that is now the secretary of home landland security. >> janet napalono has done a great job, and her remarks about the system. and we want to take steps to make sure this doesn't happen again, and he needs to hold everyone accountable, including me. >> tim stark, what does that mean to hold everyone accountable? >> there are some members on capitol hill, lower ranking, that has said that janet napalon needs to go. it seems too early for that momentum, and kip bond says she doesn't need to go. and things like this if there

is another incident where she missteps, people will look and say, look, she's done this and this. and then there will be pressure. i don't think there is much prosecutor from this administration to get rid of anyone. but he did say that we are looking at everyone, at all levels. so it's not out. -- out of the question that someone will be asked to leave. and if you look at the last administration how long it took for that pressure to mount and for the administration to get rid of them. it's the case of thousands of people to die. >> if you were to write a headline of john brennan's appearance this morning, what would it be? >> it's hard for me, as i am a focused person and i was concerned that the hitting of yemen was the camp that

abdulmutallab was trained. and that's the first acknowledgment of an official, we believe that the u.s. lead that attack and not getting details out of them. and he vowed to destroy al-qaeda and i am proving why i read the stories and not the headlines. >> you did a great job, we have pam hess and tim starks as we deal into the details of john brennan's appearance, thanks for joining us on "newsmakers." >> thank you. >> i think it's gone, you have lost it, you don't own it anymore. you are trespassing and that hurts. my possessions are now in a storage bin, what i was able to get out before the house was locked up. >> this week on "q & a," the

documentary on sub-prime impact on minorities. tonight at 8. >> tomorrow on "washington journal," former bin laden chief , scheuer speaks about home grown terrorists. james traub on joe biden, and john newman speaking about afghanistan. "washington journal" live on c-span. >> federal reserve chair, ben bernanke, spoke to economists about the need for financial administration for price bubble in the housing market and other

industries. he spoke at atlanta in the meeting of american economic association. this is just under an hour. >> welcome to this event. it's an honor and pleasure to introduce this morning's speaker, ben bernanke. he will speak for about 40 minutes and take four or five questions and then try catch his plane. ben and i have similar academic pedigrees, we both have the same undergraduate thesis advisor, dale mortingson, and our thesis on the same subject. we both learned academes at m.i.t., and then ben became one

of the most powerful people in the world and my only claim to fame is having been briefly ben's landlord. a decade ago ben and martin published a definitive paper claiming how decreasing values affect the society. and that claim is an outpouring to events, and take a look at that paper when someone tells you that macroeconomics were result of the problem of 2008. ben, thank you for joining us today. [applause] >> thank you, bob, and dale for coming as well.

the financial crisis that began in august, 2007 has been the most severe of the post-world war ii era and it's range of financial constitutions that failed or came close to failure, possibly the worse in modern history. although forceful responses by policy makers around the world, avoided collapse to spark a global recession that we only now are beginning to recover. even if we stabilize our financial system and revigivate our economy, it's essential that we learn the lesson from the crisis.

and because it's so complex, its lessons are many and they are not always straightforward. surely the private sector must improve their ability to monitor and control of risk taking. they not only have oversight of financial institutions, and more fundamentally of important gaps of architectual around the world. we have policies and practices and have legislative and regulatory reforms that were exposed by the crisis. as for legislative policy, we must learned lessons for monetary policy. some have concerned the monetary policy an essential

role in the crisis. they claim that the monetary process by the federal reserve in the first half of the decade caused a bubble in the housing system. the proponents argue for a greater role in policy for preventing and controlling bubbles in housing and other assets. in contrast others have taken the position that monetary was appropriate for those that prevailed. and that was not the housing bubble or the right tool for controlling in the housing crisis. obviously by the economic damage caused by two bubbles over the past decade. a great deal more of accuracy rides on resolution of this debate.

the goal of my remarks today is to shed light on these questions. i will first review the mern american policy and assess whether it was appropriate given the state of the economy at the time and given the information to the policy makers. and i will discuss evidence from the sources of the u.s. housing bubble, including the role of the monetary policy and i will define lessons from these policies. i will begin with a brief review of the monetary policy in the past decade, focusing from 2002-2006. as you know the economy had a largely recession from the dot-com boom and the large rise in stock prices. after the terrorist attacks in

september 11, 2001 and the attacks in iraq, and scandals in 2002, clouded the information from the early part of the decade. slide 1, shows the past from 2002 to present. with one key monetary policy, the target of the federal fund rate set by the foc. the federal reserve controls the rate for one association to other. you see that this lowers from 6.5 to 1.75 in 2001, and to 1% in june, 2003. after reaching the then record low of 1%, the target rate

remained at that level for a year. and in june 2004, the rate was raised reaching 5.25% in june, 2006 before pausing. and more recently as you know, and the right part of the slide indicates that rates are cut sharply once again. the low policy rates were accompanied at various times by guidance of the committees. begin in 2003, the policy was noted to remain accommodated for quote, a consider period. the monetary policy response in 2002-03 was note -- noted by two factors. first the recovery remained quite weak and jobless until

2003. real gross domestic product rose at an average rate of just above 2%, a rate insignificant to halt increases in the unemployment rate that peaked by 1/2 percent, and second there were concerns of a possible unwelcomed decline in inflation. taking note of the painful experiences of japan, policy makers worry that the united states may sink into deflation and that was one consequence of the rate hitting zero bound. limiting the scope. those decisions in this period were faced with the risk of

hitting zero-bound, policy makers should control the rates and being constrained by the lower bound on the policy interest rate. although these were warranted in policies in subsequent years, the question remains if the policy was necessary. since we cannot know how the economy would evolve under policies, the answer to this question is conjectual. one approach by this question is to compare policies during this period and the recommendations from the taylor rule, developed by john taylor of stanford university. this approach is subject to a number of indications. notably simple policy rules like the taylor rule are only rules of thumb and important

people can disagree about the details of such rules. moreover simple rules may leave out factors that may be relevant such as the risk of the policy rate hitting zero-bound. which is why we don't make policy based on such rules alone. for these reasons even strong components for simple policy rules are advised to be only used as guidelines and to ensure robustness that recommendation of alternative rules should be considered. that said much of the debate about monetary policy after the 2002 recession, make use of such rules, i will discuss them here as well. slide 2. the well known taylor rule relates the prescribed setting of the federal funds rate, the

rate of the monetary policy with two factors. first the deviation and consideration points of the long-term inflation objective and second, the output gap, that defines current output usually defined by gdp and the normal and projection of output. the taylor rule is given in this equation in the slide. in this equation, i sub-t is the rate. and pi t minus pi star is from the rate of period t. and yt minus star, the output gap is the real inflation output from output star. the period of these describe how

strong the output is from the target to the potential. as we would expect the taylor rule tells policy makers that interest rates should be higher when inplation -- inflation is above the target or greater than the potential. taylor in 1993 estimated the real value of the federal funds rate to be 2.5%. and it shows that the federal funds rate expressed here in nominal terms is two rates of inflation. the real value of the federal funds rate should equal 2% according to the rule. to make the taylor rule operational, you need to specify "a" and "b" and choose

output and measure the potential output. in his 1993 paper introducing his rule, taylor suggested setting "a" and "b" to 0.5. for example, according to the original taylor rule, if output rise 1%, then the rate should be raised by 0.5% or 50 basis points. following taylor's suggestion, in slide 3, we show the guideline implied by the taylor rule from the period of 2000 to the present, for the cpi and the fed's assumed targets at 2%, and output by real gdp and the output retrospective as the

frbs model. the taylor rule is juxtaposed from the rate shown in blue. the comparative rate in slide "b" shows that the policy rate was too easy from 2002-2006. the indications of the taylor rule by 200 basis points on average from 2002-2006. the validity of the conclusion depends on the assumptions and measurements are appropriate. room for disagreement exists. for example, some empirical assimilation evidence that the output gap by taylor rule "b" in the output equation should be 5 as shown higher by taylor.

these represent policy rates by recessions and the aftermath. the descriptions of the taylor rule have difficulties of measuring the output gap, these are well known. the choice of inflation measure may be consequential, in the original 1993 paper, taylor chose to use inflation by the gdp inflator. in slide 3 this is based on the cpi measure by inflation. for its part in the past decade, the focus on inflation is based on the price index because that measure is less dominated by cpi by the commuter rent of occupied housing.

as it matters there were alternative measures that gave policy makers some different signals in real time. notably core inflation was reported in 2003 to 2004 of having slowed at 1% and it appeared to be on a steep downward deflectary. in contrast the cpi data showed core inflation in 2003 at 2%. and these were raised by inflation of the period implying that inflation was rest of a risk than thought at the time. and that such indicators would not be known in advance and policy be available at a given time. for my purposes today, however, the significant concern of this taylor rule as a policy

benchmark is indication that monetary policy depend on curves of the value of output. the taylor rule in slide 3 relates the prescribed policy rate to the inflation rate and output gap that correspond in the same quarter. however, monetary policy works with a lag, and the monetary policy is forecast gap of the variables than the current variables. therefore in that spirit there are projections that have current input on policy decisions. the distinction between current and forecasted values does not matter much. like high levels of output

today may signal those in future. however over the past decade this has been an important one. on several occasions in this period, surges in energy prices led to inflation. according to the taylor rule, these episodes should have lead to a significant tightening of monetary policy. however, both the fic and private forecasters provide for these to coincide and not forecast for inflation. consequently policy was not tightened as much as would have been called for by the standard taylor rule. to put it another way, the standard taylor rule makes no increase says in inflation expected to be temporary and

those long lasting. in contrast policy makers have expected temporary to give strategy that policy affects inflation only with a significant lag. slide 4 shows the quantitative implications of this point. that in blue and the policy restriction by the standard taylor rule, the dashed line are the same in slide 3. also shown as the dotted green line is the policy path described by the taylor rule by projected inflation over the current inflation over the subsequent three quarters. forecast are those made in real-time, that is the time that the corresponding policy rate was chosen. these are the staff forecast,

the so-called green book forecast prepared for each policy makering. because green book forecasts of the period for 2004 are not publicly available, from 2000 on they are projected using methods developed by invoker-wheelland. these are measured in the graph by the pce price index that was available at the real-time than by the cpi. the slide shows that the alternative taylor rule prescribes a path for policy. in other words when one takes into account that ÷t

appropriate to a simple policy rule. which version of the taylor rule, the standard version or the alternative version that employs inflation forecast is the guide. i have explained the inflation forecast, monetary policy reports with a lag and that policy making should be forward looking. one may look at current inflation values. however note from slide 4 with current inflation values would recommend that the f 1 c raise the policy rate into 2008. just as with the financial crisis in september and october. that's a policy decision i suspect would not have garnered

much support. the forecast inflation in green dots explains the monetary policy early in the past decade and as well as to not respond as aggressively that turned to be a temporary surge of inflation in 2008. this suggests that the taylor rule using forecast inflation is a benchmark and a guide for appropriate policy. although monetary policy from 2002-2006 appears to be consistent with the goals of max stability. we have not addressed that monetary policyings perhaps appropriate for output goals contributed to the housing bubble. let me turn now to that question. to set the stage for the discussion, slide 5 shows the

annual increase of nominal housing prices. after slow growth, the housing prices rose in the 1990's. growing at an annual rate from 1998 to 1999, thus the beginning of the run of housing prices predates the housing policy. 2007 dates the boom of 1998. on the other hand the rates were in 2004 and 2005 and the housing increase and thus this does not rule out the housing policy. to try to assess the importance of that contribution, in the remainder of my remarks i will consider briefly two major questions.

first the housing prices shown in slide 5 is quite large. could a monetary policy have contributed to the increase that we observe, if not, what does account for it. second, houses rose in this period in many countries. not just the united states. if monetary policy was the source of housing increase in the united states, it seems reasonable to expect that international perspective that those houses would have rise as well. is that the case? with the respect of the magnitude of house price increases,economists have found that only a small portion of increase in the housing prices in this decade can be contributed to the housing policy.

this can be used in models that make no use of economic theory. to demonstrate this finding in a simple way, i will use a statistical model that summarizes the historical interfaces of the housing model. this model is similar to economists that seek to analyze the evolution of data series over time. the model incorporates seven variables including measures of economic growth, inflation, unemployment and house prices and the federal funds rate, and it's estimated using data from 1997-2002. for our purposes the value of such a model can be used to predict the behavior of any areas studies, assuming that

the historical situation holds and that the other historical values are included. slide 6 shows these from 2003-2008. . .

a possible objection to this conclusion is that because of changes in methods of housing finance, responsiveness of prices to monetary policy may have been different in the past decade than was in the 1980's and the 1990's. about one-third of mortgage applications were for adjustable rate mortgage

products in 2003-2004. this linkage could rationalize the stronger effect of monetary policy on house prices in the more recent period. some evidence on this question is provided on a slide 7 which shows initial monthly payments for immediate priced houses a three different prices of mortgages. the interest rates used in calculating these payments are the actual percentages from 2003-2006 as provided by freddie mac. a comparison of the initial monthly payments shows that the uniform payment is about 16% lower -- shows that the arm payment is lower. it is not sufficiently lower because it provides the

amortization of principal. moreover, less policy would have had an effect on arm payments. this is taking into account the feedback effects of monetary policy on the economy. under this scenario, we found that the initial arm rate would have been slightly higher than the base line and that the initial monthly payments for a borrower under the policy would have increased by only about $75. this results does not suggest that tighter monetary policy would have persuaded many potential borrowers. slide 7 also shows the initial monthly payments for alternative types of variable-rate mortgages including interest only, long

amortization, negative amortization in which the initial payment is not cover interest and pay option which give the borrower considerable flexibility given the size of the monthly payments in the early months of the contract. these more exotic mortgages it shows a giving a reduction in the initial monthly payment then to ban could be obtained through a standard arm clearly, those who want to lessen their initial payment was important for some. these alternative products proved to be quite important and has many have recognized a likely problem of the housing bubble. a slide eight is mortgages that arise with various exotic features beginning in the year 2000. the use of these non standard features increased rapidly from early in the decade through

2006. because such features are presumably not appropriate for many borrowers, slide eight shows the change in mortgage writing standards which is further exacerbated such as the no documentation loans. the picture that emerges is there. both lenders and borrowers became convinced that house prices would only go up. borrowers shows and were extended mortgages that they could not be extended to service -- expectations. for a time, rising house prices became a self-fulfilling prophecy, but ultimately further appreciation could not be sustained and prices collapsed. this description suggests that regulatory and supervisory policies rather than monetary

policies would have any more effective means of this. i returned this point in my conclusion. let me turn to the international evidence on the link between monetary policy of house price appreciation. cross-country evidence is shown in slide 9. the figure is drawn from a recent study of 20 industrial countries by the international monetary fund and replicated by the board staff. the vertical axis shows the change in inflation adjusted house prices in each country from the fourth quarter of 2001 until 2006, which is the sharpest period of price appreciation and most of these countries. countries represented by diamonds that are further north had relatively greater house price appreciation over this period. you can see from the figure that house price appreciation, though of course large, was actually

less than that of the majority of countries in this sample. the horizontal axis of the figure following the study shows the degree of monetary policies or tightness in each country measured by the aviation policy in each country from the description of the taylor roll over the corresponding period. countries shown further to the left had more accommodative policies over the period. the united states is shown as having a relatively accommodating policy, as you can see. that is driven in part by current and not forecast of inflation as i discussed earlier. interestingly, essentially all of these countries had monetary policies easier than those prescribed by the taylor role as shown by every country is situated on or to the left of

the vertical axis in the figure. as this slide shows, the relationship between monetary policy and house price appreciation over countries is quite weak. for example, 11 out of 20 had both tighter monetary policy relative to the prescriptions and a greater appreciation than the united states. the overall relationship between house prices and monetary policy commissioned by the solid line, as the expected slow in that tighter policy is related to slower appreciation. however, the relationship is insignificant and economically weak. moreover, monetary policy could explain only about 5% of the appreciation across these countries. well, then what does explain the house price appreciation across countries? in earlier remarks, i pointed

out that capital influx through emerging markets and industrial companies -- industrial countries helped appreciation and low long-term interest rates in those countries, the hypothesis. today is not the appropriate time to visit that hypothesis in any detail, but i would like to take a moment to show that accounting for inflows it is providing free fall. slight 10 which is analogous to slide 9 shows the relationship between capital inflows and house price appreciation for the same set of countries as in the previous slide. also, house price appreciation is shown on the vertical axis of the figure. the horizontal axis shows the increase in the current account or the increase of capital inflow for each country measured as a percentage of gdp. the downward slope of the

relationship is as expected. countries in which accounts worsened and inflows rose are shown on the left half of the figure. they had greater house price appreciation. however, in contrast to the previous slide the relationship is significant but statistically and economically. over 31% of those appreciations is explained. this simple relationship requires more interpretation before any strong conclusions can be drawn. in particular, we need to understand better why some countries do structure causes than others. i will know here that with more accommodating policies reduce capital inflows, the relationship appears to be inconsistent with the existence of a strong link between monetary policy and house price appreciation. my objective today has been to review the evidence on the link between monetary policy in the early part of the past decade

and the rapid rise in house prices that occurred roughly the same time. the direct linkages are weak because monetary policy works in a lack. their response to changes in inflation and other economic variables and it should depend on whether the changes are expected to be temporary or longer lasting. from that point it is taken into account that policy during that period the accommodative has not been appropriate given the state of the economy and of policymakers meeting objectives. house prices began to rise in the late 1990's. although the most rapid increases were the lowest levels, the managing was too large to be explainable by the stance of monetary policy alone. moreover, cross-country evidence shows no significant relationship between monetary policy and the pace of price increases.

what policy implications should we draw? i noted earlier that the most important source of lower initial monthly payments that allow more people to enter the housing market was not the general level of short-term interest rates but the increasing use of more exotic types of mortgages and the seceding decline in underwriting standards. that conclusion suggests that the best response would have been regulatory rather than monetary. strong regulation and supervision and the problems with underwriting practices and lenders' risk management would have been a more effective approach for constraining the housing bubble than a general increase in interest rates. moreover, regulators, supervisors, and the private sector could have been discussed about risk-management without having to make a judgment about sustainability of house price increases. the federal reserve and other agencies did make efforts to

discuss this. in 2005, we worked with banking regulators on nontraditional mortgages and arm products. in march 2007, we had interagency guidance on a sub- prime lending. in 2006, we used authority granted to us to issue rules to apply to all mortgage lenders and not just banks. however, these efforts came too late or insufficient to stop underwriting standards and constrain the housing bubble. the lesson i take from this experience is not the financial regulation and supervision are ineffective but that their execution must be better and smarter. the federal reserve is working not only to improve our ability to identify and correct problems in financial institutions but also to move from an

institution by institution supervisory approach to one that helps the financial system as a whole. it towards that end, with comparative evaluations across firms and analyses of interactions between firms and markets, we have further strengthen our commitments to consumer protection and we have strongly advocated financial regulatory reforms such as the creation of the systemic risk council that will reorient our country's overall regulatory structure towards a more systemic approach. the crisis has shown us that indicators such as leverage and liquidity must be evaluated from a system wide perspective as well as the level of individual firms. is there any role for monetary policy in a dressing bottles? economists have pointed out the problem of using these to pop bottles and many of these were illustrated by the recent episode. although price bubbles appears

obvious in retrospect, all of them do. in its earlier stages, economists differed drastically over whether prices were sustainable for whether the bubble was a national or merging or in a few markets. an interest-rate increase in 2003 and 2004, it could have weakened the economy at just a time when a recovery from the previous recession was just being established. that being said, having experienced the damage that the bubble can cause, we must be vigilant in ensuring the recent experiences are not repeated. all efforts should be made to strengthen our regulatory system to prevent a recurring crisis and to cushion the effects should another crisis occur. however, if adequate reforms are not made or they are made to

insufficient, we must remain open to using monetary policy as a supplementary tool for adjusting risks. proceeding cautiously and keeping in mind the inherent difficulty to that approach, clearly we have much to learn about how best to make monetary policy in this new era. maintaining flexibility and an open mind will be essential for successful policy-making as we feel our way forward. thank you very much. [applause] >> the chairman will take about four or five questions. raise your hand. a microphone will be brought to you. only after the microphone comes to life give us your question and the chairman will answer. >> on international statistics, are there two or three places

where you think improvements in comparative international statistics would help with understanding some of these things especially in forecasting? better comparative international data? >> we certainly could use better information on the capital flows which is one of the issues that are showing relevance to the asset price movements in conditions in the economy. that is an area where we have really rough statistics and the precise information about where the flows are coming from. that would be one area to emphasize. we have a good idea on trade, but we still have difficulties in, for example, distinguishing the value-added components of trade both abroad and domestic. it is a wonky thing. >> thank you.

>> when you drew the distinction between the contemporary is data and forecasted data, what you did is he made a comparison between cpi contemporaneously and core pce tested. if you had usedco -- core pce contemporaneously and forecasted the distinction would be smaller or even if you had used a real time contemporaneous g.d.p. deflationary data in forecast today that the distinction would be smaller. the biggest ever to is using the cpi that john taylor did not use and that is where the big distinction cons and that is where you get that ridiculous policy description in 2008

because of the very high cpi inflation coming from the energy crisis. >> let me be clear. the forecast version of the slide, we used total inflation and it included overall inflation. it does make a bit of a difference. it also makes a difference in the way we use real time output gap. if you look at, because it turns out the recession is worse than we thought at the time. we had an inkling of that. your reference to core, the reason it makes a difference is because core inflation intends to replicate because the entire points is that policy makers were not putting the full weight on temporary surges in energy prices when looking at responses to inflation. that is the point.

yet the effect when you look at only a core. wanted to emphasize was not core, per se, and that makes a significant difference. >> on your point on taylor using forecasted inflation, what are your thoughts on using market- based measures such as tips despite their problems? a second question, when looking at the new types of mortgages, negative amortization and other products you said contributed more with lower policies, what about the law or policy rates impact on those firms having cheap financing and causing those firms to come out with one of the new products in answer to regulatory? >> alternative matters is -- it does not matter for this exercise what you use. you cannot use tip spread for

historical analysis because we only have those reliably back to the early part of the decade. neither ted spreads or forecasts -- tip spreads both responded to the increase in energy prices. the put in the very of tips, i suspect you'd get pretty much the same result. in terms of your second car -- second question, i do not think it is the cost of the funds but the question of the bubble mentality. these firms lost a lot of money on these mortgages. it is not like they did not. they made loans and they came back and did serious damage. evidently, either the people making the loans have the wrong incentives, which is part of what happened, or the people who are writing the loans were not taking into account sufficiently the risks that house prices would stop rising in loans would

not be serviceable. i would put the bubble mentality, the poor incentives in herons in the we loans were being made -- inherent in the way it loans were being made, and the innovation and changes in mortgage structure being the primary reasons for the problem. >> you argue that the emerging market seems to provide a better explanation for housing price increases than the u.s. money supply. in view of the fact that in europe it is a national currency and many of those do not use the national key currency but are convertible. they have a u.s. dollars to lend it to the u.s..

does that modify your conclusion? u.s. dollar supply supplied to the inside world? >> i did not get the last part. >> it is not going to be entirely in the u.s., the money supply. some of it may go somewhere else. >> u.s. currency certainly goes abroad, but the phenomenon i am talking about is the increase in savings rates. when i say global savings, i do not mean just savings rates alone. in some cases, emerging asian crisis, investment rates went down and that was the source of the saving outflow that needed to find a home elsewhere. anything can happen including the buildups in reserves, a very high savings rate associated

with emerging market development strategies, oil prices or another part of the story. they traded large accumulations of wealth that needed to be invested. there were a number of factors to generate savings in these emerging markets. we have these rather perverse relationships of capital flowing from poor countries to rich countries. let me be clear. i am not trying to put blame outside the united states. there was an analogy in previous crises when we see foreign capital coming in and the country receiving the capital does not do a good job investing it. we saw that in the asian crisis, for example. what i'm arguing to some extent is that one aspect to this is that all of the capital can flowing into the u.s. and other investor countries and we did not do a good job investing it and put too much into housing the of these mad via these bad

instruments. we're trying to reform our banking and regulatory systems which is what asia had to do in the 1990 proxy. >> mr. bernanke, i noticed that you did not talk about the other side of monetary policy which is the money supply. you look at interest rates and the taylor role. i notice that the adjusted monetary base is growing very rapidly again. can you explain why that is going on? also, what role do you think gold plays after this financial crisis? are you concerned that india and china are now net buyers of gold? is that a reflection of a loss of confidence in the dollar and our current financial system? >> on the money supply, the monetary base is the consequence of the federal

reserve policies. we have been purchasing securities including treasuries and mortgage-backed securities. we have a target which we have announced for that. those purchases will create more monetary base is as it creates excess reserves in the banking system. the net effect of on purchases was muted due for quite a while as we were creating excess reserves. the other parts of our programs with the lending to banks, swap agreements with foreign banks, the whole programs which were dominating our balance sheets were unwinding as the recession is ending said the need for liquidity has disappeared or more moderate. the decline in borrowing has been offsetting the increase in

asset purchases. as the short-term borrowing has come down to a minimum level, the effects of asset purchases are showing for. i have talked about this in numerous occasions and has a written -- and have written an op-ed. we are aware we're going to have to normalize our balance sheet. we have to have an exit strategy to make sure the increase in the monetary base does not lead to forward increases in credit aggregates. we have a strategy for doing that which includes both raising the interest rates that we pay on reserves plus a number of measures we have been testing that will allow us to drain reserves. we are quite confident that we can constrain growth as needed

to exit from this unusual policy when the time comes. as far as gold is concerned, i will not get into investment decisions being made by people around the world trade the dollar remains a dominant currency in reserves. you can see that every time the conditions become worrisome and stress rises, people still use the dollar and see the u.s. as being one of the most the best and most liquid markets in the world so i am not too concerned. >> thank you, mr. chairman, for giving a very instructive or i may say "geeky" address. thank you very much. [applause]

>> so there, john taylor. so you are no longer a core guy? >> that is a shorthand forecast. [laughter] >> if you missed the entire speech by chairman bernanke today in atlanta we will replace it tonight at 10:15 p.m. eastern on c-span. >> i really think it is gone. we lost it and do not know -- do not on it anymore. that hurt. my positions are in a storage bin. i was able to get out before the house was locked up. >> this week, "american casino,"

a documentary about the impact of sub-prime mortgages on minorities. >> there is less than one month left to enter the 2010 s students cam test. there are $50,000 in prizes. the top prize is $5,000. create a five-eight minute video on one of the country's greatest strengths were a challenge we are facing. it must show varying points of view. enter before midnight january 28th. winning entries will be shown on c-span. do not wait another minute. go to studentcam.org. >> a discussion now on iran what options are available. this is from today's"washington journal." continues. host: our guest is ever ever. professor at penn state. thanks for joining us. how serious of a threat do we

face from i ran's nuclear capabilities? guest: i don't view it's a serious threat. it needs to be dealt with. what we know about the iran look - nuclear. they're trying enrich uranium. as far as we know. iran has enriched uranium to 3-4 percent the level required for civil reactor fuel but is nowhere near the level to have weapons grade this material. iran is not forbidden to do that by the nonproliferation treaty and they believe it is their right to be able to develop these fuel cycle capabilities. this is not an eminent threat.

there's no sign that i ran has nuclear weapons today and my own view is that, what iran might like to achieve at some point is something that you might describe as a nuclear option where they would have mastered many of the cape biments would would need to assemble nuclear weapons but i see no evidence they've actually taken a decision to go all the way to weaponization. so i think this is a nuclear program like any other, has proliferation risks associated with it and those risks need to be ma'amed through diplomatic manners but i don't view it's a serious threat. host: first of all the president said when he took office he wanted to give a year to continue iran's nuclear

diplomacy. you also have iran saying, we're going to continue this nuclear program. it's for energy not for nuclear weapons and you can accept our proposal or reject it but that's basically what's on the table. host: right now the positions of the two sides are not easily reconcilable. but in particular iran has proposed, they have a civilian search reactor used to produce medical isotopes. that reactor is thoroughly safeguarded and never been implicated in any activities that generate concern about weapons proliferation and that reactor is running out of fuel. many months ago iran proposed that it basically buy new fuel from international providers to help it do that. the united states and a few other countries came back with a proposal. maybe we can get you some fuel

but you'll have to ship most of your current stockpile out of iran in order to do that. the two sides have been going back and forth under the conditions under which some sort of swap might take place. the united states has a set of conditions that are unacceptable to iran. and so there's no deal been made on swapping uranium for finished fuel for the new reactor. iran said, look it's a simple commercial technical transaction. we need fuel for this and we want to buy it if you don't we're going to have to figure out how to enrich the uranium to the higher levels required for this particular sort of reactor. i don't think, as a matter of nonproliferation we should want to give iran incentives to do that. host: about that then, by our way to our audience including

those onx m. our guest is flynt leverett and he'll be with us to the top of the hour. the "new york times" front page the headline is u.s. see as window to pressure iran on nuclear fuel. unrest on those critical of the government in tehran and administration seeing what they call leaders particularly vulnerable to strong and immediate new sanction as according to the "new york times" would initiate a phase to force iran to combine with demands to halt the production of nuclear fuels. is there a window of opportunity? guest: no. i think they have an accurate sense of thinking on how to proceed at this point to the president barack obama administration but i think that reflects wish full thinking about iran and where it is and degree of western leverage over

uranium decision making. i don't believe iran is vulnerable to the kinds of sanctions that might be endorsed by the un security council. i don't think it's vulnerable to unilateral sanctioned by the united states and i don't believe some of the demonstrations and protests we saw in iran last weekend, and in any way, create some unique vulnerability for opportunity for the united states to leverage that decision on a nuclear issue through sanctions. i think that is detached from reality. host: some of the scenes from tehran, what, if any repercussions do they face in iran? guest: there's reports that perhaps as many as a thousand people have been detained connection with the protests that took place on december

27th. but you know, i think that the coverage of those protests was really grossly over blown in the west. i mean, you had many commentators and reporters talking about how this is the begin of the end of the islam republican and how they will disappear during 2010. i think that is really fanable. you have perhaps it is largest demonstration in tehran since a funeral in 1989. basically a million person demonstration in tehran to show support for the islamic republican. i don't believe that the islamic republican will collapse or implode and you know, if the obama administration or other western fonts are basing their policy on that kind of assessment i don't think it'll

work well. host: maryland. good morning to you. independent line. caller: i been looking at the demonstrations in iran and they look similar to those in france last year. look like demonstrations we've had in this country. young people are demonstrating and burning cars but i don't understand this constant drum beat. this language against iran from this country and i think it's instigated by the support of israel. there's a program on public television. he do a program, with steve, did 45 hours of filming. beautiful program. he aided private citizens home and interviewed all kinds of people. american people should get this program and look at it. guest: i think the caller makes a couple of important points.

one is, the islam republican is a more normal country than a lot of americans - i think are inclined to believe - i think that the basic political order of the islaming republican still commands the support of the vast majority of the iranian population. but i think she makes another important point too. there's an incredible amount of dehumanization in iran that goes on in the united states. i think that's unfortunate. it is perfectly legitimate to have policy differences with iran. you know, there are real differences in interests and policies and perspectives on regional issues between the united states and iran. but this is a very, very important and substantial country and a critical part of the world.

and at this point, the united states cannot achieve it's subjective in the middle east without a better more productive relationship with the islamic production than we have. i like to draw the analogy between iran today and the people's republican of china in the early 1970's and thank god president nixon realized the united states needed a productive, constructive strategic relation ship with china and i think the world has been the beneficiary of that since. we need to understand that we need a constructive, strategic relationship with the islamic republican of iran and get to work on building that relationship. host: ever ever is a graduate of texas christian university. also at mit and professor at

penn state university we do have twitter comments saying sorry flynt they're building a bomb to drop on new york city. we're going to preempt them by force. question to you, then what? guest: i hope the forecast is wrong. i hope we're not so full hardy to try to eliminate their program by force. first of all i don't think that's feasible. i think the program is to dispersed. we would not be able to eliminate it through military action. but secondly, i think that the consequences of such an action would be very, very bad for american interests. i mean first of all as i said earlier. my own view is that iran has not taken a decision to go all the way to building nuclear weapons but if you wanted to increase the chances that iranian

leadership would take such a decision, i think striking iran's nuclear program militarily is a very, very good way to encourage that kind of decision on the part of the iranians. secondly, i think iranians have many ways of pushing back against american interests in iraq and afghanistan. places where we have troops deployed. other ways in the region that they have of pushing back against our interests in ways that could really do damage to the american strategic position in the region. so, i hope that the forecast is wrong that we would not be so foolhardy to try and deal with what we think are the proliferation risks involved with iran's nuclear activities by resort together military force. host: weekly standard says in

209 we engage and in 2010 we need to e limb nalt the current regime in that country. is that likely? guest: no. i don't think the islamic republican is doing anywhere in 2010. i think that it is - it is unfortunate. president barack obama who is pursued what i consider half hearted. not to say half baked efforts at diplomatic outreach is given the region a bad name. the obama administration has not pursued engagement aimed a the kind of realignment of relationships between the united states and islamic republic as what president nixon did. obama has made some nice

statements and he's offered some interesting or favorable rhetoric, rhetorical formulations in addressing iranian leaders but put no proposals on the table that would address key iranian strategic needs and he's not laid forward a road map for realigning relationships for the two countries. until we do that we in the united states have not been serious about engaging iran. it's unfortunate the half hearted a tempts the obama administration made in this last year are taken as litmus test that engagement with iran won't work. i think strategic engagement with iran is absolutely needed and for us to adopt regime change for the islamic republic. what i think was a very bad

decision. caller: good morning. what a refreshing change it is to see this gentleman on instead of the neo-liberal talking heads we always get with their blathering for war. iran poses no threat to this country. i do not see why all of this demonization is going on like it is. it is of so difficult to run up to war and come to find out they had nothing -- it is oh-so- typical. for once, our foreign policy is not run from televisa. host: i think he made interesting points. one i would like to respond to is the parallel. rhetoric, public statements from government officials and

the way in which those are attending now with regard to iran as being parallel with the run-up to the iraq war. to the iraq war in 2003. i find those parallels um... both increasingly obvious but also quite disturbing. in the run up to the war, on iraq. people in institutions both institutions of government, institutions of the media intelligents and so forth that should have asked really hard questions about why we were doing this and what was the threat and problems and evidence to indicate that these were the problems, hard questions needed to be asked that for the most part were not asked. and in many cases now i see a kind of similar rush to

adjustment going on with regard to iran and unwillingness to take the time to ask the hard questions and what really is going on here? what really are american interests here? how is it best to pursue those interests? and you know, i think that it would be a real tragedy if, basically we had not learned enough from our sad experience dealing with iraq, if we had not learned enough this time around to ask some of the hard questions. host: part of the on-line conversation. one says i know let's bomb the crap out of everyone. we talk about war like we're talking about going to a picnic. guest: well, i think there's certainly some people that are very fast holding in advocating use of force to deal with iran or add slow kating regime change as ultimate goal of american

policy toward the islamic government but i think those approaches are not just that they won't work, but they would be really damageing for american interests in the region. would not help us accomplish what we say as our goal in this part of the world. host: and some one saying iran cuts down the straight. 30 percent of the oil, gone. guest: if iran were to shut down the straights. i ran would not be able to export it's own oil. and exsporting oil is a very critical component of iran's economy. so - i don't really see that as a very feasible or likely scenario. host: kevin democrat line with ever ever professor at penn

state university. our focus is iran and relations and what's next for the president barack obama administration. caller: good morning. to doctor ever ever, t flynt leh more people thought like you do. one of the questions you asked was, is iran an eminent threat to the u.s.. i couldn't agree more with the fact that, no it's not. one of the previous callered said it's not at all which i think is nieve. any country could be a threat to the u.s.. i agree with flynt leverett on the fact that we need to have diplomatic relations with iran. there's no sense in talking of the fear monger of bombing iran that they have nuclear weapons already or hiding or lying just

like iraq in 2003. supposedly had all of these hidden weapons of mass destruction and so forth. i think the eminent obvious threat we have right now is something you had discussed earlier on your show which was the new front on terrorism. you said yemen is at the new front on terrorism. well it's not necessarily the new front. it might be a different front on terrorism. with the fact that they are al qaeda is able to go into the mountains of yemen and with the country being as poor as it is with what you read from the times and post, that there's no government control over many parts of the country and they're free to do what they want. we're in afghanistan, and unfortunately we're in iraq. that to me is more of an eminent threat. someone like these countries

that the terrorists, al qaeda whomever can just go and hide and you know, and train and try and do what it is that they have in their mind. host: kevin i'll stop you there. thanks for the call. response from flynt leverett. guest: i think i would agree that we really have not handled the effort to contain, roll back, stop sunnis extremist terrorists threats to the united states, but i think this links to a point i made earlier. at this point, the united states can't achieve any of it's high priorities the middle east without a more productive relationship with iran. and i think you know the fight

against extremist terrorism in this part of the world is a very, very good example where al qaeda groups like al qaeda you know, they may dislike westerners or dislike jews and israelis but the number one enemy for al qaeda and groups like it are shiite muslims. iran has been a victim of this kind of terrorist violence. in the immediate aftermath of the immediate attacks i can tell you that iran offered us quite substantial cooperation when we went into afghanistan, cooperation in getting rid of the taliban and trying to round up al qaedas seeking to flee afghanistan. cooperation in standing up postal ban government in

afghanistan. bush administration ultimately walked way from that cooperation but iran was prepareed the aftermath of the 9/11 attacks to cooperate and help the united states in fighting al qaeda and i think that's just one example of an issue where the united states will not be able to achieve it's goals unless we develop a more constructive relationship with iran. host: our guest is flynt leverett. you can log on-line for more information at new america dot  net. a link available to c-span dot o'n org. texas call. caller: good morning. i got four sons. and three different universities and one in junior college. if i had a professional i would pull them out.

they walk around like a sack over their head like nothing going to happen to this country. that's like having a bandit outside your house and opening the door. i don't know why everyone is so against israel. the only way is to get independent on oil in our own country that will hurt those countries. that's all i got to say. guest: um... you know, i don't consider myself antiisraeli. i don't think i've said anything this morning that can be construed as antiisraeli in any way. i understand certainly you're not the first person to suggest that the united states could be energy independent that we could basically extra kate from dealing with the problems in the middle east but i think frankly energy independence is an

illusion or myth. we can't do it. so, i think, you know we're going to be involved in the middle east because of oil, because of israel because of a lot of other interests that we have. we're going to be involved in the middle east for a long time to come. host: david from south carolina. republican line you get the last question. good morning. if you could turn the volume down on the set. please go ahead david. caller: how's it going? good morning.. well i had a comment about iran. maybe we could like stop funding them for yemen also, all the muslim countries and their oil and dig on our coastline and maybe that can slow down the terrorism and stop funding the

countries trying produce it and maybe we can like slow the war down and slow down these people with that. thank you, sir. host: thank you, david. guest: frankly i don't think there's enough oil in the united states even including the outer continental shelf. i don't think there's enough oil to make-up all of the oil that the united states has to import. every day. even if the united states by itself could achieve some version of energy independence, we have very, very vital allies in asia, europe who will remain dependent on imported hydrocarbon. i think as, you know a major economy in the global economic quarter, the united states has an on-going interest for as far

as eye can see in a free flow of crude oil, hydrocarbon from the persian gulf to international energy markets and i don't think that will change any time soon. host: tom with this twitter comment saying what does iran want from us? guest: i think what they want from us is first of all, acceptance of the islam republican as legi mate political order in iran. i think that they want a recognition or acknowledgment that iran is an important country in it's region and has both legitimate interests and a legitimate regional role to play. um... i think that within a framework of that kind of acceptance and acknowledgment of

iran's regional role, i think iran would like to senior mallization between ra relations in the united states. lifting of sanctions. normalization of sanctions and constructive strategic relations with the united states. host: flynt leverett a teacher at penn ñññ >> tomorrow, former cia bin laden unit she discusses the alleged attack on flight 253 and with the obama administration should do to protect the united states from homegrown and foreign terrorists. james traub his article on joe biden. john newman discusses his

handling of vietnam and obama's policy on afghanistan. that is live at 7:00 a.m. on c- span. >> now available, the book "abraham lincoln," is a great read for any history buff with a unique, contemporary perspective from columnists, journals, and writers from his early years to his life in the white house and his relativity today. now it is in digital audio to listen to any time available wherever digital audio download are sold. learn more at c- span.org/lincolnbook. >> up next, filmmakers lesley and andrew cockburn