we have to make sure we grow some hair. the camera -- he did not himself have much hair. you can see it, especially if you are looking down. this may sound danceable, but this is the sort of thing -- fanciful, but this is the sort of thing people are concerned about because television is an impressionistic medium. ..

>> a lot at stake this afternoon. >> every tuesday and every thursday there is what is called a " prime minister's question time." where the prime minister gets up and answers questions from any member of the house. the leader of the opposition is allowed to ask at least four questions. it is like a gladiatorial contests, and there is a lot riding on it. >> we will be bringing that one week from today. we thank you very much for coming by. we will keep you here to help us fill in the spaces for the

american audience. now let's go back to the house of commons. >> that research reveals that during the last parliament, there were two other members of the class of 1983 with similar majorities to my own who seconded the loyal address. at the subsequent general election, both of them lost their seats. now mr. speaker, the secretary is a marvel of kindness and courtesy. i got his message loud and clear. the return to the house of my hon. friend, who was one of those second yearers. our political lives are being

lived out in the most exciting and dramatic of times. recent events in germany and eastern europe have shown that history is a constantly moving pageant. it was john kennedy whose words we all recall of the last few days of the berlin wall. he said " some men see things as they are and ask why. i dream of things that never were and ask why not." it is because i believe that the program is in accord with the spirit of that message. i have no hesitation in commending him for the house.

>> during the course of the previous speaker statements, he made reference to serve clarence. -- to assert clarence. i had many arguments with him. he is the occasion to make a snide comment about someone who is no longer here. even though i disagree with him,

he was a good member. >> even before were televised, the house will have heard me say that we have freedom of speech, but every honorable manner -- hon. member -- order. the question is that an humble address be presented to her majesty as follows. most gracious sovereign, the commons of the united kingdom in parliament assembled offer mumbled thanks to her majesty for the gracious speech which her majesty has addressed to both houses of parliament. the leader of the opposition. >> mr. speaker, for those who

may be uninitiated, it is one of the most pleasurable customs of this house that the leader of the opposition is allowed to pay compliments on their speeches to the humble gentleman who have moved and seconded the royal address. i do that now with my usual passion and enthusiasm, particularly for the usual performance of the hon. member. as i looked across the chamber, it struck me as one of our number who has never presented himself at any television charm school for rooming. i took possession of something

called something that looked like blotting paper for mopping one's head. i would be more than happy to pass this across the hon. member should he require it. it was all these qualities [unintelligible] [laughter] >> i suppose it is better than

super ice berg. he will suffer no difficulty in his -- in this new era of televised democracy. another feature we share, he suffers from a certain tonsorial deficiency. it is the case that he only has to look along his own front bench to see the deputy prime minister, the chairman of the conservative party, the counselor of the exchequer, to be absolutely assured that gray hair is not necessarily evidence of wisdom. [laughter] the honorable -- the honorable gentleman has many talents.

a different pair of glasses would allow him to double the output of that chance or of the exchequer. his speech was a considerable delight. i mean in all respects other than political. we also heard from a man who his -- it is an earnest member of parliament who has shown not and considerable courage. at the time of the 1983 general election, to his credit, he clled upon stockton not to vote for the x national front man who is the conservative candidate, and i think everyone would acknowledge the courage that it took and strongly support him. i know his wife, caroline, who is an extremely active

supporter of the campaign. the liberty is celebrated in many ways in the queen's speech. the hon. member is also not only the consultant for the independent bookmaker's association, but they also reject it also shares the same birthday with charlie watts, the drummer of the rolling stones.

he might become something of a rolling stone. until then, we will continue to be informed and delighted by his contributions. >> mr. speaker, may i first joined the leader of the opposition in congratulating my hon. friend in the way in which he moved the royal address. he did it in his own inimitable style. with his own particular way of showing that even the opposition have benefited very much from the conservative prosperity.

i know when we were on the bench, which i am sure we will never be again, it was in charge of the then labor government. of bill to privatize bus companies, to privatize the national freight corp., cable and wireless -- of course privatization got nowhere with a labour government. there are socialist. i am happy to say that all of those things were achieved under my administration. may i also congratulate my hon. friend who seconded the motion. he is well known for having won his seat and retain that against all the odds, and he will do so again.

he has truly looked after his constituents and their rights in this house. i was very glad that he pointed out that during the lifetime of the labor government's that it was the father and mother of unemployment. its citizens have profited enormously from more jobs for them to choose from. may i just finish? then i will give way to the hon. gentleman. it is a very happy coincidence that in the year when the speech contains important proposals for legal reform that both the proposal and second year of our distinguished solicitors. i welcome this early start to giving them rides of audience. both of my hon. friends are to be warmly congratulated.

i give way to the hon. gentleman. >> in what respect in the remarks given by the former chancellor of the exchequer? >> i would like to deal with some of the things which the right hon. gentleman -- the national health service. for everyone pal labor's bent on the national health service, his government has spent a great poet. -- his government has spent three. a record number of people have jobs in this country under the

conservative government, a record number of all time. about traffic congestion, they had to cut the amount spent on motorways and roads. of course they did. they ran the economy so badly. it then came onto pensions. the way they were managed is very different from here. he omitted pointing out it was the labour government that was not able to honor a pledge to protect pensions against rising prices and the rising prices would have required a 20% increase, and they just did not have the money to do it. they say there is a higher proportion of teachers to pupils it than ever before in our history. there is also a larger number of dissidents in higher education.

he omitted to point out that the age allowances we have increased and the actual age of wage allowances will go up very much more than inflation. that will go up by 14% and for those 80 and over, by 30%. he said what they had in the soviet union was not socialism. of course it was. the union of soviet socialist republic. massive nationalization. if you look back in his speeches in opposition, he wanted more and more nationalization, massive lay high-tech -- massively high taxation and massive detailed control.

at the end of the last period of labor government, manufacturing output was lower than it was at the beginning. he omits to say that. it was lower at the end and that it was at the beginning. he says we are being dragged along behind. we are, in fact, ahead in the way in which we are implementing the directors for the single market. by now, some 68 single market directors should have been implemented by the end of june. france has yet to implement nine. denmark and the netherlands 12. all others, more than 12, with italy at 33. we have the record with only

three measures not implemented. he tried to suggest that competition policy was not an essential part of having a single market. of course you cannot have varying subsidies and have their terms with which to compete with other people. this country will have the biggest subsidy and there'll be no common market, no single market, and nothing for us to enjoy. he pointed out the red times when britain was isolated -- there were times when britain was isolated in her argument. we stay isolated until we succeeded and got a fair deal. eventually we got reform of the

common agricultural party. we went on with our argument and eventually we won. what he calls isolation is really leadership and winning their argument. mr. speaker, this new parliamentary session will begin the start of a new decade. the 1970's men that we had to be treated like a third world country and rescued by the imf. the 1980's were a decade and britain regained her strength and pride. british industry has been set free to adapt to new ways and new technologies and and and regina and unparalleled rate.

is this and once again get a good return on investment. that is why over the last three years we have seen of 40% increase in business investment, and unprecedented advance. industries like steel, newspapers, and the docks whose equipment and methods were barely adequate for the 1950's have now been transformed to compete with the best in the 1990's. that is why this country has been given the lion's share of overseas investments coming into the european community. they prefer to come to britain. the government sees their main task in the time ahead. we must do everything possible to encourage and sustain genuine democracy. in the euphoria of the moment, we must not underestimate the magnitude of the task. i genuine democracy, we mean not

just the outward trappings but the underlying substance. >> order. i think the whole house heard the prime minister say she wants to get on with her speech. >> mr. speaker, i don't think anyone has given away more than i have. but genuine democracy, we mean free elections in a multi party system. in some east european countries, to achieve genuine democracy and economic reform may well take years, so great are the changes required. business has already -- our second task is to enable great changes to take place in conditions of stability in

europe so that no country feels it security, its alliances, or its borders threatened as a result of them. we should remember that these changes were not be happening were it not for the courage and vision. these methods were discussed by the european community heads of government at a very successful meeting in paris last saturday evening at which this approach received wide support. we all welcome changes in eastern europe and agree that the community should continue to give them every possible help. the particular urgency of poland and hungary posies need to recognize. -- poland and hungary's needs were recognized. not just financial help, but

further food supplies. we should also consider the possibility of extending european community programs in areas such as technology and education to eastern europe. the suggestion for looking at various options for bringing eastern europe into association with the committee will also be studied and discussed further. but the same time, we agree that nato and the warsaw pact continued to be the basis for defense that borders are not on the agenda, and we will continue to abide by the helsinki final act. without the region without nato and european community, these great events would surely not have happened. it was an excellent meeting and a very satisfactory outcome. the next step is for nato heads of government to meet on the

fourth of december when president bush will report on his meeting with president gorbachev. before that happens, i shall be meeting president bush at camp david later this week. the action of the right hon. gentleman, the leader of the opposition, is to see what is happening in eastern europe as yet another excuse to weaken our defenses by getting rid of nuclear weapons, even though they are a fundamental part of nato's strategy. because we have nato and have tech defense is strong, because we deploy cruise against the soviet union's ss20, because we convince the soviet union that it could never succeeded in intimidating are threatening the west, that we are now witnessing these great changes. mr. speaker, times of great change our great uncertainty and even danger.

we have to be prepared for anything, however unexpected. events demonstrate even more conclusively that we are willing -- our nuclear deterrents are the collective security provided by nato. is the cornerstone of our defense. how we react to what is happening now will shape europe and the wider world for decades ahead. against a background of assure defense, or programs set out in the greater speech a larger opportunity, enhancing the quality of life and improving well-being is the right one for britain of the 1990's, and i commend it to the house. >> you are watching live coverage of the british house of

commons on c-span television. that was a speech by prime minister margaret thatcher and prior to that, a speech by the leader of the opposition. joining us is a former political reporter for "panorama." >> it is represented, although everyone has been on their best behavior. it allows people to interrupt a great deal more often than they normally would. sometimes the prime minister can be positively aggressive about it. the convention is that you give way, but sometimes people can stand up and try and interrupt you in order to put you off your stride.

i suspect when they are not on good behavior and not playing for the cameras, they will tend to revert to the more traditional form. >> you have watched mrs. thatcher a lot and have written about her. >> i thought she was very nervous to start with. i was saying earlier in this program that she had a problem about whether to wear her glasses are not. it seemed to me that the way she overcame the problem was that she got her speech written in very big type so she did not have to wear her glasses. because he had raised some points she did not anticipate, she had to put her glasses on in order to read debt. at times she was not quite clear whether she wanted to have them on or off. for most of her speech, she did not have them on.

i thought she looked a little more tired, a little more matronly, a little older than when we had seen her sometimes before. normally she will come into a television studio and there will be a great deal of work that will have gone into the make up. here, no doubt she had been made up for television but she could not often power her notes -- she could not go off and powder her nose. >> i wanted ask you a couple of things. what are the members waving? >> it is called their order

papers, the order of the day's business. one of the things they do not do in the house of commons is a plot. they have various ways of showing their approval. one of the ways of showing approval is to waive their order papers. >> we have heard that the shot of the speaker is mostly head and shoulders. looking at the camera angles, you were able to see the person sitting in back of them. it was a wider shot than i expected. >> the reports that many broadcasters had about how restrictive the coverage was going to be turned out to be exaggerated. you had not only shots that were wider than just head and shoulders, you saw the background of people in some cases where it looked as if the

deputy prime minister was actually falling asleep. week the broadcasters are meant to be on very good behavior for all this. it was eight experimental transmission. after six months they would decide if they wanted it. it would be interesting to see if they run those pictures on the british news tonight where it looked as if the deputy prime minister was falling asleep during the prime minister's speech. whether we die like that our hope and pretend it did not happen. >> we will be back in about 10 minutes. in the meantime, let's go back to the floor and listen to the speech. . .

>> i remind the lady, this is a democracy. more humility on her part and understanding of her electoral mortality, play well lead to better government in britain and rather less -- rather less of the kind of abuse of power that we have come to see as a hallmark of this government. now mr. speaker, both the right

gentleman spoke and the right honorable lady, judged this gracious speech. the fact it is the last greatest speech of this decade and maps out the program for the first year of the next decade. this is right there, that we should look at it in those terms. look at it in terms 0 of we have sat, with the fruits, that will be known as the facts of the case and whether or not they measure up to the requirement that is now face britain in the 1990's. and now, that's the measure -- mr. speaker, then i'm bound to say that any rational judgment of this speech must lead to one conclusion, that as a program for the first year of the next decade, this speesh speech is particularly sad and visionless and irrelevant and downright expensive.

and i do not sir say that in the spirit of negative 0 opposition. i do not say that, as the gentlemen will know this party, who has supported and does commend, many of the things that government has done in the last decade. we believe they have done things in britain that needed to be done and those things should not be undone. we have supported them in the democraticization of the trade union and supported them in moving forward on enterprise and liberalizing the markets in britain. all of those have been good things. we're not measuring this speech mr. speaker against what they have done in the past. it is against how they measure up to the task in the future. and lying right at the heart of the gracious speech, the program for the next year of the next decade lies in e -- in our judgment, a vacuum. where it speaks, what it says, is irrelevant to the real needs of britain in the future. and where it does not speak on

the issue of training on the issue of reinvestment, and on the issue of europe, is why britain desperately needs a ahead. it is a speech, gracious speech full of leftovers furks like, it is a speech that reflects the the decade. i like to look at what it might have been and the program it play have addressed itself to. first of all, the program it play have addressed itself to in relation to the regeneration of the industrial base of this country. industrial base, of which is calculated to have been wipe ad way in the recession with which this government visited the first years of the decade. it did not, mr. speaker, peculiarly brutal quom meant on the legacy of this government, that the answer in the 1980's where they -- the vicious long-term recession that damaged

the british industry and they end the decade of government and perched on the edge of another recession in the future. well, maybe it should not be called a recession. i see the chancellor shaking his head. he will tell us this is not a recession. how should we refer to it? his own figure, mr. depp i, mr. speaker. his own figures show growth in the next year will only be 0.75. given the government's record on accuracy in the matters in the past, is he so confident that a tiny class mark will not end up as quite a substantial minus mark at the end of the year it is said this is all the price of success.

well, the house needs to remember, when we came in, we were told we had to have a recession because of the price. that was the price that we had to pay for past failures. and now we're told we have to have a recession, we have to have a hard year ahead of us, because that's the rice we have to pay for success. it would be a sick joke were the truth not so painful and the truth is that overall production in britain has only now just blitzed, if i play use that phrase above its level in 1979. and after 10 full years, the truth is our market share has dropped and candidated to drop. the truth is that inflation is now running at the highest level of any of our major industrial competitors. and the truth is that interest rates in britain are now higher than any of our major investor countries. the truth is that wages in brip running ahead of inflation at at

rate faster than any other of our major industrial countries and the truth is, mr. speaker and the truth is mr. speaker, i'll give way in a moment. the truth is that we do now have a trade deficit of record proportion. a full 6 billion pounds above what the government predicted it would be six months ago. that's the truth of the present situation in britain. >> i'm grateful. >> could you tell us what a mythical liberal government would do to control wage inflation? >> gentlemen has heard the statement that is we have made in the past about this, one of the things we would wish to do would be to see this government, would see this government enter into the european monetary system which means we would begin to control inflation and therefore control -- and therefore, control wage rates without using high interest rates. but i'm here to discuss the government's program. and the honorable gentlemen will

-- i'm here to discuss the government's program. and in a relatively short speech i do not have time to put forward all of the alternatives which he sees. the government tells us that the success story is in rations. well the record shows that investment has a percentage of g.d.p. has now again only just blitzed above its level in 1979 as a percentage of g.d.p. and with interest rates at the present level, who can doubt that they will begin that investment levels will plunge back. mr. speaker, this is described by the governments as an economic miracle. i say it is not -- not an economic miracle. it is an economic mirage. you could only call this a miracle, mr. speaker, if you were in -- entirely the prey of your own propaganda and entirely capable of deluding. >> paddy ashdown sped speaking before the first televised

session of the british house of commons. michael kongal, the floor of the house of commons has gotten very small in comparison to what it was what it was during the speech. >> the chamber is empty. >> it is empty. >> extraordinary. >> one of the things that happens is that for the two big speeches everyone is there. it shows in a way how quickly this -- the television has worn off. within a couple of hours, the m.p.'s are prepared to go back to their normal practices with most -- most debates in the house are thinly attended. it is partly because members have other things to do and committee meetings and so on. it is only really for either the big speakers like -- like the prime minister or the heard of the opposition, and some of the famous parliamentary names that they attract people in. most of the time it is thinly attended. one of the things you're seeing, is when you see the cut away

shot, you see how few people there are. when you look at mr. ashdown speaking, there are -- it hooks as if there are lots of people. he hat smallest party, or the third party, which has only about 25 members compared to 200 and 400 sort of thing. and what they have obviously worked out is those members will all bunch hind him, it is called doughnutting. they will give the impression that all of his people are there supporting him, even if no one else stayed on. >> and you have worked in covering british politician for many years being the chief mill reporter here. and how do you think m.p.'s are walking out of the chamber now and what they're feeling about television? >> hot. i think it will be the lights. they'll all be absolutely you know, on edge because of this -- this, what i say is a great day,

historic moment. one thing they'll do is ringing up their wifes and their mistresses and their journalists friends to find out how it came over. they don't know. >> they can't see it. >> that's right. all they know is what it felt like when they were in the chamber. and in the bars in the house of commons tonight, there will be. endless talk about how it came over. the house of commons has more bars than anywhere else. >> within the palace. >> there are 13 different watering holes and some are specifically for the members of the house of commons and privileged section of the journalistic community. they meet and say how does it go. and they'll all scan the newspapers tomorrow and watching the highlights on british television tonight. so they could make up their own minds because they're at the moment in a vacuum.

>> in the united states, there are a variety of books that can be bought or received regarding background on members. we thought we would go through the ones that are available here. one is, if you want to go the expensive route, dodge companion. you could get it on an address that you will see at the bottom of the screen. it has pictures and background and more extensive version. i'm going to go ahead and drop this one and then show you another one, which is called the m.p.'s chart. it is done by a gentlemen by the name of andrew roth. you could see that address at the bottom of the screen, it is from parliamentary profiles and it is more of a lighthearted look at members of parliament and how they work. finally the cheapest one was one called parliamentary companion. which you can get from the street here in london. you could buy that for 4.95

pounds. you could write to the altracis at the bottom of the screen if you could get one of these so you could more easily watch members of parliament in -- and learn more about them. what do you think will be the impact of television in the house of commons in regard to its future and the after the six-month debate here? >> i think that on the basis of what i have seen today, m.p.'s certain my will vote to keep the television cameras. i think that -- we're in for a -- some, some thrills and spills ahead. and you know, we the broadcasters will have 0 decide -- whether we put in cheeky shots of someone yawning or falling asleep. but they can't turn the clock back. this was democracy in action in the mother of parliament using the most powerful means of mass communication ever invented. you can't say no-no, go back. go back horrid cameras. for a long time they refused even to allow writing reporters,

and journalists into the house of commons because this was thought to be a -- a e -- would have an effect on privilege of parliament. it was only 150 years ago that they allowed the journalists in. and it didn't -- it didn't ruin the house of commons, indeed it made reporting much more accurate. what people were doing when they weren't allowed in, was to invent what they thought the m.p. wiest would be saying. this is what happens now on two of the cameras came in, all you had was the written version, written really rather like a parliamentary sketch, like a theatrical notice. and now you can actually see the live flesh and blood and guts. i think it is here to stay. >> the parliament returns this week. we'll have coverage at the regular time. 7:00 a.m. eastern wednesday and that's live on c span 2, with a

reply play sunday night 9:00 here on c span. >> tonight federal reserve chair on the housing bubble. fndfnged [captions copyright national cable satellite corp. 2010] [captions performed by the national captioning institute]

>> this was held in atlanta at the annual meeting of vanderbilt university's economic association. this is just over 40 minutes. how often -- an honor and pleasure to introduce this morning's speaker, ben bernanke. and he'll speak for 40 minutes. and then take maybe four or five questions and then try to catch his plane. and ben and i have similar academic ped agrees. we both have the same undergraduate thesis as dale

jorgerson sitting in the first row here and our these cease were on the same subject, the investment tax credit. we both learned modern economics at m.i.t. and we slaved as academic geeks for decades but ben became one of the most game truss -- famous people in the world, while my claim to fame has been briefly benees landlord. a decade ago, ben and simon published the definitive paper explaining how declining asset values trigger stress and recession. that paper is proving to be the foundation for an outpouring of new analysis of the issues central to the recent economic events. take a look at the paper next time anybody tells you that, macro economics failed to provide an understanding of the events that followed the financial trauma of september

2008. and then in the world -- the world looks forward to further instruction from you today. thanks for joining us. [applause] >> thank you, bob and thank you dale for coming as well. the financial crisis that began in august 2007 has been the most severe of the postworld war ii era. very possibly once one takes into account the global scope, its broad effects on a range of markets and institutions and the number of systemicly critical financial institutions that failed or came close to failure possibly the worst in modern history. and although forceful responses by policy makers around the world avoided an utter collapse of the global financial system in the fall of 2008. the crisis was nevertheless sufficiently intense to spark a

deep global recession, global recession from which we're only now beginning to recover. even as we continue working to stabilize our financial system and reinvigorate our economy, it is essential that we learn the lessons of the crisis so we could prevent it from happening again. the crisis was so complex and its lessons are many and they're in the always straightforward. surely both the private sector and the financial regulators must improve their ability to monitor and control risk taking. the crisis revealed not only weaknesses in regulators oversight of financial institutions but more fundamentally important gaps in the architecture of financial regulation around the world. for our part, the federal reserve has been working hard to identify problems and to improve and strengthen our supervisory policies and practices and we have advocated substantial legislative and regulatory reforms to traci problems exposed by the crisis.

as with regulatory policy, we must discern the lessons for the crisis for monetary policy. however, the nature of those lessons is controversial. and some observers have assigned monetary policy a central role in the crisis, specifically they claim that excessively easy monetary policy by the federal reserve in the first half of the decade helped cause a bubble in house prices in the united states -- a bubble whose collapse proved a major source of the economic stresses of the past two years. proponents of the view typically argue if a substantially greater role for monetary policy in preventing and controlling bubbles in the prices of housing and other assets. in contrast, others have taken a position that policy was appropriate for the macro economic condition that is prevailed and that it was neither a principle cause cause to the housing bubble or the

right tool for controlling increases in house prices. obviously in light of the economic damage inflicted by the collapse of two asset price bubbles over the past decade, a great deal more than historical accuracy rides on the resolution of this debate. and the goal of my remarks today is to shed light on these questions. i will first review u.s. monetary policy in the aftermath of the 2001 recession and assess whether the policy was appropriate, given the state of the economy at the time and the information that was available to policy makers. i will then discuss evidence on the source of the u.s. housing bubble including the role of monetary policy. finally i'll draw lessons for future monetary and regulatory policies. i'll begin with a brief review of u.s. monetary policy during the last decade focusing from the period from 2002 to 2006.

ads you know, the u.s. economy suffered a moderate recession between march and november 2001 and largely traceable to the end of the dot-com boom and the resulting sharp decline in stock prices. geopolitical uncertainties soc yeated -- associated with september 11th attacks as well as a series of corporate scandals in 2002 further clouded the economic situation in the early part of the decade. slide one shows the path, the year 2000 to the present, of one key indicator of monetary policy. the target for the ferm funds rate, set by the market committee or the f.o.n.c. and the federal reserve manages the federal funds rate and the interest rate at which banks lend to each other. and to influence broader financial conditions and thus the course of the economy. as you could see, the target

federal funds rate was lowered quickly in response to the 2001 recession, from 6.5% in late 2000, to 1.75% in december 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. in june 2004, the fnc raised the rate in june 2006 before pausing. more recently, as you know, and as the right slide indicates, rates have been cut sharp my once again. and the low policy rates during the 2002, and 2006 period were accompanied at various times by forward guideance on policy from the committee. for example beginning in august 200 , the f 1 c noted that policy was likely to remain accommodated for, quote, a

considerable period. ed aggressive monetary policy response in 2002 and 2003 was motivate bid two principal factors, first although the recession technically ended the recovery remained weak and jobless into the latter part of 2003. and real gross domestic product which normally grows above trend in an economic expansion rose just above 2% in 2002 and the first half of 2 lun 3. a rate insufficient to -- to to continue increases in the unemployment rate, which peaked at about 6% in the first half of 2003. second, the fonc's policy response reflected concerns about an unwelcome decline in inflation. taking note of the painful experiences of japan and policy makers worried that the united states might sink into deflation

and that as one consequence, the fonc's target rate play hit zero bounds limitting the scope for further monetary accommodation. the fonc's decisions during the period were informed by a strong consensus among researchers that when faced with hitting the lower bound, policy makers should lower rates preemptively, there by reducing the probability of being constrained by the lower bound on the policy interest rate. although macro economic conditions warranted the policy decisions, the policy reains anyone theless easier than necessary. we can't know what would have happened under alternatives, any answer to this question is necessarily conjectural. one approach use bid many who have addressed there question is to compare federal reserve policies during the period, and the recommendations derived from

policy rules such as the, so called taylor rule, developed by john taylor of stanford. and this is subject to a number of limitation which is are important to keep in mind. notably, simple policy rules like the taylor rule are only rules of thumb and reasonable people can disagree about poirnt details of the construction of such rules. moreover, simple rules necessarily leave out factors that play be relevant to the making of effective policy in a given episode such as the risk of the policy rate hitting zero lower bounds, which is why we don't make monetary policy on the basis of such rules lien. for these reasons even strong proponents of policy rules generally advise they be used only as guidelines and not as substitutes for more complete policy analysis. and this to insure row bustness, the recommendations of a number of alternative simple rules should be considered.

that said, as much -- as much as the debate about monetary policy after the 2001 rae session made use of rules, i will discuss them here as well. slide two, please. and the well known taylor rule relates to the federal funds rate. the interest rate targeted by the fomc for two factors, the deviation and percentage points of current rate from policy makers longer term inflation objective and the second, so called output gap, the difference between current output usually defined by real g.d.p. and the normal and potential level of output. in symbols, it is given by the equation shown in the slide. in this equation, t is the described value of the rate in a given period. pie mine nuss pie star is the

target rate from pie star and yt minus star t the output gap is the deviation of actual real output wide, from wide star, in period c. the pramenters are positive numbers to describe how strongly the policy rate should respond to deviations of inflation from its target and utah put from its potential. as we would expect, the taylor rule tells policy makers that interest rates should be higher when inflation is above the target and when output is above its potential. talener 1993 estimated the long run real value of the funds rate to be about 2%. the equation shows that when inflation and output are equal, the federal funds rate which is expressed here in nominal terms should equal two plus the rate of inflation. equivalently when inflation and

output equal the targets, the real value of the federal funds rate should equal 2% according to the rule. to make the taylor rule equace, shown in the slide two operational, one needs to specify the coefficients a and b and choose appropriate indicators of inflation and output and specify a target rate for inflation and a measure of potential output. in his 1993 paper introducing the rule taylor suggests that setting a and b equal to oy o.5. according to the original rule, if output rises 1% relative to its potential, then all else equal, the feve should raise rates by 0.5% or 50 basis points. and following taylor's suggestions for pramenter values in slide three, we show by the dashed red line the values of the federal funds rate implied by the taylor rule for the period from 2000 to the present

with inflation measured by the consumer price index or c.p.i. the fed's assumed inflagse target at 2% and output measured by real g.d.p. and the output gap as estimated retrospectively by the federal reserve's primary forecasting model. the failer rule is juxtaposed to the policy rate taken from slide one and again shown in blue. and the compareson to -- displayed in slide three provides the most commonly cited evidence that monetary policy was too easy from it -- 2002 to 2006 as the funds rate is below the values employed by the taylor rule by 200 basis points on average. from 2002 to 2006. and of course the validity of the exhoogs depends on whether the specific assumptions and measurements used to constuct a taylor rules policy prescription

are appropriate. room for disagreement exists. for example, some impir kel assimilation evidence suggests the responses to policy in output gap given in pramentter b should be higher than 0.5 originally chosen by taylor. higher values of b lead the taylor rule to recommend lower policy rates during recessions and their aftermath. the prescriptions of the taylor rule play depend on how inflation and the output gap are measured. the difficulty in measuring the output gap especially in realtime are well known. the choice of inflation measure play be consequential. in its original 1993 paper taylor chose to measure inflation using the g.d.p. deflator. and the taylor rule shown in slide three is based on the familiar c.p.i. measure of inflation. for its part, during the last decade, the fonc has focused on

the price index for personal consumption expenditures or pce because that measure is less dominated than c.p.i. by the imputed rent of owner occupied housing and for other technical reasons. as it happens the choice matters to the interpretation of this episode as alternative gave measures different figures in realtime. notably core p.e.c. inflation was initially reported in the first quarter of 2004 as having slowed to about 1%. and it appeared to be on a -- on a steep downward trajectory. and these data heighten concerns about deflation on the fonc. and in contrast, the c.p.i. data showed core inflation for 2003 of about 2%. in this case, data visions rayed for the period, implying inflation was less of a risk

than thought at the time. but such revisions would occur could of course not be known in advance and policy decisions must be made on the information available at a given time. for my purposes today, the most significant concern regarding the use of the rule as a policy benchmark is this implication that monetary policy should depend on the currently observed values of inflation and output. and in particular, the taylor rule recommendation we saw in the slide three relates to prescribed policy interest rate to the inflation rate and the output gap that correspond to the same quarter in which the policy decision was made. however, because monetary policy works with a lag, effective monetary policy must take into account the forecast values of the gold variables, rather than the current values. indeed in the spirit, the fonc issues from jections and these

projections have been shown to have important influences on policy decisions. the distinction between current and forecasted values does not always matter very much, as for example, high levels of inflation or output today play signal high levels of those variables in the future. however, orche the past decade, the distinction between current and forecast inflation in particular has been an important one. on several occasions during this period, surges in energy prices led to increases in overall inflation. according to the standard rule whose policy depends on current value, this should have led to a significant tightening of monetary policy. however, both the fomc and private forecasters expected the increases in the energy prices to subside. correctly, as it turned out, and therefore did not much adjust their medium term forecast for

inflation. consequently policy was not tightened as much as would have been called for by the standard taylor rule. and put another way, the standard taylor rule makes no distinction between increases in inflation that are temporary and longer lasting. in practice policy makers responded less to north carolinas in inflation that they expect to be temporary, which is reasonable given monetary policy reflects inflation only with a significant lag. slide four shows the quantitative imflickses of this point. the actual path of the policy rate in blue and the policy prescription implied by the standard taylor rule are the same as in slide three. and also shown, though, is a dotted green line, is the monetary policy path proscribed by an alternative version of the taylor rule that replaces the current value of inflation on the right-hand side with a

forecast of inflation over the current and subsequent three-quarters. forecasts for throws made in realtime, that is at the time the corresponding policies rate was chosen. for the period through 2004 these forecast rts staff 401ks the, so called greenbook forecasts that were prepared as preparation for each policy meeting. greenbook forecasts for 2004 are not yet publicly available and 2005 on the forecasts are constructed from the publicly released contemporaneous projections of the participants using methods developed by voguer weiland. in addition, inflation is measured in the graph by the p.c.e. provides index that was available in real-time instead of by the c.p.i. and a slide four shows, the alternative rule proscribes a path for policy that is much

closer to what was followed throughout the decade, including recent years. in your own words when one takes into account, the policy makers should and did respond differently to temporary and longer lasting changes in inflation. monetary policy following the 2001 recession appears to have been reasonably appropriate, at least in relation to a sinl pell policy rule. which version of the taylor rule? the stand ard one? or the alternative version that em replies inflation forecasts is the more reliable guide. and i have explained my preference for using inflation forecasts rather than actual inflation in the policy rule. monetary policy works with a lag and therefore policy decisions must be forward-looking. and one might still prefer the simplicity of the standard taylor rule that uses current inflation values. however, note from slide four that the proponent of the standard rule with current inflation values would have recommended that the fo mrks c

replace the policy rate to a range of 8 to 7% during the first three-quarters of 2008 after the recession peaked and before the intention fiction of the financial crisis in september and october. that's a policy decision that i suspect would not have garnered much support among monetary specialists. in contrast, slide four shows the version of the taylor rule based on forecast inflation. that's the rule in green dots explained both the course early in the past decade, as well as the decision not to respond aggressively to what did in fact turn out to be a temporary surge in inflation in 200 . this comparison suggests that the taylor rule is more useful benchmark, both as a description of recent fomc behavior and as a guide to plope yet policy. although monetary policy from 2002 to 2006 appears to be recently consistent with the federal reserve's mantated goals of maximum sustainable employment and price stability,

we have not yet addressed the possibility that accommodative policies though perhaps appropriate for achieving medium term inflation and output goals inadvertently contributed to the housing bubble. let me turn now to that question. >> and to set the stage for the discussion, slide five shows the annual increase in nominal house prices from 1978 to the present. after seven years of slow growth, u.s. house prices began to rise more rapidly in the late 1990's. and prices grew at a 7 to 8% annual rate in 1998 and 1999 and in the nine to 11% range from 2000 to 2003. and thus, the beginning of the runup in housing prices predates the period of highly accommodative monetary policy. and chiller, 2007 dates the beginning of the boom in 1998. on the other hand, the most rapid gains were 2002 005 when

the rate of appreciation was between 15 and 17%. the timing of the bubble does not rule out contribution from monetary policy. to try to assess the importance of there possible contribution, in the remainder of my remarks, i will consider brief my two related questions. first, the cumulative increase in the housing prices shown in five is quite large. and can accommodative monetary policies during this period recently account for the magnitude of the increase in house price that is we observed. and if not, what does it -- account for it. second, house prices rose significantly during this period in many industrialized countries, and in the just the united states. if monetary policy was a important source of house price appreciation in the united states, it seems reasonable to expect that in an international comparison, countries with easier monetary policy should have been more likely to have significant rises in house prices as well. and is that the case?

with respect to the magnitude of house price increases, economists who have investigated the issue have generally found that based on historical relationships only a small portion of the increase in house prices earlier this decade can be tribute to do stance of u.s. monetary policy. this conclusion has been reached using both models and purely statistical analysis that make no use of economic theory. and to demonstrate this finding in a simple way, i will use a statistical model developed by the researchers that summarizes the historical relationships among key macro economic indicators and house prices and monetary policy. the statistical technique employed in the model, known as vector auto regression is familiar to economists that seek to analyze the joint evolution of data series over time. the model incorporates seven variables, including measures of economic growth and inflation and unemployment and residential

investment and house prices and the federal funds rate and it is estimated using data from 1977 to 2002. for our purposes, the value of such a model is it could be used to predict variables studied assuming historical relationships hold and other variables take on their historical values. and slide six illustrates the application of this procedure to the federal funds rate and housing prices, over the period from 2003 through 200 . in the left panel of the figure, the solid line shows the actual history of the federal funds rate. and the shaded area in the figure is constructed using the results of the statistical model. and it shows the range of possible outcomes that would be considered normal for the federal funds rate, assuming that the other six variables included in the model took their values during the years 2003 to 2008.

values of the federal funds rate that falls in the shaded area could be thought of as being relatively close to or technically within two stand art deviations of the corresponding forecasted values. in line with the earlier discussion, the left panel discussed that although monetary policy during the period following the 2001 recession was accommodative, it was not inconsistent with the historical experience given the macro economic environment at the time. the right panel of the figure shows the forecast behavior of house prices during the recent period. and taking macro economic conditions and the actual path of the federal funds rate. as you could see the rise in house prices falls well outside the predictions in the model. thus when normal historical relationships are taken into account, it is difficult to ascribe the house price level to the monetary policy or the prodder macro economic environment. a possible observation to this

conclusion is that because of changes in methods of housing finance, the responsiveness of house prices to monetary policy play have been different in the past decade than it was in the 1980's and 1990's. for example during 2003 and 2004, about one-third of more gadge applications were for adjustable rate mortgages. and money is fed through more with arms. this linkage could rationalize a stronger effect of monetary policy on house prices in the more recent period. some evidence on this question is provided in slide seven. and that shows illustrative initial monthly mortgage payments for a medium priced house for different types of mortgages. and the interest rates used calculating these payments are the actual averages for prime borrowers for the period from 2003 to 2006 as provided by

freddie mac. and a comparison of the initial monthly payment for a fixed rate 30-year mortgage and an arm, shows that the arm payment is about 16% lower. a consequential but not dramatic difference. the arm payment is not substantially lower than the fixed rate payment because it includes amortization of principal and a spread over the index interest rate. moreover, less accommodative policy would not have had substantial impact. using the board's model, staff stimulated the effects on the economic and on mortgage rates of a monetary policy that followed the original 1993 taylor rule, taking into account the feedback effects of tighter monetary policy on the economy. under this scenario, they found the initial arm rate would have been about 0.71% points higher than the baseline and that the initial monthly payment for an armed borrower under the tighter policy would have increased by

75 dollars. this result does not suggest that moderately tighter monetary policy would have dissuaded many potential armed borrowers. and slide seven also shows initial monthly payments and alternative types of variable rate mortgages including interest only arms and long amortization arms and negative amortization arms and pay option arms which give the borrower considerable flexibility regarding the size of the monthly payments in the early stages of the contract. these more exotic mortgages show more significant reductionses in the initial monthly payment than could be obtained through a standard arm. and creerly for lenders and borrowers focused on minimizing the initial payment the choice of mortgage type looks far more important than the level of short-term interest rates. and the availability of these alternative mortgage products prove to be quite important and a many have recognized, this is

likely a key explanation of the housing bubble. slide eight shows the percentage of variable rate more depackgadge -- mortgages originated with exotic features beginning in the year 2000. as you could see the use of these nonstandard features increased from early in the decade to 2005 and 2006. because such features are not appropriate for many boyer rowers, is slide eight is evidence of a detracted gettation afterunderwriting standards which was exacerbated by the practice of no documentation loans. and the picture that emerges is consist went many accounts of the period. and at some point, both lenders and borrowers became convinced that house prices would only go up. borrowers chose and were extended mortgages that they could not be expected to service in the longer term. they were provided these loans on the expectation that accumulating equity would allow

refinancing into more sustainable mortgages. and for a time, rising house prices became a self-fulfilling prophecy but ultimately further appreciation could not be sustained and house prices collapsed. this description suggests that regulatory and supervisory policies rather than monetary policies would be a more effective means of addressing the runup in house prices. i'll return to this point in my conclusion. let me turn now to the national evidence on the link of policy and house appreciation. some cross country evidence on the link is shown in slide nine. the figure is drawn from a recent study of 20 industrial countries by the international monetary fund and replicated by board staff. the seart cal access of the figure shows the change in real and inflation adjusted house prices in each country from the fourth quarter of 2001 and until the third quarter of 2006. a period that spans the sharpest

period of price appreciation in most of these countries. countries represented by diamonds that are further north in slide nine had relatively greater house price appreciation over this period. you could see from the figure that how price appreciation in these united states though of course large in chute terms was actually less than that in a majority of countries in the sample. the horizontal access of the figure following the i.m.s. study shows the degree of monetary policy ease or tightness in each country measured by the average deviation of policy in each country, from the proscription of a standard version of the taylor rule over the corresponding period. countries shown further to the left had more accommodative monetary policies over the period, relative to the predictions of the taylor rule. united states is shown as having a relatively accommodative policy as you could see. and however, that conclusion is

driven in part by the use of current rather than forecast inflation in the taylor rule, the point i discussed earl here. and interestingly, essentially all of these countryhaus monetary policies easier than that proscribed by the taylor rule as shown by the fact that every country is situated on or to the left of the vertical access in the figure. as slide nine shorks the relationship between the stance of monetary policy and house price appreciation across countries is quite weak. for example, 11 of the 20 countries in the sample had both tighter monetary policies, relative to the standard taylor rule proscriptions and greater house price appreciations than the united states. and the overall relationship between house prices and monetary policy shown by the solid lines, as the expected slope in the tighter policy is shoshiated with somewhat slower house price appreciation. however, the relationship is

statistically insignificant and economically weak. moreover mo monetary policy differences explain only 5% of the vareyabblet in house price appreciation across countries. and then what does explain the variability in the house price appreciation across countries. in the earl here remarks i pointed out that capital inflows for e emergencying markets to industrial countries can help to explain asset price appreciation and low long-term real interest rates in the countries receiving the funds. the, so called global saving glut hype these. today is not the appropriate time to revisit that in any detail. but i like to take a moment to show that accounting for capital inflows is likely to prove fruitful for explaining cross country differences. and slide 10, which is analogous to slide nine, shows the relationship between the capital inflows and house price appreciation for the same set of countries a in the previous

slide. also as in the previous slide, house price appreciation is shown on the vertical access of the figure. the horizontal access shows the increase in the current account, equivalently the increase in capital flows for each country and measured as a percentage of g.d.p. the downward slope is as expected. countrys in which current accounts worsened and capital inflows rose, shown in the left half, had greater house price appreciation in this period. and however, in quontrast to the previous slide, the relationship is highly significant, both statistically and economic my and over 31% of the variability in house price appreciation across countries is explained. this simple relationship requires more interpretation before any strong conclusions about causality can be drawn. in particular, we need to understand better why some countries drew stronger capital flows than others and i will only note here that it is more

accommodative monetary policies generally reduced capital inflows and the relationship appears to be inconsistent with the existence of a stong link between monetary policy and house price appreciation. my objective today is to review the ofede between monetary policy and the earlier decade and the rapid rise in house price that is occurred at the same time. the direct linkages are weak. monetary policy works with a lag, policy makers responses to changes in inflation and other economic variables should depend on whether those changes are expected to be temporary or longer lasting. when that point is taken into account, policy during that period, those -- though certainly accommodative does not appear to have been inappropriate, given the state of the economy, and of policy makers medium term objectives. house prices began to rise in the late 1990's and though the

most rapid increases occurred when interest rates were low, the magnitude seems 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 house price increases. what policy implications should we draw? i noted earlier that the most important source of lower initial monthly payments which allowed more people to enter the housing market and to bid for properties was not the general level of short-term interest rates but the increasing use of more exotic types of mortgages and the associated decline in underwriting standards. that conclusion suggests that the best response to the housing bubble would have been regulatory, rather than monetary. stronger regulation and supervision aimed at problems with underwriting practices and lenders risk management would have been a more effective and surgical approach for constraining the housing bubble than a general increase in interest rates.

moreover, regulators and supervisors and the private sector could have been more effectively addressed building risk concentrationings and inadequate risk management practices without necessarily having to make a judgment about the sustainability of house price increases. the federal reserve and other agencies made efforts to address poor underwriting practices. in 2005 we worked with other banking regulaters to develop guidance for banks on nontraditional mortgages notably interest only and option arm products. in march 2007 we suggested interagency guidance on subprime lending which was finalized in june. after a ear viss -- series in hearings, the use authority foo us through the truth in lending act to all high cost lenders not just banks. however, these efforts came too late or were insufficient it stop the decline in underwriting standards and restrained the housing bubble. and the lesson i take from this

experience is not the financial regulation or the supervision are ineffective for controlling emerging risks but 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 vferry approach to one that is attentive to the stability of the financial system as a whole. and toward that end, we're supplementing reviews of individual firms, with comparative evaluations across firms and with analysis of the interactions bhoong firms and markets. and we have further strengthened our commitment to consumer protection and strongly advocated financial regulatory reforms such as systematic risk council that will reorient our country's overall regulatory structure to a more systematic approach. the crisis has shown us that indicators such as leverage and the liquidity, must be evaluated from a system-wide perspective

as well as at the level of individual firms. is there a role for monetary policy in addressing bubbles. the problems to pop bubbles and many were illustrated by the recent episode. although the house price bubble appears obvious this retrospect, all publics appear obvious in retrospect. in the earlier stages the economists differ about whether the house prices were sustainable or if it was a bubble whether the bubble was national or confined to a few local markets. monetary policy is also a blunt tool. interest rate increases in 2003 and 2004 sufficient to constrain the bubble could have seriously weakened the economy at just the time when the recovery from the previous recession was just being established. that said, having experienced the damage that asset price bubbles can cause, we must be especially vigilant in insuring

that the recent experiences are not repeated. all efforts should be made to strengthen our regulatory system tou prevent a reoccurrence of e crisis and the push in the effect if another crisis occurs. however,, if adequate reforms are not made, or if they're made and prove insufficient to prevent dangerous built-ups of financial risks, we must remain open to using monetary policy as a supplementary tool for defwreasing those risks. proceeding cautiously and keeping in mind the inherent difficulties of that approach. and clearly, we still have much to learn about how best to make monetary policy and meet threats to financial stability in the new era. and maintaining flexibility and an open mind, will be essential for successful policy making as we feel our way forward. thank you so much. [applause] [cheering] [applause] [captions copyright national cable satellite corp. 2010] [captions performed by the national captioning institute] >> if the chairman will take four or five questions.

raise your hand and -- microphone will be property to you. and only after the mike phone comes to life give us your question and then the chairman will answer. thanks. >> i was wondering on -- international data, statistics, are there two or three places where you think improvement in comparative international statistics would help with the -- understanding these things, especially the forecasting of inflation? >> on the data? >> the data. better international comparative data. >> well, we certainly could use better information on the capital flows can is one of the issues that, certainly has been relevant to the -- to the asset price movements and to thinking about the -- about conditions in the economy. so that is an area where we have rough statistics and -- not only information about where the flows are coming from. that would be an area that i emphasize. we have good data on trade but we sfill have, you know,