when you have a rule that people describe like in many ways pornography, in other words, you know it when you see it, it is hard it to make a rule. would it be helpful if congress clarified the fact that market making is a -- is not intendeded to overturned by virtue of volcker rule. market making is a very valid and appropriate process for these regulated entities to be involved in.

do you think that might help? you've got all these comments and regulators trying to come to the conclusion each being pushed by various constituencies and congress outside. would it be helpful if we clarified that as a congress that market making should not be negatively impacted by the volcker rule. >> the federal reserve pushed for these exemptions, and i think the statute is clear that market making is exempt and we want to do our best to make that operation operational. >> i think we're generally speaking on the same page in the volcker rule. we don't want it to do damage to the depth of liquidity unnecessarily for lending activities in this country. >> that's correct. >> i think we're on the same page that it's probably a legitimate concern for other sovereign governments like

kantd, like japan, like other ones to say, look, this is incredibly unfair for the largest economy in the world to place a tremendous bias on liquidity of treasuries and mortgage backed securities unbelievably, but not our own sovereign debt. would you agree that's a little bit of a problem? >> there's an issue. we're in conversations with partners there. of course, there is one difference, which is that the primary markets for, say, japanese debt are in japan, and, of course, therefore not broadly affected by the volcker rule, except to the extent u.s. banks are doing it. you agree what we place on sovereign debt especially in this world and especially in the a lot of our fact we're our own worst enemy in this country and we still have not been able to

deal with our longer-term issues. with the basil rules in place, should there be a zero risk waiting for treasuries or any other kind of sovereign debt? we've seen some pretty big risks out there. >> none of those securities is completely riskless. that's true. we have in the case of non-u.s. -- we've approached this in various ways. in the same of non-u.s. sovereign debt, as i mentioned before the europeans asked the banks to write down the value of the debt. in some sense it's subtracted from capital one to one. in the united states we have been making banks. we're not just relying on the capital ratio. we're making banks through stress tests and look at the european holdings and hedges and so on. we want to make sure they're safe and sound. in the case of u.s. treasuries, our assumption is that the biggest source of risk is

interest rate risk as opposed to default risk. under the default i think the whole financial system would be in enormous trouble. we do ask banks to stress test their interest rate risk including their risk of holdings of treasuries and municipalities and so on. >> thank you. i know you received some criticism over the housing white paper, and i know we had a brief conversation about it and those weren't your ideas necessarily. i do hope in your core area since the fed has been pretty active in getting nice outside the core areas, i would love to see the white paper on the effect of the financial regulation we just passed on our country. i don't know if if that would be forthcoming, but i would success specially in your core area it's useful to us as we work through the details. thank you for your testimony, and thank you mr. chairman.

>> thank you, mr. chairman. chairman bernanke, this is a question which is a follow-up in your discussion with senator crepele. in your testimony you note there has been some modestly encouraging data recently, including slightly better performance in the labor market, improved consumer sentiment, and some increases in manufacturing. but these signs of economic recovery aren't necessarily reflected glet experiences of our workers and their families in the communities. putting aside a question in the euro zone, what possible set backs concern you the most with respect risks in our economic

recovery. for instance, could action to cut critical investments too quickly send the economy back into a slowdown? >> let me just say first that one of the points that i talked about in my remarks was there still is a little bit of a contradiction between the improvement in the labor market and the speed of the overall recovery in terms of growth in particular. i mentioned that income had been flat for consumers in 2011 to revise data from yesterday, it actually says it was a little bit better than flat, but still less than 1%. you still have consumers -- consumption spending growing relatively weakly. you've got the fiscal issues there hanging over our heads. so in order to make this a really sustainable, strong

recovery, we need to have both declines in unemployment and strong growth in demand and production. i think that's something we have to watch very carefully. in terms of the risk to that, i do have to mention europe, because i think that's important. another is the oil prices. we've seen a number of movements up and down many in energy pric prices. the movement is inevitable, because if the economy is growing and the world economy is growing, the command for commodities goes up. when you have shocks to commodity prices arising from geopolitical events and the likes, those are unambiguously negative, those are bad for both households and the economy. housing is a very difficult area. we hope for price stabilization. we think once people have gotten a sense that the housing markets have stabilized, it's much more

willing to buy, and that banks are more willing to lend. right now there's still uncertainty about where the housing market is going, which i think is troubling. i guess finally i would mention fiscal policy, which both in the short term in terms of the uncertainty about where fiscal policy is going to go over the next year and in the long term in terms of whether or not congress and the administration will work together to have a sustainable fiscal path, i think both of those things create some uncertainty and concern that will -- do pose some risk to the economy. there are a number of different things, but overall, of course, there has been some good news. of course, that's welcome. >> thank you for that response. chairman bernanke, as you know, i'm most concerned with the well-being of consumers. in their current economic

climate, consumers are confronted with different financial decisions, and this is the case in hawaii where many homeowners face possible foreclosure. the average credit card debt of a resident is the second highest in the country. we know that by saving individuals can help protect themselves during economic downturns. and unforeseen life events. we also know that our slow economic recovery is partially due to low consumption of consumer spending. my question to you relates to the intersection of these two factors. how can we continue our efforts to promote economic recovery and

at the same time encourage responsible consumer behavior and financial decision making? >> well, that's a very good question. part of the problem now is that the demand, the total demand in the economy is not adequate to fully utilize the resources of the economy. that's why we talk about the need for greater consumer spending and greater investment and so on. of course, we want consumers to be responsible as well, p and they have, in fact, raised their savings rates and reduced their eleven and all that is positive. i think there are two answers to your question. one is that demand comes from places other than security spending. it can come from capital investment, for example, and it can come from net exports. those are some areas where unambiguously it creates more

capital and potential growth in the future. greater exports helps and makes us more competitive internalally. those are alternatives to provide growth. they're the paradox that consumer spending collectively, if it generates more activity, more hiring, more wage income, actually can in the end lead to sounder consumer finances than the alternative. if the economy is growing strongly and jobs are creates and income is created, then consumers will actually be better off. so confidence is really important. if people are confident about their job prospects and income prospects, it can be a self-fulfilling prophecy as they become more confident in their purchasing habits. of course this all relates to as you mention to financial

literacy and the ability to make good decisions. we want people to make decisions appropriate for their own needs, for their stage in their life cycle, for their family responsibilities, for their retirement, all those things. that remains an important goal, even as we worry about trying to get the economy back to full employment. >> senator demint. >> thank you very much, mr. chairman. >> senator. >>. >> you've mentioned several times the need for us to have a plan for a sustainable fiscal policy. would a plan that balanced our federal budget within a ten-year window, would that be what you consider a reasonable transition towards good fiscal policy? >> i would go for -- at a minimum i would aim for in the next 10 to 15 years eliminating

the so-called primary deficit, that is everything except interest payments. once you eliminate the primary deficit so kurn spending and current revenues are equal, that means that the ratio of your debt to the gdp will stabilize. as you go beyond that, you start to bring the debt-to-gdp ratio down. you mentioned ten years. the other thing we mentioned earlier is many of the things that are going to be problems are kicking in after ten years. i hope congress will take at least for complaining purposes a longer term horizon on that. >> in my conversations with your governors and some of the central bankers around the world, there seems to be a broad consensus that there's not the political will here, europe, and many other places to actually get control of fiscal policy. that much of our monetary policy here and around the world is really driven by trying to clean up the mess that policymakers

make, and you may not want to comment on that. xwau quantitative easing and dealing with the debt we created as policymakers and what we see happening in europe today dealing with debt from a monetary policy rather than fiscal policy. my concern now -- i know you meet with central bankers all over the world regularly. as i see what appears to be coordinated increase in money supplies here, europe, and other places. it may not be formal coordination. there's an effort to keep relative values of currencies the same as we increase our monetary supply. others are doing it. i just love to have some insight beyond just the individual policies here as to what degree you feel like you can be honest

with us as the one that creates the problems. is it at least within the -- is it true that a lot of monetary policies are drin by irresponsible fiscal policy from policy makers and is there an effort for central banks around the world to work together to deal with that? >> i would say no to both instances. our monetary policy is aimed at the dual mandate, which is maximum employment and price stability. we're setting monetary policy at a setting to help the economy recover in a context or price stability. i think it's interesting that other countries are following the basic approach. it's not because we kood natured in any way. we have weak recoveries and low inflation and the fact that interest rates are close to zero. so some of these quantitative easing type policies are the main alternative once you have interest rates close to zero.

so no, we're not -- this is not an attempt to cover-up or clean up fiscal policy. on the other hand, i think the concerns that people express both about the united states and other countries about to political will and the ability of the political system to deliver better fiscal results over long term, that's an issue that a lot of people are concerned about. i've noted in previous occasions that the reason the s&p downgraded treasuries last aulgt wasn't because of the size of the debt. they took the view that our political system was not, you know, adequately progressing on making long-term, sustainable fiscal plans. i hope we can prove them wrong. i think that the -- this january 1st event where so many things, you know, if left unchanged will be happening that would be, i think, on net contractionary.

i hope that forces congress to say how do we solve this problem? i realize how difficult it is politically, but i encourage you to make every effort to help restore fiscal sustainability in the united states. my concern is i really do believe we wouldn't have $16 trillion in debt going on 25 or whatever the projections are if we had not been irresponsible as policymakers over many years and i'm not blaming that on any president or party. it's clearly a problem. as been pointed out by the "wall street journal" today and in other articles in financial magazines that the loose, monetary policy is compounding the potential problems in the future. i think as senator shelby talked about, the need for transparency and the need to understand where

we're headed with this is pretty important to us as policymakers. first, for you to be brutally honest and maybe more than you've been today that we're on an unsustainable path. it hurts me to hear you say in 10 or 20 years we need to bring it under control when the analysis i've seen of worldwide available credit suggests that a five-year window may be tough for us on our current pace as far as borrowing the money. we seem to have a compounding and growing problem and not a sense of urgency that one would expect given where we are from a political side and now a monetary system around the world. it seems to be potentially making that much worse. i'll let you comment examine yield back. >> i would only say i don't mean that no action should be taken in 10 or 20 years. i mean that the plan needs to be

a long run plan, because our problems are long run problems. looking only aat 2013 is not helpful. you need to look at the whole horizon. >> senator bennett. >> thank you, mr. chairman. thank you, mr. chairman for being here today. i wanted to focus my questions on the economy with you, since you actually know what you're talking about. i want to to go back to an answer earlier on interest rates. you thought the risk of default was not a series -- obviously, it was catastrophic if it happened, but that the risk is you're worrying about interest rate risk for our financial institution to the economy. could you talk more about that, what would that ka that interest rate risks and what's the effect of the more normalized interest rate than the one we have today, which is at a historic low, isn't it? >> both short-term and long-term interest rates are quite low.

our current expectation, as we said in our statement, is that the short run rate will stay low for a good bit more time. eventually at some point the economy will strengthen, inflation may begin to rise and the fed will have to begin to raise short-term interest rates. at the same time, stronger economic conditions here and globally will cause longer term rates to begin to rise. that's a good thing. that's a normal, healthy thing as the economy returns to normal. but if you have this, you know, of course depending on how your portfolio is structured, you could have the risk of losing money on holdings of bonds. we want to make sure that banks understand their risks and are well-protected and hedged against whatever course interest

rates might take in the future. eventually they will begin to rise. we just don't know when. >> the senator made the point earlier that we have seen economic growth and it hasn't hit home in many ways. this chart is not useful for this, but it's so small. the top line is gdp growth, and what we see is that our gdp is higher than it was before we went into this recession, which surprises a lot of people when they hear that our economic output is higher today since the recession started. productivity has risen mightily over the same period because we think of our response to competition from abroad and the use of technology and then the recession itself that drove the productivity index straight up because firms were trying to figure out how to get through with fewer people. as you observed, median family

income has fallen over the decade, and we're producing that economic output with 23 or 24 million people that are unemployed or underemployed in this economy. we're being stuck with a gap of economic output and productivity here and wages and jobs here. as learned economists, can you help me think about the kinds of things that would lift that median income curve in the right direction, that job curve in the right direction? i encourage you to think broadly about that, so education and immigration and whatever you think will help. that, unlike the political stuff we're talking about in washington that doesn't make sense to people at home, that's the issue they're confronting, is what i just did. >> of course. let's not belittle the impact of getting back to full employment. that would, obviously, be very helpf helpful, and it's what the fed is trying to do with the

monetary policy it's one of the more interesting things that profit share of gdp high it's a bit of a puzzle. it may have to do with globalization, and it may have to do with the fact that products are oversees, so that's one question. i think more generally there's a whole raft of issues associated with globalization including trade competition, including the fact that low-skilled workers are effectively competing with low-skilled workers around the world, advent in new technologies provides a lot of benefits to people with greater education and greater training and creating discrepancies between them and people with less training and education. so from that not a lot of good answers, but certainly the most

basic thing is training and skills because that's -- those are highly rewarded in our society still. but the low-skilled workers are effectively competing with low-skilled workers globally, and it's very difficult for them to earn a high income. >> i'm out of time, mr. chairman. i realize that. i just would say the worst the unemployment got for people in this recession with a college degree was 4.5%. there's a lot to learn from that. i'll submit by other questions for the record. thank you for being here today. >> thank you. >> senator ritter. >> i'm concerned about the negatives that could grow over time about the 0% interest rate policy. what would you consider the list of present or potential negatives, and how do go about sort of monitoring those to always determine whether this

continues to make sense in your mind? >> well, a number of issues have been raised. one that's often raised is the return to savers with low interest rates. is that not penalize savers? with that we take that into account in our discussions, but as i mentioned yesterday, something of total household wealth, something only less than 10%, according to the survey of consumer finances, is in fixed income instruments like kcd olympia or bonds or so on. it's in small business ownership, real estate, et cetera. our efforts to strengthen the economy will increase the returns in value of nose assets. our activities raise household wealth overall even if they use the interest rates you receive

on fixed income assets. keeping inflation low helps in that respect. second issue is pension and insurance. low interest rates increase the contributions that those companies have to make. again, we've had many conversations with those folks about these issues. i would say that it's a serious issue and one that we look at. there, again, there are countering factors. if you look at compensation to workers, which includes pension contributions, it remains quite low like 2% a year growing. these pension contributions are significant but not massive, and on the other side of the balance sheet, of course, pension funds and insurance companies have to invest in the economy. a stronger economy produces higher returns and the like. the third issues, which is very tricky, has to do with possibly creating a financial bubbles of various kinds. people have different views

about that. our view is basically that the first line of defense against bubbles should be what's called macroprudential supervision. supervisory approaches looking at what's happening in the system and making sure financial institutions are as strong as possible through capital, for example. we have greatly upgraded our ability to monitor the financial system since the crisis, and we are, you know, both trying to identify potential problems, but also making sure that the institutions are sufficiently strong if there's a problem they can withstand it. if those things don't seem to be working, then we prepared to take that into account and monitor a powerful. those are some issues, and we are aware of them. >> one of the things that might have been first on our list is commodity prices, a weak dollar pushing up commodity prices. of course, now the most obvious example of that is gasoline prices. briefly, how would you analyze

that, and when does that start becoming such a negative you rethink this? >> so i think the two ways in which low interest rate policies realistically would affect commodity prices first would be through weakening the dollar. the dollar has been pretty stable. it really hasn't moved much since november 2010 when we introduced qe-2. the second is by creating growth both here and perhaps to some extent, higher growth increases demand for economies. if you want a growing economy, it puts more pressure on growing prices and so. those are not a big problem. i think particularly if you look at commodities, the one commodities that has been particularly troublesome is i'll. currently it's quite obvious in there are a number of factors affecting the supply of oil, including concern about iran and supply issues in africa and so

increase chls. >> most of the quantitative easing announcements have more or less coincided with increases in oil prices. are you saying that's largely a coincidence or not? >> no, it's not entirely a coincidence. p if you look over longer periods, it's not as close a correlation you might think, but i think part of the reason, again, that there is a coincidence is because to the extentd th that o the extent that monetary policy is structured in a way to increase growth expectations, that feeds into commodity prices through the demand channel. so that is one link that i do wrap up, ts. mr. xhamr. mr. chairman, at what point with regard to oil would that factor driving up prices be a sufficient negative in terms of