paying taxes and businesses are paying taxes. that is the most important thing we can do. we understand that in this administration. that is not always the dialogue going on out there in public, and we have to do a better job of educating the public on that. the last thing we want to do in the midst of what is a weak recovery is for us to essentially take more money out of the system, either by raising taxes or by drastically cutting spending. frankly, because state and local governments generally do not have the capacity with that spending. some of that obligation falls on the federal government. having said that, what is also true is that unless businesses and global capital markets have some sense that we need to plan medium and long-term to get the deficit down, it is hard to be credible, and that is counter-

productive. so we have about as difficult an economic play as possible, which is to press the accelerator in terms of jobs, but then no one to apply the brakes in the out years. .

>> so this goes to other locations. >> mr. president. as you know, in addition to all of these people, a lot of people have been watching through the website, all of the breakout sessions which will be available for anyone to watch afterward. they have also been talking on facebook and twitter about what they're seeing. we had one question, from -- from don arrington who says -- what confuses me, is i have an m.b.a. and that's educated my maine right out of the market. i thought furthering my education was supposed to help know a tough job market. and -- >> well, look. long -- first of all, i got a law degree, so -- it was more expensive, it took longer and i don't know how much more useful

it was. that e-mail is indicative of what a lot of people are feeling out there. this is not the normal recession that we just have gone through. this is one that is -- going deep into the economy. it is not, hitting blue collar workers alone. it is hitting white collar workers, just as hard and in some cases when it comes to middle management, it is hurting -- hitting them harder. a lot of people that expected to find a job are finding the market really tight. >> i guess what i would say is -- number one, we know long-term that -- that more education means more opportunity for the individual, greater income for the individual and that is not decreasing, that is actually increasing, the gap between -- between higher education and -- and somebody with a high school education.

and -- and in a knowledge based economy, that's not going away. so -- as frustrating as it play be for the college grad or theman -- the m.b.a., you'll be much better off if you didn't have the education. short-term as well as long-term. it is not only good for the individual, it is also critical for our economy. i told this story -- i think in this room, just a while back. i just want to repeat it. we're doing a session on science, and technology and math education. and one of the things that i'm very proud of about this administration that nobody except friedman and others have paid attention to, we're initiating more education reform, and tougher education reform than just about any administration over the last several years, and people like randy and others are helping us in this process.

but i told the story of my lunch with the president -- president lee of south korea. and gary, you were in that lunch. remember, i asked him, what is happening in terms of education policy in korea? he said, well, you know my biggest problem is, korean parents are too demanding. and they are insisting for example, that i import -- and i have had to import, thousands of foreign english teachers because they all feel that first graders should be learning english already. now you think about that mentality which is pervasive throughout asia, you saw the same thing in china. and it gives you a sense of what we're up against in terms of global competition. so, as tough as this recession is, as tough as the job market play be, we need to double down on our education investment. we have to be more demanding of

our schools, of -- of our -- ourselves, as pirpts and young people will have to be more demanding in terms of our ability to compete. and i -- i don't want the -- the last thing i want and this relates to the previous question, the last thing i want is us to essentially use up our seed corn here, to not make investments in, in -- in education, to not make our investments in clean energy, to essentially say, the only way we could handle is is to constrict our dreams and to go small because -- these other countries out there, they're making these investments. and infrastructure and education and clean energy. and -- and we can't lose the rates, just because we're going through a tough time right now. now is the time to actually make sure that we're pry artizing properly and pushing harder on that front. and okay. yes, sir. >> mr. president, fred of merit

medical systems. one of the overriding thoughts in our forum was that there's uncertainty, that there's such an aggressive legislative agenda that business people don't really know what they ought to do. in fact one c.e.o. said, that he thought, he has to kind of wait and play have to restructure his business. this is a large multi-national farm company and uncertainty is holding back the jobs. and i hear that a lot in the press. there's so much going on respect nobody knows what to do. how will you give us that confidence and make sure that we're certain about both the near term and long-term growth prospects. >> i have -- i actually think this is, this is -- this a legitimate concern. this is been a tough year. with a lot of uncertainty. and now -- at the beginning of

the crisis when we were in transition, we could have made a decision and there are legitimate arguments for that decision or -- there are legitimate arguments for the course that could have been taken which is to say, things are so bad, we got two wars, we have got -- a crisis, in financial markets, and we have just found out we lost 700,000 jobs per month in the first quarter. and that -- we should not try any big initiatives, legislatively. and just shouldn't do it. until everything has stabilized and settled down. and -- you know, i -- i strongly considered that argument. but -- i think the response is the point that was just made earlier, that -- that if we keep on putting off tough decisions about health care, about energy, about education, we'll never get

to the point where there's a lot of appetite for that. keep in mind, we just went through 10, 15 years where everything looked pretty good. except what happened was that growth was built on a house of cards. and the fundamentals of the economy were weakening. and they were papered over by massive leverage, credit card debt and a housing market bubble. our health care system we keep putting off, but the fact of the matter is, there's no way that -- that businesses can sustain their current spending levels on health care. they can't do it. and families can't either. and -- and this -- c.e.o. pharmaceutical company i think would know that. because i'm sure that companies, and -- and health care providers are sending the message.

my belief was that -- that we had to start tackling some of those fundamental problems if we were going to emerge stronger than we were before. and having said that, my strong hope is that we get health care done by the end of this year. and that eliminates some uncertainty, because people will have a sense of what is going to be happening in the health care field. that we get financial regulatory reform done. and if not by the end of this year, then early next year, so banks have certainty. and that -- to the extent that the uncertainty is derived from these major initiatives, i think will be solved in the next few months. and i think that the best way for us to deal with long-term uncertainty is to tackle the things that we have been putting off and sweeping under the rug. there's no point in us pretending these aren't problems, and thinking that

somehow we could go back to business as usual. because i think if we take that approach, then we might be able to manage for the next three or four or five years, but sooner or later we're going to get back spot same problems that we have already been in. i think it is very important to start doing the hard business now. okay. >> yes. >> right there. >> and thank you, mr. president. my name is chandra brown and i'm the president of united streetcar which is a subsidiary of ironworks and we're hiring and we're building the first modern streetcar in 58 years, back in the country. so we're bringing jobs from europe, to here. and i just wanted to emphasize the importance of -- having the federal government as a partner in some of these infrastructures, because we're a traditional manufacturing union house. and we want to be the next generation in clean energy, whether that's building streetcar vehicles for the 85

cities looking for it or whether it is building the first wave energy device that we'll build off the coast of oregon. i think it is critical our traditional manufacturing base at those jobs stay here in the united states and this we could continue to advance on those, where it is going to be a benefit for all things. climate change and job creation and economic development, especially for streetcars and the 85 cities that are looking at them. i'm looking forward to riding on one of them. >> all right. anytime. >> good. >> this gentleman right her has been waiting. go ahead. >> whoops. >> and thank you for the invitation, my name is bill aussie from cedar rapids iowa. i have a request that won't cost us anything. it'll bring money home. could you help ease the visa regulations to have students coming back and international business visitors that will bring money and cultivate long-term resources of culture and academic relationships?

please help ease this, it'll bring money in and won't cost anything. >> i think you make an important suggestion. we live in an interconnected world and interdependent world. i think that properly we had to respond to 9/11 by reviewing our policies on these sas and on immigration and a whole host of issues. and i think it is important for us not to get interest a -- a bunker mentality. that's not america's strength. our strength has always beyoncing yes to the rest of the world. and inviting ideas and different cultures and commerce. we have not seen the same kinds of openness i think over the last several years that i like to see. we got to do it in a prudent way, but let's just take the example of foreign students. one of the great things about

this country is -- we get the best and the brightest talent to study here and once they study here, they start enjoying the slel intellectual freedom and entrepreneurship and they stay and start businesses and then you have a whole new generation of folks that are creating intel or other extraordinary businesss. and if -- if those students start seeing -- a -- a closed door, then we are losing what is one of our greatest competitive advantages. and that is something that i think -- we're commit to doing. let me broaden the point, there are a lot of things that don't cost money that could make a difference. this goes back to the issue of certainty. i do think that providing regulatory certainty and reducing red tape on a bunch of areas like infrastructure investment, is very important. and what i have instructed our team to do is any good idea that

will make the systems and processes of the private sector interacting with government smoother and quicker and crisper, and more -- more tech savvy, i'm for. and -- and -- you know, i think on the export front is another example of where you know, a lot of times just showing up making sure that -- gary lock or our trade representative, what is that guy's name? ron kirk. i'm messing with you, ron. is he here? you can tell them i said that. but making sure that, they are actively pursuing business opportunities overseas and we're not making it tougher. let me give you one specific

example that could have job implics. we still have a lot of trade restrictions on high-tech exports. and that -- that are actually carries -- carryovers from the cold war. and now, part of the problem is we haven't gotten the kind of intellectual property enforcement in other countries that we need and so understandably, businesses are wary about sending their products overseas, just to be duplicated and -- and then shipped back to us, with -- with using lower wage labor. and in some cases, it really has to do with -- with a failure to update and review what restrictions still make sense and what restrictions don't. now china and korea and a whole bunch of asian nations would love to -- to import some high

value added, hayek stuff that could create huge numbers of jobs here in the united states. if we just increased our share of exports to asia, by 1%, that's a quarter million jobs right there. if we increased by five, that's a million jobs, that fills a big hole and doesn't cost us money. we're going to be scouring federal regulations, and restrictions, et cetera that are inhid -- inhitting sexport growth. we'll see if the federal government can link up small and medium businesses to export more effectively. i note a lot of this stuff was talked about in the export section. this is going to be a top priority. and -- even though i was only supposed to take one more question. i'm going to take two because i actually called on this gentleman right here and i felt bad that -- that, that -- go ahead. >> i'm chairman and c.e.o. of

ethan allen. it follow up on the question, although my comment is on separate subject, i came to the united states at age 21 with just a few hundred dollars. i went to work during the day printing envelopes and went to school and this country afforded me the opportunity to be where i am today. i think we should make sure that opportunity is not taken away. now, my comment is that ethan allen is a 77-year-old company. and we have just -- just to survive, we had to reinvent either by chance or plan. otherwise, anybody 77 years old, and has an enterprise cannot survive. this last year i referred to like a tsunami hitting the economy, and has given us more opportunity to reinvent in the last seven or eight months than i have seen in the last 25 years that i've been president. and we have in the first seven of eight months, we had to

consolidate, and we had to let people go, we had -- we're an integrated company from manufacturing to retailing to logistics. we have taken the brunt of this recession, in communities, that are very far away from washington. in vermont and maine and north carolina that and pennsylvania and we had people that will tell you, 40 years we had to let go. but we had to. in the last seven months as i said, after all of this major reinvention, and major consolidation but we're inventing. in the last few months, we have been adding people. we make furniture and we have 30 stores in chien a we're shipping them from the united states. it is possible, i would say, mr. president, that we should not miss this opportunity. and crisis, creates an opportunity. and we as business leaders are ready for invention and i think the government should help us, should help us in fiscal policy and tech policy, because the reinvention and infrastructure, we got to build the plans and

the technology and i think the government can play a important role, because this -- this at some point is going to be shot, and i think we should not miss it. >> this is actually a good place to close. what people are going through every day is heart breaking, all across country. and the decisions that you just made as a c.e.o., obviously have enormous ripple effects. you had to do it in order to keep your company profitable. and on the other hand, the consequences of those hayoffs obviously are felt deeply, and in the just by the individuals involved but by -- by the -- the places, the restaurant that that -- that person has been laid off used to frequent and -- and it just keeps on rippling throughout the economy. digging ourselves out of the

hole is not easy. the loss of -- the job loss this past year and the months preceding it, were as severe as anything we seen if a very long time, as rapid as we have seen in a long time. and -- and generating the kind of economic grothe that leads to the kind of hiring that -- that gets our employment base back up to where it was is going to be hard. it is going to take a lot of work. but i just want to echo what i said at the tpwhring of the session, we city have the best universities in the world. we still have the most open entrepreneurial economy and market of any advanced nation. and woe still have the most productive workers in the world. and despite the issues of unsettledness around some of --

some of the things like the banking industry and the financial sector, the truth of the matter is that we are still -- the most stable country in the world, which is why during the midst of this crisis, everybody was buying into the u.s. and the dollar was shooting up. and people were snatching up treasuries because they still have confidence in -- in what america has to of. so, the most important message that all of us i think have to take away from this session is -- that if we combine traditional american optimism with an acknowledgement that we can't go back to business as usual, and that we have to rediscover a sense of seriousness of purpose when it comes to educating our kids or when it comes to government managing money properly or it comes to c.e.o.'s feeling obligations to the workers and

communities, if we -- if we could recapture that sense that we're in this thing together, and -- and that we are willing to work hard that america is not great because it is owed to us, but we have been great because previous generations have put in the hard work to get us there. and then i'm confident that we're going to get through this tough time and -- and -- and the 21st century is going to be as good for us as the 20th was. but it is not going to come easily. and it is going to require a level of cooperation and -- and a willingness to work strategically together that we have not seen over the last several years. and frankly this town, and -- and the way the political dialogue is structured right now, is not conducive to what we need to do to be globally competitive. all of you are leaders in your

communities in the business sector and labor sector and in academia, we even have a few pundits here. and it is important to fand what is at stake and that we can't keep on playing games. i mentioned that i was in asia on this trip, and thinking about the chi, and i sat down for a round of interviews, and not one of them asked me about asia. and in the one of them asked me about the economy. i was asked several times had i read sarah payen's book? and tru. but it is an indication of how -- how -- how our mill debate doesn't match up with what we need to do and where we need to go. but this kind of dialogue helps and i appreciate all of you participating. thank you, everybody. [applause]

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>> excuse me. i just -- because i'm traveling to allentown, pennsylvania. i want to make sure that this

room of business leaders, and labor leaders and -- others, just have a chance, real quickly to hear directly from the mayor of allentown who is here right now. come up here, mr. mayor. i want to make sure that -- that -- that, this is -- this is -- this is the kind of town where the rubber hits the road. and -- i am going to be having conversations with workers, and small businesses and community cleans and i wanted the mayor to give a sense of when is going on and what you think would make the biggest difference in your town. >> thank you, mr. president. we're honored do you have you in allentown. i'm thankful you're taking on these challenge, i know you were handed a mess when you came in, probably the worst economy in 70 years. i want to say thank you, personally for all that you have done. i think you're doing a great job. and -- on behalf of the city of allentown, we have had some --

some difficult challenges, and it is like most mid sized cities in the northeast, and our unem ploit rate last month has gone up to 1.8% and we have 41,000 people in the region that are unemployed but there are great things happening. we hopefully and hopefully are going to see the great things. we have great companies that are greg and expanding. and we a company that i know you're going to be at tomorrow that is actually manufacturing steel, steel in the united states and doing a great job at it, and growing their business and growing the work force, and we have -- a number of unique small businesses. in that region, we're diversified and we have a lot of fortune 500 companies and air products and chemicals that is headed there. and olympus that hair north american headquarters around the city of allentown and we have over 1400 em plirs, only 1100 of them are large em moyers. the majority are small businesses. and there's a number of small

businesses in the area that are actually growing the economy and one of them is the terror group and i want to say thank you on behalf of them. they started a product that was a small water filtration portable water filtration system and the marines have bought that for our troops in afghanistan. and they're expanding and -- you could clamp on that. and they're actually, expanding to -- to a toe toe to hire another 40 jobs because of that. soy want to thank you, we look forward to having you tomorrow. and -- we look forward to -- toe having you around the city of allentown and talking to many of the businesses that are doing great things in rebuilding the economy. >> and if -- if -- if there are any c.e.o.'s here looking to relocate, i'm shoo sure mayor ping, mayor pal how sky and mayor of des moines, they're all interested in talking to you and

they have literature, i'm sure. thank you so much.

fbdfnd [captions performed by the national captioning institute] [captions copyright national cable satellite corp. 2009] >> it is no secret that unemployment is high and 3 million americans have lost their jobs this year alone and the biggest reason employers are not hiring is the job killing, policies that are being offered by this administration and this complaining. and creating an awful lot of uncertainty for american employers. and in addition to that, not knowing what the tax rates are

going to be, with all of the tax increases that have been proposed this year, not yet enacted, and employers don't know what the effective tax rate is going to be. as a result you can't make a decision. about reinvesting in your company without having an idea of what that cost is going to be. so, one of our noted economists that was here today, doug, a former budget office director and advisor to the mccain campaign. doug? >> thank you. i think he's given than an eloquent summary of the tubs there face small business in the united states to create jobs. i think that the underlying theme of everything the administration and democrats are pursuing now leads to greater national debt. we know that congressional budget office looked at the plans and it says that over the next 10 years we will triple our national debt, we will arrive 10 years from now, with an economy

that has presumably recovered, with a financial crisis that is only a memory, with revenue that is are boof the historic levels but nevertheless, the federal government would be running a trillion dollar deficit, and some is simply to pay debt on previous borrowing. in the end, job creation in the united states is something that entrepreneurs in the private sector will do. but they cannot do it if they're burdened by a legacy of debt and prospect of higher taxs to pay off the debt and that's the most troubling aspect of the policies this administration is pursuing. i like to turn it over to diana. >> i'm diana. i'm a senior fellow at the hudson institute. what is discouraging to me is the extent to which congressional bills, potential legislation in front of us would raise taxes on our most productive small businesses. i mean, look, the top tax rate is scheduled to go up to 39.6% january 1, 2011. under the house bill it would be 45% and this would be an 89%

payroll tax on employees who don't provide the right kind of health insurance, a catastrophic health insurance program with a health savings account does not make the frayed, you get an 8% tax, and there's a cap and trade legislation that would raise taxes on all forms of energy. and now if you're a small business, you wouldn't think about hiring under these circumstances, if you don't know what your tax rate is going to be. and all of this tax revenue taken from the private sector, taken from -- small businesses, and that is also a transfer, where people can spend the money themselves, they cannot go and take that money and go to a restaurant. they can't go shopping. that diminishes all of the economic activity throughout the spire economy. and -- and these kinds of things, of course, discourage job creation and that needs to be fixed now. thatee -- there needs to be certainty that taxes will not rise so businesss have certainty and they know that they could proceed with confidence, to hire

more workers. and i would like to introduce kevin hassett, director of economic studies at the american enterprise institute. >> thank you. >> and the president is having a job summit today, because the stimulus package didn't work. the stimulus package didn't work because it was so incompetently designed, to put it in perspective the administration created 340,000 jobs with the package, and that amounts to 1.2 million per job. instead of the stim husband package we had just hired people, given them jobs and paid them the average wage if the united states, then we would have created 21 million jobs. where is the multiplier? i'll tell you where it is, it is lurking in the background waiting for sound and prudent policy. i can guarantee you that such policy is not going to be created by the team that gave you the previous stimulus bill, the team that is meeting at the white house today. thank you. >> and any questions?

>> yes. >> and what do you think the message was -- from the obamaed a strace that the chamber of commerce is not invited to the job summit? >> that's the -- the nation's largest organization representing employers and the fact that they're not at the white house, gives you some indication that they're considering policies that are in the going to help employers be more confident about the future of the economy -- and therefore, put employers in a position where they're not going to hire more people. i used to run a business before i stumbled into this mill arena. and begin to scratch my head and wonder why. and -- but i know what it takes to meet a payroll. and what it means to create jobs. and without certainty, without some confidence about what tomorrow is going to bring, i'm not going to move. and when you look at all of these policies that are proposed and the tax rates that are so uncertain, it is no surprise to

any of us that employers complaint to do nothing. >> mr. boehner were you invited to the white house, were any republicans? >> i know i was not invited. [unintelligible] >> the tarp money was intended to solve an economic emergency in the financial sector and now that that money is being paid back, it should be used to lower the federal budget deficit and the national debt. and this idea that we're going to take this -- this money, that is being paid back to the government and then turn around and spend it on useless government programs is a -- is a very big mistake. >> i have a question.

>> thank you. >> senators are continuing their debate of the health care bill through the weekend. [captions copyright national cable satellite corp. 2009] [captions performed by the national captioning institute]

>> mr. president, i believe ben bernanke should not reappointed. i place a held on his nomination. and mr. president, everybody in this country understands we're at the midst of the worst economic crisis since the great depression. we're looking at 17% of our people being either unemployed or underemployed. and we are looking at -- at average length of unem ploit being longer than it has been since world war ii and we're

looking at a situation where over the last eight or nine years, median household income has declined by over $2,000. we're looking at a situation where according to u.s.a. today, september 18th, 2009, quote, the incomes of the young and middle-aged, especially men, have fallen off a cliff since 2000, leaving many age groups poorer than they were even in the 1970's. what we're seing is a long-term trend, resulting in the collapse of the middle class and increase in poverty and growing gap between the rich and everybody else and then to make a very bad situation worse, as a result of the greed and irresponsibility and illegal behavior of wall street, we are now in -- in a terrible, terrible, economic decline. >> mr. president, the american people voted overwhelmingly last year for a change in our

national policies and for a new direction in the economy. and after eight long years of trickle down economics, that benefited the very wealthy, at the expense of the middle class and working families, the people of our country demanded a charninge. and that would put the interests of ordinary people ahead of the greed. of wall street and the wealthy few. >> a and what the american people did not bargain if was another four years for one of the key architects of the bush economy, federal reserve chiang chairman ben bernanke. mr. president, the chairman of the federal reserve and the federal reserve itself has four main responseants. i want the american people to determine whether they believe the fed has in fact succeeded in fulfilling these obligations. here they are. four main responsibilities. number one, to conduct monetary

policy in a way that heaves the maximum employment and stable prices. and maximum employment. when you got 17% of your people unemployed or underemployed. i do not think the fed or all of us or any of us have succeeded in that area. number two, to maintain the safety and soundness of financial institutions. and obviously that has not been the case either. and to contain systematic risk in financial markets and four, to protect consumers against the deceptive and unfair financial products. and mr. president, not since the great depression has the financial system been as unsafe and unsound and unstable as it has been during mr. bernanke's tenure, more than 120 banks have failed. since he has been chairman and the list of troubled banks has grown from 50 to over 416.

and mr. president, mr. bernanke has failed to prevent banks from issuing deceptive and unfair financial products to consumers. under his leadership, mortgage lenders were allowed for issue predatory loans that they knew consumers would be unible to repay and this risky practice was allowed to continue long after the f.b.i. warned in 2004, of an epidemic in mortgage fraud. and here's what the bottom line is, the bottom line is -- is that -- that -- there are key responsibility of the fed is to maintain the safety and soundness of our financial institutions, and -- they failed. and they failed. and as a result of the greed and speculation on wall street, which the fed should have been observing, which the fed should have acted against, which the fed should have warned the american people and the congress

about, they did nothing and our financial system went over the edge. then, mr. president, after not doing their jobs as a watchdog, not fulfilling their obligations to protect the safety and soundness of the financial system, then the financial collapse occurred. what happened? what the fed did is provide not only, not only the congress put 700-plus billions of dollars in the bailout, but the fed provided several trillion dollars, trillion dollars of zero interest loans to large financial institutions. and mr. president, when i asked chairman bernanke, which financial institutions received these zero interest loans, the answer was, i am not going to tell you. not going to tell you. and mr. president, the reason that the congress against my vote bailed out wall street is

they were too big to fail. and large financial institutions were too big to fail. well, since the collapse, three out of the four largest financial institutions have become even larger. and so the -- the systematic danger for our economy is today even greater than it was before the bailout. and mr. president, the american people want a new wall street. they want a wall street that begins to respond to needs of small business and so that we could begin to create jobs, not just to wall street and outrageous executive compensation. and let me just suggest to you some of the things -- that i think a fed chairman should be doing, things mr. bernanke are not. and number one, today bailed out financial institutions are charging consumers 25 or 30%

interest rates on their credit cards. and the fed has the power to stop that, to put a cap on interest rates and that's what they should be doing. and the fed has the power to demand that bailed out institutions provide loans and low interest rates to small and medium sized businesses so we could begin to create the kind of jobs that are desperately needed in the country. that's not what mr. bernanke has done. mr. president, the fed has the power now to do, what is taking place in the united king democrat, something that many economists are demanding and that is to start breaking up these large financial institutions, which are too big to fail. in my view, if an institution is too big to fail, it is too pig to exist. we got to start breaking them up and not allow them to get larger. the fed has chosen not to do that. and mr. president, we need

transparency, at the fed, and i am the author of a -- a g.a.o. audit of the fed which now has 30 coresponsiblers which i hope we will pass. but the at the very least, if the taxpayers of this country are putting at risk trls of dollars, being lent out it large financial institutions, we have a right to know which institutions are receiving that money and under what terms. let me conclude, mr. president, by just saying this. this country is in the midst of a horrendous economic crisis, millions of families all over the country are at their wits end. here suffering. and they're trying to figure out how they're going to keep warm this winter. and how they're going to pay their pills. and the time now is for a new fed. for a new direction on wall street. and for a wall street which is helping our productive economy create decent paying jobs, not a wall street based on greed and

only for themselves, whose goal is life is to make as much money as possible for their c.e.o.'s. so mr. president, we need a new fed, we need a new wall street and we surely need a new chairman of the fed, my hope is -- that president obama will give us a new nominee and not mr. bernanke. with that, i yillingd the floor. >> and during his reconfirmation hearing thursday, the federal reserve chairman ben bernanke said he's concerned about a congressional proposal to audit the fed. and he's being considered if another four year term and his testimony before the senate banking committee was four hours. [captions copyright national cable satellite corp. 2009] [captions performed by the national captioning institute] >> the com plitity will come to order. i could ask my colleagues and the friends in the media to -- whoa. you okay? and photographer there. we had a -- a train wreck. and all set?

and the committee comes to order and we're here this morning to consider the confirmation of ben bernanke with the chairman of the federal reserve. let me begin by welcoming you once again to the senate banking committee. you have been before us on numerous occasions over the last couple of years and -- and we welcome your appearance. and we want to thank you for joining us again here today. today we're faced with as i see it, two separate questions. before i begin, just for the purposes of members information, we're going to have a series of votes on the floor of the senate and by intention would be to go to 11:45 and then the next hour and 45 minutes, adjourning at 11:45 and coming back at 1:00. because we have a series of votes and rather than having a vote disjointed going back and forth, we'll have it in two parts and get as much done as we can. and this are times when we have opening statements by senator shelby and i and then we'll hear

the statement by the chairman and then i'm going to have -- i'm going to have eight minutes to 10 minutes for questions. what i'll do is put the yellow light on at :00. again, i have never been rigid about banging a gavel down but i ask members to try and keep their questions in that time frame so we could get to as many colleagues as possible and limit -- limit to the extent possible this afternoon, obviously if you want a second roundst, we'll do that as well. i don't want to deprive members with the opportunity to be heard. that's the way in which we'll proceed. so again today, we're faced as i see it with this nomination. two separate questions, first should ben bernanke, here our nominee santa fe on as the chairman of the federal reserve. second as the committee works to create a regulatory structure, what should be the role of the institution that our chairman here and the nominees would oversee. and does the existing truck chur 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 -- or is it about the members of the committee including the chairman. this is about the institution that will be around long after the nominee or the members of this committee are gone. what makes the most -- what makes the most sense for the success of this institution, the federal reserve. first let me address the nomination for another term as chairman of the federal reserve. this is incredibly important job during a crucial time in our nation's history as we all know. over the last year, our nation has been rocked by a devastating economic crisis and this committee met dozens of times it talk about its impact on our constituents and the millions of american that is have lost their jobs and familys have lost their homes and those that watched their wealth evaporate as home values dropped and investments were wiped out. and under your here, mr. chairman, the federal reserve has taken extraordinary actions. and to right the economy, and providing liquidity to tetch positories and sustaining the

commercial paper market and working with the united states treasury to restart the acid backed securities markets and bringing critical support to the housing marked. these efforts have played in my view a significant role in arresting the financial crisis and financial parkts have begun to recover. and for that, mr. chairman, you and the federal reserve deserve in my view, prays for your acumen and your role in preserving a far worse outcome than we might otherwise have seen. i believe you deserve another term as chairman of the federal reserve and i intend to vote for your nomination both in the committee and on the floor of the united states senate because i believe you're 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 you for the efforts, i remain concerned as you know about the weaknesses in the overall regulatory system that allowed the financial collapse to occur in the very 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 reg tore structure as i see it, created by historic accidents as government reacted to problems, with piecemeal solutions over nearly a century. and you & i think agree that the federal reserve should be strong, and very independent, and i feel very strongly about the second word in being able to perform its core functions conducting monetary policy and supervising payment systems and acting as the lender of last resort. i worry over the years that loading up the federal reserve with too many piecemeal responsibilities has left important duties without proper attention. and exposed the fed dangerous politicalization that threatens the very independence of this institution. and congress gave the federal reserve the authority to protect consumers and more gadge markets. in 19e9, we talked about this many times. in this committee. but for many years, and 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 make meaningful guidelines and regulations until the housing bubble burst. there have been other happenses in consumer protections, with the fed doing little in my view over the years to protect users of credit cards and checking accounts, from abusive company practices. in addition, to my view, the fed failed to rein in risk take big some of the largest holding companies it supervised. many firms whose irresponsible actions contributed to the crisis had ultimately required and ultimately required a taxpayer funded bailout, did so under the fed's watch about and the lesson i believe we could learn from these mistakes is that the country is b-served by a strong and focused central bank. and not one that is saddled with too many diverse missions and competing responsibilities, that its independence and competency and independentcy and competency

is called into question. it is proposed the fed has and the another role to overall financial stability. i feel these additional responsibilities would further distract from the fed's core mission and leave it open to dangerous politicalization. and undermining it, it is critical independentance. so as congress takes up the financial reform this year, i have proposed creating new entities outside the federal reserve it focus responsibilities for bank regulation and consumer protections and systematic risk. these important duties will not need to compete for the federal reserve's attention. and appreciating that -- that conducting effective monetary policy requires full access to information. and on banks, my proposal, our proposals preserves and expands the fed's involvement in the ability to access information directly from financial institutionings and a new bank regulators. and the ability to participate in bank exams and new authority to regulate systematicly important payment and financial

utilities and to seat on the boards the risk agency. what i'm proposing does not exclude the fed from involvement in the issues but rather expands the participants in the effort. we share the goal of strong and focused independent federal reserve. and that can operate successfully as part of a new regulatory framework that will restore our nation's economic security and afford to work with you on this very important task. i know there are important issue that is my colleagues of course want to discuss here today with you as they consider your nomination. and again, i think you're deserving of renomination and confirmation by the united states senate. and i believe you have done a very good job in helping us avoid the kind of catastrophe that could have occurred in the country. but i also believe we bear a responsibility to consider the institution which you lead beyond the role of our tenure, either as chair of the committee or chair of the federal reserve and that's why i raised these issues as part of an overall reform of the financial regulatory structure that is the

desire of many people over many years and in the absence of the situation we find ourselves in today, i suspect we would not be dealing with it. so again, i welcome your participation here today and congratulate you on the work you have done and turn to senator shelby for opening comments and then we'll hear from you and proceed with questions. >> thank you. welcome, mr. chairman. and we all know that chairman bernanke's academic accomplishments prior to joining the board of governors, first as a member and then as chairman. he have 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 the current crisis. and it is important to note, however, that every crisis has a beginning and a middle and an end. and while we learned a great deal about crisis management from the great depression, it appears that we have 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. and encouraging a housing bubble and excessive risk taking. in addition the fed failed to use its available powers to mitigate those risks. and congress also bears some responsibility, often, over my objections here, we enacted housing policies that imprudentantly encouraged home ownership to levels we now know were unsustainable and we failed to curtail the activity ches of the housing of g.s.e.'s and fannie mae and freddie mac, my record on that topic is well known here. after the recession that sended in 2001, which was preceded by a bursting of the dot-com bubble, the fed was concerned about a sluggish economy and the specter of deflation. and given throws concerns, the fed chose to hold interest rates remarkably low for years. and indeed, the effectivelyive federal funds rate was well below 2% between 2001 and november 2004.

and 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 and in 2002, then governor of -- bernanke warned of deflation. he stated. li gover . . nanke o n. l e, 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 of the board of governors spoke of a great moderation involving potential permanent reduction in xlook economic volatility and risk no don't the result of a vigilant and in depth monetary policy. this left market participants believing that large risk had been mitigated opening the door for greater risk taking. in the face of rising home prices and risky mortgage underwriting, the fed chose not to use the -- its rule-making authorities over mortgages to

st stop risky lending. though the equal credit opportunity act, respa and the moment mortgages disclosure act gave the fed the authority to act, nothing was done. the fed also made major forecasting errors leading up to the recent crisis. then after the housing market bubble about again to burst in 2006, the fed was slow to entertain possible spillovers from housing sector into the general economy and the financial system. finally n response to the growing crisis, the fed 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 executives, academics, and community agricul@ @ @ 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 the formation of monetary policy. under the proposal we put before the committee, we would -- the fed would not be a bank supervisor, but it would have access, which was not reflected in your piece, but it would have access to all the information that it currently has about banks, could participate in examinations of any bank or bank holding company and would be part of the systemic risk regulator. wouldn't this information allow you to set monetary policy and act as the lender of last resort since it's the access to the information is critical for the conduct of monetary policy, and therefore the objections to the proposal made here are not as well founded as they appear to be in the piece. >> thank you, mr. chairman. as you know, i do think that

taking the federal reserve out of active bank super vision would be a mistake for the country. first, i think it should be noted that the federal reserve has unparalleled expertise that arises from its work in monetary policy. we have a great group of economists, financial market experts and others who are unique in washington and their ability to address these issues. as we go forward, as we try to supervise complex multi company firms, holding companies, and as we try to look at the system as a whole from a so-called macro prudential perspective, we need not just bank supervisors who can go in and read a loan file, but also financial market experts and economists who can create the context 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 á

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 -- >> you believe the 13 act should be changed? >> of course congress created that structure -- >> absolutely. >> -- but the way it fully functions is that the -- there

is no connection. the banks who are members of the boards of the 12 reserve banks select -- vote for -- >> explain to the audience and the committee again how the members of the reserve banks, say the federal reserve of the atlanta, richmond, new york, san francisco -- >> i would be glad to. >> tell them how they're selected to serve on the board who does the nomination. >> yes, sir. so, again, as provided by the federal reserve act, each of the 12 reserve banks has a board of directors with a chairman. the directors, 12 at each bank r in three classes. one class is drawn from banks in the district. most of them are community banks. the second class, so-called "b" 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. welcome, chairman bernanke. igm4@o@@ @ @ rs m

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 economic growth, but it will be a hard slog, job creation is fundamentally a private sector process and the private economy is experiencing a broad retreat from credit-driven spending. mark san difficult of moody's reports this astonishing figure. since last spring, the number of bank credit cards has dropped $100 million. about 25%. banks are tightening credit standards, partly in reaction to new credit card legislation designed to protect borrowers from rate increases. consumers are canceling cards. meanwhile, empty office buildings, shuttered retail stores 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 in the economy dropped in the first half of this year. this hasn't happened in

statistics prior -- since 1952. he goes in the short run, and this will take me where i'm going, san difficult doesn't worry about the effects on the federal budget deficit. the perception that the administration will tolerate, despite rhetoric to the contrary, permanently large deficits could ultimately rattle investors and lead to large self-defeating increases in interest rates. there are risks in over 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 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 us 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 a# 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't uniform. it is true that for the most part small banks didn't engage in some of the activities that got big banks into trouble. they do have real estate issues, small banks do. it's also the case where large banks have reduced lending, small banks have stepped up and provided cred to it small business. that's one of the reasons why community banks are such a valuable part of our banking system. we face a dilemma which is, we want banks to lend and we're encouraging them to lend. we certainly don't want them to make bad loans because, of course, that's what got us into trouble in the first place. as i described earlier, we're pushing banks to made loans to

credit worthy borrowers, making sure our examiners are appropriately balancing the needs of the borrowers and the economy against avoiding excess sive risk aversion, pushing banks to raise capital as the bank of america example shows. and we are -- done quite a bit to restore the skurthization market. that's about a third of our credit system. it was mostly shut down during the crisis except for the government guaranteed mortgage markets. our activities both in small business lending and also in commercial real estate have gotten those markets, look like they're in better shape. that is very important because it provides a source of funding for the banks that they can then pass on into loans. >> thank you, mr. chairman. >> just 30 seconds here. the bank of america you mentioned to senator shelby and 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@@@@@ @ @ @ @ @

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 power, we really had no way to create a substantial discount. >> mr. chairman, i don't want to take anymore time. but the fact of the matter is aig, aig was 80% owned at that time by the federal government. >> i want to just say, let me say, and i disagree with my friend and colleague from kentucky about the conclusion of what happened under your nomination. going through that period at that time with all the headlines about the $168 million in bonuses that went out to aig and virtually no reporting

whatsoever on the counterparty issue. the fact of the matter that we allowed 100 cents on the dollar to go to the counterparts with little or no negotiation, i've raised the issue with others before, i don't understand that at all and most americans don't. that was billions dollars. one company alone was $12.5 billion. it's hard to accept the negotiation that we couldn't negotiate with the counterparties at that time. >> we had no leverage. if we didn't pay off, they would say you're bankrupt. >> wrote a check to $180 billion to aig. >> to aig. >> that counterparties would have been in trouble, too? >> that's all true. >> what's the deal? >> most of the firms were foreign. we had no authority or leverage over them. >> you're the chairman of the federal reserve. you've got power. >> i don't abuse my supervisory 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 @á

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 risk regulator in such a way that we could achieve that kind of assurance that liquidity efforts would be limited in that way? >> i do. i do. i think it's very, very important. let me just say, be absolutely clear. the actions we took last fall to stabilize these firms were done extremely reluctantly and only because we had no good mechanism to allow them to fail without having severe consequences for the financial system in the broader economy. it is imperative and the most

important thing that congress can do is find a way to solve the too big to fail problem. i think that's absolutely essential. the only way to do that is to find a way to let those firms fail. i do believe that can be done. it can be done in a way that also -- that forces creditors to take losses and 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's possible. and i think the model we can use is the model we already have for resolving failing banks, the fdic has, just apply 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 or a new financial regulator that we should establish? >> i think the institution with

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 bubble, i think basically that supervision of regulation of the financial system is strongest, most effective approach. and i you know, i do not rule out using monetary policy as necessary if that situation does become worrisome and threatening to our dual mandate, which is growth and inflation. >> thank you very much, senator. i appreciate your indulgence, chairman bernanke here in break this up a little bit. but i thought it might be better deserved, yours and ours as well to have some continuity to it. take a break, get a bite to eat, we'll see you back here

this committee will come to order. 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.

>> i'll try. w 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 th@@@@rbá i just want to start for the purposes of memory, we often seem to have a short-term memory here. november of 2008. the time -- i think you reference this, to some degree in your opening statement. after the presidential elections, you and the secretary came before the members of this committee, and you basically said, we have an emergency set of circumstances and we need for you to act and to do this boldly, and in the

absence of doing that, we would have a global financial meltdown. so, i want to start right there. the beginning of what has been transcended ever since then, is this a fair statement? ince 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 new jersey, you know, senator, when i make a mistake, i have to pay for it. and it seems when these financial institutions make a mistake, i have to pay for it, too. and i think that the difficulty is creating the connection between why we acted based upon the expertise of yourself and others who said we needed to do so because otherwise there would

be a global financial meltdown and that obviously has real life consequences to main street in new jersey, or for that fact, across the country. is that a fair statement? >> of course. >> which brings me to where we are today. i want to get a sense from you, do you believe that the american economy is recovering? >> it's beginning to grow again. we would like it to grow faster. we would like jobs to come back faster. we avoided, i do believe, avoided a far worse situation by avoiding the collapse of the financial system as you indicated. >> to give us a sense, when we say we avoid it, you know, i think senator schumer mentioned that sometimes when you avoid harm from happening you get no red dcredit for it. give us a sense of what would have happened if we let the markets do it on their own, let them figure it out. >> my professional career before

i came to the fed, a scholar, academic studying financial crisis and their effects on the economy including the great depression. there's a lot of evidence, not just the united states but many other countries, that when the financial system collapses or melts down, that it has very, very serious effects on the broad economy. and i think just the fact that the lehman brothers and the associated instability around that period contributed to a global recession as evidence for that point. it's my belief that if we had not acted, if congress had not supported our actions to stabilize the system, if we and our partners in other countries had not worked together in those weeks in october to prevent what, in my view, would have been a collapse, a meltdown of many of the major banks in the world, that we could very well be in a depression-like situation, with much higher unemployment than today, very deep decline in output, and no

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 we have undermined the system that made this country prosperous. i think that this is an egregious error. what you say -- the predictions that he makes are critically important because we are acting on them, and the whole world is acting on them. i want to witness a couple of -- i want to mention a couple of these. when asked about the subprime

market, he said, the impact of the broader economy and the financial markets, and the problems in the subprime market are likely to be contained. a little bit later, you said, we do not expect a spillover from the subprime market to the rest of the economy. february 28, 2008, on the failure of the banks, he said, among the largest banks, the capital ratios are good and i did not expect any problems among the internationally active banks that make up a very big part of the banking system. on june 9, 2008, the risk that the economy is entering a downturn has diminished over the last month. on july 16, 2008, speaking of fannie mae and freddie mac, you said that they are in no danger

of failing. to a large degree, the oversight that we are responsible for, we did not accomplish because of the assurances that we received over the years from your predecessor. i think that we have failed the american system. >> let me mention a few things as i run out of time. mention a few things here as i run out of time. capitalism depends on that and i would like to ask a couple of questions about the federal reserve and capital. is the federal reserve an instrument of the government? >> it's an agency of the government, yes. >> do you believe money is an instrument of government to be manipulated as necessary to calibrate the collective economic behavior of the public with the perceived financial needs of government? >> the monetary policies intended to follow the mandate that congress gave the federal

reserve, which is to achieve maximum employment and price stability. that's what we try to achieve. >> do you believe that employment should be a mission, a goal of the federal reserve? >> yes, i think the federal reserve can assist keeping employment close to its maximum level through joint policies. >> should a government or agency established by the government have the power to distort the purchasing power of money? >> the federal reserve is mandated to achieve price stability and one thing you didn't mention in your list was inflation. inflation has been low. and in that respect the purchasing power of the dollar has been good, it's been stable. >> in a free market economy you would think that the cost of capital would fluctuate based on supply and demand. yet a big part of the role 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, 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 we gave examples for how small business that wants to borrow against their place of business and the value of this store has gone down, but they can still make the payments. why is that a good loan and why should you still make that loan.

and on top of that, we have been pushing the banks to add capital. there has been an increase in the amount of private capital raised by the banking system. and we have supported their funding through the discount window, and to the efforts to get the securitization market running again. they are programmed to help the investors connect with small- business lenders, credit cards, and other consumer loans. we are not where we want to be, but we expect things to get better as the economy is improving. >> my more focused question is,

this is an impediment to banks -- >> they do not see a good landing alternative. we want to look at the alternative to put out the money. the low interest rates stimulate the demand for credit. part of the reason that this credit is contracting is because the demand for automobiles and houses and furniture has fallen in the recession. and the lower interest rates make it more attractive for people to purchase a car, for example. and this will bring people to the bank to take out a loan. the purpose of the low interest rates is that this is great for the economy to get us going again. çóas the economy becomes stronger, the credit risk will be lower and this will make

them more willing to lend. >> we will talk about the following -- but as i have said, months ago, it seems to me that there is a disconnect between many of the discussions that we have here, and many of the discussions that you have at the fed in terms of trying to -- 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 is through regulatory reform that will address the idea of something being too big to fail. one component of this is tougher regulation for these large firms, with higher capital requirement and liquidity and supervision. on the other hand, going back to his comments and others, there

is a resolution regime that will allow the government in a situation of crisis to wind down and allow the firm to fail, without having all of the collateral damage with the system in the economy. >> if you have already answered this question, i apologize. the chairman of this committee put out a bill. this is adequately deal with this issue? >> this will address the resolution -- and he knows that i disagree about the role of the federal reserve in the regulatory side of things. we both have the appropriate expertise and the need to know, and we should be involved in overseeing the banking system. >> taking this issue out, taking that issue off the table, does this adequately address this issue?

>> this is about the soundness of the plan -- but putting that aside, at least on one side, which is the resolution, to be frank i have not read the latest version. we are in discussions right now. broadly speaking, this has the features that they will be able to be wound down. this is where we should be going. >> >> that is a wild endorsement? >> that is a strong endorsement. >> i am trying to help you. some people recommend using troubled asset relief program money -- but montana is one of two states that did not receive any funding. the banks do not want this finding. so what other recommendations would you propose to support

small business lending. >> we have to address the regulatory issue that you have raised. we are trying to strengthen the secondary market so that the banks that make small business loans can sell this. we have made a lot of progress in restoring the secondary market, and also, commercial real-estate loans. if -- that is the suggestion that i have. suggestion i have. >> all right. i need to know your thoughts on an idea that was bounced around here a bit, bounced around in montana. the new employee tax credit concept. providing a business credit to bring on a new employee and keep them for two or three years, or whatever that arbitrary time might be.

what is your perspective? >> i don't think we have a clear answer to that question. unfortunately. the historical record is mixed. some have been seen as successful, some not. there's not a clear enough consensus for me to make a recommendation to you. especially since i told senator corker i was not making fiscal policy recommendations. >> we're talking jobs. >> i know. there's a loft ways to approach the jobs. i'm sure you've seen a list that was in the wall street journal. i would have to say that some of the yoers mentioned are more straightforward. we would have a better sense of what the effect would. but, the jobs tax credit, i think one of the drawbacks is we don't have a good sense of how strong an effect that would be or how permit it would be?

>> regard less of how it's structured? >> it would have to be who it was based on. >> if we had a more concrete proposal, you could? >> we could help you analyze it. i'm reluctant to make a clear recommendation. >> i understand. >> thank you, senator. >> mr. chairman, thank you for being here. i'll show bias to start out. i believe less government and lower taxes helps create jobs. let me pursue something with you. i think your biggest challenge is maybe not what you have been through, though that was significant, it's what you do from here. at some point, there has to be an artful exit strategy.

the fed has done some things that have been unpretty dented. it's gotten a lot of debate, a lot of concern, some have agreed with you, some have not. i think that's refektive of what's happened with the committee today. i would like you to just walk us through the things that the fed has in place, everything from your policy with treasure ris to interest rates. and talk to us about the exit strategy. number one, and what timing, and i'm not necessarily looking for by june 1st, we'll do this. i'm looking for what economic signals will cause you to reach a conclusion that we can pull back from this or we can do that. so, talk to us a little bit about that. >> certainly. well first, as you know, the

federal reserve created a number of special programs to try to address problems in specific markets, like the commercial paper market, the inner bank market and so on. the money market mutual funds. a variety of areas where there were stresses. we tried to reduce the stresses. as things have improved, the demand for funding from there is improving. we're down to about 15% of the dhars outstanding. we have made progress because demand for these things have gone away as markets have improved. we will be cutting back the size and closing them as first as market conditions normalize as they continue to do. and in particular, those programs are just fied only

under so called unusual and exgent circumstances. from a legal perspective, we'll need to think about closing them down. we've made a lot of progress in that direction. beyond that, our major programs have been asset purchases. we had a treasury purchase program that brought our holding of treasury bonds about to where it was before the crisis. we have also had a very big program of purchasing fannie mae and freddie mac mortgage based securities. the current program will be wound down, tapered off through the first quarter of next year. that's currently on schedule. so what we have is a -- if you will, a lolling exit process. the special programs are running off because of lack of interest.

they'll be shut down over time. we've bought a lot of treasuries and mbs. we've announced tapering off of those programs. the next step, at some point, when the economy is strong enough, is to begin to tighten policy, raising interest rates. we can do that by raising the interest rate on excess reserves. congress gave us that power. by raising that rate, we can raise rates throughout the money markets. we will reduce the amount of reserves in the system. we'll do that over time. from a technical perspective, we have plenty of clarity about how to commit from the programs. how we can tighted policy, raise rates, remove the accommodation at the appropriate time to get a sustainable recovery without

inflation. the xun occasion, timing, and so on is difficult. it always is coming out of a recession. it's not specially difficult in the sense that the various programs and unusual steps we have taken, we have good means now of reversing them and unwinding them as the time comes. >> as we look out to next year, let's say the next 12 months. we have unemployment now over 10%. probable, well not probable, it's much higher than that if you count people that have given up and not -- that number is in the 17%, 17.5% range, from what i understand. we're a consumer driven economy. a bunch of consumers are on the sideline trying to keep things together as best they can. a whole bunch of other consumers worried about losing their job.

as you look out there over the next 12 months. what is your expectation when it comes to unemployment numbers? and is this going to get worse before it gets better is kind of the bottom line of where i'm headed with that question? >> the unemployment rate is very high. it's tremendous problem. it means a lot of hardship for a lot of people. and some very long-term scars in the laber market. the rate at which the unemployment rate comes down defends on how fast the economy grows and how much confidence empoiers have to bring more workers on. we have an employment number tomorrow. we'll get a near-term reading of what is happening. i do not know what the number is. at the most forecast right now are for job loss.

but as the economy continues to grow, we should begin to turn that corner and see job creation. however, because we have people coming into the labor market all the time, you need to have a certain amount of growth to absorb the new entrants to the labor market. you need 2.5% growth in the economy to absorb the new entrants. right now, the fomc expects growth to be somewhere in the 3.5% range. over the next year, we'll see the rate declining. but slower than we would like. it depends on employers. they have been very effective in increasing productivity and reducing the amount of labor that they need to produce output. our sense is that they can't keep that kind of cost saving up indefinitely. at some point they'll have to bring back some workers.

that will be another drag. the bottom line is, we don't really know. our forecasting is far from precise. if the economy grows at a moderate rate, the unemployment rate should peak, but then come down slowly. >> my last question, one of the things i hear as i talk to the business community, in my home state and those who come into my office, is they just feel there is a tremendous amount of uncertainty that is causing anxiety about decision making in terms of investment, capital expansion, even when they see the business pick up, they are very very reluctant to add people. here's the uncertainty they talk to me about. day talk about climate change legislation and the impact that will have. they talk about car check.

and the impact that would have on their business. the impact of regulatory reform. the impact of health care reform and that has a real financial impact on them. how big a problem is that in terms of our economy starting to find its equilibrium, stabilize itself, with all of those you know, really exorbitant things going on out there impacting that psychology of the marketplace? >> well, we have heard the same thing in our digss. you know, the fomc has reserve bank presidents from around the country. they talk to business people as well and bring the message to us. a lot about concerns about uncertainty. one place where it's particularly relevant to the federal reserve, one reason banks may be reluctant to lend

is that they don't know what the capital standard is going to be. don't know what the regulatory standard is going to be. that creates uncertainty for them as well. i don't think, i don't have a my guess is this would not be the reason the economy cannot grow. that will have to wait a little bit longer, maybe there will star with temporary workers, maybe they will do some overtime. i do think that this pays tribute to some extent, as the firm makes a commitment to the new capital investments to bring the workers back. >> thank you very much. >> thank you, mr. chairman, and thank you for staying with us today. i am under the weather. one great benefit