his? or are they? >> for the first couple of years, this administration was not very favorable to business and free enterprise. they were using rhetoric that talks down to wall street, but some of the policies, cap-and- trade, unfunded mandates, micromanaging of parts of the free enterprise system, >> you think it was a bad decision to let gm go? another too big to fail policy was invoked but what was in it for the small business? nothing. i will say that pieces of the stimulus were helpful. some was just increased spending for democrats being out of power

for 15 years. if they had spent the money-the stimulus package on infrastructure -- spent the money on infrastructure that would have been one time non- recurring expenses that would have gotten people back to work right away. what we are investing this year now that we have a surplus and i forecast $500 million in new money because our economy is growing faster, we are putting money into higher education. that is absolutely critical part of growing your economy, improving higher education opportunities. secondly, we are putting money in transportation and into new development and trade. i have asked for another $54 million from the general assembly this year on tax credits to direct subsidies to other incentives to get business to come to virginia. >> when you talk about investing

in infrastructure, education, is it different because it is at the state level versus the federal level? >> not necessarily, i think some of the things the president has begun to talk about after two years of things that have not been helpful, investments in infrastructure, it is a good idea. we have crumbling and substandard infrastructure in many parts of the country. i think those investments are uprooted -- those investments are prudent. i just say it is a little late. that is what should have been a big part of the stimulus package as opposed to 6%. we are going to invest about $4 billion in roads in virginia over the next four years. that is critical for our future

prosperity. >> we have a question from a student at the university of north carolina. go ahead. >> good morning. i had a question, you were talking about engaging in trade with other countries and opening of borders. the u.s. exports goods to other countries, you are concerned about how it will affect the global economy and how it will be detrimental to other economies not on the same plainfield. >> -- not on the same playing field. >> i am glad you are calling from north carolina. you are a very staunch competitor with virginia. that is the way it ought to be. we want states competing with one another. the governor has done very well in attracting jobs to those states.

i believe in free trade. i guess i am less concerned about the concerns of the young man. we ought to try to promote american goods and services around the world. if there is not a balanced playing field, that is an issue for our federal government. i know there are a lot of concerns about protecting property rights in china. i am cognizant of that but at the same time if i can expand markets for virginia products in korea and japan, i will try to do it. >> we have a question right here from the live audience. all the way in the back. >> good morning. i in a defense contractor in arlington. -- i am a defense contractor. my question was about in a pending defense cuts and how this will affect the state of --

my question was about impending defense cuts and how this will affect those working-va. >> thank you for your work. we have the greatest military on the planet. you folks are doing a marvelous work for the folks around the globe. i could not be more proud of our military. we are the home of the u.s. military with the pentagon and the naval base in norfolk. the federal government makes enormous investments in virginia in defense. there are plans by secretary gates to put more money into the war fighter and less in administration. we have $14 trillion national debt that is unsustainable. every branch of the federal government ought to look at how they can cut. it needs to be done in a prudent

way. that is why i am concerned about the jobs and cutting back on investment in virginia. the recent announcement the secretary made about reducing the joint forces command presence in hampton roads and producing contractors 30% in virginia -- it was of great concern. i know general odierno will make an announcement this afternoon, so i will let him make that announcement. we will do better in virginia than we had hoped, but with the defense contractors' side the 30% was completely arbitrary. no analysis about whether it will create more value or whether those services could be done cheaper than a contractor. we have a work group at the table to look at that because i do think so much of the

technological capacity that makes us a superior war fighter in america is because of the great technology our defense contractors provide. hopefully we will have a good presence at the table. >> another question from the audience. >> i am the president of the association for competitive technology. we represent thousands of i.t. companies around in -- around the world. gm will probably sell more cars to china this year than they do in the u.s. you mention expanding agricultural sales. you made a reference to the problems associated with intellectual property, but virginia has to confront the issue while china appears to take their own intellectual property more seriously, what do we need to do to get them to take the innovation and green technology that are coming out

of virginia more seriously there? those markets are really available to entrepreneurs in virginia. >> that is part of the purpose -- thanks for your leadership, by the way. i think that with that size of a population and with more opportunities for markets to be open over their, it is a prime time and opportunity to talk to them about some of these technological advancements. you pointed out the key challenge is that what we don't want to do is take some of the great new stuff entrepreneurs are creating in virginia and everything that we have that has been protected through art patent and trademark office gets immediately appropriated and you lose the value and you have

copied materials for that technology coming out of china. that is still a huge concern for our federal government. it is ongoing work with china to find a way to balance the plainfield. but on any -- to balance the playing field. we need to push to expand those markets over there. we know there is a flood of goods from china that are being manufactured. a lot of them used to be manufactured in southern virginia and now are being manufactured in china. i would much rather have them take those things manufactured here and purchase them. the president was right when he said we need to make things again in america. we are less towards the manufacturing industry. we have to get back to that.

>> you have a question from online. >> this is from one user. he would like to know where do we think a job growth will be in 2015-2020? what should our colleges be doing to prepare today's americans? >> that is a crystal ball. >> that is a great question because we are examining it this year. i have asked for major reforms in our higher education system. there is a bill that passed unanimously because there it will now be a link between higher education and economic development. you cannot grant degrees without a sense of what the jobs of the future will be. when you look at some of the pacific rim countries like china and japan, they are doing a marvelous job. we are way behind in the number of engineers and scientists that we graduate.

that is a bad long-term trend for manufacturing industries. the question is timely. for us in virginia advanced manufacturing, fence contract in of all flavors but -- defense contracting of all flavors. these are things we are good at that we are growing and we want to invest. i know where those jobs will be so part of our restructuring is to create incentives to be able to create the degrees in those areas where we will have adequate work force to meet those demands in the future. that is critically important so that the young person now in eighth grade will know what be -- what will be on the table for their future. >> what have you learned in the year you have been in office

about job creation that surprised you? >> that this trend towards incentives is not going away. some would call it corporate welfare, but we talked about a young man who called in from north carolina. the governor has three times the amount of incentives in virginia. >> what is an example? >> i have something called a governor's opportunity fund which is a cash incentive to locate to virginia. microsoft just made the largest investment in southern virginia. we offered a series of incentives to come. northrop grumman relocating to fairfax county this year. we offered a cash incentive to offset the cost of the relocation and create incentives to come here to have proximity

to d.c. i guess the bigger one, morant then the incentives, -- more than the incentives. what my predecessors of virginia, jefferson and henry said were important are still important now. that is the basic impediments to free enterprise are still problems today. if you have a climate in your state that is not friendly on those issues, you will not be able to expand. if you do, you will grow. there is nothing new under the sun in terms of what it takes to promote a strong economy. to the degree that virginia promotes those values, we will stay strong. >> indeed some taxes to provide these services people need -- you need some taxes to provide these services. >> we have to be able to build

roads and hospitals. >> governor mcdonnel, thank you for being with us. thank you. >> up next comment federal reserve chairman ben bernanke testifies about the u.s. economy. then house speaker john boehner and republican house leaders meet with president obama. later, a hearing on state and local government debt. >> on tomorrow's "washington journal," we will get an update on the federal budget. later, won his story on the lincoln presidency and the 150th anniversary of the civil war. "washington journal," each morning at 7:00 and the heads of the cia and director of national

intelligence testified that u.s. security threats. live coverage at 10:00 a.m. eastern. then at 10:30, james steinberg will take questions about the political unrest in egypt. that is live from the house foreign affairs committee. >> federal reserve chairman ben bernanke told a house committee he is not worried about inflation and talk about economic growth for 2011. he testified at the house budget committee which is chaired by paul ryan. we start with mr. bernanke's opening statement. >> thank you very much. chairman ryan and other members of the committee -- >> can you pull your microphone closer? >> thank you for inviting me. i am pleased to offer my views on issues pertaining to the

federal budget. the economic recovery that began in 12,009 appears to have strengthened in the past few months. -- that began in 2009. the initial phase of the recovery that occurred in early 2010 was a charitable to the stabilization of the financial system, the effects of fiscal policies and the strong boost to production from businesses rebuilding their depleted inventories. economic growth slowed significantly last spring. concerns about the recovery intensified as the and the test from fiscal stimulus diminished if and as your's fiscal problems troubled financial markets. fiscal as europe's problems troubled financial markets. real consumer spending rose at a rate of more than 4% in the

fourth quarter. although strong sales of motor vehicles accounted for a significant portion, recent gains appear broadbased. this is investment in new equipment that increased robustly last year s. firms replaced aging equipment and the demand -- as firms replace aging equipment. construction remains weak, reflecting an overhang of foreclosed homes and poor fundamentals for commercial real estate. improving household confidence, and more supportive financial conditions and willingness of banks to lend it seems likely to result in a more rapid pace of economic recovery in 2011 than we saw last year. while indicators have been encouraging on balance, the job market has improved only slowly. following the loss of 8 million

jobs from 2008-2009, private sector employment expanded by more than 1 million. but this was barely sufficient to accommodate the recent graduates to the labour force, and not enough to erode the wide margin that remains in the labour market. notable declines in the unemployment rate with improvement of job openings and firms hiring do provide some grounds for optimism on the employment front. even so, with growth likely to be moderate for a while and the employer still reluctant to add to payrolls, it will be several years before the unemployment rate returns to a normal level. until we see sustained stronger job creation we cannot consider the recovery to be established. on the inflation front, we have seen increases in prices,

notably gasoline. prices of many agricultural commodities have risen largely as a result of the strong demand for emerging market economies coupled with constraints on supply. nonetheless, inflation is still quite low and longer-term expectations remain stable. prices for all the business services consumed by households increased by only 1.2%. to assess underlying trends in inflation economists also follow several alternative measures. one such measure is core inflation which excludes food and energy components and can be a better predictor of inflation. core inflation is only 0.7% in 2010.

wage growth has slowed as well with average hourly earnings increasing only 1.7%. these downward trends is not surprising given the substantial slack in the economy. although the growth rate of economic activity appears likely to pick up, the unemployment rate will remain elevated for some time. inflation is expected to persist below the levels of the federal reserve policymakers have judged to be consistent over the longer-term. under such conditions the fed would typically ease monetary policy by reducing its target for the federal funds rate. however, the target range has been near zero 2008 cents, leaving no room for further reductions. -- the target range has been near zero since december 2008. the past two years the fed has

eased monetary conditions by purchasing longer-term securities. these purchases have settled into the banking system with -- although large-scale purchases art a different monetary policy tool then the more familiar approach, eight two policies affect the economy in similar ways. this works by lowering market expectations for the future path of short-term interest rates, which reduces the current level of long-term interest rates. these changes bolster household and business spending and increase economic activity. by comparison, the purchases of

longer-term securities does not affect short-term interest rates which remain close to zero, but put pressure on longer-term interest rates. by easing conditions in financial markets these encourage spending by households to the same channels of conventional monetary policy. a wide range of market indicators suggest the security purchases have been effective at easing financial conditions, of letting -- lending credence that this provides economic support. my colleagues and i have said we will review this program regularly in light of incoming information and will adjust it as leavitt to promote stable prices. -- adjusted and use it to promote stable prices.

our ability to pay interest on reserve balances held at banks will allow us to put pressure on short-term market rates and tight monetary policy when needed. -- tighten monetary policy. we have developed additional tools that will allow us to facilitate the smooth withdrawal of policy accommodation. we could also tighten policy by reading or selling securities. -- by redeeming or selling securities. the purchase of longer-term securities are not comparable to ordinary government spending. the federal reserve requires -- acquires financial assets. these purchases do not add to the government's debt. the fed will normalize its balance sheet by selling these assets back into the market or allowing them to run off.

the interest that the fed turns from the security holdings adds to the remittances to the treasury. in 2009, those remittances totaled $225 billion. fiscal policy makers also face significant challenges. the fiscal position has deteriorated since the onset of the financial crisis. a significant deterioration is the result of the effects of the weak economy on revenues along with the actions the administration took to ease the recession and steady financial markets. even after economic conditions returned to normal, the federal budget will remain on an unsustainable path with a budget gap becoming increasingly large overtime unless the congress enacts significant changes. under plausible assumptions about how fiscal policies might the cbo projects the

deficit to fall to 5% of gdp by 2015, but rise to 6.5% by the end of the decade. in subsequent years the budget situation will deteriorate even more rapidly with federal debt reaching 90% of gdp by 2020. the long-term fiscal challenges confronting the nation are daunting because they are mostly the product of powerful underlying trends and not temporary factors. the most important driving forces behind the budget deficit are the aging of the population and rising health-care costs. the cbo projects health care spending will roughly double as a percentage of gdp over the next for the five years. the ability to control health care spending while still

providing high-quality care to those who need it will be critical for bringing the federal budget on to a sustainable path. the cbo's long-term budget projects since -- projections do not account for such high deficits, but if this were to grow at this pace the effects would be severe. sustained high rates of borrowing trains funds away from private investments and -- drains funds and increases our debt to foreign countries. diminishing investor confidence will be brought under control would ultimately lead to sharply rising interest rates and potentially to a broader financial turmoil. in a vicious circle, this would cost debt to grow even faster, resulting in further increases in the debt to gdp ratio.

in thinking about this sustainability, it is useful to apply the concept of the primary budget deficit, which includes -- excludes interest payments on the national debt. the primary budget deficit must be reduced to zero. under the projection that i noted earlier, the primary budget deficit is expected to be 2% of gdp in 2015 and rise to 3% in 2020. these projections provide a gauge of the adjustments that will be necessary to attain fiscal sustainability. to put the budget on a sustainable trajectory, policy actions will have to be taken to eventually close these primary budget gaps. the unsustainable trajectory of the deficit that the ceo

outlines cannot actually happened because creditors will never be linked -- willing to lend with a government with debt this time. fiscal adjustments must occur at some point. the question is whether these adjustments will take place through a collaborative process and gives people adequate time to adjust to changes in tax policy, or whether immediate adjustments will come as a rapid response to an actual fiscal crisis. acting now to develop a program to reduce future deficits would not only enhance stability in the long run but could also yield substantial near-term benefits in terms of lower interest rates and increased business confidence. plans put forward by the president's national commission and other prominent groups provide useful starting point for a much-needed national

conversation. although these proposals differ on many details, they demonstrate realistic pollution's -- realistic solutions to exist. economic growth has affected not only taxes and spending but also by their structure. i hope that the congress and administration will undertake reforms to the tax policies and spending priorities that serve not only to reduce the deficit but also enhance the long-term growth potential for our economy by reducing disincentives to work and save, by encouraging investment in the skills of our work force, by promoting research and development, and providing necessary public infrastructure. our nation cannot expect to grow its way out of our fiscal imbalances, but a more productive economy will ease the trade offs we face. thank you, i would be pleased to take your questions. >> let me read of what you

concluded. you do believe one of the best things we can do for short-term economic growth is put out a plan that actually stabilizes our fiscal picture? that gets our liability under control and shows with confidence we have the right trajectory because these spending programs are getting us out of control? is that the case? >> yes. >> i want to talk about qe2. last time you came to testify you said that qe2 is not an exercise in monetizing the debt. the question basically is this, understand you say qe2 is not causing on -- not causing runaway inflation because the money you are creating is being held as excess bank reserves. but isn't this a distinction

without a difference? it seems the argument is that the intention of qe2 is what we ought to be focusing on, because the intention is to bring rates down. there for the intention is what should matter, but this is debt modernization. isn't that a distinction without a difference? >> no, modernization would involve a permanent increase in money supply to pay the government's bill through money creation. what we are doing here is a temporary measure which will be reversed so at the end of this process the money supply will be normalized and there will be no permanent increase in money outstanding in the balance sheet or inflation. >> if we get this wrong, and credibility is diminished and expectations for around price increases, then we do have a big interest rate problem. if you look at our fiscal side,

raising interest rates under an average prediction would just be vicious to our balance sheet. the interest payments alone go from $200 billion to $1 trillion at the end of the budget window. if interest rates move up, that is about $6 trillion in extra interest payments. this is based on confidence that what you say it will be done. confidence is critical in all of this. what i am trying to get at is look at today's "wall street journal." inflation worries spread. in brazil, the government reported inflation is accelerating. we have inflation popping up in other parts of the world. many countries to tighten their currency to the u.s. dollar.

to what extent do you think the demand -- monetary policy stance has included -- has contributed to the problems that have led to some of these global imbalances that are not appreciating when we examine the costs and benefits of your qe2 monetary policy stance? >> your first sentence was very revealing, inflation is taking place in emerging markets because that is where the growth is and economies are overheating. it is the responsibility of the emerging markets to set their exchange rate policies in a way that will keep their economies on a stable path. the increases in oil prices are entirely due to increases in demand coming from emerging markets. they are not coming from the united states. the majority of the increase is a global phenomenon. in the u.s., inflation is very low.

that is a serious problem, but monetary policy cannot do anything about bad weather in russia or increases in demand for oil in china. what we can do is to try to get stable growth in the u.s. >> as you look at the leading indicators, the yield curve, commodity prices, to those not send you a warning that inflation is building in america? or are you still looking at core inflation as your main guidepost in measuring monetary policy is keeping prices in check? my concern is using your output model, my fear is he will catch it before -- you will see inflation efforts already launched. given that you have a huge balance sheet, given that we are in uncharted territory -- the responses you put out their, we will catch this after it is too late.

can you give us a sense of what else you are looking at to gauge inflation in america other than core inflation? even decd uses broader definitions of inflation. -- even the ecb uses broader definitions of inflation. >> let me say first that there is no doubt we are committed to maintaining price stability. that is a very strong goal and objective. in terms of what we are looking at, overall inflation including food and energy is still very low. looking forward, you asked about the yield curve. if you look at inflation break evens, is a measure of what the markets think, it is about 2.1%. there is not any indication in

our markets that in the u.s. there is an expectation of inflation. we will look very carefully not only at output gaps, but also at commodity prices, interest rates and the other indicators that will help us assess when inflation is becoming a problem. it is always an issue in the recovery period you have to pick the right moment to take away the punch bowl. we face that problem as the central bank always does, but we are committed to making sure we do it at the right time. >> when you see the steepening of the yield curve, do you see that as market participants showing concerns about future inflation or as signs an economic recovery is beginning to take root? >> the inflation break even as have risen since we began the qe2 program but they have moved to normal levels.

the bulk of the increase in interest rates has been on the real side. the bond market is expecting a greater future growth and is more optimistic about the u.s. economy. that is a good thing. >> we obviously have a bigger punch bowl than we normally have in these times. if we were in a cyclical situation i don't think concerns would be as great, but part of our problem is structural. we have a tidal wave of debt we are running into. if interest rates began to leave, we have a serious problem on our hands. it just gets into a vicious cycle. the punch bowl -- have you done a stress test on the fed's balance sheet assets as an exit strategy occurs with higher interest rates that result from what has been going on? have you done a stress test on

your balance sheet? what level of losses are acceptable as you withdraw? >> we have done multiple stress tests. under the most likely scenario the fiscal implications of the balance sheet are positive. we have already turned in $125 billion to the treasury. given our low level of costs of financing, under most scenarios we will continue to be profitable. that is not the main objective. if short-term interest rates were to rise high much more than we anticipate, and a could be that the remittances would go down for a time. but it would also be the case the economy was much stronger and tax revenues would compensate. our sense is from a fiscal side

is that this will be constructive and reduce the federal deficit. >> i want to be clear. >> thank you. chairman bernanke, thank you for your testimony. obviously the u.s. is part of a global marketplace by your job is to watch out for the american economy, is that right? >> yes. >> your testimony is that you are vigilant about looking out for inflation pressures by your assessment right now is we don't have an inflation problem. is that correct? >> we don't have a problem but i want to repeat we are very vigilant and will be careful to make sure we don't wait too long. >> your policy known as qe2 was referenced. by your assessment, how many american jobs has that saved or created? >> it is obviously difficult to know precisely. there have been a number of studies which have tried to

assess. a very careful study suggests that the total job impact of all of the qe programs and the reinvestments could be up to 3 million jobs. the important thing is to understand that it is not insignificant. it is an important contribution to growth and job creation. we are in a situation where we have almost half of the unemployed being out of work for more than six months. the longer people stay out of work the more difficult it will be for them to rejoin the labour force at a decent wage and return to their previous employment. >> so that was a credible study, was it not? >> it was and there have been other studies as well. >> my understanding is with respect to qe2, that it created

around 700,000 jobs. is that correct? >> the same study attributed to the $600 billion qe2 about 700,000 jobs. let me emphasize these are simulation studies but they do indicate the potential impact was significant. >> these are the studies we all do. with respect to that policy, if you did not have those tools at your disposal i assume that would mean you would not be able to take action to save or create 3 million jobs is that correct? >> that is correct. >> i want to turn to the question of debt ceiling, because this congress will face an important decision. last week you indicated failure to raise the debt ceiling would

be catastrophic for our economy. i assume you have the same opinion today. >> yes. >> you also indicated at the national press club it would be a mistake for the congress to use the debt ceiling as a bargaining chip with respect to decisions on spending and tax. that we should address those as part of our normal discussion but not hold the debt ceiling hostage to that. i assume you still have that view today. >> it is very important to address these issues, but the risk of not raising the debt ceiling is interest would not be paid on outstanding government debt. if the u.s. defaulted, it would have bad consequences for our financial system and would mean we would face higher interest rates in definitely because creditors would not trust us to make our interest payments. >> it would be reckless from an

economic perspective to allow -- to default on our debts and question the creditworthiness of the u.s., is that correct? >> we do not want to default on our debts. >> have you looked at some of the legislative proposals introduced in the senate and house that would try to delay those payments? have you seen secretary timothy geithner's comments? >> we have just begun to look at the issue of whether or not you could reprivatize -- 3 prioritize -- reprioritive these. there would be some difficulties from an operational point of view. you would have to differentiate between social security payments purses interest payments to individuals holding

savings bonds -- vs interest payments. >> some of these proposals would actually allow the credit of the u.s. to extend to some of our foreign creditors but not to u.s. businesses and american citizens. let me ask you a quick question on the fiscal policy, because i think we all agree the congress should act now to put in place a plan to get our deficit under control. we need to come up with a plan to put this country on a sustainable path. as you indicated, you reference the bipartisan commission in your remarks. the authors of that plan observed in order to avoid shocking become a, the commission recommends waiting until 2012 to begin enacting spending cuts.

let me ask you this, if he were to take a lot of investment out of the economy at this point when it is fragile, could that create a drag on the economy? >> if it were large enough it could, but i want to emphasize the deficit reduction approach should be one that takes a long- term perspective. you are looking at a long-term window in addressing the whole trajectory of spending rather than the short-term. >> last question, i was pleased to see in your testimony that you believed certain investments in our economy can lead to productivity and growth. some are trying to turn investment into a dirty word, but investments in our public

infrastructure, education and investments in science and research can have a positive impact on economic growth. is that correct? >> if they are well done, yes. >> we will have a big debate over the definition of investment. >> thank you, mr. chairman. following up on a couple of those questions, with regard to monetary policy, whether monetizing the debt -- you said your actions now have been a short-term in nature. the question is if you had implemented permanent, there is nothing that would have precluded the fed to undo their reaction -- undo their action

later on, so anything permanent is also changeable, correct? there is nothing permanent you would do today that you could not undo. >> what is key is expectations. the markets don't expect inflation which means they expect us to undo this process. >> would you have is a definition between one's interpretation of what is permanent and what is temporary. i would imagine no fed chairman would say i am engaging in permanent monetizing of the debt. they would describe it as i am only taking a temporary action to get over it this period we are in now. isn't that correct? >> the fed always buys securities for various reasons. that is how we create the currency that americans use every day. >> this is obviously outside the norm. part of your opening comments was one of the good things is that consumer spending is going along coming right?

isn't that because of what you are doing? it is because of the cheap money that is encouraging all of us to say it is cheaper to borrow so i can increase consumer spending? >> that is how monetary policy works all the time. >> in housing you have said with regard to housing policy, what caused us to get into this situation? you said i don't think it was monetary policy. i know the line that you have three economists and you will come up with four different definitions on what policy should be. about three-quarters of business economists were saying the opposite. they say it was cheap monetary policy bringing us into this situation. you disagree with other economists that it was the low cost of money that exacerbated the housing problems coming right? >> right. >> now you are saying we will

use that policy of cheap money to do what? to try to dry up the cost of housing in order to pull us out of this, right? >> housing is not responding at all to policy. >> but that is your ultimate goal. if we have cheap money people will be able to buy houses and housing prices will go back up again. >> that is the way the policy works by lowering rates of return. >> you are saying in the past when your predecessor had a cheap monetary policy that did not cause the problem because it was not driving the cost of housing. now you can use that exact same formula to say it does have a significant impact upon the monetary policy. i am at a quandary as to which is it? if you don't think it had an impact in the past why do you think it will have an impact now on housing? >> it should have any effect

that is proportionate to the interest rate change. the housing bubble we saw earlier was far greater than can be explained by the monetary policies of that time, which is one of the reasons the policy was not a major source of that bubble. >> with regard to spending, wouldn't significant reductions for addressing the short-term spending aspects be good for the market and the economy despite some critics who say this may be detrimental to overall growth? >> i think it is a question of convincing the market there is a long-term plan. it could be helpful, yes. >> i guess midi's is optimistic as to what we will do because they came out -- i guess moody's is optimistic. they said the u.s. exceeds the median level of triple a rated nations and concludes it would expect to seek constructive efforts to reduce the deficit as well as efforts to control long-

term growth of spending. they are optimistic as to what washington does. are you optimistic we will be made -- will be able to make these changes even if they make significant cuts in spending? >> i am not certain. that is why i'm in making this case. i hope people will take seriously to address this problem. >> i appreciate that. >> thank you very much for your service. while it may be true that there are only two certainties in life, death and taxes, i would think a close third would be a gigantic bonuses for many at gigantic wall street financial enterprises. when you were here to testify last you responded to my question about that by indicating that the federal reserve under your direction was preparing a public report to the american people on bank

compensation structures that would be available at the end of last year or early this year. about four months ago your general counsel testified in the house about the importance of making that report public to the american people. when can we expect to see the report? >> i believe that will be soon. we are working in that direction. we put guidance out in june 2010 and we are working to follow the requirements of the dodd-frank act to put out additional restrictions. >> there has been some discussion that that public report you testify to us about would now be kept secret. but it is your intent to make it fully public to the american people? >> that is my understanding. >> you think that will happen very soon? >> i believe so but i would like to get back to you on the exact

date. >> please do, especially if any part of it will be kept secret as some have suggested. that kind of reversal would be very troubling. thank you. moving to the issue of the consumer protection bureau created in the wall street reform law to on the american people a information they need to make informed decisions, many question whether that bureau should be located within the federal reserve given its mission and given concerns about independence of the bureau and the ability to fulfil its mandate. with its set to begin full operations in july and no consumer financial protection bureau director yet nominated, can you provide us assurances that it will be sufficiently strong and independent to fulfil its mandate to offer consumer

protection to the american people from the many credit abuses they have faced in the past? >> teh cfpb is located in the federal reserve in the narrow sense the fed pays the bills. we have no control. the control is coming from the treasury. they are the ones who would be most appropriate to respond to you about the nature of the bureau. >> the fed has no involvement in the operation of the bureau? you are just the landlord? >> we are doing our best to help them get set up. there is a lot to be done in terms of hiring people and so on, but in terms of policy- making, they are completely independent of the federal reserve. we have no say whatsoever. >> you were making no recommendations about who the director should be or how the

bureau will operate in any way from a policy standpoint? >> no, that is not part of our responsibility. >> another major issue that involves a treasury is the future of freddie mac and fannie mae. some are concerned that perhaps most of their functions will be turned over to a few large financial enterprises. what is your general approach to the future of these two institutions? >> the treasury is promising us a set of proposals very soon. it will be interesting to see what they have provided. there are various possibilities we could do, including making them a government utility or privatizing them. one suggestion which i had made in previous remarks is bad if take -- is that if the

government is involved in providing credit guarantees, it should do so only as a backstop. the first losses should be borne by the originators of the mortgages. the government, if it provides backstop insurance, should do so for a fair fee. that would allow the government to provide a backstop in situations like we had in the last few years where the housing market comes under enormous stress. >> thank you. >> mr. campbell. >> thank you. some things in economics are a cyclical and some are structural. you mentioned you felt unemployment would remain elevated for an extended amount of time. how much of our current high unemployment is cyclical and how much is structural? >> i don't have a precise number but we have done a lot of work looking at this. i would say the bulk of its is

still cyclical. the risk is if it goes on long enough it will become structural as people lose their connection to the labour force. >> is it fair to say you have control over monetary policy and not fiscal policy, and to the extent of unemployment is structural, that is something out of your purvey to deal with? >> that is correct. >> i would like to talk about this thing about spending and investment. lots of talk about what we need to grow the economy is government spending. there is a great distinction that the term investment is thrown around a great deal but investment means someone puts money to work expecting a return. that is very different than spending. in order to achieve long-term growth, stable employment growth, isn't investment from a

true definition and saving where we should be trying to head rather than focusing on consumer spending? you mentioned earlier we should remove the disincentives to saving. should we be removing disincentives to get this long- term growth rather this focus on spending? >> i mentioned in approving the tax code to reduce incentives for productive activity. that is important for individuals and for businesses and investment. the government does have some role in providing infrastructure and education. the way that is done is a matter for congress to decide. >> do you believe that we currently -- you mentioned disincentives to saving. do we have disincentives in place that blocks savings or investment from the private sector that could help growth?

>> i think there would be agreement our tax code is very complex and is not conducive to the most productive activities. >> switching to qe2, had you fully implemented qe2 yet? >> no, we announced an intention to purchase $600 billion between november and june. we are about halfway through. >> what are the metrics -- when qe2 finishes, what are the metrics that you are following that would lead you to believe you should have qe3 or should reverse qe2? >> first is the question of efficacy. we are seeing the results in terms of financial markets and financial conditions.

in that respect we think it is been successful. in terms of looking forward, we will be trying to assess whether the recovery is on a sustainable track and things have moved in that direction. we will be trying to assess whether inflation is low and stable around 2%, which we think is the right level. and looking forward, if that appears to be the trajectory we are on, additional action would not be necessary. we are in a situation where the recovery is not established. where risk remains a concern what is the trigger the causes reversal? >> if the economy continues to grow very quickly an inflation risk begins to rise, we will reverse it. >> final question. there have been fairly significant moves in the 10- year end 20-year treasury moves.

are you concerned? >> i think it reflects primarily increasing optimism about the u.s. economy. it is natural for the term- structure to move in that way when investors become more optimistic about growth. >> thank you. enhaur.bloom and >> thank you for joining us again. you come at a time when there are lots of people very interested in helping you do your job better. maybe undertaking some things that would restrain direct control. what i got from your message is that there are a couple of things congress -- congress should be focusing on.

we are all in the business of making sure that confidence in the united states government, meeting its obligations, not putting an undue cloud of red, -- i do cloud over it. there is no secret, there has been a lot of suggestions that as we approach the debt ceiling -- and no one disputes the need to extend it -- there are discussions about conditions and terms under which some of them might have a little changed to schedule back payments and so forth. has this been, in your experiences as head of the federal reserve and a catalyst, has this been the routine? has congress done this

regularly in the past? >> there has been in the past political battles, and both parties have done this, over raising the debt ceiling. >> has congress ever in the past establish conditions on limitations on the debt ceiling -- the sequencing and changing the order of business so that we do not just honor our obligations and make sure there is adequate to go if you're talking about prioritization of payments, that has not happened. >> are there conditions attached to debt ceiling increases in the past? obviously, there have been matters proceeding those conditions. >> that is our job. we will get down to cases in terms of cutting. i think there may be some bipartisan initiatives that

would implement some of the recommendations, for example, that came from the president's desk. to what extent does that impact global perception, market confidence, in the united states as being a good repository for their investments? >> we want to address our fiscal issues, my argument is that we do not want to cast any doubt or uncertainty on the fact that the united states will make good on its obligations. i think that is critical.

when we -- even if it is seriously considered, not negotiations are disagreeing about some elements, but considering that as the nuclear weapon, that has got to shape the economy. you mentioned health care. there is something that is within our purview. there are some differences of opinion. some are not interested particularly in advancing the reforms that are in place as opposed to perhaps an opportunity to accelerate, to put teeth into what we are doing and get down to cases to actually change that health care kerf. from your perspective, are we better off actually falling true on the commitment to deal with health care reform and dealing

with long-term cost or making this one of those areas where we continually talk about and make no progress? >> it is out of my purview to support or not support a specific plan. i think it is very important and essential to the long-term fiscal situation that we adjust the cost, but for the private economy, but also of the federal budget which are going to be increasingly a dominant part of our spending. >> thank you, sir. >> mr. chafee. >> process, mr. chairman. in january, he said the federal reserve would not bail out state and local governments. is that because you had no intention of bailing out local governments or because you physically cannot do it because the law precludes you from doing that? >> i would say both.

[laughter] >> imagine that enhancing the long-term growth of our economy by reducing disincentives to work -- what are the disincentives ec to work that you mentioned? >> speaking generally about the tax code and also transfer programs that create a very high marginal tax rate on earned income to the extent that we can simplify our tax code, reduced rates, broaden the base, eliminate complexity, etc. in ways that will make it more financially attractive for people to work, save, invest, and so on. >> anything above and beyond the tax treatment that you have looked at? >> again, tax and transfer policies are the two that i would focus on.

>> thank you. >> the cbo records fannie and freddie -- they consider fannie and freddie government entities, but treats the mortgages they guarantee as obligations for the government. do you agree with this budgetary treatment? >> it is important that we take into account in our budgetary planning the cost or the prospective cost of fannie and freddie. as i understand it, they are not fully consolidated with the federal budget. that decision was made to try to keep some separation between the government and those institutions. clearly, as we think about our budgetary situation, the costs have already been occurred and may still be occurred for fannie

and freddie. it is important to keep in mind. >> reports are that the fed has surpass china as the biggest owner of treasurys. does that distort the bond market and create dependency? is this something the fed should be worried about? >> we have been very careful to not distort the bond market. we paid a lot of attention to that issue. we monitor the market's option. we made sure we do not own too high a fraction of government bonds. our clear sense is that the treasury markets are functioning very normally. they are very liquid. we do not see our policy, which is a temporary policy, creating any particular problems for the market itself. >> mr. chairman, there have been discussions in the newspapers and what not of other countries buying oil was something other

than the dollar. what are your concerns about this? dc this as a reality -- do you see this as a reality? >> the currency in which goods are invoiced is not of much consequence. another question, a broader question, is what currency is the reserve currency -- the currency debt countries all their international reserves in. the u.s. dollar share of 60% + is a staple. i do not see a likely change in that. given the problems with the bureau, the dollar and the prospective growth in the economy, the dollar is looking more attractive relative to the other currencies in the world. mrs. mcclellan. >> thank you, mr. chairman.

chairman bernanke, thank you for being here. i believe that we have a lot of work ahead of us. i want to thank you for the work that you did in stabilizing our economy. i look forward to hearing some of your advice, suggestions, and ideas on how we move forward with getting out of the great recession. i want to be part of the solution. we hear a lot of talk here in congress about spending, but i am also concerned about the perks that lobbyists have been able to get for special interest in our tax code. i take we need to put everything on the table. having said that, today we focus on spending quite a bit. in fact, i will paraphrase a popular tea party slogan. the federal government does not

have a revenue problem, it has a spending problem. last week, chairman bryant put forth his best effort to reduce the deficit with spending targets cuts at $41 billion in the fiscal year 2011 budget. the deficit was expected to be 2.5%. that leaves 97.5% of the deficit in tact. in an extreme scenario, if all 176 republican committee members who had their way and took control, they would be allowed to cut four times what chairman o'brien said. that would still only represent 10% of the budget deficit for fiscal year 2011, leading $1.30 trillion. it seems to me that the deficit is not just a spending problem. is it possible to reduce the federal deficit to responsible

levels without tapping or cutting defense spending and without looking at the tax perk that many corporations have been successful in getting? my second question is, with the type of cuts being discussed, the you think we need to be an siple when making these spending decisions on what to cut on the impact of jobs as well as u.s. competitiveness and the global economy? i think we need to be careful of getting domestic investments in education, and for structure, and research and development because it could put us at a competitive disadvantage. >> on your second question, i am hoping -- it is very important for the deficit to be brought under control. it is a matter of how smart are spending is. are we doing it in a way that is constructive for growth and competitiveness? i would urge the congress to not

only talk about total budget numbers, but they hard about the various programs and tax provisions to make sure that they are friendly. that is a very important part of your job. you mentioned perks. i think one direction that should be considered is in the corporate tax code, for example, to reduce a lot of loopholes, to broaden the base, and therefore be able to lower the tax rate which will be the highest in the industrial world, so that the decisions made by corporations are based not on tax distortion, but rather on the economics of where they should locate their plants and so on. i do you think that growth friendliness is an important part of this and that lower rates and broader base is

something most economists would agree is a good direction to go in the tax code. i understand there is a lot of focus on this year's budget. without commenting directly on that, i think that in order to be credible given that the budgetary problems get worse over time, that is, as the baby boomers retire and health care costs rise and so on, given that prospective deficits are rising, i would hope that a good bit of your discussion will be about the long-term and to the extent that you can change programs that will have long- term effects on spending and revenues, that will be a more credible program than one that focuses only on the current fiscal year. >> thank you, mr. chairman. we are setting the budget.

there are issues with the tax code. but i cannot make a decision in isolation. i look to all of us to put everything on the table so that we make a well-grounded decision. mr. chairman, i will be looking for your comments. >> it is our first effort at getting fiscal control in this place. >> thank you, chairman ryan. thank you, chairman bernanke, for coming in today. i have spent the last 30 years of working in the private sector, owning my own business. my questions today are going to relate around to the essential areas -- one is the debt ceiling and, also, your take on lending to small and medium- sized businesses. first of all, i understand it

might be reckless for the united states government to fall on its debt. would you agree that is a true statement? >> yes. >> is it also reckless to have uncontrolled spending? >> absolutely. i do not need to apply that you should not be addressing that. i think you should do that as a separate measure. >> understood. as a business owner, oliphant the lenders would impose their own debt limit on many companies. if our balance sheets did not look very good, at some point they would impose their own that limits. is it not likely at some point that the lenders to the u.s. government are going to impose a debt ceiling of their own? >> the banker's debt when it -- that the banker's debt limit is isolate a spending limit. you have already made decisions

about what the government is going to spend. if he set a limit that is too low, it a sense that you cannot borrow money that you already spent. it is really extraneous things. when she sets spending and taxes, you are by definition defining how much you have to borrow. if you got it -- if you do not allow the government to bar that, the only way to do that is not to make the required interest payments. the banker would not like that. >> is correct. >> or the other alternative would be to increase revenue or decrease spending so you did not exceed the debt. >> if that could be done. >> you just mentioned moments ago that we should look at a 10 to 20 year horizon. the american people are cynical that we can do that.

we will still be having the same discussion over again. the fear the american people have is that at some point lenders are going to say that is all we are going to land or the will price it in such a way it will be catastrophic to the economy. dc that as a legitimate risk over the next decade? >> yes. >> thank you for that comment. it is an almost constant stream of constituents coming into my office, discussing the difficulty they are having finding financing and lending. their ability to borrow has been greatly restricted in the last 24 months. can you talk a little bit about what it might take for local, medium, and national banks to begin once again to loan money? >> what is causing the restriction?

>> first, part of it came from the fact that banks after the crisis were the leveraging and cutting back themselves. part of it came from the fact that the economy was very weak and, therefore, borrowers did not look very attractive. the cash flows were less attractive than before the crisis. it is a supply and demand element to that. i think both of those things are looking better. banks have increased their capital. they are feeling more stable and more liquid. we do surveys. our sense is that while they still have thai standards, banks are beginning to ease the standards and are beginning to look more actively at finding borrowers. that is improving somewhat. likewise, as the economy strengthens and we see increases in the prices of small real- estate, which is what small

businesses use as collateral, there will be more small businesses that qualify for credit. things will be getting better slowly. the federal reserve is working with those banks and small businesses to make sure that, at least from a regulatory point of view, we are not preventing banks from making loans they should make. we want them to make good loans. we have been very clear about that in our instructions to banks. >> thank you very much. >> welcome, mr. chairman. in your speech to the national press club on february 3, you noted that unemployment, which is then economic indicator for the well-being of the american people, will remain stubbornly high and will only improve gradually. he also noted that the trajectory of our national deficit is unsustainable. he went on to state that among the course of corrections needed

our investments in skills of the work force, which i will simply call education, and changes to reduce our deficits and debt. my first question is in regard to the latter. the current war group -- rules of the house have taken the war on terror of the budget. the actions associated by the war on terror can be financed. afghanistan represents a cost of approximately $10 million per hour. $325 million per day. disturbingly, this is our country's largest long-term investment. with the savings that resulted from an indian combat -- from reducing combat forces to help the debt? >> i am not qualified to comment on whether or not we should be

engaging in that conflict. >> the budgetary actions that were taken that we put it aside as supplements, what impact does that have on our debt and our deficits? >> clearly, additional spending for military other purposes but that the deficit. >> if there is no revenue sustaining it, we take it off budget, we are essentially creating an automatic deficit. >> that is right. >> thank you. i think it is very important to note that among investments, including incentivizing purchasing new machinery, promoting research and development, and promoting public infrastructure, you single out education as an area of public investment that would promote economic growth. would you explain to this

committee held public investment in education promotes economic growth? >> one of the key elements in economic growth that a lot of economists have identified is the skill of the work force. we like to say that there are a lot of ways to import skills. in this case, education and college, but there are also technical schools, community colleges, on the job training, a variety of different ways. it has always been a strength of the united states. we have a diverse set ablaze to get people trading. it is something we should pay close attention to. it may or may not be a matter of money. it may be a matter of spending more wisely. one of the concerns we have about our society is the increase in equality between the richest and poorest. there are many reasons for that. no doubt the largest reason is

there is a part of our society that is not receiving the training that they need to get good paying jobs. that is going to be a problem for us and the problem for our economy. >> i would probably call that an investment. in making that investment in education, it would be something we could count upon as a return on our investments. if we have an education system that has been totally decimated, what impact the ticket would have -- what impact do you think it would have on the return on our investments? >> it is very important to have a good education system. we are not doing well on that count. there is a lot of dispute about exactly how to accomplish that. we could talk about that for quite a long time.

i think we need to think as a country about how we can both increase the cut -- the quality of our training and make sure it is broadly spread -- everyone has the chance to get the skills they need. >> i understand education comes in a lot of forms. our investments in research and development and the other kinds of programs that we have. the system of education and the department of education, which seems to be one part we can focus on with the complex problems of equity and distribution of resources -- can you comment on that? >> the department of education helps us understand what is working and what is not working. as a country, we are having a crisis of confidence. we know how to provide a broad based skills. i think that is part of the problem. it is not just resources, it is

also "how do we do this better? "it is not clear that our models are working well right now. >> thank you, mr. chairman. i appreciate you being here today. i had a couple of questions, particularly about job creation. i am a little confused on the testimony. you say we are in a period of economic recovery. is that correct? >> yes. >> on the other hand, you indicated that the unemployment rate is not where you would like it to be. what is the targeted unemployment rate that you would be comfortable with? >> the fomc makes projections of what the long-run unsustainable unemployment rate is. those projections are between 5%

and 6% of the labor force. that would be a more normal level. that does not mean that we would maintain maximum monetary policy accommodation until we reach that level. we have to which all that accommodation at some point before we got there. that would be sort of the area we would hope we get back to. >> 5% to 6% -- is there projected time when that might occur? >> at the rate we are going, it takes about 2.5% real growth just to keep even. indeed about that much growth to make jobs for the new entrants did the labor force. if we were to thank hypothetically 4.5% growth, which is quite ambitious, it would still take us another four years or so to get back to the 5% to 6% range. >> at the 2.5% level how many

years would it take? >> it would be very, very slow. >> our current rate of growth is what? >> in the last quarter, it was 3.2%. we are looking for 2011 to be 4%. that will bring unemployment down, but not very quickly. >> you still figure policies are promoting success if we are still projecting 10 years until we reach -- >> >> we are not projecting that. you asked about the fourth quarter. we think it will pick up over 2011 and possibly even further in 2012 depending on a variety of circumstances. >> mr. chairman, i appreciate

that we are all hopeful it does that. you said ultimately at the appropriate time the federal reserve will fix this balance sheets. a couple of questions about that. can you provide information as to why you believe that a sell- off would not have the opposite effect? >> it is the same pattern that we always see with monetary policy which is a low interest rates to help stimulate the economy. once the economy as a self- sustaining -- once it has reached escape velocity, so to speak, that monetary fuel can be withdrawn. in this case, it would involve raising short-term answers rates and reducing the size of the balance sheets. as the economy begins to get

stronger and develop its own momentum, it needs less monetary policy support and we will begin to withdraw it. otherwise, we risk inflation. >> we are kind of looking at 4% growth, maybe 3%. you are comfortable it will not take years to return to normal employment levels. if you are not for certain, is it like 5% -- is it like five years? >> i hope it is less than that. >> i do too. some of my constituents. on one hand you claim the policy is driving economic growth, even though it is very slow from what would be the target. my fear would be that the reverse policy would potentially have that other effects. can you tell us why you big $600 billion vs $500 billion for the

target? >> we tried to make an assessment. we ask a hypothetical question -- if we could lower the federal funds rate, how much would be lower its? a powerful monetary policy action would be about a 75 basis points cut in the federal rate. we estimate that the end back on the whole structure of interest rates from $600 billion is roughly equivalent to 65 basis points cut. on that criteria, it seems that was about enough to be a significant boost, but not one -- be a significant boost. >> thank you, mr. bernanke. i have had such low ranking that it has been a hard time getting an opportunity to ask a question. the last -- all want to thank

the congressman for the last question. i was curious about how -- you said i in your testimony on page 4 -- that exit from the policy at an appropriate time would be very easy. i think you may have answered my question when he spoke with him. qe 1 and qe2 have been very important, i think, in terms of presenting -- predicting a financial catastrophe. qe2 was supported by a variety of congress -- and other economists. the manufacturer in my district, harley-davidson, is really grateful for qe2 in terms of boosting their exports. but you have been accused of everything from creating an

environment for inflation with this qe2 policy. everything from that to causing the riots in tunisia and egypt. i would like for you, because it economies are traded on dollars and they say that food prices and commodities have gone up. the speculation on commodities have risen. this qe policy has been very inflammatory with respect to destabilizing the region. can you please respond to that? >> i would be glad to. first of all, it does not matter what commodities are priced in. what matters is the currency of the country's that are

purchasing. when the dollar weakens, that makes the palace stronger. it makes it easier for them to buy commodities. is it is the world was the leading importer of wheat. we have seen a very bad harvest in russia and eastern europe, which are primary sources of wheat. of the agricultural side, there have been droughts and other problems around the world that have affected commodities. it is determined by agricultural productivity and the weather and those factors. we can see on the agricultural side that a combination of andly issues like whethereather increased demand from emerging markets have put pressure on the supplies.

that is where that is coming from. i think monetary policy in the united states has little to do with the price of wheat in egypt. >> with respect to your creating an environment for emplacement with -- for inflation in ae2 and creating an inflation bubble in the united states and traders as being weary over these threats, i am wondering what your response is to qe2? you are saying you can exit this monetary accommodation. eventually we will have to raise interest rates. walk us through how you will exit this without raising inflation. >> inflation is currently level in the united states. markets are not expecting high rates of inflation. as i said before, the measure of

market expectations is a little over 2%. that is about where we would like it to be. obviously we cannot continue at this level of monetary accommodation indefinitely. it will begin to increase inflationary resurgence -- increase inflationary concerns. the difficult question is choosing the right moment. once we decide when to do that, we can raise interest rates to normal. we would do that by raising the interest rate paid on excess returns to banks. that would make them unwilling to lend to the short-term money markets. we can raise the rates as we always do. in addition, we have a number of tools i have talked about in detail that could help us to drain bank reserves of the system and reduced liquidity in the system. for example, we have been testing a time-deposit program

whereby banks locked up their reserves with the fed for a period of time. we do have the tools to do it. as always, we have to make the right call about when the balance of risk is starting to shift everything the economy is strong enough and inflation has risen and it is time to take action to avoid problems down the road. but it is really not all that different from normal monetary policy in that respect. >> thank you very much, sir. >> mr. chairman, thank you for being here. you testified before the committee that not raising the debt ceiling would be a very bad thing because you specifically singled out it would mean interest would not be paid on the debt. in january you told the senate budget committee that we are not seeing extraordinary address in the municipal markets. that means investors are

reasonably, that there will not be the fault among major borrowers. they may believe that the cosmos states have rules that put debt repayments and interest payments at a very high priority above many organizations. would it not be a good idea if the federal government did the same thing? >> it would reduce the risk for the government, that is for sure. i would like to just comment that it would take some time to change our systems and computers and so want to make sure we could change that prioritization in inappropriate way. doing that would reduce some of the wrist. again, let's be clear, we would need some notice to make that practical. >> but would you recommend it as a long-term reform? >> frankly, i would just prefer that you put the debt limit

issue aside and just address directly the long-term fiscal problems. i admit, i agree, and i have emphasized they are very serious indeed to be addressed. that particular device, at least under current law, has some risk in terms of the possibility we would default on debt. >> what is the percentage of debt held by american investors? >> less than half, i think. roughly half. >> what is the percentage of u.s. debt held by china? >> about 25%. >> 25% of the debt held by the public? i thought it was 9.5%. >> you may be right, but i think they hold more than $2 trillion of u.s. treasurys.

that would be closer to 20%, 25%. >> nevertheless, we are still apparently -- >> the global markets are where we borrow. if we do not this confidence, they will not lend to us in the future. that will give the state fiscal crisis almost immediately. >> maintaining our debt service would provide better, and as to those investors would it not? >> subject to the ability to make that we prioritization effective in a short time. >> you also testified today that if the economy begins to grow rapidly and inflation begins to rise, the federal reserve would reverse the qualitative easing. how will that drained $1 treen in excess reserves? >> first, we can raise interest

rates without draining reserves. we have at least three other tools to drain reserves. >> how much would you have to increase? >> we want to raise the short- term measures rate to 1%, then if we pay 1% on excess reserves to banks, they would not be willing to lend money to the money market at less than 1%. that would achieve our objective. there are other tools we have including reverse repossessions, asset sales, and perhaps others. >> what is the impact on the economy as you do that? >> it would be a tightening of monetary policy. interest rates would go up. that would slow the economy. that is what taking away the punch bowl always does. it means the accommodation is no longer needed. the economy can afford on its

own. the point there is to try to normalize interest rates so that you can get back to a healthy growth path without inflation. >> there are some of us who can remember a day when we had not only double-digit unemployment, but double-digit inflation and interest rates at 21%. what can you tell us to allay our fears? >> i can also mention that since when centrals banks began to understand the critical importance of keeping inflation low and stable, the u.s. economy had a more stable economy. that was a 25 year experience. there are some differences. we have no illusions about it being not so bad to let inflation rise. we are strongly committed to keeping inflation low and stable

and we will do so. >> next is missed caster. >> thank you very much. welcome, chairman bernanke. not unlike many places in the country, my home state of florida was hit particularly hard by the great recession. it seems like it started earlier in florida -- 2007 -- because the housing bubble burst and we were so tied to real estate development. the job losses that happened so quickly. at the end of 2008 and early 2009. we are still in the double digits in florida. he say in your testimony that there is some optimism on the unemployment front, but we need more. i think people at home looked at the economic indicators and they see plenty of hope out there. corporate profits are way up. consumer spending is up.

we have that six straight quarters of economic growth. but the bottom line for families is jobs. they need this quicker job growth. the economic drivers in my area is the port, the airport, the universities and research centers, at the public schools, small businesses, and tourism. all of them benefited by the recovery act. the recovery act investments are coming to an end now. business owners and others in the community are torn. they are hearing this schizophrenic message from washington. they understand that we all have to live within our means. they do it every day. but they also understand that those efforts structure investments and keeping the colleges and universities healthy and able to do the

research simply to attract private investment and allows them to hire. they are hearing a lot of talk about cutting spending, but they are also, at the same time, clamoring for additional public investment. it is only government that can dredge support so that the oil tankers can come -- dredge up the port so that the oil tankers can come in. the cruise ships can come in. the private businesses can continue their. what can you share with them on this schizophrenia between investments and living within our means and where we should be headed here in future budget years? >> it is not an easy problem. the reason the federal reserve is doing what we are doing is to try to promote job creation, which we think is a very serious concern.

florida, like california, nevada, and some other states, were particularly hard hit because of the real-estate decline. we do have to live within our means. the congress needs to find ways to make sure that over the longer term that our revenues and our expenditures are close enough that debt does not grow without limits. we do not have any choice about that. that is just a bit we have to do. as i indicated in my remarks at the end, that does not mean we cannot think about the money that we are spending -- can we do it better? can we use the money more effectively? can we do it in ways that we are promoting? one way to do that is to think hard about health care costs, which are still very high, and see if there are savings there that can be put into more growth-friendly types of investments. i appreciate your quandary.

we would like to be able to undertake all these different projects, but we have to have a budget that will be reasonably in balance. >> it would be helpful for me and others to explain what you said in your testimony regarding the long-term fiscal challenges confronting the nation are the two most important driving forces between the budget deficit and the aging of the population and rapidly rising health care costs. the cbo projections on federal spending for health care programs will double as a percentage of gdp over the next 25 years. maybe we can explain to the business owners that rely on the investments in infrastructure, education, and innovation that the strategy is to work on those

investments, but look at the long-term issues. >> yes. >> thank you very much. i yield back. >> mr. forest. >> thank you, mr. chairman. chairman bernanke, thank you for joining us. i appreciate your service to the country and the federal reserve. there is a natural debt level for any organization, be it a country company -- be it a country, the company, or family. they cannot succeed without turmoil. the second principle is that interest rates are made up of two components. the first is expected inflation. the second is the risk premium that investors want to receive for the perceived risk of the estimate. treasury rates have gone up quite a bit in the last few months. your testimony today says that inflation is going to be low.

that implies a substantial increase in risk premiums which further implies we are getting close to a natural debt limit. my question for you is, what is the natural debt limit of the united states government? you can answer in a couple of forms -- either an absolute number or as a percentage of gdp. i would like some help with that, please. >> there is a third component also. it is the expectation of future short rates which is tied to growth. one important reason the rates have gone up and the stock market has gone up so much is that markets are becoming more optimistic about growth in the u.s. economy. that is a good thing. there may be a part of the increase, i do not know how much, that is related to concerns about government fiscal policy. that is another part of your question. there is no magic number for

what ratio of debt to gdp is the limit. if we look around the world, we see that countries in the 60-70 range are generally comfortable. if you look at greece, which is 120, where japan, which has been downgraded because it is 200 -- if these numbers are very concerned. you want to leave some space for a recession, war, or some other kind of emergency. i hope we can stabilize the jet to gdp ratio -- debt to gdp ratio. i do not think there is a magic number, but the higher it gets, the more your annual appropriations are going to pay the interest of the debt. that is a strain of what government could otherwise be doing. >> be said today that we are on an unsustainable path, but in

interviews he gave in june of last year, you indicated that you felt it was inappropriate to reduce spending or increase taxes at that point in time, but he said we needed to reduce the deficit. let me rephrase that. if you are in our state, there are not many tools left. the reduce spending? do you raise taxes? what is the recommended approach? >> spending versus taxes or a combination of spending and taxes is a congressional prerogative and responsibility. what i think is the right way to do this, which on the one hand does not put too much pressure on the recovery, but at the same time makes credible progress towards a balanced budget a and a sustainable fiscal trajectory, is to talk about a 10 year window and take actions which are credible, which will cut

spending in the near term, but will cut spending more as you go forward in time, or raise taxes. this is a long-term problem. the numbers we are looking at going to 2050, that is when the problems get unbearable. anything we can do now to change that trajectory going forward of the next decade or two decades, those are the kinds of things that will have a good effect on the economy and the current interest rates as well as restore confidence in our fiscal policy. >> thank you. i yield back. >> thank you, mr. chairman. dr. bernanke, thank you for your expertise that you lend it to this economic recovery. when you came before this committee last june, he predicted that the economic growth rate would rise to an

annual rate of just over 3%. that is for the last month of 2010. it could increase over the course of 2011. that is nearly a double-digit turnaround from the 6% downturn that we witnessed under the end of president bush's administration. has your forecast, in your opinion, proven accurate as for how you calculate it and its bottom-line results? >> we were disappointed over last summer as the economy slow down. that is why in august we began to take the steps towards the second round of so-called quantitative easing. since we have done that, the markets have strengthened again. the outlook has improved.

the numbers you gave, the fourth quarter was 3.2%. looking for to 2011, most forecasters think 3.2% is about right. these things are very uncertain. that seems to be about where we were predicting. >> we hear on the hill here in washington and certainly within the microcosm of the house, different philosophical approaches to programmatic responses to the recovery of our economy. that being said, some of our colleagues across the aisle have been very enthusiastic about the growth we have seen in the last few months being budgeted to the november elections. is it fair within your calculus

for these projections -- was there a result of the in the november election that guided whatever your forecast would be? in other words, did you need to know who would win the elections? >> we do not take election results into account in our forecasting. i could not make a judgment on that. i agree that it is more policy driven than politics. can you cite for us what did go into your calculation, your forecast on growth and employment? specifically, can you emphasize the main elements we need to focus on in order to drive the numbers to help the economy improving become more stable? >> there have been two policy initiatives since the late summer. qe2, which came into effect in

august. that is when we began to invest our maturing securities and we indicated that we were considering additional securities purchases. the other step that has been taken, of course, is the agreement that took place during the lame duck session about extending tax cuts and creating a payroll tax rebate. those two things have been positive in terms of near-term growth. going forward, it is much more difficult. the policies have less room to operate than they would under normal circumstances. as i was saying, it is important to think about the competition of what you're doing. is a great family? will it increase confidence? we have to look for the things that will increase productivity,

for example. >> i appreciate your expertise and would hope that in the spirit of bipartisanship and the growth of consumer, investor confidence we can move forward with a progressive bit of policy that will bolster this economic recovery and lead to the best way to move forward. just a final question on the ways for american workers falling into some $26,000. about half of our work force is making less than that $26,000. at the end of 2010, we okayed a tax plan that isolate raised taxes on those individuals that make under $20,000 a year while relieving the tax burden on our wealthiest families. since those first payments came home in mid january, i have been hearing from outraged constituents on that outcome.

if we continue to finance tax breaks for the top 1% at the expense of our bottom picking% of wage earners, how will that impact the consumer spending out there that is necessary to lead us out of these economic woes? >> the distribution all aspects but taxes are very contentious. i am sorry i cannot be the answer you what. ultimately, there are decisions about equality and deficiencies to get into this tax code decisions. i will leave that particular decision to the congress, only netting to iraq to pay attention to the overall revenue collection as a part of the plan for restoring a balance. >> thank you for coming. i am sure it is our favorite day of the week every time you come up to the hill.

thank you for doing this. in oklahoma where i represent, there has been a large number of community banks that i have chatted with that are frustrated with the regulatory environment. they feel like some of the largest banks in america and made some mistakes and they are being punished for it. lending has slowed down dramatically. they look at the regulatory environment that is surrounding them. personal perspective for you -- where you think how do we open this up? >> community banks have clearly shown they are worth. as larger banks withdrew from small-business lending, a lot of community banks stepped up and

made more loans. that shows their knowledge of the local community. i agreed with you that small banks cannot bear the same burden of regulation that larger banks there. as they do not pose the same risks. the federal reserve is doing several parts. we have added new groups to our regular routine with the board meets outside the committees to create special rules for banks. we have a council of community bankers that comes three times a year to talk about our issues we want to make sure -- issues. we want to make sure that we are very attentive to the implications for small banks.

we want to do that. the other thing is that we recognize in some cases that examiners can become a conservative, because they do not want to see their bank failed. they may put pressure on what could normally be good loans. we are fighting this by issuing guidance to our examiners of the banks. we what months to be made. we are training our examiners. we are very focused on that issue. i think we have made progress. we are seeing some modest improvement in terms of the lending environment in terms of growth a community banks. >> there has been growth in this area. it is modest. there is frustration with

individuals that say they need to men. -- lend. companies are saying that they would like to borrow and expand. the bank is hiring more compliance officers. that is a bad formula for what is functional for us. >> you mentioned the high priority is dealing with unemployment. i am sure there are times you dealt with inflation. how do you balance out what formula? this will be more on unemployment numbers? how do you decide this? >> we do this with a variety of models of helpless project where we think the economy will go. our models are showing that unemployment is likely to stay high. inflation not withstanding, we

underlying inflation looks to be pretty low. we think the policies are still warranted. we are committed to price stability. we are not buying in that we can let inflation get higher than normal. we want inflation to be around 2% or less >. we are moving toward those levels. just like a quarterback has to leading receiver, we have to begin to move before the economy gets there. even though models and projections are not always accurate, are our best tool to analyze at what point we begin to pull back on that support and

to worry more about the inflation side and less about the employer side. >> i yield back. >> thank you. one of the mandate for the fed is to keep unemployment low. there are some folks that i think that should no longer be the role of the fed. how would you have negotiated the crisis? where would you be today without that mandate? >> our policies would have been somewhat similar. we have high unemployment and low inflation. they have moved us to be accommodative. in situations like this where unemployment is very high and inflation is low, monetary policy does have some scope to support recovery and help. we emphasized that just like

other essential banks are committed to price stability, we will make sure that happened as well. >> will we have the unemployment numbers today if you did not have a mandate to look out for unemployment and keep it loaded? >> it is hard to tell. inflation is also low. we would have had easy policies anyway because of the need to keep inflation away from its .ero bigge >> i am concerned that we could be in a worse scenario to recover and come out of this. one thing that struck me is that ambitiously 4.5 is term growth. it could still take five years. if we had three plus, it would

take three years ticket out of here. that is a day -- to get out of here. that is a long decade. that is unacceptable to me. some districts are at 10% or 15% unemployment. people are out of work. what can we do that could help drive that number down? >> it is very difficult. there are no easy answers para. one suggestion i have is that even as you are looking at the budget crisis, it is important to be thinking about the composition. can you make the tax code more friendly? canyon improve the way you were spending -- can improve the way your spending is allocated?

>> $100 billion in the next year or two for infrastructure needs to be given anyway. is this something that would help drive down the unemployment rate quicker? >> i would like to see that combined with a longer-term perspective that maintains budget discipline over the next few years the the and. otherwise, interest rates would go up. >> this is what we try to deal with with the health care reform bill. it could save as $1 trillion. that is what the cbo is saying. there were disincentives. one is being gone medicate means

health care for their kids. -- are on medicaid because it means health care for their kids. i think we need additional fiscal stimulus to drive it down. we should not be worried outside of our country. i think we will worry about jobs here at home. one final word on chinese currency. do you still believe the chinese are manipulating their currency? if they are, is that fueling the inflation in china? how is the manipulation of chinese currency affecting our ability in the united states? >> the room in the is undervalued. -- renminbi is undervalued. they could raise the value of the currency.

it would help the inflation problem. one thing that is surprising is that they are not addressing it by raising their currency value which would reduce the demand for their exports. they are leaving it where it is. they are trying to reduce domestic demand and higher interest rate. it seemed like a better strategy whitby there. -- strategy would be there. yes, it is a counterproductive policy for them and us. it is contributing to the global and balanced sees -- imbalances. >> thank you. >> thank you. it is a privilege to be here and bring you creighton --

greetings. we are getting ready to bring the budget process. one thing we look at is the cbo baseline projection. it is a made available to us last week a the a i am comparing it to what we saw in the bond -- it was made available to us last week >> i am comparing it to what we saw in the bond market. when you look at the projections for what the interest rates will be, they assume a 3.4% rate for the treasury. is it fair to say the cbo may have underestimated the environment we will see for 2011? >> wi-fi would say that we are at three. -- i would say that we are at 3.7% now. great change radically.

i do not know what the cbo expects for next year. you would expect interest rates to grow up. it is 3.8% for next year. my concern is that we are so exposed on our dead at $14 trillion, they estimate that if they are off by 1% of their estimates it translates into an additional $1.30 trillion over the next decade. that brings me to the debt ceiling. you were concerned that some of the proposals that may have been offered. you have questions about the workability of that.

given our fiscal situation, if we were able to figure out a way to work with the problems, if we were able to find a way to prioritize, would that change our ideas of fiscal policy? >> my concern is about not defaulting on the debt. that is a very high priority. that would help. you are still in a position where you would not be paying contractors. you are not be putting out social security and medicare checks. -- would not be putting out social security and medicare checks. >> we talked about your plans to exit the policy when you see the need to do so. you talked about raising rates and redeeming some of these

securities. are you satisfied he would be able to do that quickly enough to react to inflationary concerns? >> yes, we can raise short-term interest rates as quickly as we like. we can raise it to banks. we do not have to sell off all our assets. if we can do its -- we can do it via interest rates. >> said he considered not renewing the qe2 program? -- have you considered not renewing the qe2 program? >> it is possible. we take very seriously that this is a program that needs to be looked at in every meeting in light of how the economic news comes in th.

it is at the more unusual tool we are using. would it be fair to say you would consider ended before rates were raised? >> yes. that is the most likely outcome. >> there is another one provide dollar trillion gorilla in the room -- $1.50 trillion carell in the room -- the gorilla in the room which is our fiscal policy. if we continue to spend a bunch of money we do not have, we will be contributing to the inflationary pressures, want the? >> yes, you will be interesting to stress in the financial markets. say hello to my friends. >> i will. thank you. >> thank you for laying bare

some of the ideas of the financial situation we face today and the financial system ration we actually faced -- system we actually facedtwo years ago. thank you for the civil tone that these questions have taken. i will try to continue on that avenue prad. i will try my best. for the past several months, some folks have been promoting -- with an overrun health care system, overbearing and government, and economic stagnation some of these same people had been mounting the

pre of low taxes -- the praise of low taxes and spending. the problem of this theory is that it is incorrect. arlen to rank near the top of the economic freedom -- ireland ranked near the top of the economic freedom index. then the bubble burst. the revenue drop. -- dropped. we need to remember my good friend the mayor of new york who said that what we need to do --

we do not want to return, that is the point. we see the systemic and result of not addressing this. these countries are relying on the same theories of slash and burn budgeting predel. it does not work. pretended gdp fell 0.5% in the last quarter r. widespread losses in construction and transportation and in services rendered to the public pra. i think we are here to roll up our sleeves and address our long-term deficit.

we cannot pull this out from the recovery. this is the message. by taking a slash and burn approach on government operations, mr. chairman, what do you see as a result of the immediate and drastic cuts? what would be the result? >> it that is all that was done, the cost to the recovery would outweigh the benefits in terms of fiscal discipline. we need to take a long-term view. we need to show that we have a plan that will carry us forward to the next decade that will produce consistent reductions in

net deficit over time. it has the benefit of allowing us to see it through an exchange programs -- and change programs. my message would be that the best approach is to take a longer-term perspective. this is not a one or two years thing. nothing we do this year will sell its -- save it long term. >> i understand. there has to because to the budget. we cannot continue to have tax cuts that are not paid for. we were warned in 1999 before the things ever happened. we did not heeded them. is it your opinion that whatever deficit savings we would find

would be lost to an economic downturn or stagnation? do you agree with that? >> there is a concern about only focusing on short-term cut. -- cuts. i think it to be less painful for the bond market. >> thank you. i appreciate it. >> our time is fleeting. the staff has suggested that we go to three minutes if there is no objection. without objection, we will go. >> thank you. the comment -- it seems like when we talk about dealing with the but the deficit, it reminds me about all these imaginative

weight loss programs. it seems like when you get down to the bottom-line you can eat less or exercise more. you are only given to alternatives. we can try to sugarcoat it but the problem is we are either spending too much are we have to attack a whole lot more. a comment was made earlier -- tax a whole lot more. a comet was made earlier that the deficit was not a spending problem. big bear planhat to cut spending that you will try to increase taxes -- let's assume that if you were going to cut spending that you will increase taxes. if we were to double the tax rate on everything across the board, we cannot assume that we avoid to get a double in federal revenue.

we crashed the economy and get less. -- we could crash the economy and get less. there was more revenue because the economy got going. when i tabled get this overall problem -- when i take a look at this overall problem, it is the key to me. you add all the entitlements -- spooky to me. you add all the entitlements. the numbers look at roughly $2.30 trillion. i do not understand. do not we have to essentially deal with the entitlements by definition?

can you make it up a by doubling taxes? >> i think that's in the long run -- that in the long run, entitlements plus interest will be the entire government budget. it is up to the congress to find the right balance. you need to look seriously at the health care costs. it would be difficult. i am loath to prescribe how to address these issues. it would be difficult to leave health care programs untouched and still achieve budgetary balance in the next 15-years.

>> i heard you say you really have to deal with that rate of spending in the entitlement. can you raise taxes? >> we are out of time. >> thank you. >> thank you. thank you for your good work over the past few years. you have been helping the economy grow. i appreciate what you have done. some of your comments are very important to as as b.c. the beginning of a recovery. -- important to us as we see the beginning of a recovery. you have made some comment that i wanted to follow up on the which was about the debt ceiling.

there is politics being played. no one wants to raise the debt ceiling. we would rather not be in the situation. the consequences of not raising the debt ceiling is really the harm it would do to the united states and our ability to borrow in the future and in default on our not paying. i wanted you to talk about that. i think it has been pointed out from our new senator that they have proposed legislation that would make debt payments to our creditors the priority over pay social security but if this

series, -- beneficiaries and veterans. it would put this in a different position. could you comment on both of those? ira yardy think you have addressed how reckless it would be -- you already have addressed how reckless it would be . you made it clear that you'd rather pay foreign creditors than the american people. >> on defaulted on the debt coming in to retreat a very severe financial crisis. -- on defaulting on the debt, it would create a very severe financial crisis

applying a higher interest-rate would be a great step backward. on the prioritization, that might help address the default problem. that is very important. congress thinks it is worth doing what you say. i just wanted to make a very narrow point that there are operational problems as well. we make a lot of the payments on behalf of the treasury. this check is the social security check. there would be some practical problems we would like to bring up. >> it is reckless.

thank you. i appreciate your comment. >> i appreciate you wanting to spend these 2.5 hours with us. i am grateful. i appreciate your comment about the economic impact of simplifying the tax code and eliminating the distortions that are there. i want to talk about the dollars that are overseas. there was a trillion dollars overseas that want to come back for whatever reason. we will try to taxi. -- tax you. what would be the impact of having a tax holiday for those who want to bring it to the american? >> we did that a few months ago. -- years ago.

and lot of money did come back. some of them probably went to investment. you might want to consider the more permanent alternative. you wicket and but if you did this. >> you talked -- you would get a lot if you did this. >> you talked about bond rates. we see a substantial difference. would it be substantial? >> uygur one is probably less than normal. -- is there one is probably less than normal. -- either one is probably less

than normal. >> there was a lot of discussion at the time prepare you have talked about the importance of consumer spending. is this a bad thing? is it different from investment? >> dividends could be spent by consumers. that is right. by you talked about how smart is the spending. is there any spending that should not be examined? >> i hope you look at everything. >> thank you. >> thank you. it is good to be with you. when he testified before the budget committee, you acknowledged that the expiration

of the puns would worsen the fiscal outlook of the state. -- of the funds would worsen the fiscal outlook of the state. this was a critical component in the recovery act. given this headwind, what would you say the impact would be coupled with the cuts in state and local spending budget because of the deficits they will face? if combined with the draconian spending cuts, and is there any way that cutting discretionary spending in 2011?

>> the tax revenues have improved somewhat as the economy has gotten better. they are still under considerable strain. this would be a negative for growth. i can only come back to the point i made several times. it is important to address the deficit. i hope you will look at a blogger term window -- a longer term window. we are still coming out of a very deep recession right now. that is not reduced the need to address these long term structural budget problems. i hope you will do that. >> of the balloting that we do need to address the deficit --

and knowledge in that we do need to address the deficit, -- but what is this likely to do to our potential for creating jobs? >> it will depend on the details. it is better to think about this in the context of a longer term plan and trajectory for fiscal spending. >> on healthcare, it included numerous provisions to contain costs by moving from a pavement system -- from [unintelligible] a payments [unintelligible] do we have the ability to create real savings? >> i am not able to make

estimates. i do not know how effective they are going to be. that is something congress ought to monitor very closely. they are finding anything they can to reduce spending but ther. >> i appreciate your thoughts about the long-term reform. this is just the beginning. i cannot wait to get some long- term reforms. when you say you will be vigilant about watching for inflation, can you name one time in your agency's history where

you caught it right? where you got a break to correct it? >> absolutely pepc. ever since paul volcker conquered inflation and the 1980's, inflation has come down steadily. >> i do not think he got sick it in time. -- he got to it at the time. >> by the time he left office, he came in with a 13% inflation rate and left with a fourth term -- 4% inflation rate. it came down over eight years. from there, under general greenspan, it came down to about 2% and it has been there ever

since. >> i do not think the agency got there. >> it has predicte. >> we will beg to differ there. there are elected government projects on the street to support this borrowing that we are doing. when banks have one of your products to invest verses a small business down the street, they will go to your project. k you argued that -- can you argue to stop these products from being offered? you can get a better return on your money. >> we paid 25 basis points. the existence of the reserves is the counterpart to the purchases of securities that we are doing

that is making it easier for borrowers to get credit. you cannot look at one side and not look at the other side. i do think it helps credit extension. >> over the last three years, you had over $1 trillion in government spending. when government gets a dollar, we make 60 cents . can you argue that taxing it is not the most effective way to grow the economy? >> taxation is a dead weight loss. the loss to the private sector is more than the taxes actually paid. anything that can be done to

make it more efficient would be good. >> i agree with you there. thank you. >> thank you for your testimony. i want to focus on the economic consequences. the idea of prioritizing payment is frightening to me. wouldn't this have the effect of paying china before we would pay our troops in afghanistan? >> yes. >> that is pretty scary. if we were to not raise the debt ceiling and we did that do it for six months, we'd be spending about $1 trillion at the current level.

would that be right? >> ok. >> we are now borrowing 40 cents of every dollar we spend. we would be taking close to $1 trillion out to the economy during the six-month time frame. that is more than the entire recovery and investment act. >> some of that money will be going overseas and so on. i think that effect would be the worst by the financial crisis. -- cote worst -- coereced by the financial crisis. >> i do not think she said that

it is the day spending problem. she said it is not solely a spending problem. we are at the lowest tax rate in this country in 60 years. >> we have a revenue problem right now because we have not recovered. the gdp the we are getting has a historical average. that is a temporary situation. we hope to go back to this 19% of gdp. in the longer term, economies will have to decide where the values are. i hope you look at the whole set of options and try to think about what is best. >> you mentioned taxes that are

growth friendly. my friend is in the barbeque business. he has done well and pay a lot of taxes. he said he does the care what the tax rate is coming he cares that people can afford barbeque -- what the tax rate is, he cares that people can afford the barbeque. >> i want to move into state pension reform and state debt and deficit. earlier, someone referred to the debt ceiling as a "routine." i believe that is part of the problem we are having, if this notion that we will continue to borrow beyond our means.

i think it has a direct impact to the global market, to our market here and the consumers. i was concerned about some of the common here and the appraises you have to use. -- you have used. one was to unwind some of the stimulus. i agree. we should be stopping the use of stimulus and returning some of the dollars. you also said future spending must be smart spending, how would you categorize it up to this time? >> i was only making a point along t.

congress will only look at the total revenue numbers and try to make it look important. it is important to the pet the tax code and that it is as effective as possible -- to look at the tax code and see that it is as effective as possible. >> we have to simplify the tax code. we have to reduce some of the regulatory environment that will get some of the private sector money back into the economy. that would replace the federal spending that is being suggested. the second question i have is according to census bureau data, we have 4% of interest on? outstanding.

can you comment briefly on these levels and compare it to our levels? >> they are lower than the federal. it is 15% vs. 69%. most of that deck is associated with capital pride? as well. -- most of that debt is associated with capital projects as well. they are having some very difficult cuts they have to make fun spending and employment. that is not take into account some long-term issues. unfunded liabilities are much more significant. >> thank you.

>> thank you. >> thank you very much. thank you for your long suffering. i had to leave for another hearing. i have three simple questions that are probably one word answers. had you ever seen a recovery in modern history that has not been led forward by housing and construction? >> it is normal for housing and construction to be part of the recovery. >> thank you. this is troubling. with the instability in the rising of gas prices, at what level of gas prices and our nation would trigger a steep recession again? i put it at about $4 a gallon. >> i do not think there is a single number. you are beginning to take a

significant amount of income away from people. it makes it more difficult for the economy to grow. >> thank you. >> i do not know if you have any ideas to put toward the unemployed. this weapon out of work for more than six months, thank you -- those who have been out of work for more than six months, thank you 4 dealing with that. what are your goals? >> i do not have any good answers. we are doing our best to try to help the implemented to ration. when area to look at to be the unemployment insurance system. there might be ways to use some of the money to do training with an income support. >> last december, congress forced the fed to release its

report on what it had entering the and into crisis and which institutions received money through the federal reserve. you propose releasing the report claiming that it would disturb the financial market. the federal reserve wanted to keep secret that it had brought back from german and swiss banks more than half a trillion dollars of bad mortgage-backed securities that wall street banks have pawned off. this is something the congress did not want -- the fed did not want congress and the public to know. why should congress and the public know what the fed is doing, especially when it was put onto the u.s. financial

system? my questions are, it did you defended secrecy for the sacred secrecy? -- for the sake of secrecy? >> there is no longer any secrecy. all the information is now revealed. there is no aspect that is permanently secret. i have no idea what you are talking about with the swiss mortgage backed securities. it is required b. we were repaid in every single

case. >> as you know, japan recently had the credit rating downgrade it in light of the fiscal situation. parted the justification -- part of the justification was that japan has no plan to deal with the fiscal stimulation prepa. we have very low interest rates compared to recent history. our deficits are adding to the national debt. we have no coherent plan to deal with this in the long term. you indicated that there is the magic number. i think that is fair.

that said, you have some sense of when we are keeping close to unsustainable debt. when are we kidding close? what are the main indicators that we need to monitor? >> we already have a considerable increase. we are heading toward 90% by 2020. as to remove up to 100, we are approaching levels where some of the countries in europe are that are having very serious problems . there is not a magic number. each cannot tell in advance >> -- you cannot tell in advance.

the markets will be quite forgiving. >> this congress has not implemented the bipartisan plan to deal with that situation. there are things like medicare. i was a curious to hear my friend who was to put everything on the table as we deal with this. why do we put medicare on the table as one example? we had to do things quickly. do you agree that medicare is on an unsustainable path and that must be addressed very quickly? >> it will be a very big share

. it requires us to dsave costs. >> i would like to ask you a few questions about a consequences of not lifting the debt ceiling. i want to know if you can paint a picture of the consequences. we were having to manage our budget crisis when i whispers there a couple of years ago. our budget was $110 billion. now my colleagues are still there. they are left with a $23 billion deficit. if we did not lift the debt

ceiling, what would that do to the state? >s? >> i see what you are stating. california always pays its interest. .he risk premium went up for it will cascade through the system. other institutions are receiving the interest in order to make their payments. you would have a seizing up of

the financial system. the debt ceiling was raised in a few hours. this could be quite serious. it makes interest payments much higher. on the states, there would be in effect. government does provide a good bit of income. it to make their situation work as well as it is given to the state. >> [unintelligible] >> there is no doubt that the bond markets are very disrupted. it is plausible it to be at higher rates than they are today. >> what about intergovernmental transfers?

we were suggesting that a couple of seconds ago. could you elaborate? >> it depends on the prioritization. i think it has some serious technical concerns associated with it. >> there is. thank you. thank you for being here. as a small-business owner, for the last 15 years, i have seen a lot of fluctuation.

i want to touch on one thing bill as a business owner, do one thing. as a business owner, we do not currently prioritized debt. why can we change that and focus on making sure that our current debt obligations be taking care of and then start moving down that laughter and saying we will make sure it that we do not default? we have an obligation to do that. >> there are some technical difficulties. the federal reserve makes many of these payments including interest rates. we would have to find ways to make sure we were making interest payments and not of their kind of payment of a villa there would be some

serious operational repayments. there would be some serious operational concerns. congress has to make the determination of whether you are willing to stop social security payments as a temporary measure. >> if we make that one of our priorities, people have paid into that. we are making sure our interest is a priority. we will make sure our priorities are at the top of the list so we do not have to worry about it. are we taking steps to say long term that you would have to change operational and for

structure? wouldn't we better off having some flexibility like that? >> the amount of borrowing was determined when he agreed on how might you would spend and tax. i am sure this can be worked out. i want to make sure people understand that this is a short- term thing. it might not be terribly possible to carry it. right to you think it to be a bit -- >> do you think it to be a good thing? >> the best way to do it is to look at the long term situation and each part of the budget but