summer over the debt limit has very significant adverse effects for financial markets and for our economy. it's knocked down consumer confidence quite noticeably. that's a somewhat issue, but i urge congress to come into agreement on that well in advance, not to push us to the 12th hour. but, again, i think that trying to put our fiscal situation on a sustainable basis is perhaps one of the most important things congress can be working on. >> when you look at the fed's last action since late 2008, short-term interest rates have been held to zero, mortgages securities naefrtd to support our economy, do the past actions inform you as you go forward in the current economic situation as you make your decision? >> yes. obviously, when we began these

nonstandard actions we didn't have the benefit of very much experience except looking, say, at japan. but we now have more actual data, more experience. we've been able to observe the effects of these actions on financial market crisis. we have some model-based analysis of the effects on the broader economy. so there's stale lot of uncertainty about the effectiveness of these tools and the channels to which they work. and it's probably also the case that monetary policy is less effective, it would normally be because of various constraints on lending and so on. but as i said, having had that experience has certainly made us better informed and better prepared to use these tools if necessary. >> okay. my state's doing better than a lot of the states. our unemployment rate's at 5.6%, but there's still people hurting. one of the things i've noticed

when you look at the numbers in past recoveries, we see a more direct correlation nationally between economic growth and hiring. we don't seem to have that correlation today. what has changed? and do you think we could be doing more to address that issue? >> i talked about this in my testimony. in fact, the pace of improvement in the labor market from last summer through, say, march or -- say march was actually surprisingly strong given the relatively tepid rate of growth and overall economic activity. and it was a puzzle that we were trying to understand. i gave a speech about this in march. and one hypothesis is that there was a burst of extra hiring that reflected the reversal of what might have been excessive layoffs during the recession period, that firms felt they had actually laid off too many workers -- >> catching up. >> catching up to that. if that is true, which we do not

know for sure, because there are a lot of other things going on, but if that is true, then the implication is that if growth -- going forward, if growth stays near the potential rate of growth, say 2% to 2.5%, that the improvement in the unemployment rate going forward might be quite limited. and so that's, again, as i said, a question that we really have to think about. >> thank you. >> senator demint. >> thank you. thank you, mr. chairman, for being here. my experience in business and politics tells me that most of the time when we're trying to solve problems we're actually treating symptoms. and i'm worried about that with our political policy as well as monetary policies. it's pretty clear our current tax rates didn't cause the recession. as you know, they were implemented during the downturn in the early '90s. we had six years of growth.

the problem clearly came from a loose credit policy that resulted in subprime mortgages and toxic securities. and we have not really addressed that except it appears that we overaddressed it from talking to a lot of businesses, home builders, realtors that we've constricted credit to such a degree that local banks that don't have the flexibility to deal with their local economies because the federal government and various agencies are telling them what has to be in their portfolio. so i feel like maybe the solution is much simpler, maybe not simple, but in effect we're not addressing that problem that would allow the flexibility. you know we can't deal with over a billing of houses. it's going to take years to do that. but i don't think we've addressed the true cause or at least a big part of the cause. instead, we have -- we've tried unprecedented bank bailouts, unprecedented government spending, uns precedented

monetary activism, and it's not working. and so i'm concerned about that. the thing i'm really concerned about now is since 2008 the national debt has increased about 50%, but the interest paid on that debt has increased about 2%. and i think some of the things you're doing in the federal reserve is giving us a false sense of security. last year i think you bought over 75% of the debt that we created, which masked the real problem. and i think it probably gives us a debt interest rate that's much lower than it would be. and part of my concern now is, as my colleague just said, on one side, you appear by these huge derivative markets and other things that are going on to have to keep our interest rates low. and on the other side, if you don't keep trader yields low, banks are going to park the free money we're giving them in

treasuries. it seems you're caught in a catch-22 now where you have to work both sides of this to keep interest rates abnormally low and you have to continue to buy treasuries or we'll be paying so much on our national debt that the fiscal problems we're looking at will complicate overnight. so woe ear on one side doing things that don't appear to address the true root causes of our problem. we seem to now be in a quagmire that we can't get out of. now, i'm sure you have a totally different take on that, but i think you'd have to agree that the activism has been unprecedent unprecedented and reason to at least cause some concern. >> well, of course. it's been a whole range of approaches and responses to this crisis, which, of course, was a terrible crisis and required a strong response.

i guess i would comment on your point about the interest rates and the federal debt. the reason we keep interest rates low is not to accommodate congressional fiscal policy. the reason to keep interest rates low is because we think it's going to help the economy recover just a bit faster and keep inflation near our 2% target. those are our objectives for low interest rates. but i don't think -- i mean, i would question whether or not low interest rates are in some way enabling fiscal deficits. the deficit over the last three years has been over a trillion dollars a year, as you know, about 9% of gdp. if we were to raise interest rates by a full percentage point and ignoring the fact that most -- most debt is of longer duration and would not reprice, that would still only raise the annual deficit by something a little over $100 billion. so -- >> a trillion dollars over ten years. i mean, that's real money.

>> no. a trillion dollars a year is what i'm saying is is what the current deficit is. >> right. but the interest costs on that, if it would be $100 billion a year, talking of a trillion over ten years, i mean, we are talking real money. >> a trillion there, a trillion here. yes, sir. no. i agree with that. what i'm saying is the situation is -- the deficits are so large, particularly going out over the next few years, irrespective of the level of interest rates that i would think that congress would have bull pplenty of moti to try to address that and that, you know, whether or not the interest rates are currently 1.5% for ten years or 2.5% just doesn't make that much difference. >> i want to respect the chairman's time, but there's one other point. my concern now is we're equating pro-growth economic policies with more government spending and our president is talking about that to the europeans, austerity is bad, and on one

hand you're telling us this debt is creating a potential huge crisis, yet you're telling us we need to keep spending with more debt. what is the real signal here? >> well, first of all, it's not necessarily more spending. appropriate tax relief would also help in the same way. but i've always said, and i said in my remarks and i've said this a number of times, that you don't want to just do short-run stuff and ignore the long run. you don't want to just do long-run stuff and ignore short run. you need a balanced program, one which at least avoids i would say -- you know, a do-no-harm policy is what i'm looking for here, at least avoid derailing the recovery in the short term but combines that with a strong and credible plan for reducing the deficit over the medium term. i think that's the best policy. it may be very difficult to achieve, but in principal, that would be the best way to go. >> thank you, mr. chairman. >> so far the bipartisan members

are keeping time. excellent. senator sanders. >> thanks very much, mr. chairman and mr. bernanke. thank you very much for being with us. i'm going to try to be as brief as i can. i think i have three questions which i would appreciate your answering. number one, first one deals with conflicts of interest at the fed. as you know, jamie diamond is the ceo and chairman of jpmorgan chase, which is the largest financial institution in this country. during the fed bailout, if you like, $116 trillion in low-interest loans over a period of time were given out to every financial institution in this country. jpmorgan chase received over $300 billion of those loans. the american people, i believe, perceive a conflict of interest when you have, among others, the head of the largest financial institution in america sitting on the new york fed wihich is presumably supposed to be

regulating the fed, regulating these financial institutions. many people, me, myself, see this as a situation where the fox is guarding the henhouse and that we need real reform in fed to make sure that it's representing the middle class, small business of this country rather than just wall street and the big-money interests. would you be supportive of legislation that i introduced which says that representatives of financial institutions, not just mr. diamond but others, get off of the fed and they be replaced by folks from the general public? >> well, you raise -- senator, you raise an important point, which is that this is not something the federal reserve created. >> right. >> this is in the statute. >> yeah. >> congress a in the federal reserve act says this is the governance of the federal reserve, and more specifically that bankers would be on the board. >> six out of nine. >> sorry? >> six out of nine in the renal nal banks come from the banking industry. >> that's correct. and that is in the law. >> that's right. >> and what we have done is

tried to make something useful out of that. what we've done is first of all we have take an lot of actions to negate conflict of interest, and urn dodd/frank the gao did a comprehensive study of our governance, did point out some appearance -- >> i wrote that position. i am familiar. >> yes, and i congratulate you. but it also found -- it also found that there were no actual conflicts of interest because there is a fire wall that -- so that the bankers do not have any information or ability to influence supervisory decisions. i'll answer your question, though. the answer to your question is that congress set this up. i think we've made it into something useful and valuable. we do get information from it. but if congress wants to change it, you know, of course we will work with you to find alternatives. >> thank you. and i think that is something -- you're quite right. this is something congress

established a long time ago. i think it's time to change it. my second question is, in america today, we have the most unequal distribution of wealth and income of any major country on earth, worse than at any time in our country since before the great depression. we have 400 individuals owning more wealth than the bottom 150 million americans. you've got the top 1% own 40g% of the wealth of america while incredibly enough the bottom 60% own only 2% of the wealth in america. the last report that i've seen in terms of income, not wealth, suggests that in 201093% of all new income from the previous year went to the top 1%. now, my question -- we can talk about economic growth all you want. but to the average person, it doesn't mean a dam thing if all of that new income is going to the top 1%. do you believe that we can see an expanding middle class if we continue to have that kind of

growth and inequitable distribution of wealth and income? >> well, i think it's not so much a question of bringing down the top 1% as it is bringing up the lower 99%. the question is how can you strengthen the middle class, how can you make middle-class incomes higher and more secure. this has been -- as, you know, a trend that's been going on for 35 years, and it's related to a lot of factors including globalization, the technical change, which is ma-- which has made a high school education simply less valuable. i would be very much in favor of strengthening the middle class and helping the average american do better and approaches like education and so on i think would be very constructive. >> last question. you have six of the largest financial institutions in this country, the large wall street banks that have together at this equivalent to two-thirds of the

gdp of the united states of america, over $9 trillion. you have some folks on the regional feds, n.i., and some ore ohs beginning to talk about the need to break up these huge financial institutions, which have so much economic and political power. the top six banks write two-thirds of the credit cards in this country and half of the mortgages. my suspicion is if teddy roosevelt, a good republican, he'd be talking about breaking up these financial institutions. how do you feel about the need to finally break up these large financial institutions that have so much economic and political power? >> my first comment is that a lot of these people say they want to break up the banks are not very specific. does that mean making them a little smaller? does it mean making everything community banks? i really would like to see a plan that clarifies what is really meant by that. dodd/frank act put forward a strategy for ending too big to fail. i think it's incredibly important to end too big to

fail. that strategy involves taking away the advantages of size, means that banks will be allowed to fail but through a safe method that will avoid the effects on the broader financial market through the liquidation authority that dodd/frank created for the fdic. it means that large banks will pay -- will have higher capital requirements, tougher supervision, will be subject to a whole set of rules that smaller banks will not face. i will guess that, you know, if the size of banks is basically motivated by a too-big-to-fail motivation, if we take that away, then market forces themselves will make it attractive for banks to down size, rationalize and so on. i would add an additional tool that we have from the dodd/frank is the so-called living wills, which require banks to give us information about their very complex structures. one approach would be to ask banks for the purposes of being

able to be brought into receivership if necessary is to simplify their structures to avoid these very complex interconnected types of situations that i think are such a problem. >> thank you very much. >> senator kot zx. >> thank you, mr. chairman, and thank you, mr. chairman. on page four of your statement you talked about inflation. you say with regard to inflation, the longer-term inflation expectations have, indeed, been quite well anchored. expectations among investors have changed little on net since last fall. and we are lower than a year ago. substantial resource slack in u.s. labor and product markets should continue to restrain inflation mare nary pressures. that's good news. that's good news for all of us. let me ask you a question about the reverse of that, and that's deflation.

we've gotten some bad unemployment numbers not only for may but the revision for april. bad news out of asia. it appears that the australian manufacturing is in recession, that india has posted its slowest growth in nine years, that china, many say, is is on the verge of manufacturing downturn. a lot of people are saying that we're at a stall in the united states. the question is what is the risk of spending too much time worrying about inflation and ending up in potentially deflationary new recession perhaps prompted by a shock from europe? they can't pull it together? and what are your concerns about that? what is the thinking about that? is that something we should

worry about? is that something you're worrying about? what kind of guidance can you give us in that? >> well, when we set our definition of priceability is 2% inflation, we meant that to operate in both directions. we don't want inflation that, but we also don't want inflation well below that. we of course want to avoid deflation. one of the provisions in qe2 we did in 2010 to avoid inflationary pressure, and we were successful and brought inflation back to target. now, part of your question was about sort of general slowdown in the global economy, and there are some signs certainly in europe, china cut interest rates today, some of the emerging markets i've seen some slowdown, so there's certainly some signs of global slowdown and trying to assess how important those are and what implications they have for united states. i would say, though, at this juncture that respect to deflation specifically that we think deflation is at this point

probably a pretty low probability risk. and at the moment, inflation seems to be pretty stable, close to 2%. we haven't seen much indication of declining inflation, particularly when you look at the -- either the noncommodity prices or look at expectations. so that particular concern right now is not i think very much in our -- forefront of our concerns. >> what would a shock to the system -- war in the middle east, europe coming apart -- what would that do to that analysis of what you just gave? >> well, it -- i think it depends on what the shock is and how it ratifies. a shock in the middle east would cause oil prices to go up a lot. that would tend to be inflationary, but it would also probably slow the economy further because it would be like a tax increase on consumers who would have to pay more for gas

and therefore less for other things. the ewe situation depends a lot on, you know, in the situation which we hope will not occur in which there is a big escalation of financial stress, it would depend a lot on exactly how that happens. if greece, for example, were to leave the eurozone but the stresses were contained there, then the effects would likely be fairly moderate. if the financial stresses were to spread more broadly, then that would create a lot of volatility in our own financial markets, would put stress on our financial institutions, would probably reduce lending, and would at minimum tend to slow the economy. but again i don't think deflation is the main concern here. i think the main concern is promoting adequate growth to

continue to break down unemployment over time. >> given the kind of fragile state we're looking at, fragile world we're looking at from an economic standpoint and particularly the situation in europe as it's unfolding, do you sleep well at night? >> do i -- >> do you sleep well at night? >> i generally sleep pretty well, yes. but i have a lot to do during the day and i need to be well rested. >> thank you, mr. chairman. >> thank you. . representative maloney. >> thank you, mr. chairman, and welcome, mr. bernanke. and i would like to respectfully speak in opposition to the point of view that has been put forward by my colleagues on the other side of the aisle, in strong opposition to any qe3. i believe that the fed should use any tool in your arsenal, whatever it is, to provide support to our fragile economy. and we need to ensure against any downward turns that would

hurt housing, employment, and all the other areas in our economy. i think it's particularly important coming up on your june 17th meeting that you act forcefully to help our economy given the fact that china has cut its benchmark lending rate and already in response to that the price of gold has gone up, the dollar has fallen. i'd like to hear your comments on china. will china be buying our treasury notes now with this economic downturn and what appears to be in their economy, and combined with the news from the past month that the eurozone debt and banking crisis seems to have deteriorated further in europe? so could you comment further -- you have in many ways but even further on china specifically and the impact china will have in the overall -- really our economy. they have been a partner in

financial recovery, and your comments on china. >> well, china is -- has slowed somewhat. so far the slowdown is still pretty moderate. they still have rates of growth that we would love to have here. part of the -- part of the slowdown is policy induced, intentional. in particular, china took a number of actions to try to avoid what looked to be a building bubble in real estate prices. so they took a number of actions to mitigate that. that tends to slow activity. and they have in general tried to slow growth both to achieve a more sustainable pace of growth and also as a part of their process for trying to switch from an export-led economy to one that has a greater emphasis on domestic demand. so there's been some slowing there. we watched that very carefully.

but so far i don't think the change in chinese prospects on net are enough to be concerning to the united states, particularly since there are some offsetting factors, notably when china slows, that tends to bring down oil prices and that is actual lay positive for the u.s. economy. i think the greater concerns for us right now are still coming from europe, even as the situation is still being managed. we're seeing, of course, you can see every day the volatility and large movements in stock prices and other asset prices and the uncertainly that that generates. so that is -- that is a concern. >> i would also like to ask you a question about the so-called fiscal cliff that we confront next year if current laws governing taxes and spending are maintained and the bush tax cuts expire. also the payroll tax cut expi s expires. the federal unemployment insurance expires and the

automatic spending cults mandated by the budget control act would take effect. cbo tells us that this will cause the economy to fall into a recession. it also tells us that if we continue all current policies, we can avoid a recession, but that our long-term budget situation will continue to deteriorate. certainly neither of these outcomes are satisfactory. my question is what would happen if we failed to achieve a budget agreement in the lame-duck session and all the fiscal cliff priorities kicked in? >> well, i agree very much with the cbo's general analysis there. if no action were taken and the fiscal cliff were to kick in in its full size, i think it would be very likely that the economy would begin to contract or possibly go into recession and

unemployment would begin to rise. so that's obviously something we want to avoid if at all possible. at the same time, i am not advocating with undoing all of these measures and simply ignoring the distant future. i mean, i think, as i've said before, what we need is a combination of sensible policies that allow the recovery to continue over the next year or two with a long-term credible plan for putting our budget on a sustainable path. >> thank you. my time has expired. >> thank you. representative burgess. >> thank you, mr. chairman. dr. bernanke, welcome to our committee again. i just want to pick um -- senator demipt used the word quagmire, senator coats used the term skull seed. i have to admit i'm concerned about some of these same things. the vice chair of the fed yesterday at the boston economic

club described adverse shocks that could push the economy into territory where a self-reinforcing downward spil of economic weakness would be difficult to arrest. i'm not an economist, but that sounds bad. bad. right? >> the concern she's expressing is is that if growth is not sufficiently strong, that it wouldn't take too much to put us back into a -- >> that's correct. >> -- either a recession or at least a significant slowdown. >> so i won't admit to having trouble sleeping every night, but what bothers me at night is lehman brothers. when i wake up at 3:00 in the morning, that is what i worried about. i don't know what lehman brothers would look like. i don't know what it would be in this country or perhaps be in europe, but i think she summed it up pretty well. this was report tond cnbc "squawk box" this morning, and i must admit when they played that clip it really got my attention because this is one of the things that has bothered me since september of 2008.

i see a lot of parallels as we cruise into this summer season with the summer of 2008. gas prices have moderated so perhaps you can move that off the table a little bit. but similar situations, presidential election year coming up, the economy in tough shape, hasn't recovered. and we see all this stuff happening in europe. so you said on page three of your testimony down right at the bottom of the page, you said you're prepared to take action if needed. can you outline for us very briefly maybe what the top three steps are if that action is needed, items that you have there? >> sure. first of all, we're already taking some actions, important actions, notably that we are working to ensure that banks have adequate capital and i w l liquidi liquidity. and as i noted, banks are now much better capitalized than they were prior to lehman, which is helpful. >> can i ask you a question about that? >> sure. >> when you talk about our banks -- >> our