creating jobs than others? z nts also, which give the public some upside on the stock values of the companies. the treasury is trying to determine, you know, how to price those warrants and how to go forward with that.

there is a bit of a complication as i understand it because in the law, the banks have the right of first refusal in terms of purchasing those warrants before it can be -- before the warrants can be auctioned in a public market. so that requires some analysis of the value of the warrants which i understand treasury is undertaking. so i assume that -- >> will we necessarily cash in? because some have complained the cost of the warrants would make the cost of the loan actually excessive. >> well, you know, the point of the warrants was that if things turned around and got better, that the public would share in some of that gain. and i would say that t.a.r.p. has been a pretty successful in terms of stabilizing the banks and helping to get them -- back on their feet and get the banking system back on its feet. and stock prices, though they're still relatively low on a historical basis have done a lot better lately and some of that gain, which should go to the public.

>> some banks have also complained that the additional fdic fees have -- will reduce their lending capacity. and therefore have an adverse effect on the economy. do you have a comment on that? >> you mean the assessments for the deposit of insurance fund? >> yes. >> that is a concern because given the losses to the banking system, if those losses were made up very quickly, it would be a fairly heavy tax on banks including community banks. and for that reason, my understanding is the fdic is trying to arrange to spread that assessment over a longer period of time, which i think would be desirable in the sense that this is not a time to be -- be putting a tax, essentially, on the banking system. and we need them to be making loans. >> that would convert directly into reduced lending capacity. >> to the extent that it reduces

capital, that's correct. >> thank you, mr. chairman. >> thank you, mr. chairman. thank you, dr. bernanke. if i look at the bills we had here on the floor over the last couple of weeks we were in session and this week, virtually everything we're doing, either authorizes or appropriates more money spending. even in many cases than what is anticipated in the charts that we have talked about today. what are the economic consequences of continuing that sort of trend? >> congressman, as i've indicated, we as a country have to make hard choices. we can't expect to continue to borrow, certainly not 12% of gdp, but not even 4% or 5% of gdp indefinitely so we need to make a plan, some decisions about how to bring the budget closer to balance over the immedia medium term. that means as you discuss spending, you need to think about the revenue sources that will be related to that.

if you don't do that, then, again, you'll see interest rates rise and see reluctance of lenders to provide credit to the u.s. government. that would be a very bad outcome. and i believe there is a great deal of confidence in the markets that u.s. government will take the necessary steps to restore fiscal discipline, but it is essential that this body and the congress in general do that hard work and get that done. >> thank you. chancellor murkle of germany yesterday was very critical of central banks worldwide, but specifically of the fed. would you like to make any comment -- i presume you read what she said. would you like to make any comments relative to her comments? >> only that i respectfully disagree with her views. the u.s. and global economies including germany have faced an extraordinary combination of

financial cry siisis. and i think it is justified to try to avoid an even more severe outcome. i'm comfortable with the policy actions that the federal reserve has taken and as i've described to mr. hensarling, mr. ryan, we are comfortable that we can exit from those policies at the appropriate time without inflationary consequences, and therefore, we are comfortable with our policy position. >> are the current powers of the fed in your estimation inadequate, excessive or adequate? >> well, i think there are some changes that are worth making. and i would mention specifically -- i was asked a question a moment ago about aig, for example. it was with great, great reluctance the federal reserve got involved in that kind of situation. there being no good alternative to avoid a collapse of a major financial firm and the consequences that would have for the financial system and for the economy. as i've said, for a number of

times, at least a year, i think a very critical step that the congress needs to take is to develop a resolution regime that will allow the government, not the fed, but the government to step in when a major financial firm is near default and financial system is in crisis. that would be parallel to what we already do now for banks, through the fidicius system. if we could have such a system in place, we would no longer be in the hobson's choice of standing aside and letting the system collapse or taking actions which are very uncomfortable for us. that would be an area where we would be happy to withdraw or pull back on our activity if the government would provide a good system for addressing that issue. >> we discussed a little bit the treasury bill rates and specifically the ten-year treasury which according to my thing now is 3.58% yield. most adjustable rate mortgages reset on the ten-year treasury

number. if that ten-year treasury yield were to increase some more this year, what impacts might that have on potential second wave and mortgage-backed security failures or arm resets? >> i would like to check the data on that, but my impression is that most a.r.m.s reset on shorter term interest rates, like the libor rate, which is very low now or the treasury bill rate. since the federal reserve brought interest rates down to such a low level in the last year or so, concerns about resets in the mortgage market have considerably been reduced. there are certainly very serious concerns about affordability and about principle, principle mortgages being under water because of declines but the interest rate reset on a.r.m.s has been moderated by the short-term interest rates. >> last quick question, t.a.r.p. money was originally intended to stabilize the markets and to give banks capital for which 20

do more lending. as they want to give it back and as you increase the things -- make it -- as they want to give it back in order to avoid the restrictions being placed on them, isn't that in effect going to reverse the -- part of the original intent to provide them more capital from which to lend and therefore reduce potential lending in the marketplace? thank you. >> yes, that was part of the original intent. unfortunately because of the restrictions and other reasons including just bad publicity, banks, many banks went to repay the t.a.r.p. and it won't be able to serve that function. on the other hand, after the stress test and our supervisory reviews, many banks are raising private equity which will, i think, be a more permanent form of capital, higher form of capital, and more willing to make -- base their lending strategy. >> mr. bishop? >> thank you, mr. chairman.

and mr. chairman, thank you for your testimony. i've just two quick questions. earlier i think i'm accurately paraphrasing your testimony, you indicated that in your opinion that both the t.a.r.p. funding and the stimulus legislation averted a tragedy. is that essentially -- >> that's correct. >> and in response to a question from mr. scott, you indicated that you thought direct government spending was the most effective means by which we would either stabilize jobs or create jobs? >> well, i think it is foreign ha important to have a mix. but upon the immediate impact on the economy, government spending doesn't have the issue that tax cuts do, which is part of it may be saved. but that being said, i think a good mix is useful. >> the stimulus package that was passed had round numbers, $500 billion worth of spending, $300 billion worth of tax cuts, those are round numbers. when that legislation was on the floor, the republican

alternative offered was a package of essentially $500 billion worth of tax cuts. can you estimate what the impact would have been had we passed simply a $500 billion package worth of tax cuts as opposed to some stimulus spending? >> no, i really am not able to do that on the fly. in any case, i'm sure part of the motivation for the tax cuts was the incentive effects of tax cuts as well as the direct spending effects. that would have to be factored into some comparison. but i would prefer not to get into that detail level. >> understood. one of the policy issues before us over the next several months will be to deal with the president's recommendations with respect to higher ed policy, one of his recommendations is to move away from what is referred to as ffel lending to 100% student direct lending, monies provided by the treasury. there are arguments for doing that. there are arguments that would

suggest we should not do that. one of the arguments raised that suggests that we should not do it is that the increase borrowing would be detrimental to our, both short and long-term fiscal stability. what is your assessment of that argument? >> i don't think that's a very strong argument because you either are directly making the loans or guaranteeing the loans and as far as the potential loss to the treasury is concerned, the guarantee is the same essentially as making the loan. it is really an accounting difference, not a real economic difference. i think there are a lot of other issues that you point out, there are arguments on both sides for using a private lender who may be better at making the loans or may not be versus having the direct lending. i would just point out that if you were to continue using the private lenders, one of the problems that emerged last year was a mismatch between the interest rate they were allowed to charge and the interest rate in which the -- their cost of

funding was determined. so there was some technical issues that would have made that situation better, but, again, that fundamental question of private versus public, a lot of issues there. >> okay. thank you. mr. chairman, thank you. i yield back the balance of my time. [ inaudible ]. >> i don't remember that, sir. thank you, mr. chairman. chairman, thank you very much for being with us. and, in fact, over easter i was in latta, south carolina, driving down that way and i had a picture of my kids by the sign there the corporation, so they could say they were there. but, thank you very much, for being with us. and a little background about where i'm from. i'm from the 5th congressional district, the largest manufacturing district in ohio,

also has the unique -- also being the number one agricultural district in the state of ohio. i have myr-- we're in tough tim. i have part of the -- i have the highest unemployment rate counties in the state of ohio, one over 16% now. and as we have been on our break, i crisscross my district during that time, and also when i'm at home every weekend, going through factories and talking to businesses across the region and also the people that work there. and, you know, i'm finding, you know, folks are out there in the business sector, especially in these factories, they can't shed any more jobs. they shed any more jobs, they're not going to be operating. a lot of them are hanging on by their fingernails now. there have been pay cuts that people have taken. they have reduced the number of hours that they're working for a week. and so it is a very, very tough

time. and when we have been doing this, one of the -- going across the district, one thuing i woul like to ask, on your testimony on page one, you say that, you know, the consumer spending has been relatively flat and consumer sentiment has improved. it says in the coming months, household spending power will be boosted by the fiscal stimulus program. i guess -- i had another town hall last night and folks are telling me what they're doing. and are not buying. what in the fiscal stimulus package out there is going to help the 5th congressional district in the next few months in our area? >> well, in reference to my specific comment about boosting household income, the make work pay tax cuts and the ui insurance and other transfer payments will go, social security, veterans payment, will, of course, go to your constituents like anyone else in the country. they will get extra income. as i mentioned also in my

testimony, how much of that they will spend and how much they will use to pay down debt or squirrel away is an open question. but we saw already just this week we have seen an increase in personal income and that's -- a lot of that is coming from government support. >> okay. i guess in the next question we were talking about income and things like that and also jobs, you quoted the cbo, by the end of 2010, you said there would be -- cbo said about a 1% to 3% increase or 1 to 3.5 million jobs being created. are we talking about private sector jobs or are we talking about government jobs? years back i was a county commissioner. back in '91, '92 recession, we had other official comes before us and said we could get government money and we would ask the same question, how long is that job going to last. after that one year, 18 months is over, we're not going to fund it because we didn't have the money in the county budget. when we're looking at that cbo, which you mentioned, are we

talking private sector jobs being created or on federally created jobs that might just last a short period of time? >> well, it depends on the these jobs are going to have to, you know, be created over, especially getting back to working the private sector? >> well, the stimulus program only roughly speaking puts out a quarter of the money in 2009, half the money in 2010 and if it

takes several years for unemployment rates to come back down to more sort of normal levels, the fiscal program will be having some effect over that two to three-year window. >> thank you. >> thank you, mr. chairman. i yield back. [ inaudible ]. >> thank you, mr. chairman. mr. chairman, thank you for being here this morning at this critical time. along with congress and the treasury department, the federal reserve has taken action to try to help the credit markets and you talked about that a little bit already. and we thank you for that, to try to in the i was you said, one of the toughest downturns we have seen since the great depression. let me ask two questions.

you touched on this some. you touched a little bit on the sectors that have improved. but let me go back to that on the credit markets, which ones are improving, what are the areas that are still lacking that need attention to improve to get there, and specifically thinking more about how long will it take to -- for additional credit to be available for consumers of small businesses. because i was home this past week, and i talked to a lot of folks. they still tight in the business sector. car dealers are having a difficult time and a lot of places in getting people qualified to buy the vehicles that actually are available and want to buy and actually have pretty good credit. i would be interested in your thoughts on that. the other things, treasury and the federal reserve needs to do or things we need to do here because there are people that are still hurting and i think it is bleeding over into farm sector as well a -- i would be interested in your thoughts on

that. >> certainly, there has been a pretty widespread improvement in markets. activity is up. this is true both in the short-term money markets and in terms of -- also true in the longer term corporate markets. as you point out, an area which is still quite tough is consumer lending and small business lending. and that's true for a couple of reasons. and the fed is trying to address both of them. it is true, first of all, because of -- the consumers an small businesses rely on banks. and banksave not only had their capital reduced by losses, but they have become, you know, more reluctant to extend credit to these customers, either because they're worried about losses or because they're worried about their own financial positions. in this respect, we have heard

complaints that bank examiners from the fed and other agencies are too prone to prevent banks from making loans in the interest of safety and soundness. we had a joint statement, the federal reserve and other banking industries last fall, making the point that making loans to credit worthy borrowers, maintaining credit relationships is profitable for banks and therefore good for banks. and that in addressing whether or not certain types of loans should be made, the examiner should balance the need for conservatism in a difficult situation and the need to make credit worthy borrowers allow them to receive credit. >> mr. chairman, i won't interrupt you. maybe time to send that note back out again. >> well, it is difficult to get that message from the top down to the examiners. we have been having workshops and so on. we'll continue to try to get that message out. the second reason for the problems is that banks, after they make these loans, have traditionally wanted to securitize them in the secondary

market. those markets have not been functioning. our talf program has brought those spreads down, has increased activity, and i do think we have already seen, for example, an in auto loans, we have seen better availability and lower rates. as we continue in that area, we expect that will help you ask me where there are still problems, one area i would mention besides small business and consumer lending is commercial mortgage-backed securities, commercial real estate, that's an area where we are also going to try to address that. but currently, getting refinancing for existing commercial projects is very, very difficult. >> thank you. let me just say, as a student of not only a student of, of the most world renowned specialists in great depression, what are your thoughts on aborting these kinds of economic crisis in the future and are there lessons the fed has learned from its role in the banking supervision that we have gone through so far that we might -- that we as a body might pay attention to and help with?

>> so, in dealing with the situation like this, there is the immediate emergency response, and then there is the longer term actions you want to take. on the emergency response, the two lessons i learned from studying the great depression are first that monetary policy has to respond aggressively. and the fed did not respond in the early '30s. and we, of course have done that. the second is that maintaining financial stability is absolutely critical. and as you know we have taken a number of measures, some extraordinary, working with the treasury, to prevent a meltdown in the financial system. i believe that we have averted a much worse outcome by taking those steps. going poerforward, we want to a this crisis happening in the future we learned a lot of lessons from the recent experience. i think we will have to have stronger oversight of the large firms, maybe higher capital. we need to have a resolution regime to help resolve failing

firms. and i believe we need to strengthen the financial infrastructure, but i would also say that i think we do need to take a more system wide approach to regulation, instead of looking only at individual firms where agency a is responsible for firm one and agency b is responsible for firm two, there needs to be a more collaborative approach that looks at the whole system and makes sure there aren't building risks in one area that are being ignored because they don't bear on a particular firm. i think a more macro prudential or system wide approach may help. >> thank you, mr. chairman. i yield back. >> mr. garrett? >> thank you, mr. chairman. mr. chairman, you know, the other hat i wear is in financial services and when you come over there, the issue that is often discussed the term the systemic risk, the systemic risk regulator. of all the hearings we had, nobody defined what it is, what authority they'll have, what

they'll regulate, so on and so forth. one thing, out of tboth of the committees i serve on, i'll take a page out of paul ryan's comments here that is that one thing is a systemic risk is the unfunded debt out there. the numbers vary on that. interesting enough, we had expert after expert last six years come before the committee. they all say the same thing. and we hear it from both sides of the aisle. in the budget we got this year, unfortunately, it really isn't addressed. we spend more of the numbers you already said before, we're looking at a national debt double in ten year, and interestingly on those numbers, maybe somebody else referenced this, what happened over in the united kingdom with s&p's downgrading them, going from stable to negative, and their situation, and some economists say not as bad as where we are

and our trajectory that we'll be worse than them. your comment already is that this is probably the looming largest issue that we need to address? >> i would say that's right. >> yeah. and i wonder, everything else we do besides that is just almost -- is almost that, besides the point. is that a correct -- >> well, i wouldn't go -- there are other issues we face. i want to say, you had a lot of experts and it is easy to sit at the table and tell you, you have to solve this problem. it is a hard problem to solve but it is critical that we address that. >> all right. it is not -- i overstrayed it by saying it is besides the point. but the other thing is getting our overall budget in order by getting our numbers down. secretary geithner talked about our spending and said, don't worry, we're going to try to rein things in. the response from the chinese

was just laughter to that. i guess they just don't believe it. a month ago, our president said he's going to start tackling it and the way he said he's going start tackling it is he's going to save $100 million. where would you put that $100 million savings in the whole scheme of things? significant, large, major, or just totally irrelevant to the entire picture we're dealing with as far as our untended liabilities and our budge aet a well? >> $100 million is not a lot of money relative to the problems. >> do you see any commitment from the administration based upon $100 million so far or from the budget presented so far? >> i, you know, a lot of the budget presented was place holders and, you know, broad plans and themes. i think a lot -- the proof will be in the pudding, athey say,

how congress and the administration begins to implement health care reform or climate change policy. those details about how to spend and revenues will be matched will be the critical issue. >> regardless of how we spend, let's assume for the moment, we spend on all the best things in the world, the deficit numbers don't change, right? the debt numbers don't change. we're still going to spend that $634 billion on health care or something else, we're still going to spend the money on something. so the bottom line numbers don't change. >> well, my understanding was that $634 billion place holder came with some perspective revenue offsets from the carbon permits and from upper class tax increases. mr. ryan says no, but -- >> i'll yield. >> half from medicare cuts and half from the upper tax -- >> okay. so at least, there was a match there, as i said this is all about execution and that's the key issue.

>> okay. when the cbo was here, i guess about a week or two weeks ago, one of the questions, i referenced to you being a historian on this, during the great depression, i'm not saying this is a depression, we saw two depressions, one before roosevelt and one afterwards. is there, with regard to the recession we're in, the possibility that we will see what we're in now and that if the stimulus and their description of the stimulus, my words, not theirs, was it started out small and will peter out together next year, if it doesn't have the impact that they suggest that you will see that second bottom of a w then in next year's budget -- next year's economy? >> it is very difficult to forecast that far in advance. you have to fiscal program is not effective, then, of course that would be a negative going forward. >> they said next year will have minimal inpact, you saw the impact on the tax side of the questions and it will have minimal impact next year. if the stimulus is not having an impact, what would? >> half of the effect will be in

2010 is my understanding, that the timing of the stimulus package, but there are other factors at work as well. if confidence returns, private sector activity ought to increase, low interest rates will stimulate demand. the rest of the world is strengthening. a lot of other factors would provide support for growth outside the fiscal package. that being said, again, we -- there are a lot of issues to be resolved like excessive leverage, for example, that are likely to be head winds as the economy tries to get back to sustainable growth path. >> my time's up. >> miss schwartz. >> thank you, mr. chairman. and mr. chairman, thank you for your testimony and for your comments both about reality of the situation fiscally and economically and also going forward. i wanted to ask two questions if i may that really relate more to households. and some of the things that we hear about in our districts. and i think mr. latta alluded to it on the issue o