exchange's affordable, that it is not an empty promise or requirement. we made a lot of headway. this is an extremely complicated part of the plan. we did not reach closure on it this morning. there are maybe one or two members that cannot come back this afternoon. we talked to the president today. he was just checking in to see how we were doing. i said, fine, mr. president. this is what we are working on. this is what we accomplish. he found it very encouraging. we appreciate it very much. we are actually moving ahead and will have an agreement. . .

>> republican senators are asking more questions -- that is not true. but everyone is asking a lot of questions. i am very encouraged. we have no choice but to keep going down this road. we allow senators to keep asking questions. everybody there really wants a bill. everybody there wants to reach an agreement.

we want to make sure we get this is right as we can get it. we do not want to be criticized. we're very concerned about the cost curve. we do want to make sure we are bending the cost curve and the right direction, make sure it is all paid for, no smoke and mirrors. sometimes, when you want to do it right, it takes a little bit of time. over and over again, we say, just one portion of this is a big bill. the trouble is, we have a whole bunch of big bills together. it is true. we will get there. it is going to take time, but we will get there. >> one senator told the hill that august is no longer a possibility. do you agree? >> of the leadership sets the

floor schedule. it would be up to senator reid. i talked to senator read about a half-hour ago. i would love to get this concluded very quickly, but i cannot guarantee it will be. that is a leadership call. i am not going to prejudge that one. >> you gave your president your best estimate, can you share that with us? >> i would rather not. >> in these negotiating sessions, democrats in the senate conference, what had these conversations been like? >> i had a lot of conversations with senators on the committee or not in this group. they're curious as to what is going on. they ask questions and i tell them that when we reach an agreement, i will sit down with

them. i am sure that they will on the other side as well. they will have a markup. i am confident that after the markup, all democrats and republicans will meet. we have to merge the two bills. senators should way and as they should. >> have you heard grumbling from people who are not in the room and did not know how long it is going to take? >> i have not heard grumbling, just concerned with this or that. i am sure there is a little anxious -- angst. i have done my best to reassure them. during this last spoke, they said, max, when will we find

out? i said, when we're ready to meet with everybody. >> would you take away from the decision of war and hatched to drop the talks thewarren -- warren hatch to drop the talks? >> i did not take anything out of it, really. they clearly want to vote for a bill that is going to pass, and they're clearly part of the team. they are under incredible pressure by some republicans who just don't want health care reform to pass for political reasons. they're very upset with the effort to pass. when this is all over, i think

they deserve the congressional medal of honor. they're wonderful senators. >> you worked a lot with doug in the midst of these negotiations. the white house sort of brought him into a meeting. some people have questioned his objectivity. should the white house -- >> if anybody calls it like it is, is doug. you cannot push him one way or the other. i met with him countless times. we need a bill here, can you burn the midnight oil to get your people to get the numbers out, what ever they are? i see no problem whatsoever. i think the white house just wants to do it right. they don't want to put pressure on him to bend it one way or the

other. it is clear you cannot persuade him this way or that way. thanks. i have a dinner schedule. >> you have dinner plans? >> not mine. i can cancel mind. senators have dinners. i want to see the president. it is yet 8:00? i do want to watch the president. i'm sure you will do , too. >> happy, happy, happy. well, we have been focusing on medicaid today in all of its complexity.

some of the staff has really done an excellent job of putting together additional options. we're going to go back in right now and see if we can agree on a framework for submission for additional scoring analysis. we're getting closer. i know there is frustration. i hear it from my colleagues. i will just say this. there are six of us in the room because we can't have 100 in the room. our job -- we are not the ciders. where the posers. -- we are not the the seiders --

deciders, we are the proposers. the six people in this room have been given the spots ability to put together a proposal. our colleagues will be able to debate, amend, change, approved, reject. that is the process. i absolutely understand the frustration of colleagues. they're wondering what the plan entails. we do not have agreement on a proposal. i just want to stay that -- i just want to say that i understand the frustration of colleagues who are wondering when we will produce a plan and wondering what the plan will include. i and a stand the feeling of not being in the room. most of my career was not in the

room. the point is, we are posers -- proposers, not deciders. they will have the full right to review, amend, alter, and ultimately decide whether to approve or reject. i will be happy to take a quick question or two. >> where the frustrations? >> largely from the press. [laughter] may be exclusively from the press. i am not hearing it directly from members, but i eat here the press telling me they are hearing it from members. >> if you guys do end up getting -- how tough of a jobless be to sell that deal to the democratic members of the finance committee? >> i think is going to be hard

to -- this is just hard. there is a reason this hasn't been done. this is really hard. on the other hand, the stars are more and alignment than they ever have been before. i think we are doing a very serious job of putting together a proposal to take to our colleagues for their review. >> have you made any progress solidifying an agreement on co- ops? >> we have this agreement, but nothing is agreed to until everything is agreed to. we had discussions on all of these things. until everything is concluded, nothing is. it would not be accurate for me to say that there is a final agreement. >> what is holding up the co- ops?

>> is not something particular to co-ops. it is the overall -- going through options after options after options analyzing and trying to put them together. it is more the overall plan isn't ready yet. >> senator durbin set up bill off the floor by august is not a possibility. is that a good thing for him to say? and you agree that that is reality now? >> @ think you know that i have never believed that that timeline was probable. i have always thought that it was unlikely given the enormous complexity. this is not like typical legislation. this involves every single

american. it involves one sixth of our economy. this is far more complex. it is not like a typical tax bill or a defense bill or even a budget. this has levels of complexity that are just way beyond typical legislation. i just don't think you can have a typical anticipation of how it is going to move. >> is the finance committee a realistic goal? >> i think it is. i can't really say what the operating premise is in terms of timing. it is in the hands of the chairman of the committee. >> how you feel about the white house calling for a briefing on health care? >> think it is great. i met with the president last week on friday and had a very detailed discussion.

i urged him to call in the director and others to get their view on how you most effectively been the cost curve. i think that is very good. >> what you think the president should be doing that he has not? what can do to help? >> i think he is being very constructive. he is talking to members individually, in groups, he is putting up ideas. he is having his people help with analysis. i think he is being entirely constructive. he is doing this in the right way. keep steady pressure, the move, get things done, otherwise things drift. at the same time, he has not

appear with a specific legislative proposal. he is letting the process work its will. he comes in with good advice and help with analysis. he is conducting himself at a very constructive way. >> are there more specific ideas on these big pieces. --? some people are frustrated by that. >> first of all, i think he has been, as i said, break constructive. he has had ideas in almost every part of this that he has shared and laid out. i did not think that would be a fair criticism. we got to go. >> coming up tonight, a house appropriations hearing on the fiscal 2010 defense spending bill. then, federal reserve chairman ben bernanke testifies before

the senate banking committee. later, another chance to see president obama's news conference. coming up thursday on "washington journal." a recap of the president's news conference and the health care debate with david hogberg. the minority whip begins his reaction to the president's remarks. and the deputy special i.g. of the tarp program. and later, a look at congress through the eyes of freshmen members. "washington journal" takes your calls starting live at 7:00 a.m. eastern. >> this weekend, watch 1997

extended interview with the light -- with the late frank mccourt talking about his pulitzer prize-winning book "angela's ashes." >> they passed a spending bill for the defense department that includes funding for the f-22 fighter jet, a move opposed by the obama administration. they totaled -- david obey of wisconsin shares this 20 minute meeting. -- chairs this 20-minutes meeting. that's david obey from michigan. live coverage here on c-span 3. good morning, everybody. >> good morning. >> mr. lewis. >> thank you, mr. chairman. harkening back to a day when we did all our work on a bipartisan

way, i'd like to this morning make two points. first one is to express my deepest appreciation for the work of mr. murtha and my buddy, mr. young. and then from there, i'd like to wish a happy birthday to mr. aiderhofl and mr. jet. happy birthday. mr. chairman, i yield back my time. >> mr. murtha. today we discuss a $700 billion bill, $128 billion for the war, fully funds the troops in the field. i think later on we're going to need more money. but they've done the best they could to figure out how much money they're going to need. we put extra c-17s in, but the thrust of this bill is to take care of the troops and the medical problems, to take care of the troops across the board.

we continually make sure that they have what they need. whether it's mraps, whether it's bradleys, whatever it might be. the other thing that we stress to the defense department, you can't keep spending money on research and not get anything out of it. we've got a couple programs where they want to cancel, and we're saying to them, wait a minute. wait a minute. let's not get too excited about this. let's get something out of this thing. we're trying to stabilize it so that we buy enough, whether it's ships or airplanes or trucks, we buy enough that we get a good buy. for instance, the c-17s, we don't get as good a buy when we put the money in as when they put it in for a long period of time. so we have a bill, which is finally crafted, which staff did a heck of a job. a couple things we still have to work out between now and full committee.

i was going to offer an amendment to adjust the f-22 but decided i couldn't get it together fast enough. so i couldn't do that today after what happened over in the other body. so today i'm going to have an amendment but that's it. basically we take care of the child advocacy, we take your wounded warrior, we increased the amount of money in health care, and we take care of problems that you have had. we had lot of suggestions from people. we appreciate them. we had them up to the last minute last night, we had suggestions and tried to take care of them up to the last minute. so this is a good bill and i appreciate the support of the committee for this bill. mr. chairman, thank you very much. mr. murtha spoke longer than he normally does, and -- but he -- we do our talking as we're producing this bill, and it's a

bipartisan bill. we worked together every day with the members of the subcommittee who are really outstanding members and the tremendous staff. it's interesting, a lot of the staff of this subcommittee were here when mr. murtha was chairman before. and then they -- we kept the same staff when i was chairman and when mr. lewis was chairman. we have a really great staff. they know what they're doing. so we produced a good bill. we're a little less than $4 billion under the president's request. we could have used that money because there's a lot of things that we should be doing that we're not, mr. murtha mentioned the f-22. that is a substantial issue, and i will tell you why. i remember one of the earliest session that's i sat with on the defense appropriations subcommittee as a fairly new member listening to a marine who said, we will fight anywhere our country sends us. on the beaches, on the battlefield, wherever.

just promise us that you will do everything you can to make sure that while we're fighting, if there's an airplane overhead, make sure it's an american airplane and not the enemy. and that's what the f-22 does. they're superiority so we have to deal with the f-22 later. part of the bill we will not discuss in open session today is the intelligence session. i want to just compliment, especially rodney friehlinghizen and norm dicks, the select intelligence oversight panel. and they attended a lot of sessions and did a great job in helping us make decisions on the intelligence section. now, mr. murtha has provided

all have access to, if you want to see it. but i want to close on a good news story, one that i hope will make you all feel good, and feel that what you do is important. on monday afternoon, beverly and i were visiting wounded marines at the navy hospital in bethesda. and as always, before we go in a room, somebody from the navy staff, a doctor will enter the room, talk to the patient and see if it's okay for us to come in. we don't just walk in cold. if the patient doesn't want a visitor, we don't go. anyway, the admiral that went in preceding us told this marine who we were, what we did, what my job was in congress. so when i came in, he said, i want to thank you for saving my life. i said, well, gee, thanks a lot, that sounds good to me but i don't know what i did to save

your life. he says, yes. he says you and your colleagues provided us mraps and he said on a particular patrol, there was a humvee that was hit with an ied and the four occupants were hit. he said we hit a similar ied, a much larger ied. we were in an mrap and none of us were killed. some of us were beat up pretty bad but we survived. we really appreciate what congress does to make sure that we have all of the equipment necessary to carry out our mission and to give us a little protection while they're doing it. and we have the responsibility on this committee, as well as the armed services committee, to look ahead. we don't know what tomorrow's combat situation might be. we don't know what the threat might be tomorrow. but we have, we, combined,

jointly, it's our responsibility to make sure that whatever that contin jensy is, that we're prepared to meet it. that our soldiers are trained properly, that they have the proper equipment, that they have the proper protective gear. and that's what this committee does. and i'm really happy to work with mr. murtha to make sure that we do look ahead. because like i said, we may be fighting a terrorist war today. we don't know where we go next. we don't know what north korea is going to be doing. we don't know what iran is going to be doing. so we have to think ahead and be prepared for whatever contin jensy might be. that brings me back to my final comment and the mrap story again. we could have fielded mraps a lot sooner than we did. the committee was prepared to move on the mrap and we did, once the department of defense told us that's what they needed. d.o.d. was a little slow getting the message to us. but when they did, we responded

quickly. this subcommittee, this committee, and the house and the senate. and so we're prepared to do the job that has to be done, and this bill goes a long way toward doing what we need to be doing to make sure the mission is accomplished, to make sure that the troops are protected. so thank you all for supporting this, and i'd like to just move the bill, but i think that would be out of order. >> let me take just one minute to say something on one of the issues in this bill. i'm in an unusual position because i normally am fully supportive of virtually every decision made by every subcommittee. but on this issue, i must confess i am considerably dubious about moving forward to fund the f-22, in light of the administration's opposition to it. they've made quite clear to me that they intend to veto any bill that contains funding for the f-22. and i think it would be

unfortunate if we wind up in a situation where the bill cannot move forward. i don't expect that to happen. i think that this issue will be worked out. but i think we're going to need some attitude adjustment on both sides before the -- before the issue is finalized. and i would hope in light of the senate amendment that we would recognize that conditions have changed in terms of support for that weapon system. mr. murtha? >> i have a matter, mr. chairman. the clerk will suspend and the gentleman will explain. what we've done say lot of explanations at the last minute, which people wanted to adjust things. we worked very closely together right up until this morning. >> gentleman, we agree with the amendment. >> in favor of the amendment by

saying aye. the ayes have it. are there further amendments? if not, the chair will obtain a motion. mr. kirk. mr. kirk, i guess i won't entertain a moment at this point. >> mr. chairman, under this legislation, we are following, i think, the wrong direction of the authorizing committee in which we are limiting the deployment of a european missile defense system, a radar to be located in the czech republic and ground based intercepters to be located in the -- in poland. when we look at the threat as it's emerging to the united states, much of our efforts have been directed to the growing

missile developments in the democratic republic of korea. and the system. i've brought a globe here because the standard map projection of the united states does not show the proper gee om tri for looking at missile defense. when we look at north korea and we look at the united states, and this ribbon would show, if you want to come up here later, that an attack by north korea on the united states involves over flight of southern alaska and the northern part of the united states. meaning that the two missile defense bases of the united states at ft. greeley in vandenberg are correctly aligned to eliminate the threat. most of us watched the north korean missile test just about eight weeks ago. so-called tay po jrks don sim.

it didn't work as well as the north koreans wanted and ended up in the middle of the pacific ocean. ironically, a far more successful test was carried out on february 2nd, with little press attention. in the modern era, we have a growing missile competition between two countries, north korea and the tape poe dong system, it's a satellite. on february 2nd,@@@@@@@ @ @ @ @n they were able to orbit their satellite. remember your orbital dynamics, if you orbit around earth, you can deorbit anywhere on earth. for most of us that what this very closely, the threat from the iranian system is now far

greater than the threat from the north korean system. sales of the iranian system are now far more potent than sales of the north korean system. and when you look on a global of the flight path between iran and the united states, you will see that the flight path lies united states, for example, new jersey, you will see that the flight path flies directly over southern poland with an ideal location for the czech republic. under this legislation, we are rescinding $114 million for the defense site of the united states which is directly in the path of the iranian flight path to the united states. without this system, and this is why a globe is so important, have you to defend the united states from california and from alaska. and as you can see, from this globe, they are very poorly

aligned. especially for the defense of the east coast. now, in the pentagon, whenever we see a missile launch, everybody gets a little nervous. because as you know, it takes less than a half an hour to transit the globe. and we would not like a future president ever to see that his only military option in response is the devastation of an attacker. you would much rather have the ability to bring down these reseptemberers. we are making what i think is an historic and tragic decision on behalf of future military commanders. without that european missile defense site, the options of a future president have become only a devastating attack. i would worry -- if i could just continue, i would worry that in the past, we have depended quite a bit on the rationality of the soviet leadership. but if we have the security of the united states depending on

mahmoud ahmadinejad not having a dream that the 12th imam has told him to attack the united states, then the only -- >> gentleman's time has expired. i understand what you're saying, i visited poland and the czech republic before and we'll take a look at it. i'd appreciate if you'd withdraw the amendment and we'll take a look at what you're talking about. >> i can count the votes here. this is an extremely serious topic involving just minutes to make sure the people of the united states can be protected. both the czech government and the polish government went to the wall, when they saw that the president had been elected, knowing of his views on this, they backed off. but this is really far more important than anyone's individual views. this is the future capability of the united states against a missile system far more capable than the north koreans. so i ask unanimous -- >> that objection, the amendment

is withdrawn. gentleman from oklahoma. clerk will suspend, the gentleman will explain. >> thank you very much. my amendment, i've had an opportunity to discuss it relates to -- it does three things, it directs the secretary of the army to the future combat system, it directs the secretary of defense, buckets for that by -- finally a report from the 90-day [ inaudible ]. the current system we have in power was designed in 1958 and

it's really a half century old faux. it's certainly adequate to our immediate needs in afghanistan and in iraq, but very questionable as to how adequate it's going to be moving forward. a soldier i talked to about this on the eve of the invasion of iraq, i happened to be down in our district and he was showing me the pile of [ inaudible ]. the same weapons we had 12 years ago, he said no, sir, we've updated it, we can change the chassis, we've got a better weapons system. the iraqi army thinks tare going to be fighting the same army in 1991, they're making a mistake. one more thing, sir, you know how much -- did you ever hear of a '57 chevy?

i said, yeah. he said you can sup it up, but at the end of the day, it's a '57 chevy. this gun is a '57 chevy and that's what we're talking about here, the ability to have standoff fire power. right now we're engaged in conflict with a dangerous enemy. but they've got an ak-47, some day we're going to fight another enemy that's got power like the f-22 today and that standoff power -- whatever puts men and women in combat frankly without a capable system the same as what they're facing on the other side of the yard, i just hope as we go forward we can have a discussion about this and include this in thinking l inin term about the military. >> without objection, the amendment is withdrawn. are there further amendments? if not, the chair will entertain a motion.

>> i move that the bill as amended be favorably reported to the house. >> those in favor say aye. >> aye. >> opposed, no. the bill is reported, i ask unanimous consent. we still have one other item that the clerk may be permitted to make changes, three days, and now, i have to pick up the proposed 302b changes -- the proposal before you makes three changes. first is to provide overseas contin jensy funding for the subcommittee of $128 billion, the second is the energy and water bill. the third change is to provide the bill of the program integrity funding $846 million and $1.9 billion funding adjustments pursuant to section

422 of the budget resolution. if there's not any discussion, those in favor say aye. opposed, no. the adjustments are made. [ inaudible question ]. >> not unless you -- no. all right? oh, that's right. again, the chair will entertain a motion. >> i move the revised section be approved. >> without objection, they'rea that's it, thank you very much.

>> coming out tonight, federal reserve chairman ben bernanke testifies before the senate banking committee. then, another chance to see president obama's news conference on health care. and later, house floor debate -- house floor debate on paygo rules. coming up thursday on "washington journal." recap of the president goes a news conference at the health care debate with david hogberg. then, congressman erick kanter, the deputy minority whip gives his -- eric cantor, the deputy minority whip this is a response. and the deputy special i.g. of the tarp program. later, a look at congress through the eyes of freshmen members.

"washington journal" takes your calls live starting at 7:00 a.m. eastern on c-span. on "america and the court's" on saturday, the discuss the last term and the cases that made the greatest impact here on c-span. >> q&a sunday, susan jacoby the public's ongoing fascination with the public trial of alger hiss. >> now the senate banking committee hears from federal reserve chairman ben bernanke. this is one of two appearances the chairman makes before the committee each year to assess the state of the economy and talk about monetary policy. the chairman discusses the use of taxpayer dollars to help the financial industry and the president's plan to give the fed a greater role in financial

regulation. chris dodd of connecticut shares this 2 hour 45 minute hearing. >> the committee will come to order, and let me welcome the chairman of the federal reserve. we have a rather full complement of senate banking committee members here this morning, so there is a lot of interested in having a good conversation with you this morning about the issues before our nation. i will begin with some brief opening comments, turn to senator shelby, and i will beg the indulgence of my colleagues to reserve their opening comments for the question. -- fo the question period. i suspect you will not dramatically change your testimony from yesterday to today. the most important part is the question. -- the question period.

i hope my colleagues will except that structure and move forward. -- will accept that structure and move forward. we're preventing -- we are presenting the my terry policy report. i would like to welcome chairman bernanke who has worked hard to address the enormous challenges during this very difficult time in our nation's history. address enormous challenges during this difficult time in our nation's history. let me just say to you, chairman bernanke, that concerns that i'll raise here this morning more go to the constitution of the firm and grappling with these many complicated issues. you have to go back to the first part of the last century to confront a time as schajing as this one has been. so i'm very supportive of the efforts you've been trying to make as the chairman of the federal reserve. but i have some serious issues

about the constitutional response. so i appreciate your testimony. if the success of our government's attempts to get our economy back on track would be measured by executive compensation or large financial institutions' bottom lines, then perhaps would be a today to celebrate. all leading economists believe these indicators show we have gotten into a catastrophe and recovery may be imminent. the recovery won't be real until main street. so today is a day to ask fundamental questions. when will working families in our respective states, respected in the committee members here as well as not on the committee. when will they start to see the effects of our work to restore the economy? today we need to receive the semiannual monetary policy report mandated by the 1978 full

employment act. if the goal is full employment, then the news today is grim. most economists and the fed itself believe that it could top 10% before the end of this year. meanwhile americans who have lost or worried about losing their jobs, their homes, their retirement security have watched as others reap the benefits of our government's response. they hear about a stock market rally and wonder if it's enough to gain the retirement savings they've wiped out. millions of dollars going to ceos of firms who caused the the meltdown in the first place. they hear about large financial institutions, large banks, bailed out with billions of taxpayer dollars and now reporting billions of dollars in

profits. they still can't get a loan themselves. or as a families worry about whether they can borrow the money necessary to send the child to college or buy that new automobile. it is critical for economic recovery. they're getting slammed by the same institutions, fees, and credit card -- stabilizing the housing market is key to stabilizing our economy. they're still having trouble modifying their mortgages as families are hit with foreclosure notices every day. mr. chairman, i appreciate the work you have done. on the monetary policy side of the equation, there are indicators we have seen in recent weeks. these positive indicators seem to be stuck at the top in the process. we've seen in recent weeks. these positive indicators seem to be stuck at the top of the process. it's not insignificant, the

accomplishment. stabilizing the economy and stabilizing the institutions is krit important. on the committee all work for the same people, that is the american taxpayer. when will we start seeing working families see the rally? their pay raise, their jobs being stabilized. what are we doing as the holding company supervisor as these recipients of t.a.r.p. money to ensure that we're serving the interest of the american people? these struggling people aren't ready for an exit strategy. first recovery must reach them. as we move forward we need to make sure to lay a strong foundation to reach every corner of our nation part of that will entail the regulation so the mistakes that got us into this mess aren't repeated. many of us here have called for

and the administration has proposed an independent consumer financial protection agency as part of the mission. the administration has also proposed expanding the fed's power over systemically important why does the fed deserve more authority when constitutionally it seemed to have failed to prevent the current crisis? the work you're doing, we all understand. that's not just a generous comment. we all look forward to continuing to partner with you in this effort. the financeers who engineered this kris aren't the reason we're here. the millions of families who are struggling and falling further and further behind. i hope they can be the focus of our attention today. so the basic questions i have for you is when will this recovery, when will this effort that we're making reach those

families who are facing foreclosures, people who have lost their jobs, worried about their savings, worried about their long term retirement security, what are we doing as the feds to help see to it that they are going to reap the benefits. as we talk about the large institutions with the powers that already exist. we ask the institutions to make a difference. the fed has the authority to make the difference. many are asking why that is not being authorize. with those in mind, let me turn to senator shelby for opening comments, then we'll get directly to your testimony and engage in this conversation of how we not only deal from the top, which is critically important, but also those who depend on the the institutions, recognizing the value of what consumers and small businesses need. why we need to do more to assist

that side of the equation as well. senator shelby. >> thank you, mr. chairman. welcome back to the committee, chairman bernanke. the purpose of today's hearing is to overshe the federal open market committee's conduct of monetary policy. there's no doubt that we're in a very challenging economic environment. the economy is extremely weak. bank lending remains sluggish. unemployment is rising rapidly. the unemployment rate stands at a 26-year high. we have gone to great lengths to put liquidity in the economy. in small businesses, however, are desperately seeking capital from the financial sector and have not been able to secure it. i've heard that from a number of my companies in alabama who have been abandon by all their traditional funding providers for years and years.

while it's important to bring stability to the financial sector, if the part of our economy most responsible for job creation, that is small business, cannot obtain funding, mr. chairman, such stability i believe will be short lived. going forward the measure of success will hav to include whether main street businesses are retaining or adding jobs. while i understand that they cannot by itself solve all of our economic problems, the effective conduct of monetary policy is a necessary condition for economic recovery. therefore today i hope to hear from chairman bernanke on whether fomc will need to take additional steps to revive our economy. if so, where. interest rates remain at record lows. i'm interested to hear what other specific actions they can and are prepared to take if additional easing becomes necessary. in addition i would like to know what chairman bernanke can be

done to spur lending to small and medium sized businesses. while monetary policy is the central focus of the hearing we must also exam the fed's performance as a bank regulator as well as his participation in bailouts over the last few years. many ov the large financial companies were also subject to the fed's regulatory oversight. while they were regulated by the feds they were allowed to take great risks off their balance sheets. when the housing bubble burst, those risky positions were exposed and firmed had to scramble to shore up their finances. the credit crunch quickly followeded. i'm not aware of any effort on if part of the fed prior to the crisis to question or require some such firms to take any

action to address the risk in which they were taking. this effort could have resulted in a significant reduction in overall bank capital levels. i wonder where we would be today if the fed had been able to act on its desire to eliminate the leverage ratio. cannot imagine a scenario where banks would be better with less capital sesz as the one we're currently experiencing. if the fed had conducted its regulatory oversight with greater diligence, i do not think the financial crisis would have achieved the depth and scope that it did. in the end it was the failure, i believe of the fed to adequately supervise our largest financial institutions that required the deployment of the monetary policy resources to stop the financial disaster. it should come as no surprise that congress is taking a closer

look at the fed and reconsidering its regulatory mandate, thank you, mr. chairman. >> thank you, senator shelby. mr. bernanke, welcome to the committee. >> i am pleased to present the federal reserve semiannual monetary policy report to the congress. aggressive policy actions taken around the world last fall may well have averted the collapse of the global financial system. an event that would have had adverse and protracted consequences for the world economy. even so the financial shops that hit the economy in september a and october were the worst since the 190s. they pushed the economy in the deepest recession since world war ii. the u.s. economy contracted sharply in the first quarter of last year and the first quarter of this year. more recently the pace of decline seems to have slowed significantly and final demand and production have shown signs

of stabilization. the labor market has continued the weaken. consumer -- due in the first six months of 2009. to promote economic recovery and foster price stability the federal committee last year brought target to the federal funds rate to a historically low range to 0 to 1.4% where it remains today. we an tisz pate that economic conditions are likely to warrant maintaining the federal funds rate at exceptionally low levels for an extented period. at the time of our february report, financial markets were under tense strains. equity prices, risks for private borrowers at elevated levels and important financial markets essentially shut. the past few months have seen notable improvements. for example, interest rates spread to short term money

markets, such as the inner bank market and commercial paper morkt have continued to narrow. the extreme risk aversion from last fall has seemed to ease somewhat. reflecting this greater investor, corporate bond issuance has been strong. equity prices have recovered to roughly the levels at the end of last year and banks have raised a significant amount of new capital. many improvements can be traced to policy actions to improve the flow of credit. the decline in inner bank rates and spreads was facilitated by the federal reserve to ensure financial institutions have access to adequate amounts of short term liquidity.

interest rates dropped significantly as a result of the facilities the federal reserve introduced last fall for the market. our purchase of agency mortgage backed securities and other longer term assets have helped lower mortgage rates. we have virs classes of consumer and small business credit. earlier this year the federal reserve and other agencies undertook the supervisory program to determine the capital needs of the largest financial institutions. they appeared to increase investor confidence. the majority of institutions have raised equity in public markets. on june 17th ten of the largest u.s. bank holding companies, all but one of which participated, repaid a total of nearly $70

billion to the treasury. consumer spending has been relatively stable so far this year. the decline in housing activity appears to have moderated. businesses have continue to cut capital spending and lick l liq. although the recession and the rest of the world led to a steep develop in the demand for u.s. exports, this drag in our economy also appears to be waning as many trading partners are also seeing signs of stabilization. despite these positive signs the unemployment rate has continued a steep rise. job insecurity is likely to limit gains in consumer spending. the possibility that the recent

stabilization will turn -- board members and reserve bank presidents compared economic projections covering the years 2009 through 2011. participants generally expect after declining in the first half of this year output will increase slightly over the remainder of 2009. the recovery is expected to be gradual in 2010 with acceleration in activity in 2011. the projected declines in 2010 and 2011 would leave unemployment well above fomc participants views of the longer run sustainable rate. all participants suspect inflation will be lower this year than recent years. most expect it to remain subdued over the years. in light of the substantial economic slack in the inflation pressures monetary policy remains focused on fostering

economic recovery. accordingly as i mentioned earlier the fomc believes that monetary policy will be appropriate for an extended period. however, we also believe that it's important to assure the public and the market that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner. avoiding it could lead to a rise in inflation. we've been devoting similar and we are confident we have the necessary tools to implement the strategy when appropriate. to some extent our policy measures will unwind automatically as the economy recovers and financial strains ease. because most of our facilities are priced at a premium over normal interest rates spread. indeed total federal reserve credit extended to banks and other market participants has declined at the end of 2008 to less than $600 billion.

reflecting the improvement in financial conditions nevertheless, should economic conditions warrant a tightening of economic policy before this process is complete, we have a number of tools that will enable us to raise market interest rates as needed. perhaps the most important tool is the authority of congress granted to the federal reserve last fall. raising the rate of interest gives us substantial leverage over the federal funds rate and other short-term interest rates because banks generally will not supply funds to the market and interest rates significantly lower. indeed, many foreign central banks helped set a floor on the market interest rates. .

means the only tool from the system by conducting reverse agreements in which we sell securities from our portfolio with an agreement to buy them back at later date. reverse purchase agreements which can be executed with primary dealers, government enterprises and a range of other counterparties are an additional method of managing the level of bank reserves. they could also put pressure on longer term interest rates by expanding supply of longer term assets. in some we are confident that we have the tools to raise interest rates when that becomes necessary to kpaef objective of maximum employment and price

stability. our economy and financial markets have faced extraordinary near term challenges and strong and timely actions to respond to the challenges have been necessary and appropriate. i've discussed some of the measures taken by the federal reserve to promote economic growth and financial stability. even as important steps have been taken to address the recession, maintaining the confidence of the public and financial markets requires that policymakers begin planning now for the restoration of fiscal balance. prompt attention to questions of sustainability is critical because of the challenges associated with the retirement of the baby boom generation and the continued increases in the cost of medicare and medicaid. it will require difficult choices but postponing the

choices will only make them more difficult. agreeing on sustainable paths now for the considerable near term economic benefits in the form of lower long term interest rates and increased consumer and business confidence. unless we demonstrate a strong commitment to fiscal sustainability we risk having neither financial stability nor durable economic growth. a clear lesson that we must make our system more effective. both in the united states and abroad. not just the safety and soundness of individual institutions. that includes formal mechanisms for identity and sealing with systemic risks. stronger security capital for lorj, complex and interconnected firms.

the enhancement of supervisory oversight to all financial organizations that propose a significant risk to the overall financial system. an enhanced regime for the constitutions that would allow financially troubled systemically important institutions to be wound down without disruption to the financial system and the economy. enhanced protections for consumers and investors in the financial dealings. measures to assure we are resilient and practices related do not pose risks to the financial system as a whole. and improved coordination across countries the federal reserve has taken and will continue to take important streps to strengthen supervision, improve

resiliency of the financial system, and to increase our oversight. for example, we are expanding our use of horizontal reviews of financial firms to provide a comprehensive understanding of practices and risks in the financial system. we also remain committed to carrying out our responsibilities for consumer protection. the federal reserve has written rules providing strong protection for mortgage borrowers and credit card users among substantive actions. later this week the board will issue a proposal to include new consumer tested disclosures as well as rule changes applying to mortgages and home equity lines of credit. the proposal includes new rules governing the compensation of mortgage originators. we are expanding our activities to include reviews of consumer clins in nonsubsidiaries. our community affairs and verj areas have provided support and

assistance for organizations specializing in foreclosure operation. the federal reserves combination of expertise payment systems and supervision positions us well to protect the interest of consumers in their financial transactions. we look forward to discussing with the congress ways to further formalize our institution's strong commitment to consumer protection. finally, the congress and the american people have a right to know how the federal reserve is carrying out responsibilities and how we are using taxpayer resources. the federal reserve is committed to transparency and accountability in its operations. we report on our activities in a variety of ways, including reports like the one i'm presents to congress today, other testimonies and speeches. the fmoc releases a statement after each meeting and details of each meeting by minute.

we provide the public with detailed annual reports of the financial activities audited by an independent public accounting firm. we publish a complete balance sheet each week. we have recently taken additional steps to better inform the public about the programs we have instituted to combat the financial crisis. we expanded our website to bring together already available information as well as considerable new information on our policy programs and financial activities. in june we issue ad monthly report that provided even more information. including breakdowns of our lending and other facets of programs established to dres the financial crisis. the congress has recently discussed proposals to expand the authority of the gao over

the the federal reserve. the federal reserve is already subject to frequent reviews by the gao. the gao has brought authority to our operations and functions. the congress recently granted them new authority to conduct audits of the federal reserve under the authority provided by section 13.3 of the federal reserve act. including loan facilities provided to or created for aig and bear stearns. they have the right to audit our health program, which uses funds from the troubled assets programs. in doing so the congress carefully balanced the need for public account nlt with a strong public policy benefit that flow from maintaining an appropriate degree of indpengs to the banks in maintaining monetary policy.

financial markets in particular would see a review in these areas to the gao as a serious weakening of monetary policy independence. because gao reviews may be initiated at the request of congress, reviews or the threat of reviews in this area to be seen as efforts to try to implement monetary policy decisions. a perceived loss could raise fears of future inflation. leaving to hire long term interest rates and reduced economic and financial stability. we will continue to work with the congress to provide the information it needs to oversee our activities effectively. yet in a way that does not compromise monetary policy independence. thank you, mr. chairman. >> thank you, chairman bernanke. i'll ask the court to put on seven minutes on the clock. we'll try to watch it carefully. let me just begin by asking you

what recommendations you would make. the unemployment rates are troubling. the highest in more than a quarter of a century. indications they may jump up baseding on economists looking at the situation. what recommendations do you have as chairman of the federal reserve that we might take that you should take in order to stem the tide. what are the looming problems out there? the consumer borrowing practices. consumer debt issues are looming as well. what are the problems you see coming along? for instance, are you considering extending the talp program beyond the expiration? i think it's in december, if i'm not mistaken. and if that will extended to accommodate the problems in commercial real estate.

what recommendations would you give us to start to deal with the other side of the equation? can you mention some of your statements? >> certainly, mr. chairman. on unemployment, that's the most pressing issue. both the federal reserve and congress have taken aggressive actions to stimulate economic activity. i'm hopeful we're seeing stabilization in the economy. beyond that the congress has already extended unemployment insurance to help those without work. people without work for extended period may lose their skills. they find themselves with accuracy skis and inability to find work once the economy has recovered. so i would call to your attention the possibility of

expanding training and other programs to help people maintain the skills or develop new skills as needed to enter new industries. i believe this is one of the most difficult and challenging parts of our task at this point. on commercial real estate we agree this is one of the more difficult areas. during the last few years while residential investment was declining sharply, commercial real estate was actually pretty strong. we have seen now in the last six months or so that vacancy rates are rising, rents are falling, prices are falling, and financing divisions have gotten a good bit more difficult. we are working with fwanks in the same way they should work out defaulting mortgages for residential borrowers. it's in their interest to make anxio arrangements to work out problems as well. many banks will be facing extensive amounts of challenges

going forward. # if you know, we have recently added to the list of assets that we are supporting both new and legacy commercial mortgage backed securities in an attempt to open up the market which has been an important source of financing for this area in the past. it's early yet to know how much effect that will have. we were encouraged by the effects on other areas. such as consumer lending and small business lending. we currently have an expiration date of december 31st. we will be monitoring the situation. if markets continue to need support we will be extending the final date of that program. >> and you have the authority to do that? >> we don't need action. we are using the authority to require us to make a finding in unusual circumstances. we would have to continue to believe that financial markets were in essentially still some distance from normal operation.

if they were normal operation it would be diflgt. >> i appreciate the answer on that. i appreciate the steps you're taking on dealing with credit cards and dealing with the residential mortgage market. so don't misunderstand what i'm saying in terms of what you responded to. obviously a crisis is emerging. there's a history of the fed deeply troubling to me when it comes to consumer protection. 1975 the fdc act which gave the authority of the fed to deal with protecting consumers for unfair deceptive practices. even as late as 2001, when the fdic wrote to the fed urging there were problems that they needed to respond to. we've all talked about listening to jim bunning, we talked about the 1994 act. the hope of legislation. that we went 14 years before the fed, under your leadership, stepped up and responded to that situation with a series of regulations. there seems to be pattern of

behavior over the years that would lead us up here to@@@@@@#n the consumer issues that have been hammered by the problems in the residential mortgage market and consumer products. give me a reason why you think this is something i should be less concerned about given this type of behavior. i>> i understand your concern. if we invoke authority to broaden the scope of high-cost loans, but we were not quick and aggressive enough to address consumer issues earlier in this decade. i agree with that. we have demonstrated the past few years we have the capacity, ability, expertise, range of abilities, and in complement with other activities to be effective when we are working in that direction. my recommendation to you to consider would be to ask whether

there are steps that could be taken to strengthen the commitment of the federal reserve so we could be strongly committed to this area in the future. taken to strengthen the commitment of the federal reserve to be strongly committed to this area in the future. a few suggestions i would make. one would be to put consumer protection in the federal reserve act along with full employment and price stability as a major goal of the fed. the second step would be to require the chairman to come before you or another committee, at least once a year, present a report in the same way that we do for my trade policy, on our consumer protection steps. adopt a system of hearings or sufficiency reviews to allow the public to see what steps the fed was taking and provide input to make sure actions are being adequately taken in addressing problems. and yet another possibility would be to upgrade the strength in the consumer advisory counsel to give it a higher, stronger status and ability to meet with the board on a regular basis.

some steps could strengthen the framework to address the legitimate concern about the long term commitment of the fed to this particular area. >> let me jump to this issue involving the power that the fed presently has with the bank holding companies. all of us here, we go back to our respective states. and we get an earful. on a daily, hourly basis. about the unwillingness of these lending institutions to provide the necessary credit at a critical call time, when businesses are out there asking for it and demanding it. there seems to be no response at all. we can jawbone on the issue. the fed has the power to exercise greater influence. why is that not happening? why aren't we getting more support in order to demand the institutions be far more responsible to the demands of industry out there relying on the institutions to expand and grow and help recover? >> the first order of business was to avert the collapse of the

schl. that was a very important step. we did chae that. the system appears to be much more stable. it's still challenged. some banks are still short of capital. other banks are concerned about future losses. they're concerned about the weakness in the economy and the weakness of potential borrowers. so there are legitimate concerns that banks have. that being said, the fed and the other bank regulators have been very clear that banks should be making loans to credit worthy borrowers. it's in their interest, the bank's interest, as well as in the interest of the economy. and we're working with banks to make sure we do that. we are seeing improvement over time. we're seeing stabilization in the terms and standards that banks are applying to borrowers. and i do expect that we'll see continued improvement. but we understand that issue. and we are trying as best we can to support bank lending through measures such as the talp, that

we will discussed. >> i would hope you might make that earlier rather than waiting until late fall. >> chairman bernanke, i believe myself that monetary policy decisions by the fed should be kept outside of political consideration. independently. it also seems that the fed owes a very expensive view of these activities, that it considers to be monetary policy actions. i assume this is done in an effort to expand the range of things subject to limited congressional oversight. would you support an independent review perhaps by the gao so that we can establish a clear line as to what must be kept independent and the what should get more securityny scrutiny?

>> our view is that the congress should have the ability to oversee all aspects of our operations, including whether or not we are -- we have the appropriate financial controls. whether we are lending on a good basis of collateral and so on. we really need to work with you on that. we do think the congress has the right to see how we're using taxpayer money. where we're concerned is that the congress would be intervening in our specific policy decisions related to monetary policy in the economy. outside the area of policy determination we are quite open toing with you and the gao to determine appropriate oversight. >> your monetary policy report notes rather casually that

nontraditional monetary policy actions employed by the federal reserve since the onset of the current financial turmoil have resulted in an expansion of the federal reserve's balance sheet. from 918 billion at the end of 2007 to over 2 trillion last week. by categorizing these as nontraditional monetary policy actions, good choice of words, are you suggesting that actions by the feds that have more than double the size of the fed balance sheet are beyond congressional securityny? you see where we're coming from? >> yes. senator shelby. so the gao has already been given access to rescues. they already have access to the talf. which is a major program. i think we willing to extend gao

access to any extraordinary program with the focus being on r operational integrity and making sure we're protecting the taxpaye taxpayers' money. we're nervous when they second guess our monetary policy decisions. all those things are appropriate for congress to oversee. >> i like to get into something you've talked about on the house side. on a number of occasions that i don't believe we've heard yet. that is the bank of america merrill lynch merger. what really went on between you, senator paulson, the ceo -- secretary paulson, former secretary paulson, and mr. lewis. i guess still currently the ceo of bank of america. there's been a lot said. a lot of charges both ways.

some that you and secretary paulson threatened mr. lewis. i would like to hear in your own words what went on there. that controversy has not gone away. >> he saw no villains in the story. i don't think anybody the in th there's no one in that story who didn't behave appropriately and in their appropriate role. you should remember that the way this became even an interest of congress was the report from attorney general cuomo that said mr. lewis, that we, mr. secretary and i had urged him not to disclose material which he was supposed to disclose under s.e.c. rules. he clarified one oath that no one had done that and he had been solely in control of his own disclosure decisions. that eliminated the only issue

that had only legal consequence as far as i could see. nonetheless, the committee proceeded to collect emails and materials and look for whatever possible problems they could fine. in fact, as i've said in my testimony, we were dealing with a very difficult situation where on one hand we wanted to make sure we respected the rights of mr. lewis and his shareholders. on the other hand, we wanted to make sure that the financial system was stabilized and protected. i think we achieved that. we did that in a way that was fully legal and fully ethical, in which mr. lewis also performed his necessary fiduciary duties with respect to his company and the outcome has been very successful. both companies have been stabilized. merrill lynch has been contributing to the profits of bank of america. the overall financial system has been stabilized.

the outcome was success florifui don't think there was anyone who broke any law or ethical code as far as i could see. >> you see the conduct of secretary paulson, your conduct and that of mr. lewis was all above board? >> yes, sir and with good intentions. >> thank you mr. chairman. >> thank you, senator shelby. senator johnson. >> welcome chairman bernanke. as you know, this committee recently heard testimony regarding the possible creation of a new federal agency with the specific purpose of consumer protection from dangerous financial products. the creation of this agency would take considerable protection off the fed's plate, while wanting the fed to concentrate on other areas of

responsibility. do you feel that the fed has been effective in protecting consumers and would this agency be more effective? >> senator, as i indicated, i think the federal reserve in the last three years or so has demonstrated it can be very effective. we have a lot of expertise which bears on consumer protection. we have used novel approaches to develop good approaches to solving these issues. so, i defend the record of the federal reserve in recent years and as i reiterate what i said to the chairman, that i think with some additional steps to strengthen the commitment of the federal reserve to this area we can maintain that commitment going forward. i also don't think hat the consumer protection function is in anyway detracting from our other activities. it is complimentary to our bank examination activities when we

go in and look at a bank, we do one exam, both for compliance, consumer compliance and safety and southernness and oversight and many things we look at such as underwriting standards. that being said i understand, i agree with chairman dodd that the federal reserve did not do all it should have at certain times in the past and i understand why some would. want to see a new agency that would be fully committed to this area and i'm not criticizing that. i'm simply saying from the federal reserve's perspective we believe we can continue to do good work in this area. >> in your view, does the president's proposal allocate costs fairly between large and small financial institutions, given that most community banks and credit unions had a large role in the creation of the crisis? >> if you're referring, senator,

to the fund or the cost of resolving failing financially credit firms, my understanding of the proposal is that assessments would be based on non-insured liabilities. so in principle any bank holding company or any, almost any financial company might be subject to assessments to help pay for an intervention when a critical firm is failing. small community banks, most of their liabilities are insured, their deposits, for example, and so the portion of their liabilities which would be subject to an assessment would be relatively small, so i would magazine that the bulk of the cost would be borne by larger banks and you could make the cost progressive and put a heavier weight on the assets and

liabilities of larger firms. i do think that's an important issue and i do think it would be appropriate for larger more systematically critical firms to bear their fair share, obviously, of the costs of resolving any systematically critical firm. >> there's been speculation in recent weeks of the economic stimulus package that was ena enacted in february and if enough has been done to boost or economy. in your judgment is the stimulus package mitigating some of the effects of the economic crisis and are there additional principle policies responses that congress can tame to help the current economic siation? >> based on our economic analysis which draws heavily on previous experiences, you know,

we --@@@@@ @ @ @ @ @ @ @ @ @ @ it should relieve budget pressures and allow them to spend more on services that they would otherwise not be part of the economic presumption is there would be some effect on the activity and spending from a fiscal package. that being said, at this point, less than a quarter of the moneys have been dispersed, and probably less than that have been put into action, spent, and so i think it is somewhat premature to make a strong case one way or the other in terms of the impact of the program and i also think it is premature to consider an additional package at this time. with respect to strengthening the economy, i think, although the impact is in direct, i think

regulatory reform should be a high priority. although the impact is indirect, i think financial regulatory reform should be a high priority and this committee will make sure to make sure our financial system is stable and able to provide credit to the economy in the future. >> finally, we have repeatedly heard testimony in this committee that families and investors will continue to be weary of the housing market until a bottom can be found. has the mortgage market finally hit bottom? >> it's difficult to know. we've had false bottoms before. but the reason data had been mildly encouraging. we've seen demand fairly stable now for some months in terms of housing. we've seen some increase, actually, in construction and permits. the data on house prices, there are a number of different series. they don't always agree but it seems to be at least for the

moment some leveling off in house prices and, of course, in part because of the federal reserve actions mortgage rates are a good bit lower than they were last fall and, indeed, housing affordable right now is the highest it's been in many, many years. there are some positive indicators on the housing front. that being said, we still also have problems of foreclosures coming on the market which will put downward pressure on prices. we can't give a guarantee that the price declines are over, but we are seeing a few positive indicators in the housing market. >> thank you, chairman bernanke. >> thank you. >> thank you very much, senator johnson. senator bennett. >> thank you, mr. chairman. welcome, chairman bernanke. appreciate your service in a time of great stress and difficulty. appreciate your willingness to hang in there and try to remain as calm and serene as you can.

when we heard these discussions a year ago and we heard you first with bear stearns and thought that was over and then we had additional problems all the way through, through it all, the one overriding principle that motivated me was if we're going to get stability in the market in these very difficult times, we have to inject public capital or sovereign capital, if you will, into the market to produce stability and then as quickly as we can, we want to remove that sovereign capital so that private capital can come in and fill the vacuum, and that's the 50,000-foot view of what it is that we've been trying to do. now you talked about the difficulty with commercial real estate and the potential that it could be as bad as the housing

difficulty. i've heard that there's currently as much as $450 billion of private capital waiting to be invested in financial institutions and that is a substantial amount of money. the question is why is the private capital waiting on the sidelines? do you have any sense of that? >> well, senator, we've had some recent success in this area, as you know. the federal reserve led an interagency evaluation of 19 large banks simultaneously, which was an enormous effort, i must say in the so-called stress test, and what that did, apparently was give the market some more confidence about what the eventual losses would be and what these firms needs for capital would be in the future. as a result, direct result of those stress tests, virtually every one of the 19 firms was able to go out and raise private

capital and about $70 billion of government capital has been repaid. what the private capital is waiting for is greater clarity and assurances both about the state of the banks, their potential losses, but also there's a lot of uncertainty in the economy and if the economy has looked better and stabilized somewhat the credit markets in general have improved and i think that will lead to more confidence in the banking sector as well. i'm not sure what step we can take other than try to provide as much clarity as we can to the markets so they will under our policies and the balance sheets of the banks and give them every opportune to inject capital. obviously they are waiting for the bottom, for the sense okay this has now stabilized. the concern about commercial real estate suggests it has not stabilized. now, wouldn't it be true that concern -- okay, if we're not at bottom, public money will still

come in. that there's still money to come from the fed, or come recycling t.a.r.p. money will come in so we'll wait on the sidelines in addition. wouldn't it be a further signal to the public money the time to come in if statements could be made that this is the end of the public money that would be available? >> well, the stress test did that to some extent. we did a two year forward looking analysis and we included commercial real estate, all different categories of assets and tried to project loss rates and we concluded for the banks that passed the test we concluded without new public money and with these heavy losses still to come, that they would at the end of two years still well be well capitalized. that was as much of an endorsemen we could. we can say no public money will not come in under any circumstances because there could be situations of critical firms for one reason or another

are on the verge of failure and we need to consider whether or not the cost to the broad system of allowing a disorderly failure outweighs the cost of putting more government capital in. it's not fair to say there's no more capital under any circumstances but there are institutions which seem to be in a situation where they are unlikely to need any further government assistance. >> looking at the economy as a whole, getting into the r-shape, w-shape, u-shape or l-shape kind of thing, we've seen inventory liquidations, and that was inevitable when the whole world economy fell off the cliff there were a lot of people who had excess inventory and they liquidated it and there by did not help stimulate the economy. now the liquidation seems to be over in many areas in the world,

so new manufacturing, new products have to be produced to meet the demand. my sense is that in the contracted world we're facing, the demand is not at the level that it was before, and that argues for more of an l-shaped kind of circumstance, yes, we hit bottom but what signs do we see that we're going to come back up, particularly if the american consumer, which is the driving force really for the whole world, because the economic model, the chinese and the indians and the koreans and so on, the japanese are following, let's produce to sell to america. and if the americans can't afford to do it or the americans aren't willing to do it at the same levels they were before, the whole world economy remains in kind of an l-shaped circumstance. could you respond to all that and give us your sense of where we are with respect to inventory

liquidation and further manufacturing consumption? >> yes, sir, you're absolutely right inventory liquidation is not complete but substantially advanced and that will be a support to production both here and perhaps even more so abroad which will create a stronger global economy which will be helpful indirectly. we expect recovery and still a great deal of uncertainty but we expect recovery to start off relatively slow and in part because of the consumer who is facing a damaged balance sheet, still has high debt on the balance sheet, wealth has been reduced by housing and equity price declines. so, we don't expect the consumer to come roaring back by any means particularly with the labor market in the condition that it's in. so the american consumer is not going to be the source of a global boom by any means. on that very topic, we're

continuing to encourage our trading partners in asia and elsewhere to understand and i believe that they do, that they need to substitute their own domestic spending, their own domestic demand for american consumers as the engine of growth in their economies and we're seeing, for example in china with their large fiscal package and their attempts to strengthen their infrastructure spending, attempts in that direction. our anticipation is for a recovery that will start slowly, begin to pick up speed over time but it depends very much to the extent consumers can get comfortable with their financial situations going forward and also to the evolution of the labor market. >> thank you very much, senator. >> thank you, mr. chairman. thank you, chairman bernanke. as senator dodd pointed out in his comments the real measures for most americans for success are jobs that are stable and housing prices that have

stabilized. you understand that. but, had we not taken action, the congress and t.a.r.p. and federal reserve with their programs, health and other programs, where do you think we would be with respect to the average americans with access to credit, jobs, et cetera? >> senator, it's hard to get credit for something that didn't happen. but in september and october i believe we faced the worst global financial crisis since the 1930s and including the 1930s beyond the crisis of lehman and merrill and so on. in mid-october we faced a global banking crisis where not just the united states but other countries were on the verge of the collapse of the banking system. there was a loosely coordinated effort around the world involving injection of capital, provision of guarantees, purchase of distress assets,

which succeeded in stabilizing the global economic system in mid-october which set the basis for the slow stabilization of the financial system recovery that we've seen since then. by the way, there's so much focus on aig and the interventions here but there's been about a dozen similar interventions around the world so we're not ta lone in that respect as other countries have moved in to protect and avoid the collapse of systematically critical firms. i believe if those actions had not been taken, if the t.a.r.p. was not available to prevent that collapse, i believe we would be in a very, very deep and protracted recession which might be almost like a depression. i think much, much worse than what we're seeing now. the situation i don't want to understate. the situation is very poor. unemployment rate is high. americans are suffering. but i do believe that we have a much better situation today than we would have if we had seen a

collapse in the global financial system last october. >> mr. chairman, let me focus on the point you just made about unemployment. . 540,000 americans will exhaust their unemployment benefits by the end of september, 1.5 million will run out by the end the year. we understand this is a central problem, maybe a systemic risk. would you extend unemployment benefits? >> i urge you to look at the unemployment problem. i think one issue that you should at least think about, maybe different ways to extend unemployment insurance, should thereabout a training component as i mentioned to senator dodd. clearly there are a lot of people who are unemployed for significant periods of time through no fault of their own, and i do think we need to provide them some kind of a support and i hope some way to continue to remain in touch with the labor market and developing new skills so that as the economy does begin to recover there will be productive workers once again.

>> mr. chairman, we're in the midst of a very important debate on health care. let me ask you, if the current system persists, if there's no change, and there are many versions of change, do you see that as imperilling economic growth and ross pert going forward? >> we have a very significant problem which is that medical costs have been rising at about 2.5% a year faster than per capita income for some number of years. the medicare trustees just assumed that that difference would go down to 1% and even so, even with that magical reduction in cost increases they still see an enormous $35 trillion unfunded liability for the federal government. whether we stick with our current general system, whether we adopt a new system, i'm really not qualified nor is it

we need to address increasing cost. any program that is undertaken should look to how we're going to get control of costs so would not bankrupt -- so it will not bankrupt our government and economy. >> would you agree that action now is probably necessary, not with just access and affordability, but the whole range of issues? >> dara are multiple issues, access, quality, and others, and everyone would agree there are a number of improvements that could be made. of course, congress is looking at that and i encourage you to continue looking at ways to improve our health care system. again, i come back to the cost issue, which is the most relevant to the broad economy in the fiscal stability of this country and i urge you as you look at other aspects of health care reform that you keep costs on the front burner.

it is very important to achieve. your keep costs on the front burner because it's very important to achieve. >> mr. chairman, we'll engage shortly in a debate about systemic regulation, and i know you're interested in not only the debate but the topic. one of the things looking back we discovered is we did not have a coordinated mechanism to evaluate risk to the system. we didn't anticipate the risk, et cetera. in that context, what would you describe as the systemic risk that we face today? >> well, first let me agree with what you said is that our system was two siloed, too much looking at individual firms, individual markets, not enough function, not enough attempt to look at the entire market and so a more macro prudential approach is very valuable. the systemic risk today, i

think, come from the fact that the financial markets are still unstable, we have some areas like commercial real estate which pose concern. they could cause problems in a large number of banks. we have foreclosures and their implications to the housing market so we have a number of very clear stresses. in this case they are not hidden problems, this is a clear threat to the recovery and we're, of course, trying to deal with those. going forward i do think it would be a good idea to have some sort of mechanism to look broadly across the financial markets to establish whether there's some new systemic risk involving and what measures should be taken to address that risk. >> thank you, mr. chairman. thank you, mr. dodd. >> thank you for being here, mr. chairman bernanke. lately the fed has spent a lot of effort fighting transparency and a real audit. when you were in front of this

committee begging for t.a.r.p. you promised transparency but haven't delivered. yesterday we learned from the i.g. on t.a.r.p. that nearly $24 trillion -- i said trillion dollars of support had been offered or has been offered including $6 policy 8 trillion by the federal reserve. in your statement today you again said how important transparency is. but you still resist fully opening your books. i understand your concern about the fed's independence, but you are the one that threw away the independence by acting as an arm of the treasury in engaging in fiscal policy. now here are the questions. one, would you rather have an audit of the fed or give up all of your nonmonetary policy

functions? >> we'll work with you on an audit to fed. i want to respond to the t.a.r.p. that number makes all kind of assumptions which are not realistic. >> they are not our numbers, sir. so, the i.g. is in charge of those numbers. so, whether you want to fight with the i.g., that's your business. don't fight with me about it. >> senator, to answer your question, i'll be more than happy to work with the congress to give access to all of our operations relating to how we use taxpayer money, how we secure the loans, our financial controls, all those things to make sure that you're comfortable that we're protecting taxpayer money. where i am resisting is congressional intervention in monetary policy decision making which i think -- >> no one is asking for that. >> that's what's in law. there's no carve out for that in the law. there's nothing to stop you, for example, from saying i didn't like -- >> there is no law presently. >> in the proposed law, proposed

bill. >> we would carve that out and make sure that's not there. >> i would be open working with congress to giving that carve out in giving access. >> second question, do you understand why the congress and public think the fed's independence has already been compromised? >> well i under but i think it's a misconception. the federal reserve has worked with the treasury, the re-and democratic treasury because in a situation of financial crisis it's important the american people want to see their financial leadership working together to protect the stability of the system. >> but your job is monetary policy not fiscal policy. >> my job is also financial stability. >> so, you think interfering or assisting the treasury with fiscal policy is part of the fed's task >> not fiscal policy. we have a joint statement with treasury which makes clear that the fed should not be responsible for credit allocation for fiscal policy.

we're looking at financial stability that's our objective. >> this question is about unbiassed reports of the facts. not reports with an agenda. are you opposed to objective external review of monetary policy and other federal functions. if so what monetary policy information do you not want in the hands of the public? >> we provide a great deal of information including the minutes and eventually the transcripts and this meeting today was put together by the humphrey-hawkins bill. this is a review by congress -- >> this is by law. >> yes. i think it's an appropriate way for oversight. >> how does providing fact the all information on fed's discussions and the data that goes into fed's decision compromise the fed's ability to function? >> it would provide a sense that

congress was second guessing or trying to overrule the decisions. >> okay. this one includes you but includes the former chairman. it's been clear to me for years and finally it is now to just about everyone else, that the fed's monetary policy for the last decade has been flawed. former chairman greenspan attempt to smooth normal economic cycles killed the so-called great moderation and led to bigger recessions than we would have had if he followed traditional monetary policy like the taylor rule. the way to get the fed back on track is to reduce your responsibilities, not increase them. to start, we should move consumer protection and banking regulation to somewhere like the fdic. then we should make the fed's sole responsibility, the stability of the dollar since a stable currency would lead to a

stronger economy with higher employment. what i want to know from you is what you think the goal of monetary policy should be, stable currency or something else? >> the law of the humphrey-hawkins law say the goals of monetary policy should be full employment and price stability. that's what we're looking to. on the issue of taking away other powers, i want to point out this is what was happening a few years ago in a number of countries, for example the uk. >> please answer my question. we know what the law is. i'm asking for your opinion. >> think that law is appropriate and i follow that law. >> you follow the law to the letter. >> to try to achieve full employment and price stability, yes. >> okay. last question then since my time is running out. yesterday you made it clear that you think that the fed has the tools to stop the coming

inflation by controlling all the new money you have printed. you may be right. but do you have the will as former chairman volcker did to tighten even if the economy is still weak? >> senator, it was in 1978 that in the humphrey-hawkins bill that congress put in the exclusion for monetary policy in the gao audit bill before volcker came in. he took those decisions because congress didn't intervene although plenty in congress said they should intervene. >> i'm asking you, would you do it? >> we'll absolutely do it so long as we're not forced to do something different by congress. >> even if the economy is still weak? >> we'll take the necessary actions to balance off appropriately the price stability and full employment parts of our mandate. >> it's a balancing act as most fed chairmen have found out, including you, that if you start

to pull too fast, the economy stops recovering, and if you add too quickly, you have a tendency to put the economy in a recession. so, i wish you good luck. >> thank you, sir. >> senator schumer. >> thank you, mr. chairman. i thank you, chairman bernanke for these two long days of hearings. this job is a very tough one and of course you're subject to criticism and that's a part of it, and some of it valid and some of it agree with. but i just would remind people where we were six months ago, worried that we might enter a great depression. and i think the actions that you and others have taken have avoided that. we still have a long way to go but it's easy to take all the shots and certainly i have my criticisms but also we should remember where we were six months ago and where we are

today, and give you some good credit for that. so i thank you for that. now i would like to talk about credit cards, something i care a lot about. i know chairman dodd has mentioned them briefly. at the hearing back in may we discussed new credit card rules and i was troubled by the 18 month delay. senator dodd and i asked you to put the new rules into effect immediately. we talked about how consumers were suffering from an increase in predatory credit card practices, arbitrary rate increases, you said you would look into it. so, first part of my question is have you looked into it? it looks to me as if nothing has changed. things are getting worse. credit card issuers right now are changing fixed rates to floating rates so that they can say when the law takes effect if the rates go up well we're not raising the rates. that's outrageous. that's against the intent of the

law. they are increasing fees for balance transfers, cutting credit card limit, hiking up interest rates. so i would like to ask you how did these new advance notification rules help consumers hit hard by this kind of behavior. isn't it true that consumes slammed with fee or rate hikes have no recourse other than to pay the increase and cancel the card? cancelling a credit card adds insult to injury by lowering a consumer's credit score. so i have a question for you. i don't think we can afford to wait until our legislation goes into effect, can the fed take some actions now, which you have the power to do to deal with these practices, which some of which are clearly predatory. >> senator, i think all our focus now is in implementing the law which congress passed and in particular we put out a regulation last week which will come in to effect on august 20th, three or four weeks from

now and those regulations will require a credit card company to give a customer 45 days notice before raising interest rates and, of course, that gives the customer options to find alternatives. >> then their credit rate is lowered. >> not if they choose voluntarily to move to another credit card. i don't think so. i agree with you it's a problem. as we discussed earlier and i got back to you, we just didn't think we had the authority given the process involved to move it up substantially and given that the congress had passed new legislation it was very explicit we thought our best objective is to implement -- >> what do you think of switching people from a fixed to a variable rate is that within the spirit of your regulations or through we passed? >> not prohibitive if the variable rate is tied to some publicly available rate like libor or something like that. >> i would say to you and everyone else, that's why so

many of us feel we need a consumer products financial safety commission. because they always find ways around this. for years i said disclosure will do the job. it doesn't. and every law you pass they find a way around it. frankly the fed is not very light about these things. that's way before you got there. but continues. and we need somebody who is going to focus on consumer products, on making sure when they find a new way to get around the intent of the law if not the letter that somebody is able to stop it and stop it quickly. and i know you were asked about the consumer products financial safety commission. i hope you'll be supportive of it and help us draft it. because we need a regulator who is not going to -- who will be a little more light than you than the fed has been. what is happening is outrageous. and you have the power to

do that. i have heard stories all over my state of profitable business who cannot get loans for reasons not to do with their fault, not nothing to do with them. is the fed considering any additional programs to help small business obtain access to credit? >> first, we are urging the banks to make loans to creditworthy borrowers. we do not think it is desirable from a safe and sound this point to be cutting of borrowers who can repay, even if they are small business. >> you admit that is happening? >> of course it is happening. working with the banks, beyond the banks, the fed has included small businesses and our program and we have had some issuances which have seen to have helped that market. >> could you give us some numbers?

>> can you give us some numbers on the small business talf? >> i would have to get back to you with the exact numbers but we've seen improvements on tint rates and spread in the secondary markets which show increased availability of funds and rates. all thoits not a federal reserve initiative i take note of the treasury's initiative under talf to put money in the sba lending and support that area. i agree with you, this is one of the toughest areas because the toughest areas because traditionally in a small business is the first to get cut off. >> okay. and what about lifting the credit unions cap on small business lending? it was put in as part of a political compromise years ago, maybe decades ago. i don't think there's any reason not to lift it, if they want business in another place where small business could get loans or credit unions are often tied into their community and want to

help, what do you think of that idea? it's now 12.5% and some of us have proposed legislation to lift it. >> i would be happy to look at that with you. it's an opening to consider. i would have to understand better the rationale, but certainly worth looking at. >> thanks, mr. chairman. >> senator martinez. >> thank you, mr. chairman. chairman bernanke, welcome and i want to join with my colleague senator schumer in acknowledging the fact you've had a difficult situation back several months ago. everything isn't perfect but you've tried, i know, sincerely and i think avoided a whole lot of problems on a dark day back in the fall we all were fearful might be right down the corner or around the corner. i also want to by way of a question and a comment also strongly disagree with my colleague from new york because i believe that the worst thing

we could do right now in the current environment is to overregulate, overreact to circumstances that happened in the marketplace. i have not had a more unanimous negative reaction about anything here in the congress than what i've heard over the last several days about this regulatory scheme that i think take the banking industry at a time when it is in a perilous state and choke it. we should take our time before we overregulate the banking industry in a way that i think will drive away investment money and everything else from the banking industry. i'm sensitive to consumer issues but i think we should go slowly on that issue and think thoroughly through it. along those lines, about investment, private investment money into the marketplace, you indicated that investors seem to be returning. it concerns me grate greatly th

don't believe there's any significant private investment going on in the mortgage security backed arena. i wonder if you can tell me what you anticipate there? i come from a state where we have some high value markets and even though all of them are depressed, conforming loan limits don't cut it. do you anticipate we'll be in a position to see private investment money coming into securityize mortgages so we can get away from fannie and freddie being the only game in town when it comes to mortgages? >> not exactly a question of private investment money, it's a question of private label, securitization which is not government guaranteed. >> that's what i meant. >> we're not seeing any activity in that area right now. and i think it will take two things to get that going. one a little bit moreonfidence that housing prices are stabilizing because right now there's too much concern on the

private label side that house prices may go further and that would create losses for mortgage holders. the other is, i think there's still scope to improve the instruments, to increase the transparency in these instruments and industry as an incentive to do that. it's been a pretty slow process in part because activity has been so low but i think there might be scope for trade associations like securitization association to work with private issuers to try to develop a more transparent, more standardized securitization issuances. >> i guess rating agencies would come in to that as well? >> the rating agencies as well, absolutely. but also the rating agencies have to show themselves that

they have got good criteria, they have eliminated potential conflicts of interest and be transparent as well. they are part of the problem as well as the solution at this point. >> the issue of bank regulation and getting money out on the street from banks at a local level, i continue to hear complaints that banks are not lending but i also hear from bankers that there's not a clear message and that regulators are giving a different message than what i hear here from whether the fdic or yourself. what can we do to make sure that the message gets down to the local level and that we're not seeing a situation where bank regulators are overreacting to the situation, and expecting banks to do the impossible while the marketplace is in desperate need for credit. >> let me make this statement to examiners every where and other federal agencies. it's good for the bank, good for safety and soundness for banks

to make safe loans to credit worthy borrowers, to maintain those relationships. and to extend credit to profitable and economic purposes. we are thing -- we recognize that there's kind of a built in bias among examiners in a period like this where the economy is weak and there's a lot of risk to be overconservative and push banks to be over conservative. on one hand we don't want banks to be making bad loans. that's how we got in trouble in the first place. but i do think examiners should be appropriately weighing the fact that profitable lending to credit worthy borrowers is good for the bank and maintaining those relationships is good for the bank. at the federal reserve have for a long time communicated that message and we have ongoing training, work shops, manuals

and other communications with the directors of supervision to put that message through. i have to admit that it doesn't always get through. but on the other hand it's also probably true that, you know, bank terms and conditions just are going to be tougher now for a while given the difficulties in the economy. and so, you know, not everybody who was used to getting credit is going to get credit but to the extent that we can continue to make loans to credit worthy borrowers we want to support that and we're trying to put that message into our examiners -- into our examiners. >> think your statement is very helpful and no question what used to be a good credit is not good credit in current circumstances. along the same lines the federal reserve implemented a talf program to restart the securitized debt markets and my question has to do with the commercial real estate and potential short fall there.

what do you think in terms of your program for the private commercial real estate lending investing and what may be coming in the months ahead which is a very serious situation. >> it is a very serious situation and that's why we brought both the new commercial real estate, cnbs and legacy cnbs into the program. the addition of those two asset classes is relatively recent. so we haven't yet seen a whole lot of activity. which is not surprising because it takes time to put together cnbs packages and deals. what we've seen with the talf in other categories of securitization like in consumer loan, small business loans, student loans and like is it's been very helpful even without a great deal of lending. we're optimistic this would be helpful. it's a few more months before we have a good read on the effect. but at a minimum i think it will get to the cnbs markets moving

again, get new deals made and create interest on investors and getting involved in financing commercial real estate. >> my time is up. i want to thank you. i just want to mention in conclusion that there is in talf still room for there to be more room lending, more encouragement to lending in the area of floor planning, for rvs, boat, big boating industry in florida which is back on its heels as well as securitized mortgage market for vacation rentals, i mean time share opportunities. people in florida are wanting for credit availability. thank you, mr. chairman. >> senator mendenez. >> thank you, mr. chairman. mr. chairman bernanke, thank you for your service. congress is in the midst of a very rigorous debate about health care.

and, you know, there are those in this debate who suggest that we can put off our tomorrow further seeking reform of our system. and it seems to me that when we look at, you know, obligations of the federal government that both under medicare and medicaid these long term obligations are unsustainable at the rate we're going. not to mention that it's unsustainable for the private sector in terms of rising costs for health care which they seem to provide for their employees and, therefore, creating more and more challenges to people who have health care coverage today. is it not true that this is one of our significant economic challenges moving forward and that the longer we delay the greater the consequences will be? >> yes, as i indicated before, there are a lot of challenges in health care, including access.

a lot of people are uninsured. the quality in the sense that we see very different costs in different areas but with not different results. what is the transparency to the process and so on. but speaking as the federal reserve chairman and interested in macroeconomics stability for me the most important issue is cost, and the current structure has many benefits and other problems but one of the main issues is it does not control cost, and ageing of our population, we have the threat of an unstable fiscal situation going forward and a tremendous tax essentially on our private economy which has to bear the cost of medical care. so, i think congress would be looking at a whole set of these issues but one i would focus you on is making sure that you

address the questionbending the slowing down a worrisome increase in the rate of cost of health care. >> i appreciate that. let me ask you this. in march of 2007 at a banking hearing i said that we were going to have a tsunami of foreclosures in the residential real estate market. i was told at that time that was an exaggeratation. unfortunately i wish i was wrong. now i look at the commercial real estate market, several trillion dollars that there seems to be no present market for as these mortgages are due. i heard you gave an answer previously on this issue with reference to lf. should we not as i believe we should have done in the residential real estate market been pro active to be ahead of the curve instead of facing an enormous challenge after the curve. you mention talf.

do you think that the reserve and the administration are focused on dealing with this up front in a way that's aggressive and can meet the challenges not just to that industry but more importantly to our economy and the jobs that flow from it? >> well, from the federal reserve's perspective we h which are no longer performing in very much the same spirit that we worked out for residential mortgages that are not performing. with the residential mortgages, there is an incentive to do that. i think one slightly positive thing is that i do not think commercial real estate experience has quite the increase in prices or the bubble component that housing did, but, nevertheless, it is still under pressure. the second thing is the telf

which will also now allow borrowing also to come in and buy cmbs. when congress wants to take additional steps, you know, you could intervene with guarantees or other types of support that will have ramifications for the government bearing risk, but i would be somewhat reluctant to strongly endorse one, particularly when congress has to make those trade-offs of the fiscal costs and fiscal risks, and what i agree are very real risks, of foreclosures. >> as i talked to this industry, mr. chairman, the sikh the private marketplace. -- they seek the private marketplace. for what is coming down the road, and so, the question is, do we wait again for the crisis to happen, or do we anticipate

it, because otherwise, we had significant risks to our economy, so i am just wondering if what you think we have to pay is sufficient to meet that challenge of the days ahead, or not? economy? i'm wondering if what you think you have today is tools is sufficient to meet that challenge in the days ahead or not? >> think what we have, including the fact that some banks are now restructuring mortgages will help going in the right direction. whether it's enough i can't tell you. again i'm not sure what interventions there are except those that involve fiscal risk and fiscal cost to the government. it's congress's call on that one. >> let me ask you finally the most significant source of money for the government's economic recovery program is actually not coming from t.a.r.p., but from the federal reserve using its powers to the tune of about $2.3 trillion. there are many who are concerned that this may lead to some significant inflation in the

coming few years. what is your view about the risk of some severe inflation, and what are you doing to avoid it? >> senator, i wrote an op ed in the "wall street journal" yesterday and i discussed it somewhat in my testimony. we believe we have the necessary tools to unwind our balance sheet, to reduce the bank reserves that are outstanding and to raise interest rates at the appropriate time. we don't think there will be a technical reason we can't raise interest rates when the time comes to do that. now as senator bunting pointed out it's difficult to know the exact moment when it is because you have to balance off the risk of moving too soon versus moving too late. so that problem is still there and we'll have to do our best to make the right judgment. in terms of having the right tools to unwind our actions, and to raise interest rates we believe we're quite comfortable we have the tools to do that. >> thank you, mr. chairman.

>> senator corker. >> thank you, mr. chairman. mr. chairman, thank you four testimony. i know there's been a lot of discussion about an audit, if you will, of the fed, and i hope that you'll do everything you can to make sure that the fed maintains its independence. i realize it sounds like to me there may have been some agreement as to what might ought to take place as it relates to an audit but i can't imagine a greater catastrophe for our country for folks like us sitting up here, the administration to be getting involved unduly in monetary policy. so i urge you to do everything you can to stay independent. and hope that we will enable that to happen. i appreciate the mention on commercial real estate. i do think we're creating a self-fulfilling philosophy out there. i know you sent a message out here today out to the fed folks but i think the functional

regulators in many cases are creating a self-fulfilling prophecy and one of the things that could help is for all of you to get that message out to to regulators. i know you said to chairman dodd it's in the best interest to make those loans. that could help as much as anything we're doing. on consumer protection, administration came up a couple of weeks ago talking about their proposal. i assume folks at the fed were having to hold back some degree of humor. there was discussion about them designing products for the financial industry. i assume you, like many of us, believe that is pretty outrageous and i would love any comments you might have in that regard. >> well, there's some economic analysis which suggests there might be benefits in some cases of having a basic product available, so-called vanilla

product. the design of that would have to be an industry decision. >> by the private sector? >> by the private sector. also be careful to make sure that didn't eliminate or create a regulatory danger in some sense to legitimate products that are not the basic products but still have appropriate features that are good for some borrowers. so, we don't want to -- we want to make sure that simple straightforward products are available. on the other hand, we certainly don't want to roll back all the innovation in financial markets that take place over the past three decades or so. >> the fact is you believe that that should reside in the private sector and not be administered through the public sector? >> should be in the private sector but there is some scope for basic, a basic black, if you

will and then the version with sequines on it. >> another piece the administration had come forth with out of treasury was basically keeping t.a.r.p. in place in perpetuity to give treasury to invest taxpayer money in companies and also to draw a bright line around those companies that posed a systemic risk and in essence in my view creating a more freddie fannie type view of institutions that were over a certain size. do you have any comments. we watched what the fdic proposed that would unwind companies that failed. you made testimony earlier, i know you did, i read it that says you believe that's the best route to go. i wonder if you have any comments for those of us working on regulation. >> yes, i think too big to fail

is an enormous problem. we were forced to rescue some companies because of the alternative was worse and we didn't have good tools. it's absolutely essential we have a good system for wining down failing systematically critical firms and i would include in that first the provision that creditors of a systematically critical firm would lose money so then the firm would no longer be too big to fail and the firm could be wound down or broken up or sold off or put into a bridge or whatever mechanism is appropriate and secondly i do think you need flexibility for the resolving agency to bo from treasury for a time, the same way the fdic can do in case there's costs up front to resolving the company but ultimately i would argue that most or all of the costs ought to be born by the financial industry. >> so the notion of treasury having the ability just to prop them up and actually cause them

to be going entities again is not one that's good for our market system? >> i don't think -- that's not my interpretation of the treasury proposal. the idea would be to have something analogous to the current fdic laws which allows the fdic to intervene before actual failure, seize the company, sell off assets, in it order to avoid a costly bankruptcy. >> back to the independent issue. i know there's been discussion and i guess one of my major concerns is you've received criticism here today about activities that have taken place. i find it difficult to believe that anybody, even as intelligent as you are, can actually look out and see what all systemic risks are. and i see that as not possible. i mean, there are going to be other failures down the road. i think we know that regardless of what we do. that's the way the market works. and i guess i have a fear that if you become or the fed becomes

a system he can regulator and you miss it and you are, it is going happen again, we all know that, that that will be -- that will create an opportunity for even further attacks, if you will organization your independence. and i wonder how you might respond to that. >> it's a good point, senator. i would note that just taking the administration's plan as referenced, that plan does not propose toic matt federal reserve into a super regulator with the gas to move all over the system and to take whatever action it wants. in fact, it's a multi-part plan that includes a counsel, as you know, which would include eight different regulators that would be mostly responsible for looking for emerging risks, it includes the resolution regime which would be the treasury, the fdic and not the fed. so the fed's specific role would be much more limited than being the overall regulator in that particular proposal, would be the holding company supervisor of the systemically critical

firms, the tier one firms, which would be identified through some combination of the fed and theoff sight risk council. so our particular role in that plan would be not radically different from our current role, which is to be the adviser of large bank and financial holding companies. so we would not be given just the broad role. we have a very specific role which is to supervise and look at a specific set of companies. and, therefore, i think our vulnerability would be much more limited than what you're describing. >> thank you, mr. chairman. i know my time is up and we have a vote coming, so i won't extend over like i sometimes do. and, mr. chairman, thank you for holding this hearing. >> thank you you, no corker, very much. senator warner. >> thank you, mr. chairman. and thank you, chairman bernanke for being here during such a long line of questioning. i've got a lot to ask, but i'll try to move quickly and want to follow-up on my colleague, senator corker. i share his concern that as we

move toward the resolution going forward, that the goal. resolution should be allowing large institutions to fail, not simply be propped up. i do have concerns that what the administration has proposed would still in effect have the failed institution not bear the burden of the resolution since they would, in fact, still be going to the fed or others as a lender of last resort to get through a period and then you'd have a post resolution assessment. i'd rather have that -- see that assessment more up front for those extra large institutions. one of the questions that i've been struggling with, as well, is when we had the secretary in and a number of us have had concerns particularly about aig and the recommendation to continue to pay off 100 cents o the dollar, and i wonder whether you have any thoughts on smcht

bankruptcy provisions that have elevated counterparties higher in the capital structure in terms of a bankruptcy than those changes haven't been fairly recently, whether those ought to be revisited, the bankruptcy priorities on a going forward basis. >> the problem with ai government wasn't the bankruptcy law per se but the fact that we couldn't go -- we couldn't allow the company to go bankrupt because of the implication -- the broad implications to the market. and given that we had to honor all of the contracts the company had. under the resolution authority, we would have apalternative to bail out the bankruptcy. right now we have bankruptcy and chaos or bailouts and necessary of those are satisfactory solutions. a good resolution authority would allow -- would avoid the days on but would allow both creditors and counterparties and others to take losses in a controlled way as under perhaps

pre-identified sets of seniorities identified by the law. >> when you've got this exemptions to the repo provisions that allowed the counterparties to have -- >> yeah, those are useful because very short term derivatives and other short term provision, the netting provisions that will you to you deal with those before the whole bankruptcy process takes place i think is actually constructive given our existing bankruptcy you la, but this would intervene prior to the standard bankruptcy and would allow the government to intervene and to unwind all different kinds of transactions. and that would be an appropriate time to think about how you would deal with these short term derivative positions and other types of obligations going forward. >> i differ from the administration and perhaps your views in terms of where the responsibility ought to be on systemic risk oversight. i believe an independence

council including the fed, but regardless of where the policy makers end up, in the interim period, are you comfortable, whether it is as senator menendez mentioned in terms of getting ahead -- potentially getting ahead on the issue, are you comfortable that the fed is the defact toe risk the aggregation of information taking place. >> no, we are not being a super regulator at all. we are trying to do a couple of things. one is within our scope, which is with bank and financial holding companies, we are taking steps to take a more macro approach. and we are taking a number of steps to take into account the systemic implications of the failure, so we have been doing

that, and me and basically try to strengthen our oversight of those firms. by the way, the stress tests are an example of an analysis of banking terms simultaneously to see what the risks were across the system, so we have been doing that, and we have been looking at the payments and settlements' area where we have responsibility. in taking a holistic view of the whole system, we do not have the resources or the authority to do that, but, of course, in general terms, we are watching the economy, but not in that kind of deal. >> a non-financial institution that might be posing systemic risks -- the next disaster could still be living at this point because we have not taken action in the interim? there is no one trying to get ahead of that? >> we are not aware of any such situation, but it is true if there were something outside of our purview. he next aig comes down the pike?

>> we're not aware of any situation, but it's true there was something out side of our purview. >> let me go back to something the chairman raised. i do fear that one of the casualties of this crisis may be small business lending, not just in the authority term, but over a longer period of time. and not just for particularly already performing firm, but i used to be in a startup business and while i think venture and real estates capital reemerged, interim financing, start upcapital fup capit capital for smaller businesses, i would hope that we could see some actual numbers in terms of take-up rates for small business. i know the treasury has taken some actions with sba, although that has has mixed results. i just wonder from a general comment whether -- i know you don't like to give policy advice, but as we think about trying to get the financial system back this place, i could

see the small business area being really sometime mied f st. comments, suggestions? >> one comment is that one of the main sources of small business financing is smaller bank, community banks which have relationship, more local information. and to the extent that they remain strong and some of them are under a lot of pressure for various reason, but many of them remain strong and they in some cases have been able to step in where the national -- you you know, the national banks have had to pull back, that's one slightly encouraging direction and that supgts that we should continue to support community banking which play as very important role in supporting small business. beyond that, i think we just need to get the banking system working as well as possible again. i think there are even large banks that use small businesses

as an important profit center and will continue to lend there, but clearly in a downturn like this, small business which already has a pretty high mortality rate is even a riskier xe proposition. >> mr. char man, i know we've got a lot on the docket, but i would like to have a committee perhaps take a hearing or some examination of what we in the congress can do to look at the state of lending small business and startup businesses, how we get that next step of innovation. because that financing market has disappeared and i have a lot of folks in that respect who say they don't see any signs of a returning -- that that's basically totally broken. so i'd love to have your thoughts on that. >> a good point. we should. the point you make, it's a start up, it's also that mezzanine level which can be really difficult. you're right at that point of going in one or into directitwo. and the idea of someone sustaining that effort.

and that's been a great source of not only job creation, but tremendous innovation in so many areas. so i think it's very worthwhile. it's something as i mentioned earlier, all of us hearing about it every sipping fwel day, grapple with it every day, and we don't have very good answers on this yet and we should. so a very good suggestion. >> thank you, chairman bernanke for your work. i have questions in artwo areas. the first is the proposed consumer financial protection agency. do you think it's a good idea to have a very powerful consumer issues driven regulator structurally divorced from safety and soundness regulation? >> i understand the motivation. i understand why people are concerned that the fed and others have not been sufficiently active on this and they think that maybe having a separate agency would be more committed to these issues.

i do think, though, that there are some costs to splitting consumer compliance regulation from safety and sounds regulation. it means banks have to go through two separate sets of examinations. it means there are certain areas like underwriting and others that on both sides, and it may mean that there is not sufficient feedback from what's going on in the banks to the rule writers at the agency. so i think there are some costs there. i understand the motivation of those who would like to have such an agency and i'm not here to criticize that, but your particular point about some costs about the safety soundness and the consumer compliance, i think there's some validity to take. >> my concern is when you look at the recent crisis, some of the causes, not all, we can point to a lot of different things, but some of the causes at fannie mae, freddie mac, in

mandates like the consumer reinvestment act, are consumer driven, politically driven mandates that essentially got ahead of safety and soundness in my opinion, promoting lening beyond reasonable safety and soundness guidelines. aren't we at risk of broadening and institutionalizing that danger by having this very powerful separate consumer issues regulator again structurally divorced from safety and soundness? >> it would depend whether the agency was involved in promulgating -- actually promulgating proactively actions that the bank shoes take uld ta. it's promoting certain kinds of lending does raise the risk that that lending might not be safe

and sound. if it's mostly involved in putting limits on the types of products to be offered, that could also have implications, but it doesn't have the same as what you're talking about, which is lending which is not safe and sound. >> although bankrupt ability goes to safety and soundness, too. >> that's true, but we want the profits to be made with good products. so that is important. >> and my secondary of concern is this effort which i support for fuller audits of the fed. i certainly strongly support fed independence from monetary policy. i'm also a co-author of the senate bill for broader audits. i've read your statements against that and specifically one of them quoted if we were to raise interest rates at a meeting and someone in the congress didn't like that, and said i want that decision

audited, wouldn't that be interfered as an interference. i think that's exaggerated, but what if we mandated these broad audits on a regular time interval, not at the direction of members of congress with a specific request. wouldn't that take care of that concern? every two year, whatever the reasonable time interval is. >> i'd like to discuss it further, but we're having right now a semiannual hearing on monetary policy where i'm here to answer your questions about monetary policy and we provide a statement, we provide minutes, and we eventually provide transcripts. so i don't think it's an issue of what is the process. what's going on. i think the question is were the policies good choices or not and i'm a little concerned about the gao having a set of experts coming in and saying we think that was wrong choice and congress, therefore, essentially second guessing the fed's

decisions. but, again, this is a very -- i'm here to be accountable and i want -- if you have question ps monetary policy, i'm here to explain and respond to you. >> well, again, let me suggest that this sort of fuller audit particularly if it's at regularly scheduled intervals, not as a specific response to a member request, seems to me is exactly the sort of thing in a less detailed basis we're doing now. how is it fundamentally different? >> well, the gao audits really involve an assessment of policy and decision process. so it presumably would involve collecting all the materials that we had in our meet, it would involve interviews of the participant, it would involve depositions from outside experts and so on temperature about just seems to me that that's more of an enter essential than condition event with practice around the world that center banks operate on monday tar policy independent live the congressional oversight, not of

oversight, but of congressional intervention. but let me respond, one concern i know you have is the fed's balance sheet, the lending we have done, the various unusual actions we have taken. and there i think we have common ground. i think that the congress and the public ought to have comfort and confidence that all the operations that we run, all the lending we're doing, all those things are done at the highest standard of quality with appropriate controls, appropriate attention to collateral and to the taxpayer's interests. and on those sorts of thing, i think we agree that that needs to be done in a way that congress can be satisfied. i'm just concerned about what it might look like sbept on congress's part to even if indirectly try to send a message, if you willto take a different action than it thinks is in the long run interests of the economy. >> well, again, i think that's

really exaggerated. i think that possible danger would be even further mitigated if these broader audits are regularly scheduled, not at a specific request. and quite frankly, i think that would pale in comparison to possibly perceived intervention than the fact that we call you sometimes with specific actions in mind to come up here and testify before us. the president can certainly request meetings with you which i assume you would have. even in the context of his being able to reappoint the chairman or not reappoint the chairman. it seems to me in all that context, regularly scheduled audits are nothing more significant in terms of any danger of interference. thank you. >> thank you. >> thank you, senator vitter. >> thank you very much, mr.

chair, thank for your testimony. in your testimony, you noted that you're going to be announcing new rules on the compensation of mortgage originators. are you intendsing to family size disclosure or are you going to benld the practice? >> we're going to ban the practice of tying the compensation to the type of mrt gan mortgage, having prepayment penalty, for example. >> so in this situation, if a broker would get the same xeb saying if they are toing ing iig a plain have a nail la 3 year mortgage as if they were providing very high interest rates? >> we'll be providing the details at our meeting tomorrow, but the purpose of the regulation would be what you're saying, to provide no incentives to brokers to steer borrowers into inappropriate high cost mortgages. >> i'll look forward to seeing the details, but if that is accomplished, that is very important consumer reform.

there are basically four missions that are being discussed in this conversation for the federal reserve. the monday it taker mission, the rue deny shal or safety and soundness mission, consumer protection, and consumer risk evaluation. can you envision circumstances in which these missions are really in conflict with each other? there are certainly times when they wouldn't be, but are you aware of certain circumstances when they would be in conflict? >> i don't think so. i think they're much more likely to be complimentary. for example, our rue deny shal work in banks and our monetary policy work involve as great deal of information about financial institutions and markets as does consumer protection work. and all of that feeds into the systemic risk work. so i think in terms of operational activities, are type of people we would have, the expertise we would have, i think they're mostly complimentary and i think they're complimentary in a policy perspective, as well 37 for example, i think you need

have the prudential television and good consumer froeks have good systemic stability. i think you need have good systemic stability to have price stability. so i think in general, they tend to be complimentary. i don't see any serious conflicts of interest or inconsistencies between those plan dates. >> frankly, your response frightens me because i think there are occasions that they're in conflict. at least the pressures that the players in the system, you may have practices that are quite profitable for the banking system that a person looking at it from the consumer protection point of view might say that disclosure or fairness isn't complete. indeed some of the many things that we've been addressing recently in regard to the compensation of how all of these things may be profitable in ways that strengthen the banks, but there

is the position of consumers, and i think to at least be able to carry off these missions simultaneously, one has to be conscious and aware of the inherent conflicts that arise and address those. >> i do not think -- safety and soundness does not mean max improbability. i do not think it is good for banks to engage in dubious practices. potentially, it hurts them reputationally, they become subject to suits, so i would say that banks ought to make their money the honest way by providing good products, and i do not see any incentive to rip off consumers. to the contrary, we want to have good products for consumers and a good, healthy business for the banks to be safe and sound. >> well, i wish your vision had been fully in place 10 years ago, and then we would not have much of the mess that we have now. be safe

and sound. >> i wish your vision had been fully in place ten years ago and we wouldn't have much of the mess that we have now. i will tell that you every consumer issue i've worked on, the complaint has been that it would undermine the success of our financial institutions and so i think it is inherent to one has to where he is sell with. i'm told there's just a few minutes left, so i'll be very quick on my final question. and that is, do you envision a point in the near future if congress was to adopt the plans related to the too big it fail issue, and by plans i mean higher capital requirements or the and to unwind nonbank financial institutions, the main ideas that are on the table, do you envision a point where you would be able to give a speech and say as of today, no financial institution in america, bank or nonbank, should count on being becamed out because we will not support that? >> i would go further and say if you had the systemic risk

resolution authority, that the fed's ability to lend it to a fatherly systemic institution ought to be curtailed so that it could be invoked only at the request of the resolution authority as a support of their operations. so i would make our interventions of the sort we do with aig, i would make them illegal. >> well, i appreciate the fact that you could envision going beyond the strength of the statement i was laying out because we've got to address successfully this issue of moral hazard or we're per pet chew alley in a psych dhael doesn't serve our financial system or our citizens. so i'll look forward to being in attendance when that speech occurs and i thank you very much for your testimony. >> thank you. >> thank you, senator. >> thank you very much, mr.

chairman. welcome to the committee. it's always good to be in touch with you. we share a firm commitment to empowering our citizens to financial literacy, to build stronger families, businesses and communities. and i greatly appreciate your efforts and of that your talented and dedicated staff on this issue. too many working families were steered in to mortgages that they could not afford or effectively understand the potential risks associate with the mortgage products. now some potential homeowners can not obtain mortgages especially in states such as hawaii with high housing costs. what must be done to ensure that

the families are better prepared to purchase a home, select an appropriate mortgage, and remain in their house when challenged with financial hardships? >> well, senator, as you say, you and i agree very much on the importance of financial literacy. we've talked about this in the past. and i think if there was ever any doubt about the importance of financial literacy the past two years and the problems we've seen would dispel those doubts. as you know, the federal reserve is very actively engaged in this on a number of fronts both at the board level and various reserve banks around the country. we have partnerships with a large number of nonprofit organization, schools and others who provide financial literacy materials and to try to learn about what works and what doesn't work. we have found that financial literacy is difficult. we have not been as successful, we the selective community, have

not been as successfuls with we would like and i think in part students didn't see the immediate relevance to their own lives. but we have seen i think people who are close making important decisions, to take out a mortgage or to buy a car or other important decisions are very motivated and counseling has turned out to be very helpful. so i've been very support i have of counselors to help people make better financial decisions. i think, also, there's room for partnership in that parents and kids together can learn. the parents who are motivated and who understand the financial challenges they face working with kids, maybe in programs after school, those sorts of things, may be helpful. so there are a lot of ideas out there and the fed is working on many of them. we d't have a magic bullet yet, but i certainly again applaud your support of financial literacy and financial

education. the more people can understand about these things, the less risk we run of problems down the road because people just made bad choices. >> chairman bernanke, as you know, due to the outstanding efforts of the chairman, other members of the committee and administration, we enacted landmark credit card reform legislation. i'm proud that the law includes provisions for my credit card minimum payment warning act which will provide consumers with detailed personalized information on their billing statements and access to reputable credit counseling services. what will be done to ensure that credit card minimum payment warning provisions be implemented in the manner that will be most helpful to consumers and also are there additional key personalized

discloser sure di dissures pertaining to other financial service products that would enable consumers to make better informed choices? >> well, you put your finger on minimum payment being an important issue for consumers to understand when they manage their own credit cards. we of course are writing the rules for this legislation. and as you know, we have pioneered the use of consumer testing as a way of making sure that disclosures are effective and understandable. and in particular, we have found ways of presenting minimum payment information on periodic statements that we found through consumer testing is effective. so we're using that very actively. i would mention, also that the fed has some online resource, including a payment calculator that allows consumers to go and ask if i pay just the minimum payment and this is my balance, this is my interest rate, how many years will it take me. so we are trying to be very

responsive on that issue. i also agree that in providing disclosures to consumer, it's important to have transactional specific information. they can see their own payment, their own loan as opposed to some kind of generic example. so we have been working on -- we will be releasing tomorrow new disclosures for mortgages and for home equity lines of credit which require an earlier presentation of information to consumers that includes information specific to their particular mortgage. and look at student loans and other areas we're working on providing new disclosures. so again going back to my earlier xlept about counseling, people see their own numbers, their own transaction, it's much more salient to them, they're much more willing to pay

attention and we hope by making these disclosures more individual specific, we'll make them much more useful for consumers. >> let me ask finally, even if these difficult financial times, many of mystituents tip to play excessive amounts for remit answers when they send a portion of their hard he wered wages abroad to their relatives. what must be done to better inform consumers about lower cost remittances and how can remittances be used to increase access to mainstream financial institutions? >> the federal reserve is interested in that as well. we have a program that allows for the low cost sending of remittances. about i think the federal reserve bank of atlanta working with the mexican central bank has developed some low cost methods. i think this is an area where many main street institution, banks and credit unions, can

provide cheaper, quicker services to minority communities. and this is a way to get a higher rate of participation by minorities in the mainstream bank system. and since i've talked about this for a number of year, we have seen credit unions in particular, but also banks and others offer new resit tans service which is gives them an opportunity to attract minority ku customers in to their other services, as well. so i think that's a positive development. >> again, i want to express my praer appreciation for your talented staff and all your work in this area. >> thank you. >> senator hutchen son has just arrived and if she's prepared, she will be recognized. >> that you think, mr. chairman. thank you, mr. chairman

bernanke. i wanted to focus depend on the health care issue that we are certainly grap plink with right now. and, of course, the cost estimates are all over the lot. cvo says there kn's no way this going to lower the cost to government and what we're concerned about, of course, is that the government plan then attracts more and more from the private sector plan. and i just wanted to ask you how you would assess another big government health care program in addition to medicare and medicaid that are already causing great concern for the future that will be required. what you think that does to debt and is it the right approach right thousand considering our

economy and let meed a the disincentive to employers to hire people which is what we're trying to do the reverse of right now when we have the high unemployment rate. just give me your view of whether we should be looking at something different, is there a problem here that you see on the horizon looking at the big picture and the long term. thank. >> thank you. >> there's certainly a number of issues that health scare intended to address. as i mentioned to a couple of your colleague, i think that from a broad economic point of view, an important one is the cost. we have medical costs rights more quickly than the gdp for a long time now. and even under existing arrangements with medicare and medicaid and so on, estimates are that we will in a few decades be spending a great part

of the federal budget just to cover those programs. so while i think there are lots of reasons to look at our medical system and try to feend better ways to deliver health care to more persamerican, i wo urge congress to find ways to reduce the curve or bends the cost because i think the federal government will have a bigger share because then the fiscal challenge becomes even greater. so if could i just propose that there be a lot of attention paid to how the program, however you look at it, however you choose to design it, find ways to either through consumer choice, through government choice, through however it's designed to try to limit the so-called ongoing increase that will really cal think our fiscal stability over a long period of time. >> does it concern you that cdo

really recently came out and said that it would, in fact, raise the curve not lower it or bends it? >> i haven't looked at in detail and i don't any specific comments. but to reiterate, i think swhee make an important part of whatever health care reform with dough, close attention to the inch plimp kmplications not onl fiscal, but the cost of health care affects businesses and householding even outside the >> one of the things that has been brought out is the medicaid mandates and the cost to the state, and in my home state of texas, it was estimated it would add $3 billion a year to the state budget, and, of course, that is also a great concern and being raised and all of the state'