take it on? >> well, i was chosen by the administration and bp by agreement. you'll have to ask representatives of both as to why they are relying on me to act independently. i suspect that others have pointed out my prior work. >> all right but you don't know who selected you? who called you, the president? >> no, i have never talked to the president about this. on the bp side, i had two meetings with bp officials in houston. they asked me to come down and meet and talk about my experience. and on the administration side, the contact person for me has been tom perelli. he is the one i've been dealing with. i think i had one conversation with carole browner of the white

house, but, it has been tom perelli on the administration side. >> today, you weren't subpeonaed, you came voluntarily correct? >> to this committee? >> yes. i always come when the chairman invites me. >> you said before other venues and it seems clear that you are not accountable to any one, the administration, so, is there anyone who you do account to? >> i think i'm accountable to the people in the gulf that i am trying to help. >> what if they disagree with your decision? >> i think they would voice their feelings to the members of this committee. >> hwho could fire you? >> i guess i could be fired by

the administration or bp. >> you say you are accountable to the people in the gulf, but normally accountability carries with it the possibility that those to whom you are accountable can do something. >> i suppose they can complain to our committee and then somebody in that duo would fire you. >> i think that is right. >> they would agree that my service rz no longer needed. >> with the folks in the gulf. if they don't like your decision, did i understand there is an apel at review? >> there is a review by a panel that has yet to be selected. >> who will select the panel? >> the panel will be selected, names will be submitted to me. right now i select the panel. >> boy, i would love to got to

choose those who got to review mine. >> let me say two things about this. if the claim ants have lost confidence in what i'm doing, there is no requirement that they sign up. there is no greater check on my ability to serve the people of the gulf than the people have lost confidence in me and voluntarily don't apply. if they are not aploying -- >> so you would self fire yourself? >> well, if i have nothing to do. no one is going to have to fire me, i will resign. you have an able staff, are they working pro bone know? >> no. >> who decides their salary. >> bp is paying for the entire cost of this facility. >> who decided on what their

salaries would be? >> i will submit proposed salaries to bp. >> okay. >> bp has already been paid about 1500 tepeople in the gulf. we'll decide who should be continued and who shouldn't. on issue who paid for this facility has to be bp. you can't ask claim ants to pay. >> can they tell you they disagree with the salary you have set? >> i suppose they could say it. >> you mentioned jurisdiction, who set that? >> the jurisdiction has been established by the government and bp. >> the government being us? >> oh the administration. okay. >> and bp together chose me and explained my jurisdiction to me

orally. >> and that >> you can watch this hearing in its entirety at our web site. you can watch video on recovery efforts and links to other resources. coach to c-span.org/oilspill. up next on c-span, federal was served chairman ben bernanke testifies about the u.s. economy. after that, president obama signs the financial regulations bill. and later, the senate debate on in the unemployment benefits package which passed earlier today. >> this weekend, clark hoyt on the changing newspaper industry. >> i worry about the standards and maintaining journalistic integrity as we move from one

media world to another. >> clark hoyt sunday night on "q&a." >> federal reserve chairman ben bernanke told congress that the u.s. economic outlook is "unusually uncertain." chairman burnett was asked -- was before the senate banking committee and deliver his semi- annual report. this is 2.5 hours. guys okay? ready? all right. the committee will come to order. we are here today to hear from the chairman of the federal reserve on the semiannual monetary policy report to the congress. mr. chairman, we welcome to you

our committee. once again, we thank you for your service to our country. and at least on my part, thank you and congratulate you for the tremendous work you and staff of the federal reserve have been doing through these very difficult days in our country and we very fortunate to have you in my view, at the chair. i want to make some brief opening comments and then i will turn to senator shelby for any opening comments he may have. and i will leave it up to the members themselves, we don't have a full complement here but several that would like to be heard brief ofly before we turn to you for your thoughts and then the questions we will have for you this afternoon. let me express my gratitude to the chairman and the other members of the committee. normally, we would have had this committee hearing in the morning and because of the bill signing ceremony this morning, we delayed it until this afternoon, so i appreciate being able to accommodate us. we are pleased to welcome you, again, mr. chairman, to the committee. today, will deliver his semiannual monetary report, as i have said, to the congress. the timing of this testimony could not be better, in my view.

key questions about both financial regulation and our current economic policy will be answered in the coming months. federal reserve will play a key role in answering both of those series of questions. today, the president is as many know signed into law the wall street reform bill this bill in my view is a comprehensive response to the financial crisis that devastated our economy. the bill demands that regulators change the oversight of the financial market, and financial institutions in very fundamental ways it sets up a financial stability oversight council, which will function as early warning with system, we hope, responsible for spotting and addressing threats to the overall financial stability of our country and institutions this in and other even nations around the world it creates a new orderly liquidation authority to provide for the lying down of large financial institutions whose failure threatens overall financial stability. further it makes the markets for financial derivatives much more transparent and requires

regulators to establish capital standard and marginal requirements for large derivative dealers that will reduce the risk, we believe posed by these financial instruments. further it limits the aity of banks and their owners to engage in risky trading strat joirs to invest in hedge funds or private equity funds. further, requires higher prudential standards, including capital and liquidity for large bank holding companies and nonbank financial firms that have the potential to put the financial system at risk. the bill establishes for the first time a consumer financial protection bureau, with a mandate to focus exclusively to on protecting consumers from financial abuses and ensuring that consumers get the financial information that they need to form -- a form they can understand. but while the bill gives regulators substantial new authority it does not contain specific regulations. that will translate authority into action. congress is not in a position to write them t is above the

capacity of this institution to do that. those rules and regulations require the expert knowledge and they must adapt over time to changing circumstances. congress must rely on regulatory agencies to implement the goals of this reform bill. however, it is the role of congress to oversee the actions of our regulators, given the importance of getting financial reform right. it is a role that should be pursued with great vigor, intelligence in the coming months and years. the federal reserve is one of the institutions on which congress will rely most levellism the additional authority it has been given is remarkable in this bill the federal reserve will be a member of the oversight council and the insights of its group of advisers and research letters play an important part in identifying, developing risks to the financial system. it will be the fed's job to set the heightened prudential standards where the nation's large banks and nonbank financial companies designated by the oversight council.

the fed will help to decide when a failing financial firm needs to be put into new resolution process and the fed will have the responsibility to oversee important financial utilities, including, for example, the clearing houses that become increasingly central in der require it was market. as you are aware, mr. chairman, i have been critical of the fed's past performance and in fact, advocating striking the fed's supervisory role. the fed managed the fed crisis soup per latetively in my view it did less so in the run-up to the crisis it failed to use the authority and -- to present the serious deterioration of mortgage underwriting standard an abusive and fraudulent mortgage lending practices that in my view, fueled the financial crisis we have been going through it also failed energy my view, it adequately supervise some of our largest bank holding companies. these holding companies were allowed to accumulate significant exposures to mortgage-related assets for loss these suffered went house price

bubble burst help hadded to produce the financial crisis from which we have not yet fully recovered. however, as the financial reform bill worked its way through the legislative process, the congress, in its wisdom, decided not only to preserve the fed's existing supervisory power but to bolster it, including, mr. chairman, indeed mr. chairman, you sought those additional powers and as a result, the fed is central to man taining our financial stability. i think it's fire say that the success of the financial reform law depends in large measure on how the federal reserve meets its new responsibility it is my fervent hope that under your stewardship, the fed will exercise these authorities wisely. of course, the financial reform law left the fed's responsibilities for monetary policy unchange and this gives the fed even more crucial work to do the devastation brought by the financial crisis is still with us. and while output has begun to grow it is not growing rapidly enough to replace the millions of jobs lost during this crisis.

the first quarter of this year, gdp grew at an unimpressive 2.7%. the unemployment rate in june was still at 9.5%. and nearly 7 million workers have been unemployed for 27 week as well or more. as you have acknowledged in previous testimony, mr. chairman, the effects of long-term unemployment, which destroys jobs skills and demoralizes those who suffer from it has boat tention to create serious long-term problems in our nation. and although firms with access to credit markets are able to borrow at relatively low interest rates, the businesses and households that depend upon banks for credit continue to find difficulty in assessing credit. apart from inventories, investment demand remains anemic and real fixed investment decline in the first quarter of this year. in this less than robust environment it is not surprising that price inflation is hardly an issue. over the past year, the cpi has increased by only 1.1% and core

cpi has increased by only .9%. in short it looks like our economy is in need of additional help. it is evidence that the fed takes this issue seriously and i applaud you for that the federal fund's rate is now near zero and the banks are sitting on extraordinary quanties of excessive reserve bus one of the issues i would like to explore with you today is whether the fed can do more to help expand output and employment in our nation. and now i would like to turn to my good friend and colleague, the former chairman of the committee, senator shelby for any comments he may v. >> thank you, chairman dodd, welcome to the committee again, chairman bernanke. you have been with us for many years now on many occasion. mr. chairman, judging by the minutes of the fed's june open market committee meeting and statements by fed officials, uncertainty about the economic outlook has risen recently and there is a growing divergence of views. recent data suggests that the already modest recovery may have

hit a soft patch. with we have also recently experienced another flight, quality, elevated uncertainty given the events surrounding greece and others. although some concerns have waned with, wane wi wi ed we should learn from europe and their fiscal difficulties. given fiscal uncertainties and possibility of a double-dip recession, there has been a modest change in the fed's outlook as reflected in this recent policy discussions about whether inflation or deflation is the predominant current threat. there are questions about what the fed's contingencien place are in the event of a double-dip recession or persistent inflationary pressures there are questions about whether the fed could combat inflationary fresh showers whether the u.s. would have an experience like japan. there are questions about whether the fed has changed its focus from executing an exit

strategy to lowering interest rates on reserves and possibly further ballooning its balance sheet with more asset purchases. this is especial willy concerning because the purchase of even more long-term assets may channel credit to favored segments of the markets at the expense of others. in the current environment in wit distinction between fiscal and monetary policy is sometimes blurred, fed transparency about its plans i think is crucial. i believe that it's important for congress to know what options are on the table and where the fed may be headed chairman bernanke, as the economic outlook has become a bit more cloudy of late, i look forward to hearing your views here today and i'm sure all of us have a number of questions for you. thank you, mr. claireman. >> thank you, senator shelby. any of my colleagues want to be heard on this? we hearny anyone on the democratic side? senator buenning? >> very shore. >> sure. >> it is amazing to me how two

people can differ on a financial reserve law than the chairman and myself. some of us think that we didn't do enough and we didn't hit the heart of the problem. we didn't touch fannie mae or freddie mac, derivatives or credit default swaps. we just barely skimmed the top and we didn't do anything but put into law -- put into the law too big to fail. so chairman, i'm anxious to hear what the outlook for the economy s. >> anyone else wish to be heard? >> mr. chairman, i don't want to make an opening comment, i know you know that well, but how long is the chairman going to be with us today, just so to we can organize our thinking about questions and how long all right question period be?

>> well, a good part of the afternoon, i guess. i don't know, the votes on the floor may disrupt us. i don't know what the majority/minority leader's plans r r each amendment could take ten minutes of debate plus the vote itself, i don't know when that could come. that can disrupt are the flow. >> one round or two, do you know? >> i will stay as long as people want to try to get through as much as we can with. mr. chairman, welcome.with. mr. chairman, welcome.ith. mr. chairman, welcome.th. mr. chairman, welcome.h. mr. chairman, welcome.. mr. chairman, welcome. >> i'm sorry. thank you. chairman dodd, senator she will bind members of the committee i'm pleased to present the federal reserve's semiannual report to the congress. the economic expansion that began in the mild of last year is proceeding at a moderate pace, supported by stimulative monetary and fiscal policies.

although fiscal policy and inventory restocking will likely probe sliding less impetus to the recovery than they have in recent quarters, rising demand from households and businesses should help sustain growth. in particular, real consumer spending appears to have expanded at about a 2.5% annual rate in the first half of this year, with purchases of durable goods increasing especially rapidly. however, the housing market remains weak with the overhang of vacant or foreclosed houses weighing on home prices and construction. an important drag on household spending is the slow recovery in the labor market and attendant uncertainty about job pros expect aer two years of job losses, private pay rolls expanded at an average of about 100,000 per month during the first half of this year, a pace insufficient to reduce the unemployment rate material flip. all likelihood a significant amount of time will be required to restore the nearly 8.5 million jobs that were lost over

2008 and 2009. moreover, nearly half of the unemployed have been out of work for longer than six months. long-term unemployment no not only imposes exceptional near-term hardships on workers and their families it also erodes skills and may have long-lasting effects on worker's employment and earning prospect he is n the business sector, investment in quilt and software appears to have increased rapidly in the first half of the year in part, reflecting capital outlays that had been deferred during the downturn and the need of many business to replace aging equipment. in contrast, spending on nonresidential structures weighed with down by high vacancy rates and tight credit has continued to contract, though some indicators suggest the rate of decline maybe slowing. both u.s. exports and u.s. imports have been expanding, reflecting growth in the global economy and the recould havery of world trade. stronger exports have, in turn, helped foster growth in the u.s. manufacturing sector. inflation has remained low.

the price index for personal consumption expenditures appears to have risen at an annual rate of less than 1% in the first half of the year. although overall inflation has fluctuated partly reflecting changes in energy prices, by a number of measures, underlying inflation has trended down over the past two years. the slack in labor and product markets has damped wage and price pressures and rapid increases in productivity have further reduced producers' unit labor costs. my colleagues on the federal market committee and i expect continued moderate growth, a gradual decline in the unemployment rate and subdued inflation over the next several years n conjunction with the june meeting, board members and bank presidents prepared forecasts of economic growth, unemployment and inflation for the years 2010 through 2012 and over the longer run. the forecasts for qualitatively similar to those we released in february and in may, although progress in reducing unemployment is now expected to

be somewhat slower than we previously projected and near-term inflation now looks likely to be a little lower. most participants expect real gdp growth of 3 to 3.5% in 2010 and roughly 3 and a half to 4 1/2% in 2011 and 2012. the unemployment rate is expected to decline to between 7 and 7 1/2% by the end of 2012. most participants viewed uncertainty about the outlook for growth none employment as greater than normal and the majority saw the risks to growth as weighted to downside. most participants projected that inflation will average only about 1% in 2010, and that it will remain low during 2011 and 2012, with the risks of the inflation outlook roughly balanced. one factor underlying the committee's somewhat weaker outlook, financial conditions, though some much improved since depth of the financial crisis, have reported growth recent

months. ably, concerns about greece and other euro area countries to manage their sizable budget deficits and high levels of public debt spurred a broad-based withdrawal from risk taking in global financial market necessary the spring, resulting in lower stock price and wider risk spreads in the united states. in response to these fiscal pressures, european leaders put in place a number of strong measures, including an assistance package for greece and 500 billion your rose of funding to back stop the near-term financing needs of euro area countries to help ease strains in u.s. dollar funding market, the federal reserve re-established temporary dollar liquidity swap lines with the ecb and several other major central banks. to date, drawing under the swap lines is limit bud we believe the existence of these lines has increased confidence in dollar funding market exhelping to maintain credit avail bill knit our own financial system. like financial conditions generally, the state of the u.s. banking system has also improved

significantly since the worst of the crisis. loss rates on most types of loans seem to be peaking and in the a aggregate, bank capital ratios risen to new highs. however, many banks continue to have a large number of troubled loans on their books and bank lending standard remain tight w credit demand weak and banks writing down problem credits, bank loans outstanding have continued to contract. small businesses which depend importantly on bank credit have been particularly hard hit. at the federal reserve, we have been working to face i will sil tate the flow of funds to credit-worthy small businesses. along with the other supervisory agencies, we have issued guidance to bank and examiners, emphasizing that lenders should do all that they can to meet the needs of credit-worthy borrowers, including small business. we have also conducted extensive training programs for our bank examiners with the message that lending to viable small businesses is good for the safe tu and soundness of our banking system as well as for our economy. we continue to seek feedback

from both banks and potential borrowers are about credit conditions. for example, over the past six months, we have convened more than 40 meetings around the country of lenders, small business representatives, bank examiners, government officials and other stakeholders to exchange ideas about the challenges faced by small business, particular any obtaining credit. a cap stone conference on addressing the credit needs of small businesses was held at the board of governors in washington last week. this testimony includes an addendum that summarizes the finding of this effort and possible next steps. the federal reserve's response to the financial crisis and the recession has included several components. first in response to the periods of intense illiquidity and disfunction in financial mark that is characterize the crisis, the federal reserve undertook a ring of measures and sit up emergency programs designed to provide liquidity to financial institutions and markets in the form of fully secured, mostly short-term loans. over time, these programs helped

to stem the panic and restore normal functioning in a number of key financial markets, supporting the flow of credit to the economy. as financial markets stabilized, the federal reserve shut down most of these program during the first half of this year and took steps to normalize the terms on which it lends to depository institutions. the only such programs currently open to provide new liquidity are the recently re-established dollar liquidity swap lines with major central banks that i noted earlier. importantly, our broad-based programs achieved their intended purposes with no loss to the taxpayers. all of the loans extended through the multiborrower facilities that have come due have been repaired in full with interest. in addition, the board does not expect the federal reserve to have incur a net loss on any of the secured loans provided during the cries cities to help prevent the disorderly failure of systemically significant financial institutions. the second imaginer component of the federal reserve's response to the financial crisis and recession has involved both standard and less conventional

forms of monetary policy. over the course of the crisis, the fomc aggressively reduced its target -- indicated in the statement released after the june meeting, the fomc continues to anticipate that economic conditions, including low rates of resource utilization, sub died inflation trends and stable inflation expectations are likely to warrant exceptionally low levels of the federal funds rate for an extended period. in addition to the very low federal funds rate you the fomc has provided monetary policy stimulus through large-scale purchases of longer term treasury debt, federal agency debt and mortgage-backed securities a range of evidence suggests that these purchases helped to improve conditions in mortgage markets and other private credit markets and put downward pressure on longer term private borrowing rates and spreads. comp bartd period just before

the final crisis, the systems portfolio of domestic securities has increased from about $800 billion to $2 trillion and has shifted from consisting of a 100% treasury securities to the having almost two thirds of its investments in agency-related securities. in addition, the average match your churity of a treasury portfolio has nearly doubled from 3 1/2 years to almost 7 years. the fomc plans to return the systems portfolio to a more normal size and composition over the longer term and the committee has been discussing alternative approaches to accomplishing that objective. one approach is for the committee to adjust its reinvestment policy, that is, its policy for handling repayments of principal on sec dwroirts normalize the portfolio over time. currently, repayments from agency debt and mbs are not being reinvested, allowing the holdings of these securities to run off as the payments are received. by contrast, the proceeds from maturing treasury securities are

being reinvestmented in new treasuries with similar maturities. at some point, death may want to shift investments from maturing treasury sec dwroirts shorter term issues as so as to gradually reduce the average match choifrt treasury holding toward precrisis levels while leaving the aggregate value of those holdings unchanged. at this juncture, however no decision has been made. a second way to normalize the size and composition of the federal reserve security portfolio would be to sell some holdings of agency debt and mbs. selling agency securities rather than simply letting them run off would shah ringt portfolio and return it to a composition of all treasury securities more quickly. fomc par cis pants broadly agree that sales of agency-relate second yourities should eventually be used as part of the strategy to normalize the portfolio. such sales will be implemented in accordance with a framework communicated well in advance and

will be conducted at a gradual pace. because change notice size and composition of the portfolio could affect financial conditions, however, any decisions regarding the commencement or pace of asset sales will be made in light of the committee's eval wigs of the outlook for employment and inflati inflation. as i noted earlier, the fomc continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. at some points, the committee needs to remove mod tary -- to prevent the buildup of inflationary pressures. two tools used to drain the system will be ready when

needed. the federal reserve is putting in place the capacity to conduct large repurchase agreements with an expanded set of counter parties much second, the federal reserve has tested a term deposit facility in which instruments similar to certificates of deposit could be auctioned to depository institutions. of course, even as the federal reserve continues prudent planning for the ultimate withdrawal of extraordinary monetary policy accommodation we also rell recognize that the economic look look remains unusually uncertain. we will continue to carefully assess ongoing financial and economic developments and remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability. last week the congress passed landmark legislation to reform financial system and financial regulation and the president signed the bill into law this morning. that legislation represents significant progress toward reese deucing the likelihood of

future financial crises and strengthening the capacity of financial regulators to respond to risks that may emerge. importantly, the legislation encourses an approach to supervision designed to foster the stab bit of a financial system as a whole as well as the safety and soundness of individual institutions. within the federal reserve, we have already taken steps to strengthen our analysis and supervision of the financial system and systemically important financial firms in ways consistent with the new legislation. in particular, making full use of the federal reserve's broad expertise in economics, financial markets, payment systems and bank supervision, we have significantly changed our supervisory framework to improve our con ol supervisor of elections dated supervision of large, complex bank holding companies and we are enhancing the tool wes use to monitor the financial sector and to identify potential systemic risks. in addition, the briefings prepared for meetings of the fomc are now providing increased coverage and analysis of potential risk for the financial

system, thus supporting the federal reserve's ability to make effective monetary policy and to enhance financial stability. much work remains to be done, both to implement through regulation the extensive provisions of the new legislation and to develop the macroprudential approach called for by the congress. however, i believe that the legislation, together with stronger regulatory standards for bank capital and liquidity now being developed will place our financial system on a sounder foundation and minimize the risk of a repetition of the devastating events of the past three years. thank you, mr. chairman, i would be pleased to respond to your questions. >> thank you very much. and what i will do is i will ask the clerk to try seven minutes a round. again, i won't be banging down the gavel too hard but if people try to keep them in that timeframe it would be helpful, since we got a pretty good turnout, if we can. let me begin, raise the issue,

senator shelby made note of the recent crisis in europe. let me start out there as i can, the european union announced its stabilization program in may, you briefed us, in fact, here on the committee on the fed's decision to temporarily reopen dollar swap lines with the acb and other foreign central banks to support liquidity in the dollar funding market he is. clearly, the fed identified a need to protect american economy from events in europe. with continued downgrades of european of rinse, i noticed ireland the other day they downgraded a bit, european bank stress test results expected this week and again there has been a lot written about that, what -- how successful they may be and uncertainty about future economic growth as well, what challenges lie ahead energy your view, for our -- the photograph efforts you and your counterparts in europe have made to stabilize the financial system? >> well, senator, as i mentioned, concerns about the european situation created some

problems in financial markets this spring, which spilled over into our own financial markets as well. the europeans have been quite aggressive in addressing these problems. as you know, they -- together with the imf have provided a financial program for greece and they have collectively developed a stabilization fund of 500 billion euros, together with additional funds potentially from the imf to be used to ensure that countries under fiscal stress will be able to make their airport paimts tonight finance their governments. and indeed, in the last few weeks, we have seen some of the troubled governments being able to go back to the market, which i think is encouraging. the federal reserve liquidity swap lines were a relatively minor part of that effort but i think they have provided some assurance that dollar funding

markets will be sufficiently liquid and have reduced the risks to our own financial system. the other thing, of course, the europeans are doing is trying to duplicate the success of the american bank stress tests of a little more than a year ago by conducting a set of stress tests whose results are supposed to be released later this week. of course it remains to be seen how effective those stress tests are but it's clear that the europeans are very focused and very committed to addressing these issues and my sense that the financial market concern about european problems has diminished to, some extent recently, which is in turn, of course, helpful to our economy, but we will, at the federal reserve, of course, continue to be in close contact with our colleagues in europe. i'm going to europe for this weekend. and we will continue to monitor

developments and their potential impact of the u.s. economy. >> i appreciate that and i think the committee probably as a general matter like to be kept abreast and informeds as to your observations regarding their progress. obviously, a lot of difficulty while they share common currencies and so forth, the differences in fiscal policies and fiscal policies, resolve these in a united fashion more difficult it seems, but i hope your assessment is correct. let me, if i can, raise an issue that's been -- and it is not your job, obviously, to get into policy debits, specific legislative matters. i'm not going to try to pin you down on that but we are going through the debit here now, obviously, we have got slow growth, high unemployment, low interest rates, low inflation. again, to obviously, we have got deficits in an amount. so the debate back and forth as to where's the balance, how do we strike here, an austerity program or try to stimulate some economic growth in the country at the same time and how do we do that? you were a student of the depression era and many have

written about the failure of the new deal administration after the first couple of years to not sustain a policy of economic growth. in fact, following an austerity path, if you can, using that language and those have argued that use because they did that they delayed or caused a second, more delayed recovery during that period of time. give us your take on this as a general matter. and again, i'm not asking you to engage in debate about specific budget "and the like, but stepping back, sort of the macroapproach here. what do you advise us in the legislative branch as to how to approach this debate because obviously it is tearing us a bit apart up here and we need to strike some balance on all of this deficit rezux clearly a goal we have to focus on but also simultaneously we have to try to stimulate economic growth in the country which requires some government activity as well. >> mr. chairman, you know, this has been very controversial an a lot of debate on both sides.

on the one hand, and i will come to become a kind of recommendation, but on the one hand, you have folks who are focusing on the need for government support in the current economic environment. obviously, in the united states and many other countries waevg great deal of excess capacity, private spending is weak and so the argument is that additional fiscal support might be helpful to the economy. on the other side, you have people who are concern about the longer term deficit situation, worried that financial markets might respond in an adverse way, or confidence might respond in an adverse way, two signals that -- any government is not committed to long-term fiscal sustainability. so there is some truth to both of those arguments, i think the right way to combine them, if i may is to think about the entire trajectory of fiscal policy. i do believe that at the current moment, that the large deficits,

as unattractive as they are, are important for supporting economic activity and they were important also in restoring financial stability and so i think they were justified in that respect and i would be reluctant to withdraw that support too precipitously in the near term. at the same time to maintain confidence and keep interest rates low, it's very important that we have a strong and credible plan for reducing deficits over the next few years. so, if we think of this instead of either/or, but a combination and think about the trajectory, the best approach in my view, is to maintain some fiscal support for the economy in the near term, but to combine that with serious attention addressing what are very significant fuss cal issues for the united states in the medium term. >> let me pick up again, because you and i have chatted over the years and i have been very impressed with some of your writing about the long-term

effects of unemployment. we have a tendency to see these matters, got a certain level of unemployment, things happy to get people back to work and that is obviously the goal. but talk to us about the long-term effects of unemployment. what worries you about that, in a brief comment, if you would? >> well this is part of the reason why i'm -- i am concerned about the current situation and why i make reference in my remarks to the fact that currently, about half of the unemployed have been unemployed for six months or more. in terms of long unemployment, this is the worst labor market earthquake the worst episode suns the great depression. of course, long-term unemployment is very stressful for the unemployed and their families, being without income or reduced income for such a long period of time. but even from the perspective of economic growth and stability, as we have seen in other countries, people are unemployed for a long period of time often see their skills at trophy or see their skills being irrelevant to the new economy to

or economic -- the economic wait economy is developing or they may become demoralized, may become separated from the labor market and indeed, long-term unemployment sometimes becomes essentially long-term unemployment. not only for the sake of the unemployed and the short-term strength of the economy but also for our long-term viability, international competitiveness, i think we need to be very seriously concern about the imp plic kifgs long-term unemployment for skills, for labor force attachment, for long-term earnings and employment opportunities. >> i appreciate that. that is the point i was trying to make here and there is -- your point is there is enough empirical data on this and other examples that have occurred, that is not mere speculation about what can happens in terms of job skill levels and the ability of people to recover and get back on their feet, not just individually but overall, the economy of a county affected by

t. >> a good bit of research on this question. >> thank you for that let me turn to senator shelby. >> mr. chairman, we all, i think, agree that long-term unemployment problems is a cancer dealing with our economy and people. a spiraling deficit and accumulating debt like we are going through now is also a real problem. yet is how do we balance that and how much time do we have with, isn't it? >> senator, as i responded to the chairman, i absolutely agree that this is a concern, that if there is a loss of confidence in the financial markets, that the united states is committed to and will achieve fiscal sustained ability you then the implications could be bad, not only for our long-term growth prospects but they could actually hurt the current

recovery from higher interest rates, for example, higher inflation expectations. so it is very important to demonstrate, as best we can, given, of course, you know, the difficulties of committing future congresses and so on du to demonstrate as best we can that we are serious about addressing long-term issues. i don't think it is either/or. i think you really need to do both.long-term issues. i don't think it is either/or. i think you really need to do both. >> but accumulating debt after debt each year is not good for anybody in this country, is it? >> i agree. >> short term, right? >> if the debt continues to accumulate and becomes unsustainable, as the congressional budget office believes our current policies are then the only way that can end is through a crisis or some other very bad outcome. >> do you, as chairman of the fed, believe that our current continuing to have these big deficits adding to our debt is unsustainable? >> i do.

and i think -- that view is widely shared. >> thank you. mr. chairman, the jin minutes of the f to omc, federal open markets committee stated, and i quote, "the committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably" with. aside from take the federal rounds rate and interest rate paid on serves zero, it is not clear to me what further policy stimulus would mean. if further stimulus were to involve more asset purchases that you alluded to by the fed works the fed by refresh roirs try to channel credit to specific segments of the financial markets, such as housing or perhaps even municipal debt? >> senator, think is important to preface the answer by saying monetary policy is currently very stimulative it, as i'm sure you are aware. we have brought interest rates

down close to zero. we have had a number of programs to stabilize financial markets. we have language which says we plan to keep rates low for an extended period and purchased more than $1 trillion in securities. so certainly, no one can accuse the fed of not having been aggressive in trying to support the recovery. you know that being said, if the recovery seems to be faltering, then we at least need to review our options, and we have not fully done that review and we need to think about possibilities, but broadly speaking, there are a number of things that we could consider and look at. one would be further changes or modifications of our language our framework, describing how we intend to change interest rates over time, giving more information about that. that's certainly one approach. we could lower the interest rate we pay on serves, which is currently one fourth of 1%. the third class of things has to

do with changes in our balance sheet and that would involve either not letting securities run off, as they are currently running off, or even making additional purchases. we have not come to the point where we can tell you precisely what are the leading options are. clearly, each of the options has got drawbacks, potential costs. so we are going to continue to monitor the economy closely and continue to evaluate with the alternatives that we have, recognizing that, as i said, that policy is already quite stimulative. >> some people believe that the fed is running out of options. and what you just said, you believe you still have some options, depending on the circumstances? >> i think we do still have options, but they are not going to be conventional options and so we need to look at them carefully and make sure we are comfortable with any step that we take. >> i want to get into the area of small business lending. mr. chairman, i hear reports of

a credit crunch of small business and -- calls by other people to -- jump start lending in this area. i have two questions relating to small business credit. first is there some market failure or regulatory failure inhibiting the flow of small business credit which require ares even more government intervention? secondly, is any slow down in small business credit because of weaker demand, because of a deterioration in financial conditions of small business and values of the collateral that they hold or because of regulators somehow inhibiting or preventing good loans from being made? in other words, do we need -- do we know the definitive reason of the slowdown in credit flow to small businesses? what's your take? >> we have done a great deal of work on this senator and the addendum to my remarks gives you some of the findings of my

meetings around the country on this issue. certainly, a significant part of the reduction in lending to small business is the result either of lower demand, because firms don't want to expand, they don't have the financial demand to -- >> -- perhaps? >> sorry? >> uncertainty. >> uncertainty and other factors. in other case, the firm might like to expand but it doesn't -- its collateral value has decline and it is financially weaker and no longer viewed as being credit worthy at the current credit standards. so, there are certainly a number of reasons why the demand for credit or the attractiveness of some borrowers are has declined in this recession. at the same time, we want to be sure that every credit-worthy small business or borrower is able to obtain credit. many you shall us to look at, as

regulators, one we are particularly concerned about regulators might be putting their thumb on the scale on the wrong side and being excessively cautious about not letting banks make marginally risky loans and not take nothing account the importance of our economy that credit-worthy borrowers receive credit. much of our effort has been focused on instructing and training our examiners to take a balanced approach, where they both are taking appropriate caution but also making sure that credit-worthy borrowers can get credit. >> my time's running -- had run. gse debt reform. do you believe that the debt of fannie and fred i did backed by the full faith and credit of the united states of america? >> well, not technically or legally but -- legally as far as -- i don't -- i don't know what the legal status is. i don't think it has been given that status by the congress. but of course, the -- >> believe the market has given

that status? >> the market, i think, takes appropriate comfort from the fact that there is a considerable amount of appropriated funds backing up those two companies. >> what risk does the fed face in holding gse debt? >> well, for exactly the reason you just raised, that the treasury is providing backstop support for the mortgages. we are taking essentially no credit risk. there is some interest rate risk, if interest rates were to rise sharply. but on the other side of that with the very low cost of funding, we have actually been earning a fairly high income from our holdings and remitting that to the treasury. >> lastly, do you believe that it's important for congress to act quickly to reform gses and provide certainty and clarity to our nation's housing policies? >> and i have said so before and i agree with that senator. >> thank you, mr. chairman. >> thank you very much. senator reid? >> thank you very much, mr.

chairman. thank you to chairman bernanke. as you pointed out, the president signed the financial reform bill this morning and there were many that thought we could not do it get it passed. but tribute to senator dodd's leadership, actually the collaboration of everyone on this committee, including many of my republican colleagues. people thought we couldn't do it and i think there is a sizable population out there that believes that the regulators might undo much of what we've done. so could you give us a -- your sense of how procedurally and subst substantively you and your federal regulators will prevent or ensure that the regulation community doesn't have an undue influence with on the rules and regulations that are going to be develop? >> well, speaking for myself and the federal reserve, we think that the framework in this bill is very constructive. it addresses many of the gaps

and problems that we saw in the crisis. and for our part, you know, we intend to write rules that will implement the intent of congress and that will be sufficiently tough to ensure that the risk of another crisis is very low. a lot of the -- a loft effectiveness of this bill you of course, depends on the implementation, not just the rule write bug the actual supervision and execution of those rules and we are taking this very seriously. we are, in seriously. we are, in fact, restructuring our entire supervisory framework both intellectually and in management terms to make sure we are able to address risks to the broader financial system as this bill envisions and that we're able to support the fdic in its winddown function and the cftc and sec in their oversight of

central counter parties. we are very committed to making this work and think it gives us the tools that will allow us to do that. >> just to follow-up, i think there's a high degree of skepticism and you go into this i assume acknowledging that in the public so that your efforts has to be transparent, not only the substance but the appearance of the deliberation is not influenced by anyone. >> that's absolutely right. we are working with international colleagues on liquidity standards which i think will be an additional strength of the package. >> mr. chairman, i've been made aware and others have too that there's roughly $2 trillion on the balance sheets of american companies that is not being deployed in new product research, investment, expansion of jobs. can you give us an indication of

why that's happening and also it would seem to me that this recovery is going to either be led by very aggressive federal policy to support employment or private policy, and the private monies there but it's not happening. >> well, the private, larger corporations in particular, have had a significant rebound in their profits. they have been able to refinance their debt at quite favorable terms, given the low interest rates in corporate bond markets, for example. and, of course, they have been reluctant to make large capital investments in an environment where they have a lot of excess capacity. for all those reasons and also for reasons of caution, those cash balances have built up. my presumption is that as uncertainty declines, as firms become more confident in the

recovery, that they'll deploy those funds, and that will abimportant source of growth for our economy. >> mr. chairman, let me talk about another area which could be and in some cases already a potential drag on the economy. that is state and local governments. who are being faced with significant budget challenges. are you concerned that they might, indeed, collectively counteract what you and what we are trying to do to move the economy forward? >> well, as you know, the federal government has already provided a great deal of supported to the state and local governments. notwithstanding that, they are still in a cutting mode and seem likely to cut several hundred thousand jobs going forward. so that is a drag on the economy. no question about it. i suppose that one small piece of good news is that municipal bond markets are functioning

reasonably well and most states are able to obtain funding if they need it. but it certainly is one of the factors which is reducing the recovery speed we're experiencing. >> a final sort of area of concern is, you have spoken about, my colleagues have spoken about the need to address the deficit and the need to do things that will not contribute to the long-term deficit. is it useful to think about those policies that add to the structural deficit versus those policies such as unemployment compensatixecompensation that d to the deficit that will be made up as the employment recovers and the economy recovers? in that regard, proposals to once again extend the bush tax cuts what i think would add to the structural deficits since

they're unconditional, but temporary assistance to states and workers would not add to that instruct yarl deficit. is that a fairway to look at it. >> it's useful to distinguish cyclical and structural deficits. right now some fiscal support for the economy is probably a constructive thing. whereas over the medium term we need to reduce our fiscal deficits which is consistent with lowering the structural component of our deficits. but i would urge you if possible not just to leave the structural deficit alone. it's too high and anything we can do to reduce the instruct yarl deficit not just leave it alone would be positive for the markets and make it easier for the markets to accept any shorter term actions you might want to take. >> the unconditional extension of the bush tax cuts would add further to a structural deficit

that's much too high at the moment. is that your opinion? >> well, the cwo would do that holding everything else constant. but i don't want to be interpreted as recommending one policy or another policy. as you know. >> your colleague was not that reticent. your predecessor. >> i don't think it's really my place to tell congress which specific tax and spending policies to choose. i prefer to address the broader trajectory of fiscal stimulus. >> well, the trajectory would be made better or worse if those provisions with were extended without condition? >> if no other changes were made, it would increase the cyclical or maintain the cyclical and also increase the structural. there's always the possibility of taking other measures to offset whatever you do on any particular program. >> thank you, mr. chairman. >> thank you, senator. senator bunning. >> thank you, mr. chairman,

thank you. chairman bernanke, thank you for being here. there's so many things i'd like to ask you. first of all, the jovt federal reserve is monetary policy. i want to clear that up. >> that's part of our job but we also have financial stability responsibilities in my view. >> but the main thrust of the federal reserve is to conduct the monetary policy of the united states of america. >> i don't think it's the exclusive -- >> i didn't say it was exclusive. >> it's very important and unique to the federal reserve. >> if i got into the monetary policy, you'd get mad. as a congressman. >> i think it's important for the fed to have independence in making monetary policy. >> i just want to emphasize something that mile ranking member said. several news stories in the last

few weeks, senior federal reserve officials, presumably you or someone close to you, have explained three actions the fed could take to boost the economy if conditions get worse. and you have talked about them. lowering the interest reserve rates to zero. not one quarter but zero. extending the period of time for a near zero fed fund rate. and using proceeds from previous asset purchases to buy more mortgage-backed securities. however, many commentators and even some officials at the fed doubt that these actions would have much of an impact. do you share their concerns, and what are we going to do if these options do not work? are you out of bullets? >> well, i don't think so.

we need to continue to evaluate those options. as i said, we're not prepared to take any specific steps in the near term, particularly since we're still also evaluating the recovery and the strength of the recovery. but i do think that there is some potential for some of those steps to be effective and we'll continue to look at them, recognizing your concerns, you raise the issue of credit allocation, for example, with the mbs and a number of members agree with your concern. >> new evaluatie ining summonta policy in discussion of your own testimony, you said that you were looking for 3 to 3.5 in 2011 for growth and 4 to 4.5 in 2012. is that accurate? >> i don't think those were quite the numbers i had.

>> i'm sorry. i wrote them down. >> i think it's 3.5 to 4.5 i believe was the number. >> that's close. over the two years? >> for 2011 to 2012 it, yes. >> thank you. okay. and 7.5% unemployment by the year 2012? >> 7. -- by the end of 2012, 7.1. >> 7.1, okay. you know, in this reg bill, we've given the fed a lot more power. you know, in 1994, we gave the fed a lot of power. we gave them total control over bank mortgages and mortgage brokers. 1994 law, we passed this congress. and you know for 14 years, they

didn't write a regulation. not one. not till you did after your second year in office. now, if we give you all that power in this new regular bill that has just passed and you sit on your hands for 14 years, it isn't going to do us any good, is it? >> you're absolutely right. >> well, i'm really concerned because we're at approximately 90 bank failures this year in the united states of america. 90. i don't know what it's going to -- you know what, august, september, october, november, and december will bring. but the fdic has to resolve those banks. or the comptroller of the currency or whichever is the regulator of that bank. now, we've handed you a job in my mind that's damn near

impossible. you're going to have to pick and choose who's too big to fail, you and a group of so many people, but you particularly. and it's a subjective view. it's not -- it doesn't say these are the categories. it says that you should decide who is too big to fail. is that accurate? do you accept that as an accurate review of what's in the. >> no, senator, what we have to determine is which firms are systemically critical but they will be subject to this resolution regime, which means that they will fail and creditors will lose money. >> but it's subjective, it's not objective. >> i think it will be important for us to develop as many criteria, clear criteria as we possibly can. obviously, it will be partly subjective, yes. >> okay.

you know r, we're $13 trillion going to $14 trillion in our debt. and if you count agency debt, that's public debt. if you count agency debt, just at social security we're at $1 trillion. so if we add that to the 13, agency debt plus public, that's $14 trillion already. this year, we're not going to have a $14 trillion gdp. not unless we have an unbelievable recovery in the second half of this year. isn't that the pretty close to where greece was? >> well, i think that first of all, that the adding the gse debt is not entirely appropriate because on the other side of the balance sheet are assets, mortgages that are worth something. >> but don't we have to make

good those trust fund mortgages like social security? don't we have, as a government, have to make good on those pieces of paper or up in west virginia? >> but if we have 5 or 10% losses, we'll still have 90 or 95% assets there. so it's not as if we had borrowed the $5 trillion of the outstanding mbs and had no assets to show for it. >> but we did spend the money. >> we spent several hundred billion but not $5 trillion. >> well, as the chairman of the social security subcommittee when i was there they were spending every penny they got from the social security administration for other purposes. that means that we have to make up the difference. i just am worried where we're heading. and i'm worried about the tools that you have to counter where we're heading.

i surely don't want us to not recover fully from this recession. because that's -- i mean, lack of jobs is the secret. we've got to create jobs, small business creates jobs. and if this congress doesn't act, we're not going to create those jobs. so i wish you good luck. thank you. >> thank you, senator. >> let me say here, the tools that existed two years ago, we would be a lot more vulnerable today than we would without this. so i thank you. senator bayh. >> i just want to take this moment to thank you for your service to our country once again and to say it's a pleasure working with you on some of these issues. >> thank you. >> my first question, there have been a lot of the comments about our budget deficits and debt which is accurately described as unsustainable. i'd liking to asking about

another unsustainable disequilibrium and that is the surpluses in china and other parts of the developing world. many observers believe it was in that gave rise to a glut of global capital that undergirded the asset bubble that led to some of the problems that we've seen. there were some signs it was beginning to be self-correcting. savings rates in our country were going up, consumption. china is rising. but the most recent data suggests that perhaps the imbalance is still alive. how concerned about this should we be? and given the apparent return to the status quo in terms of the gap, is this going to be self-correcting or do other measures need to be taken? >> the current account deficit did drop from 6% of gdp to 3%. it has increased slightly.

it's not going to go back to where it was in the medium term. we have made progress in that respect. to continue with the progress we need to continue to have global adjustment. that essentially means that surplus countries like china and others need to increase their reliance and domestic demand and where appropriate have flexible exchange rates and the united states has to do its part and this ties back to your first comment about sustainability which is that in order to reduce our current account deficit, we have to increase our national saving, better fiscal position as part of that, higher household and business saving as art of that. so that is an important imperative one that the imf and other international agencies continue to focus on and i absolutely agree with you that if the current account deficit were to return to 57 to 6% of gdp, that would be a very

worrisome situation. >> let's hope we can get bipartisan cooperation in getting our fiscal house in order. let's hope the chinese will continue to move in the area of currency flexibility. as you look out to the future, you think that 3%, is that going to be about where it will be, and if so, that's clearly not 5 or 6, is that sustainable at a 5% rate. >> it's just a forecast. >> hopefully that doesn't augment the return of something more. >> we don't focus on bilateral trade deficits, u.s., china. we look at the overall. >> my second question has to do with the greek debt crisis once again. and as you pointed out the europeans moved very aggressively and things seem toll have calmed down a fair amount there. i look with some alarm, even if they implement all these austerity measures and you can see there's a fair amount of political turmoil, it looks as

if they're still going to be 130% of debt to gdp ratio even after they implemented all these steps. just putting my political hat on, it could be hard for them to go substantially beyond that. that still looks like it's going to be hard to sustain a situation like that. so i don't expect you to comment upon the likelihood of restructuring or anything like that, but you mention that had that whole episode while it caused some disturbance, we've now kind of gone beyond that. my question would be, in the event of an orderly restructuring of greek debt at some point, i assume that would only have a marginal impact upon our own markets? >> what i think is important is the next few years, the europeans have provided enough funding to assure nofr restructuring, no default. and that's important because we remain vulnerable in our recovery and in our financial

markets to kind of stress that that would cause. so i am encouraged by the commitment of the europeans the large amount of funding. the other side of their program, though, is also to create what the imf would call conditionality which is that they are strengthening they're within european mechanisms for achieving fiscal sustainability within their members. so the countries that receive assistance will also be under a lot of the pressure from their peers within the eu or the euro zone to make appropriate adjustments. >> that actually leads to my final question. i'll make one comment i don't expect you to respond to. but a skeptic might look at this and say what was really at work was a choice between an orderly structuring or disorderly restructuring that could have been destabilizing. the europeans are attempting to

recapitalize their banks and get them in better shape for the eventual haircut that melee down the road. that's an observation some have made and hopefully the world economy will be in a stronger positioning to be able to absorb all that you will if something like that happens. we had a great hearing yesterday and thank you for making mr. tarily local available. his testimony was candid, insightful, and helpful. since we passed our financial regulatory response to the crisis, the importance of global harmonization and convergence about enforcement mechanisms and all that. i'm sure particularly the germans wish they had focused on enforcement mechanisms with regard to government fiscal policy. and so mile question to you, chairman, my final question would be, how important is it to our country that we continue to have you know, harnization of standards than there are enforcement mechanisms in place to ensure those standards are

abided by most of the time because that's going to be important to avoiding a recurrence confident crisis and secondly, there are competitiveness aspects that could affect american institutions. >> it's very important. we're not going to having perfect harmonnization because countries have different banking and financial systems. but we are making good progress in negotiating with our colleagues a strengthening of capital liquidity standards that will help make our banking system more stable in the event of another stress event as we recently saw. we don't really have binding mechanisms to enforce the agreements across borders. every country applies the bazzal standards within its own borders according to its own decisions

but we do work closely together and an apply peer pressure and other mechanisms to try to keep the standards very similar and indeed, our very key objective over the next few months is to come up with an international agreement on capital liquidity standards that will both be tough in the united states is leading the way in looking for a very tough set of rules, but one also that will be acceptable and agreed upon across the major countries. >> capital and liquidity standards resolution protocols, how we handle derivatives, it's important we harmonize as much as possible. otherwise, we could see a repetition of the greek phenomenon, not in the sovereign debt situation but when it comes to financial regulation. so we've taken some major steps here. if we're going to get the full truths of that, it's important as we get as much of the rest of

the world to go along. thank you for your service to our country. >> thank you, senator, very much. on that point, we had regulatory arbitrage. could you end up with sovereign arbitrage in a sense if we don't try and harmonize those rules. senator corker. >> thank you, mr. chairman. i was thinking last time federal reserve chairman was in and today the difference between the wait federal reserve was being looked at six months ago and the outcome as it treeltsz this regulatory bill. i should have spiked the ball before he sat down but i guess federal reserve chairman don't show emotion in that way. but i know things have changed tremendously from that time. i certainly appreciate you coming back and would want to talk to you a little bit about the report that you gave. obviously was disappointing to the markets.

i think people are a little concerned about where we are. do you discuss much in your meetings the probability of a double dip and can you give us some sense as to the future there? >> well, we certainly try to talk about all contingencies and the committee has identified some downside risks to the recovery, including problems of credit availability, some business, some of the issues we talked about, the high level of unemployment which in turn has ached consumer confidence. and their willingness to spend. so there are certainly some risks. but i'd like to emphasize that our forecast, our expectation is still for a moderate recovery. the numbers i gave today 3, 3.5% depending on the horizon, which will overtime bring down unemployment rate. so that's still our main scenario, that the economy will continue to grow and that the

final demand, private final demand will take over from invent tritt building and fiscal policy as the drivers of growth. >> the ranking member scud a question. obviously sort of the customarily tools that you have or you've used in the past for easing. low rates i think right after your testimony today that the ten-year treasury went to 292, rates were low. the fed fund target is low. a lot of the sort of customary things are kind of gone. and so he asked the question about what you may be thinking about, and you mentioned some nonconventional things. i know that then tul alluded to some projections into the future that you all might use to maybe spur things along. i know in a 2002 speech, you talked about the ability of the fed to create inflation. and i'm just wondering what you

were saying in essence to the ranking member and what you might be referring to as it relates to projecting into the future. >> well, my actual speech pointed out that there were other things that the federal reserve could do besides lowering the overnight interest rate to try to stimulate the economy and those things included making commitments or statements about the length of time that rates would be low, they included purchasing securities, they included intervening in financial markets that were dysfunctional as we did during the worst parts of the crisis and those are all things that we actually did in the last couple of years. and i continue to believe that there are additional steps that could be taken but obviously we do need to think about them very carefully and also to evaluate the state of the economy before taking any further action.

>> what would be the hurdle or threshold that you would have to cross over before you'd begin tightening? >> well, that's certainly got to be a committee decision, but i would say that certainly one important criterion would be weather the recovery is sustainable, whether it's fading and not being self-propelling. if the professor is continuing, at a moderate pace, then the incentive to take extraordinary actions would be swa less but certainly we would want to make sure that the economy continues to move back towards a more normal state of resource utilization. >> so i know a lot of people up here have tried to sort of take you in whatever direction they think they'd like to take you as relates to the deficit. i want to sort of ask it in a neutral way. and that is, look, we've got a debt commission right now that's

looking at long-term issues. it's bipartisan, no doubt in, my opinion, the administration has added to our concerns in that regard but if you really look at where our debt is, a lot of that's just been building for years and to -- because of many entitlements and other things. as a matter of fact, when you look where we are over the next ten years, regardless of what the factors are, i think the american people look at deficit reduction almost academically today and yet, in the near term, we're talking about drag conian things having to occur. i know erskine bowles talked about getting to 21% of gdp. some of us would like to see it at 18 to 20 as it relates to expenditures. even getting to that level is going to take draconian steps. my question gets back to monetary policy. i think you all know full well where we're headed and i think the american people haven't really digested what it means

for to us get our house in order. i'm not sure if any of us really have digested fully what that means. how does that impact the decisions that you all make as it relates to monetary policy? i mean, you know that's coming. you know it's going to be draconian to deal with it in an appropriate way. how is it affecting your internal discussions as it treats monetary policy. >> well, it's a risk factor. depending on how markets respond to developments in the debt and deficit, it could potentially, i'm not saying this is likely at all, but it potentially could be a drag on recovery if interest rates were to rise, for example. but in the near term, we're mostly focused on the business cycle, the state of the economy, the level of inflation. i think for the most part, i think of these fiscal issues, they're very, very difficult but i think of them as being medium

term. for example, the objective of the commission is to get the deficit down i think to about 3%, 3.5% by the middle of the decade, something like that. and that's the kind of objective we want. we want to get the deficit down to a point where the ratio of debt to gdp sort of stabilizes and that would i think be very good for confidence in the markets. >> evan bayh mentioned the hearing it yesterday we truillo. he did a very good job. we had somebody come in dealing with a lot of foreign ministers and others with g-20. somebody i think respected by both sides of the aisle. one of the things he mentioned was the fact that there was a lot of discussion by people in other countries regarding the legislation that we did just pass. and the fact that many of them

saw the opportunity for jobs to migrate out of this country into theirs or for their particular institutions to fill in the gaps, to be able to take on additional business because of some of the things that we've done. i know that you and others are going to attempt to assure that we have sort of a worldwide set of regulations that work together. one of the things he specifically spoke to was the volcker rule. there was a lot of the resistance around the world community regarding that. i'm just wondering what your thoughts are on that and you know, is there a concern in your mind today about us not achieving that and the fact that we may, in fact, lose financial system jobs here in the country. >> quickly. >> the volcker rule was i think constructed in a reasonable way that it allows continued hedging and market making activities which are critical activities

for banks and other financial institutions. i think it's evident that the european banks will not adopt the same rule because they're universal banks, they have a different mode of operation. but our banks have been able to compete with european and other banks effectively even though there have been differences in powers and other requirements. i don't see a major change in that competitiveness. >> senator cochran. >> thank you very much, mr. chairman. i want to add my welcome to chairman bernanke back to the committee. we share a commitment to improving the lives of working families by better educating, protecting and empowering consumers. this is a great day for america. and the american people. don frank, wall street reform and consumer protection act

became law today. one section of the act that will provide economic opportunities for working families is title 12 which authorizes programs intended to improve access to mainstream financial institutions and affordable small loans. please share with the committee the challenges that the unbanked and underbank reasonable doubt confronted with and explain why it is important that more people utilize banks and credit unions. >> well, senator, you've been a leader in this area for a very long time. of course, you're well aware that many people, particularly in many cases immigrants or minorities are utilizing nonmainstream financial institutions like payday lenders

or check karchers. and that frequently, that's very costly for them and may involve getting trapped in a cycle of debt where they have to continue taking out more loans at high interest rates in order to -- in order to pay back their previous loans. so i think it is very important and you and i have had this discussion a number of occasions to bring the broader public into the mainstream financial system not only for deposit buzz for credit, for saving, for all the important functions of the financial system for families. i agree that there are some useful things in the bill that will address that, including financial literacy provisions, as well. i believe the bureau, the consume ker protection bureau will have some education and literacy components.

that's very complementary. the consumer bureau will certainly be active, i'm sure, in trying to eliminate deceptive, misleading advertising or products, but that alone is really not sufficient for people to make the best use after financial markets and financial products. they have to be educated, as well. and you know, i think that's very positive that we're going to increase the commitment to that training. >> thank you. chairman bernanke, as you mentioned, financial literacy, recently enacted law includes a provision to establish the office of financial education within the newly created bureau of consumer financial protection. the office will craft a strategy

to develop and implement initiatives to improve a financial literacy among consumers. what do you think must be done to insure that consumers are able to make informed financial decisions? >> well, as i indicated, i think this is a very important component of consumer protection. and i look forward to seeing the proposals and the ideas that come out of this office. i am very happy about the trend that we see across the country that more and more high schools, for example, are offering financial literacy courses that we have more organizations like junior achievement and others that are working with schools to increase financial literacy. i would have to say in all honesty that there's still some very difficult challenges in figuring out how best to educate people.

if many of the programs that have been tried in the past have not been so successful, based in terms of subsequent testing or are evaluation of people who have taken those courses. so there are some i think some difficult problems figuring out how best to transmit this information and make sure people absorb it. one of the best ways too do that, i believe is to put financial literacy in the context of actual decisions that people make. if people are involved in buying a house or a car, they are much more involved and much more interested in the issues than they are if they're learning something in a high school class perhaps. so counseling and other kinds of support for people making it financial decisions might be a good direction. but as i said, i applaud that will the bill did not neglect financial literacy and i hope that we'll be able to, the

federal reserve will be able to cooperate with the bureau as you know, we have our own programs and we will continue to press education in this area. >> chairman bernanke, many hard-working immigrants send a portion of their earnings to relatives live agbroad. the don frank wall street reform and consumer protection act establishes long overdue requirements for simple, meaningful and relevant disclosures about the cost of sending remittences. additionally, the act requires that the federal reserve work with the department of treasury to expand the use of the automated clearing house assessment and other payment mechanisms for remittance transfers to foreign countries and i look forward to continuing

to work with you on then important issue. almost chairman, what are the benefits of having consumers utilize banks and credit unions for remittances and what must be done to encourage greater use of mainstream financial institutions for sending remitten remittences. >> well, this is an issue i've spoken on in the past. we were just speakinging about ways of getting particularly immigrant communities to get them into the mainstream financial system. remittences which is a very common practice for immigrants who are sending money home is one natural way 0 get people into the mainstream financial system and we have encourages and seen many financial institutions improve their remittence services and use that as a way of attracting the interest of minority or immigrant groups. so i think it's a very useful

way to make the transition from nonmainstream to mainstream finance. so we do support that and you mentioned the ach, the federal reserve has been involved in a long time in developing better ways of transmitting remittents and we have, for example, agreements with the bank of mexico to reduce the cost and increase the efficiency of remittences to that country. so we certainly are eager and prepared to expand those services as is required by the new legislation. >> thank you very much. mr.? >> thank you, senator, very much. >> senator gregg. >> thank you, mr. chairman. it's a pleasure to see you. appreciate the good job you do for this nation and i'm glad you're still independent. obviously, you've brought us some information that is some ways not all that optimistic.

unusual uncertainty, interesting term. let me try to get to a couple of, hopefully, positive certaintities. one would be if we were to do -- if you look at the banking financial institutions today, the major ones, and you reflected in the terms of a stress test, which is what the europeans are going through and what we've been through, do any of our banks have stress test issues of any significance right now? >> i'm not quite sure what you mean by stress test issues. we do do stress tests of 19 of the largest banks in the united states. >> i'm talking the bargest banks. >> some of them were required to raise additional capital, all of which did. since then, large banks have become increasingly profitable. their losses on most categories of loans seem to have peaked. in some cases they're reducing their reserves against loan losses. so the overall capital levels

and the quality of the capital of large banks is certainly much improved over the last couple years. >> the chairman referred to an extraordinary quantity of excess reserves. which would imply that the banking system is fairly aggressively capitalized right now. do you see that as being true, i mean the major banking system. >> well, the excess reserves about a trillion dollars held at the federal reserve, doesn't -- -- it doesn't count as capital. it is really a form of liquidity and it helps to ensure that banks have all the access toes liquid funds that they might need. it's another belt suspender protection for the banking system. they have so far been reluctant to make use ever those reserves, probably because they view either because they view the

demand for credit as being weak or the quality of borrowers as being weak or in some cases because they are uncertain about how much capital they'll need in the longer term and therefore, being cautious about putting their capital to work but capital reserves, of course are, different quantities. >> but they all reflect the strength of the system? >> well, the excess ares in particular which are created by federal reserve purchases of securities in the open market are a strength of the system in the sense that they will insure that banks have easy access to large amounts of liquidity, but it is a separate issue from capital. >> i guess my point is, isn't our financial structure in a pretty good shape right now compared to where it was a year and a half ago and isn't it moving in the right direction? and so when you say unusual uncertainties isn't at least one uncertainty that at least that element of the crisis which we confronteded a year ago has been

settled out and moving in the right direction? >> yeah i took note of that that both the financial system and the markets are considerably in better shape than they were two years ago. >> the -- senator reid referred to $2 trillion of on asset balance sheets across this country in corporate america. and i've heard this refrain a series of time from the other side of the aisle. it's almost as if that $2 trillion should be ours. it should be the federal governments and we should get to reallocate it right now because it's a sitting there. isn't it really a reflection of the fact we are poised for positive activity if confidence can return to the markets and in other words, there are resources for capital expansion and for economic expansion sitting on the books? >> that's right. the availability of funding or credit is not a constraint for

most large firms. >> what is the constraint, of course, is the unusual uncertainties that are facing american business today and small business especially but all business, and that is we're facing a government that's got a long-term debt which is unsustainable and so there's a huge uncertainty as a result of that. in the short-term, it's a two-step, we understand in the short-term there's a stimulus event that's occurring. in the long-term, we have unsustainable debt. is that not true? >> yes. >> and that within the next year, it's the administration's position that major tax events will occur which will significantly dampen the creation of capital, specifically capital gains rates will go up bill 50%. dividend tax rates will go up by 150% on some earners and top rates will go up which dampens

capital formation. doesn't a major tax event like that in a slow economy dampen capital formation? >> well, again, as you know, i don't want to be recommending for or against specific taxes but obviously as you look at the tax code, i hope thinking about this not only in the short term in terms of demand stimulus but also the long-term in terms of efficiency and effectiveness, i hope you look at it the from both perspectives. >> if you tax the formation of capital over the next six to eight months at a rate which is 50% higher than it is today or 150% higher than it is today, you're probably going to slow economic activity. that's rhetorical. and then of course, you have the issue of this federal -- of financial reform bill. there is going to be a period here where people aren't -- a lot of the banking industry is not going to know what sort of capital reserves it should

actually be holding which will contain its willingness to go out and lend where the derivatives market is going to be frothy to be kind because it won't really know where it's ending up and what types of derivatives have to have margins and where under the volcker rule, a large amount of proprietary trading will no longer be available to american banks although it will be available to international banks, all of that will contract development over the next six months to two years as people sort out their responsibilities here? >> these are legitimate concerns. for that reason, the federal reserve is going to do the best we can to get these things resolved as quickly as possible. >> if you want to look what's really causing the uncertainty causing this $2 trillion to stay on the balance sheets, it's the fiscal policies of the government? >> policy uncertainties are no doubt part of it.

but there's also economic uncertainties, uncertainty about how labor markets will evolve, how consumer spending will evolve, and so on. so there's a lot of the uncertainty. and that's certainly an issue. >> if you were doing a formula, i think the percentage that would be assigned to federal fiscal policy would be fairly high for creating uncertainty as a result of our unwillingness to face the long-term debt problems we have, the tax policies coming at us which will penalize capital formation and the uncertainty what sort of capital you have to have on your books in order to make loans in the financial institutions for at least the next six months to two years. >> before i turn to senator brown, i say this to the snaf in the room as well in, consultation with senator shelby, i'd like to be able to

move our nominees for the federal reserve before the -- the committee before the august break. and they were with us a few days ago. if my colleagues have questions for them in addition to what they asked during the confirmation hearing, if you haven't submitted questions i'd urge you to do so that i haven't scheduled anything yet. i'm obviously going to stay in touch with all of you so that we can try and get those done at least out of the committee. i'm not trying to get it out before we leave but at least set it up. i'd urge to do -- to submit questions if you have them to members. senator brown. >> thank you, mr. chairman. chairman bernanke, welcome. last time you were here, you and i talked about manufacturing, its role in our economy that manufacturing typically automotive but manufacturing generally is the most -- the best vehicle, if you will, pardon my pun there to lead us

out of recession. and i mentioned to you that 30 years ago, more than a quarter of our gdp was manufacturing and financial services made up only about a tenth of our gdp. and in the last 30 years, we've seen that flip and know where that got us. it got us a shrinking middle class it, got us our financial crisis in part, not quite that simple but we know if we don't make things in this country that it's a significant problem of getting out of recession and beyond that. also in the last several months, of the international trade commission signed off on more or less, by the president the commerce department made two rulings. one of them on chinese tires, one of them on -- that was last fall. since you've been in front of this committee, they made a ruling on oil country tubular steel. each of those rulings found that the chinese weren't playing fair on subsidies, dumping each of

those rulings, resulted in immediately in american companies and in my part of the country and beyond in tires especially hiring several hundred people. back in december, 2006 and this gets me to comments that senator bayh touched on, december 2006, the u.s./china strategic economic dialogue you described china's currency as an effective subsidy for chinese exporters. you know how many jobs depend on our trade deficit or we hope shrinking deficit, not a lot of evidence for that long-term that i can see although you touchdown on that. but explain whether you believe your words effective subsidy is still in place and whether the g-20's commitment to rebalance growth can be achieved with this apparently slow and gradual appreciation of the yuan. >> related to my answer tones

senator bayh about the current account deficit, there are two tools to address imbalances. one is you exchange rate flexibility. the other is to rebalance your economy so that it's more dependent on domestic demand rather than on exports. on the latter, chinese have made some progress. they will have through fiscal policy and other policy actions they have increased somewhat their dependence on their own domestic demand rather than excessive reliance on exports to some extent. there's been progress in that direction. on the exchange rate, as you know, they have recently begun, again, to undertake this controlled float that they have. obviously it, hasn't move the exchange rate very far and i would agree with you that we would like to see them move it will considerably further so that it would both create a level playing field as your

concern addresses but also from the perspective of china to give them a more balanced domestic economy and more independent of their monetary policy. so it's really something important for both sides. >> one thing china seems to understand better than we will when we make these very, very small baby steps on currency appreciation, is time. 30 years ago joe enlie was asked what he thought of the french revolution. he said he thought it was too early to tell. it seems to me that china plays us out on this currency and continues it is as you say an effective of subsidy. i assume you haven't changed your mind, it's an effective subsidy? you would use that term again? >> yes >> okay. would you agree with many, many economists who have been parts of both democratic and republican administrations that the subsidy is approaches 40%?

>> i don't know exactly. there's a range of estimates that are -- >> would you give me your range of estimate? >> the numbers that you see in the literature range between 10 and 30%. >> many say 40. >> i don't think that's the center of the distribution anyway, but there's a wide ranging. >> 10 to 30, it's 10 to 40, the center's still not 40. you're pretty good at math. what is the range and where do you come -- i want you to be more specific than 10 to something? >> could i come back to you with some numbers? >> could you discuss it a little more now? so the range, sorry i interrupted you, the range is something? >> the range that i have seen through a variety of ways of calculating it, many different ways to try to make this estimate is generally, my recollection, somewhere between 10 and 30%. >> okay. does that mean that chinese

goods sold into this country are underprized 10 to 30%? >> yes, holding constant some of the things like wage wiz have started to rise, for example, but broadly speaking, yes. >> and doesn't that mean that it should be no surprise we have this sort of, this huge bilateral trade deficit with china? >> well, it's a function both of the exchange rate and i'm not disagreeing with you, but it's also a function of savings and investment policies. china has made some progress towards increasing the dependence of its economy on its own consumer. it's own domestic demand. >> if we were to enforce two issues where there have been petitions through the commerce department, one on coated paper and another on aluminum, two fairly major industries in the country, if we were to make the decision and enforce the laws that there is, in fact, as we do

this study that there is in fact, or this investigation a currency subsidy, if you will, that is it fair to assert that absolutely would mean job growth that, it would assume mean job growth oh in our country? >> there would certainly be a short-run effect on those particular industries but i would point out, senator that there's not much correlation over a longer period of time between overall employment or unemployment and our current account deficit that, resources are not being utilized in one industry, they tend over time to be deployed in other industries. maybe there's misallocation across industry. overall, employment doesn't depend too much on the current account. >> that's a story that would ring hollow to lots of cities in my state, large and small alike like your city in south carolina, understanding how capital moves and families can't

often. but if, in fact, and i'll wrap up with this, mr. chairman. i see my time's expired. ffr current accounts account deficit notwithstanding, if the currency, if the currency is so your term, the undervalued currency is an effect of subsidy, doesn't that always mean lost jobs? in a bilateral relationship when trade is going back and forth more back than forth on these comod commodities or these manufactured goods? >> it could mean that there's a transfer of jobs across different industries. it doesn't necessarily mean that overall, again, that jobs are lost. >> but when the overall net effect, you can talk about, it's not like we're losing jobs in paper, or losing jobs in chemicals in steel or aluminum or losing jobs in glass and we're picking it up in other

manufacturing, i mean, the net loss is manufacturing if large, correct. >> what's happening is the jobs are being pick the up in nontraded areas in good and services that we don't trade abroad. >> perhaps. >> thank you. senator tester. >> yeah, thank you, chairman dodd. welcome, ben. i appreciate you being here. i want to step back to some questions that were asked earlier. and you said i think it was in response spoke chairman dodd but it may have been in your opening statement where you talked about the expenditures being made now are necessary to keep the economy propped up and keep it going and correct me if i'm wrong. another question was asked shortly thereafter, you had said that the deficits are unsustainable right now. those team to be competing statements. although they can go together, the question is -- is, from your perspective, the expenditures we're doing right now regardless of the deficit are necessary?

>> broadly speaking, yes. i don't think that there is really much benefit to trying to reduce the 2010 or deficit substantially. i think that that is supporting the economy. those two statements are not inconsistent. it has to do with the time frame. >> i just want to make sure that that's the case because i think sometimes we interpret them as being diametrically opposed when they're not. >> i would much prefer to see consolidation or cuts over the medium term as opposed to >> let me get to that because we all know that large and sustainable deficits, as you pointed out in the past, we're going to have to make tough decisions. we'll have to make some choices, none of which will be easy, whether you're talking about cutting expenditures or increasing the income. what are the indicators that you would use to determine when we start addressing those issues? and is today the day we start or

when do we start? >> well, i think if you look at the -- for example, the cbo and other projections, they have deficit to gdp ratios from 2013 to 2020 in the 4% range. that 4% is the structural deficit. that is too high to keep the debt-to-gdp ratio constant over time. in particular, just to give a specific example, the deficit commission, i believe, has been tasked to bring the deficit down to 3% or 3.5%, something in that range, by 2015. i think we ought to be shooting for a sustainable path, 3%, maybe even less of gdp as a

deficit starting three years from now and going out for the next decade. that would be one broad trajectory that would be, i think, reassuring to the financial markets. >> is 3% to 3.5% gdp sustainable? >> it depends on lots of different things. you don't have to have a zero deficit for sustainability. you just need the deficit to be roughly equal to the interest payments that you make. so if interest payments are 2% to 3% of gdp, say, then a permanent deficit of that amount is, in fact, sustainable, yes. >> the g-20 met recently and they set up a time frame for deficit reduction. do you think that that time frame is appropriate? >> it's a medium-term -- 2015 i believe? >> i think half at the deficit by 2015. >> it would -- the g-20 have --

includes -- a majority of them are emerging market economies, many of them which are growing quickly right now. i'm not sure i'd want to impose a sid a single standard on all members of the g-20. the important thing is the overall trajectory, is there some evidence that the -- that that will begin to stabilize within the next few years? >> okay. investors have been -- the treasury bonds have been pretty solid. that's maybe an understatement. how long -- how long do you think this will remain this way? and is it dependent on what's going on in europe right now, that they're solid, or is there anything reason for it? >> well, there are a number of reasons why the yield is under 3%. >> right. >> currently. they include low inflation expectations. low growth expectations. very importantly, also safe haven effects. that is the u.s. dollar, u.s.

debt is considered to be very liquid, very safe instrument. and given the amount of risks in the financial markets around the world, many investors have decided to acquire u.s. dollars, including many foreign governments who want to hold dollar reserves. so those are some of the reasons. clearly the bond market at this point is not -- evidently is not focused on long-term deficits, at which point it would become more concerned. it's very hard to know. >> some have said there's going to be -- there's a strong potential for another -- what impact does that have on the treasury bonds? if it would happen. >> just to be clear, the federal reserve's forecast is for moderate recovery. but if for whatever reason there were a significant slowdown, treasury yields would fall further. >> okay. so, i mean -- so treasury doesn't -- i'm happy to hear you say yes to this question. treasury doesn't see a commercial -- another dip due to

commercial markets? >> the federal reserve? >> the federal reserve, i'm sorry. >> no, we don't think that a double dip is a high probability event. >> that's good news. you had talked about -- in fact, it was ranking member shelby that had questions on the credit crunch. and the reason for it, you talked about lower demand, you talked about collateral, value decline, you talked about regulators being especially cautious. i want to touch on that. you said that you were instructing regulators to be more -- have more consistency in the regulation, consistency goes to stability, goes to better lending. how are you evaluating that? >> well, first in terms of what we're doing, we have put out a lot of specific guidance in terms of how you go about making those evaluations. and we have put out guidances about commercial real estate, about small business and a number of other key areas. we've been following it up with very intensive training of

the -- the examiners to make sure they understand that there needs to be an appropriate balance between prudence and making loans to borrowers. in terms of evaluation, we're doing this a number of ways. we are gathering more data. we're gathering on a quarterly basis, lending to small businesses instead of annually. we are contributing questions to the nfib's survey of small businesses to try and understand what problems they see. very importantly, as i mentioned in my testimony, we've had a series of 40 meetings around the country, meeting with banks, small businesses and other relative parties, to talk about the issues. and we have put together an addendum to my testimony, which includes a number of findings and recommendations to address this. so we have been both qualitatively and quantitatively been tree trying to assess ban

activity. >> okay. just one last thing, mr. chairman, if i might. i continually -- when i go into the state of montana every weekend or when i come back here i'm continually getting calls from community banks that are saying the regulation isn't consistent, it's not consistent between agencies, it's not applied across the board within agencies in a consistent way. i said, you know what, i'd love to call these guys up and they said, don't use our name. if you use our name, it will be worse. there has to be a way that you being the person you are can dig down and get that information. quite honestly, i believe the banks because i hear it from every one of them. if you could do that, i would appreciate it. >> i invite those comments. if they're unwilling to talk to their federal reserve bank in their district, we have an ombudsman here in washington that would be happy to take those comments. our bank supervision department will be happy to take those

comments. >> thank you for being here. >> thank you, mr. chairman. thank you for holding this hearing and the ranking member, thank you. thank you for being back here. i actually want to pick up right where senator tester left off because the last time we were together i asked whether or not we might have metrics where we can distinguish between lending that's not happening because of loan demand, because of a regulat regulator's overreach, all that stuff. in the back in the addendum , you've talked about this. what you've heard from people. there are a million things in here that -- i don't know why we haven't done it already, but we haven't. we haven't had the focus on small business lending that we need to have. i don't think the administration has had the focus on it they need to have.

my question is that -- and my anecdotal evidence in colorado continues to be exactly the same as senator tester's, which is that small businesses that assert that they can pay on their loans can't get credit and banks are saying that the reason they can't extend the credit is because the regulators have swung too far over to one side. it's a consistent theme. every now and then you hear somebody say, well, there's not really loan demand. or they'll say people are actually paying off their letters of credit and they're running capital to banks. so my question for you is you talked about the training and the guidance, wanting people to take a balanced approach. in the evidence that you've collected so far, what is the evidence? what does it tell you about wlau what's happening here? >> i don't know if i can give you a completely final answer on this. i think we're pretty confident

that a lot of the reduction in lending is not regulatory constraint. a lot of it has to do -- we have reduced demand from small businesses or from the fact that their financial and economic position has been weakened so that it's more difficult for them to get a loan with the tighter standards which now exist in the banking system. so that's a big part of it. i don't have definitive answers for you that you would want on the regulatory, but to give you an example of something which we're currently doing which i didn't mention to senator tester, which is we have done baseline analysis evaluation. we've gone out to 200 or more banks and asked them how they dealt, for example, with commercial real estate problems, workouts, relending, refinancing and so on. and we are doing a follow-up subsequent to our guidance on

this issue. we want to identify whether there have been changes in behavior. we are trying to get the metrics that you are -- >> is your sense that the -- what i hear a lot is we used to reserve 10%. it's now 12% or it was 9% and it's now 12%. do you think that the regulators are striking the right balance there? >> 10% of, i'm sorry, the -- i don't understand the question. >> of what the -- they're saying that the assets that they have to reserve, that they can't lend, have increased from i think 9% to 12%. >> there's no simple rule like that. there's an evaluation of the overall quality of the loan, which depends on a variety of things. >> in my state, they feel like there is a simple rule. >> so if you actually -- so there is -- there are data -- some of the data that we look

at, for example, are a survey we do of 100 banks of loan officers. we asked them whether they're tightening or easeening standards and they've been tightening for a while. a lot of this is the bank's decision to tighten their lending standards. recently we have seen a cessation of tightening. standards are no locklonger get tighter. we've also seen that small business lending is still dropping but more slowly than before. so there are some indications that credit is becoming more available. whether it has to do with the fact that the economy is looking better is hard to say. >> i just want to say -- talk about the deficit and the debt situation. you talked about how the markets need to see a compelling -- that we're taking it seriously. you've testified to that before.

they're not the only ones. my daughters have heard me talk about this so much that they are enormously agitated about this question themselves because they don't want to make these decisions that we're failing to make. congress after congress after congress have failed to make the decisions. we now have $13 trillion of debt on the balance sheet. what's appalling about it is that we don't have much to show for it i don't think. we haven't invested in this country's infrastructure. we haven't built the energy infrastructure. so the hole is actually even greater than i think we imagine. you mentioned at the very beginning the difficulty of having one congress behind the next congress and the next congress. what kind of thing do you think about when you're not here but in your office that we could do that would show that we're serious about this? that we're actually putting ourselves on a path of sustainability knowing that we can't fix this overnight? what is it that we -- what will do we need to demonstrate and

how do we need to demonstrate it? i realize -- i'm not asking for specific policies, but what do you say to yourself? >> well, congress has over time moved towards multiyear budgeting plans. and you try to look at projected trajectories over a ten-year window, for example. so those kinds of exercises where you're looking at how programs will affect the deficit over a ten-year period is certainly one way to demonstrate commitment. and that would force an -- true, a future congress could reverse what you did, but they would have to take active action to do that and you could demonstrate your commitment to gradual deficit reduction over a period of time. at some point, you're going to have to address in some way or another the unfunded liabilities associated with entitlements. the problem there is that it doesn't seem likely that you would want to change those from

people who are near retirement, for example. those are relative -- any changes you'll make today will take effect relatively far in the future. part of the challenge is to find things that will affect the trajectory say between now and 2020, which is what the commission is looking at. >> mr. chairman, may i ask one more question? >> yeah, very quickly. >> do you think one of the things that i worry about is that we recover, we forget that we've got these obligations to deal with. do you think that it would be possible to create a legislative instrument that helps manage our deficit to a percentage of gdp? we would be saying to ourselves that we have a policy objective that says by such and such a year, the budget deficit can't be greater than 3% of gdp or lower? >> it certainly is possible. there have been a variety of different kinds of rules over

the years that congress has tried to impose on itself. sometimes successful, sometimes less. you have a created congressional budget office, which is very useful in trying to make sure people are making an honest assessment of the costs of their programs or tax cuts. so, yes, i think there probably are a range of ways of constraining future deficits. if you look around the world, many countries either have constitutional provisions or they have a non-partisan office that enforces certain constraints. of course, the states have budget balance requirements, which are not perfectly enforced but do constrain their spending obviously. >> thank you. thank you, mr. chairman. >> thank you, senator. senator menendemenendez. >> thank you, mr. chairman.

thank you, chairman bernanke, for your service. i always believe the starting point always has consequence. and i hear a lot about spending, which i agree is a challenge, but i also hear it in the abstract. let me just do a very quick history line with you. you came to us in the end of 2008 with secretary paulson and you said to this congress we need to act or otherwise we will have financial institutions collapse and that collapse will mean an entire systemic risk to the country and maybe we'll have a global financial meltdown. is that true? >> absolutely. >> so that was necessary. >> yes. >> and then we asked you in the beginning of 2009 which president obama -- so that happened before president obama took office. and then president obama takes office in 2009 and we have an economy that's flatlined. is that correct to say? >> yes. >> we had negative growth?

>> yes. >> we were losing 3/4 of a million jobs in 2009. we had negative gdp growth. is that correct? >> yes. >> and then we needed to stimulate that economy because it had no private sector activity. is that correct? >> yes. >> and therefore that was necessary? >> well, i -- i never specifically endorsed any particular program, size, composition and so on, but -- >> but to stimulate the economy -- >> but stimulus was certainly beneficial or was certainly useful in the context of the weak economy we had. >> if we had done nothing, would it have been worse? >> probably, yes. >> so it was necessary. so i have a little difficulty in understanding some of our colleagues from their starting point. let me ask you now, now if we do absolutely nothing, what's the

economy going to look like? what's the job picture going to look like? >> well, we are not anticipating -- our baseline analysis is that there will not be another large fiscal stimulus and based on that, we've come up with a forecast which is for moderate recovery. >> but you're also looking at monetary policy as a way possibly to see if you can further stimulate -- my word -- the economy. >> yes. >> that's an action that would have somewhat of a cost. so it is -- we have choices here. we could have done nothing, spent nothing, and had a meltdown or we could have prevented that. that means a depression in the 21st century. would that not be true? >> senator, i've never objected

to the spending that was -- >> i'm just trying to get the record straight. >> the fact that we have a 10% of gdp deficit this year is completely understandable given what we've been through. >> now -- so we're looking at debt and deficits now, and i agree we need to tackle that. o adding another $680 billion to the debt, is that a good idea? >> it depends on -- everything else being equal, it's -- raising the debt is a negative. >> so raising the debt is a negative. and if i do that in a way that i don't offset that, that would be a negative, would it not be? >> from the debt perspective, yes. >> now -- but that's in essence what some of our colleagues what us to do in extending the tax cuts that are expiring and not pay for them.

i don't understand how we reconcile those views. is it permissible never to pay for tax cuts? is that a good fiscal policy? >> if you don't control the deficits over time, eventually the markets won't -- won't lend to you at reasonable interest rates. >> speaking of lending at reasonable interest rates, if we continue -- you know, my colleagues from montana and colorado, i could echo in new jersey the reality of what, you know, banks tell us, particularly community banks and others. so it gets to be a little wide swath of the same set of statements that are being made, which always make me think a little bit about the truthfulness in terms of, you know, it seems to be more veracity when i get from a wide range of entities the same answer. but if you can borrow from the

federal reserve at, what is it, one point? >> the discount window is 75 basis points, but we're not making many loans. >> but if you can borrow incredibly low and then go buy treasury bills, why would you take risk to make loans? >> it's still profitable if you can make a good loan, it's still profitable. buying treasury bills with short-term money is not -- it's not an arbitrage. it's a risky way of -- of making short-term profits at the risk of long-term capital losses. >> let me ask you this. why is it that we hear from bank after bank after bank after bank that in the regulatory aspect, we are telling -- for example, in commercial loans that are performing, performing, that, however, they need to be recapitalized. well, if we do that, we're going

to dry up an enormous amount of capital, especially as we are looking at a market problem that is going to be incredibly troublesome. >> there are a number of different bank regulators, as you know. there may be differences among the regulators in terms of how aggressive they've been in trying to maintain this appropriate balance. speaking for the federal reserve, which oversees about 10% of community banks, we have made a very strenuous effort to try and achieve that appropriate balance. it's also possible -- i mean, that banks maybe blaming examiners when, in pact, it's their own reluctance to lend which is the problem. but i agree with the basic point that we need to continue and we're making extraordinary efforts. we need to make sure that banks make good loans. that if a creditworthy borrower comes that they can get credit.

with respect to your particular point, one of the specific elements of our guidance is that a decline in the value of the property, the commercial real estate -- we've seen a very widespread decline across the country, is that it's not unreasonable not to make a loan if the cash flow is adequate to make repayment. we have been clear about that particular issue. >> finally, i hear from the business community that they need certainty. it seems to me they have certainty in the health field, as a result of the law. they now have certainty in financial services regulations and -- or i should say the financial services, you know, the wall street reform legislation. and i -- i just want to make sure that my colleagues look at your testimony where you say that legislation represents significant progress towards reducing the likelihood of future financial crises and

strengthening the capacity of financial regulators to respond to risks that may emerge and you go on to say i believe that legislation together with stronger regulatory standards for bank, capital and liquidity now being developed will place our financial system on a sounder foundation and minimize the risk of a repetition of the devastating events of the past three years. i think it's incredibly important to highlight that part of your testimony. thank you for it. thank you, mr. chairman. >> thank you very much, senator. let me, if i can, with the -- judd gregg, who i have a lot of respect for, raised the issue that uncertainty and fiscal policy was the -- was one of the reasons for the lack of activity here. i'm wondering if it's also -- it seems to me that you're getting business -- businesses -- this low growth capacity, where they

just -- the demand isn't there. i mean, i -- it seems to me that's as much of a factor here as anything else. i wonder if you might comment on that. i'm not trying to take a side in this debate one way or the other. there's clearly some uncertainty out there. but it seems to me as well if people aren't -- there's the capacity, the growth and capacity, there's no demand and people are not -- the economy is not growing. how much of this -- >> demand is certainly very important, absolutely. firms have a lot of excess capacity. they're not making use of the factories and the buildings and the equipment they have now. and so that reduces their incentive to invest further. >> we have a lot of buildings that are sitting idle, vacant. >> that's right. >> so there's no demand for it. that has an awful lot to do with that. i think that has to be added as

a major factor in all of this. do you agree that? >> certainly the lack of demand, even the small businesses we've been talking about, when they talk about what is their number one problem, their number one concern, it isn't credit. it's lack of demand. >> okay. let me jump, if i can, back -- i didn't get into this stuff. several members raised questions with you about -- in the financial reform bill, the role of the federal reserve. i want to raise the issue of the responsibility imposed that heightened capital liquidity and leverage standards. bank holding companies and designated nonbank companies and the issue that's going to be important. but in your view, will such standards need to be set significantly higher than they are at present in order to reduce the likelihood of another fiscal or financial crisis? >> we're still working. we're trying to think about small versus large bank or

critical versus noncritical bank capital issues. we're looking, you know, with our colleagues internationally to try to establish relationships between capital standards across countries. we don't really come to a conclusion there. it's not a straightforward thing to answer that question. large banks some small banks have such different activities. they'll have different capital levels even for the same set of rules. but i do think we need to -- we are committed, of course, by the legislation and by our own -- our own approach to requiring more capital of systemically critical firms and in a more progressive way. as firms become more interconnected, essential to the functioning of the system, they need to be -- both have higher capital and to be subject to tougher regulation because of the effects they have on the whole system if they fail. >> let me ask you this.

we'll get a lot of monday morning quarterbacking on the bill for years to come. there was a proposal to set actually set standards in the legislation. i oppose that idea because the very answer you just gave to my question. i'm drawing the conclusion that you think we did the right thing by not trying to set standards but allow for more nuanced response to it. the same question has been raised on -- we left a lot to the regulators. again, i -- i'm the first to admit that, yes, we did that. all of the factors and processes we go through to determine how best to set these up. as someone who's been not only a student and a practitioner in all of this, stepping back from sort of a regulator role, was that generally the right approach in your view that we took rather than trying to write

rigid standards in the legislation that would have been more constraining in terms of our ability to have a more measured response? >> on the specifics of capital, of course there are some rules. but it was very important that we have at least some flexibility in order to negotiate and collaborate with our international colleagues on developing an international set of capital standards. that was very important. inevitably, in a big this complex that's addressing so many complex issues, if you want it to be responsive to changes in the environment, to deal with a lot of technical details, i think inevitably the regulators have to play a role, but congress certainly has an oversight role. you'll be seeing what we do. if you're dissatisfied, i'm sure you'll let us know. >> i want to do that. i'm not going to set a hearing date today, but i want to put my colleagues on notice here that

my view would be as early as september -- we'll be leaving here in october for the elections. in san antonio eptember, we'll series of hearings, either one or two of them, with yourself and others to come before us and lay out what steps are being taken by the regulators under the proposed legislation so we get a sense of where things are heading. in that regard, i just wanted to ask you the financial reform bill creates the financial stability oversight council, to provide it with data and analysis on overall market conditions. i think particularly despite the criticism, the office of financial research would be a real asset for us in terms of that data that ought to be of assist toons you a assistance to you and others. do you think it can help to prevent the financial crisis in the future? and how do you foresee the

interaction of macro supervision with the traditional bank by bank micro hasupervision of banking regulators? >> there's been some commentary that says that the bill relies too much on regulators to identify, you know, risks that are emerging. in fact, there's -- there are multiple aspects of this -- of this bill. first, there is the aspect that asks the regulators to look for emerging risks. >> right. >> and i think we would have -- not me personally, but i think the regulators would have had a better chance of identifying the problems that arose in this recent crisis with that kind of framework that you have created, but beyond that aspect, there's also a number of steps to strengthen the system, make more

resilience, to put more derivatives through counterparties, to increase capital, so that whatever the source of a fup efuture crisis, the system will be better able to withstand that effect. and finally, if we get to the -- unfortunately to the firefighting stage, there are additional tools there. so i think it's a useful approach to have multiple ways of addressing crises, both preventative and resilience and firefighting. so that's very important. it's difficult. it's going to require coordination among different regulators. but it's -- it's a direction that regulators around the world and academics and others looking at this really believe is the right direction and there is quite a bit of thinking already out there about how we could do, for example, stress tests that look at the whole system which

combine the results for individual firms, as you mentioned, but also are available to infer from that how the system as a whole might perform if a certain set of stresses arose. so there is clearly a relationship between the micro and macro prudential part. >> i agree. i'll leave this for our -- a later gathering to look at all of this and how supervisory functions need to change under our legislation. i know you're giving a lot of thought to that already as well as -- as how we're going to handlethex pand the expanded ma. i appreciate your response to the question of whether or not you can do this. i'm confident you can. you've got -- again, we've had differences of opinions. i was looking at this differently. we sort of evolved from that to

what we've ended up here. i accept that. that's how the process works here. even my views change and are modified as we go through the process. i started out in one place. i would have been closer to where i started out from than where we ended up, but we are where we are. we can get this right. the fact that there is more of a holistic approach to this thing where we have the ability of talented people all driving towards the same goals, maintaining a strong safe and sound financial system with the kind of stability that's necessary in it as well as restoring that -- that level of trust and confidence in the system, which to me is the most critical element of all. if the american people and others feel that sense of trust and confidence about financial systems, that will have its own reward. so, again, i'm very grateful to you and your staff and others for the tremendous effort you put into this. i look forward to getting together with you again to really get down to the details of how this is going to work. senator shelby?

>> mr. chairman, some observers warn of growing risk in the 2.8 trillion municipal debt market. parts of california as well as municipalities in illinois, michigan, new york, seem to have been vulnerable to market-driven widening of spreads on their bonds relative to treasuries, especially when market anxiety over fiscal conditions in the euros -- i have two questions regarding municipal debt. what is your assessment of the state of the u.s. municipal debt market? secondly, do you believe there's any merit to a recent characterization by warren buffett that there is potentially, quote, a terrible problem, end quote, ahead for municipal bonds? >> well, first, the -- it's certainly true that states and localities are under a lot of fiscal and financial stress. their revenues have fallen considerably and they're trying to maintain services and so on.

clearly we've seen some deficits and some cuts at the state and local level. my view, though, is that first of all that the municipal debt market is functioning pretty well. that at least state and localities that -- states and localities that have good credit or seem to be sound are not having any difficulty accessing the municipal market and that yields are pretty low. which is, i think, fortunate because there are a number of states and localities that being forced to borrow in the current circumstances. certainly there may be some localities in particular that -- that will have trouble, but i would draw a distinction between, you know, say, california and greece, which is that because of these budget balance requirements, the outstanding debt of states is generally much less than the

united states or other countries. so, you know, my -- of course we always have to pay close attention. there are a lot of stresses at the state and local level. but i don't at this point view the municipal debt market as being a major risk to the economy. >> deflation in the japanese experience, some people expressed fear that the u.s. could find itself in a period of deflation and like japan have difficulty escaping. do you -- what are your -- what do you believe are the differences between the u.s. and japan in terms of structure of economic policy that would ensure that we do not follow the japanese experience? is that a concern to the fed? >> again, we're -- forecasts are very uncertain, but i don't view deflation as a near-term risk

for the united states. if you look, for example, at inflation expectations as measured by government bond markets or by surveys, there has not really been much decline in -- expectations is one important factor that will keep inflation from falling very much. so, again, the forecasts are for gradual increase of inflation towards more normal, say, 2% level. and there's not, at this point, i think a very high probability that deflation will become a concern. i think there are very important differences between the u.s. and japan. some of them are structural. the japanese economy has been relatively low productivity in recent years. its growth rate is lower than the u.s. it's been a less vibrant economy in that respect.

also in japan, much longer problems with their banking system, which were not addressed for some years. for better or worse, we were very aggressive in addressing our banking system issues. i think as i mentioned to a couple of folks, we are seeing a strong -- our system is strengthening and looks to be doing much better. i don't think that will be a source of long-term drag either. and finally, i would comment that i -- i think the federal reserve does have the capacity, the tools, should deflation occur, which i don't believe is very likely, to reverse it. and we would be -- i don't consider this a very high risk at this point, but we'll continue to monitor the economy and the price level. >> senator corker?

>> thank you, mr. chairman. mr. chairman, i thank you for your testimony and coming here today. i know there's been a lot of probings about monetary policy. i very much appreciate the fact that you stayed consistent with your report and so i want to probe in another area. and that is senator brown was pursuing the whole issue of china. i do think -- i know you said we should focus on the overall trade deficits, not the bilateral deficits. but i do think with the -- with the economy being as it is and just the relationship as it is and -- there may be attempts to try to deal with that. i don't know. i just wondered if you would share with us -- the fact is, you did say it's a subsidy, and it is, to the chinese people to have a currency valuation

relative to the dollar that allows them to export to us. what are the things that all of us who want to make sure we try to do good things, what are the things we should think about as it relates to -- to the chinese currency? and what are some of the unintended consequences we should all be aware of? >> of the -- >> well, i mean, there are people looking at -- there's all kinds of things. and i understand. especially folks who come from orientations and all of that -- i know we've looked at some things. what -- i think there's going to be a push. i just think as this economy moves along slowly and that trade gap widens, i think there may be some legislative efforts to deal with that. i'm not saying i'm going to be a part of that or not part of that. but what are the things we should think about as it relates to that issue and some of the inuntended consequences of

dealing with it inappropriately? >> i fully understand the concern. again, it is felt more in specific industries than it is for the economy as a whole. >> say that again. i didn't hear that. >> i understand the concern. i think that it's easier to identify effects on specific industries than it is to find effects of the currency policy on the economy as a whole or unemployment as a whole because there's not much relationship between our unemployment rate and our current account deficit. take an obvious example, unemployment has soared and the deficit has gone down. but i do understand the concern. all i can really say is that it would be to take some of the steps that have been suggested would be quite severe steps and would cause considerable concern about our overall relationship

with china and other countries and about our training policies. again, i understand the concern. but i would just reiterate first that this is a complex problem and that it's not just the currency that's involved. the chinese are also involved in trying to become more reliant on domestic demand. first of all. secondly, i would note that united states has got a vibrant bilateral relationship in terms of our dialogue, for example, strategic and examine dialogue, which was created by secretary paulson, has been expanded and continued by the current administration. and one of the things that's evidenced from that is that the u.s. and china have a wide range of issues not just the currency but a wide range of issues relating to energy and environment and tourism and investment and trade and many other things where we have common interests where we need to work, you know, cooperatively

together. so i hope that congress will think very carefully before taking any strong action. at the same time, i recognize it's incumbent upon particularly the treasury has a special role because they are the spokesman for the currency, but for the federal reserve as well to try to maintain a constant dialogue to persuade the chinese and to apply pressure to them that they need to adjust their currency, which is their current policy is -- is -- distorts capital flows globally. it's not evegn good for china. it distorts their economy as well and makes them too reliant on experts and reduces their dome domestic consumption. we're hopeful that -- i think they have become more

appreciative of those concerns over time. >> in most recent statements that they made, they gave a tilt, if you will, prior to some g-20 meetings as to what they may be doing. what do you read into that? and what is your sense as you talk to counterparts about what their longer-term efforts will be? >> with respect to the currency? >> uh-huh. >> they've gone back to the -- this managed float, which allows for small changes in the currency. i think the amount that they let it move will depend on their own views of the stability of their own economy and global growth. we're going to have to see. i honestly don't -- i don't know exactly what their plans are. i suspect they will be responding to how they view the evolution of global economic conditions. >> well, mr. chairman, i thank you for coming. certainly look forward to talking to you about those

issues going down the road. we had a good hearing yesterday. i think in any bill that passes, there are good things and bad things and people have to make decisions about what they -- how they vote based on the net effect. i think that all of us are hopeful that as it relates to our relations with the other countries that we end up with a regulatory regime that works well for all of us and i wish you well in those efforts and look forward to talking to you as you move ahead. >> thank you, senator. >> i -- again, this is the same kind of question that senator corker has raised. some have suggested that we would have been better off if we had not acted in this area of financial reform. some have even suggested that even the opportunity, they'd like to repeal this effort we've gone through over the last year

and a half. assuming that what you're talking about is going back to the status quo, are we better off with this legislation? i know a lot of work needs to be done. than we would be if we would have just maintained the status quo as things were prior to the passage of this legislation? >> yes, i think we are. there were gaps which became painful painfully evident during the crisis. we've increased our capacity to take a macroprudential approach. and the ability to wind down large firms and avoid the bailout problem or be -- avoid the situation where we have to choose between a bailout and a financial crisis, that's an important step also. all of those things are going to require a lot of work to make them effective and useful tools. but it's very important to

address those [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> on our companion network c- span3 tomorrow morning, a look at the oversight of offshore oil or oil and natural gas drilling. that is like that in eastern. -- that is alive at 10:00 eastern. >> as the senate prepares to debate the energy bill, find out

more with cs bands video library. watch congressional hearings in previous debates on the house and senate floor. it is all online at free -- and free. it is washington your way. >> president obama signed the financial regulations bill into law. the legislation title of the dog consumer protection act passed largely along party lines. this is 20 minutes.

>> ladies and gentlemen, the president and vice-president of the united states. >> thank you everybody. thank you. thank you. thank you. thank you very much. bank you, everybody. thank you.

everybody, please have a seat. good morning, everyone. we are gathered in the heart of our nation's capital, surrounded by memorials to leaders and citizens who served our nation in its earliest days and in its days of greatest trial. today is such a time for america. over the past two years, we have faced the worst recession since the great depression. 8 million people lost their jobs. tens of millions saw the value of their homes and retirements plummet. countless businesses have been unable to get the loans they need and many have been forced to shut their doors. and all the old economy is growing again, too many people are still feeling the pain of

the downturn. while a number of factors led to such a severe sore recession -- a severe recession, the primary cause was a breakdown in our financial system. it was a crisis born of the failure of responsibility from certain corners of wall street to the halls of power in washington. for years, our financial sector was governed by antiquated and poorly enforced rules that allowed some to game the system and take risks that endangered the entire economy. unscrupulous lenders locked consumers into complex loans with hidden costs. firms like aig placed massive, risky bets with borrowed money. and while the rules left abuse and excess unchecked, they also left taxpayers on the hook if a

big bank or financial institution ever failed. now even before the crisis hit, i went to wall street and i called for comment-cents reforms to protect consumers and our economy as a whole. and soon after taking office, i proposed a set of reforms to empower consumers and investors to bring the shadowy deals that caused this crisis into the light of day, and to put a cap -- put a stop to taxpayer bailouts once and for all. [applause] to day, thanks to a lot of people in this room, those reforms will become belote the land. for the last year, chairman barney frank and chris dodd have worked day and night --

[applause] barney and chris have worked day and night to bring about this reform. and i am profoundly grateful to

them. i would be remiss if they did not also express my appreciation to senator harry reid and speaker nancy pelosi for their leadership. it would not have happened without them. passing this bill was no easy task. to get there, we had to overcome the furious lobbying of an array of powerful interest groups and a partisan minority determined to block change. so the members who are here today, both on the stage and in the audience, they have done a

great service in devoting so much time and expertise to this effort, to looking out for the public interest and not the special interest. [applause] and i also want to thank the three republican senators who put partisanship aside, judge this bill on the merits, and voted for reform. we are grateful to them. and the republican house members. good to see you, joe. [applause] let's put this in perspective.

the fact is, the financial industry is central to our nation's ability to grow, to prosper, to compete, and to innovate. they are a lot of banks that understand and fulfill this vital roles. there are a whole lot of bankers who want to do right and do right by their customers. this reform will help foster innovation, not hamper it. it is designed to make sure that everybody follows the same set of rules so that firms compete on price and quality, not on tricks and not on traps. it demands accountability and responsibility from everyone. it provides certainty to everybody, from bankers to farmers to business owners to consumers. unless your business model depends on cutting corners or bilking your customers, you have

got nothing to fear from reform. [applause] now for all those americans who are wondering what wall street reform means for you, here is what you can expect. if you ever applied for a credit card, a student loan, or a mortgage, you know the feeling of signing your name to pages of barely understandable fine print. what often happens as a result is that many americans are caught by hidden fees and penalties, or saddled with loans they cannot afford. that is what happened to robin fox, hit with a massive rate increase on her credit card balance, even though she paid her bills on time. that is what happened to andrew

giordano, who discovered hundreds of dollars in overdraft fees on his bank statement, the ec had no idea he might face. -- fees he had no idea he might face. both are here today. with this law, unfair rate hikes like the one that hit robin will end for good. and we will ensure that people like andrew or not unwittingly caught by overdraft fees when they sign up for checking account. with this law, we will crackdown on abusive practices in the mortgage industry. we will make sure that contracts are simpler, putting an end to many hidden fees and penalties in complex mortgages, so people know what they're signing. with this law, students who take

out college loans will be provided clear and concise information about their obligations. and with this law, ordinary investors like seniors and folks saving for retirement will be able to receive more information about the costs and risks of mutual funds and other investment products, so that they can make better -- better financial decisions that to -- as to what will work for them. all told, these reforms represent the strongest consumer financial protections in history. in history. [applause] and these protections will be enforced by a new consumer watchdog with just one job -- looking out for people, not big banks, not lenders, not

investment houses, looking out for people as they interact with the financial system. and that is not just good for consumers, that is good for the economy. reform will put a stop to a lot of the bad loans that fueled a debt-based bubble. and it will mean all companies will have to seek customers by offering better products, instead of more deceptive ones. beyond the consumer protections i have outlined, reform will also rein in the abuse and excess that nearly brought down our financial system. we will finally bring transparency to the kinds of complex and risky transactions that helped trigger the financial crisis. shareholders will also have a greater say on the pay of ceo's and other executives so that they can reward the success instead of failure. and finally because of this law, the american people will never again be asked to foot the bill for wall street's mistakes. there will be no more tax-funded

bailouts, period. [applause] if a large financial institution should ever fail, this reform gives us the ability to wind it down without endangering the broader economy. and there will be new rules to make clear that no firm is somehow protected because it is too big to fail, so we do not have another aig. that is what this reform will mean.

now what does not mean our work is over. for these new rules to be effective, regulators will have to be vigilant. we may need to make adjustments along the way as our financial system adapts to these new changes and changes around the globe. no law can force anybody to be responsible. it is still incumbent on those on wall street to heed the lessons of this crisis in terms of how they conduct their businesses. the fact is every american from main street to wall street has a stake in our financial system. wall street banks and firms invest the capital to make it possible for start-ups to sell new products. they provide loans to businesses to expand and hire. they back mortgages for families purchasing a new home. that is why we will all stand to gain from these reforms. we all win when investors around the world have confidence in our

markets. we all win when shareholders have more power and more information. we all win when consumers are protected against abuse. and we all win when folks are rewarded based on how well they perform, not how well they evade accountability. in the end, our financial system only works -- our market is only free -- when there are clear rules and basic safeguards that prevent abuse, that check excess, that ensure that it is more profitable to play by the rules than to game the system. and that is what these reforms are designed to achieve, no more, no less. that is how we will ensure that our economy works for consumers, for investors, and for financial institutions -- that it works for all of us. this is a central lesson not only of this crisis but of our history.

ultimately there is no dividing line between main street and wall street. we rise or fall together as one nation. these reforms will help lift our economy and lead all of us to a stronger, more prosperous future. and that is why i m so honored to sign these reforms into law, and i am so grateful to everybody who worked so hard to make this day possible. thank you very much, everybody. [inaudible]