are offering carrots, apples, and oranges, but we have no stick. there are so many different cross-cutting incentives. so many entities are worried two or three different hats. it is difficult to untangle without involving neutral third party is in some way. >> ms. schwartz, i love to hear your response third >> sure. -- your response. sure. these are taxpayers' dollars. if they do not qualify, and there is a like solution outside of hamp, we should not necessarily say it is a bad thing. people that do not qualify could go into foreclosure. if the person wants to stay in their home, and has the capacity, the servicer and the investor can accommodate that.

i think it is a complicated issue. i would say that the lost documentation -- we also recognize that, and that is why we developed a safe and secure way for counselors to be involved. i really like the third party help in having a trusted adviser as they submit things. >> you talked about mortgages that involved a larger reduction in payment. do you know, for those modifications, what the average increase in payments is going to be when the permanent modification ends in a five-year period. how much will it go up, and you look at the numbers, can you speculate what would happen at

that point? >> the modifications are permanent changes in contractual terms. the reductions in payment are permanent. you are expecting the bar were to have lower payment. -- the borrower to have lower payments. when you look at hamp, you're seeing a reduction. >> in some way, it resets. the payments will go up. at the end of that time, the interest rate will reset. presumably, they're making higher payments at that time. is that not true? >> when we are tracking right now is basically when the contract will change in payment, and basically saying that the time of the modification that is being done, and we are comparing what it was before and

after. we are doing that for hamp and non-proprietary modifications. we have not looked out further by seven or 10 years. >> that seems like something worth doing to me, i guess. i would encourage that. >> it is something we could look at. >> thank you. i would like to direct my first question to mr. evers, and ms. schwartz. you probably heard my dialogue with miss caldwell around the sustainability of modifications, and i want to point out that this call will has remained for this portion of the panel. we have often asked treasury representatives to stay for the second panel, and it has not been a practice in the past. i think it is very helpful for her. we appreciate listening -- her listening to the dialogue. you may have also heard ms.

gordon, who shared my concern that borrowers in proprietary modifications might be worse off than they were before. my question really close to the data, and do you share our frustrations in being able to assess the actual sustainability of the proprietary modifications. though you point out in certain sections that proprietary modifications would be the reduction in payment, maybe half of what they are a four hamp modifications, we still do not know the terms. in hamp we know there will be for five years. how comfortable are you, and how can we improve these reports, so we really can get our arms around the sustainability of proprietary modifications?

mr. evers? >> it is a great question. it is something that we have looked at and have been trying to track data. in the second quarter report, where we are at right now is knowing that change in payment for a hamp modification against a non-party, as well as the default rate. the hamp is half of what it is for a proprietary modification. >> it is an important question, and one we need to address. we have been attempting to track, in addition to how many loans have a lower interest payment, which is a good step forward, and we have asked for a five-year duration, and a 10% or more reduced payment, so you can measure that as well.

we have been working to collect that. it is probably this month or next, that we could report that. all of the government agencies have looked to us. >> mr. evers, could you share our interests in getting that data by servicers so we could actually compare performance as well as provide a more effective supervisory to pull -- tool for regulators? >> we could cut to that in just about any way possible. >> is there a reason you are not sharing that information by servicer in the public reports? >> it is confidential, supervisory information. >> why do feel that is supervising information, while the factual data included the the treasury's mother reports do not present similar issues --

monthly reports do not presents similar issues? >> we are collecting all-level data, and using it as a part of the supervisory process. under our legal authority, we deem it to be confidential, supervisory information, and our approach has been to disclose accurate data, but not bank- specific data. >> you are using that with respect to the supervisory responsibility. >> right. when we saw a high default rates, we calculated that for each of the reporting institutions, and criticize each of them using their data asking them to fix the rates, and put in modification programs. >> thank you. we have a registry of mortgage loan servicers in new york for the first time. we have oversight responsibilities. we have adopted duties of tears and business conduct rules that are enforceable, including the

requirement to receive quarterly data regarding the modification efforts and performance data. our ability is limited because of the visit for real powers we would be restricted in receiving data. i also assume the industry would not necessarily like to see different reporting structures among 50 states, even though we do believe this is a model that could be adopted nationally. would the industry support the national reporter in -- reporting requirement? ? >> i am not spoken to them for that specific question. there have been some calls in the dodd-frank bill to have a data base created. >> thank you. >> miss gordon, to continue my other question, what you think the present foreclosure

problems have on hamp? >> the problems with robo- signing, these are not a technical problem. also, these are not allegations. these are things we know. it is symptomatic of problems throughout the serving -- servicing industry. what is interesting, as mr. damon silvers used the term "call the fire alarms." they only get pulled one of the bank's solvency is threatened. when the systemic threat is to the american people, and we could have one-quarter of homeowners with mortgages lose their homes, that seems to be worth a few fire alarms.

the problems we are seeing now just demonstrate how broken the system -- these problems are not a cause, they are a symptom of a broken system. >> i felt that. -- i at kodak. any foreclosure program that permits servicers to craft the system around their choices, their preferences for how to deal with homeowners is going to fell largely. one of the leading problems with hamp from the very beginning that we have seen treasury try to repeal is putting the servicers front end center in charge, saying you steer the ship, and we will just sit there and shout everything -- something that you once in

awhile. the other thing i am concerned about in getting people to the defense, and doing outreach, the -- to the defense and doing out reach, i am concerned that the homeowners are discouraged by hamp. there is a community contagion aspect here. even as things improve, there is a lag in getting the word out. i am concerned that the result is people not coming into a program -- the program, and instead their new plan is they will sue in court, and they have -- they do not have the legal capacity to do that, and with all due respect to the court system, they do not have the court capacity to litigate these things.

people are clinging to a life raft, looking from one to the other, and falling in between. >> thank you. >> mr. mcwatters. >> thank you. i look at this problem as a lawyer, and i am mystified. when i take out my foreclosure mitigation at, -- hat, and if someone says to pay more for something that is worth less today, what do i do? the first thing i do is ask them if it isn't not recourse debt. if it is not, i have an answer. if it is recourse, but i'm broke, and now we have the facts. in a commercial setting, you

would write alone down. he would not fool around. guess what? that is what the property is worth. if you for cloche -- if you for clothes, no one will pay a dime over that. first and second lienholders are not chomps. they will say that if a marked turns -- what if the market turns? then, you give them an equity kicker. you cannot write them down to zero, they will extort something. you give them 10 cents on the dollar, 20 cents on the dollar, and equity kicker, you write it down. secondly, you refinance the loan. refinance the loans to a market rate of interest. you take it down to a 3.75%

rate. what am i missing? why does that not work in this environment? yes, ms. schwartz? >> you have investor contracts that will not let you write down mortgages. you have fannie mae and freddie mac that will not allow for a write down like that. >> those rules need to be changed. >> the test requires something the north of what it is work -- what it is worth. one thing the program has done is target affordability. it is not negative equity, per say. >> so, you are saying there are rules that would inhibit a common-cents, market-oriented response. that is encouraging. anyone else? >> i am a bankruptcy lawyer. >> i am try to keep everyone out

of bankruptcy. >> >> i have been honed up on a few times. >> the basic idea was there was not this intermediary, and it was the net. >> up until then, it was a personal problem. they caught a bad deal in 2004. i'm sorry, but if they turned out to have a good deal, with a call secretary dieter and --

secretary tim geithner and give him more money? >> this is what we have pushed. our sense is servicers will not reach the rational conclusion. a negative equity is important. they will not get there on their own. we need a system to force them. baker to courts are not a perfect system. -- bankruptcy courts are not the perfect system for this. we need a state, because people have gorged themselves on a buffet of carrots, and we need something stronger. >> i'm way over my time. >> i just want to get some relative pieces of data on the table. mr. evers, or other panel members, testimony today was there has been 600,000 national foreclosures this year.

do we know what portion of those were on homes whose mortgage was held by fannie, friday, or another agency, as opposed to what percentage were in the private label market? >> i do not have that data available. >> if you could please follow- up. does anyone have a guess? >> sure. it has to be close to half, particularly if you throw in the fha. the whole government shares market is 60%, even assuming the mortgages perform better than non-agency mortgages, it has to be close to half. the answer is fannie mae, freddie mac, fha d.a. have a large role. >> to you think that is correct? i would have thought, given the problems about the balance of quality, that it would not be.

>> i do not know, but i am sure someone in my office does. i think there is no doubt that some of the foreclosures happening art agency loans. >> it is just the percentages. mr. evers, you probably have the definitive information. secondly, in your written testimony, i believe you said that approximately 2% of modifications involved principal reductions. is that correct? >> correct. >> ms. schwartz, does that make sense to you? does that sound right? thinking about the testimony and what your members are doing? >> early indications show that investor rules and the hamp waterfall is using the three tools until the market has a

standard test that includes the principal right down first, which i think is coming through treasury. we can then see more activity, where applicable. >> i have a final question. i think one could characterize the testimony and remarks of my fellow panel members, particularly mr. recorders remarks, which i -- mr. mcwatters remarks, which i fully believe -- agree with, we are faced with a choice here. we could have a rational solution to the foreclosure crisis, or we could preserve the capital structure of the banks. we cannot do both. what should we do? [laughter] >> i think we can do both. >> i am not surprised. any other panel members?

>> i am not sure. i think either way, down the road, -- these homes are worth what they are worth, no matter what anyone is carrying them on their books as. we are not going to change that. the best hope of changing that is fixing the foreclosure crisis, and stopping the death spiral led the housing sector is in. so, if we do that right, maybe e can help make the banks' books closer to reality. if we do neither, everyone can lose their homes, and banks will lose money anyway. >> my time is up, you favoring keeping people in the homes have to deal with bank balance sheets as a result? >> yes.

>> we had too much leverage. they got their chance to dump some of their bad stuff on the fed of new york. >> the fed wants it back. >> i know, but the american family is still very highly leveraged. we are still at a point of debt that is unprecedented in the history of america, even with them making a little more savings, not using their credit cards, they are still vulnerable going forward. that effects the ability of the financial sector to be stable. there is some benefit, and pain in the short term. it's a whole pool is risky and unstable, you run the risk of more blowups on very poor lending. >> thank you, dr. troske.

i would like to preface my question a little, and i am actually going to answer the question my fellow panelist has asked before. to the previous witnesses, i am actually an economist, and understand a little bit about supply and demand, and dynamics. mr. silvers is correct. if we push homes on the market, prices will go down. why would that be rational? of course, there are trade-offs. we are at a point where house prices are worth less than they were. banks need to write that off, and people do as well. there are lots of actors in this

economy, many of whom were hurt, and many who will recover when the economy begins to grow. there is a trade-off between short-term growth -- losses in the short term, for the potential of the long-term growth. we are looking at the best way to get to a long-term solution where we have people in affordable housing situations. ms. gordon, you seem to be the one that was willing to address this question. i will ask you to expand on what you talked about. should we not take any of the rest of the actors in the economy well-being into consideration when thinking about this trade-off? we are where we are. part of the question is how did we get here, but the other question is how do we move forward in a way that gets us

back to a growing economy as quickly as possible. >> i do not want to pose false choices. there are four cultures that are not avoidable. we need to figure out a reliable way to separate. we do not have that reliable way. that is the system in which the public has lost confidence, and the buyers have lost confidence. we are in a pickle as a result. foreclosures that are not avoidable, i agree -- let's do them, and get the home sold, hopefully to someone in the community and get the community rebuilt. for the ones that are unavoidable, as mr. mcwatters pointed out, it makes no sense to go through these very costly for closures when -- foreclosures when both the

investor and the homeowner and up worse off. that is not an optimal scenario perplexed as an economist, i agree 100%. what mr. mcwatters said it is correct. if it is -- if it is in the interest of the buyer and the lender, that should be done. >> we want that to happen in all of those situations. >> thank you. >> superintendent neiman. >> one of the main frustrations has been issues regarding lost documents. that is why i have been so strongly interested. what is the level of usage? when will we begin seeing data regarding access and volume from counselors and borrowers using the system?

>> we just left our pilot phase in june of this year, and signed on some of the largest servicers over the summer, which is what you need. you need housing counselors to direct that volume. we have work to help endorsed the system for counselors throughout the country. we have thousands of loans on at that entered the system. >> thousands meaning? >> up to 6000. what is most important, is we tested it thoroughly. it was banks and counselors together. we have good agreement on how to operate and tell each other what is going on in a timely manner, and the guidelines. we are working closely with industry groups, counselor groups, as well as the banks and services geared >> plans for direct access by borrowers?

>> we would like to see that happen. one of the state parliament agencies already has direct access. we would like to see that more broadly offered. we think third parties should be helpful to the bar or in document retrieval and scanning -- to the bar or in document retrieval and scanning. >> by last question is also directed to you. you heard mr. evers talk about the limitations on sharing data regarding the proprietary modifications. however, the same restraint that was not applied to the industry itself to voluntarily share that information by servicer. >> we went to a long process to get all of the servicers to agree to share data.

i do not seek individual data. i have aggregate information. i would leave it up to the regulators and supervisors to work bank-by-bank. >> ideally, treasury, hope now, and the regulators, if they could find a way -- ms. gordon, how important is it to get that data out? >> our goal is to make evidence- based policy. when you cannot see the evidence, that makes it harder. we have been frustrated by the fact we have been -- we have yet to see the public release of the loan-level data that has been promised for months and months. the people of my organization, who do their research using this data, really, really need it. >> great. my time has expired. >> thank you very much.

i also want to thank ms. caldwell, for staying behind. i thought this was an excellent panel, and we all learned a lot. clacks today's election day, marking the end of the 2010 campaign. the faster turns freezing the first returns are not expected until after 7:00. join us later for results around the country.

that is all i c-span. today's votes will determine which party determines the house and senate. when congress returns, members need to work on federal spending for the budget year. congressional leaders say they want to vote on extending some or all of the bush administration tax cuts. you can watch the house live here on c-span. the president of the new york federal reserve will talk about the economy. william dudley spoke about the pace of economic recovery at the university of buffalo. this is about 40 minutes. >> we're very pleased to welcome

him today. we are delighted to see so many people in attendance. people from the business community are here, former faculty, students from the university of buffalo. we have some great high school students here today to -- here today, too. where are they? very good. they wanted to be here with us today. happy to have them on campus. for many years, we have been fortunate to host many distinguished speakers here to provoke our thinking on the issues of the day. our speaker today will do exactly that. on behalf of the office of the provost, and the office of economic engagement, we are very pleased to welcome the speaker here to our campus. our speaker today is the 10th president and ceo of the federal reserve bank of n.y.. a position he assumed two years ago. in natural, he serves as vice

chairmen at a permanent member of the federal open market committee. the group responsible for formulating the nation's monetary policy. an economist at the best served in many capacities, our speaker was a partner and managing director of goldman sachs before joining the federal reserve. his tenure at goldman sachs included time as an economist responsible for the firm's foreign exchange forecast. he also chairs the 10 -- g-10 committee. he is a member of the board of trustees of the economic club of new york and a member of the technical consultant group of the congressional budget office. we will have some opportunities for questions following our speakers presentation. please consider that during his

time here. we will have microphones in the aisle and we will ask you at that time to present yourself for a question. please welcome here to the university of buffalo mr. william dudley. [applause] >> thank you for coming. we had a great torres the upstate new york region. you're very kind in terms of the weather today. pretty spectacular for this time of year. as always, what i have to say reflects my own abuse and not

necessarily those of the open market committee or the federal reserve system. as many of you know, this is my first chance to speak at the university of buffalo. by way of introduction, i thought i would start with a description on what's been york fed does and what makes my job so interesting. it is part of the federal reserve system, which is america's central bank. it was established by congress in 1913. congress delegated to the federal reserve cut the constitutional authority to manage the money supply and designed to be decentralized. independent of the political process. the federal reserve system is comprised of the board of governors in washington d.c., that is the federal agency led by ben bernanke. + 12 relativelyn the country.

the district overseen by the new york federal reserve includes all of new york state, the 12 northern counties of new jersey, a fairfield county, conn., and pr. always a good place to visit in the winter. each reserve bank is autonomous. we are overseen by the board of governors in washington. the law that created the federal reserve system made it independent said that we can make decisions in the national interest free from political pressure. the fed is accountable to congress, however. to pursue the highest level of employment consistent with price stability. this objective is often referred to as our mandate because it combines high employment and low stabilization. in order to promote these objectives, we pay close

attention to financial stability because without financial stability, it is very hard to achieve our goals for jobs and inflation. we meet in washington a times per year to deliberate. our next meeting is tuesday and wednesday of next week. i am vice chair -- i get a permit vote on the committee. at these meetings, the 12 federal reserve banks president's and six members of the board of governors discussed the outlook for the economy and decide what they want to do in terms of monetary policy. to reach these assessments, we augment input from our research department of critical information about economic conditions that we draw from our board of directors, a regional advisory council, and conversations with local voters -- local stakeholders. it is designed specifically to provide timely information from

this area. in this way, the decisions of the federal market committee arc formed by views gathered by all parts of the country. one thing that makes my job even more interesting is that the new york fed is unique within the federal reserve system. we implement monetary policy. they can decide that they want something to happen on the monetary policy front, they instruct to carry out the operational arm of the federal reserve board. we buy and sell treasury securities. we are also the eyes and ears of the federal reserve on wall street. we operate a payments system that allows banks to implement payment in real-time between each other. we provide quite a few banking

sources for the u.s. treasury. we conduct the treasury auctions that the treasury uses to fund the federal debt. we also offered lots of services for central banks are around the world. there is the federal reserve adult, it is the largest repository -- repository of gold in the world. if you come by the new york fed, you can take it for a big gold vault. i encourage you to do that. we have a pretty diverse district compared to some of the other federal reserve banks. we have manhattan, which is pretty dense. it ranges all the way from upstate new york and the caribbean islands. there is plenty to keep us busy. in the last few years, it has been even busier than usual. let me talk about the last couple of years, the crisis and

our response. these are not normal times. the financial crisis that broke in mid 2007 intensified dramatically following the failure of lehman brothers really was the worst financial crisis the united states has experienced since the great depression. that crisis in the financial markets was followed by one of the longest and deepest recessions that we have had since world war ii. our actions and response to the crisis fell into two broad buckets. first, we took steps to -- so that financial markets could continue to function properly. in order to enable households and businesses to maintain their ability to obtain credit. we load funds to financial firms

secured by their collateral. traditionally, -- in the modern u.s. financial system, there were many other lenders that were not banks. they provide financing for credit card loans and many other activities. during the crisis, it is the head -- congress created the federal reserve emergency authority to lend to nonbanks. during the crisis, we were in an unusual circumstances. we used this authority to lend to a wide variety of financial firms and markets. a handful of times, we had to make difficult decisions with respect to making emergency loans offer banks -- for banks.

we did not do this because they wanted to help those firms. allowing them to collapse in a disorderly fashion would have done grave harm to the u.s. economy and to households and businesses throughout the united states. in all of the actions that we took, at the federal reserve loans were collateralized and we are very confident that we will be repaid in full. in the second bucket, we addressed the steps to ease monetary policy in order to support economic activity and employment. by the end of two dozen 8, were reduced short-term interest-rate that were directly controlled to virtually zero, the lowest level of short-term rates in the history of the federal reserve. given that the economy was so weak, and we went a bit further. we bought more than $1.50 trillion all long-term assets freddie mac that are supported

by the u.s. treasury. when the fed buys long-term assets, it pushes down long-term interest rates. this provides support to economic activity because it makes housing more affordable, it supports consumptions because households cannot refinance their mortgages at lower interest rates. in addition, it reduces the cost of capital for businesses. this encourages them to hire more and invest more and that lends to the economy. where are we today in terms of the national economy? the great recession has been followed by a tepid recovery. since june of 2009, economic activity has grown, but not robustly. in recent months, the momentum has slowed. after rising about a 3.250% in

the second half of 2009, gdp grew more slowly in the first- ever in 2010. we expect that we get the third quarter gdp numbers, we will see growth plus or minus 2%. with demand growth -- the rate of growth has not been sufficient to generate much and the way of employment gains. as a consequence, the unemployment rate remained stubbornly high. it is currently at 9.6%. there are lots of stock -- there is lots of slack and the economy. -- in the economy. why are we experiencing this now? why has the economy slowed? in the first year, at this recovery benefited from firms replenishing their inventories.

during the recession, inventories were drawn down sharply. but unfortunately, this effect has run its course. the benefits of that are now petering out. the u.s. and off that we have seen from inventory -- inventory growth to private demand growth has not been fully established. we have ongoing sluggishness in two key sectors that typically have led to recoveries. consumer spending and housing. the slow recovery of consumer spending and housing reflect the painful unwinding of the dynamics at work that happened during the expansion that preceded the great recession.

beginning around 2003, underwriting standards were significantly relaxed. that led to a sharp rise in household borrowing. the rise in home prices helped support more borrowing as household used second mortgages and lines of credit. this also fuelled a response in home construction. it increased demand for housing, robust hiatt -- home prices, but these prices could not be sustained without limits. when home prices peaked and started to turn down, the somewhat shoddy underwriting practices or revealed and the dynamic went into reverse and the home price boom turned into a bust. let's consider what this means for consumption. consumption rose at a 2% annual rate during the first half of 2010.

we're not saying much signs of a strengthening. several factors are keeping families from spending. jobs, income losses, low levels of competence, declines in well -- well, and household are saving more. lenders have tended to reinforce this with tightening underwriting standards for credit relative to what we saw previously. the question that is critical is -- have household completed their deleveraging? does the process have further to go? we believed substantial progress has been made in the deleveraging process, it is hard to tell whether this has run its course. let's consider why housing market activity remains depressed. one reason for this is that many existing homes stand vacant. we estimate that there are roughly 3 million vacant houses.

this will shrink when the foreclosure pipeline empties. and more of these empty homes are rented out or sold. on the sales side, even though mortgage rates are unusually low and house prices have boosted housing affordability to the highest levels in 40 years, the current pace remains free sluggish. impediments to home sales include tight lending standards, a weak job market and continued uncertainty about the future the trajectory of home prices. one important factor is that the large price -- drop in home price has reduced the amount of equity that households have in their homes. this makes it more difficult for homeowners to trade up and move into better homes. in fact, for many families, the mortgages that the whole today are worth more than their homes are worth. this means that they cannot

easily refinance their mortgages or sell their homes if they need to. on the foreclosure side, foreclosure completions are at all-time high. the initiation of new foreclosures may finally be starting to slow. recently, there is been a lot of attention on cases where the documentation used in the foreclosure process may have been flawed. the fed actively encourages efforts to find a viable alternatives to foreclosure. not many people know this but we have officials that work with mortgage counselors and community activist to support distressed homeowners. at the same time, we have to recognize that it is important that foreclosures to comply with the law can take place. this is a necessary part of returning the housing market to

normal conditions. along with two other agencies, the fed is reviewing the foreclosure practices at the major banks and mortgage servicers. we are keeping an eye on bank potential liabilities. we want to ensure that the housing finance business is supported by a robust operation. that means for processing new mortgages as for foreclosures. so that home buyers and investors have full confidence in the process. we are monitoring developments very closely in this area in order to evaluate the potential impact on housing, on financial markets, and on the overall economy. let me turn to economic conditions in upstate new york. it is no secret that this region has a weak economic growth and population loss in recent decades. the region has experienced some very painful economic restructuring, particularly as

it has lost many of its high- paying jobs over the years. the good news is that this process has yie ae productive and more diversified economy with a much larger service sector than before. for this and other reasons, upstate new york economy has weathered the great recession relatively well. while the of state economy -- its recent experience has been quite different. while things are not good here in absolute terms, the great recession began in upstate new york later than it did for the united states as a whole. job losses were less severe than for the nation as a whole. the relatively strong economic performance of the region is clearly tied to its stable housing market. upstate new york relatively slow economic performance and lack of population growth during the expansion of 2000's supported

only modest increases in home prices and sales during the housing bill. as a consequence of that, home sales began to -- home sales for relatively steady across this region. as a result, upstate new york has been largely spare the bill and bust cycle and housing. many of the upstate new york -- making these places among the best performing in the country. many parts of the country have experienced short housing boss -- busts. and fast-growing places such as california, construction jobs grew to be a very large share of employment. that was good news during the boom. during the bus, a large number

of these jobs were lost. this dynamic did not take place in buffalo were the housing sector was small to begin with. another important part of the story is that homeowners in upstate new york did not take on as much? in household here. home prices did not appreciate rapidly here so homes remained relatively affordable. there was generally much more penetration of risky non prime mortgages. upstate new york colognes have generally performed better than elsewhere in the country -- whole loans have generally performed better than elsewhere in the country. most of the region was scared at the worst effects. compared with other parts of the nation, the economy has performed relatively wellvelocas

are part of this story and they have contributed to the economic stability over the past few years. the university of buffalo provides a clear example of how a university can play a key role. the benefits of the higher education go beyond their direct economic contributions. these activities can increase the region's stock of human capital. that is the total supply of knowledge and skills in the workforce. it contributes to its economic success and resiliency. the educational activities of the region's colleges and universities help build the skills of a local work force. the knowledge secreted by colleges and universities of their research activities can play a key role regarding supporting local businesses. businesses can use university expertise, infrastructure, and

research to help them develop cutting edge products. universities also employ local businesses. this dynamic can expand local activity and create new jobs for highly skilled workers in the region. institutions such as the university played a vital role. the diversification of buffalo's economy has helped the region to whether the great recession. major investment in the buffalo and niagara -- to expand. it has become increasingly important part of the local economy. these sectors provide stability because they are less susceptible to contraction. the bank industry provides an additional source of strength. the strong canadian dollar

attracts canadian shoppers to shop in the united states. what is the federal reserve doing now? since the beginning of the downturn, the fact -- the fed has reviewed monetary policy to help support economic activity. as a consequence, things have been better than what we would have gotten without support. with regard to monetary policy, the fed has placed a highly accommodative stance. the fln see -- fomc has said it will keep interest rates of 48 -- al low levels for a long period of time. the federal open market committee has stated their commitment to take further action to bring interest rates

down further should economic conditions warrant. in a recent speech, i said that the current level of unemployment and inflation and the time frame over which they are likely to return to levels consistent with the mandate are unacceptable. i said that i thought further fed action would likely be warranted unless the economic outlook were too involved in a way that made me more confident that we would receive better outputs for employment and inflation. turning to a regulatory policy, the biggest lesson of the financial crisis is that severe financial disruption can inflict a very large cost on people's lives and jobs. over the past year, the fed's leadership -- to create a global financial system where players can not slide back into risking business as usual. these include the recent

agreement with international bank regulators to impose stiff liquidity standards for globally active banks. the considerable regulatory changes embodied in the dog- nk act.ct -- dodd-fram to avert future financial crisis is, we needed a financial system that can withstand a large negative shocks. participants must not have an incentive to take on excessive risks. incentives should reward actions that support economic growth and financial stability. financial firms must set aside enough capital liquidity so that when things go wrong, they can absorb losses with their own resources. finally, it is proved to be inadequate and financial firms dozen airports failure, but the official sector needs the tools in place to wind them down in an

orderly manner without having to make a terrible choice between economic failure that would devastate the entire economy versus a taxpayer funded rescue. in conclusion, i have to say that i have enjoyed my past few days traveling from upstate new york. it is been a real privilege to talk to all of you about how my job effects your lives and what is going on in your lives and how we can take that into consideration in terms weekend moderns -- conduct monetary policy and regulatory policy. the links i think are many. how we rely on economic conditions in this region as an input for how we formulate our policies. and how our efforts to restore financial stability have provided a more solid foundation for lending to households and businesses.

to summarize, conditions -- the region is showing signs of a modest recovery. a more diversified, more knowledge based economy and a relatively small housing sector helped limit the recession's impact on many committees in this region. nevertheless, the great recession did spread much pain about this region. the unemployment remains much higher than we would like. the fed cannot wave a magic wand and make the problems vanished immediately. but we can provide special support for the needed adjustments. even with our best efforts, the road to recovery is likely to be long and bumpy. i am confident that we will make its. . the private sector, combined

with academic learning and research, i am very confident -- i thank you very much for coming here today. i thank you for your kind attention and i will be happy to take your questions. [applause] >> we only have a limited time based on his schedule. please identify yourself and keep your question brief so that we can get a response. who would like to start? >> i am sending and i know you mentioned a lot about housing. a lot of people are seeing that -- saying that is where employment is.

is there going to be regulation toward health care as well? are you thinking ahead of that? >> want to give you some guidelines. we have a federal open market meeting next week. as a consequence of that, i am not supposed to top it all about monetary policy or the real economy. the national economy. if you could eat richer questions into regional economic conditions and financial reform, those questions i have no constraints. if you asked me about monetary policy, i may have to shy away from those questions. turning your question on health care. this is something that is far away from our dual mandate of full employment and price stability. but there are a lot of questions raised by health care reform as to how it will be implemented. this is a hugely important for

the wire -- for the country. it represents a large share of gdp. how health care reform is implemented will have significant effects for economic performance over the next two years. it is too early to answer that question of how that will go it is one thing that we hear about from the business community, quite a bit of uncertainty of what health care means for them. and that uncertainty is a factor that is one of the reasons causing people to be more cautious in terms of their behavior. >> question from the side. up at the top here. >> good afternoon. are the separate federal reserve banks able to address the

variation in employments in regions across the country? >> the way i would frame that is that the federal reserve banks all are very focused on economic conditions in their region, so that they can share that with the other federal reserve bank presidents and the members of the board of governors so that everyone has a good picture of what is going on in the entire nation. once that information is shared, monetary policy is based on what is best for the country. it would be very hard to have the 12 federal reserve presidents go to the meeting and talk about what is happening in the region. there would be a lot of disagreement and it would be hard to reach consensus. the information is shared. on a national picture is a symbol. it is fair to say that the federal reserve presidents and the board of governors make policy on what they think is best for the country as a whole.

>> any questions? bill, there is a question to the top. >> [unintelligible] we like to do things and i will let the follow-up on what you just described. my understanding is that there is a share of a information and gathering of them permission -- all the information. different regions of your constituency. the question is simple. what can the new york federal reserve bank do? >> we do a number of things. one thing we do is provide a lot of information about what is going on in the regional economy. every quarter we had a regional

economic briefing where we share information that we have assembled with reporters in the region to shine a flashlight on the key issues in the region. for example, last week we have a regional economic briefing focusing on housing and the difference in upstate new york, new york city, compared to the rest of the country. we do a lot of community outreach. that means working with community activists in the region. we do work on financial literacy, education. it is very important for us to stay well connected to the region. the reason why we spent the last few days here is because it is very important. this provides the legitimacy for the federal reserve as an institution. that is what the federal reserve has a lot of support nationally. i think it is hugely important

that we stay in touch with the region. we need to offer a value added back to you. we're talking about what other things might be advantageous -- where we have a comparative advantage in can be helpful in supporting activity in the region. >> we will take one more question. fed expect that the unfunded pended opera -- a unfunded obligations have a drag on the economy either regionally or as a hole in the future? >> do we think the unfunded pension liabilities of state governments have a drag on the economy in the future? i think the answer is of course those unfunded liabilities have some -- they will have to be funded. they can be funded by increased contributions or by changing the terms of conditions of those

pension commitments. it is not really clear exactly when this might take place and how it will take place and how significant the constraint will be from those decisions. i do not think that we should expect anything that dramatic in the near term. the pension liability took a long time to build up and it will probably take a long time to work down those unfunded pension liabilities. if this is a long run process rather than the short run process. >> thank you very much for your question. all like to introduce one of our students, he is president of the chapter of the delta sigma pi. dan like to present you with this token of appreciation. >> thank you very much. [applause] >> on behalf of the university

of buffalo student body and affiliated organizations, and of the professional business fraternity, i would like to once a grand think mr. dudley for joining us here at the university of buffalo. to show our gratitude, i offer you these two tokens of appreciation. the first is the millard fillmore presidential $1 u.s. coin. the former president was an original founder of the university of buffalo. he served as its first chancellor in 1846. the symbol represents the university of buffalo's impressment of our historic influences. it is that constant expression of our commitment to excellence and our contribution to society. the sec is a comer to the pan from the brothers of delta sigma pi -- the second is a commemorative pen from the

brothers of delta sigma pi. this is our obligation to further higher standards. i present these to you at this time. [applause] >> thank you very much. i have a selection of very interesting dollar bills and coins in my office. they have a lot of historic significance. i will add this to the collection. thank you. >> please get around applause to our speaker. -- give a round of applause to our speaker. thank you for coming today. that is the conclusion. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> nancy pelosi joined

democratic congressional chair committee crist and holland and a photo opportunity. they will hold their election watch and who until now the capital. -- in a hotel near the capital. >> we're very confident in our candidates and the message that they are giving to america that. mr. van hollen will have something to say about the returns that we're seeing thus far. but we see early returns and an overwhelming number of democrats coming out. we are on pace to maintain the majority in the house of representatives. but the people have to speak and

this election will not be determined by the pundits or a few precincts in the east. it will take place across all across america. we're very proud of the hundreds of thousands of volunteers who are knocking on doors and ringing doorbells and making phone calls to get out the vote for democratic candidates. >> as the speaker said, we are gathered here and as we speak, millions of voters for approving the washington pundits absolutely wrong, using high levels of energy on the democratic side. we saw this in the early vote where democratic early votes were ahead of projections. and now you're seeing strong turnout by democrats across the country and voting today. all this talk that we have heard from washington, trying to project the outcome of this election, it was so obviously premature. this thing is not over.

the voters are sending the opposite measure -- message. washington pundits do not tell us what to do before we get out there and take advantage of our democratic rights. >> bank you all very much. -- is there -- >> we're looking at various districts and bellwether districts in various districts. >> thank you very much. [inaudible]

>> join the senate about an hour for election results around the country. we will have victory and concession speeches and give you a chance to voice your opinion with e-mails and tweets. hart campaign coverage gets underway at 7:00 p.m. eastern here on c-span. a reminder that we have dozens of debates and political ads available for you online. you will also fine newspaper endorsements, analyses, and links to related web pages. that is all at c-span.org /politics. tomorrow on "washington journal," more reaction from the midterm elections from reporters from key districts. "washington journal" live every morning starting at 7:00 a.m. eastern here on c-span. also tomorrow, we will hear from

president obama if holding a post-election news conference at 1:00 p.m. eastern time here on c-span. now what georgetown business school conference on the implementation of the new financial regulation law. >> i will tear off here and talk about the economy. you have been talking about the financial background for what is next. i will give you more on the macro economy and the environment. i will try to relate the two subjects and the impact of financial reform on the economy for a few minutes in my talk. my overview of the economy is that we are in for a slow climb out of a deep hole. low inflation for some time into

the future. why slow? although the recession was deep, the slow recovery has been the experience following that -- the other recessions that occurred in the context of high debt and banking crisis. in this case, we have households who need to repair their balance sheets. household accumulated of very large amount of debt. on the basis of rising house values. although debt service burdens have declined substantially with the drop in interest rates, debt levels are still very high and many loans, particularly loans backed by house mortgages, are under water. there is a lot of what -- a lot of pain to work through on the debt side of the household balance sheets. households were counting on a high and rising house prices to fund their kids' education, they

run retirement, and with the decline in house prices, they will have to save the old fashion way by not spending. by not consuming all of their income. building their wealth and paying down their debt in that kind of way. the savings rate has risen from 1% and under to about 6% most recently. every dollar that goes around, households are taking a few more pennies out of that dollar and putting a toward saving. this is absolutely necessary to build a strong sustainable expansion and the economy over time. but as the saving rates happen, and more money is taken out and not spent, that is a big head when for the u.s. economy. not only households have some balance repair sheets to improve, but businesses as well.

they were vulnerable to runs because they were financing long-term assets, mortgages and traditions -- in particular, with short-term liabilities. as they became aware of the wrong vulnerabilities and the effects of the recession on their borrowers, they needed to rebuild capital, make up for past losses and tightened terms of lending very substantially. once again, this is something that needed to happen because they were way too easy. but in the year and in the problems of the recession, they became very tight. security markets are open for corporations. corporate bond markets, there are a lot of clothes there. for borrowers dependent on banks, households, small businesses, credit is still quite tight. this is even in the real estate area for plain mortgages. some securitization markets are

reopening but some such as jumbo mortgages are still impaired. the third problem is that we entered the recession with an overhang of houses and probably an overhang of consumer durables as well. these houses and durables were purchased with two easy credit, including second mortgages, lines of credit, and is overhang and excess supply of houses and durable-goods needs to be worked out. this is not a garden variety recession that begins when the federal reserve is worried about recession and tight monetary policy very tightly, slams the brakes on spending, and the spending is cut back in the federal reserve eases policy and there is a pent-up demand from the spending that did not get done in a tight policy periods. that is not what happened here. the federal reserve tightened

policy some but not a lot over 2004 and 2005. we did not -- the recession was caused by oversupply of houses and other things rather than tight monetary policy and cutting back on demand that way. the fundamental problem in of bubble, there were too many houses, houses too large to afford, and the price was to hide. it will take a while to come to these problems during we need to portion the losses between homeowners and lenders through loan modification, and foreclosures. that process is clearly imperfect in many dimensions and will take a lot longer than we previously thought. we need to get people into houses and apartments that they can afford over the long term. convert owners to renters were they cannot afford to be owners. and we need to work through the

overstock of houses. houses to not appreciate rapidly. the overhang and it has been situated by weak household formation. even after that recovers, there will be quite a few extra houses around. shadow inventory will keep the supply coming as people trade down. relative to a normal recovery, the economy is facing the headwind of a weak housing market. the fourth head when is the uncertainty about the future course of the economy. the death of this recession, the sudden onset of the financial crisis created a lot of uncertainty. this is not an experience any of us fortunately have had in our lives. it is hard to know how to react. there is a huge amount of uncertainty out there. uncertainty has been compounded for households by the very weak labor market. businesses found ways to produce more with fewer workers.

there was a substantial increase in productivity in 2009. businesses have been very cautious about hiring. they have expanded hiring but temp workers rather than adding to payrolls. these weak labor markets feedback on consumer confidence and undoubtably on consumer spending. we have an adverse loop between weak labor markets and consumer spending. a lot of these factors that i've talked about, maybe not productivity, but some of the others are typical of debt and banking crisis. but i think we're facing some issues as an economy that are not typical of such crises. one is the global character of the recession. but global integration of financial markets meant that problem sped -- spread rapidly. they pulled back everywhere at the same time when their access to liquidity and credit

worthiness was called into question. if emerging market economies have come back from the downdraft that this cause, but many of our major trading partners are still very weak. we cannot rely on demand from these trading partners to pull us out of this recession. tax and regulatory uncertainty is always with us. it is not the main force blocking spending. i think that is concerned about how the uncertainty of the recovery is going to go. but certainly tax and regulatory uncertainty is weighing on the wrong side. tax side, congress could not even tell us what our tax rates would be on january 1, much less what they are going to be over the next decade is we come to grips with our government deficits and debt problems. on regulation, health care changes -- justified on various policy grounds -- but they are

adding to uncertainty as to what a new hire will cost over coming years. many of these things holding us back are abating and will update over time -- update over time. but it will be a gradual strengthening from here. households are rebuilding net worth for the saving i was talking about. it will slowly get more comfortable with their balance sheet positions as debt relative to income falls, and with the drop in wealth, the decline of housing rise largely behind it. saving rates could go up some more. it is not clear whether it will not. but the headwind of the substantial rise in savings -- it would be very surprising that have that happen.

capital in the financial sector is being rebuilt with greater earnings per if problem loans are beginning to -- their competing to little more than for it -- vigorously for new credit. the last one we had was all this and we will get another in november. any loosening in credit is from a very tight level. securitization markets are continuing to open. we see some of this in the c&s market. in honor of this convocation, i ask myself what the effects of financial reform, regulatory reform, dog-frank requirements in the financial sector and private sector are likely to have on the recovery, how they are likely to dampen the recovery. i think the key point here is that the political process, the

g-20 leaders said that the financial sector, rather than the taxpayers, must be equipped to absorb risks, the kind of shocked to the system that we have had over the last couple of years. tail risks, that can be reduced by a number of things, structural things in the financial market. my guess is that you talked about derivatives markets today and central counterparties and things like that. that could be very helpful in reducing the complexity and the odds on structural problems. the federal reserve in the fslic in -- and the fsoc is stars -- charged with looking for problems that might be building up and taking action to diffuse those. that also will take the pressure of the financial sector.

even with that reduced to tail risks, the risk was badly misunderstood in this price before the crisis. i think better understanding and more absorption of that tail risk by the financial sector implies higher rates on credits , relative to the cost of funds. of blog -- on a broad variety of credits. having flinders with more capital be more liquid is part of the equation that transfers the risk back from the taxpayers to the private sector. moreover the implementation of dodd-frank and causal -- basel iii will be sped up. it would be better than the taxpayer bearing the risk. ultimately borne by the

customers of the banks. customers who want to live in short on deposits and borrow along with 30-year mortgages are going to find that the spread is wind out. -- widening out. i think there will be in effect on the cost of credit. if the requirements or phased in slowly, credit availability should continue to improve, given that it is much tighter than it needs to be as the economy returns for prosperity, so there will be up dampening effect. i think it is quite limited. and there is a very positive long run trade-off for these changes, the extent that the requirements and the changes in practices make our system sector, but more resilience, less subject to this sort of crisis we have just been through. that crisis is adding substantial continuing costs,

reducing the possibility of incurring those costs again. it seems to me, it is a very positive aspect of regulatory reform and higher capital and liquidity. i think that the heading, the fading of the head winds from credit availability will still occur despite the efforts made to make a financial system safer. overhangs of durables are probably disappearing, another headwind fading a bit, disappearing. those things do depreciate. business capital spending, we see the evidence of pent-up demand in the business sector. equipment has been very strong over recent quarters. productivity is likely to grow less rapidly. i do not think productivity will fall back again, but it will not be as strong as it was last year. that means that as demand strengthens and, more will pass

through to the labor markets. therefore i think that will help household confidence and we could get into more of a positive feedback loop in this - one them we have now. i said it was a slow climb out of a deep hole. let's talk about hole for a second. one of the controversial aspects of the current situation is how much unemployment, the five percentage increase, how much as structural and how much of consequence of the business cycle? i think some structural. structural unemployment has risen as a consequence of extended unemployment benefits, and also job matching issues. skills for available jobs, the ability to move to new work. we're going have fewer billable -- fewer people building

houses, if fewer people and financial-services and consumption sectors. they need to find jobs and other sectors and they need the skills to find jobs in the other sectors. so there is some structural unemployment. some of it will cool way as the extended unemployment benefits are phased out. i think most of what we are seeing is cyclical, the absence of demand rather than a frontal. i think the job losses are widespread, suggesting it is not in a couple of sectors where people need to find work. it is very broad, all over the economy. it is not just about job matching. as i say, a majority of the five percentage point bank increase in unemployment represents real slag in the economy. and we can see this in the inflation and compensation.

inflation, cpi inflation was in the 2.5% range, and it is now 1% or even under in the most recent data. that suggests that there is a very competitive environment out there. many -- plenty of slack in the economy and people competing for sales. because i see the slacked as large and only diminishing slowly, i see inflation staying low for several years. slack will continue to make the pricing environment in goods and labor markets highly competitive, putting downward pressure on inflation. the inflation expectations seem to be accurate above the current level of inflation, and assuming these remain anchored, and i will come back to this when i talk about monetary policy, that will be exerting a upward pressure on inflation. people are acting as they expect inflation to be at 2% rather

than 1%, they tend to act to pull of the inflation rate. but the slack in the economy in the competition for jobs and to sell products is tending to pull the inflation rate down. they are roughly in balance. it can see these low levels of inflation persisting for some time. expectations to play -- i want to emphasize the key role expectations play in inflation formation. they helped to define some of the risks and i will come back to this later in the discussion of monetary policy. what can policymakers to about this? in the case of fiscal policy, unfortunately, the alternatives are somewhat limited. this is a textbook situation, a classic situation for the fiscal stimulus. private demand is deficient. the federal reserve is holding interest rates low. the risk of crowding out with

additional fiscal stimulus, of raising rates by additional fiscal stimulus is low. but there are very widespread problems to additional his goal stimulus. one is skepticism in the political system about the efficacy of stimulus. we had a slug of stimulus of a few years ago. it is hard to see the effect. the counterfactual is always a very difficult argument to make in the political arena. if we had not done this things would have been worth. but the experience i had at the federal reserve in the last few years -- if we had not taken our actions on liquidity, the purchase of securities, i think things would have been a lot worse. it is a hard argument for people to grasp when you come through that crisis and it was not worse as it was. there is widespread skepticism about what would work. without a long-term plan for

dealing with the unsustainable deficit and debt situation, short-term stimulus makes problems potentially worse. you come into the next few years with even higher debt. i think there are a number of reasons to think that fiscal stimulus, however the economic textbooks that are taught here at georgetown, i am guessing, whatever they would say about the situation, will in the political arena be very difficult to get through. as long as the long-term path of fiscal policy is unsustainable, there will be uncertainty about the eventual of luck, and that uncertainty plays on damping the recovery. uncertainty is not good with people to make forward-looking commitments to spend, hire people, things like that. i do not know what to do about that. i think the political system has to come to terms with that.

i do think that the system will have to make quickly a decision about what the near term tax rates will be. that will relieve some uncertainty. make a decision and people will work around it. on the regulatory side, as i noted some regulation is necessary. to achieve a social goal, but i think we need to make sure that we are subjecting regulations to rigorous cost-benefit analysis. i think we need to reduce the uncertainty as quickly as possible and put the regulations in place, whether in the financial sector or in other sectors, so folks can know what they're dealing with and can work around it. and the government needs to recognize -- and this is part of a cost-benefit analysis -- that businesses must be -- sees profitable opportunities to spend or hire people. we need to make sure that we do not damp that out. what about monetary policy?

i want to emphasize that i have no inside information here. i had been out for two months. i was not part of the september fomc deliberations. i have not been a part of anything since then. i will not predict what the fomc might do. my advice is listen to the committee in their chairman. they are much more informed about what they may do then i might do. let me make a few points about the potential for a future -- for a possible additional steps by the federal reserve, and hope to help you understand some of the issues they are grappling with. the federal reserve has a mandate, a legislative mandate for high employment and stable prices. the chairman just the other day designed this -- to find the

stable prices as 2% inflation. why did he say to%? that does not sound like price stability. even with errors and biases in the price index, it is closer to 1% as absolute price stability. the higher inflation rate should give you slightly higher nominal interest rates. it your nominal interest rate is about 3% with 1% inflation rate over long periods, they should be about 4% with a 2% inflation rate over a long period. the higher nominal interest rates in good times means that as i shot hits the economy, the federal reserve has further to reduce i'd been downward shock, they have further to reduce interest rates before it hits 0% in order to cushion the economy against that shot. having a 2% inflation

definition of price stability gives a little more flexibility to the federal reserve to hit its other mandate of maximum employment. something is driving unemployment down, and it has more room to lower interest rates. that is what they call that the mandate consistent inflation rate. as i noted in my presentation, i think both employment and inflation are likely to run short of their goals for some time. going to be running with a high unemployment rate, and a low inflation rate, well below -- almost 2% that the chairman was talking about or why. i do not expect deflation or recession, but i do not -- the outlook i have outlined is not have those two variables near what the legislation would ask for.

as i also noted, declining inflation expectations are an important downside risk. inflation was being held around 1% by two opposing forces, the slack and the extra people looking for work and businesses looking to sell stock, it was putting downward pressure on inflation. inflation expectations were counterbalancing that and pulling inflation up. inflation expectations start to decline -- that counterbalancing force starch to add an inflation going down. declining inflation expectations, as the committee pointed out in the minutes of its last meeting, it implies their real interest rates are rising. if i am right and we are in for a slow climb out of a deep hole, the economy does not need higher real interest rates discourage in spending. and there is a risk under those

circumstances, not high expectations, that you could get into an adverse spiral of rising real interest rates, slower growth, the unemployment rate not declining in all, inflation going down even further. it is not the most likely outcome but it is a risk. it is clearly one that the fomc is concerned about. they pointed that out in their last analysis. monetary policy is not the reason that the recovery is so modest. i pointed to half a dozen had winds -- headwinds, the overhang in housing, things like that. interest rates are incredibly low, liquidity is plentiful in every sector of the market. even though monetary policy is not the problem, monetary

policy potentially -- even at the 0% bound -- can help ameliorates the effects of some of these other systems. lowering -- short-term interest rates are already a 0%. if the federal reserve were to decide to purchase more intermediate and longer-term treasury securities, putting some downward pressure on intermediate and long-term rates, that reduces the cost of capital and helps to boost asset prices. it discounts the expected earnings loves from companies and brittle flows from housing as a -- and it will raise prices. it sounds like a constructive thing to do at a time when the economy is fighting against balance sheet constraints. but there are negatives that the open market committee will have to wait. this is about comparing costs and benefits. the benefits are very hard to

calibrate. we have very little experience -- fortunately -- with this kind of policy under the sorts of circumstances. it is hard to say what additional purchases -- what benefits will bring. it is unlike moving interest rates around, which we have decades of experience doing, and can track their effects through the economy. we do not have that kind of experience with buying assets. to some extent these channels are a bit clogged. to think about lowering intermediate and long-term bond interest rates. one channel might be refinancing on houses so that borrowers have lower obligations and have more income after interest income. but to the extent refis --

that is going to dampen the response. and uncertainty dampens the response to lower interest rates. more people are uncertain about the future, the less likely they are to respond to the small decline in the cost of capital. the second problem is that the more the fed buys, the more it will have to work at exiting -- selling are getting rid of those securities at some point. the federal reserve has worked hard at developing the tools and instruments to do that. i think this is been a very constructive aspects of the policy, as run by chairman bernanke, but it is absolutely critical that the public have confidence that the central bank can have -- head off inflation when it needs to do so. i think this is especially important at a time when fiscal policy and the trajectory for the debt and the deficit are not

seen a sustainable and under control. and people to worry about the intersection of fiscal and monetary policy and the temptation for the fiscal authorities to lean on monetary authority month to monetize that debt. i think it is absolutely essential that the federal reserve continue to make the case that it has the tools to exit this policy when it wants to do so, and not all of the tools, but the will to do so. i believe that it does in both cases. everyone at the federal reserve -- it is in the drinking fountains, i think, it is in the water, in the dna -- i am not sure the right metaphor -- concerned about allowing inflation to rise to uncontrollable levels. those is that the 1970's, that was a very bad time. the central bank is very aware

of part of its mandate for stable prices. it will take the actions necessary, i am completely confident, to meet that piece of its mandate. it is important that people not think otherwise. finally, the purchase of intermediate and longer-term securities does distort asset prices to a degree. there inducing people to take on more credit and interest-rate risks than they otherwise would. denison's, overriding the market judgments of people is the whole point of the exercise of buying these securities, trying to drive down as interest rates more than they otherwise would be. had some point, there is a deliberate distortion of asset markets in many respects, and it drives up equity markets, trying to elevate housing prices, and

that is the way in that we exit the economy. exit this week growth period more quickly, if that is what they decide to do. but there are risks there. your inducing people to bring purchases from the future to the present. as the economy recovers, the distortions will on wind and we do not want that on winding to a friend financial stability -- to threaten financial stability. federal regulators need to step up regulation to make sure there financial institutions are not taking on more risk than they know what to do with. and to be ready for the eventual exit from this low interest rate policy. let me say a word or two about the international and global dimensions of this. they have received heightened the tension in the recent days.

this is a difficult situation globally. if slow growth in industrial economy is all around the world. there are some exceptions but not that many. and the reliance not only in the u.s. but in other places on monetary policy to help their economies grow, fiscal policy and some other countries -- think about the uk as they tighten quite substantially. and in places in europe as well. you have fiscal policies that is neutral or tightening, relying on monetary policy, and that means you have very low and just rates throughout the industrial world. this is putting pressure on prices in the emerging markets which are growing more quickly now. to some extent, this easy monetary policy is having a tax that are not exactly welcome in other economies. but i think we must return to

higher levels of resource utilization in the united states. this is a very serious it's a question and it does not in anyone's interest for the united states to stay weak for long. in the u.s., we have a huge reservoir of fun use labor -- of our newsletter. lots of long-term unemployment. the longer they are unemployed, the less attachment they have to the labor force. their job skills deteriorated and there could be long term effects on our ability to produce. we're also seeing the longer that this weakness persists, the more that there are protectionist pressures which would safeguard against imports, which would be very dangerous to the global economy and the u.s. economy. but when we return to higher levels of spending, we cannot replicate where we were quite sure years ago.

where we were four years ago worked consumer spending -- u.s. consumers spending almost all their income and accumulating huge amounts of debt. u.s. builders building more houses than anyone would want, and u.s. financial institutions producing some pretty toxic assets in the financial sector. we have seen that movie and it did not and very well. when we come back to higher levels of unemployment, we need less consumption, less residential investment, less financial sector activity, and more investment and higher exports. the world cannot count on u.s. consumers driving global demand. this implies that the rest of the world needs to lift its demand. there is a global demand cap --

gap. if the u.s. cannot and should not phillip, the rest of the world will have to step in. the ones that have the surpluses in their current account. they are depending on exports to the u.s.. they are not going to be able to do that. they will have to increase domestic demand. for the run sake and for the sake of the global economy. logically most of the policies that will bring about this realignments or demand-type policies, the industrial countries including the u.s. need to have more sustainable fiscal policies over time, dampening demand from the government sector. and the emerging market economies need to have more domestic demand. so that they fill that gap. mostly it is about affecting demand, but also about changing -- to make that effective we

will have to change some relative prices of stuff produced here and stuff produced there. i was glad to see the g-20 played for more market determine exchange rate. i think that that would be a very constructive move. they also pledged to resist protectionist pressures and strengthen multilateral cooperation. i think the devil will be in the details, or maybe a better cliche would be, it will be implementing that that will be critical. it was helpful to see the g-20 finance ministers and central- bank governors recognizing that tensions in the global economy, and at least saying the right things about addressing those tensions and coming out with more sustainable patterns of growth globally then we have experienced in the past few years.

that concludes my presentation. i would be happy to take some questions, unless you are so anxious to get to the drinks. [laughter] and i would not blame you after listening to me. any questions? go ahead. >> precursor research. given the point that you made about the deep hole, keeping pressure on the aggregate credit because the people deleveraging and credit losses -- and given the fact that the banking system is still broken dealing with this issue, and the multiplier effect, you expected quantitative easing -- how long can you do this for? quantitative easing. and are there any limits to how how lock -- how big you let the balance sheet get? >> the effects of quantitative

easing have not come so far from the creation of reserves, which you are absolutely correct, banks do not seem to be anxious to put them to work. you cannot see this. the loan growth is negative or very slow depending on the category. a loan pricing suggest that they are still not aggressively seeking loans. i agree that is not working. but the aspect of quantitative easing -- and we've seen this over the last couple of months as chairman bernanke started talking about it at jackson hole -- lowering interest rates and elevating equity prices, and of reducing the exchange rate a little bit, that can have positive effects on the u.s. economy, even if banks are not using -- are not trying to use those reserves to expand their balance sheets. it would be better -- the whole

process would be faster, i think -- if banks felt more comfortable and more confident that risk adjusted, there were opportunities out there to make loans and they started finding small businesses in particular. that is not a necessary condition for this quantitative easing to work. as to the limits, in some theoretical sense i think that there are not many limits. but the limits are the negatives i was talking about, the costs of talking about. the federal reserve needs to be absolutely certain that people know that it can exit when it needs to exit. they need to beat careful about the distortion asset prices, even if they are quite

delivered. indeed supervision and regulation of key financial institutions. the need to keep up with those distortions. people need to be careful about what happens when it unwinds. yes? >> i understand the levels of quantitative easing being talked about are in the order of the hundred billion dollars a month, multiplied out by year. you're talking about $1.2 trillion. how was that not monetizing the debt? how can you not see that as it debasing the currency? >> without commenting on the amounts that might be done, it is monetizing the debt because it is buying the debt and creating the reserves with that. but that modernization of the debt is not intended to reduce the discipline on the fiscal of ies.sts, -- authority o

i believe the federal reserve does have the tools to demonetize that debt when the time comes. we have worked very hard -- and i am still saying week -- to develop those tools to absorb the reserves when it is time to raise interest rates. yes, if they decide to go ahead and do this, that would be buying government securities. in a sense that is monetizing the debt. but when people say monetizing the debt, the reason that is a scary term is because it implies a threat of inflation down the road. that the fiscal and monetary authorities will be tied together so tightly, the monetary authorities will be able to stop monetizing the debt. -- will not be able to stop monetizing the debt. in that is not an issue in the

united states. they will be able to stop monetizing the debt when it is time to do that. i am absolutely confident of that. people should not be concerned that purchasing treasury securities will compromise the federal reserve possibility to control inflation. -- the federal reserve's ability to control inflation. >> that capital requirements for banks, they discriminate against the borrowers. how much do you think that the distortion -- for instance, small business entrepreneurs are required by 8% -- when they lend to the public sector, it is 0%. how much of that introduced distortion in the rate that we're seeing the right now? >> it should not introduce distortion. if that is done correctly. then those capital requirements

should be proportional to the risk. i think it is not a distortion to say to a bank, if you are doing something risky, if you have not hold more capital. if you are doing something not risky, if you have all less capital. i do not see that of the distortion. if the capital requirements are not well calibrated, then there will be distortions. but the effort is to calibrate the capital requirements and they should not be distortions if it is done right. ok. now what really is time for drinks. [laughter] all right, thank you very much. [applause] >> thank you, dr. kohn. the fourth floor is where the drinks will be for those of you that made a reservation.

they will be just off the first floor. thank you all for being here and look forward to seeing this evening. >> polls are starting to close around the country. c-span's live election night coverage begins in just a few months results, victory, and concession speeches and your calls, e-mails, and tweets. we continue to bring you the updated information about races tomorrow. at 7:00 a.m. eastern, a number of political reporters plus your reactions. then the afl-cio's richard trumka will join us for election results. that is at2 8:00 a.m. on at. later in the day, president

obama will hold a press conference in the east room of conference in the east room of