exams and consolidated supervisory activities. improvements in the supervisory framework will lead to better outcomes only if day-to-day supervision is well executed with risks identified early and promptly mediated our internal reviews have identified areas of improvement. in the future, to facilitate swifter and more effective supervisory responses to buff the oversight and control of our supervisory function will be more centralized with shared accountability by senior board and supervisory staff and active oversight by the board of governors. supervisory concerns will be communicated to firms promptly and at a high level with more frequent involvement of boards of directors and senior officials. greater involvement of senior federal reserve officials with strong systematic follow-through will facilitate more vigorous mediation by firms but where necessary, we will increase the use of formal and informal enforcement actions to ensure

prompt and effective mediation of serious issues. in summary, the federal reserve's wide range of expertise makes it uniquely suited to supervise large complex financial institutions and to help identify risk to the financial system as a whole. moreover, the insights provided by our goal is supervising a branch of banks, including community banks, significantly increases our effectiveness in making monetary policy and posturing financial stability. we await enactment of comprehensive legislation, we have undertaken an intensive self examination of our regulatory and supervisory performance. . .

i will let them make clear my long-held view -- i would like to make clear my long-held view. monetary policy and concerns about the structure and systems and the banks are inextricably intertwined. if you need further proof of that proposition, consider the events of the last several years. many have a legitimate interest in regulatory policy.

but neither monetary policy nor the financial system would be well served if the four reserve is denied influence over the financial system. today, conceptual and practical concerns about the extent, the frequency, and the repercussions of economic and financial speculative excesses' have come to occupy our attention. it bubbles are indeed potentially disruptive of the comet -- economic activity, then important and interrelated questions arise for both monetary and super various policy. judgment is required about if and when an official response is warranted. if so, is there a role for monetary policy, for regulatory actions, or four votes? how can they be coordinated and

implemented in the midst of a crisis and a matter of days? the practical fact is that the federal reserve must be involved in those judgments and that decision making. beyond its broad responsibility for monetary policy and its influence on interest rates, it is the agency that has the relevant technical expertise growing out of working in the financial markets virtually every day. as potential lender of last resort, the fed must be familiar with the conditions of those to whom it lends. it oversees and participates in the basic payments system, domestically and internationally. in sum, there is no other official institution that has the breadth of institutional knowledge and experience to identify market and institutional vulnerabilities. it also has the capability to act on very short notice. the federal reserve is the only agency that has financial resources at hand in amounts capable of emergency response.

more broadly, i believe the experience demonstrates consistently -- conclusively that the responsibilities of the federal reserve with respect to maintaining economic and financial stability require close attention to matters beyond the specific confines of monetary policy, if defined narrowly as influencing monetary aggregates and short- term interest rates. for instance, one recurring challenge in the conduct of monetary policy is to take account of the attitudes and approaches of banking supervisors as they act to stimulate or to restrain bank lending, and to adjust capital standards of financial institutions. the need to keep abreast of rapidly developing activity in other financial markets, certainly including the markets for mortgages and derivatives, has been driven home by the recent crisis. none of this to my mind suggest a need for regulatory and

supervisory authority to lie exclusively in the federal reserve. in fact, there may be in bandages in some division of responsibility -- advantages in some division of responsibilities. a simple regulator may be excessively rigid and insensitive to market developments. but we do not want competition in laxity among regulators aligned with particular constituencies or exposed to narrow political pressures. we are all familiar with weaknesses in supervisory oversight, with failures to respond to financial excesses in a timely way, and with gaps in authority. those failings spread in one way or the other among all of the relevant agencies, not excepting the federal reserve. both law and practice need reform. but however these issues are resolved, i do believe the federal reserve with the broadest economic responsibilities, with the perceived mandate for maintaining this financial

stability, with the strongest insulation against special political or industry pressures, must maintain a significant presence with real authority in regulatory and supervisory matters. against that background, i will respond to the particular points you raised in your invitation. i do believe it is apparent that regulatory arbitrage and the fragmentary nature of our regulatory system did contribute to the nature and extent of the financial crisis. that crisis exploded with a vengeance outside the banking system, involving investment banks, the world's largest insurance company and government-sponsored agencies. regulatory and supervisory agencies were neither reasonably equipped nor conscious of the extent of their responsibilities. money market funds growing over several decades are essentially a pure manifestation of regulatory arbitrage. attracting little supervisory attention, they broke down under pressure, a point of significant

systemic weakness. the remarkable rise of the subprime mortgage market developed through a variety of channels, some without official oversight. there are large questions about the role and supervision of the two hybrid public/private organizations that came to dominate the largest of all our capital markets, that for residential mortgages. undeniably in hindsight, there were weaknesses and gaps in the supervision of well-established financial institutions, including banking institutions, major parts of which the federal reserve carries direct responsibility. some of those weaknesses should have been closed by more aggressive regulatory approaches. but some gaps and effective supervision -- institutions owning individual banks or small thrifts -- were loopholes explicitly permitted by legislation. the federal reserve is thrust

into direct operational contact with financial institutions and markets. beyond those contacts, the 12 federal reserve banks exercising supervisory is -- supervisor responsibilities provide a window into both banking developments and economic tendencies in all regions of the country. in more ordinary circumstances, intelligence gleaned on the ground about banking attitudes and trends will supplement and color forecasts and judgments emerging from other indicators of economic activity. when the issue is timely identification of highly speculative and destabilizing bubbles, a matter both important and difficult, then there are implications for both monetary and supervisory policy. finally, the committee has asked about the potential impact of stripping the federal reserve of direct supervisory and regulatory power over banks and other financial institutions, and whether something can be learned about the practices of other nations. those are not matters that

permit categorical answers, good for all time. international experience varies. most countries maintain a position, often a strong position, particularly strong for central banks on financial supervision. in some countries, there has been a formal separation. at the extreme and contrary to earlier approaches, all sue -- all formal supervisory and regulatory authority over financial institutions was consolidated in the u.k. into one authority, with rather loose consultative links to the central bank. the approach was considered attractive as a more efficient arrangement, avoiding both rape -- both agency rivalries and gaps of inconsistencies in approach. the sudden pressures of the developing crisis revealed a problem in coordinating between the agency responsible for the supervision, the central baghdad -- the central bank which needed to take action, and

the treasury. the bank of england had to consider intervention with financial support without close and confident appraisals of the vulnerability of affected institutions. as a result, i believe the u.k. government is reviewing the need to modify the present arrangement. for reasons that i discussed earlier, i believe it would be a grievous mistake to insulate the federal reserve from direct supervision of systemically important financial institutions. something important, if less obvious, would also be lost if the present limited responsibilities for smaller member banks were to be ended. the fed paused regional roots would be weaker and a useful source of the formation loss. i conclude with one further thought. in debating regulatory arrangements and responsibilities appropriate for our national markets, which should not lose sight of the implications for the role of the united states and what is, in fact, a global financial system. we necessarily must work with other nations and their

financial authorities. the united states should and does still have substantial influence in those matters, including agreement on essential elements of regulatory and supervisory policies. it is the federal reserve, as much as and sometimes even more than the better -- and the treasury, that carries a special weight in reaching the necessary understandings. that is a matter of tradition, of experience, and of the perceived confidence and a party of our central bank. there is a sense of respect and confidence around the world, matters that cannot be prescribed by laws are easily replaced. clearly changes need to be made in the status quo. that is certainly true within the federal reserve. i believe regulatory responsibilities should be more clearly focused and supported. the crisis has revealed the need for change within other agencies as well. consideration of broader reorganization of the regulatory and supervisory arrangements is timely. at the same time, i urge in your

deliberations that you recognize what will be lost -- lost not just in the safety and soundness of our national financial system, but influencing and shaping the global system if the federal reserve were to be stripped of its regulatory and supervisory process -- rest -- its regulatory and supervisory responsibilities and be no longer recognized here and abroad as "remiss interpol arrest -- "primus inter pares" among the agencies concerned with the safety and soundness of our financial institutions. let us instead strengthen what needs to be strengthened, and demand the high level of competence and performance is that for too long we've taken for granted. >> we want to try to stick to 5

minutes, so i recognize myself first for 5 minutes. chairman bernanke, the current system we have as a division of supervisory responsibility between the fed, the fdic, the occ, and a third agency -- a fourth agency that would be consolidated under the house bill. how has that worked? how had you been able to compensate for the things that you say are so critical in that framework? >> mr. chairman, i think there were some balls at each level. there were flaws at the level of the legislative structure. there were flaws at the level of execution. i think we need to look at all of those. there two main lessons from the crisis.

one is that every systemic large institution needs a supervisor that can look at the whole company and understand the risks that are faced by the company. many of the worst problems at the banks and aig and other companies and markets were areas where there was no strong supervisor, where there was just a gap. and we need to fix that as we go forward. we also need to strengthen concept of consolidated supervision. we currently have a system where each supervisor is assumed to defer to the functional regulator of each subsidiary, which is not appropriate when one person sees a problem in a subsidiary. they need the authority to go in and look at that. the other broad concern, at the

very highest level is the need to look at the system from a systemic perspective, not just each individual firm but the broad risks to the whole system. i think some of the ideas advanced in the house bill and senator dodd's proposal, such as creating a systemic risk council, broadening the responsibility of some regulators, they would help to address that problem. and what tougher regulations like higher capital standards, that would improve our oversight considerably. >> the dodd bill recently introduced sets a $50 billion threshold for supervision of the fed. is there any rationale for either that $50 billion threshold, or any other threshold?

how does this cut in terms of actual need to be able to be involved in these things, to determine or set monetary policy? >> mr. chairman, we are quite concerned by the proposals to make the fed or regulator only of the biggest banks. it makes us the "too big to fail" regulator. we do not want that responsibility. we need that have insight into what is happening in the entire banking system, to understand how regulation affects banks and to understand the status of the assets and credit problems of banks at all levels, at all sizes, and small and medium sized banks provide irreplaceable information both in terms of making monetary policy and understanding the

economy, but also in terms of financial stability let us not forget that small institutions have been part of financial crises in the past. we think it is important for the federal reserve not just to be the big institution regulator. we need to have exposure to the entire economy and to the broad financial system. >> chairman volcker, you communicated that some division of responsibility -- supervisory and regulatory responsibility is appropriate. i was trying to get a better view of what you think that division should be, if the senate bill is not necessarily ideal, nor the house bill necessarily ideal? pressure microphone there. >> that is a matter specific numbers. if you have only one regulatory

agency, and i have some sympathy for that, if you have to have some division of responsibility. where you place that, i do not know. i do not know the implications of $50 billion. if the federal reserve maintains smaller member bank supervision, what the fdic would have been the occ would have, it seems that is say arbitrary matter. i do think that we do not want to to have institutions that are too big to fail. particularly non-banking institutions can fail. that brings up many other issues in financial reform. they do not rest significantly on quantitative announcements.

>> my time has expired. i will recognize the gentleman, mr. bachus. >> was the federal reserve aware that lehman brothers was using the accounting technique, repo 105? >> the federal reserve was not the regulator for lehman brothers. we did not have that information. we had only a couple of people in the company whose primary objective was to make sure we get paid back the money we were lending to lehman. we were not the supervisor, and it and any case, we would not have the authority to address accounting and disclosure issues. >> the federal reserve had run three stress test on lehman, and

in the course of the stress test, when you have found out that they were using this accounting gimmick? >> no, sir. we did liquidity stress test. we determined that they had enough liquidity to deal with a stressful situation. they've failed all three situation -- we were determining if they had enough liquidity to do with a stressful situation. they failed all three situations and we shared that information. >> you are seen as the lender of last resort and you might have direct access to bank data to assess their credit worthiness and the collateral of the would be barred. the new york fed won't lehman brothers -- they made the discount window available for cheap money with this going on. and all last chairman volcker, doesn't that trouble you? and then i will ask chairman bernanke. >> we accepted the value of the

collateral and they took a hair cut. and we were repaid fully. that part worked fine. again, we were not charged with supervision of the company. it was a very troubled company, and if we had not had some kind of provision to take a non-bank into the receivership, we would applaud that. >> chairman volcker. >> this is an issue of why you need reform so that an institution of that size will have some kind of oversight. if you do not have the reform we're talking about, non-bank institutions would not be relevant, because that would be under the so-called resolution the party, that would have the power and resources to provide

suitable liquidation or resolution of that institution. the federal reserve would not have to be involved as a lending institution. >> at their lending money to it through the discount window. >> they would not have to be put in that dilemma. we ought to have a system that could provide -- >> de support our efforts -- do you support our efforts to bail out in the last year? senator dodd says that 13-3 cannot be used. it cannot be used for an ad hoc bailout of a non-bank financial institution. do you believe that? >> if you have resolution authority, you would not need 13-3. >> he said that we should not

lose sight of the implications for the role of the u.s. in what is in fact a global -- and we must work with other nations. how about of all our role? bridging what about the volcker rule? what other countries do not adopt that? would that put us at a disadvantage? and could we instead use capital requirements and maybe restrictions on leveraging, or restrictions on coming to the discount window to achieve money? >> the first thing we ought to do is get the other countries to go along. and then we would not face that kind of a problem. i am hopeful that will be the result. >> if they do not? >> we can still apply it to the united states. they are american institutions and i think it would present

relatively minor problems. what activities are we talking about? on a small part of the activity of very few american banks. >> thank you. >> the gentleman's time has expired. mr. kanjorski is recognized for 5 minutes. >> thank you very much, mr. chairman. chairman bernanke, you referred to some loopholes and legislative holes and things you can and cannot do. has the federal reserve done a critique of the legislation put together by this committee has passed in the house, and a critique of the dodd bill so that we can have a criticism as to whether or not loopholes exist that should be covered, or if not covered, what the impact will be? >> no, sir, we do not have a

critique of these individual bills. we're clear about what we think is the right approach and i would be happy to discuss that. >> could i make the request of you -- i appreciate the discussion, but could i ask you, if you could have your experts make those car reviews so that if there are any loopholes that have to be closed or considered or at least identified -- there are many members of the committee, including myself, that would not recognize a loophole if we walked into it. but i am sure the expertise of the federal reserve sees them and sees that they are there. i would like to be informed of them. if you could have your experts at the federal reserve review our piece of legislation and the dodd bill and any other bill that hopefully comes out of the senate and give us that critique, so that we may use that when we go to conference committee to address those loopholes?

>> while we have been doing is to provide technical assistance on each issue, we do not want the overstep our bounds and say this is good and bad is bad. we would like to help wherever we can. >> on the part i am responsible for, do not worry about overstepping your bounds. mr. volcker, unfortunately we did not have the volcker rule before us when we went through the house i regulatory reform, but it is included in the dodd bill. i have this open question -- did the dodd bill include the entire volcker rule or important portions that may be left out that we should look at an address if we go to conference? and then, if you could for the record indicate why you think it is so important that we have mandatory provisions such as the volcker rule?

>> the first part of your question -- is a big step forward. there may be a few areas where additional clarification would be desirable. i am not in office so i have no need to not overstate my party. i do think it should be mandatory because it is very hard to take top, restrictive measures before the crisis. after the crisis, it is too late. in an area like this, to me it is quite clear. the law should be as specific and mandatory as possible. senator dodd's bill goes considerably in that direction.

>> i yield back. >> the gentleman from texas, mr. poe. >> i have a question for chairman bernanke. during the early part of the decade, a lot of the free markets and would say that there was a financial bubble and there had to be a correction. we did in 2008. since 2008, many of the mainstream economists have more less agreed with that assessment, because we'll hear them say interest rates were held too low to long. even secretary geithner has made that statement. where you come down on the perfection -- where did you come down on that perspective? >> i had given a speech on this. the bottom line is nobody knows for sure the evidence is quite mixed. i would say that even if there were -- they were held to low

too long. management of the error was not enough to account for the huge crisis that we had. what caused that was the failure of regulation. i would toss the fed in there, too, because we did not do enough. we did not do enough regulation. i think the weakness of the regulatory system, not arbitrer policy, that was important. >> i cannot agree with that, of course, but if you assume for a minute that it was too low too long, what is the harm of that? do you see any damage by interest rates being artificially low for a long period of time? $1 possibility --

>> one possibility is that you keep them low, you get inflation. you need to keep prices stable. >> do you think the investors and the businessman makes a mistake and if interest rates are locomote 10 interest rate is since -- is an indication that they are saving. but if the interest rates are low because of the newly created money by the fed, doesn't that send this false signal to some business people? >> interest rates are below their level because the economy is operating at a low level. we are in such ways and where a lot of people are out of work and consumption is well below its normal levels. low interest rates serve the function of increasing demand and putting people back to work.

>> but if interest rates are 3% instead of 6%, without artificially low interest rates, there would not be a temptation for people to build too many houses or for people to try to capitalize on the fact that they are anticipating inflation and participate in the bubble? >> interest rates are low right now and i don't think building too many houses an important problem. >> but in the boom cycle, people do things that might not be proper and the best for the economy. and then when the bust comes, we resort to the same policy of keeping interest rates extremely low for too long. what are their -- are there any chances that we will look back and see that they were too low too long, there were also that

way in the latter part of the decade. when prices go up too late, you have the job of reigning that all in. >> fiscal banking is an art. rigid central banking is an art. we need to find an appropriate policy that gets us as close as we can to both sides of the mandate. >> the free-market sees that the regulation is imaginary because the fault is, all of these mistakes are made in the have false information you cannot run the economy that way and that is why socialism failed. you fix the price of interest rates, that is one-half of the economy because you are messing around with the monetary system. and then we'd just say we need more and smarter regulations and we're cortisol all of these problems. it does not concern you at all?

>> we need some system to set the money supply. i know you are a gold standard supporter. >> fine for the constitution. >> every country in the world currently uses the central bank to make a decision about the money supply, to keep it stable or move it around. it is the choice that is made. >> that is not good and permission for an investor, unfortunately. >> the chair -- that gentleman's time has expired. >> i think those in the financial world understand the damage done to our political and social institutions, done to the social contract by the bailout, with these institutions branded too big to fail. chairman volcker with three

federal provincial -- prudential supervisors, how can we get consistent, comprehensive, and effective regulation and supervision of all banks and similar institutions? shouldn't there be a single body for setting out one set of rules that all supervisors can apply consistently? >> conceptually, there should be one supervisors. most countries have it that way. we have our own traditions which is led to a multiplicity of regulatory agencies. it is fair to say there is a certain amount of confusion. you've got to do better in coordinating what they do. we have extremely weak supervision outside the banking system. that is a matter of historic

development. but let me say on the other side as i said to my statement, and this is a political decision, there are some advantages in having more than one regulator. many instances, countries find one regulator gets -- and its bureaucracy and there are legitimate complaints by the financial institution that there is no room for innovation and flexibility and freedom. on the other hand, you don't want regulatory agencies competing with each other. >> can i agree with you on that? >> what i think this comes down to -- >> i have to interrupt you because i have two questions to squeeze them. chairman bernanke come you have outlined the advantages of

mixing regulatory policy. i would ask you not -- please address the disadvantages. bureaucracies eight that have lines. -- hate bad headlines. they do things behind the scene to avoid the headline that the break-in. prudential regulators are going to get bad headlines if a big institution fails, particularly under some circumstances. they can prevent that the year if they could just put it off for six months, and their reputations and careers can be saved. monetary policy, just cutting the interest rate by a 1/4 point, can save the troubled institution. how can we be sure that monetary policy is not influenced by the natural human desire of banking regulators to save institutions

long enough for them to move over to another department? how do we make sure that monetary policy does not meet the clear needs of bank supervisors? >> i don't think that is a very realistic scenario. if the bank was that sick, i don't think a quarter port change would help the very much. >> every dying patient is on the borderline at some point. and there can be circumstances where it is touching go. -- touch and go. >> i don't think that is an efficient or effective way to achieve that objective. i suspect the central bank chairman would still be all round and concerned about his or her reputation with whatever problem might arrays with that interest right -- might arise

from that interest rate policy. of course i'm going to squeeze in one question and you can answer on the record. why should be exempt the fed from audits of transactions for or with the central bank, the government of a foreign country, or non-profit international financial organization? and are you willing to provide for the record a description of all such transactions from the 1990's so we can get an idea of of what the bank was doing at an international level? >> you have been invited to submit your answer to them for the record. i think you of already done it on several occasions, but do it again. >> could i comment on the previous question? i think you put your finger on that "not on my watch" syndrome. that is why it is so important

to get this resolution authority enacted into law in a rigorous way so that the policy maker is not faced with something that seems to be an awful dilemma of letting an institution fail or rescuing it. >> i assure you that the resolution of party -- resolution authority is not a bailout. >> the gentleman's time has expired. >> thank you, mr. chairman. i want it goes through this process of the fed being a prudential regulator. we have had all lot of people come in here for the last 18 months looking for the bogyman and all the calamity that has happened in the financial market. everyone says that it was not my fault. the bottom line is, on the the

propose structure of the house or senate version, basically, the fed had regulatory authority over many of these entities that people are saying were part of the problem. the question i have is, if it did not work before, how does it work now? and the second part of that is -- these large financial institutions, if you had gone into them, let's say, 18 months ago and said we were concerned about what is going on here, and they say, we have record earnings and we're making lots of money and we have good liquidity, good balance sheets, and our ratios are right in place. you want us to stop originating mortgages? you want us to slow down our securitizations activities? you want us to get out of the credit default swaps activity?

how did you miss it and how would you have done a different course remark if you're not willing to do it different, then we are moving in the wrong direction. i'll start with chairman bernanke. >> that is the $64 billion question u.s.. >> know it is the trillion dollar question. >> mistakes and problems throughout the system, and other regulators and the federal reserve, private citizens and the congress made mistakes in this crisis. we can only go forward and mix -- and fix the mistakes. we're recommending changes to the overall statutory structure to address gaps and other problems in the system, but we are also taking action are so. we're strengthening capital requirements. liquidity turned out to be a big issue in this crisis. we are strengthening that substantially. executive compensation. we have -- execution is very important so within our own supervisory system we are doing

a lot of soul-searching and changes, and those changes are at the level of framework of supervision, which needs to be more systemic, so macro- potential, and we've found situations like you described, where we were not passed or forceful enough, and we need to change our culture, our structure, and our instructions to examiners to make sure we do a better job next time. everyone has to do a better job. we are working to do a better job. there structural reasons that the central bank needs to be involved in the process. >> chairman volcker? >> you caught me with the same question. let me make a general point. with a discussion on supervision and caps and supervisory policies, supervision is a tough job. you are dealing with a very complex situation where there

are known and unknown factors, and a political world where your tools are limited. you have to explain what you're doing, which is very hard in a constructive role when things are going world. so don't put more burden on the supervisors that is necessary. but if there are structural factors that you want to promote or eliminate, do it by legislation. don't leave everything up to the supervisor. give the supervisor of very clear flame work in which the word -- a very clear framework under which to work. >> i do not disagree with that. i am a "less regulation" person. but the point is that we actually had regulation in place. we have regulators in place.

there is an unreasonable expectation here that somehow we're going to fix the s -- we have bank regulators today, but we had over 100 banks fail, and some people think, by expanding or reshuffling the deck where you're going to have a better outcome. i think we would have a much better outcome if we had people doing the job they were already supposed to be doing. >> i cannot deny that. but there were gaps and regulatory authority. one was in the investment banking area. you had gaps in the subprime mortgage, some regulatory authority but not over other parts of it. you had a big gap in the resolution authority. there was no resolution authority there to get the

supervisors are reasonably effective and efficient way of closing down an institution without doing damage. that is something for the legislature. >> the gentleman's time has expired. the gentleman from new york is recognized. >> thank you, mr. chairman. thank you for your testimony. let me ask chairman bernanke first. we've got this language in the house bill empowers regulators to deal with systemic risk. my question to you -- do you think that the language we have in the house bill is sufficiently strong enough to expedite the removal of systemic risk? there was a question, do we need something mandatory why it volcker rule. we asked mr. volcker, and i would like to get your response on that. >> i like to answer you in

writing on that because it is a complicated bill. the general direction is good, but there are some areas where we think, if we had our preference, we would make some changes. it is a complicated bill. >> i would gladly wait for you to give us a response to that. i want to see if you think that you have the authority from what we put in there, or you don't mr. volcker? >> are respond to the previous comment. this so-called volcker rule, the division between proprietary trading and hedge funds, is a provision that it is voluntary. it turns it over to the regulators and supervisors. i think it is unlikely that they will invoke that prohibition

until the crisis came, and then it is too late. that's why you wanted in the legislation. -- you want it in the red coat -- you want it in legislation. >> with the region would -- would the volcker rule -- i look forward to hearing that in writing. mr. bernanke, if you added up a cumulative working hours at the fed, could you tell me about what percentage of work is spent on bank oversight, what on consumer protection, what on monetary policy, and monitoring systemic risk? is there any way of you could tell us that? >> we have separate divisions that work in each of those areas. we're doing a lot of cross disciplinary work. i can tell you the data on the

number of people in that area. i can tell you that off the top of my head. >> that would be great. mr. volcker, when you are chair of the fed, can you tell me the fed spent the majority of its time? >> i must say, through history, i think the federal reserve activities in this area very depend on the leadership in place. specifically during my time in office, we had some big problems. we were fortunate at one point in having an extremely effective head of the supervision area and regulation area. he made a big difference in the effectiveness of the way we went about our work. i cannot emphasize the

importance of having the effective people on the job and effective leadership in the organization. i have been an advocate of something and the dodd bill, having a new position in the federal reserve, one of the governor's designated as vice- chairman of supervision. i think you need a continuing focus and a clear sense of responsibility, so that the attention of the federal reserve is less subject to the ups and downs over time. it would be built into the organization. >> i agree, but sometimes in our congressional offices, if you have to prioritize. something is more important than another, and those priorities -- in my office, i make a priority

and something else might come up. that is generally the way that things were. i wish to see what the chairman. i do have some concerns about what you do in the offices. >> it is his priority by law to pay attention to this. to report to congress as appropriate, and be confirmed on the basis that he has a particular responsibility for overseeing the federal reserve. >> the jobless thomas's buyer. -- the gentleman's time has expired. >> chairman bernanke, watching the trends of the market for treasuries, it appears as though major creditors, japan and china, have begun to scale back their purchases of u.s.

government securities, and filling the void in demand have been other foreign governments, or other foreigners, as i say, i assume foreign banks and hedge funds, and also u.s.-based financial institutions. clearly there is market place your -- market plate -- the carry trade is in effect here by these banks, which essentially amounts to borrowing at next to nothing from central banks and lending it back to the u.s. government had 2%, depending on how far out they go on the yield curve. have we backed ourselves into a corner here? if you raise interest rates, that carry trade evaporates as does the demand in the treasury market and our ability to finance the 1.5 -- the $1.5 trillion deficit this year. who is going to lend to us if we

do that? if foreign governments are scaling back and financial institutions can no longer make money in this market, where will the demand for treasuries come from? >> this is a very large indeed market. -- and deep market. the dollar tends to strengthen because the money goes into the u.s. treasuries, but i have not seen any reduction in demand for u.s. treasuries. the foreign demand remains quite strong. i anticipate -- i do not anticipate any problems. there is always the question of price, and there the question is, well all of our creditors, including domestic, remain confidence in the long run fiscal stability of the united states? there is important for the

congress to devise a plan to create a trajectory whereby we have a more stable debt position going forward. that is very important. >> i concur on the points that you have made publicly. but getting back to the question of the extent that we are dependent upon the carry trade to finance our debt, do you think there's an element of truth to that point? >> there's sometimes a misunderstanding that they carry trade is an arbitrage opportunity. it is not. if that is a long-term security, there's a considerable risk on the life of the security. as short-term interest rates go up because the economy strengthens, then long-term rates might go up as well. that would affect our off-

financing of deficits, and another good reason to get deficits under control. but we will do what is necessary to attract demand for securities. i don't see any reason to think there will not be demand. >> let me ask a question of mr. volcker, too. with the introduction of mr. dodd's legislation in the senate, we now have regulatory reform bills in each chamber that institutionalizes rather than eliminates this "to big to fail" concept. the ultimate cost of "too big to fail" will be borne by our capital markets and the broader economy. the approach put forward in these bills essentially bifurcates our financial system, and those institutions that will be labeled systemically significant will likely see lower borrowing costs and greater access to capital compared to their smaller competitors. that would give these firms a

significant competitive advantage. this is what happened with fannie mae and freddie mac. they wiped out the competition and they formed the duopoly of the secondary primary mortgage market because they're perceived to be government-backed. mr. volcker, are we recreating the moral hazard problem by labeling these institutions "too big to fail?" how would you expect counterparties of these institutions to react to this label or even make -- even making the label official? >> with fannie and freddie in particular and the moral hazard, i think it is very real and it will be a real challenge to change that in the future. you're not going to do right now, but the market is wholly dependent -- mostly dependent on government participation, including support for fannie mae

and freddie mac. so you're stuck with it. i don't think we need to get ourselves in that position in the future. i hope that is on your agenda next year when we reorganize the mortgage market. so far as other financial institutions are concerned, i hope your opening comment that the institutional station of "too big to fail" is not correct. i understand your concern about labeling and i do not want to do that. that is part of the reason of the kind of proposals that i've made. i don't want that resumption to excess particularly for non- banks. banks to have access to the federal reserve. they do have deposit insurance. they are also heavily regulated. and that is the balance. so they do not have that much competitive advantage.

the others do not have a competitive advantage. if they are extremely vulnerable. >> the gentleman's time has expired. >> these are what are behind my concerns. >> the gentleman from new york -- the gentlewoman from new york, ms. maloney. >> thank you to paul volcker, a great president of new york state, and we are proud of your contribution to our country and your public service. there's a great deal of concern about the proposal in the dodd bill in the senate regulatory reform proposal that limits the fed's banking supervision to banks that are larger than $50 billion. first of all, do you see a need to make a distinction between large and small banks?

and i would specifically like to comment on the federal reserve's interest rates steady by the federal open market committee which met yesterday, comprised a federal probe -- federal reserve governors, the president of the new york fed, and on a rotating basis, the presidents of five of the regional reserve banks. does this have an impact on the fomc's activities, first mr. bernanke and then mr. volcker? >> if we of the regulator of only the banks, we are thinking that is a bad idea. we need to see a broad financial system. we need to have the information about the broader economy and know what is going on across the country, not just in the great state of new york, for example. there is a close connection

between the need for the federal reserve to look at banks of all sizes, and our regional structure. exactly why we have a regional structure -- we have policy makers from 12 regions to speak to local people, including local bankers, to get information about what is happening in their part of the country. but the regional structure of the federal reserve and the supervision of small and medium- sized banks, both of those things together provide us with information, qualitative the information, which cannot be obtained it nearly any other way. >> it's important to monetary policy to have the supervision of all the banks? >> also of financial stability, because we need to see what is happening in the entire financial system. >> mr. volcker, do you have of the position -- have a position

on this? >> let me make one comment on this "to big to fail." the $50 billion limit, i don't see that as the limit between who will be saved and who will not. $50 billion is much too low in my opinion. it's a rather arbitrary decision as to which the size of banks would be regulated by the federal reserve, apart from losing the contacts through the federal reserve. >> i've received a number of calls on this proposal. many from small banks who are concerned that they would not be part of the federal reserve system. they want to be a part of it. can you comment on the supervisory powers over your member institutions, and on

various sack -- financial activities in which they operate? .

as a regulator of the banking system, we will be able to see what happens and be able to make better decisions about how to address any potential risk to the broad system those kinds of products might pose. >> mr. volcker, any comments? >> no. >> feel ladies time has expired. the gentleman who -- the young lady's time has expired. the gentleman from texas. >> i have been an outspoken opponent of having a federal reserve's fed conducted itself to monetary policy tied to specific inflation targets. and your testimony, you deposit it is a critical element of

conducting monetary policy to have the prudential regulator role, and i certainly have an open mind to that argument, but is an historic evidence -- isn't the empirical evidence kind of murky if you looked at the u.k., if you looked at japan and sure many. clearly they did decouple the two. -- japan and germany. clearly, they did decouple the two. can you please elaborate on the evidence that is out there that might be convincing to members of this committee'? >> it is interesting. as you point out, there was a decoupling in the central spanking function. i believe in all three the current trend is strongly towards giving back the central

bank to supervisory authorities, and in europe, the european central bank is being made essentially the financial stability regulator for the continent. i think the perception in each of those countries was moving the central bank out of regulations deprive it of information it needed to be affective in the financial crisis, including executing its last resort function verio -- function. >> clearly we have not the couple. we did not avoid the recession. >> that is absolutely right. >> the question is we can identify problems. i have tried to identify some. there is some in the execution. surely, there are problems. i think the lessons of history are generally on the side of having integration in monetary

and supervisory functions. >> on the next panel, we are going to hear from the doctors sitting over your left shoulder he was kind enough to quote me in his testimony. i will quote him. it is another way to fit the public's first. systematic to others who caused them. -- which clearly takes us again to the whole question of too big to fail. i have a two-part question, and is that really in the eye of the holder thelma -- boulder? if so, in order for you to

execute your charge in price stability, is it not counterproductive to have any type of designation of of fund that creates the impression there are firms too big to fail. is there not another message as you have argued for that would avoid creation of an explicit fund, and could not the proper standards be used in order to avoid the designation of too big to fail but essentially solve the problem?

>> the industry and not the taxpayer would bear the costs. i think it is important to make sure -- if an institution threatens the entire system that has failed, we need to be especially careful. in particular, going back to a question raised earlier, we really have to address too big to fail, and the means the resolution regime has got to be one that makes sure all the providers of capital, including subordinated debt and so on, will be wiped out, but they will not be protected, and that the authorities have the ability to go further oup the obligations o the extent it is consistent with civility. we can only do this if people

believe they think of send -- to take office. we did not have the flexibility in many cases to impose losses without creating the bankruptcy we were trying to avoid, so the well-designed resolution regime, we can impose losses. >> the gentleman's time has expired. the young lady from california is recognized. >> i would like to thank both of you for being here today, and while we are not going to get into the volcker rule, i understand we're going to hold hearings to talk about it more, and i understand the president is very interested in what he calls the volcker rule very good i am looking forward to

having you back with us again. having said that, i want to go to chairman bernanke. it was not until 2008, well after the mortgage loan products have done their damage, the the fed finalized its rulemaking, for the act which covers gustin 1994, mandating the federal reserve prohibit this lending. you mentioned they examination the federal reserve has taken of its supervisors. i really do appreciate that. i am not going to get deeply into the consumer finance protection agency, which we have talked about so much, and the dodd bill, but here is what i want to try and focus on. i have this notion there are

some products so bad, so predatory that they should have never been on the market. it seems to me that slides in the face in what those of you in the industry think about, the ways you think about it. you feel that in a free market society businesses are able to come up with all kinds of ideas about how they want to provide products or services, and it is up to use to regulate them, not to prohibit them and say, you cannot do that. i do not understand why a regulator cannot take a look at a product and say, this is so bad, this is so predatory it should not be on the market, and we are not going to allow it to be on the market, or we are going to discourage it, and that is one reason i am so interested in different -- the consumer

protection agencies. do you feel as a regulator said you should have the ability to say no? you cannot put the product on the market. it is too bad. it is to predatory. absolutely -- >> absolutely, and we have done it. we have them practices like double cycle billing. if there are practices a consumer cannot understand, there is no reason to allow it. >> if i may, those were banned after they had been so abusive and out in the market for such a long time. we do not get to see these mortgage products. they are calling my office every day, and i am looking at an elderly couple who took out an interest only loan, and after

five years that adjusts, and they had a 30-year adjustable rate, which is a contradiction in the way they show alone to work, and what happens this -- shows alone to work, and what happens is that loan was 4.5% of your years ago, and that alone can go up to 9% after it resets. the couple was over 65, and in the next 65to 10 years, it can go up to 10%. we do not know what the interest rates are going to be, and they said they did not have that when they first took out the loan but an amendment was put in there, and they signed off on it. what can we do about that kind of thing? >> the federal reserve or whoever is in charge of consumer protection needs to make sure the products are safe for people

to use. you were right to criticize the federal reserve for being late in doing the mortgage regulation. we did do some things, but we did not do enough. once we did it, and we have worked hard on these areas. we bend a lot of bad practices, and you cannot offer a mortgage that has these practices anymore. i did not know about this particular case. we are looking at features -- some of them wages event because pubec cannot understand what they are about -- we just banned because the public cannot understand what they are about. >> first question. i have a bill the suggests the gfc should be on budget.

quick question. their obligations -- are they sovereign debts? the government has been pretty vague about it. i thought i knew were the chairmen stands. where do you stand? >> my interpretation is standing behind -- >> do you think it is sovereign debt? >> whether it is legally sovereign debt, i am not the quick to tell you. we did not see equipped to tell you. >> i agree. -- i am not equipped to tell you. >> i agree. >> let's move on to the other questions. the report with regard to the lehman situation. it seems as though the answer you gave was that you were not

the primary regulator in that case. let me ask it this way. the fed was on scene. the paper reports of your people being over at lehman. was the federal whereof one of the -- aware of the situation? >> no. >> and the reason was because? >> they were hidden. we are currently the principal regulator of goldmansachs, and we have a dozen people on site and another dozen who are looking at the company. we had two people assigned to lehman, and their main obligation was to make sure we got paid back. >> the paper reports there were a dozen people.

only a couple of the more. >> that is my assessment. >> before, women would not have had access to the discount window at this point. is that correct? >> our objective -- lehman would not have had access to the discount window at this point. is that correct? you did get paid back, but is the because the collateral was adequate? >> it was largely the collateral. also, the loan we made was to the brokerage and not to the holding company, so that was a bit of distinction, but if we took collateral to make sure it was safe. >> you tell me you only had a couple folks at: -- at goldman. >> there were about a dozen folks. i got this number this morning.

about a dozen people who go to goldman every day. >> i am not going to hold you to that number. in light of these reports is the something we should be concerned about? if that's something we should be concerned about or something the fed should be concerned about? are you looking into it? >> lehman is no longer in existence, but goldman and morgan stanley and merrill are under the fed's position, so it is our responsibility and we are paying attention to these issues. >> are you specifically looking at their accounting to see if this same activity is done now, or was it going on at that time as well? >> i do not know. i have to check and see. this report shows came out this week. >> would that be one of the gaps we should be concerned about going forward. >> it is our response ability, and we need to do a good job, but there are other things to

look at. in the case of lehman, it is clear, there were in a weak position independent of this accounting. " that is interesting, because new york did -- >> that is interesting, because new york did 3 liquidity stress test, and each time they failed those. >> correct. >> were any additional recommendations made? >> we pushed them and secretary paulson pushed them to improve their position and raise capital if possible, but they were unable to raise sufficient capital. >> my understanding is the new york fed required no reaction from women in response to the stress test. is that correct? >> we have no authority to require them to do anything. >> did you indicate to the regulator they should require them? >> i did not have the exact

information. >> if you can get back to me on this point. >> chairman bernanke and former chairman volcker, thank you for your public service very did you both have had to take some unpopular actions during -- for your public service. you both have had to take unpopular actions, and with an -- without an independent said i do not think where it -- we would be where we are. last week the house approved a strong bill favoring a consumer protection agency, and senator dodd's proposal contains of euro located in the fed. chairman volcker, would you -- contains of euro located in the fed. chairman volcker, would you support this so each job could -- each party could do their job better? >> i think there is some

overlap, because some of the consumer protection. i think they are distinctive enough that you can separate them. >> thank you. with respect to the banks, i am concerned it will turn the cents per three defense focus from smaller institutions and focus its only on the largest -- it will turn the said's attention away from some -- the fed's attention away from smaller banks. >> we care about smaller banks. it keeps us in contact with the country as a whole and not just wall street, and we hope very much to retain actions. >> if the senate's proposal became law, what would that mean for community banks and our local economy back in kansas? >> the law would give the

oversight to the fdic. for state banks, but what it would do from our perspective, besides being quite disruptive for banks and regulators, it would close off an important source of information and connection to the broader economy. >> thank you. any thoughts, sir? mr. volcker? >> this is one area we agreed earlier as to whether you have one regulator or a variety of regulators. there are a lot of small banks. i think this is one area where it is possible to argue having more than one supervisor is not a bad thing. it does not pose the same systemic risk, but there is value to the federal reserve and

may be some value to having more than one agency, because the fdic has a legitimate interest in knowing what is going on among a lot of institutions. >> another issue i am interested in is looking at how we have become dependent on debt across the board, especially financial firms. the president of the kansas city fed wrote last month, the financial crisis has shown the levels risk-taking and leverage can go when our laws it -- our largest institutions are protected. a stable and robust financial industry would be more and not less competitive. equitable treatment of financial institutions will end the enormous competitive advantage the largest banks enjoy all over the country. as we think of how over

leverage the largest financial firms became leading up to the crisis we experienced, if the fed is disconnected from smaller financial institutions who are not over leverage and leaving the fed with nothing to compare to, when that hinder the fed boss supervision of larger institutions? reading the fed's supervision of larger institutions? >> -- would that hinder the fed's supervision of larger institutions? >> you can learn about the impact of regulation, and small banks can be involved in financial crisis as well. i think there's a lot to be learned from not restricting yourself. i agree we have to get rid of too big to fail. we have to have a system the where the creditors and shareholders can take office. >> thank you to both of you for your service to the country. >> the gentleman's time is

expired. mr. paulson is recognized for five minutes. >> the document you sent contains the statement. whee recognize bank supervision, including ours, needs to be more effective, and we will review our performance at multiple levels. i just came from a meeting with multiple bankers, and they talked about money for credit, and they want to lend it out, and their overwhelming concern was in regards to the uncertainty of regulators. these regulators are being inconsistent in a sense that when they come visit of thank, their demands are essentially preventing to loans from current -- preventing good loans from

being made. i think every member of this committee raised this issue, and they've responded by saying they have told the people in the field to take a step back in regard to what is happening, so there is still a disconnect. i met with 37 bankers, and it seems nothing has changed in recent times regarding the examination. what can the federal reserve do better to create some consistency for the bankers so credit is being put out in the market? >> this is one of our top priorities. what we need to do is get an appropriate balance between making sure the banks are safe and making good loans. on the other hand, making sure the economy can grow, so we need to find the appropriate balance, and we have done that the number of ways. we have taken the lead issuing

guidance on small business lending, on commercial real estate lending, where the emphasis is on finding that the appropriate balance. it gives you some insight into what criteria to apply when you are looking into a loan. one point we have made repeatedly is just because the asset value underlying alone has gone down does not mean it is a bad loans. as long as the borrower can make the payment, that still can be a bad loans. we have issued those guidances. we have done an enormous amount of training to make sure they understand it. we have been gathering feedback from the field, including asking for more data and information but also having reserve banks have meeting bringing in

community leaders to try to get into details of what is going on. we have also tried to support the small business market with our program that has helped bring money from the securities markets into the small business lending arena, so it is a very important priority for us. we were asked before about the interaction between being responsible for the macro economy and being a supervisor. here is one case where what is going on in the banking industry is extremely important to knowing what is going on in the economy, and we take that seriously. i realize it is still an issue. it is going to be a concern, because standards have tightened up. some people who were credits- eligible before are no longer eligible because their credit conditions are worse, but we think it is important that

borrowers be able to get credit. >> this is an old problem. i remember when i was young learning about the federal reserve, a chairman in the 1930 's repeatedly complained that the sole responsibility for banking supervision -- they were being too tough because they have a lot of losses on their watch, and they were over reacting in terms of strict regulations when it was inappropriate because the economy was in recession. there are a lot of times when and if you're just looking and banking regulation as your only responsibility, maybe it is going to be too easy when the economy is going well.

i think really, the federal reserve is in a better position to get a balanced regulatory position, a regulatory approach, simply because they are responsible for monitoring policies -- monetary policy and business practices as well. that is one of the effects. >> the gentleman from georgia is recognized. >> thank you very much, and welcome, chairman bernanke and chairman volcker. let me ask you, chairman bernanke, as we grapple with this whole issue of stripping the fed of its supervisors and concentrate on the larger banks, i must admit you make a good argument, but i am torn. let me give you an example where there has been a massive failure

on the part of the fed. i represent the state of georgia, and in the state of georgia over the last 36 months, there have been 27 dain failures of smaller banks, and -- 27 bank failures of smaller banks, and that accounted for 26% of all the bank failures in the country. one state. the issue becomes, where was the fed in this? is this not a sign of realization as to why maybe we are asking too much of the fed as we move into this new economic climate. i am wondering, where is the fed? how does this happen under your watch for one state accounted for 26% of all bank failures in only a short time in 36 months. 27 banks failed in one state.

>> i make two points. the first is fear multiple regulators, and the question you have to ask is, did the fed do as good a job as everyone else? i think we have done a good job with small and medium-size banks, but we have been leaders in this area. one issue in georgia has been commercial real estate, and the federal reserve in 2005 took the lead in developing some guidance on commercial real estate about not having too much, about managing the risks better, about not having too much geographic concentration, and we got resistance on that, and it took longer to do, and banks resisted. it took longer than it should a half, but that is something we thought was important -- then it should have, but that is something we thought was important. banks have done better, because that has been a risk area.

i would say we to those issues into consideration and did a good job of trying to address them. >> how can you say you did a good job when the fed's policy became -- made a decision not to examine the books but to allow the books -- the banks to examine themselves but not their portfolios? when we saw some of these banks had a 78% portfolio just in real estate? if there is a problem area here have been able to detect, it was in the fed failure or willingness to allow these banks to self examine, to assess themselves, and you think i should continue, or do you not agree that might have been an area where the fed fell down?

>> i do not agree. we examine the bank's and made sure they met appropriate capital liquidity standards. it turns out they should have been tougher. we have done a lot of work internationally to strengthen those standards. >> i have year -- it might not be with you, but the fed announced they would no longer directly examine banks' portfolios but would instead rely on thanks self examination and self assessment. >> that is not our policy. >> that policy has changed, and this is inaccurate? >> it probably relates to the notion of the structure of banks using proprietary models as a way of evaluating risk of some of their physicians. it was never implemented, and

clearly, it is very important whenever models are used that they be closely evaluated, and again, we are going to be very careful to make sure banks are meeting the appropriate standards. >> you were aware, or were you not aware of the portfolios of these things were averaging between 75% and 80% in total real estate? >> the gentleman's time has expired, and i am being tough on him, because we have just been called for votes, and i would like to try to get the other three members who are here. if you can respond to that in writing, that might be helpful to us. the gentleman's time is expired. we now recognize the gentleman from texas for five ministers --

5 minutes, and i encourage you to exercise your restraint as best as you can, and allow us to release this panel and the sec to go with the next panel immediately after this series -- and let us be able to go on with the next? immediately after this series of votes is over. >> i would like to ask you about the interconnectedness of fannie mae,, which is own -- the largest shareholder is the united states government, and arguably every loan that is originated today is explicitly guaranteed by the treasury. when the mortgage-backed securities -- when they package

the mortgage-backed securities, the fed is a principal holder of mortgage-backed securities. you have one trillion dollars of the hour days. fannie mae and -- you have the authority of one trillion dollars. fannie mae has accrued a loss on the loan the treasury is making, and the treasury is assessing fannie mae at a rate of 11% every month, and they are loaning fannie mae the money to make the interest payment. at what point -- who exit's first? does fannie mae slow its lending down so mortgage-backed securities slows?

does the treasury lower the interest rate to fannie mae so the losses are less? ford does the fed exit the mortgage-backed security, its holdings in mortgage-backed securities? which part will move first, >> first, the federal reserve was very concerned about fannie and freddie for many years. this is an issue we pointed out. my assumption is sometime soon that congress will be able to reform fannie and freddie or perhaps break them up. at the point, there will have to be decisions made. my assumption is the mortgage-

backed securities, which are already outstanding, will be grandfathered and will retain u.s. government backing they currently have, so at some point, there will be a change in the structure, and there will be no more of the current one created. the existing will be assessed until they are either expired or purchased back. >> a couple weeks ago, i read the treasury had sold $200 billion worth of notes and had deposited that with the fed, and the explanation was to provide liquidity for the fed if the fed decided to liquidate its position of mortgage-backed securities. is that correct? >> the treasury restored what it had last year, an account at the

fed. we pay interest on that account so the fed is not losing any money. that gives us more flexibility as we manage policy going forward. >> my last question -- how does the fed acquire the mortgage- backed securities? does it require them directly from auctions, or do they require them as collateral from banks that are borrowing against them? >> we buy them in the open market. >> thank you. >> the gentleman from kansas city is recognized. >> thank you for having me here. my office is three blocks from the fed.

i know him very well. we flew in together on monday. i am concerned about reasonable issues. first, chairman volcker, here in this post-economic crisis, how should the fed and regional banks relate? right now it appears we have two seats of power -- the one you lead, mr. bernanke, and new york. i am concerned what happens to the regional barracks. are we going to a emasculate of further?

how should we create a relationship between the federal board and regional banks? >> taking off of basic point that chairman bernanke has been emphasizing about the importance of regional banks in terms of contact with regional financial institutions, it has been a great strength of the federal reserve. that is anchored to some extent in supervisory responsibility. supervisory responsibilities are shared between the board in washington and the banks. it is fundamentally the responsibility of the board in washington. they are delegated in substantial part through the banks, and i think that works out to the mutual interest, and what you do in terms of parceling out these regulatory

responsibilities will inevitably bear on the point of the federal reserve if not immediately, over time. god knows how many years -- 95 years almost -- issing regional system clearly controlled -- i think the regional system clearly controlled by the senate, yet it serve the country well. it serves the independence of the federal reserve and the credibility of the federal reserve. >> it should remain the way it is? >> you may consider this heresy, but the regional bank presidents and regional boards could be viewed as captive of

the regional bank industry, since the president is chosen by the regional banks in the region. three of the regional bank board directors are chosen by the fed. three are chosen by regional bank members. what would you think of having the three chosen by the region shows by d.c.? -- chosen by d.c.? >> to begin, i want to make clear the perception of conflict is more perception and reality. the members of the board are completely isolated from for supervisory positions, and most of them are lifetime employees.

they are all approved by a board of governors in washington, so the conflict is not as great as it is made out to be. that being said, i think we would be open to changes of that type to try to make sure everybody understands their role of those boards regionally is to represent their area, their broad public, and to give us the information provided by vegas and other community development people, business leaders, and so on -- provided by banks and other community development people, business leaders, and so on. >> you have got five seconds. which you just lost. the gentleman's time has expired, and i am going to go to mr. foster for a minute. thank you for waiting around until the end. >> of "the wall street journal"

's list of recommendations, the number one recommendation was improved capital standards, including the corporation of capital region the incorporation of capital. -- including the incorporation of capital. i understand it is being dealt favorably in the senate proposal as well. what do you view the role of the fed in administering capital and in possibly administering the stress test? -- administering the stress tests often thought of the trigger? do you think that is appropriate and one likely to happen? >> we have a couple discussions that take place, and we have put the contingent capital idea on the table internationally. assuming we maintain our consolidated supervision and

oversight, we would be working with functional regulators to develop stress tests at that level, so we would be very much involved in the setting of standards and analyzing whether or not the contingent capital should be converted or not. we think that is an intriguing idea with details to be worked out, but we are looking at it pretty actively. >> thank you. countercyclical mortgage underwriting standards are being implemented at various levels in different countries around the world. simply put, when a housing bubble begins to develop, you turn of the down payment, and my first question is, and these policies been in place in the previous decade, how effective would they have been at damping down the housing fell, and secondly, -- the housing bubble, and secondly, would

countercyclical underwriting products been implemented? >> it is a speculative question. i cannot give you a precise answer, but there are some countries where they are using variables, and that is an interesting idea, and it is clear in retrospect that because of piggyback mortgages and other instruments that loan to value ratios got way too high in the u.s., and we are being much more conservative, but that is another interesting idea to look at. >> it is a concrete proposal i will get to you in writing. thank you. >> the gentleman yields back. i ask unanimous consent to insert into the record the fed policy statement for the role of

a regulation. i ask unanimous consent to present my opening statement. hearing no objection, that is so ordered. we thank both of these distinguished gentlemen for their patience and time. we will release them, and i will announce that as soon as the votes are concluded, we will convene the second panel, and we will be back promptly. we are staying in recess until after the vote. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010]

>> up next on c-span, education secretary arnie duncan talks to lawmakers about making changes to the u.s. education system. then president obama reacts to the senate vote on jobs legislation. later, congressman kucinich thought -- says he will vote for health care legislation. tomorrow morning, a hearing on the president's 2011 budget request for the secret service. we will hear from the secret service director. live coverage at 10:00 a.m. eastern. later, a hearing at the u.s. postal service. budget deficits are projected for the next decade for the

postal service. the postmaster general testifies before a committee. live coverage at 2:30 eastern. next, the secretary of education arnie dunton testifies about the obama administration's plan to rewrite federal education laws. this hearing examines the new child left behind act, which is up for vote this year. this is an hour 50 minutes. >> the committee will come to order. the committee meets today to hear from the secretary of education on the blueprint made public earlier this week and to

discuss that with members of the committee. this was done at the urging of the bipartisan group in the house and the senate that the secretary has been meeting with, and that has been meeting on the reauthorization of the bill, so thank you for doing that. i will recognize myself at the beginning and then recognize congressmen kline. today's secretary duncan joins us to discuss president obama's blueprint for rewiring the secondary education act. thank you for being with us. two weeks ago, you outlined president obama physician for providing a world-class -- president obama's position for providing a world-class education. you told us a strong education system was key to our economic

stability, and members of this committee on both sides of the aisle agree. right now our best suited for performing while lower-level than math students in 22 other countries. they're entering ninth grade unable to read at grade level. this has to change. it is time to overhaul sokolov finely lives of to its promise to provide equal -- so the law finally lives up to its promise to provide equal education for every child. we finally from us to retain our position in education. i promise we can build a solid foundation for future generations. what our students need to succeed is not a mystery. they need a challenging and rigorous learning environment. they need creative and effective teachers that hold them to high standards and can adjust their teaching strategies when needed. innovative performance across the country are making significant process. we have to match their courage

to push the envelope. i believe the group, -- the blueprint secretary duncan presents offers a strong road map for this kind of change. eight years ago i helped write our current version of the new child left behind act. in many ways, it was transformational. it helped shine a light on what was really going on. moffitt told the community it was no longer acceptable for any student to be invisible. it showed us how all students were fairing, not just the richest district or highest achieving students. the results were difficult for many to swallow, but it showed us the value of accountability. it provoked a conversation about education in this country that has gotten us where we are today. my apologies. we know we did not get

everything right. the blueprint will give some control to the states and districts to allow them to determine their the strategy is to turn around the lowest performing schools, and it switches the conversation to what about ensuring our students graduate ready for college anthony a career -- college and a career. we have an incredible opportunity to reshape the country. president obama has already launched game changing reforms. in my home state of california, they remove the fire wall that prevented student data from being linked to a future performance. california's recent actions and the actions of so many states have single they are ready to fix schools.

i would like to lay out some of the fundamental goals. we need to reset the bar for students and the nation. first we need to assure every child can be taught by a great teacher. teachers are a single most important factor in determining achievement. we have teachers to stop teaching in their first year. more than a third stop teaching in three years. we cannot treat them with less professionalism than other carriers. we have to provide the right tools like extended planning time and resources necessary to carry out their task, and by making sure they have data and their finger tips about how the children are learning and how we can make success and outcome for every child.

second, the quality of a child's education cannot be determined by their zip code. every school needs to hold their students to rigorous standards that prepare them for careers. third, the district across the country see incredible success. and schools across the country seeing incredible success after years of stagnant results. these schools were given room to innovate. they kept their focus on achieving the highest levels and holding themselves accountable for all students. we must encourage states and districts to innovate and to think differently while maintaining high standards for all. lastly, we have to ensure that we're reaching every student with the right resources in every classroom. secretary duncan you have repeatedly -- you have said repeatedly that our students get one chance at an education. one chance. i think the president's blueprint lays an important markers for where we begin this rewrite. i will help build the kind of -- it will help build the kind of world class system -- school system our economy needs and our

children deserve. secretary duncan, again, thank you for being with us today. thank you for your leadership and your vision. i look forward to your testimony. with that, i'd like to recognize the senior republican on the committee, congressman john kline. >> thank you mr. chairman. i want to thank the secretary for being with us here today. and coming back so soon after your last appearance. i actually very few cabinet secretaries with your appetite for this much punishment. we're here this afternoon to discuss the administration's blueprint for esea, elementary and secondary education act. these 45 pages have been anxiously awaited by many in the education community, the media and, of course, near congress. for the last several weeks we've been meeting at the member and staff levels on a bipartisan basis with our counterparts in the senate and this blueprint is viewed by many as the first attempt by any one of those parties to put pen to paper and offer details on any substantive propositions. i appreciate the way secretary duncan has framed this document and i hope we'll keep his words

in mind today. as the secretary says, this is a blueprint nirkts bill. congress writes the laws, and i'm pleased to say in the case of the elementary and secondary education act, for now we're start with a blank sheet of paper. the blueprint will serve as a jumping off point in many ways, giving us the secretary and i have spoken candidly, so i know he was not surprised to learn i have questions and concerns about the direction of certain policies we will discuss. one such concern is the exclusion of public-school choice in supplemental education service. most of us know it as 2 during. -- as to during -- tutoring. this means few if any student would have access to the immediate lifeline it provides. these concerns are precisely why we are here. i know there are members on both sides of the aisle who hope to

better understand the policies of the blueprint and their potential consequences. i tried to view the notes child left behind at through the eyes of my constituents -- and no child left behind at through the eyes of my constituents, who implemented this requirement. i have come to the conclusion that the federal government is too involved in the day-to-day operation of our school. the federal requirements are too restrictive, and the measures of success are not new of the knot. as congress prepares to write the next version, i hope we do more than simply cast aside the name and expand its requirements. i believe we need a meaningful conversation about the appropriate federal role in our schools. we have developed a set of principles to help guide that process. we believe to insure students' success, we must focus on what

is best for students and communities. we are restoring local control, and powering parents, letting teachers teach, and protecting taxpayers. these principles will guide us as we come to the table to help develop an approach that puts students before special interests and recognize innovation truly comes from the ground up. . from the ground up. i know we're all anxious to hear from the secretary, so i'll close by simply thanking the secretary once again for his approach, whether we agree on every policy or not. the open and bipartisan process has truly been a breath of fresh air. thank you, mr. chairman. >> let me take a moment. although secretary duncan needs no introduction to the members of this committee, this is being broadcast. so i'd like to introduce secretary duncan. secretary duncan. he was be secretary of education by president barack obama. that's rather obvious.

prior to his appointment, secretary duncan served as chief executive office by the chicago public schools and became the longest serving big city superintendent of education in the country. he raised education standards and improvements. he improved teacher and principal quality and increased learning options during his 7 1/2-year tenure he united reformers, teachers, principals and business stakehoerld behind an aggressive education reform agenda. as secretary of education he's spearheaded major reforms including the race to the top and investing in innovation fund. i know i'm not alone in saying he's done a tremendous amount in his first year to improve educational opportunities for children across this country. we welcome you and thank you for joining us. and you proceed in the manner in which you are most comfortable. we'll allot you a couple of extra minutes because this is a big subject with a big blueprint and we want to make sure you are comfortable in explaining it to the members of the committee. thank you. >> thank you so much, mr. chairman. thank you for your leadership. reportative kline and all the

members of the committee. it's a true honor to be here with you. i want to thank each of you for your hard work and commitment on education. and i believe that education is the one true path out of poverty. it is the great equalizer in our society, and as the president said in his weekly address on saturday, there are few issues that speak more directly to the long-term prosperity of our nation than education. education is the one issue that must rise above ideology and above politics. we can all agree that we have to educate our way to a better economy. we currently have an unprecedented opportunity to reform our nation's schools so they are preparing all of our students for success in college and in careers. today, chairman miller as you point out, the status quo clearly is not good enough. consider just a few statistics. 27% of america's young people drop out of high school. that means 1.2 million teenagers are leaving our schools for the streets. that is economically unsustainable and morally

unacceptable. in a recent international test of math literacy, our 15-year-old scored 24th out of 29 in developed nations. in science our 15-year-olds ranked 17th out of 29 nations. and just 40% of young people earn a two-year or four-year college degree. the u.s. ranks tenth in the world in the rank of college completion for 25 to 34-year-olds. a generation ago, we were first in the world. but we've fallen behind. the global achievement gap is growing. if we are serious about preparing our nation's young people to compete in a global economy, we must do better. through the american recovery and reinvestment act, we have built on -- we have built a foundation for reform. all states are reporting the progress they are making in four areas of reform. raising standards, developing and recruiting excellent teachers and leaders, using data to inform instruction and turning around our lowest performing schools. and the race to the top fund,

we've identified 16 finalists for the first phase. we've invited all the finalists to present about their plans and we'll be announcing the winners during the first week in april. the winners will blaze the trail on reforms for decades to come. to promote reforms in every state, i'm committed to work with you in 2010 to reauthorize the elementary and secondary education act. it's been more than eight years since congress last reauthorized esea through the no child left behind act. that's the longest gap between reauthorizations in the 45-year history of esea. we all recognize and nclb had its flaws. the time to fix those problems is now. my staff and i have reached out to listen and learn from people across the country and to hear what they think about nclb. my senior staff and i visited every state on a listening and learning tour. we met with parents, teachers and students themselves. we have engaged in literally hundreds of conversations with stakeholders representing all sections of the education

community. and all of our conversations, we heard a consistent message that our schools aren't expecting enough of our students. we need to raise our standards so that all students are graduating prepared to succeed in college and in the workplace. we've also heard people aren't looking to washington for answers. they don't want us to provide a prescription for success. our role should be to offer a meaningful definition of success, one that raises the bar and shows teachers and students what they should be striving for. with those lessons in our mind, we have developed our blueprint for esea reauthorization. we have shared that with you, mr. chairman, and i ask that the blueprint be entered into the record of this hearing. and this blueprint, you'll see that everything is organized around our three major goals for reauthorization. first, raising standards. secondly, rewarding excellence in growth. and third, increasing local control and flexibility while maintaining laser-like focus on equity and closing achievement gaps. all of these policy changes will support our effort to meet the

president's goal that by 2020 america once again will lead the world in college cleation. in particular, the esea will set a goal that by 2020 all students will graduate ready to succeed in college and in the workplace. we'll build an accountability system that measures the progress that states, districts and schools are making towards meeting that goal. we have a comprehensive agenda to help us meet that goal. it starts with asking states to adopt standards that truly prepare students for success in college and careers. governors and state -- chief state school officers of 48 states are doing the tough job of setting these standards in reading and in math. the leadership at the local level has been remarkable and the effort is supported by both major unions and by the business community. and our proposal, we call on states to adopt college and career-ready standards. i've been work with other states or by getting their higher education institutions to certify the standards are rigorous enough to ensure students graduate ready to

succeed in college-level classes or to enter the workplace. but standards alone aren't enough. we'll need a new generation of assessments that measure whether students are on track for success in college and careers. we will support the efforts to develop those assessments so they'll measure higher order of skills, provide accurate measures of student progress and give teachers the information they need to improve student achievement. the standards of assessments are key parts of our effort to redefine accountability. under nclb, the federal government greatly expanded its role in holding schools accountable. it did several things right, and i'll always give nclb credit for its important contributions to education reform. it required all states to be included in the accountability system, including minority students, students with disabilities and english language learners. it required states, districts and schools to report test scores disaggregated by student subgroups, exposing achievement gaps like never before. we know the achievement gap is

unacceptably large and teachers and school leaders throughout the country are working and mobilizing to address that problem. nclb was correct to create a system based on students, not just on inputs. but nclb's accountability system needs to be fixed now. there are way too many perverse incentives. it allows, even encourages, states to lower standards. it doesn't measure growth, and it doesn't reward excellence. it prescribes the same interventions for schools with very different needs. it encourages a narrowing of the curriculum and focuses on test preparation. it labels too many schools with the same failing label regardless of their challenges. it encouraged schools to focus their efforts on only that tiny percent of students close to the proficiency bar and neglect a vast majority above or below that line. we need adults focuses on all children, not on any small handful in a classroom or in a

school. we can't sustain momentum for reform if we don't have a credible accountability system that addresses these issues. our proposal will make significant improvements on accountability. the biggest and most important one is that it will use student academic growth as the most important measure of whether schools, districts and states are making progress. i am much more interested in growth and gain than absolute test scores as long as students are on a path toward meeting those standards. under our plan, we will reward schools, districts and states that are making the most progress. at the same time, we will be tough minded in our lowest performing schools and schools of large achievement gaps that aren't closing. although the schools will be gone flexibility to meet performance targets, working under the state and local accountability systems. if we get accountability right, we'll provide the right incentives to increase student achievement. and i'm confident america's students, teachers and principals will deliver.

i would like to focus on the critically important work of teachers and leaders. the teaching and learning that happens in schools every day are what drives american education. we spend a lot of time talking about reform, about the proper federal role, about the cost of education and the need for more funding and more -- and about competitive versus -- we can never lose sight of the impact it has in classrooms, where teachers are doing the hard work every single day of helping our children learn. every decision must be viewed through the framework of improving instruction for our nation's children. our partnership with teachers and parents' partnerships with teachers empowers them to do their job well. we believe that there is a lot in our proposal that teachers will like. we know that there's a lot under current law that teachers don't like. most teachers believe that we have a broken system of accountability. many teachers believe their evaluation support systems are flawed. we need a system of

accountability that is fair. i have never met a teacher yet who is afraid of accountability. all they ask is for a system that measures each child's progress, not this year's students against last year's students. we need better evaluation systems that are honest and useful and elevates rather than diminishes the teaching profession. all told, we request a record $3.9 billion to strengthen the teaching profession and increase of $350 million. we begin with the understanding that teaching is some of the toughest and absololutely the mt important work in society, and we are deeply committed to making it a better profession for teachers. to start with, we are encouraging the development of high quality teacher preparation programs. today, many teachers tell us that they are underprepared for what they face in the classroom. they have to learn too much on the job. we encourage the development of meaningful career ladders and stronger efforts to retain the great teachers we have. we lose far too many of those great young teachers due to a

lack of support. from newly hired teachers to tenured teachers to master teachers, mentors, department heads and principals, we need to rebuild education as a profession with real opportunities for growth that sustain a teacher's craft over a career, not just a couple of years. we want to encourage schools and districts to rethink how teachers can best do their jobs. how they collaborate, how they use their time outside the classroom and how they shape professional development programs. when adults have time to collaborate and solve school problems together, they are going to be much more productive and they'll get better results for our children. teachers must be at the center of those efforts. we are also investing in principals to create better instructional leaders so that teachers will have the leadership they need to do better work. historically, i think our department has underinvested in principal leadership and we're looking to dramatically change that. good principals recruit to maintain great talent. bad principals run off talent. that's for teacher evaluation

systems. our goal is a system that is fair, honest and useful. and built around a definition of teacher effectiveness developed with teachers that includes multiple measures, never just a single test score. teachers need great principles for support and we will also ask for fair valuation systems for principals. we want to use these systems to support teachers in their practice and to reward great teachers for all they do, including advancing student learning. we also want to reward them for working in high-needs schools. if we're serious about closing the achievement gap, we must close the opportunity gap our children all too often face. as i mentioned, we will change the accountability system to make it fairer. for the first time, we'll be holding not just schools and teachers acountable for student success but districts and states as well. this mouft ust be a shared responsibility. teachers can't teach and principals cannot lead where they are not support at the local and state level. we want to stop mislabeling

everyone should get credit for helping students who are behind catch-up, even if they did not meet standards. a sixth grade teacher whose student starts years behind and advances two years should not be seen as a failure. that teacher is a great teacher. she is accelerating student learning and we should not stigmatize her. the same is true for districts and states as well. we want to give them the flexibility to improve by focusing much more on the lowest performing schools and those with the largest achievement caps that at -- that are not closing. while giving them more flexibility we want to measure deep learning not test taking skill.

it would provide teachers with meaningful feedback. and we want students, parents, teachers, and communities working toward goals. issue parents and communities working toward a meaningful bar and supporting them and getting there. the goal of the k to 12 system has to be to prepare students for the next step on their journey. college and a career. the system needs to be focused on that goal. dumbed down standards mean we are lying to children, giving them false hope and undermining the high standards teachers have for their students. that must end. we are calling for over $1 billion to fund a complete education because a whole child is a successful adult. we want schools investing in the arts, history, science, languages and all of the learning experiences that contribute to a well-rounded education. this is critically important. finally, we're seeking $1.8 billion to support students by encouraging community engagement and support and exposure to other positive adults. teachers cannot do it alone.

they need parents, community leaders, social service agencies and other supportive adults in the school helping to reinforce a culture of learning and respect. a parent is always a child's first teacher and will always be their most important teacher. i also want to say that esea reauthorization provides us with the opportunity to promote early learning programs from birth through third grade. we need to ensure that children attend high-quality early learning programs that sustain achievement. at the federal level, we can encourage the alignment of standards and assessments across early learning programs and schools. we can coordinate professional development efforts. we can engage families in their children's learning. it's time to learn from the success of high quality programs. as a president has pointed out, that pipeline will never work properly unless the road to college begins at birth. thank you for the opportunity to discuss our comprehensive reform of esea. this will be one of the most dramatic changes in the law's history. it will fundamentally change the

federal role in education. we want to move from being a compliance monitor to being an engine of innovation. the urgency of these reforms has never been greater. our children and our future are at risk. so let us together do the difficult but necessary things our schools demand and our children deserve. we know that schools can transform the lives of children. we have literally thousands of examples of schools serving high poverty populations that are accelerating student achievement. we need to reward them and hold them up as examples for others to follow. i thank you for all that you have done and all you will do to make education america's highest priority and greatest legacy. we need to work together to continue that legacy and deliver world class education for every child. thank you so much. >> thank you. thank you very much for your testimony. under previous agreement, the chair and the ranking member will be recognized for ten minutes apiece. mr. secretary, the blueprint

that you have released and you are discussing with us today has received a lot of mixed attention from media and stakeholders. i'd like to take a moment to refocus that conversation as congressman kline said on the needs of the students. and especially in my case poor students -- poor children and those suffering in schools with wide achievement gaps. i've been at this for some 30 years, and we can't afford to lose yet another generation of students. and we can't wait to eradicate poverty before we take the action we need on behalf of our nation's children. ten years ago, with no child left behind, we began the process of shining the light on the achievement of all children, no matter what schools they were in, no matter what their social economic status was. and it was about the idea that

they were all entitled to a world class educational opportunity. and i would like to make sure that we don't lose that focus. and i agree with your criticisms of -- i think you raised important issues about no child left behind. i wonder if we might elaborate a little bit on the proposals -- how the -- your proposals really create a system that addresses the needs of students, particularly those who are most disadvantaged and find themselves locked into schools that, as my state just published, more or less year after year are failing to provide the opportunity for those kids to take advantage of. >> thank you, chairman. i put schools into three broad categories. there's a set of schools in every sdat and every district. take the top 10% that are world class where gaps are shrinking and we should be holding those schools up as examples. giving them more flexibility, learning from them and frankly, getting out of their way. there's a set of schools that

may not be world class yet but are improving every single year but we need to continue to support their development and growth. what i argue as a country, we need to take the bottom 5% of schools. not the 95%, but the bottom 5%. even just take one of those 5% each year for the next five years and let's do something dramatically different. the status quo is not working. we have not seen the kind of progress we need. we have far too many examples of success in high poverty, high minority communities for anyone to say poverty is destiny. we have schools beating the odds where it's simply not working for students. where students are falling further and further behind. despite our best intentions and hard work, we are perpetuating poverty and social failure. what we're saying is we need to come in. let's move with a real sense of urgency and let's give those children a better chance in education and let's do it now. >> but i assume i'm correct in understanding that for those students, in large mixed districts like i represent those students who may be in a

relatively good school but aren't -- they're not doing terribly well themselves. we're not going to lose them in this -- in this new arrangement. they do not need to be in one of the worst performing schools before they get attention or they continue to be tracked in terms of whether they are growing toward the goal of being college or career ready. >> that's exactly right. we're actually trying to do something that i don't think happened enough in the previous law that if you take a relatively high performing school, but where there are huge achievement gaps and again the big thing is progress and growth, where those achievement gaps aren't shrinking. we want to make sure those students who are being underserved have an opportunity to do better. >> thank you. i think one of the more interesting political events in the last year has been the impact of race to the top on the educational political system if you will. because of the race to the top, i think some of us reside in states where we never thought that conversation would take

place. we never thought there would be agreement between the executive and the legislation. agreement between the teacher organizations and the boards of education and/or within the legislature itself. and yet, i see, as i mentioned in my opening statement, those actions have been taken. not exactly as i would do it. i think there's more to be done. and my own state, but it's a dramatic change of attitude. i hope it's a change of attitudes. it's a dramatic change in terms of the guidances that the system will operate now under the use of data and other elements of the race to the top. the question is can we now transfer in the model that you are laying out in your blueprint, can we transfer that kind of atmospherics if you will, to bring about that kind of cooperation, those kinds of conversations among the various parts of the education system?

because i think when we look at models of success, we know that it's more than just another two-year plan that's laid on that school or that system. it's really the preparatory work that's gone in to get buy in, to get people to participate, to take responsibility across those -- across those systems. i think a lot of that has begun at one level of the educational system with the states. i think now we need to see whether or not we can use the blueprint and the wall that we will be offering here to encourage that and extend that. >> we've been amazed to see the amount of progress and momentum around the country due to race to the top. what's interesting is what i hear repeatedly is that, although there's a lot of money there it's really not about the money. there's been a level of conversations. there's been a level of collaboration. there have been folks moving outside their comfort zones, and movement and relationships that should have been happening for a long time, this has forced those

things to happen. so that's been hugely, hugely encouraging. i had folks say they'd love to get the money. but whether or not they, do they are moving forward to reform, they are behaving in different ways. whether it's race to the top, whether it's in the invest in innovation fund, whether it's in other areas where we have discretionary resources, we're going to continue to award those states and districts and nonprofits and universities and schools that are raising the bar for all students and closing the achievement gap. and where we see that movement, we want to put unprecedented resources where folks are more recalcitrant. we'll choose to invest in other places. the willingness to reform has been unbelievably encouraging. >> i look forward to work with you on that because i think that's key to the success here. let me raise another issue. and that is that the focusing of the attention on what you call the 5% of the schools that are persistently and chronically failing. i think they are failing, not just the students are failing, the teachers are failing, the

whole community if you will. but again, i want to make sure that we don't substitute a model for critically thinking about how you develop success in that particular school or those schools within the system and in those -- and in those communities. and in the blueprint, you lay out four different models, the transformation model, the turnaround model, the restart model and school closure model. i think in california we've tried almost all of those. and i'd like to have some data presented on where we've seen the successes with those various models because we have had some, but not all of them have happened. and i would also like to make sure sort of following on to my previous question, that when we consider these models, they've got to be more than just lines

on the paper if you will. i think -- i visited some of your very successful schools in chicago. and i think what you saw there was the development of an attitude, and expectations and partnerships from parents, the community, the teachers, the school boards and the individual boards about the success that they wanted. and they took a lot of time bringing people around to that point. some people left. some principles left. some teachers left and back and forth. but then they developed a community that they thought could sustain that. and some of those schools, that has been sustained now for almost ten years. my concern is, having witnessed a number of dramatic actions where we get one or two years and then we're back again trying something else more dramatic, that we provide the means, the tools, the resources for these districts that are making these choices for schools that have to make these choices to really plan out and develop that change

in expectations and attitudes and competencies that will make that a success so we don't sort of have a continued rollover of these efforts and we can bring some stability and some ongoing sustainable success. so in this discussion, following what you've put forth in the blueprint, i am very interested in looking at what are the outcomes of these models. where is it we're going to look for success? where is it school districts would go to see how this has been done. some of these have been legend in their efforts to turn around even large systems. here you are focusing on individual schools within systems. that buy-in really has to be extraordinary. and i think we have to encourage that buy-in. and one of -- just want to sign off with this. one of the remarkable things when i visited roscoe academy was the community participation on an hourly and daily and

weekend basis about the importance of that school and the success of those -- of those kids. so i just would -- that doesn't -- feel free to respond, but i just worry that we are not just putting out lines and description of what you would do and not really -- and we don't substitute that for critically thinking about how -- what those models would be successful. and evidence of their success in the past. >> it's a great point. and this only works if everybody steps up. no one gets a pass. students, teachers, parents, principals, the community. everybody has to work together and we see that sustained success you have that community buy-in. everybody has to work together. these are hard conversations. they are tough. i think we have to have them. we have to stop sort of sweeping these tough issues under the rug. where folks come together and plan for the long haul and sustain that effort, we will and we have seen remarkable results. we also, while the race to the

top has gotten all the press and publicity, that's $4 billion. we're put ting $3.5 billion out just for that bottom 5%. we're trying to put a huge amount out there. more time for teachers to collaborate. longer school days. more time in the summer. we know some of the building blocks. we're trying to put huge amount of resources out there for states, @@@@@@@ @ @ @ @ @ ah,y we've got a peer review process and we don't know who the peer

reviewers are. they are allocating big piles of money. it is hard for us, the american people, to have confidence in the system if we do not know who the peer reviewers are. confidence in this system if we don't know hothe peer reviewers are. so i'm a little troubled about why we can't know who those are. and then, secondly, i am a little bit concerned about the timing here. we had states put in their request for this money. some states put it in with sort of high expectations, like minnesota, and didn't make the final cut. we don't know why. i understand that at some time coming up there's going to be some comments and information coming forward. my question is, why don't we have it now? i know you know, mr. secretary, i've got a letter here from the governor schwarzenegger, and i think eight governors saying you got to tell us what we didn't do right because we're busy, these

states, trying to compete again for the next traunch of this money. so, you know, there's literally over $4 billion here at stake, and you and the administration are asking for another $1.35 billion just for race to the top. and it seems to me we really have some unanswered questions, and so my question to you is, why can't we know who those people are, and why can't the states know what they did well and what they didn't do well so they can address those things? >> great questions. and what's been paramount in our minds from day one was the integrity of this process. and due to the size of these grants, unprecedented, we were worried about outside influence on potential peer reviewers. and there's huge temptation for bad things to happen. and we want to do everything at all cost to prevent that from happening. so as soon as the competition is done, all that will be put out, all the interviews we're doing now with the 16 finalists are being videotaped, and all of

that will be absolutely transparent. what we said at the start of the competition was the day it was finished we would put out every state's comments. it will come back. so everyone would get that. we said before the competition started they'd get that at the end. if they get it now, states could gain their answers in the peer interviews due to those responses. so when the competition is done, everybody will get all the remarks, all the reviews, and there will be an equal amount of time between that and when the second application is due as it was at the start of the competition. try to be very, very fair but maintain -- >> okay. if i could interrupt. so you're going to start again with a whole new set of peer review teams after this first traunch? are we not to know who these people are until next september? >> the day this is done, you will know. >> define day done. >> when this competition is completed, we'll put out the tapes of the interviews. we'll put out who the peer

reviewers are and we'll put out all comments for all states publicly. >> i am sorry. i guess i'm just not -- i'm not communicating well here. competition done is some time -- >> the first oaf. >> so now i'm back to the question. we'll have this competition done in april. >> the first part. >> the first part of it it. at that point you'll tell us who the peer reviewers are? >> yes, sir. >> are they going to be the same? >> some way come back. some may not. they signed up for the first round. that was all signed up for. >> okay. it does help me to understand that. i do think, however, that it would be very helpful because the states are getting ready to compete again to know what they didn't do well and the longer that drags out, the hard ter is for them -- >> let me be very clear. we've been consistent from the start we'll put owl that out as soon as this first round is done. and the time between that and when the second round application is done will be the same amount of time. not less time, same amount of time as we had in the first go

around. >> okay. thank you. let me move now to the blueprint, and i know, mr. secretary, you've talked about this an awful lot over time. and that is being tight on goals but loose on means. it looks to me, though, and i understand this is a blueprint, not a bill, not legislative language. we'll go to work on that here shortly. but when you talk about focusing on the bottom 5%, as a way to limit the involvement of the federal government in most schools, that's -- i think i understand that. but as i read the blueprint, it looks to me like this federal -- we'll just call it heavy handedness intervention could apply to entire districts and even states. on page 10, it reads, quote, both challenged districts and states will face additional restrictions on the use of esea funds and may be required to

work with an outside organization to improve student academic achievement. both challenged districts and states. state is in the bottom 5%? i guess i'm trying to understand how that would work. >> sure. schools don't operate as islands. every school is impacted by their district and by their state. some extraordinarily positive ways. some in neutral ways. some are hurt by their states and districts. what we want to do, congressman in all this stuff is reward excellence and challenge when things aren't working. not only are there thousands of high-performing schools. we think there are hundreds of high-performing districts that are routinely showing remarkable student achievement often with children who come from very, very tough situations. we want to shine a spot light on those districts, give them more flexibility, more resources, learn from them. same is true for states. this has got to be a shared responsibility. on the flip side if you have 15,000 school districts, take

the bottom 5% of school districts where things aren't working for any -- for the vast majority of students in that school district. i think we need to look at what's going on there and see what we can do. >> i'm trying to understand. it looks to me like you are directing this at an entire state. it seems to me that state might be looking for the most flexibility to make corrections, not the least. i want to move on to something else. and i just want to mention it for a second. i've talked to you about this many times and mention it again when you came in. i'm actually not going to ask the question because i think 90% of my colleagues here are dying to talk to you about the same issue. and i want to give them the opportunity to do that. but when we've got the -- these core standards that are being developed by states, there are an awful lot of questions about how that's going to work and what the federal enforcement tool is going to be. i know, for example, that my state of minnesota said, well, wait a minute. i've got a problem with these standards now because they're not as high as in math as what

we have and what we'd like to have. and so if we step outside that and go to our own it may affect how the -- how you, how the department, awards funds. so i'm asking not to address that right now, but i just want to express the concern and assure you that as we've talked before that certainly in my conference at least there are a lot of concerns about that. who is going to adjudicate and what is the role going to be of your department. i'll yield back, mr. chairman. >> thank you, mr. chairman. mr. secretary, i remain very concerned about the administration's charter school proposal. primarily because of the fiscal effects it could have on traditional public schools. i'm concerned that disadvantaged districts, like flint, michigan, where i live, will be stretched too thin if more students move to charter school programs and

take their entire per pupil state allocation with them. what type of supports would you propose to help those districts if we transition to a system that supports significant charter school expansion? the charter schools really are able to market their schools in a way that the public school systems cannot. and very often, my experience has been that the more sophisticated parents are the ones who opt for the charter schools. how would you help those schools where the students are left behind in their traditional public school system? >> yes, sir. i've said repeatedly that i'm not a fan of charter schools. i'm a fan of good charter schools. we have some charter schools in this country that are extraordinarily high performing, often in very, very poor communities. we have some charter schools that are just mediocre. and we have some charter schools that, frankly, need to close. i spoke to the national association of charter schools. i said exactly those things.

what we want to do is we just need more good schools in this country. so we need more good traditional schools. we need more good magnet schools, more good montessori schools and good charter schools are a piece of that solution. i think, sir, every school has a chance to market itself and to tell its story. parents are very smart, very sophisticated. they'll not be swayed by some fancy marketing material. every parent is looking for a grit option for their child. and so where families have good options, that's fantastic. where parents don't have good options, we want to create new options for them of every form and fashion. so a district like flint, whether it's strengthening existing schools, creating new schools within the district or part of -- or through charters, we're wide open to that. charter schools are public schools. there are tax dollars. they are accountable to us. and i think they shouldn't receive any advantages. we think there shouldn't be any disparities in the funding they receive either, though.

just want to play it straight. >> we certainly want both good charter schools, if we're to have them and good traditional public schools. but the fact of the matter is that parents who are more sophisticated, maybe have a better level of education than others, are the ones that, in fact, do tend to choose the charter schools. what do we do, even though the charter school is a good school, what do we do when the other school down the street is receiving less dollars because those dollars are going to the charter school. the state -- entire state fund goes to the charter school. >> it's part of our proposed budget, as you know. the president is asking for historic increases in funding. and the overwhelming majority of these resources are going to go to traditional schools. to those children, to those teachers. and so, you know, i can go through line by line. for teachers and leaders.

$3.86 billion. 10% increase. for well-rounded education, a $1 billion. 10% increase. student supports, $1.8 billion. 16% increase. right down the line. so the overwhelming majority of our resources and hopefully new resources if our budget is approved will go to traditional schools. there's been lots of conversati conversation, mr. kildee, about whether charters are getting higher performing kids, more engaged families. obviously you want to make sure it's a level playing field. i'll point you to a study done in the new york public school system, the charter schools, that looked at their long waiting list for there charter schools. looked at students who got into the charters and looked at kids who applied but didn't. so there was no selection bias. same -- everyone was applying. what they actually found in that study was that the children who actually did get in did better than children who went into the traditional school. they tried to account for that

making sure it's apples against apples. so i just go back. we need more good schools. we need to support every school to be successful. and good charter schools, not bad ones, not mediocre, but good charter schools specifically underserved communities, have been a significant piece of the answer. >> you talk about teacher evaluation. how do we assure that any teacher evaluation system is, first of all, developed in collaboration with the teachers and our really accurately measure teacher performance? for example, i taught latin for the most part. 90% latin. my latin students all got as or bs. and occasionally, i would grab an american history class. no matter how hard i tried, and i knew history as well as i did latin. those students were getting cs for the most part. so, you know, the teacher doesn't have much choice over

what type of student they receive. my latin class, i mean, they were top students. how do we make sure that all these things are measured? >> it's a great point. and i will tell you, when the chairman talks about we need bold action and need to get dramatically better. one of the things most fundamentally broken are teacher evaluation systems. int to the nea's convention in san diego and spoke before 5500 delegates and talked about teacher evaluation being broken. and everybody applauded. i went to the aft convention and everybody applauded when i talked about broken teacher evaluation systems. this is one area as a country where we need to get dramatically better. there's no perfect system out there. these need to develop. what i know doesn't work is what we're doing now. good teachers don't get recognized today. teachers in the middl if the system does not work right adults, it does not work for the children either.

it has to be collaborative and can only be done with unions and teachers and managers working together. we need to get to another level to reward efforts and teachers that are getting better. the system does not work for the adults. we need to be much more thoughtful. i cannot promise you that we will have a perfect system tomorrow but we need to work as hard as we can at the local level, and many to encourage people to do that. we will put a lot of money on the table to incentivize those districts willing to take this on. >> thank you, mr. secretary. >> mr. secretary, good to see you and glad to see you here today. has the department any estimate on what the cost was too late to -- local and state school

districts to implement no child left behind of the last eight years? >> i do not know that. >> i would think that would be valuable in formation. -- i would think that would be valuable information, too. because i'll tell you what i'm concerned about. i read your blueprint for reform. and the -- it's relatively interesting. and then you go through here and on page seven it says a new approach. you get to page 13 and it says a new approach. a couple more times through the document it talks about a new approach. and it's like, wow, here we go again. we had no child left behind in 2001 as the new approach to education in america. and now for eight years, we have whipsawed local school districts and states to implement no child left behind. and we may, whether you like no child left behind or not, we

are, after eight years, we maybe have filtered down and we've got all the procedures in place and the mechanisms in place for no child left behind. now we get a new administration and it's a new approach. and it's -- you know, i can tell you what my local schools are already telling me. it's kind like, we just got done with most system and most of them didn't like it. one bad system that has put in tremendous -- a tremendous amount of cost and bureaucracy into the process. and now we've got, you know, quote/unquote, you geniuses in washington coming up with the next new approach for us. we've got a responsibility to educate kids every day, and now we're going to have to figure out the new approach. they are saying, i wonder what this new approach is going to cost us. and i actually find it, you know, almost incomprehensible that we have -- we've been moving forward for eight years on no mild left behind and you

can't tell me what it's cost. can you tell me what this new approach is going to cost in terms of mandates to states and local schools, and will this administration fully fund the mandates that it's going to put on states and schools? >> sir, let me be very, very clear. this blueprint, the ideas didn't come from geniuses in washington. these ideas came from teachers n parents and principals and students around this country. the previous law was too punitive, too prescriptive. it lowered the bar for children and narrowed the curriculum. what we want to do is raise the bar, have meaningful standards, we want to reward excellence. we want to increase local flexibility. and we want students to have a well-rounded curriculum. this is the right thing to do for children, for adults. there are too many perverse incentives. the -- >> the cost -- >> go ahead. >> i was going to say, how many, when you went through no child left behind, we went through and i highlighted every time it said

the state or local school district shall, must or will. do you expect that this new authorization will be full of school districts, shall the state, will the state, must or will there be a tremendous amount of flexibility because these ideas you are right. i'm glad they came from gra grassroots. so did no child left behind. but it went through the ideas that came up from the grassroots level and they said we're going to accept some and we're going to leave some of the others on the wayside. and then we will tell local school districts that they shall or that they must. i can tell you -- and you know this. the needs of detroit are very, very different than the needs of lansing, which are very different than the needs of baldwin, michigan. and will there be a tremendous amount of flexibility or will this be full of the mandates. and if there are mandates, will

this administration fully fund them? >> one of my four core principles i talked about was more local flexibility. we are absolutely committed to that. what i think all communities, flint, detroit, you name it, all children should have high expectations. the opposite of that happened on no child left behind. great teachers. great principals. great schools, great school districts need to be rewarded. 50 ways to fail, no ways to succeed. we want to fix that. every child deserves a well-rounded curriculum. everywhere i went iheard about a narrowing of the curriculum, rural, urban, subure ban. we want to maintain local flexibility. there's a couple core principles that every child in this country needs and deserves and we're trying to stay true to that. >> yeah, i mean, the maintain local flexibility. i will tell you most school districts, and you know this, don't believe that there is a lot of local flexibility left. and i think that, for us to restore it, you're going to have

to make a massive change in the approach. i hope that's what we see when we actually get to legislative language. we look forward to working with you to restore local flexibility instead of federal mandates. >> i appreciate that. i want to assure you i'm not a washington bureaucrat. i worked on the other side of the law. >> it's amazing what washington does to people. especially when they get into an agency. thank you very much. >> thank you very much. i really commend you for trying to really come up with a comprehensive way that we can really improve our educational system. as we all are aware, we are losing the battle worldwide. that means we're losing our edge. you know, competitively. and so i commend you for trying to make this educational ship of

state work. i just wonder, is -- as we talk about the worst performing public schools, those are the ones that i continually, and i think we've had some conversations. i'm not opposed to charter schools and all. we know they end to get more motivated parents and those parents should not be penalized because they are motivated. however, kids can't pick their parents. and, therefore, they are the victims in a lot of instances of parents that are not motivated. they languish their behind. so what -- and we're concerned about that the bottom work -- working from the bottom up. i think that's a great idea. but do you have any ideas of how we can incentivize teachers to be at those bottom schools? i know we can re-create schools,

and that's what's happened a lot with the charter schools. they'll get kids that were in failing schools. they pick them out and they, therefore, tend to perform. like i said, the chronically poor and those who have, you know, parents who are not as motivated. they tend to stay at that same school. i'm concerned about that school where they stay. what are some of the things? is there any way that you can have teacher pay incentive or have some way to have smaller schools -- i mean excuse me, smaller class sizes? could you have additional teachers' aides to work with these youngsters that have a whole host of problems when they get home? they don't have dinner. they stay up late. they come to school tired. where health components, visiting nurse in the school. are there any of these kind of creative things that will try to make these failing students who

are failing because of the environmental. it's going to be different to get these failing communities whole because that's going to take a whole new infrastructure, et cetera, et cetera. how much can you envision being at the worst school to try to turn it around? >> and again ijust keep going back. we are spending $4 billion in race to the top for the entire country. we want to spend $3.5 billion on just 5% of schools. so we want to make a massive investment. and i want the ideas to come from the local community. but all the things you talked about. more time for teachers to collaborate and work together, involving the community, reducing class size, more time for students, longer days, longer weeks, longer years. all those things are going to be absolutely possible. we'll be looking for good ideas from the community. we have hundreds of these schools around the country. i'll tell you one that sticks out is the congressman to your left. congressman scott. went to a school in his

community. not a charter school. a traditional public school. achievable dream. what's the percent of poverty there, congressman? 100% poverty. the entire community is backing it. and what you are seeing is remarkable. it basically closed the achievement gap. is the work hard? yes. is it possible? absolutely. and there are now hundreds and hundreds of schools like that around the country. so this is possible. it is doable. we have to have the courage to do those tough things. we want to put unprecedented resources behind those efforts. >> okay. since we have so many people that want to speak. i appreciate that. we have a school, a tubman school that is the same, but the thing about harriet tubm tubman, it's in the heart of the inner city, but been a high-performing school for the last 30 or 40 years. i'm trying to catch a school that's been at the bottom for 30 or 40, and see if we can make it like harriet tubman. it's a real, true public school. >> one thing i testified this morning before the senate health committee, and senator dodd said we spent a lot of time trying to

catch failure. we need to catch success. i think there is a lot of success out there that we have not been catching and we want to learn from those successes. so that's why i'm so optimistic. despite these challenges, despite the sense of urgency, we have never had more high-performing, high-poverty schools in tough communities, urban, rural, urban and. this is happening, but we have to take these pockets of excellence and take them to skyline. but again, the answers are going to come from washington bureaucrats. they're going to come from educators at the local level. >> thank you, mr. chairman. i'm taking this question from what you stated, and what i've talked to you about before, and you have stated before, and that is the issue of standards and assessments. and i understand that the governors are putting together standards, and things will hopefully bubble up from that. and somehow we'll allow that to become the standard set, which i think is good. there is no question in my mind that some states that play games with standards and with assessments. in terms of making their

standings look better than perhaps they are. my question is on the assessments. and that may also tie into your teacher evaluation issue, too. maybe it does, maybe it doesn't. but what are the plans for assessments? is that also going to come from the states? or is it -- is it going to be done as it is today, the states can select from various testing standards out there, and that kind of thing? but what are the plans for that as far as this legislation is concerned? >> if i could, congressman, just to take one second on mr. client's question. to be very, very clear on the standards. so, yes, as a consortium of 48 governors, 48 states, school chiefs working together, again, both unions are supporting it, business communities crying out for this. this was a third rail a couple years ago, you couldn't talk about this issue. everybody is come together, saying this is the right thing for children. i can give you from the record, chairman, quotes from the head of the union, quotes from republican governors. i can give you quotes from the head of the u.s. chamber of commerce, everybody saying this is an idea whose time has come. if states want to opt out of that, for whatever reason,

that's fine with us too. and we want to make sure there are high standards. so if they're working part of that consortium, great, if not, we want the local -- university of mn, university of tennessee, whatever, hitting the standard, the student won't have to take remedial classes so you can work as part of the collaborative. or if a state chooses to go it alone, just have it certified by their local institution of higher education. and we'll be fine with that, too. so again, this is driven at the local level. if you know if this is a federal initiative, if this is a national initiative, this dies. the leadership has got to come at the local level, and that's what is happening. once you get higher standards, which is where we're going, huge progress, you need better assessments, to answer your question. we were very concerned that due to the tremendous financial stress that states and districts are under now, you know, very, very, very tough budget times. tough as in decades, that folks would get to the better standards, but would be left with the same less than optimal assessments. so it's part of a race to the top. we carved out $350 million, and we're going to put that out to

state. so again, won't be our assessments, national assessments. we're going to put that out to sets of states that want to work together to come back with much more comprehensive, not just end of course, end of year, but real-time, formative data so teachers, parents, principals, can know what their strengths and weaknesses are. so we think there is a huge opportunity to get to the next generation and we want to put our resources behind it. but the ideas and leadership will come at the local level. >> talk to me about the teacher assessment situation and the evaluation of the teachers. and, you know, we all know that there are potential union problems here. that is, most unions have gotten mandates that you cannot fire a teacher after a couple years, and, you know, they're given permanent jobs, et cetera, which makes, i think, evaluation more difficult. also, there's a lot of resistance, frankly, to the ability to judge. teachers are doing a superior job, and s