critical. a number of measures that have been taken that are extraordinary to prevent a meltdown in the financial system. i believe that we have avoided a much worse outcome by taking those steps. going forward, we want to avoid a crisis happening in the future. we have learned a lot of lessons from this recent experience. stronger oversight of a large firms, capital, regimes to help resolve failing firms. i believe that we need to strengthen the financial infrastructure. i would also say that we need to take a more systemwide approach to regulation. instead of looking only at individual firms where agency a is responsible for firm one an agency b is responsible for firm 2, the agency needs to look at the whole system to make sure that there are not risks in one area that do not bear on a

particular firm. a more macro approach would be helpful. >> thank you. >> mr. garrett? . 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, of all the hearings we had, nobody defined w 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 cs 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 of unemployment is one that is very significant, more so in his district than even in mine in the philadelphia area. while not great, it is still 10%, 9%, no the where t where wo be but not as hard hit as other regions of the country. when i hear and when my constituents hear we are seeing maybe some stabilization, maybe some signs of growth, that are

positive, we still do keep hearing that the unemployment rates are going to continue to be high and not recover. you said so yourself in the testimony. could you elaborate in any way both on the expectations about unemployment, but maybe more so, what we could do about it, whether there are some 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,nd 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@@@@@@v@ @ @ b@ @ sm

>> i cannot -- we have to make that as the committee. there is some concern out there that basically the government in some form or fashion is involved in 75% of all mortgage-backed securities. 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 avoid any inflation down the road. basically the exit strategy is that when the time comes, we need to begin to raise interest rates. that's the usual way that the federal reserve tightens policy as a economy begins to recover. and the question is, will we be able to raise interest rates given the size of our balance sheet.

my answer is yes. first of all, as i mentioned earlier, many of our programs are short-term, can be wound down that will reduce the size of our balance sheet. secondly, and very importantly, our ability to pay interest on reserves means that we can raise interest traits by raising the interest rate we pay on the reserves because banks will not 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 problem 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. >>