is one that is very significant, more so in his district than even in mine in the@ @ @ @ @ @ b projections based on previous recessions, previous actions, we don't know that there won't be some changes because we're taking different actions and you are as well. could you speak briefly just about whether there are additional actions or whether we

could have more hope that we will see an increase in employment so that families in our district, businesses in our district are starting to see that personal recovery? >> well, the historical experiences that the labor market tends to lag, business cycle, and so as the economy recovers, unemployment could still remain high. in particular if growth is relatively slow, it will work fast enough to absorb workers coming into the labor force. >> one of the last decisions businesses make is new employees and a commitment to new employees. >> that's right. and so this is a very serious problem because besides very important fact that people without jobs have difficulty meeting their house payments and other bills, people who are out of the labor force for a few years tend to lose their skills and their connection to the labor force and maybe when the economy recovers, they may not even be employable. it is possible. so there are a lot of costs involved in this. and i don't have -- if i had an easy answer, i would give it to

you. all i can say is as you know, the federal reserve has been aggressive in trying to support the economy and the congress has been as well. we might look at trying to help people retain their skills through educational programs or other kinds of training programs. >> maybe while people are on unemployment, we may want to get them into other kinds of job training or -- >> at least it is an opportunity. if you are unemployed it an opportunity to fine tune your skills and be prepared when jobs begin to open up. >> and maybe look at future jobs, jobs that might be opening up, what kinds of industries are growing, look at what's next. >> the strength of our country, our economy that we have in our technical schools and junior colleges and other formats, we have a lot of ability for people to retool, even in -- >> what we did under taa, the trade adjustment assistance, i added a provision that said we would -- that you be eligible

for job training and education benefits if your industry was certified as one of those industries affected by international trade, even if your own company and your own facility hadn't closed yet, with the notion why not get people new skills and the ability to move on. maybe that's something to look at as we are dealing with a great many people who are unemployed who are going to need some additional skills. it is a good point. maybe that's something we can work on. briefly, i only have a minute, we talked before about interest of mine in helping to make sure that americans learn to save. one of the interesting aspects of this recession is that people's fear about stagnant wages and unemployment and -- is to actually hold their money and to actually begin to pay down debt and save. could you speak briefly about how well we want people to be spending this sense of encouraging the use of consumer products and stimulating the economy that way.

we don't want people to lose this notion that actually saving and preparing for a rainy day, being able to have a cushion personally is important and we had forgotten to do that in the last ten or -- maybe 20 years. just really briefly speak to what else we might want to do to hang on to this concept that americans ought to be saving some part of their income if they could. >> you're absolutely right. over the last couple of decades, in part because of rising house prices and stock prices, people felt not necessary to save. now they are saving more, for the reasons you mentioned. it is interesting to note that people who grew up during the 30 '30s, even in prosperity, 30 years later, we're saving much more than their children. this experience is, of course, a very negative one but one benefit might be have an impact on people's savings behavior there is other thing that can be done to try to increase savings, such as using only optouts on

401(k) participation, things of that sort there is no magic bullet. and attitudes and psychology seems to be important and this is having an influence on that. >> maybe that is something we can do together in encouraging americans to think about continuing to save. >> yes. >> thank you, mr. chairman. i yield back. >> thank you, mr. chairman. welcome, mr. bernanke. i'm going to switch over to the fed's involvement in the mortgage-backed securities. there has been a report out recently that says that, i think "wall street journal" said you're 10% underwater on the mortgage-backed securities. there is currently $480 billion worth, i think is the number that they use. so, as we look forward, i have a couple of different questions related to this. are you concerned that the risk of the fed purchases will outweigh the benefits? and that's first question. the second question would be this. the fed has said that they will

buy up to a maximum of $1.25 trillion of mortgage-backed securities. do you plan to go up to that limit and if so, by when? >> on the first issue, i'm not sure about the correctness of that calculation. because we have a mix of securities, not just ones we purchased recently. but it is not our anticipation to be selling those off on the market in the near term. right now we are financing those mbs which pay cues upon of s co 4% or so using funds which cost us one-fourth of 1%. there is a substantial flow of revenue that will come in that will upset losses that might occur down the road. so we're pretty comfortable. obviously there is issues there. we're pretty comfortable that -- that this will be providing revenue to the treasury. that being said, i think that

the first order -- first question is trying to get this economy moving again, and since we took very aggressive actions in the march fomc meeting to expand our mortgage-backed security purchases and initiate treasury purchases, i'm not saying this was the only reason, but since then we have seen significant improvement in financial markets and in the economic outlook. that's the first order, the most important thing. what was the other -- >> the $1.25 trillion, are you going to go up to that limit? >> that's a decision of the federal market committee, like a monetary policy decision. so we will meet and we will evaluate the state of the economy, the state of that market, the state of credit markets in general and we'll have to mack a decision. i can't preview that, we have to make that as a committee. >> there is some concern out there, there are some numbers that float out there that basically the government, the federal government, and some form or fashion, is involved in

75% of all mortgage-backed securities, of all mortgages out there. and, i think there is a concern out there that this could create another bubble, a different type of bubble long-term where you have the federal government owning everyone's home or their mortgage. do you see this trend continuing? do you agree with the 75% number? is it lower than that? >> well, it is true that currently almost all mortgages not all but a very large proportion of mortgages being originate ready passing through fannie or freddie or the fha, which means they're getting a government guarantee. those are the only mortgages right now that can be sold into the private markets. so the fed has nothing to do with that. we're buying fannie and freddie mortgages but they have already been guaranteed by those agencies that are in conservativeship in the government. >> long-term, we're on the hook. >> you're on the hook for it. i believe one of the things this body will want it look at is

reform of fannie and freddie and figure out how the government's intervention in the housing market ought to be conducted. i think everybody is -- many people are convinced that the way fannie and freddie was set up before was not entirely satisfactory and we need to have rethinking about how to -- how the government -- what role the government should pay in the housing market. >> thank you. i want to switch topics real quick here. i want to go to cap and trade and the legislation, the global warming legislation that supposedly is going to move through this body and i'll be very up-front with you, i'm strongly opposed and strongly against this policy of adding any type of energy tax at all to the american public, especially at this time. i have a real concern about how we're going to compete with china and india and brazil who are putting billions of dollars into making energy and making energy cheaper and more available to their people, to their population. and you're an independent guy, you're supposed to operate

outside of the congress. and if someone of your stature would come out and say, this is the wrong time to do an energy tax, i think it would send a message to this congress to stop this energy tax. and so i would request if you believe this is the wrong time to do an energy tax, that you would come out and say that. i think it would be a powerful statement. >> i think an important -- just from the short-term cyclical consideration, to the extent that there is an energy tax it would make sense to rebate it somehow so the net purchasing power is not diminished too much by such an action. but that would be the short-term consideration i would mention. >> so you're not willing to go all the way and say we should not do an energy tax at all? >> in the long run, this clearly depends on the assessment of the congress on the importance of reducing carbon, greenhouse gas emissions. i'm not a scientist. i can't judge that. if those costs are perceived to be large enough, than some intervention is justified.

in addition, though, and i think the point that one should make is that our doing this alone will probably not help the greenhouse gas situation that much and so part of our strategy, if we go this way, ought to be to negotiate or work with china and other countries to get them to do the same. >> well, thank you, mr. chairman. i think what we need do just to finish, mr. chairman, is that, you know, nuclear power is where we should be putting our efforts to have clean energy in this country, not into an energy tax. thank you, mr. bernanke. >> mr. larsen? >> chairman bernanke, there is escape hoods here in front if you need one. >> that's okay. >> to get away from that question. but i wanted to chat a little bit about -- ask a question, but i want to clear something up. i was just in china as well this week and visiting with a lot of their leaders on the economy,

trying to get some perspective. and the characterization that my colleague from new jersey made about mr. geithner's reception was inaccurate. and may have been a little bit accurate when he spoke at peking university but i never spoke to a group of college students that didn't take me on either. so there is perhaps a disconnect there. but in our discussions with folks from the central bank, and from the ministry of commerce and vice premier wong and others, there is a real desire for cooperating on the economy with the chinese. i want to give you a few assessments and ask a few questions based on those meetings. the first, i guess headline, there is a general concern regarding the potential of inflation in the u.s. but not over the next 12 or 18 months, but beyond that time frame. even then that concern was tempered by an express

confidence in the dynamism of the u.s. economy and understanding that the steps we took were necessary and are necessary for our own economic health. a signal in the deficit would be another headline, the chinese seem to be looking for a signal on the fiscal deficit, not that it disappears but decreases over time and that's consistent with what you said. the third, the scare is gone to parafrase bb king. there is assessment that the worst has passed, but still not enough signs of improvement. finally, exit strategy, this gets to mr. ryan's question and i hope you can be more particular about it. though there is this expectation of some inflation, the chinese are looking for an exit strategy that gradually withdraws an appropriate amount of liquid it ty from the market to increase the chance that you have to purchase your own debt issuance over time. the question i had is what can you tell us about inflation expectations and the fed's exit

strategy with regards to this concern expressed by the chinese? >> certainly. i think not just for the benefit of the chinese, but for the benefit of the united states and for our own people -- >> absolutely. >> -- we need to explain how we're going to restore fiscal sustainability and avoid inflation. let me just on that latter issue, let me just begin by saying that the federal market committee, the federal reserve is strongly committed to price stability. we will ensure price stability. price stability means neither deflation nor inflation. and in the near term, our concern for a time at least was that the recession would be so severe that we would see deflation and we have taken strong actions to try to avoid that and i think the fear of deflation has receded somewhat and that is a positive development. now, for the time being, our -- we still need to maintain a strong supportive position in order to help this economy begin its recovery. but as that begins, at some

point, we're going to need to begin to withdraw the policy accommodations so that we can '@ @ @ @ @ @ @ @ @ @ @ @ @å" be willing to lend in the federal funds market at rates they can hold by having their cash at the feds. beyond that, we have additional tools kwechlt do reverse purchase agreements which allow us to fund our balance sheet

outside the banking system and doesn't have the same effect on the many someone supplier or int rates. and we could sell some assets but that's not a big part of the plan and certainly in the near term. there is still other possibilities that we're looking at. and that perhaps we can discuss with congress at some point. but we are certainly as we look forward and decide what further action to take, we want to be sure that we'll be able to remove accommodation in an appropriate -- at appropriate time and appropriate speed to ensure that we don't have an inflation risk down the road it is not going to be an easy call, but we'll have to balance the risk on both sides. not going too soon, and stunting the recession, not going too late and having inflation, but we will get price stability after we get out of this -- out of this recession. >> thank you. >> miss lummis.

>> dr. bernanke, thank you for being here today. i want to visit a bit about that balance between taxes and spending in the medium term. if congress just increases taxes to eliminate the deficit in ten years, let's say, without cutting spending, could that have an effect on our economic recovery, a negative effect? >> as i was trying to make the distinction earlier, in a economy in recession, tax cuts or tax increases have two effects. one is the incentive effects which are more long-term effects. but also withdrawing purchasing power, taking away income from consumers. and in a short-term, recessionary situation, i think that latter effect is more important. if you raise taxes during a recession, you probably want to offset it with a tax cut elsewhere, for example. over a longer period of time, you have to weigh the implications of higher taxes on incentives and on potential growth against the benefits of

what you're using the revenue for. there is a cost benefit trade-off to be made there. and in particular, i think -- i believe the congress will want to look at both sides, both the tax and the spending side and try to find a reasonable balance between these two. >> mr. chairman, you mentioned just a few minutes ago that many of the programs that the fed are temporary and could be wound down. well, such is the case with the congress also. and this stimulus bill is -- comes to mind. if congress were to freeze spending at 2009 fiscal year levels, and freeze release of the t.a.r.p. funds at the end of the fiscal year, this fiscal year, do you believe the economy will, if recovered adequately, that we could then begin to address the debt and deficit oblem and focus on it because, you mentioned that as a very

important looming issue. so i'm looking at the point at which we can actually, as a congress, also enact an exit strategy from trying to stimulate economic growth because the economy is finally leveling out. and then begin to address that great looming issue that you mentioned as a concern that i agree is a huge concern, that being both the deficit and the debt. >> i think it is very important as i mentioned in my testimony to begin the planning process as soon as possible so that it will have a persuasive exit strategy that will not only give us a plan, but will also help to reassure lenders and the bond markets that in fact the u.s. government is going to find a fiscally sustainable path going forward. you asked about 2009. no one nose the future, of course. but based on our own best projections we think the economy will still be pretty weak, albeit starting to grow at the end of the 2009 and the

unemployment rate will still be rising. it will not be a period -- unlikely to be a period of robust growth at that point. >> mr. chairman, suppose if we froze spending of the federal government's budgets at 2009 level. and then let the stimulus package continue to work. would that be a way to begin to address the deficit and the debt as well as allow the stimulus moneys to continue to flow into the economy? >> congresswoman, i think there are lots of ways you could structure this. i don't think i want to try to pick one, particularly on the fly here. so you really need to think about maybe not just the total amount of spending, but the various programs and various needs we have from health and defense and benefits payments, everything else, and think about those programs and try to think about how we're going to structure them in a way that we'll get over the next few years, we're going to get return to more balanced situations.

so i think a longer term perspective is probably necessary. >> thank you, mr. chairman. mr. chairman, may i -- since i have a few more -- i guess the time has run out. thank you. quick question about government intervention in our economy. given the degree and depth of the government intervention in the economy, which is the highest since world war ii, can you estimate how long it might take for the government to unwind its immersion in the markets? >> it is going to depend on the market. for example, in some of the short-term markets, like the commercial paper market, we're already seeing an unwinding going on now as those markets stabilize. for other parts of the economy, like the t.a.r.p. investment in

banks, or some of the longer term holdings of the fed, it may take a few more years. but i would say that four or five years from now i would hope that we would be pretty much as a government -- will be pretty much out of the financial markets and that things will be operating on a more normal basis. >> thank you, mr. chairman. >> thank you, mr. chairman. and thank you, chairman bernanke, for being here with us. when we spoke last year as we were considering our response to the downturn in the economy, and we were trying to consider the parameters of a recovery package, i asked and you stated that helping the states prevent cutbacks and services could have a stimulative effect and indicated support for addressing weaknesses in the municipal bond market. the recovery act we passed did include money for state stabilization and created several flexible bond options to help our government, our state and local governments. and this past week when i was in

massachusetts, as part of the break in -- and happened to meet with our governor as well as state senator who chairs a ways and xhemeans committee, i can t you how grateful they were for the fact that we included significant funds to help the states deal with the downturns in their revenues and the impacts on their budgets. it has been -- i think it is one of most difficult places to be today in state and local government. so i want to thank you for that. and also for your reiterating your support today for what we have done with the recovery package, the necessity for it. in your testimony, you just stated that about one-quarter of the funds will come out through tax cuts or direct benefits, indirect spending this year. one half next year and possibly the next last quarter in 2011. are you concerned that we're doing -- we're meeting that timetable and how important is the timetable as we go forward, beyond the tax cuts that have showed up in people's paychecks

today? >> well it very early days. to this point i think something on the order of only 5% of the mond monies appropriated have entered the blood stream, so to speak. it is important that there not be extensive delays in that process because it would possibly give you a fiscal stimulus at exactly the wrong time where the economy was already in a substantial recovery mode. but i don't have any information to the effect that the stimulus is not being dispersed in a reasonable -- at a reasonable pace. i think it is just too early to know how quickly the monies will get out. >> you're confident the administration is moving in a timely fashion, especially at the -- within the various departments where they have to put in place a regulatory framework to process to make people applying for the funds, that that is going along in a manner that should be helpful? >> as far as i know. but we all recognize that this is a -- from a bureaucratic

point of view, a very challenging task. but so far, of course, i think payments are under way and the planning process is under way. >> so the impact we see today, given the fact that only 5% is out, moved out, what do you attribute that to? >> the recent improvement in the economy? it is partly the fact that we had this very sharp decline in the latter part of last year related to the financial crisis. that caused the big buildup of inventories. very importantly, as i discussed earlier, we seem to have gotten -- done a -- achieved a good deal of progress in stabilizing financial system. that has helped restore confidence. final demand is beginning to stabilize. we still had a very bad first quarter and we may yet have a negative second quarter because of the need to work down those inventories. but because the financial markets are doing better, because there is more confidence in the economy, in the financial

system, as those inventories work down, we should begin to see a modest increase in growth. i would put the internal dynamics of the economy, in terms of inconvenient toirz and so on, as being part of it. i also would like to give credit to actions taken by the treasury, the fed, the fdic and the congress to help stabilize the financial system. >> thank you, and i yield back. >> thank you so much, mr. chairman. and thank you, mr. chairman, for being patient. i have three questions. but i want to start out with your certainty that we won't be facing inflation and your certainty that we have gotten a handle on deflation. just your last answer and to mrs. tsongas about the buildup of inventory. and certainly goes by a loss of value in the housing market.

given the unemployment rate that is going to continue to rise, even recently from the gm and chrysler restructuring, given tw can you and the build-up of inventory and loss of value housing, how can you say that deflation is not at risk, that we are not having to get rid of inventory and losses being taken in the housing market. i guess i don't understand how we're going to avoid deflation. >> well, you correctly point out that we have a balancing act between on one hand, deflation risks and median inflation risks. we've got to look at both sides of the equation. resently, since the outlook has improved, because inflation expectations is measured by a

lot of different means, seems to be pretty stable, i put a lower probability now on deflation now than i would have a few months ago. >> but people don't have jobs, how they going to buy it what's going to happen when people have to sale their houses? >> that was a very negative effect on the economy. i agree with you that the economy remains quite weak, but we've seen consumer spending, even at a lower level, seems to be stabilizing. those kinds of considerations, we think the deflation risk has rece receded, but continue to follow that. >> there's been a lot of talk about th fed being named as superregulator or as

alternatively as systemic risk regulator. mr. ryan asked about the federal reserve and i want your comments about whether your appropriate agency to be a superregulator and whether or not that's a little insist yous. >> first of all, i do think there's a benefit to going towards a more systemwide regulatory approach because so many things that caused problems in the recent crisis slipped under the radar. we need a system where the large firms are being appropriately overseen. where we have a way to address failure of firms. >> should that be you? before my time expires. >> the federal reserve needs to be part of that process, but given our expertise, our historical role in financial