years. the administration has addressed the long run issues to some extent through some of the aspects of the affordable care act that have, you know, oversight boards and other kinds of things that would try to reduce cost, but obviously still a major challenge for congress to address health care costs. >> in your opinion, would you say the administration's budget would not seriously address our long-term deficit because it does not address our entitlement? >> i would just reiterate that the budget they put out was for the next ten years. by definition, you know, if you're only looking to the next ten years, you're not addressing the very long run implication. >> thank you very much. let me go now to regulations. i don't know if you read this cover of last week's economist entitled "overregulated america." it presents a pretty dark portrait of our financial system in the wake of dodd frank and

stein, as the article puts it. i think the last sentence of the article just about sums it up in "ambition is often welcome, but in this case it is leaving the roots of the financial crisis underaddressed and more or less everything else in finance overwhelm." dodd frank required that regulators write over 400 rules for the financial system, yet over 300 of these remain unwritten. would you agree that this lack of clarity is a hindrance on the financial sector? >> i think so. we're working as quickly as we can. we want to create as much clarity as we can. on the other hand, as you know, some of these rules are complex and it's important to get comment and input and do a good job. >> so as a follow-up -- >> the time of the gentleman has expired. >> thank you. >> the gentleman from missouri, mr. clay, is now recognized for

five minutes. >> thank you, chairman, and thank you, chairman bernanke, for your return to the committee. unemployment is declining and is now at 8.3%, 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 in entrepreneurship and demand on the part of consumers, and that should help bring the economy back towards 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's really up to congress, and there's a whole range of policies there, starting with fiscal, i would say. having a fiscal program that on the one hand achieves fiscal sustainability in the long run, 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 tax code. infrastructure that allows our economy to function at its best levels. there is a lot to be done. but i guess i would put the fiscal thing first from congress' point of view, and from the feds' point of view, we're going to pursue our fuel mandate. >> concerning our interest rate, 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? >> i'd like to make a distinction that is not often made. when people say "hurt the dollar," there is two definitions of the dollar. one is the buying power that the inflation rate in the united states. does a dollar buy more today than it did yesterday? the other definition is dollars of the currency, the foreign exchange rate of the dollar. those are two separate concepts, okay? in fact, our policies have been accommodative since 2008, and on both counts, i think we're doing okay. inflation over my ten years as chairman hash abo been about 2% which is lower than the previous chairman. at the same time, over three years, the dollars has been up and down, but it's roughly where it was three years ago. so i don't think that's really a big problem. although i think we should

distinguish those two components. you asked about interest rates on the second part of your question? >> will it risk fueling asset bubbles? >> obviously that's something we have to pay close attention to. we have greatly expanded our ability in the feds who monitor the financial system broadly to take a sort of macroprudential approach. right now we don't see any obvious bubbles in the economy, but certainly that's something we're going to look at and continue to monitor. >> thank you for your response. and 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. it has a direct effect on inflation and it also is bad for growth because it takes away

buying power from households. so it'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, but among them is uncertainty about supply in iran and in the straight of hormuz and in africa, so i don't think the fed can do too much about the price of gas. i think it's more important that we try to establish a security supply and take measures to reduce demand. and i think it's important to note that the united states has been reducing its dependence because we have been producing more energy and we're using -- importing less. >> if i asked, would you suggest tapping into the reserves?

>> that's really for the 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 would be less assistance during a situation where there is a long-term supply and demand problem. but again, that's an administration decision. >> thank you, my time is up. >> the gentleman from ohio, mr. stivers, 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 and i've pretty quickly realized that the only things that happen in this town are the things that have to happen. you've heard some really robust debate in this committee about how we might solve our fiscal crisis. you've admitted that 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 how we will balance the budget, but it just requires it to happen, and i do believe we can do that in a thoughtful way with some relief valves for disaster time of war with only that spending relates to those activities. usually you pump these questions but i'm going to ask you, anyway. what do you think about a balanced budget amendment about 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 there is some evidence that rules or structures are helpful in getting better fiscal outcomes. you know, for example, offsets, things of that sort. i think one year might be too short a time to demand balance, 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, but i think some kind of rule for the congress to provide a guidepost both to deliberations and for the public's awareness could be a helpful structure to make things happen. >> thanks for that thoughtful answer. i do want to follow up on a question mr. clay just asked, and i asked you this last year, but -- and i know that the bureau of labor statistics does both of your measures that you measure yourself against unemployment and inflation and i just want to ask you to continue to pay attention to the way they measure things, because 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, and as we go through structural changes in our economy, i'm not asking you to comment because 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, 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 long-term lease and they have a known amount they're going to pay which changes only a minor amount. the thing that changes their real inflation, they see, is commodity prices, the price of gas at the pump, the price of food stuffs at the grocery store. i know the bureau of labor statistics does that work for you, but i learned a long time ago in the military 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, and i'm not asking you to comment because i know it's not yours, but i would like you to pay attention. >> i would comment that the bls does provide alternative

underemployment measures u5 and u6 which does take into account discouraged workers and so on. >> so i would ask you to continue to take a look at those. you mention nd your testimony when you talked about your work in the fsoc, and i think we all know that the interconnected banks were not the cause of the loss in 2006, and because of their size and they don't have big compliance departments. i'll tell you my story and remind to you talk to your friends in the occ, and i've not heard bad things about regulators, but i've heard several horror stories about the fdic, and i'll tell you one that i heard since the last time we talked. there is a community bank that recognized a bar roar was in a deteriorating position. they asked him to put money in an account and signed a

forbearance agreement, but they got a year of principle and interest in a restricted amount that 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 in principle and basically 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've taken responsible action in the fdic and it's forced them to do things that i think are irresponsible. i would ask you to go back to regulators at the oicc and ask them please not to encourage our community banks to do things that actually hurt borrowing and hurt our economy. >> thank you. >> the gentleman from california, mr. sherman, 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 and the fed is doing more than any other agency of government to try to get us out of it. i'll have a question on the record for you on the vogel 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 swift 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 measirn

banks from swift rather than those iranian banks under u.n. sanction? >> i shouldn't guess and i won't, but swift 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 you that 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 you don't have a national security staff, whether it's the foreign affairs committee, the house, the 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 will 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 area 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. >> only that the fhfa is running a pilot program. the tradeoff is you need to have enough homes that's economic for the management company to maintain them. but otherwise, you know, i think it makes sense to -- not to overconcentrate the 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, the gses, and congress needed to fund a couple months of the lower social security tax so we hit another ten 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. >> first of all, it improves the profits and improves the profits of the treasury. another benefit is by raising those fees gradually, you may eventually begin to bring in private competitors in the market. that's part of the strategy. if you make it more costly to get a mortgage, that will hurt the demand for housing which is already pretty weak. >> yeah, and i would think another decline in housing prices in a failure to get them

inching upward is bad for the economy and the people i represent, so i yield back. >> the 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 is 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 transfers to entitlements equal the total tax revenue, you know, 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 like they did in europe based on the projections. what potential impact could that have on costs of borrowing? >> well, if market participants are not persuaded that the united states is on a sustainable fiscal course, then eventually something will give. >> since this is a projected budget, what do we do and 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? >> well, some of the most fundamental responsibilities as a congress administration to manage our finances, but as i indicated in an earlier question, it's obviously politically very difficult what you have to confront, and part of the problem, i think, is that the public might not fully

understand all of the issues and they need to be fully he heduca. >> that's where i think part of the problem with congress also lies with the federal reserve in terms of demonstrably explaining to the public the consequences of this. and your colleague, mr. drogy, the head of the ecb, he made headlines just last week. he said he had some very harsh words for member countries of the ecb. and he said there is no feasible tradeoff between economic overhauls and fiscal built typing. and he had some very damning words also for the future of the european welfare state. i'd like to get your thoughts about mr. drogy's comments. and also in light of the 2012 projected deficit for the united states, 8.5% of gdp. ichlt lo

i'm looking at these numbers for the pig nations. it's comparable or maybe a little worse in some cases. so looking at what you described as the sizeable structural budget gap under current policies, and looking and beginning to compare that, i'd ask 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. >> there is an important structural difference in europe in that they have a common monetary policy but they don't have a common fiscal policy. in the united states, if a single state is in fiscal stress, social security and medicare payments still get made because they're done by the federal government. there is no equivalent of a federal government in europe. so part of their reform process to the extent there should be a 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. drogy is certainly in his right for at least the peripheral countries, like greece and portugal and ireland, which really have no alternative but to tighten belt immediately. there may be more flexibility in other countries. >> i understand that, but with our debt gdp now over 100%, with these comparable short-term annual deficits where 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 bring that bill and say the long-term structural adjustments have to be made? >> well, you mentioned 8.5%. part of that is cyclical and part of that could be addressed by having the economy recover.

part of it is structural. in other words, it's not going to be 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 sustainability 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 demonstrably, i would think they could 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, mr. lynch, for five minutes. >> t mr. chairman. thank you, mr. chairman, for your willingness to help this committee with its work. in your remarks, i think, at page 4, you cited the concern regarding the downside risk to the economic outlook that's due to stressors in the european banking system and the eurozone

in general. and i note that recently there was an agreement between the greek government and private bond holders where the greek government will.i. impose a hait of a little over 50% on those bond holders. i'm trying to understand the agreement itself. it looks like there is a collective action clause that says once a certain amount of the old bonds are redeemed, then the government will impose a collective haircut across all of those bond holders. and there is a question here -- well, i guess you could say that charitably, at least, there is a default here. and i guess there is a controlled default. and what remains unclear is whether these bond swaps will constitute a creditor vent for some of our vault protection

derivatives and whether it will trigger a payout on false swaps of greek debt. i guess what i'm concerned about is that even though the amount is fairly small -- 3-plus billion is a small number, relatively speaking -- is what that means to u.s. bank exposure to greek debt and whether or not credit to false 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 -- a 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, the collective action clauses, and force to write down on all private lenders. i think it would be pretty high probability that that body would invoke the cds, you know, contracts. so that would be my guess. in terms of u.s. bank, their exposure either 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 exposed to cds contracts but 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 firewalls or other protection that will prevent contagion from greece to other venerable countries. >> so i guess what if the

decision goes the other way? what if they say a default has not occurred and there is no payout? i know that's hypothetical, and i know that the derivatives association, it 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. thank you. i yield back. >> the chair now recognizes the chairman in the capital market subcommittee from new jersey for five minutes. >> i thank the chair. and i appreciate your stamina for being here all this time. what i'd like to talk to you about is what's necessary under some economists' view of getting

jobs going, broadening the economy, what have you, and the need for that to expand. it would appear, at least with some economists i read about, say a decline in the multiplier effect is directly related to or perhaps some correlation to the fact that the fed pays interests on reserves. i see you nodding so you know where i'm heading on this. so the purpose of doing that is to pay interest on reserves is to do what? create a floor, if you will, right? you've already sort of created that floor by where the interest rates now are set in the zero bound rage, so can you elaborate on why the fed sees the need to continue on the ior? >> yes. we've looked at the possibility of not paying that 25 basis points, that one-fourth of 1% that we currently pay. as the perspective of what would

be beneficial to the economy. the federal funds rate is currently around 10, 12 basis points, something like that, so eliminating that might lower it still further, but obviously not below zero. so the stimulative effect, the effect on interest rates generally limiting that or the effect on the credit extension it would be quite small. on the other side, the -- we have some concerns about the effects of the almost zero rate on various financial institutions like money market mutual funds, also in 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 because the rates are so low that it doesn't cover the costs of the market. so we think there would be