so the dodd frank act, one of the main themes of the dodd frank act is to create a systemic approach. one where regulators look at the whole system and not just individual components of ithat, tools to do that was the creation of a council called the financial stability oversight council which helps regulators coordinate. we meet regularly in this council and discuss economic and financial developments and talk about ways we can look at the e to avoid various kinds of problems. moreover, the dodd-frank act gave all regulators a responsibility to take into account broad systemic implications of their own individual actions. in particular, the federal reserve has greatly restructured our supervisoryokinnow very comprehensively at a whole range

of financial markets and financial institutions so that we have a big picture that we didn't havecrisis. i mentioned in discussion of vulnerabilities the many gaps in the financial system. there were important firms like aig for example, but others as well that really had no significant comprehensive oversight by anything regulatory agency. the dodd frank act provides a kind of fail safe in that the council can designate by vote. it can designate any institution which it views is not being adequately regulated to come th federal reserve. and that's a process that's going on now. so there complex, systemically critical firms that have no oversight. likewise the soc can designate

utilities like a stock exchange or some other major exchange to other agencies. so those gaps are getting closed. we went have the situation that we had before the crisis. another set of problems had to do with too big to fail in dealing with firms systemically critical. the approach with too big to fail is two pronged. on the one hand, under dodd frank large complex systemically important financial institutions are going to face tougher supervision regulation than other firms.

rules which prohibit affiliates from taking risky bets are try to reduce the riskiness of large firms. stress tests i talked about, dd requires that the large firms be stress tested by the fed once a year and conduct their own stress tests once a year. so we'll be comfortablet these firms can withstand a major shock to the financial system. now one part of tackling too big to fail is by bringing large firms under scrutiny, more me stress tests, more restrictions on their activities. but the other side of too big to fail is well, failing. in the crisis, the fed and oer financial agencies faced a very

bad choice of either trying to prevent some large firms like aig from bad choice because it ratified too big to fail and meant that the firm was not really punished for the risks that nave would b it fail and have huge consequences for the financial system in the whole economy. that's the too big to fail problem. the only way to solve that problem is to make it safe for a big firm to t main elements of dodd frank act is the oerly liquiduation authority which has been given to the fdic. the fdic already has the authority to shut a failing bank and it can do that quickly and efficiently over the weekend, typically. depositors are made whole. the fdic's ability to do that has avoided panics and bank runs since the 1930s.

the idea here is that bs dsomeo it for complex firms which is much tougher, but in cooperation with the fed and with regulators from other countries where in case of multinational is underway to prepare so that should it happen that a large firm comes to the brink of insolvency and cannot be -- cannot find an answer, cannot find newr example, that the ability of the fed to intervene in 2008 has been taken away. we can't do it legally anymore. the only option is to work with fdic to safely wind down the firm tlyt.educe or we hope eliminate the too big to

fail problem. there are many other aspects of the dodd frank act. another vulnerability waexic fi drifities and so on that concentrated risk.ea here is to describingtives and those tractions out of the shadows. make them able and visible to regulators and to the markets to avoid a situation like we saw during the crisis. one the is the shortcomings. here at the federal reserve did not do as good a job as it should have of protecting consumers on the mortgage front. the dodd frank act creates the

consumer protection bureau meant to protect consumers in their financial dealings. there's quite a variety of aspects of dodd frank. it's a large and complex bill. is large and aining about the complex. the regulators ar e best to implement these rules in a way that are effective and at the same time minimize the cost to the industry and economy. that's difficult, but it's an ongoing process. we do that through an extensive process of putting out proposed rules, gathering comments from the public. looking at those comments making changes to the rules and so on. so i process by which we develop -- put into place these reto and again, it's still very much

underway. so finally let me concludey thie future. central banks obviously, not just the united states but around the world have been through a very difficult and dramatic period. and has required a lot of rethinking about how we -- how we manage policy. how we manage ourh spect to the financial system. in particular, during much of the world war ii peri,rltively . because financial crisis were something that happened in developing markets and not established countries, many central banks began to view financial stability policy as a junior partner to monetary policy. it was not as important. it was something that attention was paid to, but not something that the same amount of resources and tea attention was paid to.

obviously, based on the crisis and what happened on the effects that we're still feeling it's now clear that maintaining financial stability is just as important a responsibility as monetary and economic stability and indeed, this is, very much a return to the -- where the fed came from the beginning. the reason is fed was created was to try to panics. financial stability was the original motive ofe d. so now we saturday of come full will always be with us. that is probably unavoidable. we've had financial crises for 600 years in the western world.

periodically there's bubbles. given what the potential fory important for central banks and other regulators to do all we can first to try to anticipate or prevent a crisis, but if a crisis happens, to mate gait it and make sure the system is strong enough it will be able to make it through the crisis i tact. so again, we begin by noting the two principal tools of central banks. serving as lender of to prevent or litigate financial crises and using monetary policy to enhance economic stability in. the great depression as iribeth used appropriately. but in this episode the fed and other central banks and i should say that there's been a great convergence that other banks havell have followed very similar policies

to that of the fed. that these tools have been usedy case we avoided -- by doing that, we avoided much worse outcomes in both terms of the financial crisis and the depth e helpful. again, it's not going to solve the problem. the only solution in the end is for us regulators and successors to continue to monitor the entire financial system and to identify problems and to respond to them using the tools that we have. we have some time. i'll be happy to take your you. dr. bernanke.

la the first upon the main street to the wall street divide. this has been in the back of my mind throughout the lecture series. you talked abouthe educating th monetary policy. although this lecture series has demystified the fed for me, i think it's really been wall street and not main st tuning i. so given how unpopular bank bailouts were among many americans struggling to pay their mortgages who don't reall financial stability, do you ever see americans reconciling these differences? >> you're right some of the same conflicts that we saw in the 19th cey them today as well. i don't have a simple answer to that question. as you know, the fed has done more outreach, the press conferences and other kinds of tools to try to explain what we did and what we're doing.

cly accountable. we testified frequentry. not just myself, but other members of the board. we give various events and so on. it's inherently difficult because the fed is a complicated institution. you've seen the last foulecture issues. all we can do is do our best and hope that, our educators and our media and so on will, you know, begin to carry the storylp peop. so it is a difficult challenge. it is a difficult challenge. it does reflect a tension that has been in u.s. since the beg.

>> thank you, mr. chairman. earlier you mentioned that the fed had a way to unwd large purchase of scale of assets including selling them back into the market. what guarantees thattouy them bk in the future? first of all, we have essentially three separate types of tools that we can use. any of which by themselves would lo policies. taken together gives us a lot of comfort. first of all, we have the ability to pay interest on the reserves that banks hold with us. whenever the type comes for the fed to raise interest rates we can do so by raising the rate of interest we pay to banks in reserves. so that will lock up those reserves, raise interest rates and seven to tighten monetary a the balance sheet stayed large

could tighten monetary policy. the second tool we have is what's called draining tools. basically we have various ways that we can drain the reserves from the banking system and replace them with other kinds of liabilities even as, again, a total amount of assets on our balance sheet is the third and final option is to let the assets run after as they mature or to sell them. these are treasury securities. these are government guaranteed securities. it's certainly possible that the interest rate that will prevail when we sell the securities will be higher than it is today. in other words, we'll have to pay a higher interest rate in order to make investors willing to acquire them. that will be part of the process. that will be time when we're trying to raise interest rates. it will be reserve what we did when we bought them. at that point, we'll be trying to raise interest rates when we're trying to exit from the easing policy

will allow the economy to grow in a lower inflationary way. i don't k vestors won't buy th assets. they'll certainly buy them at a higher interest rate and that would be the octoberive to tighten financial conditions so to avoid inflation concerns many the future. >> thank you. so i read an article, i don't remember the exact source, it outlaid a plan to allow homeowners who have been on time with their mortgage payments to refinance at the current lower rates. sort of as a way to protect them from their housing prices dropping. so i was wondering whether you heard of plans like that and what sort of involvement the fed

would have or whether that would fall to the consumer protection agency? >> there are some programs like that one in particular is calle. that's run by the regulator the fhfa. and on this program, if you are underwater in your mortgage, in other words, if you owe more on your mortgage than your house is worth, you still may be able under this program if your mortgage is heldfy fannie or freddie you may be able to refinance at a lower interest rate which will reduce your payments. that program is underway anding. it doesn't necessarily work if your mortgage is being held by a bank because they're not part of this program, they may choose you might be out of luck if your mortgage is not held by fannie

and ramsike that. the fed is not involved in them. our jo mortgage rate low and hope we can help homeowners. but programs like that, which allow people to get lower payments obviously are going to be helpful to those people because they'll face less financial stress and maybe a smaller chance that they'll end up being delinqnt mortgage. >> hi, i'm michael fineberg. thank you very much. you mentioned in y the dangers of deflags from the great depression and more recently in japan. one of the maintaining a target inflation rate above zero to to provide a cushion about the possibility of deflation. in the united states there's been a fear of deflation causing the fed to keep monetary policy very accommodative in the beginning of the last decade and more so at this point.

do you know that 2% is enough of sh inflation target rates? thank you. >> that's a great question. and there's been a lot of research on it. it seems like the international consensus isre 2%. almost all central banks that have a target either have a 2% target or a 1% to 3% target or something like that. here. on the one hand, you want to have it above 0% in order to avoid or reduce deflation risk. 's on the other hand, if going to create problems where it's going to make the economy less efficient. there's a tradeoff. what level level of inflation gives you some reasonable buffer against deflation but it's not so high that it work less well. again, international consensus has been around 2% that's sort of where the fed has been

informally for quite a while. so that's what we announce and that's, you know, for the foreseeable future that's where issue that to look at trying to address exactly that trade-off that you're referring to. >> yes, you. >> thank you, chairman you mentioned one of the biggest lessons you learned from the recent financial crisis is policy is powerful but cannot solve all the problems especially like the structure problems. what do you think areat t can bd to solve these structure problems in, like, housing and financial credit markets? >> dependsof problems. in the case of housing, the aderal reserve staff wrote number of the issues. talked about not just

foreclosures bit also issues like what do you do with empty houses? talked about issues of how you get more appropriate mortgage origination conditions. things of that sort. we didn't come down with a list of actual recommendations, because that's really up to congress and to other agencies to determine, but we did go through a whole list of possible approaches, which i guess i won't try to do here, but housing is a very complex problem. there are many different things that can be done to try to make it work better, and indeed, looking forward given the problems with fannie and freddie, we have some very big decisions as a country to make about what our housing finance systems the nger term. so a lot of issues there. and europe, for example, you know, it's been a very complex problem. we've been in close discussions with our european colleagues. they've taken a number of steps

there. right now they're talking about the so-called firewall, how much money they'll contradict to protect against contagion if some country defaults or fails to pay its bills. so each one of these issues has its own approach. the labor market, we had the problem of people that have been out of work for a long time. obviously, one of best ways to deal with that would be through various forms of training. increasing skills. so you could just go down the list. basically anything that makes our economy more efficient and dealing with long-term issues related to our fiscal problem, those are all things that would help, and the fact that the fed is doing what we can to try to sport the recovery, you know, shouldn't mean that no other policies are undertaken. i think it's important that we look across the entire government and ask, you know,

what kind of constructive steps can be taken to make our economy stronger and make or recovery more sustainable. yes? >> thank you, chairman. you mentioned that the fed it ce recovery, and -- but with unemployment as 8.3% and the housing issues you mentioned, very sluggish, and the problems in europe, fed has to potentially fight off other issues that we're going have in the future. >> give me an example. >> i mean, that's -- i guess, you know, if -- other -- like just -- other issues, say unemployment decides to rise, or the housing worse, or, you know, portugal, spain and italy -- you know, all thri >> cost me a night's sleep now.

well, i've described what i described today was basically it is. last resort authority. we still have that. it's been modified in some ways by dodd-frank, but strengthened in some ways and reduced in some ways. so between that and our financial regulatory sure our financial system is strong, and we've worked particularly lard to make sure to do everything we can to protect our financial system and our economy from anything that might happen in know. so that whole set of tools is still very much available and in place, should there be any new problems in financial markets. then on the monetary side, i've described to you, i don't have any completely new monetary tools, but we have the tools we've used, and our interest rate policies and, you know we can continue to use monetary policy as appropriate as the outlook changes to try to

achieve the appropriate recovery, plus still maintain price stability, which is, of course, the other half of the federal rv so we have these two basic sets of tools. we'll have to continue to use them and continue to evaluate where the economy's going and you know, lots oftely other tools, and that's why i was saying earlier that we really need a, an effort across different parts of the government, and indeed, the private sector to do what can be done to get our economy back on its feet. max? >> i think this has to be the last question. >> thank you, mr. chairman. you spoke a lot about the economic recovery and while it is painfully slow there is clear recovery happening. my question is, what are the key indicators that you and the federal reserve are looking at that would suggest that the private

self-sustaining this economic recovery and that the fed may begin to tighten monetary policy? >> well, that's a great question. so -- first, one set of indicators that has been looking better lately and we've been paying a lot of attention to is developments in the labor market. jobs, employment rate, unemployment insurance claims, hours of work. all of those indicators suggest the labor market is stployment is one of our two mandates. one of our two objectives. so clearly, that's something we'd like to see sustained. we'd like to see continued improvement in the labor market. as i talked about in the speech i gave on monday, it's much more likely that that will be sustained if we also seeoverall overall growth. so we'll continue to look at indicators of consumer spending and consumer sentiment. capital plan, capital expenditures. indicators of optimism on the

part of firms. those kind of things. to see where production and demand are going to go and then, of course, as always, we have to look at the inflation side, and -- and be comfortable that price stability will be maintained and that inflation will be low and stable. so those are the things we'll be looking at and there's no simple formula, but as the economy strengthens, then -- and becomes more self-sustaining, then at some point, obviously, the need for so much support from the fed will begin to diminish. i really want to express my appreciation for this class. i think you guys have been really, obviously, engaged and your questions have been terrific, and thanks for giving me this chance. thank you. >> just a couple things i'd like

to say before we all run off and first of all i would like to acknowledge a special guest that is here today. in early december i had an e-mail from susan phillips about the federal r cairman bernanke e over to gw and do someabout as specific as we were at the time. susan phillips is the former dean of the gw business school and also a former federal reserve er matchmaker. she's the one who made this we very much for making this happen. obviously, i have to thank the chairman and also the chairman's staff. getting then over the last same message from them which was, tim, this is your class. and i think th get into this, agreeing to do this kind of a program, frankly, you wonder wul organization like that might run over you. they never did, and maybe it's

because their boss is a professor himself, but i cannot possibly have asked for a better group of people who are more respectful of the planning that went into this count by four very stimulating lectures that the chairman gave, and would like to thank the federal well. third, there's a lot of people at gw t of work from this from information technology to media relations and everybody in between. so thank you all for that and then finally, by the way, students and faculty, remember, we're going next door, a small gathering with the chairman, but i know there's some people in the back row here, and also some people watching here who have been enjoying this, and i just want to let you know the clas b. we're going to have an engaged dialogue on the chairman's remarks and look at other issues of the fed, the cons