provide quarterly updates of key elements of the federal reserve's financial stam c@@@@@k harbingers of an economy that's recovering? you've used the words incipient recovery. do you see a recovery unfolding at this point in time? >> yes, sir. our expectation is that we'll

begin to see growth in the economy, so, the end of the technical recession, later this year. underlying that prediction is some stabilization in final demand including consumer spending as well as the important unwinding of the inventory dynamic. firms have been cutting back their production and, therefore, have lowered their stocks of unwanted inventories. as that process goes forward, they'll be able to increase production as they no longer have to get rid of those extra inventories. so, we expect to see some growth, not robust growth, but positive growth, later this year. unfortunately since the growth te at the beginning of the process will be lower than potential, we expect unemployment to rise into next year and to come down only slowly. so, we will have a weak labor market for some time. >> without the extraordinary steps that we've taken, the fed's taken, the fdic and the treasury, without t.a.r.p. and talf and the recovery act, do

you think we would be where we are on the -- on the doorsteps of an incipient recovery? >> no, sir. i'm quite sure we would not be. i recognize that many people have raised concerns about various aspects of policies, financial risks that have been incurred, for example, and those are real and serious concerns. but i do think we need to keep in front of us the fact that without the concerted effort of the federal reserve, the treasury, and other agencies like the fdic, supported by the congress and the administration, that last fall we very likely would have had a serious and perhaps global financial meltdown with extraordinarily adverse implications for the u.s. and global economies. i think having averted that and that we now seem to be on a process of slow and gradual repair, both in the financial system and of the economy, is a major accomplishments and, though, again, there are many issues that we main, we must keep in front of us the fact that we diverted, i think, a

very, very serious calamity. >> undertaking these cyclical steps we've advanced large sums of money and taken back in many cases assets like preferred stock in the major banks which were recipients of t.a.r.p. funds. in addition, the fed has a talf lending facility for asset-backed securities. are you con -- can you give us some idea of what you expect in the way of recovery or repayment on these assets so that we can in turn look towards of recovery for some of the moneys to pay off the debt that was incurred in advancing these loans in the first place? >> i think that with respect to the t.a.r.p., i think our recovery will be excellent. in particular, a number of banks are looking to repay t.a.r.p., and we expect to -- the federal reserve will announce a list of banks next week that we believe are sufficiently sound and able to lend that they are eligible to repay the t.a.r.p., with, of course, interest.

and that the treasury accepts that recommendation, then we will see some repayments of the initial t.a.r.p. outlays. with respect to the talf, the federal reserve's program for asset-backed securities, we have extensive protections, which i'd be happy to detail if you'd give me a few minutes. but we're very comfortable that this program is, on the one hand, very effective in opening up the markets for consumer credit, auto loans, student loans, small business loans. at the same time i think the credit risks, especially to the fed itself, are quite minimal. >> has the fed done any work to determine what the likely pool of savings available for borrowing, may be foreign markets, world market, global credit markets, and to what extent we'll have to advance substantial from the saving pools and account pools in order to meet our debt requirements for the foreseeable future? >> yes, we certainly looked at that.

i think it's an interesting point even though as the federal government's borrowing has skyrocketed, that the u.s. current account deficit, which is essentially a measure of the amount of borrowing be do from abroad, is actually lower today than it's been in some years, which suggests that the increase in federal borrowing has been substantially offset by a decline in private borrowing as banks and households deleverage. so, in a sense of there being an availability, there is an availability of credit to meet the needs of the u.s. governments and other governments. that being said, as i mentioned in my testimony, in order to make lenders willing to continue to finance us at reasonable interest rates, we do have to persuade them that we are serious about returning to a more balanced fiscal situation going forward. >> mr. chairman, thank you very much for your testimony. mr. ryan? >> thank you, chairman. good to see you again, chairman. let's talk about our deficit and debt. the cbo, their reestimate of the

president's budget, shows record deficits of 5.4% of gdp in 2019 and debt rising to 82.4% of gdp. meanwhile, medicare and social security will have already begun their pathway of permanent deficits. are you concerned about these levels of deficits and debt, and is this a sustainable and prudent fiscal policy course? >> mr. ryan, i certainly am concerned about that. i think we face a double challenge. one is that we have to restore ourselves to a more balanced fiscal path after addressing the financial and economic crises that we currently are facing. but in addition that's complicated with the fact with the retime of baby boom and the increased in medical costs we are facing rising entitlement cost, this is no longer a long-term consideration. this is something that's going to happen in the next five or ten years. >> right. >> so, that's extraordinarily challenging. my rough rule of thumb to the congress would be, given that

we've seen this increase in the debt-to-gdp ratio, that we should hope to try to at least stabilize it at the higher level and over time to try to reduce it. but certainly we cannot allow ourselves to be in a situation where the debt continues to rise. that means more and more interest payments which then swell the deficit which leads to an unsustainable situation. so, it is very, very important. >> what matters is the trajectory, the path of the trajectories that matters in the long run, is that right? >> yes. the cbo shows simulations of debt essentially exploding, which it would if it got so high that debt payments became unmanageable. >> let's turn to inflation. your colleague at the philadelphia fed, charles foster, and i've spoken to other fed presidents, and they seem to concur. the economic forecast relies too heavily on measures of the output gap as a predictor of inflation. the forecasters argue that inflation will remain low for some time given the large current output gap.

he notes that other indicators, more forward-looking economic models, suggest a much higher risk of inflation over the medium term. are we looking at the right indicators to gauge the risk of future inflations, goals and inflation compensation spreads in the treasury bond markets are rising? so, what indicators are you using to measure inflation, and why are they the right indicators? >> well, congressman, we look at a whole range of indicators, absolutely. i do think that when output gaps reach the level that we're currently seeing, that it's no longer the case that we can really debate that the output gap exists. i think there clearly is an output gap and the experiences that in previous recessions that inflation has tended to fall after the recession, that -- i think that's the reliable empirical regularity and the size of the current output gap will be a drag on inflation. >> so, you fall into the output gap camp.

>> mr. foster does as well, he said we shouldn't put too much weight because there's difficulty to measure them. therefore there would be a downward effect on inflation. that being said, there are other factors as well, including the currency, including commodity prices and so on. and we watch those very carefully. i think i would note that if you look around you for evidence of inflation, inflation expectations, you're not going to find very much. if you look, for example, at surveys of consumers. if you look at the forecast of professional forecasters, if you look at the spreads between indexed and nonindexed bonds, all of those things are quite consistent with inflation remaining stable and well within the bounds that the federal reserve believes are consistent with price stability. >> are you concerned that today's models, which reflect yesterday's models, are not fast enough to pick up on changing expectations? what i mean when i say that is in the 21st economy, information spreads much faster. opinions are formed much more quickly because data is more

available than it was, say, in the 20th century. are you concerned that the models we use today do not fully reflect the fact that expectations can change a whole lot faster than they could in the past and we'll be too late to catch it when it occurs? >> well, of course, we always have to keep modifying our models and addressing new situations. but we have a lot of ways on checking on expectations, including monthly surveys of both businesses and households, the daily behavior of the t.i.p.s. market, the daily behavior of commodity prices and other factors and in particular, you know, inflaps expectations can only result in inflation if they reflect wage and price settings. what we're seeing in the markets that prices of manufactured goods, for example, and wages in nominal terms are not showing any signs of a wage price spiral. to the contrary, they're showing quite a slow rate of growth. so, i want to -- first of all, i want to say in the medium to longer term, we are very focused

on the price stability issue and i understand your concerns about that. but as best we can tell, within the uncertainties of forecasting, we don't see any inflation risk in the near term. >> so, when the time comes where you do see that concern, my last question is basically this -- one about your exit strategy and one about the independence of the federal reserve. you've got four big policy tools that are being deployed at full tilt. targeting zero interest rates, program of quantitative easing, you got a balance sheet around $2 trillion, $2 tonight 1 trillion, and you're buying treasury bonds. that's a lot of policy that's out there that you would have to unwind very quickly in order to turn -- turn the corner. what is the exit strategy of the fed, and how do you -- how -- what kind of confidence do you have that you're going to be able to wind all this down when the moment comes, question number one? question number two is -- it was inevitable, i would

argue, that your dealings with the treasury were unprecedented. you had to do a lot in the last year to fight deflation, and i think everybody recognizes that. however, that has, in some ways, blurred the distinction of the independence between the administration, the executive branch, and the federal reserve and its unique, independent role. what do you think of that concern? and what are you doing to reassert the independence of the federal reserve, not just in structure, but in the impression of the marketplace? >> that's a very long question, but i'd like to address it, if i might. first of all, on the technical aspects of unwinding, we are confident that we can unwind this process. what we need to be able to do is raise short-term interest rates to tighten policy in the normal ways. in order to do that, we have a sequence of things that can happen. first, short-term lending, short-term programs can either decline because of lack of demand, which we're seeing. we're seeing a very substantial decline in the usage of our

short-term programs over the last couple of months. but secondly, of course, as conditions return to normal, we can simply shut down the short-term programs, that's step number one. step number two, the authority that congress gave us last year, by setting interest rate on reserves close to our target for the short-term interest rate, we make it very unlikely that banks would want to lend out in the overnight federal funds market below the interest rate. >> is that the biggest tool? >> it's an effective tool and many banks around the world use that tool. if necessary, sales, but there are a number of ways we can address this problem. so, i think from a technical point of view, we're able to address the current level of our balance sheet. politically, there's several points here. first, as you point out, i think the american people would want the federal reserve, and other agencies like the fdic, to work closely with the treasury in

trying to address these critical financial problems which is what we've done, but we've done so on an equal basis from a perspective of an independent agency, in particular our supervisory decisions have been independent and they have been made on our own information and our own decisions. so, we've maintained our independence even as we've collaborated closely with the treasury in trying to address the financial crisis. in that respect, it's similar to different financial crises when different government agencies have worked together. on monetary policy, independence is crucial. we've not experienced any threats to our independence from congress, the administration or elsewhere. we've made our decisions on a strictly independence basis and we feel quite confident we can continue to do that going forward. we face, as always, the same difficult decision about what is the right moment to begin to remove accommodation. you don't want to remove accommodation so soon as to, you know, as to prevent the recovery from taking hold. on the other hand, you don't want to wait so long as to lead to an inflation in the medium

term. but that decision is the same difficult decision we always face when we come to a point to remove a monetary@@@@@ @ @ d h through the emergency dending powers. certainly independence and secrecy may be important in the fed's normal operations, but this use of expansive emergency

powers relying on a vague statutory provision that has not been used in about seven decades is certainly not normal. the fed indeed seems to have sprung into action through the back door as a way for some to avoid another request to the congress for public funds through the front door. one of the few safeguards that we have in the taxpayer-financed portion of the bailout is the congressional oversight panel. yet, the fed has not responded to that panel's april request for specific information about your continued assistance to aig, even though our oversight panel told you that the lack of information, quote, has substantially hampered oversight. meanwhile, we've learned that the aig bailout was also a bailout of goldman sachs and some of the worlds largest foreign banks, all of whom were not asked to accept a penny of losses. i have four questions or question areas for you that are

all closely related, and i'll try to state them and then just ask you to respond at the end. the first one is just directly -- when will you have a thorough and complete response to every query that the oversight panel ask you in april? the second is, that that same congress oversight panel concluded that a third of the taxpayer moneys that the fed gave away under t.a.r.p. were wasted. you have not provided details of a similar analysis to determine what the fed has been doing to determine what value the fed is getting for its investment of our public money. what meaningful assurances can you provide the american people that we're not being fleeced again? have you done a full review of what kind of deal the taxpayers are getting? and, if so, will you provide the complete documentation for the basis of that assessment? third, while the fed's secrecy

regarding which banks are borrowing from its discount window is understandable, the situation is far different with your newly discovered emergency powers. there's little difference between those you are aiding in secret and those the treasury is aiding in public. how can there be effective oversight, any protection really for the public, when you are not disclosing who the fed is helping, how much they're getting, and on what terms. and i'm not talking about just adding a table to your website or a summary report on a monthly basis. when you -- my question is, when will you be able to provide the identity of participants, transactions implemented, profits or losses posted from specific transactions to the oversight panel, the fed inspector general, the gao, and this congress? and, finally, relying upon the federal reserve instead of the treasury for bailouts can also mask the true cost to the public in terms of our soaring national debt.

any losses on assets on loans through these riskier, abnormal emergency power activities could result in the fed, of course, remitting less money to the treasuryn @r(t&háhp &hc% have you undertaken a comprehensive analysis of the risk to the taxpayer from the assets that you're requiring the loans that you're making? i'm not referring to a conclusionary -- concluesary statement that everything is fine, but if you have done such an analysis, can you provide it to us this month? >> congressman, on the oversight panel request, i'm sure we'll respond to that. i'm not aware of the status of that request. i would just note that the senate -- i think the congress passed a rule recently that would allow the gao to directly audit aig and other individual bank or other interventions, and we are perfectly comfortable with that. we provided extensive information to the congress on aig and those other rescues,

including monthly reports required by congress on all 133 lending. so we have been quite open about it. if there are specific issues -- >> how about specific issues on the specifics, who gets the money, what are the terms, what are the -- >> on what program? on what program? >> on any programs under your emergency powers, where you rely on emergency powers. certainly on the -- on the approximately trillion dollars that you say you'll be doing on mortgage-backed securities. >> well, mortgage-backed securities, so if you look at our balance sheet, the bulk of it is in two things -- short-term lending to financial institions, which was up to a trillion is now down to less -- about $600 billion, $700 billion because of payback basically. the institutions relates to what you referred to earlier, if you name the institutions, they will not take the liquidity backstop which is necessary to stabilize

financial markets. but i'd like to point out, your question was about credit risk, they are short-term loans, well backed and with supervisory oversight. we've never lost a penny, we've made money. that's a big part of it. the other part is securities whicher treasuries and gse debt and mortgage-backed securities. those are standard securities, they're guaranteed by the u.s. government. there's no loss to the fed from that. and there's nothing to be disclosed about that, other than the fact that they're just conventional securities. so, those are the two biggest components of our balance sheet. then, of course, there's about $100 billion, about 5% of our balance sheet, is dedicated to the bear stearns and aig rescues, as i said, those things are now open to audit by the gao and we will cooperate in every way and provide whatever information is needed on that. so, i would urge you to look at our new monthly report that we will issue very shortly, and we will respond to the congress

oversight panel and i hope we can meet you -- >> but you've declined to provide any of the specific details. >> you'll have to be more specific about what you need. i think in the case of the short-term financial liquidity provision, i think there are good policy reasons no to provide that, but we provide extensive information about the programs, about the collateral we accept, about the number of borrowers and in cases where t.a.r.p. money's concerned, we'll provide all the information that i think t.a.r.p. would want or anyone else that needs to have enforcement authority. >> thank you, mr. chairman. welcome, chairman bernanke. if the staff could put up chart ten, please. mr. chairman, as you well know we are looking at an explosion of debt over the next ten years. presently our federal debt is at 41% of gdp. i know this is well known to you. cbo says that it will increase to 82% of gdp in ten years. in your testimony, you speak of

the need to have prompt attention to questions of fiscal sustainability. in order to maintain the confidence in our financial markets. so, certainly the case has been made for short-term federal intervention in our marketplace. i believe that in testimony by the head of cbo, their estimate is that we will reach positive gdp growth in the third quarter of this year and that unemployment will level off, i believe -- i think the second quarter of next year. o and b had a rosier scenario, and today in your testimony you speak of an incipient recovery, and i believe you said economic activity should turn up later this year. so, my question is, if o & b, cbo and the federal reserve is predicting positive gdp, an

upturn in economic activity somewhere in the next 6 to 18 months, we have concerns about the fiscal sustain ability of these levels of debt. having our debt go from 41% of gdp to 82% of gdp in 2 10 years, triple the national debt in 10 years, does this meet your definition of prompt attention to questions of fiscal sustainability? >> well, congressman, i'm not sure whose projections. cbo projection i guess that is. i would say that that picture's concerning not only because of the level but because of the fact it continues to rise. sustain ability means there are countries that have 80 pez or 100% debt-to-gdp ratios, i'm not recommending that. clearly you can't have a debt-to-gdp level that continues to rise indefinitely. it's very important that we have now, or very soon, a plan to stabilize at least the

debt-to-gdp ratio so it doesn't go into a continued increase, which because of interest payments would make sort of a vicious circle going forward. >> i've seen one analysis that clearly to keep the debt at today's level, 41% of gdp, that either, number one, you're going to have to monetize the debt and essentially inflate the money f supply 100% or tax increases across the board, in the neighborhood of 60%, would be necessary to balance the budget in ten years. has the federal reserve done its own calculations? does this seem to be an accurate analysis? >> we haven't done that particular analysis. i don't think it's realistic on get back to 41% that quickly. >> which means perhaps some level of tax increase, spending decrease, or inflating the money supply is going to be necessary. >> relative to that, cbo

baseline, i mean, it's evident that either cuts in spending, increases in taxes will be necessary to stabilize the fiscal position. >> will the federal reserve monetize in debt? >> federal reserve will not monetize the debt. and i think it's important to point out that notwithstanding our purchases of treasuries as part of a program to strengthen private credit market, we will still hold less treasuries, a smaller volume of treasuries than we had before the crisis began. >> if the fed will not monetize the debt and if the congress refuses to deal with the spending curve, which will average about 23% of gdp for the next 10 years, that's either going to leave us with a massive tax increase or massive borrowing, but yet apparently, as we send representatives to china to encourage them to continue to buy our debt, they are shifting to commodities. they are indicating concerns about the level of our debt.

recently, as i believe you know, s&p downgraded uk's debt on may 21st from stable to negative. so, what's going to going to ha u.s. loses its aaa rating or what happens if we have a 60% tax increase over the next ten years to deal with this massive infusion of debt? >> at some point, you have to have a path of spending and taxes that will give you a stabilization of the debt to gdp ratio. if you don't, then fear that the debt will continue to rise will make it very difficult to finance it. and at some point you'll hit a point where you'll have to have both very draconian cuts and very large tax increases, which is not something we want. so in order to avoid that outcome down the road, we need to begin now to plan how we're going to get the fiscal situation into a better balance in medium term. >> thank you. >> mr. scott from virginia?

>> thank you, mr. chairman. we just -- the gentleman from texas just showed a chart that showed how bad things have gotten since 2000 and what he didn't show -- show the first chart -- is how we got there. this chart shows that when the clinton administration came into office, we made some tough choices and ran up a surplus that was to be surpluses as far as i could see kind of locked into the budget. in 2001, that's when the budget deficit exploded. the next chart shows the fact had nothing happened after 2001, we had a $5.6 trillion ten-year surplus. and because as the gentleman from texas has shown, that's gone into additional deficit. in fact, his chart, if you think

back to the chart that he showed, showed less than a $4 trillion debt held by the public. we had enough ten-year surplus to pay off the entire national debt and in fact it was projected to have been paid off by last year, all of the debt held by the public, if we hadn't messed up the budget. so i think the entire budget process should be shown, not just what happened starting in 2001. we had things under control. we were able to pay off the entire national debt. but the wrong choices were made in 2001 and we went directly into the ditch. one of the first things we have to do, of course, is to get the economy back in order. and i noticed on page 6 of your testimony, you showed that the stimulus package may only create one to 3.5 million jobs is that correct? >> that's the cbo estimate. >> now, what parts of the