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 stimulus were more effective in creating jobs than others? >> i think dollar for dollar the inastructure spending, direct government spending is probably -- although it takes a longer period of time, the increased transfer of payments and tax cuts work more quickly, but because part of them are saved, the impact might be

somewhat smaller. >> you mentioned the t.a.r.p. funding. can you tell me the effect, if the banks wanted to pay back the t.a.r.p. funds, what effect would the cashing in the warrants have on the cost of paying back? >> so besides paying back the preferred shares, as you know there are warrants 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 latelynd 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 goverent 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 intere )aá@@)gz >> because principle defined in the interest rate resets problems, considerably moderated. >> last question, tarp money was meant to stabilize the market and give capital to do more lending. now they want to give it back. as you decrease the thing that makes -- as they want to give it back to avoid restrictions, is that not going to reverse part of the original intent and not reducing potential lending in the marketplace? thank you. >> yes, that was a part of the original intent.

unfortunately, because of these restrictions, other reasons, including bad publicity. many banks want to repay the tarp. it will not be able to serve that function. ther 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 baseline that you are compared against. but i think it is fair to say that the preponderance of the jobs will be private sector jobs. and they would be permanent if the economy has, by the end of this period, come closer to a

better employment situation so that we're closer to a more normal labor market situation. in that respect, you're putting people to work two years earlier than they otherwise would have been put back to work. that's the sense in which employment is being created. >> i guess real quickly, you say more of a normal situation, the situation we're in right now, would you consider that normal for the time or are we looking at a longer period of time that 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 as -- 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 banks have 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 great depression, that policy has to respond aggressively. the fed did not respond in the early 1930's. second, maintaining financial il