corporate borrowers have narrowed some though they remain wide. mortgage rates and spreads have also bl reduced by the federal reserve's programs of purchasing agency debt. however, in recent weeks long-term treasuries and fixed-rate mortgages have increased. greater optimism by economic outlook and technical factors relating to the hedging of mortgage holdings. as you know, last month the federal bank regulatory agencies released the results of the released the results of the superer advisory capital assessment program. the purpose of the exercise was to determine for each of the 19 u.s.-owned bank holding companies with assets exceeding $100 billion, a capital buffer sufficient for them to remain strongly capitalized and able to lend to creditworthy borrowers even if economic conditions over the next two years turn out to be worse than we currently

expect. according to the findings of this exercise, under the more adverse economic outlook, losses of the 19 bank holding companies with total an estimated of $600 billion during 2009 and 2010. after taking account of potential resources to absorb those losses, including expected revenues, reserves and existing capital cushions, we determined that 10 of the 19 institutions should raise collectively additional common equity of $75 billion. each of the ten bank holding companies requiring an additional buffer has committed to raise this capital by november 9th. we are in discussion with these firms on their capital plans which are due by june 8th. even in advance of those plans being approved, the ten firms have among them already raised more than $36 billion of new common equity with the number of offerings of common shares being oversubscribed. in addition, these firms have announced actions that would generate up to an additional $12 billion of common equity.

we expect further announcements shortly as their capital plans are finalized and submitted to supervisors. the substantial progress these firms have made in meeting their required capital buffers and their success in raising private capital suggest that investors are gaining greater confidence in the banking system. let me turn now to fiscal matters. as you are well aware in february of this year, the congress passed the american recovery and reinvestment act or arra, a major fiscal package aimed at strength engineer-term economic activity. the package included personal tax cuts and increases in transfer payments intended to stimulate household spending, incentives for business investment, increases in federal purchases and federal grants for state and local governments. predicting the effects of these fiscal actions on economic activity is difficult, especially in light of the unusual economic circumstances that we face. for example, households confronted with declining

incomes and limited access to credit might be expected to spend most of their tax cuts. but then again, heightened economic uncertainties and a desire to increase precautionary saving my reduce households' propensity to spend. how large any follow-on effects will be. the cbo has constructed a range of estimates of the effects of the stimulus package on real gdp and employment that appropriately reflect the uncertainties. according to the cbo's estimates by the end of 2010, the stimulus package could boost real gdp between 1% and a little more than 3% and the level of employment by between roughly 1 million and 3.5 million jobs. the increases in spending and reductions in taxes associated with the fiscal package and the financial stabilization program, along with the losses in revenues and increases in income support payments associated with the weak economy, will widen the

federal budget deficit substantially this year. the administration recently submitted a proposed budget that projects the federal deficit to reach about $1.8 trillion this fiscal year before declining to $1.3 trillion in 2010 and roughly $900 billion in 2011. as a consequence of this elevated level of borrowing, the racial show of federal debt held by the public to nominal gdp is likely to move up from about 40% for the onset of the financial crisis to about 70% in 2011. these developments would leave the debt-to-gdp ratio at its highest level following the 1950s, the years following the massive debt buildup following world war ii. certainly our economy and financial markets face extraordinary near-term challenges and strong and timely actions are necessary and appropriate. nevertheless, even as we take steps to address the recession and threats to financial stability, maintaining the

confidence of the financial markets requires that we as a nation begin planning now for the restoration of fiscal balance. prompt attention to questions of fiscal sustainability and particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs. the recent projections from the social security and medicare trustees show that in the absence of programmatic changes, social security and medical outlays will together increase from about 8.5% of gdp today to 10% by 2020 and 12.5% by 2030. with the ratio of debt-to-gdp already elevated, we will not be able to continue borrowing indefinitely to meet these demands. addressing the country's fiscal problems will require a willingness to make difficult choices. in the end, the fundamental decision that the congress, the administration and the american people must confront is how large a share of the nation's economic resources to devote to

federal government programs including entitlement programs. crucially, whatever size government has chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balls of spending and revenues in the long run. in particular, over the longer term, achieving fiscal sustainability defined, for example, as a situation in which the ratios of government debt and interest payments to gdp are stable or declining and tax rates are not so high as to impede economic growth requires

to lead a review of our disclosure policies with the information that we make available to the public. that group has made significant progress. we expect to soon publish a monthly report on the fed's balance sheet and lending programs that will fill in developments and provide new information considering the number of our worst, the concentration of borrowing, and the collateral pledge. quarterly updates will be provided to the key financial statements, including information on the system market portfolio, loan programs, and the special vehicles consolidated on bank of new york. we hope that this interest will be helpful to congress and others in addressing the economic crisis in the economic downturn. we will continue to look for opportunities to broaden the

scope of explanation and analysis. >> thank you, mr. chairman. can we conclude from what you just said and what we are seeing that the favorable practices might be harbingers of an economy that is recovering? you see a recovery unfolding at this point in time? >> yes, our expectation is that we will begin to see growth in the economy. at the end of the technical recession, later this year, an underlying that prediction is stabilization in final demand, including consumer spending as well as the unwinding dynamic. firms have been cutting back production and lowering stocks of unwanted inventory. as that process goes forward, they will be able to increase production as they no longer have to focus this on getting

rid of unwanted inventory. we expect to see some growth, although not robust, later this year. unfortunately, the growth rate will be lower than the potential. we expect unemployment to continue to rise in the next year, coming >> without the extraordinary steps that we have taken, without the recovery act, do you think that we would be where we are? on the doorsteps of incipient recovery? >> i am quite sure that we would not be. i recognize that many people have raised concerns over aspects of policies and financial risks incurred, for example. those are serious concerns. i think we need to keep in front of us the fact that without a concerted effort of the federal

reserve, the treasury, and the fdic, supported by the congress and the administration, that last fall we would likely have had a serious and global financial route -- financial meltdown. having averted that, pursuing on a process of slow and gradual repair, is a major accomplishment. although major issues remain, we must keep in front of us the fact that we diverted a very serious calamity. >> by an undertaking these counter-cyclical steps, taking back in many cases asset like preferred stock from the major banks that receive part funds, in addition the fed has a money facility for lending securities. can you give us an idea of what you expect in the way of recovery repayment on these assets so that we can in turn

look to recover some of these moneys in the debt incurred by advancing the loans in the first place? >> with respect to the tarp, recovery will be excellent. in particular, a number of banks are looking to repay tarp. we expect a list of banks next week that we will believe are sufficiently sound and able to lend, repaying tarp with interest. mr. treasury secretary except that. with respect to talf, the program for asset backed securities, we have extensive protections that i would be happy to detail if you give me a few minutes. we are very comfortable that this program will be very effective in opening up markets to consumer credit.

including loans. at the same time, i think that the credit risks to the fed itself are quite minimal. >> as the fed implied to what extent we will have to borrow from those savings pools? in order to meet debt requirements in the future? >> we certainly look at that. an interesting point, even though the federal government's borrowing has skyrocketed, the current account deficit, a measure of what we do from abroad, is lower than it has been in some years, suggesting that the increase in federal borrowing has been substantially offset as banks and households we leverage. in the sense of availability,

there is the availability to meet the needs of u.s. governments and other governments. as i mentioned in my testimony, to make the lenders willing to finance us at reasonable interest rates, we must persuade them that we are serious about returning to a more balanced situation going forward. >> thank you for your testimony, mr. chairman. >> let's talk about the deficit and debt. 5.4% in 2019, debt rising. medicare and social security will have begun its pathway a permanent deficits. are you concerned about these levels? is this a sustainable course? >> i am certainly concerned about that. we face a double challenge.

one, we have to restore ourselves to a more balanced fiscal half after addressing the financial and economic crises we are facing. in addition, that is complicated by the retirement of the baby boomers and medical costs and rising entitlement costs. this is no longer a long-term consideration. it is extraordinarily challenging. my rule of thumb to the congress would be that given that we have civil -- seen this increase that we can overtime try to reduce. we cannot have a situation where the debt continues to rise. >> the path of the trajectory is what matters in the long run?

>> id involved that essentially exploding. >> your colleague at the fed seems to concur, recently giving a speech in which they rely too heavily on the measures of the out were gap as the protector of inflation. they argue that inflation will remain low for some time. other indicators, forward- looking economic models, suggest a much higher risk of inflation. are we looking at the right indicators to gauge the risk of future inflation goals and compensation spreads? what indicators are you using to measure inflation? why are they the right indicators?

>> i think that when gaps of reach the level that we are currently seeing how it is no longer the case that we can move it to the output gap. the experience of previous recessions is that inflation has tended to fall after the recession. that is a reliable empirical regularity. a drag on inflation. we simply should not put too much weight, because it is difficult to measure. currently there is not much doubt that there is an output gap and that there would be a downward effect on inflation. that said, there are other factors as well, including currency. we watch those very carefully. as you look around for evidence of inflation, you will not find much. if you look at consumers,

professional forecasters, the spread between index and non- indexed bonds, they're all quite consistent with things remaining stable. >> are you concerned that today's models, reflecting yesterday's models, are not fast enough? in the 21st century economy, information spreads much faster. opinions are formed a much more quickly because data is available much more quickly. are you concerned that these models to not fully reflect the fact that expectations can change faster than in the past and that we will be too late to catch it? >> we of course have to keep modifying the models. we have many ways of checking excavations, including monthly surveys of businesses and households. the daily behavior of the

market, commodity prices and other factors. expectations can only result in inflation if they affect what we're seeing in the markets, which is that prices of manufactured goods, for example, and wages, are not showing any signs of a spiral. to the contrary, they are showing a slower rate of growth. in the medium to longer term, we are focused on the price stability issue and i understand your concerns. as best we can tell, we do not see inflation risks in the near term. >> what about your exit strategy? what about the independence of the federal reserve? you have got four big policy tools being deployed at full tilt. interest rates, quantitative

easing, a balance sheet of around two trillion dollars. you are buying treasury bonds. that is a lot of policy of their that you would have to unwind very quickly in order to turn the corner. what is the exit strategy? what kind of confidence to you have that you will be able to wind all of this down, when the moment comes? no. 2, 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 inflation, getting everybody to recognize that. that has blurred the distinction of the independence between the administration, executive branch, and federal reserve and its unique role. what do you think of that concern? what are you doing to reassert the independence of the federal reserve, not just in structure,

but the impression of the marketplace? >> a long question, i will attempt to address it. we are confident that this process can be unwound, but we need to raise short-term interest rates in the normal way. to do that we have a sequence of things that could happen. first, short-term programs could either decline because of lack of demand -- we have seen great decline in programs over the last couple of months. second, as things return to normal, we could see step no. 2. very important development by studying interest rate reserves close to the target, it would be likely that banks would want to lend out in the overnight federal funds market a rate

above that. many effectively use that tool. there are a number of ways to address this problem. from a technical point of view, we are able to address the current level of our balance sheet. there are several points here. first, as you pointed out, the american people would want the federal reserve and other agencies to work closely with the treasury on these critical problems, which we have done. we have done so on an equal basis, from a respected agency. in particular, our supervisory positions have been independent, made based on our own decisions. we have maintained independence in attempting to address the financial crisis. when different agents of the government worked together in

previous crises, on monetary policy independence was crucial. we made all of our decisions on monetary policy on a strict defense bases. we feel confident that we will continue to do that going forward. as always, we face the same difficult decision about what the right moment is to remove accommodation. you do not want to remove it so soon as to prevent recovery from taking hold. on the other hand, you do not want to wait so long to see inflation in the medium-term. we are fully confident that while that is a difficult decision on both sides, we are confident that we will be able to make that decision as necessary. clearly occurring in an atmosphere of more oppression than in the past, given where we are now. thank you.

>> thank you, mr. chairman. while the $700 billion bailout that you are urged congress to adopt last september conceived -- proceeded under considerable scrutiny and debate, we are currently considering admitting three times that amount in public money, much of it through the emergency lending powers. certainly independence in secrecy might be important to the normal operations of the fed. this use of expensive emergency powers to rely on a statutory provision that has not been used in seven decades is not normal. the fed seems to have sprung into action through the back door as a way for some to avoid another request through the front door. one of the few safeguards that we have in the taxpayer financed portion of the bailout is the

congressional oversight power -- oversight panel. the fed has not responded to the request for specific information about continued assistance to aig, even though the oversight panel told you that the lack of information has substantially hampered overside. we have meanwhile learned that the bailout was also a bailout of goldman sachs and some of the world's largest foreign banks, all of whom were not asked to accept a penny of losses. i have four question areas for you that are all closely related. i will try to ask you to just respond at the end. the first one is just directly, when will you have a thorough and complete response to every query asked in april by the oversight panel? bill that's -- if that same panel concludes that one-third of the money given away and of the tarp was raised did, you have not disclosed significant

details to provide an analysis of what the fed has been doing to determine what value they are getting. what meaningful assurances can you provide the american people that were not being -- that we are not being squeezed again. have you done a full review of the deal from the taxpayers? if so, will you provide complete documentation for the basis of that documentation? the situation is far different with your newly discovered emergency powers. there is little difference between those that you waited in secret and those that the treasury aided in public. how can it be effective oversight, and the protected for the public -- protection for the public, when you do not disclose the terms and how much?

just adding one table to your web site, a summary report on a monthly basis. my question, when will you be able to provide the identity of participants, transactions implemented. specific transactions to the oversight panel, the fed inspector general, and congress? finally, relying upon the federal reserve instead of the treasury for bailouts can amass the true cost to the public in terms of national debt. any losses on assets of loans through these risky or abnormal emergency power activities could result in the fed giving less money to the treasury. remitting less money t have you taken a comprehensive analysis based on the loans being taken? i am not referring to the 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 institutions, 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