a severe dollar crisis. it is going to be hard for a severe dollar crisis. caller: i guess for now. host: what was your answer to the question with governor palin? caller: i will say that i was at the nevada state convention and we would have had more delegates than john mccain, but that is a separate issue. host: thank you for your call. thank you for being here. today the senate will be asking the question about whether or not ben bernanke should be up for a second term. .

a forum on the relationship between the media and the supreme court. america and the courts is on c- span, saturday at 7:00 p.m. eastern. >> as we get better and better at what we do, we run an ever increasing risk of overconfidence and arrogance. >> his book currently sits on the new york times best-seller lists. >> during his reconfirmation hearing today, federal reserve chairman ben bernanke says he is concerned about a congressional proposal to audit the fed.

he is being considered for another four-year term. the committee will come to order. if i could ask my colleagues and friends in the media -- whoa, you okay? photographer there, we had a train wreck. all set? the committee will come to order. we're here this morning to consider the nomination of ben bernanke for the chairman of the federal reserve. mr. chairman, let me begin by welcoming you once again to the senate banking committee. you've been before us on numerous occasions over the last couple of years. and we welcome your participation. we want to thank you for joining us again here today. today we are faced with, as i see it, two separate questions.

before i begin, let me, for the purposes of members' information, we will have a series of votes on the floor of the senate. my intention would be to go until about 11:45, the next hour and 45 minutes, adjourning at 11:45, and then coming back at 1:00 p.m., because we have these series of votes, mr. chairman, rather than having this being disjointed, we'll have it in two parts. we'll get as much done as we can when it comes time, i will have opening statements by senator shelby and i, and then we'll hear the statement by the chairman. and then i'll have eight minutes to ten minutes for questions. what i'll do is put the yellow light on at eight. i have never been rigid about banging a gavel down, but i would ask members to try to keep their questions in that time frame so we can get to as many questions as possible and limit to the extent possible this an. if you want a second round, we can do that as well. i don't want to deprive the

members of being heard. that's the way in which we'll proceed. today we are faced as i see it with this nomination and two separate questions. first should ben bernanke, here, our nominee, stay on the -- as chairman of the federal reserve. second, as this committee works to create a financial regulatory structure for 291st century what should be the role of the institution and that our chairman here and the nominees would oversee. does the existing structure of the federal reserve deserve to be maintained? too often that question has been dominated by the personality of the fed chairman. but in my view this is not about the nominee or the chairman, this is about -- nor is it about the members of this committee, this is about the institution that will be around long after the nominee or the members of committee are gone what makes the most success for this institution. first, let me address the nomination for another term as chairman of the federal reserve

this is an incredibly important job. over the last year our nation has been rocked by a devastating economic crisis. this committee has met dozens of times to talk about its impact on our constituents, the millions of americans who have lost their jobs, families who have lost their homes and families who have watched their wealth evaporate as home values dropped. under your leadership, mr. chairman, the federal reserve has taken extraordinary actions to right the economy providing liquidity to depositories, sustaining the commercial paper market, working with the united states treasury, and providing critical support to the housing market. these efforts have played n my view a significant role in arresting the financial crisis and financial markets have begun to recover. for that, mr. chairman, you and the federal reserve deserve, in my view, praise and gratitude for your role in preserving a

far worse outcome than we might have otherwise seen. i believe that you deserve another term as chairman of the federal reserve and i intend to vote for your nomination, because i believe you are the right leader for this moment in our nation's economic history and i believe your reappointment sends the right signal to markets. while i congratulate foyou for these efforts, he remain concerned about the weaknesses in the regulatory system that allowed the financial collapse to occur in the first place which brings me to the second question. does the structure of the institution you oversee deserve to be maintained as it presently is constituted? today we have a regulatory structure, as i see t created by historic accidents as government reacted to problems with piece meal solutions over nearly a century. you and i, i think, agree that the federal reserve should be strong and very, very independent. i feel very strongly about that second word and being able to

perform its core functions, conducting monetary policy, supervising payment systems and acting as the lender of last resort. i worry that loading up the federal reserve with too many piece meal responsibilities has left important duties without proper attention and exposed the fed to dangerous politicalization that threatens the very independence of this institution. congress gave the federal reserve the authority to protect consumers and mortgage markets in 1994. we talked about this many, many times in this committee. for many years, many years, many of us in the senate were frustrated in our efforts to get the fed to address predatory lending. the federal reserve failed to develop meaningful guidelines and regulations until the housing bubble burst. there have been other lapses in consumer protections with the fed doing little to protect users of credit cards and checking accounts from abusive company practices. in addition, the fed failed to

rein in excessive risk taking by some of the largest holding companies which it supervised. many of the firms whose irry responsible actions contributed to the crisis ultimately required a taxpayer-funded bailout did so under the fed's watch. the lesson i believe we can learn from these mistakes is that the country is best served by a strong, focused central bank, not one that is saddled with too many diverse missions and competing responsibilities. that its independence and competency are called into question. it has been proposed that the fed assume yet another role in controlling threats to overall financial stability. but i fear these addition the responsibilities would further distract from the fed's core mission and leave it open to dangerous politicalization. undermining it, its critical independence. so as congress takes up the financial reform this year, i have proposed creating new entities outside the federal reserve to focus

responsibilities for bank regulation, consumer protections and systemic risks so these important duty also not need to compete for the federal reserve's attention. appreciating that conducting effective monetary policy requires full access to information on banks, my proposal, our proposals preserves and expands the fed's involvement and ability to access information directly from fim institutions, and the new bank regulators. the ability to participate in bank exams, new authority to regulate systemically important payment, and financial utilities. what i'm proposing does not exclude the fed from involvement in these issues, but rather expands the participants in this effort. we share the goal of strong, focused independent federal reserve that can operate successfully as part of a new regulatory framework that will restore our nation's economic security and i look forward to

working with you on this very important task. i know there are very important issues that my colleagues, of course, want to discuss here today with you as they consider your nomination. again, i think you're deserving of renomination and confirmation by the united states senate. i believe you've done a very good job in helping us avoid the kind of catastrophe that could have occurred in this country. but i also belief we bear responsibility to consider t the -- either as chair of this committee or chair of the federal reserve and that's why i raise these issues as part of an overall reform of the financial regulatory structure that has been the desire of many people over many, many years and in the absence of the situation we find ourselves in today, i suspect we he would not be dealing with it i welcome your participation here today, congratulate you on the work you've done and turn to commissioner shelby for any comments. >> welcome, mr. chairman. we all know chairman bernanke's academic accomplishments prior

to joining the board of governors. he was and remains one of our nation's leading scholars on the great depression. i believe his expertise in this area has served him well during our current crisis. it's important to note, however that every crisis has a beginning, a middle, and an end. and while we learned a great deal about crisis management from the great depression, it appears that we've learned precious little about how to avoid the situation in the first place. prior to the recent financial crisis, the federal reserve kept interest rates, i believe, far too low for too long, encouraging a housing bubble and excessive risk-taking. in addition the fed failed to use its available powers to mitigate those risks. congress also bears some responsibility. often, over my objections here, we enacted housing policies that improu dentally encouraged homeownership to levels we now know with unsustainable. we also failed to curtail the

activities of the housing gses, fannie mae and freddie mac. my record on that topic, i think, is well known here. after the recession that ended in 2001, which was preceded by a bursting of the dotcom bubble, the fed was concerned wi about sluggish economy and the specter of deflation. given those concerns, the fed chose to hold interest rates remarkably low for years. during most of that period, now chairman bernanke served as a member of the board of governors of the federal reserve and supported the low interest rate policies. in 2002, then governor bernanke warned of deflation. he stated, i'll quote, the fed should take most seriously its responsibility to ensure financial stability in the economy. irving fisher, 1933 was perhaps

the first economist to emphasize the potential connections between violent financial crises which lead to firesales of assets and falling asset prices with general declines in aggregate demand and the price level. a healthy, well capitalized banking system and smoothly functioning capital markets are a line of defense against inflationary stocks. i believe the fed should and does use its powers to ensure the financial system will remain resilient if financial conditions change rapidly. the governor's warning was clear -- deflation is a potential danger which could ignite a financial crisis. the policy prescriptions seem equally clear, keep interest rates low, liquidity flows high and lean against deflation pressures. however, while keeping interest rates low for a protected period of time, the fed appeared

remarkably unconcerned about the possibility of igniting a financial crisis by inflating a housing price bubble which led to the same result -- a violent financial crisis and a firesale of assets. as housing prices soared and risk taking escalated, wall street investors pressed on as if a fed put was insured. the notion was in adverse market conditions, the fed would be a sosh faltering assets and flooding into the markets with liquidity. indeed governor bernanke at that time assured markets that the fed stood ready to use the discount window and other tools to protect the financial system, a reassurance that the fed put was in place. in 2004/2005, chairman bernanke and other mens no doubt, a result of a village and adept monitory policy.

large risk had been mitigated, opening the door for greater risk-taking. in the time of risky mortgage underwriting, the fed failed to use its rule-making ability. although numerous taxes, the poll credit opportunity act, respa, and the home morris disclosure of to give the fed the authority to act, nothing was done. the fed also made major forecasting years leading up to the recent crisis. after the housing market bubble began to burst in 2006, the fed to slow to entertain spillovers from the financial system. finally, in response to the growing crisis, the fed took actions to be ad hoc and piecemeal.

took actions that often appeared to be ad hoc and piece meal. many of the fed's responses in my view greatly amplified the problem of moral hazards stemming from too big to fail treatment of large financial institutions and their activities. in addition, some fed actions were taken in concert with the treasury, blurring the distinction between fiscal policy functions of the congress and treasury and the central bank's monetary policy and lender of last resort functions. under chairman bernanke's watch, the federal reserve vastly expanded use of its discount window including the provision of funds to some -- including the provision of funds to some institutions over which the fed had no oversight. the fed also created new lending facilities to channel liquidity and credit to markets that were deemed most stressed and systemically important. consequently, the fed's balance sheet has ballooned from a pre-crisis level of around $800 billion to more than 2.2

trillion through credit extensions and purchases of risky assets. many fed actions were innovative ways to provide liquidity to a wide variety of financial institutions and market participants. some actions amounted to bailouts. when dealing with individual institutions deemed systemically important by the fed, share holders were wiped out and management replaced. however in many instances, bond holders were made whole even though they were not legally entitled to such favorable treatment. the fed made it explicit that certain institutions and activities would not be allowed to fail. recently fed governors, certain fed governors stated private risk absorbed by the fed involved only a small portion of its enormous asset holdings. some suggested that the

government might even make money on some of its risky deals. while some of this mirgt be true, i don't believe potential profit is the appropriate metric for evaluating government support of private risk. taxpayers simply should not be subjected to possible losses from private risk. mr. chairman, from for many years i hailed the federal reserve in high regard, i had a great deal of respect for not only its critical role in the u.s. monetary policy, but also its role as a proou pru tent initial regulator. i believed it to be the nation's repository of financial expertise and excellence. over the years we have enacted a number of laws which democrat stated our confidence in your institution. we trusted the fed to execute those laws which deemed -- when deemed prudent and necessary. i fear our trust and confidence were misplaced in a lot of instances. the question before us now, mr. chairman, is what are we to do about it? currently the committee's discussing, as senator dodd said, the future of our

regulatory system. to the extent that we can identify weaknesses that contribute to the crisis, we should address them. but not everything that went wrong with be blamed on the system because the system also depends on the people who run it it's those individuals who need to be accountable for their actions or their failure to act. mr. chairman i believe in accountability. the nation can be a highly effective means to -- by which this body can hold individuals accountable. it's a process through which we can express our disapproval of past deeds or our lack of confidence in future performance. we continue to face considerable challenges, including rising nonperforming commercial real estate loans, tight credit conditions, record high mortgage delinquency rates, double digit unemployment, hemorrhaging deficits, public debt and concerns about the size of the

fed's balance sheet, and the possibilities of more bubbles. certainly we are still deep in the woods. the question before us is whether chairman bernanke is the person best suited to lead us out and keep us out of trouble. thank you, mr. chairman. >> thank you very much, senator. chairman bernanke, welcome again to the committee. >> thank you. i thank you for the opportunity to appear before you today. i would like to express my gratitude to president obama for f nominating me for a second term. finally i thank my colleagues throughout the federal reserve system for the remarkable resourcefulness, dedication and stamina they have demonstrated over the past two years under extremely trying conditions. they have never lost site of the importance of the work of the federal reserve for the economic well-being of all americans. over the past two years our nation, indeed the world what endured the most severe

financial crisis since the great depression. a crisis which, in turn, triggered a sharp con traction in global economic activity. today most indicators suggest the final markets are stabilizing and that the economy is emerging from the recession. yet our task is far from complete. far too many americans are without jobs and unemployment could remain high for some time even if, as we anticipate, moderate economic growth continues. the federal reserve remains committed to its mission to help restore prosperity and to stimulate job creation while sprefing price stability. if i'm confirmed i will work to the utmost of my abilities in the pursuit of those objectives. as severe as the effects of the financial crisis has been, the outcome would have been worse without the strong actions taken by the congress, the treasury department, the federal reserve, the federal deposit insurance corporation and other authorities both here and abroad. for our part, the federal reserve cut interest rates early and aggressively, reducing our

target for the federal funds rate to nearly zero. we played a central role in efforts to quell the financial turmoil, through our jointests through other agencies and foreign authorities to prevent a collapse of the global banking system last fall. and through our leadership of the comprehensive assessment of large u.s. banks conducted this past spring, an exercise that significantly increased public confidence in the banking system. we also created targeted lending programs that helped restart the flow of credit in a number of critical markets including the commercial paper market and the market for securities backed by loans to households and small businesses. indeed we estimate that one of the targeted programs, the term asset-backed securities loan facility has helped finance 3.3 million loans to households, excludeing credit card accounts, more than 100 million credit

card accounts, 480,000 loans to small businesses and 100,000 loans to larger businesses. our purchases of longer-term security have provided support to credit markets and reduce interest rates. taken together, the federal reserve's actions contributed substantially to the significant improvement and financial conditions and to what now appears to be the beginnings of a turnaround in both the u.s. and foreign economies. having acted promptly and forceful forcefully, we are keenly aware to ensure longer-term economic stability we must be prepared to withdraw the extraordinary policy support in a smooth and timely way as markets recover. we confident we have the necessary tools to do so. however, as is always the case, even when the monetary policy tools employed are conventional, determining the appropriate time and pass for the withdrawal of

stimulus will require careful analysis and judgment. my colleagues and i are committed to implementing our exit strategy in a manner that promotes job creation. a financial try crisis of the serverity we experienced means unsparing self assessments of past performance. we have been engaged in identifying improvements. in the realm of consumer protection, during the past three years we have comprehensively overhauled regulations, aimed at insuring fair treatment of mortgage borrowers and credit card users among numerous other initiatives. to promote safety and soundness we continue to work with other domestic and foreign supervisors to require stronger capital, liquidity and risk management at banking organizations, while also taking steps to ensure that compensation packages do not

provide incentives for risk taking and an undue focus on short-term results. drawing on our experience in leading the recent comprehensive assessments of 19 banks, we are improving our horizontal reviews of large institutions which will afford us greater insight into industry practices and possible emerging risks. to compliment on-site supervisory reviews, we are also creating an enhance the quantitative surveillance tram that will make use of the skills at nonl only supervisors but economists, specialists in financial markets and other experts within the federal reserve. we are requiring large firm provide supervisors with more detailed and timely information on risk positions, operating performance and strengthening consolidated super vision to capture the firm-wide risks faced by complex organizations. in sum, heeding the lessons of

the crisis we are taking a more proactive and comprehensive approach to oversight to make sure problems are identified early and met with prompt and effective supervisory responses. we also have renewed and strengthened or longstanding commitment to transparency and accountability. in the making of monetary policy, the federal reserve is highly transparent, providing detailed minutes three weeks after each policy meeting, quarterly economic projections, regular testimonies to the congress and much other information. our financial statements are public and audited by an outside accounting firm. we publish our balance sheet weekly and provide extensive information through monthly reports and on our website on all the temporary lend facilities developed during the crisis, including the collateral we take. further, our financial activities are subject to review by an independent inspector general. the congress, through the government accountability office, can and does audit all

parts of our operations except for monetary policy and related areas explicitly exempted by a 1978 provision passed by the congress. the congress created that exemption to protect monetary policy from short-term political pressures and to support our ability to effectively pursue our mandated objectives of maximum employment and price stabilities. in navigating through the crisis, the federal reserve has been greatly aided by the regional structure established by the congress when it created the federal reserve in 1913. the more than 270 business people, bankers, non-profit executives, academics, and community agricultural and labor leaders who serve on the boards of the 12 reserve banks and their 24 branches provide valuable insightses into current economic and financial conditions that statistics alone cannot. thus, the structure of the federal reserve ensures our policymaking is informed not just by a washington perspective or a wall street perspective but

also by a main street perspective. if confirmed, i look forward to working closely with this committee and the congress to achieve fundamental reform of our system of financial regulation and stronger, more effective super vision. it would be a tragedy if after all the hardships that americans have endured during the past two years our nation failed to take the steps necessary to prevent a recurrence of a crisis of the magnitude we have recently confronted. and as we move forward, we must take care that the federal receive remains effective and independent with a capacity to foster financial stability. thank you again for the opportunity to appear before you today. i'd be happy to respond to your questions. >> thank you very much, mr. chairman. again, i'll ask the clerk to keep an eye on the clock here so we move along with the questions this morning. let me begin in the sense, i --

in talking about both systemic risk obligations as well as the whole issue of the supervisory authority. you wrote your piece for the "washington post" a few days ago in which you raised the concern that if you lack the supervisory capacity here, it would directly effect your ability to conduct monetary policy. we had witnesses before this committee over the last number of months, including the former fed vice chair, the former fed monetary affairs director, and alan melt zzer, their testimony says the bank's supervisory authority plays little role in it would have access. this is not reflected in your piece. but it would have access. they could participate in examinations of any bank or bank-holding company. would this not help you carry

out the fed's core functions? it is access to the information that is critical for monetary policy appeared objections to the proposal are not really as well founded. >> thank you, mr. chairman. i think that taking federal reserve has out of active banking supervision would be bad for the country. there is a parallel expertise that arises from working with monetary policy. we have a great group of economists. they are unique in washington in their ability to address these issues. as we go forward, as we try to supervise complex, multi-company firms, and as we tried to look at the system as a whole, which involves looking into the interactions of companies and

markets, we need not just banks supervisors who can read a loan file, but financial market experts and economists who can treat the context and the supplementary analysis. and the supplementary analysis that will make these more difficult analyses possible. we demonstrated the value of this in the stress tests earlier this year. the second argument, the one you eluded to specifically, has to do with benefits to the federal reserve of having the supervisory authorities. you mentioned monetary policy. there is some benefits to monetary policy. i can give instances. the greater benefit is to our ability to help maintain financial stability and to be an effective lender of last resort. in the current crisis, for example, our ability to respond to the crisis, to address problems in the banking system, to help stabilize key markets was critically dependent on our ability to see what was going on in the banking system and to

have the expertise inside the federal reserve to evaluate what was happening. there's no way we could have been as involved or effective in this crisis if we did not have that expertise and information. if you go back into history, there are many other examples. in 9/11, after 9/11, the federal reserve played a central role in restoring the financial system to operational capacity and our knowledge of what was happening in the banks, their funding positions, need for liquidity, the risks they faced operationally and otherwise was critical in our ability to do that. there are many other examples. so i do believe that monetary policy is benefited, but financial stability is even more important in that the ability of the fed to play its role in stabilizing the financial system and being lender of last resort, in addition we need to be able to look at collateral and understand the solvency of banks to make loans to banks requires

our involvement in bank super vision. my belief, in looking at other countries where now the trend is very much towards reversing earlier decisions to strip regulatory powers from central banks, the trend is go back in the opposite direction in europe, and the united kingdom, for example, the political discourse is whleaning heavily towards adding supervisory and macro prou dent initial responsibilities to the bank. that comes from experience of the last couple of years where the inability to have complete information greatly hampered the functions of those central banks in addressing the financial stability issues. being on a board, having the ability to go along on an exam will never substitute for having your own expertise, your own information, your own ability go in when you believe there's an issue. so i do believe, mr. chairman, i understand your objectives here, but i believe it's a very, very

serious matter to take the fed essentially out of financial stability management which this would, i think would do. >> it's not my intention to take it out at all but expand the number of eyes looking at these situations so we have better judgments. one of the problems that occurred in the supervisory role of the bank holding companies, it was an abysmal failure. i'm talking about before your tenure. but looking at systemic risk, while we are examining ways to have resolution mechanisms here to avoid the moral haas soozard, it seems it's in our interest to avoid the occurrence from happening. the way do that is having the supervisory function here that would allow a decision to be made where an institution was getting close causing systemic risk. again, my concerns here about institutional issues rather than the individuals involved in decisionmaking, but here we were

at a time when we are now looking back, all the signs were so blatantly clear. yet in conducting its supervisory capacity within the fed it failed terribly at giving us the kind of warnings we should have had as a country of where we were headed, particularly in the bank holding company area. my concerns about this are based on recent history where there's been a failure in perform nag function. therefore the concerns that maybe we ought to be looking at something different that would provide us with greater warnings, predictions, the ability to respond so you're not spending the last two years -- i admire what you have done, but it never should have arrived at that moment. we should never have been going through that had there been cops on the street, doing their job, telling us what was going on. why should i give the institution that failed in that responsibility the exclusive authority we're talking about here. >> is true there were weaknesses in that super vision. and i described some of the

testimonies we are doing to strengthen it. the federal reserve was not the systemic regulator it has a narrowly described set of responsibilities. if you look at the firms, markets, and instruments that caused the problems, a great number of them -- senator shelby mentioned one or two, were mostly outside of the federal reserve's responsibility so there was a failure across the system. we all have to do better what we need is not only to do a better job but make a structure whereby we are look at the system as a whole. we are not just looking individually at each individual institution. we are trying to look at whole system collectively. i believe that the changes have been proposed that will create a systemic risk counsel and so on would do that and would help us independent of who is chairman or head of the fdic or sec, would helps have you a better chance of identifying those system problems in advance. >> let me jump quickly, time is

about up here for me. i don't want to exceed it. i would like to -- i'm sure others will ask you about the commercial real estate. senator shelby already raised it. the jobs picture, if i had exclusive time with you, i would want to talk about where we're going with jobs. an economist by the name of rubini, who correctly, we're told, predicted the global financial crisis we're now in and many other economists are concerned that the world's central banks are flooding the financial institutions with too much cash, setting the stage for another asset bubble burst. i don't know if you're familiar with his predictions at all with interest rates near zorro in the united states, the dollar dropped 12% in the last year against six maurnjor currencies and investors are borrowing dollars to fuel huge bubbles that may spark another financial crisis. can you tell us whether or not this threat has legitimacy? >> it's something we want to pay

close attention to let me distinguish between the united states and abroad. in the united states, it's inherently difficult to know if asset prices are appropriate or correctly -- if assets are correctly valued. but we have been trying to do our best to look at valuation models and other metrics. we do not see at this point any extreme misvaluations of assets in the united states. mr. rubini is pessimistic about the economy, if that weakened tremendous tremendousl tremendously -- i think that it needs to be understood that the united states monetary policy is intended to address both financial and economic issues in the united states, and countries which are concerned about that have their own tools to address bubbles in their own economies,

including the flexibility of their exchange rate, their own monetary policies, fiscal policies, supervisory policies. so it is not the united states responsibility to make sure there are no misalignments in every economy in the world when they have those tools to address them. >> thank you. on this issue we want to stay in close contact with you and others to see if this thing emerges as growing problem as this economist and others are warning us. senator shelby? >> thank you, chairman dodd. i want to stay on some of the subjects that chairman dodd has raised. in the past you argued, and still do, that there are certain synergies between super vision and regulation of financial firms and the conduct of monetary policy and the fed's lender of last resorts function. if we were to go back, mr. chairman, and review the minutes and transcripts of all the fomc meetings between 2003, 2008, i wonder what fraction of the time

would have been devoted to issues involving super vision and regulation of your holding companies or our holding companies. was it half the time? was it a fourth of the time? an eighth of the time? give us your judgment on that. >> in a typical meeting there would be very little discussion. let me take that back. recently we talked about it quite a bit because of the financial crisis. >> sure. >> but it depends on the situation. there are periods, like recently but also in the early '90s when the banking system's problems were what was called the financial headwinds and were holding back economic growth. where those issues were important and were discussed under normal circumstances they would be discussed much less. that's right. but to reiterate what i said to chairman dodd, though i do think that the bank supervision is helpful in monetary policy t provides us with information

that we otherwise would not have. there are academic studies which show there is a link between banking supervision information and fed monetary policy responses. i again would put a much heavier weight on the financial stability function whereby in order to be a lender of last resort and to know how to respond to an ongoing crisis or threats of crisis we need to have the expertise, information and authorities associated with being a bank supervisor. >> would it be fair to say the before the crisis in the last couple years that not alot of time was spent on regulatory and supervision talk and discussion? >> let me remind you of the structure of the fed. the fed open market committee is about monetary policy primarily. so the general economy, inflation, unemployment so on are the -- >> it's foremost s it not? >> i'm sorry? >> would be foremost? >> those would be the foremost issues in the fomc. the board of governor s has

responsibility for overseeing the systems, bank supervision activities. of course there that activity is ongoing, particularly recently as we worked hard to address the crisis and to correct the problems, it has been a major priority for the federal reserve. >> you have been on the fed -- quite awhile now, you have been chairman, this is your fourth year. do you believe that the federal reserve everyone under your tenure, not your predecessor's, before the crisis hit, when you first went there, first year or two was doing more than an adequate job of supervising and regulating the holding companies which subsequently got in such trouble? not just city corp but all of them. >> as i said before there were failures all through the system. we heard this morning that bank

of america is paying back its t.a.r.p.. >> when are they paying it back? >> immediately. >> any day. >> immediately. so as we go through the bank holding companies, we ran a stress test of the bank holding companies in the spring. of the 19, you know, i think it was nine were declared to be in good health and they paid back their t.a.r.p., the rest have all raised capital. those firms in some sense have not been the crux of the crisis. the real problems have been mostly outside of the bank holding companies. >> let's go back to your tenure, 2005, 2006, early '07, where was the fed as a regulator to try to prevent the crisis? whether you believe the federal reserve knew what was going on, and if so, why the debacle? they either knew or they didn't

know. a lot of people believe, senator dodd eluded to this, that the fed has done a horrible job as a regulator. now yet you're wanting to continue as a regulator, which is only part of your real job. >> senator, it's been an extraordinary crisis which tested every single regulator both here and abroad. did we do everything we could? absolutely not. i talked in my -- in my testimony about thing where is doing to improve. i think the question that lies before you, if you fight a battle and you lose the battle does that mean you never use an army again? you have to improve and fix the situation. you don't have to, you know, necessarily eliminate the institution. so, you know, i think we did not -- certainly not a perfect job, but i don't think we stand out as having done a worse job than other regulators. many of the critical firms and markets that were the worst

problems were outside our purview. >> do you believe a bank should have a role or a say in any way of who their regulator might be? such as the reserve banks? >> no, i don't. and in the >> the way it actually functions is that there is no connection. the banks were members of the board's of the 12 reserve banks select -- vote 4 -- >> explained, again, how the members of the reserve of atlanta, richmond, new york, san francisco -- >> i would be glad to do so. >> explain how their selected. -- and explain how they are selected. >> the directors, 12 that each

bank, are in three glasses. one is from drawn from banks in the district, community banks. the second class, the b class, our people typically elected by the banks. class, are people who are technically elected by the banks. the "c" banks are the general public. >> elected by the banks -- >> let me describe how the process works. the way the process works, first, that the directors are chosen for the most part by the leadership of the reserve bank that nominated -- nominated by the leadership of the reserve bank in order to be a wide representative cross section of economic and community leaders in the district. for example, among the 70 or so b and c directors there are three from financial services, there are many more from

manufacturing, wholesale, retail, trade, agriculture. they are not bankers. moreover, both the directors and the reserve bank president must be approved by the reserve board in washington. >> we understand that, but do you believe anybody that is going to be supervised by a banking regulator should have a say so in choosing that regulator? it seems to me and others it's an inherent conflict of interest and an incest tuous financial relationship that is not good for the federal reserve, not good for banks s tshgs t shows of interest to me. >> i can see why the way the law is written why you might think that. but the way it's structured and operates is that the boards of directors are drawn in practice from a wide cross-section of the public and they are -- there are

very strong firewalls. >> i know my time is up. lastly, do you believe that -- that the federal reserve bank, say the federal reserve of new york and richmond and san francisco, so forth, that they basically are the regulator and that you, as the chairman of the board of governors have outsourced that to the reserve banks? >> absolutely not. >> why haven't you? >> the board of governors has the legal authority and responsibility to manage that super vision. they function as operational arms of the board of governors the. we set the policy, do the quality control, reviews, we set the budgets so your earlier criticism, to the extent you're correct, the buck stops here. we are responsible for that. we are, if anything, continuing to strengthen centralized and continueding to work to make sure that that supervision is as strong as possible. >> thank you very much.

>> thank you very much. senator johnson. >> welcome to the committee, mr. bernanke. i want to join chairman dodd in voicing support for confirmation. while i certainly think transparency is important, it is the fed's independence and its ability to carry out day-to-day decisions about monetary policy without intrusion of congress that strengthens the fed's credibility and allows it to follow policies that maximize price stability and economic stability. what do you think about current proposals being considered by congress to audit the fed's monetary policy decisions and to change the way the boards of regional fed reserve banks are chosen by making them political appointees? if agreed to, how would these proposals change the way the fed

operates? frnlg>> senator, first of all, . i think there has at least among the public been some misunderstanding of the word audit. audit sounds like a financial term. i believe that the congress should have all the information it needs about the federal reserve's financial operations, financial controls, to have appropriate oversight of our use of taxpayer money. we are, in fact, very transparent about our financial operation's, and i've listed some of the things in my testimony that we provide including an audited balance sheet, regular reports and the like. in addition, the gao has the authority to audit every aspect of the federal reserve except for monetary policy and related functions as provided for by exemption passed by the congress of 1978. and the gao is, in fact,

actively engaged in looking at supervision and many other aspects. we have currently 14 engagements of the gao including looking at our consolidated supervision and some of the things that senator shelby referred to. to be very, very clear, i in no way object to, in fact, i welcome trance parp see about the fed's activities and the fed's financial position both to the public and to the congress. i am, however, concerned with the auditing of monetary policy. what that means is that the gao would be empowered to come in essentially immediately after a policy decision to look at all the policy materials prepared by staff, to interview members and to basically second-guess the fed's decision in very short order with very few protections. my concern is that, as you mentioned, senator, the fed's credibility depends on the market's perception that we are

independent in making monetary policy decisions and we will not be influenced by short-term political considerations. my fear is that, if we were to take what might be perceived as an unpopular step, congress would order an audit which would be a way of essentially applying pressure or be perceived as a way of applying pressure to our policy decisions. i would ask the congress to consider retaining the 1978 exemption which is a very wise exemption, allows full access to our financial operations and controls and access to almost all of our policy activities. but against the appropriate distance to monetary policy to maintain the independence and credibility of that policy. >> i'm very concerned that if banks aren't lending to small business, we will not be able to create the job to decrease our nation's unemployment. what is the fed doing to encourage banks to lend to small business that are ready to hire?

>> senator, first of all, i very much agree with you. i talked about this in a speech in new york a couple weeks ago. many of the credit markets are functioning much better and larger firms are pretty well able to get access to credit, as bank of america showed overnight. but firms that are dependent on banks like small businesses are having much more difficulty. and since small businesses are such a major source of job creation, particularly in an upswing like we're hoping will continue from here, they're being constrained by lack of access to credit, has direct implications for employment growth and it's very significant. the fed has been very much engaged in trying to improve credit access for small businesses. we have provided guidance to banks which emphasizes that it's very important that they not be

so over conservativeconservative, that they not make loans. we have backed up that guidance with first training programs from our examiners to make sure they understand the importance of taking a balanced perspect e perspective, while we want banks to be very careful and prudent, we don't want them to fail to make loans to credit worthy borrowers such as small businesses. another piece of guidance which is relevant here, we recently put out guidance to banks on how to manage commercial real estate. this is relevant because many small businesses borrow against their premises, against real estate, collateral. and in that guidance we showed in quite a bit of detail how examiners and banks should work together to make sure that there's not undue pressure put on banks not to make loans, that good loans are not marked down inappropriately, that loans that can pay off even if the collateral value has declined,

can still be made, and so a small business that has -- uses its store or its place of business as collateral can still get credit. so we continue to work with the banks. we've urged them to raise capital. as i mentioned, the stress test let to an enormous amount of capital-raising by the banks which will overtime improve their ability to lend as well. even more directly, we have been working to increase the flow of funds from the -- from investors to small businesses, primarily through our talf program which has been trying to restart the securitization markets. that talf program as i mentioned in my testimony has greatly improved the ability of the spa loans to be securitized and sold to investors and has led to extension of hundreds to thousands of small business loans. in addition, we're also helping

to securityize commercial mortgage backed securities which again help small businesses to the extent that it frees up the commercial real estate financing situation and allows them to borrow against their place of business, for example. >> there has been much discussion about the effectiveness of the economic stimulus package that was enacted in february to create and save jobs. in your judgment, is the stimulus package vindicating some of the effects of the economic crisis? are there additional fiscal policy responses that congress can take to help correct the current economic situation? >> senator, i think it should first be noted that only about 30% of the funds that were authorized last february have been disbursed and probably something less than that have actually been spent. in some sense it's still rather early to make a judgment.

the judgment is also made more difficult by the fact that you have to ask the question where would we be without this package? what would the counter factual be? that requires models and analysis which reasonable people can disagree about. i think it's a little early to make a strong judgment, early to decide whether or not to do additional fiscal actions. but we'll continue to analyze it and try to estimate the effects on the economy. >> mr. chairman, i yield back. >> thank you very much. senator bennett. >> thank you, mr. chairman. welcome, chairman bernanke. i'm not going to go down the same road as many of my colleagues because i think that ground is going to be pretty well plowed, to mix two metaphors here. so i'm going to discuss something i think somewhat different. and let me set the stage for it.

we all talk about the great depression. i was born during the great depression, but i have no memory of it. by i was running a business during the great inflation, and i have a very clear memory of it. the speed with which the great inflation disappeared from our economy somewhat removed the pain. but my memory is still very strong. in the carter years, one of your predecessors had to deal with that, mr. vol kerr. i remember going to a bank and begging, and that is the operative word, for a loan to allow me to meet payroll after having maxed out my credit card because i was the ceo of that company and being absolutely delitted when the banker gave it to me at 21% interest. mr. vol kerr with some assistance let the historians work out who gets most of the

credit fromment reagan, ultimately broke the back of the great inflation and set the stage for a long period of economic growth that came after that. we are now looking ahead in a circumstance that many economists say are laying the groundwork for the next great inflation. let me quote from bob samuelson's column this morning. he says this week's white house job summit will try to revive the private economy is experiencing a retreat. since last spring, the number of bank credit cards have dropped 100 million about 25%. banks are tightening credit standards, partly in rick action to policy action.

meanwhile, empty office buildings and underutilized factories have depressed business investment spending. in the third quarter, it was down 20% from its 2008 peak. despite huge federal budget deficits, total borrowing dropped in the first half of this year. that has not happened in statistics prior to 1952. in the short run -- and this will take me where i am doing -- borrowing by consumers and companies is so weak. but the perception that this ministration will tolerate permanently large deficits could ultimately rattle investors and lead to large increases in interest rates. there are risks in over- aggressive job creation programs that can be sustained only by

borrowing or taxes. . aggressive government job creation programs that can be sustained only by borrowing or taxes. all right. as i look at the protections, e we're getting out of the administration they're saying the deficits are going to run at 4.2% of gdp as far as the eye can see. and i don't see the economy growing any faster thanks say, 2%, at least in the foreseeable future. and that to me is a recipe for the japanese disease where this economy becomes like the japanese economy and ultimately for major inflation. now, if we confirm you, that's going to be on your plate. maybe not in the next six to 12 months, but certainly during your four-year term. is inflation going to come back? and if it comes back, because of these massive federal deficits to which samuelson refers, how

are you going to deal with it and what do you see in your crystal ball? >> thank you, senator. let me just first say that, in terms of your reminiscences about the 1990s, i remember that, too, although i wasn't a businessman at the time. inflation is very corrosive, a very bad for the economy. the fed has a strong commitment to price stability and we will maintain that commitment. you didn't ask about this and i won't go into detail, but we are thinking about our exit strategy from our current monetary policy actions including the size of our balance sheet and our special programs. i can't help but just take the opportunity to -- your reference to chairman voelker. 1978 is when congress passed this rule that made monetary policy independent of gao audits. subsequently, the support of

subsequently, the support of president carter and president reagan for chairman voelker, was the reason inflation was conquered and it did set the stage for many years of prosperity. again, it's just a case study of why federal reserve policy independence is so critical. with respect to deficits, i agree very much that we cannot continue to have deficits that make our debt relative to our gdp rise indefinitely. we need to come down, deficits that are closer to 2% to 3%, not 4% or 5%. if we do that in the medium term we can begin to stabilize the amount of debt relative to the gdp. >> let me interrupt you to make this point. i'm an ap eighter, which is maybe not a good thing to do -- be in this election year. i'm an ap yater. the appropriations committee has influence over 1/3 of the

federal budget. the other 2/3 is on automatic pilot in mandatory spending for entitlement programs we're discussing on the floor of the senate the creation of another major entitlement program, and the percentage that we have any control over keeps going down. further, of the 1/3, half of that is the defense budget. so in terms of discretion their spending on domestic -- well, not entirely domestic this includes the embassies overseas, national parks, education, everything else is roughly 1/6 of the federal budget. as you're commenting on, gee, we need some fiscal discipline, the trajectory is entirely the other way as mandatory spending takes over. i think you're going to be looking at a situation where the congress will be unable to provide any kind of fiscal

discipline because of the mandatory spending. this year federal revenues projected at 2.2 trillion. mandatory spending at 2.2 trillion, every single thing we spend money on in the government other than mandatory spending we've had to borrow every single dime. and i don't see that structural circumstance changing. i see it going in the other direction. and that puts an enormous burden on your plate. >> senator, i was about to address en tightments. you can't tackle this problem in the medium term without doing something about getting entitlements under control, reducing the costs particularly of health care. it's only mandatory until congress says it's no longer mandatory. we have no option to address those costs at some point or else we have have an unsustainable situation. the fed will not maintain the debt, we will not be able to do

anything about interest rates going up if creditors begin to lose confidence in the u.s. fiscal sustainability. so it is very important that -- this is obvious, but i think it's worth saying. you're right to raise it, that we need not only an exit strategy from monetary policy. we very much need an exit strategy from fiscal policy in the sense we need to get back to -- we need to have a plan, a program to get back to a sustainable fiscal trajectory in the next few years. >> mr. chairman, when you say quickly, the fed will not monetize it, that means if my son starts a business in a few years, he's going to be paying 21% interest rates as well? >> no, sir, not if the 21% comes from inflation which is where a lot of that came from in the '70s. we're not goings to support inflation. we might not be able to stop rises in real interest rates even given a stable price level. >> thank you. >> thank you very much, senator. senator reid.

>> welcome, mr. chairman. was the trajectory of federal spending and federal reserve policy more appropriate at the end of 2000 or the end of 1999 than it is today? >> we certainly face a lot more challenges since this. >> seems to me we had a surplus and had unemployment rates that were about 4.6%. we had economic growth and income growth across the spectrum at every level. so what happened? >> well, going back to some of the themes that senator shelby raised, the stock market boom was not sustainable. it popped. and that contributed to the reception of 2001. and now, of course, we've had a financial crisis and a deep recession which has dragged down tax revenues and created needs for supporting people out of work and other important

objectives. so a lot of what's happening right now -- these enormous deficits we have this year and next year are not permanent. they are reflecting the current situation, but some of it will be permanent unless we begin to address particularly the entitlement issue and the aging issue. >> so you would concur that our effort today to pass health care reform is critical to our economic future? >> i'm not going to comment on the overall health care bill. what i will just say is i think an essential element would be to try to reform health care in a way that controls costs going out. that's going to be essential. >> that's what the cbo has concluded in their evaluation of the senate plan before us. is that correct? >> they've talked about some premiums. i don't think they have made a strong statement about the shared gp devoted to health care. >> they've indicated that going forward there would be cost

savings. and i think from my view, the faster we get this accomplished, then we can move on to some of the other issues we've talked about today. but the -- i recall in the '90s because i was here, there's only two really ways you can deflect this deficit. that's either by cutting expenditures or raising income taxes or other forms of taxes. can you think of another one? >> to reduce deficits? >> yeah. >> well, logically there are other kinds of taxes besides income tax. >> i concede that, some type of taxes. >> on the spending side, again, willy sutton robbed banks because that's where the money is, as he put it. the money is in entitlements. those are the programs that are growing. at the rate we're going, in about 15 years the entire federal budget will be entitlements and interest and

there won't be any money left over for defense or any of the other activities. clearly we're facing a very difficult structural problem in that we have an aging society and rising health care costs and the government has very substantial obligations. i'm not in any way advocating unfair treatment of the elderly who have worked all their lives and certainly deserve our support and help. if there are ways to restructure or strengthen these programs that reduce costs, i think that's extraordinarily important for us to try to achieve. >> would you take taxes off the table? >> those decisions -- i wouldn't do anything. those decisions are up to congress. >> well, your predecessor signaled very strongly that the tax cuts in 2000 were appropriate. >> i have not done that. i've done my best to leave that authority where it belongs, with the congress. >> one of the most pressing issues that we face across the

country is employment, frankly. you have made the point that you will begin to reduce the stimulus, the aid that the fed is providing at some point. that will be done i hope with recognition that, until we restore employment across the country, we have not brought back the economy. we have not restored confidence in the economy and we have not made it productive for the people, the working people of this country. is that your view? >> yes. i think jobs are the issue right now. and i think it's not just today's incomes, today's production. it's also about the future. we have a situation where 30% of african-american young people are unemployment. very high fractions of young people in general. people who begin their work careers without a job,

obviously, are going to be losing opportunities to gain on-the-job training, to learn skills. and it will affect them for many years down the road. so there are very severe, long lasting costs associated with unemployment rates at the level we're seeing and with the duration of unemployment we're seeing. and it really is the biggest challenge, the most difficult problem that we face right now. >> what do we do about it? i don't want to be glip. but there's both physical and monetary consequences. and what we've seen is that, particularly in the last several months that the actions of the federal reserve together with actions, fiscal actions are effective, we hope, in some cases. what would you propose to do about the employment situation? >> well, on the federal reserve side, where i have -- i can speak, obviously we have continued to keep interest rates close to zero to try to stimulate growth.

we have seen now positive growth in output which will translate into jobs we're hoping soon. i think a very important issue is credit. if there's not credit, then that affects the ability of people to buy autos and other goods and services, affects the ability of small businesses to hire and maintain their inventories. so i discussed earlier some of the steps we're taking to try to unfreeze credit including pushing banks to make credit worthy borrowers -- give credit worthy borrowers access to loans, try to raise capital, try to restart securitization methods and other steps. the fed has a program we're employing which is focused on getting jobs created. on your side, on the fiscal side obviously there are a whole number of different options. christina romer had an op ed in the "wall street journal" yesterday where she was listing

some of the things that the administration is thinking about. all these issues will have fiscal consequences and the congress will have to make those trade-offs. >> let me get to an issue under your control. that's your supervisory responsibility with some of the largest financial institutions in the country. some of the data i've seen suggests that local community banks are much more aggressive in terms of lend together the small business administration, in lending to those small companies that are creating jobs, at least maintaining jobs. if you look at the bigger financial institutions, they're not doing enough. can you through your supervisory responsibilities get them to perform better, frankly? >> first, on the small banks, that isn they do have commercial real estate issues. many small banks do. but it is also true that in many cases, small banks and stepped up and provided credit, particularly to small business,

and that is the reason why community banks are such a valuable part of our banking system. we face a dilemma, which is that we want banks to lend, and we are encouraging them to lend, but we certainly do not want them to make bad loans, because that is what got us in trouble in the first place. we are trying to get them to make loans to creditworthy borrowers and making sure they are balancing the needs of the bar wars against avoiding excessive risk aversion, -- the needs of the borrowers. we have done quite a bit to restore the securitization market, which is very important in the united states. that is about one-third of our credit system, and it was mostly shut down, and except for the government market. those markets look like they are in better shape and starting to

function, and that is very important, because that presides -- provides a sense. >> a thank you. >> just 30 seconds. the bank of america, you mentioned to senator shelby, are you supporting their decision? do you see any negative implications of them doing so? you referenced here. are you supportive of their decision to pay off the t.a.r.p. mon nis and do you see any negative implications of them doing so? >> we as their supervisor along with occ and others, evaluated their situation and we felt it was safe and reasonable and appropriate for them to pay off the t.a.r.p. and we signed off on that. >> thank you very much. >> senator bunning. >> thank you, mr. chairman. four years ago when you became -- when you came before the senate for confirmation to be chairman of the federal reserve i was the only senator to vote against you. in fact, i was the only senator to even raise serious concerns

about you. i opposed you because i knew you would continue the legacy of alan greenspan and i was right. but i did not know how right i would be and could not imagine how wrong you would be in the following four years. the greenspan legacy on monetary policy was breaking from the taylor rule to provide easy money and thus inflation bubbles. not only did you continue that policy when you took control of the fed but supported every greenspan rate decision when you were on the fed earlier this decade. sometime you even wanted to go farther to provide easier money than chairman greenspan. a recent -- as recently as a letter you sent me two weeks ago you still refused to admit fed action played any role in inflating the housing bubble despite the overwhelming evidence and the consensus of economists to the contrary. and in your effort to keep

filling the punch bowl, you cranked up the printing presses to buy mortgage securities, treasury securities, commercial paper and other assets from wall street. those purchases, by the way, led to some nice profits for the wall street banks and dealers who sold them to you and the gse purchases seemed to be illegal since the federal reserve act allows only the purchase of securities backed by the government. on consumer protection, the greenspan policy was don't do it. you went along with his policy before you were chairman and you continued it -- continued it after you were promoted. the most glaring example is to -- it took you two years to finally regulate subprime mortgages after chairman greenspan did nothing for 12 years. even then you only acted after pressure from congress.

and after it was clear subprime mortgages were at the heart of the economic meltdown. on other consumer protection issues you only acted as the time approach for your renomination to be fed chairman. alan greenspan refused to look for bubbles or to try to do anything other than to create them. likewise, it is clear from your statements over the last four years that you failed to spot the housing bubble despite many warnings. chairman greenspan's attitude toward regulating banks was much like his attitude toward consumer protection. instead of close supervision of the biggest and most dangerous banks, he ignored the growing balance sheets and increasing risk. you did no better. in fact, under your watch every one of the major banks failed or would have failed if you had not

bailed them out. on derivatives, chairman greenspan and other clinton administration officials attacked brookly born when she dared to raise concerns about the growing risk. they succeeded in changing the law to prevent her or anyone else from effectively regulating derivatives. after taking over the fed, you did mott see any need for more substantial regulation of derivatives until it was clear that they were headed into the financial meltdown thanks in part to those products. the greenspan policy on transparency was talk a lot, use plenty of numbers, but say nothing. things were so bad one tv network even tried to guess his thoughts by looking at the briefcase he carried to work. you promised congress more transparency when you came to

the job. you promised more transparency when you came begging for t.a.r.p. to be fair, you have published more information than before, but those efforts are inadequate, and you still refuse to provide details on the fed's bailout last year on all the toxic waste that you have bought. and chairman greenspan sold the fed's independence to wall street through the so-called greenspan put. wh whenever wall street needed a boost, alan was there. you went farther than that when you bowed to pressure of the bush and obama administrations and turned the fed into an arm of the treasury. under your watch, the bernanke put became a bailout for all large financial institutions including many foreign banks. and you put the printing presses

into overdrive to fund the government spending and hand out cheap money to your masters on wall street which they used to rake in record profits while ordinary americans and small businesses can't even get loans for their everyday needs. now i want to read a quote to you mr. green -- mr. bernanke -- that's a freudian slip. believe me. here's a quote. i believe the tools available to the banking agencies including the ability to require adequate capital and an effective banking receivership process are sufficient to allow the agencies to minimize the systemic risk associated with large banks. moreover, the agencies have made clear that no bank is too big to fail so that bank management,

shareholders and uninsured debt holders understand that they will not escape the consequences of excessive risk taking. in short, although vigilance is necessary, i believe the systemic risks inherent in the banking system is well managed and well controlled. that should sound familiar to you since it was part of your response to a question i asked can about the systemic risk of large financial institutions at your last confirmation hearing. i'm going to ask that the full question and answer be included into today's hearing record. now, if that statement was true and you had acted according to it, i might be supporting your nomination today. but since then you have decided that just about every large bank, investment bank, insurance company and even some industrial

companies are too big to fail. rather than making management, shareholders and debt holders feel the consequences of their risk taking, you bailed them out. in short, you are the definition of a moral hazard. instead of taking that money and lending it to consumers and cleaning up their balance sheets, the banks started to pocket record profits and pay out billions of dollars in bonuses to their management. because you bowed to pressure from the banks and refused to resolve them or force them to clean up their balance sheets and clean up the management, you have created zombie banks that are only enriching their traders and executives. you are repeating the same mistakes of japan in the 1990s on a much larger scale while

sewing seeds for the next bubble. in the same letter where you refuse to admit any responsibility for inflating the housing bubble, you also admitted you do not have an exit strategy for all the money you have printed and the securities you have bought. that sounds to me like you intend to keep propping up the banks for as long as they want. even if the that were not true -- and i'm a little over my time, but this is very important -- the aig bailout alone is reason enough to send you back to princeton. first, you told us aig and its creditors had to be bailed out because they pose a systemic risk, largely because of the credit default swap portfolio. those credit default swaps, by the way, are over-the-counter

derivatives that the fed did not want regulated. well, according to the t.a.r.p. inspector general, it turns out the fed was not concerned about the financial conditions of the credit default swap partners when you decided to pay them off at par, not at a discount, but at 100%. in fact, the inspector general makes it clear that no serious efforts were made to get the partners to take haircuts, and one bank offered to take a haircut and you declined it. i can only think of two possible reasons you would not make then new york president fed geithner try to save the taxpayers some money by seriously negotiating or at least taking up ubs on their offer of a haircut.

sadly, those two reasons are incompetence or a desire to secretly funnel more money to a select few firms, notably goldman sachs, merrill lynch and a handful of large european banks. i cannot understand why you do not seek european government's contribution to this bailout of their banking system. from monetary policy to regulation, consumer protection, transparency and independence, your time as fed chairman has been a failure. you stated time and again during the housing bubble that there was no bubble. after the bubble burst you repeatedly claimed the fallout would be small and you clearly did not support the systemic risk that you claim the fed was supposed to be looking out for. when i come -- where i come from, we punish failure, not reward it. that is certainly the way it was

when i played baseball, and it is the way across all america presently. judging by the current treasure secretary, some may think washington does reward failure, but that should not be the case. i will do everything i can to stop your nomination and drag out this process as long as i can. we must put an end to your and the fed's failure, and there is no better time than now. your fed has become the creature from jekyll. thank you. >> care to respond to that? [ laughter ]. >> let me just correct one point. first, i'm not sure -- i think there was some misunderstanding or misinterpretation of the sig

t.a.r.p.'s report. we believed the failure would impose enormous damage on the entire u.s. economy and on every american. it is not reasonable to talk about letting large firms fail as if that would have no effect on credit extension and on the broader economy. the lehman example should be enough for everybody. with respect to the counterparties, a long discussion there which i won't go into, but i'll point out one issue you raised. ubs offered a 2% discount if and only if all the other counterparties would accept one. that was not the case. we did our best to get a reduction there. given aig was not bankrupt and given we were not going to abuse our supervisory but the fact of the matter is a aig, aig was 80% owned at that time.

by the federal government. but i just want to say -- let me say that i disagree -- >> i just want to say, let me just say that i disagree. mr. chairman, going through that period of that time, when they were talking about the bonuses, virtually no reporting on the county party issue, and the fact of the matter is that we allowed 100 cents on the dollar, with little or no negotiation, it just is -- i have raised the issue with others before. i do not understand that, and most americans do not. it is billions of dollars b and it is hard to imagine that we could not negotiate with any of the counterparties. >> we did not have any leverage. they would say, "you are bankrupt." >> aig, if they would not have done that, they would have been in trouble. >> that is all true, but most of

the firms were foreign. we had no authority or leverage over them. >> you are the chairman of the federal reserve. >> i do not abuse my supervisory powers. >> certainly not, not in that case. power. >> apparently not in that case. senator bahy. >> well, where to begin. i'm struck by the fact that senator bunning and senator sanders find themselves in agreement on this question, perhaps proving the old adage that ideology may be circular rather than linear. some of us, however, mr. chairman, find ourselves and i associate myself with the position of chairman dodd, in a different position on the question of your nomination. i will support you. not because i think you didn't make mistakes. as you admitted here today, you did. not because i don't think we should hold everyone accountable for doing better. i think we should.

but because i think you're in the best place to improve the situation to maximize the chances that we do not have a recurrence of some of these things, including the aig situation that senator dodd mentioned. there's a lot of culpability to go around. the fed made mistakes, as you've indicated. the treasury made mistakes. virtually every other regulatory body made mistakes. congress made mistakes. those on the left made mistakes. those on the right made mistakes. virtually every other government and their institutions made mistakes. virtually every institution of any magnitude in the private sector made mistakes. so should there be accountability? absolutely. do we need to maintain a sense of urgency to change those things to led to those mistakes? you bet. but some degree of mod stay and intro spec shun i think is in order and perhaps even a good long look in the mirror before engaging in too much monday morning quarterbacking.

claire voins is an attribute in short supply around here all the way around. my question to you is, with the benefit of hindsight, what would you have done differently? >> well, i think there are two areas. senator dodd has alluded to both of them. first -- and senator bunning: we were slow on some aspects of consumer protection. senator bunning was not exactly correct. we did have nontraditional mortgage guidance and subprime guidance out very early in my term. it took a year to do the hopa years. that's why it took until 2008 for those to come out. but i think that's an area where, if we had been more proactive, we, the federal reserve, had been more proactive, it would have been helpful. i believe, again responding to senator bunning, that it was not monetary policy so much as problems in the mortgage market that led to the housing boom and

bust. secondly, while again, as you kindly put it, there were mistakes made all around including other regulators, other -- the private sector, congress and so on, in the area where we had responsibility, in the bank holding companies, we should have done more. we should have required more capital, more liquidity. we should have required tougher risk management controls. i think the summary is that -- and to be quite frank, you talked about claire voins. i did not anticipate a crisis of this magnitude and this severity. but given that it happened, the -- many of the banks, but not all of them certainly, but at least some of them were not adequately prepared in terms of their reserves, in terms of their liquidity. that is a mistake we won't make

again. and i advocate not only strengthening regulation and strengthening supervision, but restructuring the nature of our financial regulatory system in a way that it will provide a more holistic macro credential approach so we're not reliant on each individual regulator in their own narrow sphere, that we have some interaction that allows us to assess problems that are arising in the system as a whole. >> i know you're concerned about the independence of the fed and perhaps the risk that there could be some politicizing of some of the functions you perform if we don't institute the appropriate reforms going forward. my own view is that the last thing we want is the political branches of government getting more involved in setting these policies on a day-to-day basis and yet at the same time we have to have accountability, we have to have oversight. what is it about some of the proposals that have been made that you believe go too far in

the direction of oversight that run the risk of politicizing the functions of the fed? >> first, i would draw a distinction between our supervisory functions and so on and our monetary policy functions. as a supervisor, we have exactly the same status as every other supervisor which is that congress controls the regulatory environment. it controls the objectives. it's responsibility for ensuring accountability. and the independence is at the level of making individual decisions at individual institutions and so on where you don't want politics there. there we don't claim any special exception or protection beyond any soup sore or regulatory agency would use. >> you're overseeing is just as accountable as anybody else? >> exactly. on monetary policy there's a special case. monetary policy by its very nature has to look ahead over a longer period of time. whereas political necessities sometimes push for a shorter horizon. so there's a very, very strong

finding, one of the major contributors is larry summers, i'm sure you know him in other contexts, which shows that country that is have independent central banks that make monetary policy without political intervention have lower inflation, lower interest rates and better performance than those in which the central bank is subject to considerable political control. now, the federal reserve has -- is a very transparent central bank with respect to monetary policy. we are the only major central bank to my knowledge that provides detailed minutes of each meeting three weeks after the meeting. we provide policy report twice a year, testimony, all kinds of information which gives congress and the public all the opportunities that would reasonably be needed to evaluate what we're doing and to second-guess, as always happens. what i'm concerned about is a set of policies that would

create the right of congress essentially to send in investigators whenever a monetary policy decision potentially went against their short-term preferences. president and i believe that the signal that would send to the markets and to the public is that congress is no longer respecting that zone of independence and is making its will known and intends to influence and to affect short-term monetary decisions which would not be constructive and is very inconsistent with what we've learned about central banking around in r the world in the last 25 years. >> might make the eye roning consequence of making interest rates higher because of an additional element of ris nk the marketplace. my final question has to do with your testimony regarding your role in both setting monetary policy and as the occasional lender of last resort and the importance of having, not just theoretical models, but some

empirical evidence and understanding about what's going on in the marketplace in terms of performing those two functions. my concern would be that the fed would become, if we just completely remove that authority, it becomes sort of an isolated entity completely divorced from an understanding of how your decisions were playing out in the real world. my question to you would be twofold. number one, how would you perform a function of lender of last resort if you didn't have some insight into the goings-on in these institutions that you were being asked to support, number one. how would that be possible? number two, how important is some empirical data, a hands-on understanding of what's going on in testimony financial sector? how important is that into maximizing you get monetary policy right? >> on the discount window lending, i guess if we didn't have any examination authority, we'd have to rely on the good will of other supervisors. i think we'd much prefer to have our own information and our own knowledge of what's happening in those banks.

more significantly, in periods of crisis or stress, as the fed uses its lender of last resort authority to try to stabilize a troubled financial system, in order to do that accurately and effectively we need to know what the funding positions are of individual banks, what's going on in those markets, what the solvency position is. i gave the example of 9/11 when the fed opened up its discount window to provide liquidity to help the financial system begin to function again. we could not have done that without the information we got on the ground in our supervisors in the banks. the 1987 stock market crash is another example where information from the banking system helped us to address potential threats to the integrity of the clearinghouses that cleared futures contracts. recently an example of this kind of problem in the u.k., over the past few years the government of britain removed from the bank of

england most of its supervisory authorities and invested if them in financial supervisory authority, the fsa. but when the crisis hit -- for example, when northern iraq bank came under stress, the bank of england was completely in the dark and was unable to address effectively what turned into a very disruptive run and a problem for the british economy. currently the trend in the u.k. and elsewhere is quite the opposite, to take away those authorities. it's to give the central bank the information and authority it needs to know what's going on in the banking system. now, senator shelby asked me about the role in monetary policy. i would say that the role in monetary policy is there. it's more unusual, doesn't happen all the time. but for financial stability maintenance, i think it's very, very important that the fed have that kind of information and insight into the banking system. >> thank you, mr. chairman. >> let me quickly, before i turn, on both those points, mr.

chairman, i say respectfully, we looked over -- in the g-20 more than half our colleagues in the g-20 supp rate supervisory and monetary policy. in fact, the countries that have weathered the storm rather well over the last couple of years have been countries that have separated both. the british system, the fsa was what they called the light touch in regulation. they didn't have deposit insurance very well, so you had the problem there. they didn't have the information. they basically didn't allow the central bank to get information. i think both of those factors contributed more to what happened in great britain than the fact that you had a separation of supervisory and mon tory policy. that's a legitimate debate and discussion. i don't think it can be said with absolute certainly that that was true. >> senator kraep powe. >> i want to focus on how we should establish our financial regulatory system. this committee is working on

financial regulatory reform right now. one of the biggest concerns i have is as we move forward in that that we do not institutionalize the too big to fail syndrome. i, for one, believe we have allowed companies that should have been resolved to continue with -- being propped up by the federal government or the fed and that has led to a moral hazard that we need to deal with in the structuring of our system. you've very often said that we need a new resolution authority so you and others can have the tools to deal with allowing large institutions to be wound down or resolved. and yet at the same time, i believe in your testimony you indicate that you believe we need to have the ability, you and others need to have the ability to provide necessary liquidity at times of crisis. there's obviously a problem there. my question to you is how do we

make the determination of what systemic risk is? maybe to put it a different way, how do we make the determination of when it is that we should provide liquidity as opposed to when it is that we should -- to sustain and maintain an institution as opposed to when we should wind down or resolve an institution. >> senator, first, under the liquidity function, that's -- to be very sharply distinguished from bailout. liquidity provision is short-term credit fully collateralized and made only to sound institutions and made only to provide a back stop when sources of short-term funding for whatever reason disappear. in the old days when retail depositors ran on a bank this was a way to prevent the collapse of the bank because of lack of liquidity. >> let me interrupt right there. do you believe we could structure a resolution authority and systemic r >> i do, i do.

i think it is very, very important. let me just say, to be absolutely clear, the actions we took last fall that stabilized these firms were done extremely reluctantly and done only because we did not have any good mechanism to allow them to fail without having severe consequences for the financial system and the broader economy. the most important thing congress can do is to solve the too big to fail problem. that is essential, and the only way to do that is to find a way to let the firms fail. i think it can be done in a way that also forces creditors to take losses, shareholders and other creditors to take losses, and done in a way that is sufficiently predictable that it will not cause as much disruption as the problems that we had last year, so i do believe it is possible, and i think the model you could use is the model we already have for

resolving failing banks, the fdic. just applied to larger, more complex institutions. >> what type of institution would you say should have that authority? would it be the fed? or would it be a council of regulators approve, or would it be a new financial regulator that we established? -- or would it be a council of regulators? ith the most experience in these kinds of resolutions is the fdic. i think the fdic should play a significant role. the treasury should probably play a significant role as well just to represent the political end of the decision making. the fed is not interested in being part of this process except insofar as congress views temporary liquidity provision as part of the winddown process, as being appropriate. let me say this as strongly as possible. we don't want anymore aigs or

lehman brothers. we want a well-established, well-stated, identified, worked out system that can be used to wind down these companies, allow them to fell. let counterparties like the aig counterparties take losses, but without completely destabilizing the whole economy as can happen. >> as a part of all this, i'm concerned that we will not re-establish the kinds of proper approaches and the principle of moral hazard until we end t.a.r.p., provide an exit strategy from the recent government guarantees and decide how we'll proceed with fannie mae and freddie mac. would you agree with that? >> i do agree with that. fannie mae and freddie mac are particular problem that need addressed. the t.a.r.p. was used to bail out companies and make all

creditors whole except for the shareholders under a well-designed resolution regime, many creditors would, should lose money which would create market discipline going forward which is what is desperately needed to avoid the moral hazard problem you're referring to. >> the recent sig t.a.r.p. quarterly report states there's $317.3 billion of unobligated t.a.r.p. funds available right now. do you support allowing the t.a.r.p. authority to expire on december 31st, 2009? >> well, i think it's very appropriate to begin winding it down. i think we should be clarifying what additional needs, if any, are still remaining to make sure that the financial system is still stable and will not run into new problems. but i certainly think that the t.a.r.p. has mostly served its purpose and that it's time to start thinking about how we're going to unwind that program. in addition, as i noted several times, many banks are paying

back the t.a.r.p. a lot of the money that was put out is now coming back to the treasury. >> do you believe that the that, we will ultimately recover all the t.a.r.p. dollars? >> i think if we look -- i won't speak about the automobile -- those sorts of things. if you look at the money that was put into financial institutions specifically, i think overall we're going to end up pretty close to break-even, maybe somewhat in the red, but not too much. considering what was achieved in terms of stabilizing the u.s. financial system and avoiding the collapse of our system, i think that outcome would be a good outcome. i do think that unlike some of the scare stories about $7050 billion being thrown away, i do believe that the financial institutions collectively will in the end -- that they'll be

something close to a break-even there. >> for my last question i'd like to shift to derivatives. and i appreciate the fact that recently you got back to me with a progress progress report on os to strengthen the infrastructure or our over-the-counter derivatives market. you stated that from the per respective of the end users, there always been occasion when they can't be met by clear otc produ products are exchange traded products. thus the issue is to preserve the counterparties to customize deals while properly managing the risk of these deals. end use verse not typically created the large exposures to counterparties that are the focus of efforts to reduce systemic risk through broader clearing. the question i have is do you believe that, again, as we try to structure how we are going to approach our financial regulatory system that we can effective effectively avoid the aig type issues and concern wes need to deal with in that context from the legitimate need for end

users to have the flexibility to hedge their unique business an risks through customized derivatives? >> i i think we can. i think we need some scope for customized drerivatives for certain users. those derivatives that can be standardize should be traded on exchanges. i think that's the plan. but i would add that unlike aig, which did not have significant oversight at all of their derivatives business, that we should be very clear that between the s.e.c., cftc and the bank regulators that bank, for example, who create customized derivatives will also be, you know, they'll be carefully watched for adequate capital and risk management for those positions. we don't get something like the aig situation where they had an enormous one-way bet with no capital behind it. >> senator crapo, thank you, very good questions. i'm going turn are to senator schumer. just to nowitzki committee, there is a vote that has

started. i announced earlier, we'll come back at 1:00 p.m., rather than having this back and forth. we've got a series of votes here, i don't want to have it be so disjointed. the committee will reconvene at 1:00 p.m. senator schumer. >> thank you, mr. chairman. thank you mr. chairman. i sat with some this room when we were are told about the imminent collapse of the financial system and panic was in the air. we have lots of problems. this economy is not moving well enough for my purposes or i think anybody's here. but we're not in the great depression, which we might have been. and in the sense, you're a victim in this society when you solve a problem, you're better off than you avoid a problem, even though society is better off that the problem was avided. i think people forget how

important that is and easy to criticize, easy to say it could have been done a different way, but at that moment, action was needed and needed quickly or we would have had financial collapse and you did act quickly and i think you know, that, well, i talked to warren buffett. he said the government deserves a high grade for its efforts to prevent the collapse of the financial system and rescue the economy from imminent freefall and you played a major role there. i hope my colleagues will remember that. my question is on -- my first question is on something that i've been very critical of the fed in the past and that is consumer protection. as you know, i think the fed dropped the ball on consumer protection issues. i support the creation, senator dodd has proposed of a strong, independent consumer financial protection agency. now we're finding every day, we find a new way, banks are in trouble, we know that. many of them, their profits are being squeezed here and there

and their reaction is to raise all kinds of fees and recoup on the backs of consumers. there has been a new report that's come out on atm fees released by bank rate.com. and according to that report, the average atm fee rose 12.6% in 2009 to $2.22. that's a heck of a lot. plus not only will the bank that owns the atm charge you, your own bank now probably charges you a fee for withdrawing money at tmas owned by other banks. the average cost of the fee for using someone else's atm is $1.32. over 70% of banks charge cu customers this fee, together with massive increases in credit card interest rates and other fees like these overdraft fees that we're seeing, consumers are bearing a disproportionate burden in maintaining the health of banks balance sheets. so i believe the fed should conduct a thorough review of atm

fees tone sure that consumers are protecteded from excessive atm fees, especially the double whammy fee for user another bank's atm. what's your opinion on this? you probably saw the study and will the fed agree to conduct its own study and get us some answers on it pretty quickly. >> well, first, senator,s you a know, we've just put out some rules on overdraft protection in general as it applies to atms and debit cards. and it will require banks to get an opt in from the consumer before they can charge them for an everydraft and that will address one of those issues. when he definitely take a look at atm fees and just at least try to verify what's happening and what the patterns are and we'll get back to you with that information. >> good. can you just make some suggestions about what should be done if you can't do them yourself. >> we'll look at it and see what we learn.

>> do you, just from your preliminary look at the report, do you think what's happening in atm fees is similar to what's happening with credit cards an others that fees are going up at a much greater rate than they did in the past? >> i'd like to get back to you on the numbers. i certainly find it plausible. i think that the fees are going up. i think in part banks are trying to find ways to make revenue, basically. >> understood. >> but we'll look at it. >> second question relates to the next bubble. senator dodd talked about the international bubbles an what's happened in dubai. but i would like to talk about the bubbles, the potential bubbles here in this country. this last crisis was a result of a massive bubble focused probably on real estate and there's been a lot of attention lately on the fed's zero interest rate policy and whether it's helping create new bubbles. the worry, of course, is is it going to be about instant replay, different acteders,

different script, same horrible outcome in terms of the movie, the horror movie we just went through. raising interest rates is one answer to deal with the bubble, but that's obviously tricky. i'd be worried about raising interest rates because it would hurt getting people back to work, which should be our number one concern. so could you talk a little bit about what can be done to deal with these potential bubbles before they burst given that you don't have the tool of interest rates as easily available because of the difficult economic situation? and then give us a little bit of your thinking on whether interest--whether and when interest rates should be ris ton deal with these potential bubbles? >> well, ideally, the way we should deal with bubbles, at least the first line of defense ought to be supervision and regulation. if we have appropriate risk controls that force banks to not

to pile in to overcrowded positions, for example, or to take excessive risks or if we have a system, systemic risk council which looks at emerging asset price increases or concentration of risks across the banking system. i think that's the first best way to try to address bubbles. that's something on in my very first speech as a governor in 2002, i said the first line of defense ought to be regulation and supervision and that has the benefit that it can help protect the system even if you're not sure that the increase in asset prices is a bubble or not. unfortunately, we do not have that system and i therefore think monetary policy has to may pai some attention to this situation. we are looking at it. fortunately, i -- well, let me be very careful. i have said in the past and i continue to believe it is extraordinarily difficult to know in real-time if an asset

price is appropriate or not. but given that caveat, we are doing our best to try to look at the major credit and stock markets, use the valuation models we have, use the standard indicators that we have and try to look for misalignments. >> straights that might work. >> the only, well, in some countries they've done -- they've had special measures for example where there have been house price increases, there have been things like mandatory increases in downpayment, things of that sort. so i suppose those are ideas that could address specific types of problems, but for a gem and, you know, i do not rule out use of monetary policy is necessary if the situation does

become worrisome and threatening to our dual mandate, which is growth and inflation. >> thank you very much, senator, and i appreciate your intelligence, chairman bernanke, in breaking this up a little bit, but i thought it would serve your interests and some others if we break it up. we will take a bite to eat, and we will stand recessed until 1:00 p.m. [gavel] [captions copyright national cable satellite corp. 2009] [captioning performed by national captioning institute] . this committee will come to order. this committee will come to

senator corker? >> thank you, mr. chairman. get my thoughts together. apologize. just came from another meeting, mr. chairman. thank you for being here and for your service and for always being available at the other end of the phone when questions arise. i appreciate that very much. i am going to spend most of my time today trying to understand more on ago forward basis what needs to happen from a regulatory process. i know that many of us here on the committee are trying to work through appropriate reg reform. and obviously the fed has been playing a big role in that. let me just start with the reg w issue. paul volcker recently has been quoted as saying that, you know, that banks have been engaged in risky behavior. we've had people in our offices

saying that -- and if mr. volcker is listening, this is not me saying it, just repeating it, okay, that he's not really saying the way things are. let me put it that way. and yet we've looked back. you know, i know senator warner and i in particular have spent a lot of time on the resolution issue. and the problem that occurs with the resolution and what you were dealing with at the time a year ago was the fact that a commercial bank inside a highly complex bank holding company is very hard to sort of take out. and yet the 23 a and b regulations which basically say that a bank's deposit cannot be used -- the depositors money cannot be used to engage in affiliates which might pose risk, there's also been some statements made that maybe you loosen that activity over the

last year or so, couple of years, and the fact is that bank deposits have been used more aggressively with affiliates than they had in the past. and the reason it's important, it's important to know, number one, but it's also important as we look at resolution, if banks are doing this and they're highly involved in other entities it's very difficult to unwind one of these organizations if, in fact, the banks depositor's monies have been used in other activities itself. that's a very long-winded question, if you would give a short answer, since i only have eight minutes, i would appreciate it. >> i'll try. 23-a exemptions allow the holding company to put assets into the bank to be financed by deposits. we don't grant those very often. we generally consult the fdic to make sure they're comfortable. .

when that's done it's done in a way to make sure that t. bank is not taking additional risks, that it's hole. it's not a general issue. it's something that we've done in some of the mergers and things that have happened, conversion to bank holding company status, those sorts of things. but it's not something that happens often. i don't think it's going to be generally an issue with resolution. there are lots of ways though which holding companies and banks are intertwined. for example, they might share -- >> right. >> -- risk controls or all kinds of other things. and in that respect both operationally and financially there are linkages that make it more complicated. the basic fact, which i'm sure you appreciate, not everyone does, fdic law applies only to banks. the bank holding company does not have a resolution and that can be a serious problem. >> i realize the management issue and the i.t. and just, look, the reason these organizations are put together so they can work together in a

more synergistic way, let's face it. should we draw a stiffer line if you will, between those and should there be any flexibility should we eliminate that so there's not either the perception or the substance behind the fact that some of those deposits may be used for more risky behavior than most people thought they otherwise would have been? >> no, i think that we're in a reasonable place right now. again, whenever assets are transferred down to the bank they -- they have to be guarantees, protections, backstop,s to make sure that the bank is not at risk of taking losses. and the purpose of those things is to segregate the bank and the purpose of protecting the fdic's insurance fund, for example. if we go forward and have a resolution regime that addresses the whole company, i think these issues are still there but they're less of a concern because the whole company will be addressed. >> you've talked a great deal about there's -- well, you've talked a great deal about the

fed maintaining supervision over some of the largest entities in the country. and some people have put theories out that, you know, the fed ought to supervise the top 25 entities in america. you know, that's been a number that's been thrown out. as we look back at citi and the fact that citi was under corrective action until 2003 and then the fed basically lifted that, the fed was watching citi. i mean, that's like prime "a," you know, the prime example of what the fed is supposed to show prudential regulation over. and yet citi, let's face it, turned out by all accounts to be an absolute disaster from the standpoint of activities they got involved in. it was the primary type of institution that the fed should be supervising. i don't say this to beat a dead

horse, but it does make one wonder -- i know a lot of people talk about the fed being the adult in the room and all kinds of things but it does make one wonder, you know, why that happens to be a good idea. i wonder you might expand on that. >> there are two separate issues. the first issue is the performance of the duties and how effective a particular supervisor is. and i talked earlier to an earlier question about some of the things that we have done in our self assessments, what mistakes we made and problems we found and how we're fixing them. we're taking a lot of steps to try to strengthen our supervision and our regulation. but there were problems throughout the entire regulatory system. if you're going to preclude anyone from participating in future regulation because they made mistakes in the crisis you're going to be cutting about most of the -- >> we wouldn't have any regulators. >> you wouldn't have any regulators left, that's right. one question is can the fed fix the problems. i believe we've made a lot of progress and i would be happy to talk to you off line in more

detail or summary now. there's a discussion in my testimony. you know, we had done a lot to strengthen the regulation to increase capital, increase liquidity to improve risk management. many issues you mentioned but other companies as well. then there's a second issue which i call the structural issue. when you're setting up for the future a structure of how regulation should work, what's the role of the central bank? and the central bank was created to address financial instability to stop panics that followed the 1907 panic is what caused the fed to be set up in the first place. we had the letter of last resort facility, the breadth of expertise. so i think that, you know, assuming that we and other regulators can correct the problems that we have discovered the appropriate structure should be one where the fed is involved because without being involved we won't have the expert tease, we won't have the information, we won't have the insight that will let us be effective in addressing systemic issues. >> so i want to talk to you more

about that. my time is about to end. i know you stated you're going to quit buying the mortgage backed securities that you're buying right now from fannie and freddie in march and other institutions. there are a lot of people saying that when you do that, that interest rates on home mortgages are going to go up a couple hundred basis points, okay? and i think it would be really good for all of us to know whether you rally are going to do that or not. i mean, i think it would be appropriate for -- you've stated it's going to end in march. i think it would be appropriate for people to know so they can be making other plans because i think it is going to have a huge impact on the market. i think a lot of people question whether that's within the section 14 of the fed's charter in the first place, but i'd love to have a response to that. and then, secondly, if we could, since my time is now and i'm filibustering, one of the things that you and i have talked a great deal about is just the political involvement in

monetary policy. i'm concerned about people like us getting involved in monetary policy. have stated that all of the way through. and i think most people on this committee would be very concerned about us getting involved in monetary policy. on the other hand, i wonder if it should go both ways. and what i mean by that is when the bush administration, you know, touted this stimulus back in may of their last year, which was most people saw on the surface was ridiculous. i mean, we're going to spread $160 billion around the country and drop it out of helicopters. i think most people thought -- i won't say most people. a lot of people thought it was a silly idea. and yet you championed that and that affects people here because the chairman of the fed is thought to be a really intelligent, important person. and, of course, you are. the same thing happened with this last stimulus, which, in my opinion, was absolutely not a stimulus. it didn't -- it's proven now it

didn't do what it was supposed to do. again, when you speak and say it out to happen, people up here vote that way. i guess i would just ask, i mean, if we're not to be involved in monetary policy, should you be used as a tool, whether it's a republican administration or democratic administration, that calls an agenda to come forth that, you know, is really a political agenda and not something that's necessarily good for our country? and mr. chairman, i thank you for the generosity of letting me go a little longer. >> let me say quickly -- >> i'd like for you to more than quickly answer both. >> both, all right. >> okay. >> on the mortgage backed securities we have a longstanding authorization to do that. i don't think there's a legal issue. we have said that the current program is going to come to an end at the end of the first quarter. the committee will -- it's a monetary policy decision. the committee will have to see how the economy is involves and whether or not we need to do more. several hundred basis points, there's a lot of uncertainty about what the impact will be if

i think that's very much at the high enden of what estimates are. but we'll have the see how that plays out. on the fiscal part i think you're -- >> so people involved in home mortgages will just know when they know? >> well, we don't know. we don't know exactly what the effect will be. >> saying it's going to end in march is not -- itself just kind of like we're going to withdraw troops in afghanistan in 18 months. that's just kind of saying it? i'm just -- >> well, in order to try to mitigate the effects of that, we've been tapering it off slowly. so far we haven't seen much effect in how it evolves and the committee is ready to respond if necessary. i think you're absolutely right. as aen matter i have tried to stay out of fiscal policy. i don't make specific recommendations. i didn't make my recommendations about the size or position or any of those things. but you're absolutely right and i will continue my practice of leaving fiscal decisions to the

congress. >> senator menendez. >> thank you, mr. chairman. chairman bernanke, i just want to start for purposes of memory, we often have short-term memory here. november of 2008. and the time -- and i think you reference this to some degree in your opening statement. november 2008, after those presidential elections, you and secretary paulson came before members of this committee and basically said, you know, we have an emerging set of circumstances and we need you to act, to do so boldly. and in the absence of doing that, that we would have a global financial meltdown. so i want to start there because

it's the beginning of what has then transcended since then. is that pretty much a fair statement? >> yes, sir. except it was october. >> october. okay. and the absence to place thereof. i often get to my constituents back in n i have to pay for it , too. the difficulty is creating a connection why we acted based on the expertise on others who said we needed to do so otherwise there be a global meltdown. that has real-life consequences. is that a fair statement? >> of course. which brings me to where we are today. i want to get a cent from you -- do you believe that the american

economy is recovering? >> it is beginning to grow again. we would like to go faster. we like just to come back faster. we avoided and even far worse situation by avoiding the collapse of the financial system. >> to give us a sense, i think senator schumer mentioned that sometimes when you avoid harm from happening you get no credit for it. give us a sense what would have happened? >> my professional career before i came to the fed was escallop of academics stunning financial crisis and the effects on the economy. there is a lot of evidence that when the financial system collapses are melted down, that it has very this -- various

effects fet. it contributed to a global recession as evident but a it is my belief that if we had not acted to stabilize the system, if we have not worked together to fervent what would have been a collapse of many of the major banks, that we could very well be in a depression like situation with a much higher unemployment than today, very deep decline in output, and in no immediate prospect for a recovery. immediate prospects for a recovery, unlike the situation we have today where we do see the economy growing. so i think the risks of allowing that meltdown were enormous. and costs to the economy, to the

taxpayer, to the average worker, the average person of allowing a financial system to collapse, the financial system is like the nervousness of the economy. if it breaks down, you get much broader consequences. so it's been a very hard message to explain but it's extraordinarily important to understand that i did not intervene because i care about wall street. i'm not a wall street person. i'm an academic. i came from a small person. i knew from my studies that it would have had extraordinarily bad consequences for main street. and i firmly believe we did the right thing. >> so now november, december of 2009, i asked you whether the economy is recovering, you answer, it is growing. growth doesn't necessarily mean recovery then? >> well, it's technically a recovery in that it's growing and that we no longer are declining. but it is certainly not satisfactory situation since we -- >> we agree on that. so what do you believe is this

most significant threat to our economic expansion both in the short term and in the long term? >> well, there are multiple concerns. certainly one of them is that it still remains difficult to get credit for bank-dependent firms. that's preventing small businesses from hiring and from expanding. the high unemployment rate is a major concern because we're seeing not just 10% unemployment but very long duration of unemployment. we're seeing a lot of people on part-time work on short hours. that has implications not just for the short term but for the skills and labor market attachment of workers going forward. it's going to affect people for many, many years. there are additional issues like our external trade deficit, the fiscal deficit, so on that we do need to address. but in terms of the immediate recovery, as i talked about in the speech i gave in new york a couple weeks ago, i think the two issues we need to watch most

closely are the return, the healing of the credit system, particularly for smaller borrowers, and the labor market which is, of course, still in great stress. >> we seem not to have succeeded at dealing with the credit market in a way that meets some of our goals that are critical to also deal with our unemployment consequences. and you know, i look at where some of the major institutions are getting the credit, they're getting credit, you know, measly two points lower than some strong regional entities. that's probably what's keeping them largely afloat. the question is, as you do that at the fed, where is the movement here, the hammer, for lack of a better word, to get them to loosen up to credit and what can the fed do to move it in a direction that also is

going to begin to make a real significant impact on unemployment, the two things that you say are critical? >> well, unemployment we have a range of policies including low interest rates and mortgage-backed securities purchases and a variety of other things. on credit, it's a difficult thing. i think it's a mistake to tell banks you must lend such and such amount because we got trouble with bad loans. we want to make loans to credit-worthy borrowers. the fed is trying to make sure that they are not by examiners or their own account failing to make loans to credit-worthy borrowers. we are issued guidance about the importance of doing that. we have trained our examiners to look at both sides to make sure that they -- that banks are giving full weight to the importance of relationships that they have, for example, to small business borrowers. we have issued guidance with detailed examples for how to deal with a borrower who may be

making payments but whose collateral which may be his business has declined in value and still might be important to continue lending to that person or that business. and in addition we have been trying to strengthen what's called the shadow banking system through our program to increase securitization of small business loans, commercial real estate loans and the light. we did the stress test to get banks to raise capital. so we are working at this. we understand that critical central importance of this is not going to be a quick improvement but i do think we are seeing some improvements and as the economy strengthens there will be a mutually beneficial improvement in the economy and in the credit markets. >> this is clearly the singular most important -- >> i agree. >> i know there are many other things that the fed deals with. but you know, this is the singular most important issue that your chairmanship is going to be critical over. in terms of helping the to

smooth this country forward in a way that its economy is recovering more robustly than underemployment is being reduced and that we give people back the dignity of work, which is ultimately the opportunity to sustain their hopes and dreams and aspirations. so i'm going to be looking at what you're doing in that respect. >> absolutely. >> incredibly closely. and my time is up. i do want to visit with you about the consumer financial froekz agency when you came to see me we had original conversation of that. but, you know, i -- my one criticism, i think you've done a lot of hard work in difficult times. my one criticism, which really proceeds your time even, but continued during your time, is that the fed has broad powers in consumer financial protection. and it just didn't use it in a timely fashion. and so there are many of us who question that leaving that there and -- is not necessarily in the best interest of the country.

so i look forward to having a discussion with you on that. >> senator, just quickly. i don't disagree we were late in using those powers. but over the past three years or so under my chairmanship we've been active in a wide variety of areas of consumer protection. >> senator demeant? >> thank you, mr. chairman. thank you, mr. chairman, for being here today and for your service. when congress created the federal reserve they created arguably the most powerful institution in the whole world. our whole economy, all our prosperity, wealth, rests on the soundness of the dollar as does much of the economic systems all around the world. so as we consider your renomination, it's important that we ask some difficult questions. not just of you, but to ourselves, because no one can say that there haven't been major failures. i think a lot of us has to admit that the federal government, the federal reserve let down the

american people and a lot of feel have been hurt. i will take exception to one of the arguments that i've heard today and i've heard often about what we heard in last october and what actually happened. we were told if we did not appropriate nearly a trillion dollars to buy toxic assets that the whole world economic system was likely to collapse. we appropriated nearly a trillion dollars and we never bought one toxic asset and the world economic system did not collapse. we can make a case and debate all we want about whether or not twisting banks' arms and forcing more money into the banking system actually helped us. we could talk about that all day. but the premise that we used to create this t.a.r.p. program was never followed through on. it's difficult for me to find credibility in the arguments that we saved our economy. i'd like to ask a few questions, mr. chairman, and i would appreciate short answers. i want to cover sumtertory today. we don't know a lot about the operation of the federal reserve. and for that reason i think the

way to judge performance is to look at outcomes, particularly outcomes based on the goals that you set for yourself. and in your confirmation hearing in 2005, you specifically listed four duties of the federal reserve. and i would just like to mention those and just ask you how you think we've done. one of them was fostering the stability of the financial system in containing systemic risks that may arise in the financial markets. has the federal reserve, under your leadership, accomplished that goal? >> no, but we also have lots of other coconspirators in that problem. >> another duty you listed, supervising, regulating the banking system to promote the safety and soundness of the banking system and financial system. has the federal reserve under your leadership accomplished that gold? >> we found some mistakes and tried to improve them. >> appreciate your short answers. another duty was conducting the nation's monetary policy in pursuit of the statutory with

maximum employment. do you believe you have accomplished that goal? >> we have moved monetary policy as much as possible to try to support employment growth, but obviously a 10% unemployment rate is not very satisfactory. >> again. i appreciate your answers. for me perhaps the biggest failure in the federal reserve in the political side here in washington is that amid all of these failures, the politicians, the folks in the administration and federal reserve have claimed credit for saving the system while blaming capitalism and unrestrained free markets for our problems. that has justified the positions that are now being taken here in congress in many ways to come back and even extend the control, the intrusion of the federal government further into the private sector. i think you've been a big part of orchestrating that and shifting the blame on to the private sector.

no one is arguing that there's not blame to go around everywhere. but the biggest failure i've seen is the failure for us to recognize the role we played and the lack of our oversight of fannie mae who created the toxic assets and sold them around the world, the monetary policy that created conically low unbloemt rates. not taking the blame that make sure the public is aware of that. we've undermined the system that made this country prosperous. i think that is an egregious error. what you say, predictions you make are critically important because we act on them, the withhold world acts on them. i would like to mention a couple of these as we go along. march 28, 2007, when asked about the subprime market, and i quote, you said, the impact of the broader economy in financial markets of the problems in the subprime market seems likely to be contained. a little later, may 17th, 2007,

you said, we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. a little later, february 28th, 2008, on the potential bank failures. i quote, among the largest banks, the capital rash cross remain good and i don't expect any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system. again, june 9, 2008, i quote. the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so. on july 16th, right before our crash, 2008, speaking of fannie mae and freddie mac, you say they are adequately capitalized and in no danger of failing. to a large degree the oversight that we're responsible for here in this congress, we did not accomplish because of assurances that we have gotten over the years from your predecessor and

from yourself. and by doing that i think we have egregiously failed the american system. let me mention a few things here as i run out of time. do you believe money is an enhancement -- and she met of government to the minute the lead based on economic behavior led -- behavior of the government? >> they are intended to follow the mandate, to 80 back some employment. that is what we try to achieve. >> do you believe and flemish to be a goal of the federal reserve? >> yes, and i think the federal government -- the fed can help keep it at its maximum level. >> should an agency established

by the government have the power to distort the purchasing power of money? >> the federal reserve has mandated to approve a price stability. one thing you did not mention is inflation. it has been low. purchasing power has been good. it has been stable. >> in a free-market economy, you would think that the cost of capital would fluctuate based on supply and demand. a big part of the role of the federal reserve is to try to fix those interest rates. is that a function that has been employed properly? is that something that needs to be reconsidered? >> we always need to improve our execution. reconsidered. >> we always need to improve our execution, but i think that as evidenced by the fact that every major country in the world has a central bank and uses monetary

policy, i think that's the system that we have determined is the most effective at this point. >> appreciate your testimony. i would again, as you and i have talked personally, ask you to consider the need to make the federal reserve more transparent. there's no reason that independence needs to mean secrecy. the confidence in the federal reserve, the mistrust around this country, has reached new heights. and we need to do something to restore the faith that the american people have in their monetary system, their financial system, and that responsibility is at the federal reserve as well as in the congress. but i would encourage you again to consider what type of openness or audit, as you and i have talked about, would be appropriate in order to reassure the american people that we're not looking at another fannie

mae situation, that over years we were told not to worry, not to worry, everything is okay. and now we saw what it did. we can't allow that to happen with the federal reserve. but again, mr. chairman, thank you very much. and i yield back. >> may i quickly respond to that? >> yes. >> senator, on fannie and freddie, the federal reserve had been raising concerns about fannie and freddie for many years. we were on the side of concerns about that. on terms of transparency, i think the congress should have access to all of our financial information, financial operations and the like. and we have made every effort to do that in whatever remains to be done, we want to work with you to do that. our main concern is the independence of monetary policy itself and not any financial aspect. we are very much committed to transparency in all financial aspects of the federal reserve. >> thank you, mr. chairman. >> senator? >> thank you very much, mr. chairman. chairman bernanke, i want to add my welcome to you and your family to the committee today.

i feel you have demonstrated tremendous skill in addressing the extraordinary economic crises and challenges that we have. as you know, i've always greatly appreciated your capacity and dedicated efforts to improve the financial literacy of students and consumers. the true cost of financial illiteracy have been made to -- all too apparent by this financial crisis. one other current causes of the crisis is that families were steered into mortgages, with risks and costs they could not afford to even understand. and that has been already expressed. we share a firm commitment to try to better educate, protect,

and empower consumers. i appreciate your advocacy and the efforts of the federal reserve to promote the use of financial institution for lower cost remittances. and we have many families that send portions of their wages to family members living in the philippines or other countries. unfortunately, too often consumers fail to take advantage of the low-cost remittance services found at banks and credit unions. my question to you, what must be done to, one, better inform consumers about costs associated with sending money and, two, encourage mainstream financial institutions to provide low-cost

remittances? >> senator, first, let me just agree with you wholeheartedly about financial literacy. the federal reserve has been committed on working on this for a long time, as you know. and, of course, the recent crisis el straights abundantly how important it is that people understand the contracts, the financial instruments that they are taking on. so we will continue to work with that and we will continue to also try to provide consumer protections that provide the information, the disclosures, the protections that help people get into the right product, which is very important. i agree with you about remittances. that's been an interest of mine for some time. the federal reserve has been working on that. we have worked, for example, with other countries to try and reduce the cost of sending money to home countries. but i think one of the valuable lessons here is that many of the remit tant services that people have are quite expensive and it may involve costs associated with exchange rates and the like.

we have encouraged institutions where possible to reach out because if we can persuade immigrants to use mainstream financial institutions for remittances they may become interested in having a checking account or a savings account or taking out a loan if necessary. so it's a way of introducing people who may not be that familiar with the banking system into the mainstream banking system, and in many cases reducing the cost that they face dealing with, you know, payday lenders and the like. so we do encourage that and i think that's encourage financial institutions to use that tool as a way of attracting new customers from immigrant communities. >> chairman bernanke, there are too many unbanked individuals that lack a formal relationship with a bank or credit union. as you mention, without access

to mainstream financial institutions, working families miss out on opportunities for saving, borrowing, and low-cost remittances. i personally understand this issue because i grew up in an unbanked family. in addition to encouraging the use of banks, credit unions for low-cost remittances, can you tell me what else -- what else must be done to bank the unbanked? >> well, the government can provide various incentives, encouragements to banks to do in many cases what's really in their own interest, which is try to reach out to these communities. for example, the community reinvestment act, which gives credit to banks for providing services, including branches in low to moderate income communities is one way to

encourage banks to take those sort of actions. we encourage banks to have multi-lingual employees to, again, establish those relationships. i would hope that banks would see that expanding those services into immigrant areas, low to moderate-income communities is really a way of expanding their customer base and increasing deposits and is really a profitable business strategy. so that, i think, fundamentally is the motivation for banks to go beyond the narrow groups that they are serving now and try to branch out more broadly. >> you did mention about predatory lenders. working families are having trouble accessing affordable credit. unfortunately many working families, of course, turn to predatory payday lenders for

small loans. my question is, what must be done to protect consumers from high-cost payday loans and to encourage the development of affordable alternatives? >> well, the federal reserve doesn't directly, you know, regulate payday lenners. i think in most cases they're regula regulated by states who set requirements they provide. it's very important for people to understand what the cost actually is. if you're paying a certain number of dollars until payday you may not realize that as an interest rate that may be many hundreds of a percent, or more. so regulatory work at the state level or whatever the appropriate level is to make sure that customers understand the cost of the credit they're obtaining and learn about the alternatives, i think is a very

positive direction. in general, as we were discussing earlier, to the extent that mainstream banks can come in and provide alternatives in the competition to check cashing and payday lending and the like the better the chance that families will have good access to credit and reasonable terms. >> thank you very much if your responses. thank you, mr. chairman. >> senator ritter. >> thank you, mr. chairman, very much for being here. the fed's current policy of extremely low and near zero interest rates is certainly helping banks recover in certain ways. i mean, they can use money to recapitalize through buying long-term government bonds.

but at the same time, that is -- that scenario is discouraging in many ways getting credit out to businesses to citizens who need it to the recovery. what's your concern about that and how do you balance those -- those objectives? >> well, as i've discussed earlier in the testimony, we have seen a lot of improvement in the broad credit markets in the corporate bond markets, stock market, and the like, which means that larger firms have pretty good access now to credit but there's still a big problem for people who are bank dependent, small businesses and consumers, and the like. and it's not an easy problem because we don't want to tell banks to make bad loans. we want them to make good loans and loans to credit-worthy borrowers. we have, however, done everything we can or at least we are trying very hard to encourage banks to do that.

in particular, by telling our examiners, training our examiners to work with banks to take a balanced perspective. that, is we don't want you to make a risky inprudent loan. but if you have a longstanding relationship with a customer who has been paying, if you have a credit-worthy borrower, you should make the loan. it's good for you. it's good for the economy. it's good for the borrower. so we are support that with our examination policy, our guidance. we recently provided some commercial real estate guidance which gave examples for how, say, a small business who wants to borrow against their place of business and the value of the store has gone down but they can still make the payments, why that should be considered still a good loan and why you should still make that loan. on top of that we have certainly pushed the banks to add capital. since our stress test in the spring there has been a very big increase in the amount of

private capital raised by a banking system and we have, as you know, increased -- supported their funding through -- through the discount window, through -- and through our efforts to get the securitization market running again, in particular, our program to provide investor funds, help investors link up with small business lenders, credit card and other consumer type loans. so we're attacking this from a number of dimensions. we're not where we want to be. but we are seeing some improvement, expect things to get better as the economy improves. >> i guess i'm more focused question was, isn't having extremely near zero interest rates, in fact, an impediment to banks putting more money out to small business and others? >> no, i don't think so, to the extent the banks use the money to bye treasuries. it's because they don't see a good lending alternative.

we want them to look at the lending alternative to put out the money. the low interest rates stimulate the demand for credit. i mean, part of the reason -- not the entire reason, of course, but part of the reason that bank credit is detracting is that the demand for automobiles and houses and furniture and other things has fallen in the recession and lower interest rates make it more attractive for people to buy a car, for example, and that increases the demand for credit and brings people to the bank to take out a loan. so the purpose of the low interest rates is to strengthen the economy, to support employment, to get us going again as the economy strengthens, that will improve the credit situation, credit lisk risk low, and that in turn with l. make banks more will doing lend. i do think it's constructive. >> okay. we talked about the following before, but as i've told you before months ago, it seems to

me, and it still seems to me unfortunately, there's a huge disconnect between a lot of the discussions we have here and a lot of the discussions you have and others have at the fed in terms of trying to -- within a strong, safety and soundness parameters -- trying to get credit out the door and what the regulators down on the ground and folks visiting particular institutions are doing in terms of really moving in exactly the opposite direction by being so cautious in reaction to what's happened in the last year that they're making it virtually impossible for community banks to -- to loan new money. just my anecdotal experience is that that hasn't changed, hasn't gotten any better since we talked about it several months ago. what more can any of us here or the fed do to bridge that

divide? >> well, we should provide you, senator, with a drips of all the various measures we're taking in terms of regular conference calls, meetings, manuals, instructions to the examiners about how they should be proc d proceedi proceeding. i think one useful step we have taken, for example, in the latest commercial real estate guidance is to give lots of examples. here is an example of what a loan might look like and here are the things you should be looking at. it helps people concretely to think about how to deal with a loan that may not be perfect but still is worth making. so we are making it very hard effort to do it. i'm sure there are some slip between washington and the grass roots. but we understand that issue. and the fed actually has over a long period of time, because of our macro economic responsibilities and our attention to the broad economy, has had a pretty good record, i believe. so i don't know which regulators your bankers are talking about. we've had a pretty good record

of trying to balance the needs of the economy and the needs for safety and soundness. >> all right. well, again, this is all anecdotal, but the experience in louisiana, particularly in community banks, is that the regulators on the ground are actually dealing bank by bank are giving almost all the signals in the opposite direction. and they're often reacting to whole categories of loans, like anything to do with real estate and just saying, no, your book is above the line we're drawing now, so don't consider anything new without getting to the merits of the loan, even when their portfolio isfolio is solid. i make that comment again in the same vein we had that discussion a qume of months ago. >> i appreciate that. >> the wall street journal has

criticized you for being part of the mistake of too much liquidity and credit around 2004, 2005, and has doubted that you'll have the ability or the discipline to rein that in at the appropriate time. how do you respond and what factors going forward will you be particularly focused on in terms of changing that monetary policy over time? >> well, senator, there's really two issues. let's talk about first going forward. clearly we have -- we've put a lot of stimulus in the economy to get growth back and jobs created, credit flowing. we understand that there's another side to it and that includes making sure we keep

prices stable, don't have inflation issues and even though ideally, the financial regulatory system would be the first line of defense against bubbles or other misalignments and asset markets. given we do not have a regulatory structure that is really designs to prevent those misalignments. i think monetary policy has to pay attention to the issues. as i mentioned earlier, we're following valuations using standard models and met rix to see if we see anything out of line. it's difficult to know if asset prices are appropriate or not. but -- we are -- we are factoring that into our discussion as was mentioned in our last minutes. on the retrospective issue, it remains controversial. my own view is that the conventional wisdom in some quarters that the federal

reserve monetary policy in 2003 and 2005 was a major source of the housing bubble, i don't think the evidence is that clear. there are economists on the other side of that. robert shiler. his view is that it had more to do with mortgage financing and policy. if you look across countries, the imf did a study, there's no correlation between monetary policy and housing prices. canada had similar policy with the u.s. as did germany. neither of them had a housing bubble. the united kingdom has a tighter policy, they had a housing bubble. the correlations are weak. not to say it's not an interesting issue. i want to raise some doubt in your mind that this is an established fact.

the federal reserve has to know about monetary issues and bubls. and how we can identify them and take that into consideration where we can. >> in terms of regulatory reform and, in particular, resolution authority that we're considering, if we have an appropriate, in your mind, resolution regime, new resolution regime otherwise, would you support taking away 13-3 and other type authority to send taxpayer dollars to specific firms? >> yes, i would. >> and would there be any -- sub category of that sort of authority which would -- from either the fed or other entities, to send dollars to individual firms that you think

we should accept and retain? >> well, currently, if the fdic resolves a failing bank, there may be rare kirks where the fed would assist. it's conceivable, i'm not saying it has to be that way. but it's conceivable to have provisions where the fed would loan on a short-term basis. that's a decision for congress to make. if the resolution authority is there, to go back to the original question, the fed does not want to be involved in bailouts. we got involved in them because there was not a good legal structure for dealing with these firms. in the future, we have to interest in doing that. there may be value in lending programs that apply to the economy in general. not to individual firms. >> again, my concern, as i tried

to say, is individual firms. >> would the senator leave the questions to a second round? >> sure. thank you. >> senator chester? >> thank you. i want to thank you for being here today, chairman bernanke. over the next four years, if quour confirmed, you'll play a key role in job creation in the country. last week, i spent days visiting five of montana's biggest cities to discuss the economy and jobs. i heard one message consistently in each town. that is we need to allow our local banks an opportunity to lend. at the same time, i'm hearing that fed regulators are sending mixed messages. from d.c. it's to lend from the field office, it's build up capital, don't consider

commercial loans. i've heard from banks that say the fdic and fed examiners are overzealous. in some case demanding write downs and reclassifications of loans and assets. you've made claims here today and before that you're pushing banks to lend. the folks on the ground are saying, for the most farther, the exact opposite. i believe that congressman minick sent you a letter at the end of october talking about common sense regulation on the ground in these economic times. you have talked about conference kauls, meetings, you've talked about what you're doing -- i guess the question is, is there anything more you can do? because what i'm hearing, it's not working. >> well, i appreciate the feedback. all i can say is we'll take

another look at it and try to step it up further. it's important to have a balanced perspective. >> you agree that the local banks play a critical role if the capital they provide, and in job creation. if they're bound up and do not loan money because regulators are putting the boots to them, it's going to -- the economic recovery is going to be slow in coming. >> that's true. but we do have to make sure they're making good loans. we don't want to go back into a situation where they're making bad loans and it ends up costing money to the deposit insurance fund. >> the real question then becomes, what is the definition of a good loan? >> one that gets paid back. >> what determines that? >> a set of criteria. >> and have they changed? >> the criteria haven't changed.

what's changed is the economic environment. you have people who have whose businesses deteriorated, asset values have declined. it makes them less credit worthy. we've tried, through our policies, to identify the key issue. the ability to repay. that may not be the same as the collateral value. we want to identify criteria that will help banks make loans to people that can and will repay but be careful about not making loans that are not likely to be good. >> there's a perspective out there that the playing field is tilted to big guys. could you xhept on that? i'm talking about the big financial institutions. the little guys that didn't create the problems are doing all the suffering. the big guys are back making incredible profits and that the playing field is tilted toward them. can you talk about that?

>> i will. we have an enormous, too big to fail problem in the country. all the problems that people are talking about texas bonuses, the unfair playing field, government back stops, all moral hazard, all of that follows from too big to fail. the best thing we can do to solve that, to create market discipline, to force them to compete on an even maying field is through regulatory reform that will address too big to fail. it has to components. one is tougher regulation for these large firms, higher capital requirements, tougher liquiddy supervision. on the other hand, going back to senator vitter's comments and others, a resolution regime that will allow a government, in a situation of crisis, wind down, allow a firm to fail, allow credit tors to take losses,

without having all the collateral damage to the economy we saw last fall. >> if you already answered this question, i apologize. the chairman put out a regular reform bill. does it deal adequately with the too big to fail issue? >> i believe it addresses some issues. i disagree about the federal reserve's role on the regulatory side. we think we both have the expertise and the need to know, so to speak, that we should be involved in oversight of the banking system. >> taking the turf issue out, if you can do that, i know you're looking to be confirmed. taking the turf issue off the table, does that bill adequately address too big to fail? >> it's not a turf issue. it's about the soundness of the plan. putting that aside, the resolution regime, to be quite

frank, i haven't read the latest version. we're in discussions and so on. but, broadly speaking, it had the features that t a firm would be able to be wound down, losses could be opposed. if i understand that correctly, that's the direction we should be heading in the. >> i take that as a wild endorsement. >> it's a strong endorsement. >> while some montana is only one of two states that receive new capital purchase program funds. banks do not want to park funds. what did the recommendations he would propose to spur small- business lending? >> i think we have to address your regulatory issue that you raised. we are tryingo