. >> thank you. i apologize for not being here. i had another meeting prepare it seems that i have continued to hear that you do agree that there needs to be a plan. they are putting it on automatic pilot do you have an idea about how it might form the budget process to help us toconsider a >> i think it is sensible to drop the somewhat artificial distinction between discretionary and mandatory spending. you want to look at everything on the budget over a longer term. in a speech i gave a few months

ago, i talked about the school rules. a lot of countries around the world have set up fiscal rules. some of these rules would empaneled were sequestered part of the government spending if deficits exceeded certain levels, for example. they always set up rules that forced congress essentially to meet certain targets. there was something similar to that with an approach that was used some time ago. i do not have a real specific suggestions. i do think that thinking hard about your framework and recognizing that the current approach when you try to find an offset, that is to say we are satisfied with the deficit where it is. you need to have something that is better than offset.

indeed something that will allow the deficit to shrink over time rather than with the current projections are. it is very challenged -- challenging to do that, i understand. again, create some kind of long- term plan and within the context of that plan fitting in various programs. that is essentially what needs to be done to get us back on a stable path. >> there has been a lot of talk about a balanced budget amendment. it takes a long time to get there. what would you think about having a spending cap that we can only stand to a certain level? >> it is up to congress to do that if you want. i would assume that would be a legislative action as opposed to a constitutional action. you could do that and didn't you that you have a mechanism similar to eight fiscal role that says you are not allowed to appropriate more than a certain level. if more was spent because, let's

say, medicare payments were higher than anticipated, you got to find a way to deal with that. that is a rule that you could apply. along with consideration of al revenues are going to evolve, that will help you with a plan to reduce the deficit over time. >> i yield back my time. we have gone over your time. we know we are running late. we appreciate your indulgence. this meeting is adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011]

>> house speaker john boehner and other republicans met with president obama. that is next on c-span. in a few minutes, a hearing on the growing debt that many state and local governments face. later, federal reserve chairman been bernanke on the economy.

-- ben bernanke on the economy. >> on tomorrow's of washington journal, will have represented tim huelskamp and representative dennis knesset. washington journal each morning at 7:00 eastern. later on c-span2, the heads of the cia, fbi, and it center for national intelligence at 10:00 eastern. at 10:30 on c-span3, james steinberg will take questions on the political unrest in egypt and lebanon. that is from the house foreign affairs committee. >> experience american history on c-span3. it is 48 hours of people and

events of telling the american story. here first-person accounts of people who shaped modern america on oral history. history bookshelf features the best known history writers of the past decade. travel to important battlefields to learn about keep figures and events. every weekend, does a college classrooms across the nation as professors to delve into america's past. join curators, collectors, and historians behind the scenes at museum exhibits and his organ -- and historic sites. also, focusing on american presidents and their legacies. personal insights on the ministration officials. american history tv on c-span3. get our complete schedule on line and have them e-mail to you using our c-span alert. > house speaker john boehner says he and president obama want to find common ground on

education, these tax code, and trade. the speaker and other republican leaders spoke briefly with reporters outside the white house. >> we had a very nice lunch with the president and vice president and the president's chief of staff. our number-one issue is getting the economy going again and getting people back to work. we believe that in order for that to happen that we need to cut spending, stop unnecessary regulations that are tampering with small business's ability to hire people. we also talked about trade. there are some places where we can find common ground to address the needs of the american people. it was a very good lunch. we were able to find enough common ground, i think, to show the american people that we are willing to work on their behalf and willing to do it together. >> we did have a robust

conversation about the need for all of us to work together to send a signal that we are serious about cutting spending. we had an agreement on that. the particulars will be in where the disagreements may lie. we are committed to do that because the economy definitely needs us to work together to send a signal that we should start growing again as america. that is when america it does best -- when it innovates and it leads. we can begin to make the foundation where entrepreneurs and small businesses can grow again end where we can see an economy that is still here in a healthy weight for our children and theirs. >> i would say the main portion of the entire lunch we talked about the economy, ways in which we could grow the

economy, regulations, reforms to unleash the shackles of government polls on small business. -- that government holds on small businesses. we looked into places where we could work together, from jobs to cutting government spending. it was a beginning and a start. we look forward to having the president on his word so we can move legislation and create new jobs. >> can you elaborate on what you said about trade? did you talk about animal and columbia? -- did you talk about panama and colombia? >> i made it very clear that the house would like to consider all of these bills. there is a lot of support for south korea. there is also quite a bit of support for colombia and panama. i take it is clear there is an -- i think it is clear there is an interest in moving all three. i would hope the sooner the

better. >> can you talk about the effort you put for tomorrow in terms of the spending bill? the state a desire to cut all funding for the health care bill. is there a possibility of the course of the year for spending cuts and tax reform? >> we talked about the need to cut spending. we talked to the president about the fact that we are moving forward tomorrow with the continuing resolution that is going to cut spending. we have a lot of work to do. the american people expect washington to cut spending in order to grow jobs in america. >> did you discuss the budget? >> no. >> did you speak to the president about reaching out to republicans? >> it is clear the president was to find some common ground with us. we will disagree on some things. all of us know there are some issues in which we can work on.

whether it is education, tax policy, trade, or even cutting spending, i think we can find common ground ensure the american people that we can work together. thank you, you all. >> the patriot act passed after the 9/11 attack. it made it easier to conduct surveillance on terrorism suspects. lawmakers are trying to renew its provisions. the house try doing that this week, but failed to get the votes needed to pass. all the history of the bill today online with c-span's congressional chronicle.

you can track the daily floor action in the house and senate. there are time lines and transcripts of every session. find a full video archive for every member at c- span.org/congress. >> the house will try for a second time this week to extend sections the the paycheck act. -- the patriot act. the measure will only need a simple majority to pass. that begins at 10:00 a.m. eastern time. live house coverage here on c- span. >> corey boles, house appropriators say they will cut programs by how much? >> it depends on the use the tube. -- it depends on who you speak to. they say they are on track to cut spending by $74 billion. that is compared to the president's fiscal 2011 budget, the budget he delivered to congress last february that promptly went nowhere. the only real comparison that can be made is comparing them to the current spending levels.

despite the fact we are midway through the federal government paltry fiscal 2011, we are looking at the current spending levels -- the proposed gop cuts. it only yielded about $35 billion. that depends on your calculations. >> house appropriators released a list of programs they expect to be cut. what are some of them? >> we have a list of about 70 programs that would either see rolling back in funding or be cut out right. the environmental protection agency, the internal revenue service would seek cuts. but would it seek cuts. -- would see cuts. in terms of the high-profile programs which would seek funding cut entirely, the -- would see the funding eliminated entirely, the proposal to increase funding for high-speed rail projects is one. this is what the president has last on to in recent days.

there are also cuts seem to the department of energy bawdry loan guarantee program. it is a high-profile way to increase investments in renewable energy sources. we were not expecting to seek further funding request in his budget next week. if you add up because they unveiled today, we only get to about $23 billion. that is short of the $35 billion or the $74 billion they are targeting. earlier today, the guy that's -- the guidance from the leadership is that we would see a final plan tomorrow. because of what we are hearing is some pretty aggressive reaction for the conservative house members, this final version could be delayed as the leadership tries to move further cuts to mollify those members. >> the top democrats on the appropriations committee also reacted. they released a statement about the plan. what does it say?

>> they are saying they are more than willing to work with republicans to reduce government spending, but that it needs to be done in a carefully targeted and careful way. not just across the board cuts or radical up front cuts. they do not want to jeopardize the economic recovery. >> what kind of debate should we expect to see of these cuts? >> the most interesting debate is going to be within the republican party itself. you have a large number, in fact, a majority who style themselves as very conservative when it comes to fiscal issues. they are aggressively pushing the leadership to do more on the spending cut front. the most interesting debate will be between the leadership of the republican party and its own members as they try to make a deal that all members can live with. >> thank you. >> any time.

>> many state and local governments are facing growing debt. in 2009 and 2010, states have been able to postpone some of their budget shortfalls by using federal stimulus funds. a house oversight subcommittee heard testimony on state debt and the use of municipal bonds. it is chaired by congressman patrick mchenry. >> i will begin by making an opening statement. i appreciate the panel of witnesses being here. today's hearing is an opportunity to discuss growing concerns over the fiscal crisis limning for states and municipalities. of the past three years, we have seen a culture arise where every institution claimed it was "too big to fail." taxpayers were put on the hook

for trillions of dollars. debts have reached an all-time high and the national debt is crippling our economy. we are facing the consequences of bad government policy in another way. state and municipal governments who are preparing for budget shortfalls totaling roughly $135 billion this year. they are struggling under a burden of unfunded pension liabilities, tax revenues, and upper giving bond measures. we must understand the magnitude of this problem to avoid the reactionary at hot decision making that has fueled the federal action of the 2008 federal crisis. this is not about one analyst. this is about a looming fiscal crisis and a lack of transparency in the pension obligations. the perfect storm is brewing. state and municipal governments are coming to washington

expecting a federal bailout like so many others. but the era of the bailout is over. that does not mean, however, that congress must turn a blind eye or a deaf ear to the crisis unfolding. the beauty of federalism whitens the fact that the federal government does not tell states out to manage their own affairs, at least ideally. the burden of federalism is that when one state or all 50 states are in a crisis, we must work together to solve them for the good of the country. state and local government spending has increased 70% faster than inflation. the vast majority of the states now find themselves in a fiscal straitjacket caused by the burden of paying out trillions of dollars in public sector pensions and health care. for the last three years,

funding from the stimulus at has amassed the severity of the state's fiscal challenges. there was $140 million in transfers from the federal government to the states included in the stimulus. states now say more money would help them through their current rough patch. the reality, however, is that money states receive from the stimulus act made them worse off. a lot of the money comes with "maintenance of effort" requirements. more money from washington with just delay the day of reckoning and further complicate the state's fiscal situation. besides, we do not have any more money. beyond that, the simple fact is the government has outgrown our capacity to pay for it. there will be severe

consequences for not changing course. young teachers and fresh out of college and ready to get back to the community will be told that their school districts cannot provide them with reasonable retirement benefits because they have to pay for the exorbitant benefits of others. firefighters, policeman, and other public servants are facing the reality that their jobs offered the promise of higher standards of living for their families. in the end, people will recognize that their government has failed them. not only that, they believe that their government has actively hurt them. while we have an opportunity to change that, we are responsible to try. this is why we are here today, to come to a better understanding of the crisis on the state and local government level, because is, and the available solutions. with that in mind, i intend to

shed light on how states arrived at their current predicament, what is the current extent of their fiscal distress, and what needs to be done in terms of available solutions. my friend and colleague from california has a proposal that will require greater transparency on the pension problem. i have been happy to work with them on this legislation. i look forward to hearing from both sides on any and all possible solutions. that is why we had this great panel here today. but there be no mistake, much is required to get our fiscal house in order, not just that the state and local levels, but here in washington, d.c. spending guarantee by unsustainable bailouts is an unsustainable course.

with that, i now recognize the ranking member, mr. quigley of illinois. >> thank you for holding this extraordinarily important and timely hearing. congratulations on your new post as chairman. the record should reflect that you and your staff have been extraordinarily accommodating and cordial to myself and my staff. obviously, the issues are too important to divide us. i also thank you -- any time i pay a compliment to you should not take from my time. [laughter] i want to thank the witnesses for testify today. -- for testifying today. i agree. this is not about bailouts or bankruptcies. i do not think either of those options can work or are optimal. i am from illinois. you do not need to tell me about how bad its finances are or how bad the situation is.

illinois with three decades of bad financial decision making bows by democrats and republicans. they have a backlog in payments and a gaping $136 billion hole in the pension system leaving its pensions less than 50% funded. the rating agencies have downgraded illinois bond issuance in the last 12 months. last year, bonds carry the worst credit risk of any u.s. state and were only slightly worse than bonds from iraq. -- slightly less risky than bonds from iraq. this bad rating is costing illinois taxpayers $551 million a year extra in interest payments. total debt service in illinois is expected to increase by 33% between now and the year 2017. the only way illinois it will climb out is to raise state income tax is a whopping 56%,

and out, no one wanted. -- an outcome no one wanted. this tax increase brought illinois' bond rating back up, but only by passing on the cost to allen boyd taxpayers. -- illinois taxpayers. illinois has to reform its way of doing business. it has left retirees vulnerable and taxpayers on the hook. we forgot the story of joseph in genesis. during the seven good years, he saved for the several lean years. illinois it did not say that for -- illinois did not save for the the several lean years and now it has to pay for the consequences. what is going on in illinois is not necessarily what is going on everywhere else. recently, states have run up large deficits due to decreases in tax levels.

the real problem actuarial -- the real problem is an actuarial problems unique to eight states, including illinois. the culprits are rising health costs, underfunded pension plans, and poor financial management. some of these pension plans looked particularly bad because of the collapse in the value of pension assets. even an appreciation in asset value will leave several state pension plans underfunded. the municipal bond market is responding to legitimate concerns about the long-term structural imbalances in these six to eight states. it would be correct to distinguish these bad apples from the other 47 states that -- from the other 40-something states that have been well managed and only have temporary datasets. that is why a one size fits all approach could do more harm than good freed we have to avoid any -- would do more harm than

good. we have to avoid any rash actions that would introduce a new risk factors to the bond market. state and local governments need to continue building roads and bridges. we do not want to make the financing any more expensive than it already is. although there are national interest at stake, it is up to the state governments to reform themselves. they need to reform sooner or later. a default on payments would make it hard for all states to borrow. taxpayers would bear the brunt of these talks -- cost either by tax increases or reduced public services. mr. chairman, i do not want a new jersey problem to become a national problem. these states need to institute common-sense reforms. they need to shore up their finances. at the same time, the government mission matters. all we need is the political will to get it done. i look forward to hearing from our witnesses on this matter and the discussions for the next possible steps.

thank you. i yield back. >> i thank mr. quigley. you have done wonderful work. we certainly appreciate that. this is not a republican versus democrats issue. try to understand the depth of this problem behooves both parties and the american people and their right to know. before we introduced the panel, we had the mission statement of the oversight committee. at the chairman's request, i would like to read that. we exist to secure two fundamental principles -- first, americans have a right to note -- had the right to know that the money washington takes from them is well spent. second, americans deserve an efficient, effective government that works for them. our duty is to protect these rights. our solemn responsibility is to hold government responsible to taxpayers because taxpayers have a right to know what they

get from their government. we will work tirelessly in partnering with citizen watchdogs to deliver the facts to the american people and bring genuine reform to the federal bureaucracy. this is the mission of oversight and government reform committee. with that in mind, i would like to introduce today's panel. nicole gelinas from the manhattan institute. she is a contributing editor to "city paper." she is a chartered financial analyst and a member of the new york society of securities analysts. her most recent book was about the financial crisis of 2008. it was published in november, 2009. david skeel is a professor of

corporate law at the university of pennsylvania law school. he is the author of a book published in 2005. he wrote a history of bankruptcy law in 2001 as well as numerous articles and other publications. eileen norcross is a senior research fellow with the social change project and lead researcher on state and local public policy project. her work focuses on the question of how societies sustain prosperity and the role of civil society in economic resiliency. her areas of research includes state and local governments and economic development. iris lav is a senior adviser with the center on budget and policy priorities. prior to joining the center, she was an assistant director of public policy for the american federation of state,

county, and municipal employees. she is a senior consultant at a consulting firm. thank you for being here today. members will have seven days to submit opening statements for the record. it is the policy of this committee that all witnesses be sworn in before they testified. we please rise and raise your right hands? do you solemnly swear the testimony you are about to get to this committee will be the truth, the whole truth, and nothing but the truth? >> we do. >> thank you. the record will reflect that all answered in the affirmative. we will begin with you, ms. gelinas. you have five minutes to give your opening statement. at one minute remaining, the yellow light will come up. if he will summarize your statements. everyone has that for the record. we will begin with you. >> good morning, chairman

mchenry. >> bring the microphone closer. >> good morning, chairman make -- good morning chairman mchenry. henry, ranking member quigley, members of the subcommittee. thank you for having me testify on this topic. congress is right to worry about the choice between bailing out the states and watching as they risk repudiating their long-term obligations to bondholders and other creditors, including union members. the good news is that congress can still act to avoid this choice. the bad news is that a state bankruptcy statute is not one to be the answer. sometimes arriving at a solution means eliminating the bad solution. i will talk about some of the answers. the proposed bankruptcy statute for states say that special interests have taken over the state budgeting process, that there is no prospect of states

getting their long-term pension obligations, a health care obligations to retirees, and debt obligations under control unless there is an outside force. in this scenario, states can't threatened bankruptcy to bring concessions from their creditors, specifically labor unions, affecting pension benefits, health care benefits and the likes. bondholders are worried about the process would force states to do this. as a practical matter, bankruptcy is unlikely to help states solve their fiscal problems and would add new problems. one reason is hell states have structured their bond obligations. when many people think of money the state owes, they look at the state's general obligation bonds -- bonds on which the state has said they will pay back the debt. states also issue bonds to

hundreds of public authorities. new york state rose nearly $80 billion in debt -- only about $3.50 billion of that is true obligation debt. the remainder is through the hundreds of authorities. each of these authorities is its own corporation. it is not an agency or an arm of the state. it has its own legal and contractual agreements with bondholders, employees, and retirees. there is no practical way for a state to pull all this debt together in one place. they cannot handed over to a judge and pare it back without violating thousands of pre- existing cut the nets, contracts with bondholders in state laws. congressman quigley points that

changing the rules would affect not only states that have gotten themselves into trouble with their own decisions, such as new york, california, a new jersey, but also states not running the long-term deficits. introducing the bankruptcy statute would allow us to all states to question and sort out the uncertainty. during that time, it is unlikely the states would have to pay more on their debt. another practical problem is that seats are not like corporations where one person can be authorized to speak for the state. in a corporate bankruptcy, you have be ceo, an agent of the ceo, and a small board of directors. they all speak as one. in a state bankruptcy, hundreds of state lawmakers could not give their power to a governor to speak in one voice. bankruptcy would not equipped the normal prophecies of --

bankruptcy would not eclipse the normal prophecies of democracy. you still have hundreds of lawmakers speaking in different voices before a judge. now wait for a judge to take over this process and solve these obligations from on high. another problem is that states do not bow pension benefits, -- do not vote pension benefits, they administer pension benefits on behalf of local governments, cities, and school districts. bankruptcy for the state would not take care of pension obligations. municipalities can do that the changes to the state law. municipalities can already declared bankruptcy debt that is a wait for them to deal with their pension obligations. this is not a benefit to municipalities to a pension and health care benefits. what are some of the other solutions congress can look to to help states pare back their benefits? one thing is making sure that congress understands that states already have the tools to

deal with this themselves. they can change their laws that govern pensions. states can govern laws that govern contracts and health care benefits. they do not need to look at congress to do this for them. with that, i conclude my opening remarks. thank you. >> thank you. mr. skeel? >> it is a great honor to appear before you. it is tempting to say that everything the kohl just said, i will not. i would just make one comment at the outset. we have lots of experience dealing with complicated bankruptcy's. there are a multitude of entities. that is not news. i would be happy to address questions about that or the other issues that were just raised it you are interested. currently, we really only have two options. the first is that a state might

simply default on some of its obligations, declaring itself unable to pay. the second option is for the federal government to bail out one or more of the states as it bailed out financial as the stations like fannie mae, -- financial institutions like fannie mae, freddie mac, an aig during the recent financial crisis. i believe that both of these alternatives are deeply problematic and that congress should enact a bankruptcy law for the states, not as a first resort, but as an absolute last resort in the event everything else fails. the claim that we do not need a bankruptcy law strikes me as a little bit like saying there is no need for a fire department because most homeowners have never had fires in their houses and if one starts, the homeowner can probably stop it before the crisis gets out of control. age of these things are true, -- each of these things are true,

but we still need fire departments for the rare case when the fire does run out of control. i would like to make three simple points. first, bankruptcy would provide several enormously important benefits that we do not have a in the absence of bankruptcy. second, it is constitutionally permissible, in case you are concerned about that. third,the law could be tailored to address any particular concerns you may have about things like it being too easy for a state to file or the bankruptcy law being too harsh with particular kinds of constituencies. >> let me say a brief word about each. first, the benefits that bankruptcy would provide for a troubled state. one of the main benefits bankruptcy would provide is a way to restructure some kinds of obligations that probably cannot be restructured outside of bankruptcy.

i would include patients in that. -- i would include pensions in that. there are real limits of what can be done with pensions outside of bankruptcy. i would include bonds in that territory as well. the other huge benefit of bankruptcy is if it is necessary as an absolute last resort, it brings everybody to the table. we do not just have one or two constituencies to get singled out to make sacrifices, we get everybody to the table and asked, "how can we distribute the sacrifices so that it makes sense that we can put our finances on a fiscally sustainable course?" my next point is that bankruptcy is constitutional in respect to states. all that needs to be done there -- there are state sovereignty concerns, but they can be honored so long as we make sure the bankruptcy law is entirely voluntarily and that a state cannot be thrown into bankruptcy against his will.

the bankruptcy law would also have to ensure that state governmental decisionmaking functions are not interfered with. all these are things we already do with municipal bankruptcy. my final point is that the law can be tailored to deal with any concerns you may have. a lot of the criticism of state bankruptcy seems to us than there is only one possible state bankruptcy law we can have and it will require us to cut everything down to zero. that is not the case. if you are worried about states being too anxious to file for bankruptcy, i do not think that is a serious worry. there will not be a strategic use of bankruptcy. if you are worried about it, all you have to do is buy some entrance requirements on bankruptcy. we already do this with municipal bankruptcy. if you are worried about the

bond markets and that they will be afraid that bonds will be written down to zero, he put restrictions as a prerequisite to doing anything with bonds. we can tailor the bankruptcy a lot to address any concerns we may have. my bottom line is that bankruptcy is not a perfect solution. it will be messy. it is an absolute last resort, but it is better than the other last resort which is states simply defaulting on their obligations for a federal bailout. >> mrs. norcross? >> thank you for inviting me to testify today on this important topic. the recent recession exposed problems in state budgets that, if left unaddressed, are certain to worsen state's prospects for growth.

it reformed today, they can mitigate the worst. the recent downturn is only one cause for state budget gaps. state and local spending has gone faster than state's own revenues. the fastest-growing area of state budgets is medicaid. states have avoided deficits in part through federal funds and have increasingly relied on debt finance by deferring the contributions to pension systems, not funding health care benefits, or borrowing to make pension payments. these days help states passed the costs on to the future. without any changes, we anticipate state and local governments will require an annual and sustained reduction of 12.3% or an equivalent increase in revenues between 2009 and 200058 to close the

fiscal gap. in addition, state and local governments face a large funding gap in their pension system. government's report the unfunded liability at $1 trillion, but economists estimate it closer to $3.50 trillion. according to government accounting standards, the discount rate may be based on what the assets are expected to return, an average of 8% annually. this violates economic theory that says a value of a liability is independent of how it is finance. this will require matching that rate with what is being valued. in this case, a public sector pension. it should be matched with a rate that reflects the safety. the circular logic of government pension accounting standards and have had several consequences to pension funding. it has led to the undervaluing of pension promises and the

amount necessary to set aside. investment risk has been suggested. union leaders and politicians often boosted benefit formulas. governments have also deferred payments to the systems and issued bonds. an economist at northwestern university estimates that the assumption is an 8% return on assets. illinois it will require $11 billion annually beginning in 2019. new jersey will require $10 billion annually in 2021. another scenario is offered.

illinois will require 13% of its budget to ensure solvency. the jurors and see where require 4.5% of its budget. -- new jersey will require 4.5% of its budget. this requires [unintelligible] other economists have released other scenarios. it is incumbent upon state governors and treasurys to ask actuaries to stress test their pension systems under a range of assumptions. the biggest government the federal government can have is in the medicaid reform. i have two recommendations. first, transparent and accurate accounting. governments must stress test their pension systems and determine what will be needed to set aside to pay these promises. these scenarios should include the risk-free state. -- the risk free discount rate as recommended by economists. secondly, stabilize public-

sector pension systems. pay what has been promised but while minimizing the budget on taxpayers -- states said defined benefit plans to the cost-of-living adjustment. they should increase contributions from workers and moved workers to defined contribution plans. the last reform will allow workers more flexibility, shift wrest away from taxpayers, and and manipulation of worker -- and manipulation of worker benefits which has turned what has been a safe investment into a gamble for employees and taxpayers. accurate accounting will enable states to narrow the trade offs recommended today. delay will only ensure what is a big problem will turn into a crisis. thank you and i look forward to your questions. >> thank you, mrs. norcross. mrs. lav? >> thank you for the invitation to appear before you today. i believe that predictions that

states will have to bailout localities or that the federal government will have to build up -- will have to bail out the state's the stakes are substantially exaggerated. i believe they are signaling an unnecessary alarm. i would like to untangle some of these claims. first, states are projecting a large operating deficits. about one of the $25 billion for the 2012 fiscal year. -- about one had a $25 billion for the 2012 fiscal year. unemployment remains high. revenues remain below recession levels. there is rising demand for public service abjuring due to the weak economy and growing population. figure one, please. the fiscal relief is ending. that is not right. is that someone else's? it has been enormously helpful

in allowing states to put off tax increases. states have used it to cover about one-third of its budget shortfalls. only about $6 billion will be available for next year, covering less than 5% of the shortfalls. as a difficult and painful as these choices are, states and localities will balance their upcoming budgets through budget cuts, tax increases, and use of reserve funds. that is what they do. it is a cyclical problem that will shrink in size as the economy continues to recover and state revenues continue to grow. there is no credible evidence of a bubble or crisis in state or local bonds. could we get to figure three, please? interest payments from state and local bonds and absorbed by% of state and local expenditures, the more than they

did in the 1970's. the default rate has been about one-third of 1%. finally, there is no large increase in bond issuance more exotic securities to hide the underlying value of the assets as was the case with the subprime mortgage bonds. third, pensions are a little more complicated. there are shortfalls in pension funding for state and local retirees. states will have to address this over the next three decades or so. pensions were fully funded in 2000. figure four, please? that was by using standard accounting. the recession reduced the availability of assets and some did not make the required deposits. the center for retirement

research at boston college finds thatstates and localities have about $700 billion in unfunded liabilities. that implies they will have to increase their contributions on average over the next 30 years from 3.8% of budget to 5% of budget. that is on average. it is not illinois. to reduce that cost is not a crisis. the major controversy is over whether these traditional accounting standards are appropriate. that $3 trillion number calls from economists that measure future costs assuming a riskless rate of concern, such as in treasury bonds, of about 4%. pension funds and to invest in a diversified basket of private securities. the historical rate of return has been about 8%. it may or may not be a little lower going forward. it is quite unlikely to be just 4%. the $3 change in number is a

contract that does not recommend what has to be put into the pension funds. the states in trouble are basically those vets get their payments. to summarize, fiscal problems are serious but will debate as the economy improves. pensions are not in crisis. i see no need for federal intervention in these areas. states do not want or need the power to declare bankruptcy nor is there a need for federal legislation to require states and localities to report their pensions on a riskless rate as a condition for issuing tax- exempt bonds. there is a process going on to reform the way pensions are reported that to put all states -- and to put all states reporting on the same basis, which would be a transparency improvement. we can see what is going on and

have a reasonable actuarial method for reporting. a proposal with short circuit that. thank you. >> i certainly appreciate that. we will begin the questioning with the vice chair of the subcommittee, mr. gantt the of hampshire.duinta of new >> thank each of you for testifying for us today. i have a couple of questions for each of you. i will try to be quick. the first is for ms. lav. hell with you define a crisis in what we are seeing with the states and their obligation requirements at the levels they are at? how would you define a crisis? >> i would define a crisis as something in which they had no way a big in themselves out. states have many tools in which

to do this. if you have to raise your pension contributions, you can accommodate that, particularly after the economy recovers. certainly, states are finding ways of closing their cyclical deficits. we do not appreciate a lot of the budget cuts they are making which are harming a low income people and residents, but that is what they do. states manage their finances. they have balanced budget requirements. >> i think the concern i and others share is that as states manage their finances, they are spending a higher amount of money percentage wise of borrowed dollars to get us to these challenging economic times. new hampshire has done that to pay expenses. new jersey has done that to pay expenses. it is not good business standards of practice. i do not note that you had a --

i do not know that you had a chance to touch upon it in your verbal remarks, but i in your written remarks you talk about standards. my concern is that there is a potential of states wanting to come to the federal government for a bailout because what they define as an economic challenge they are having, i would argue is something a little bit different. any responsible governor, legislator, or administrator should be anticipating these challenges. it does not appear that that has been done in a responsible way. i understand your point, but can you speak to the state's borrowing money essentially to pay for ongoing expenses? i am not talking about stimulus money they have received. i am talking about borrowing money. >> it is a very bad practice. states borrow money for infrastructure. illinois has borrowed from bonds

to make its pension payments. that is very bad practice. you do not see in the data in the run up in borrowing. we have a chart that provided some information to you. it makes sense economically for them to borrow for infrastructure. it is not good procedure for states to borrowed to make their payments. we do not approve of borrowing for operating expenses. in the locker paper that i referred to in my written testimony, we do have the last section that suggests that states do have some structural deficits, such a mismatch between their expenditures and their revenues. they do need to take some steps to fix those mismatches. there is no question about it that a lot of that mismatched

comes from the rate of growth of health care costs. states spend a lot of their money on health care. health care costs are growing faster than the economy. states, which had revenues that grow somewhat lower than the economy because of the structure of the tax system, have a hard time in meeting their responsibility to provide health care. >> i would agree that states need to better manage the pie and the budgetary challenges they are having, but it sounds like you are making an argument for bankruptcy when, in your comments, you said it was not necessary because of the looming challenges they are having. i would like to ask ms. norcross if you would comment on the testimony we just heard. >> i would like to explain the discount rate controversy a little bit more.

it has informed decades of policy within the pension systems. i believe we are seeing the results of that today. the analogy is this -- the reason you cannot achieve a discount rate is that if you consider you have a mortgage and you have a mutual fund. your broker says it will return to% annually on your mutual -- 10% annually on your mutual fund. that does not enable you to slash your mortgage in half. you do not get a separate mortgage statement based on that. what that logic has produced over the years -- in the '80s and '90s, some of the pension plans were trying -- they have undervalued the size of the promise. expecting that rate of return to take care of the contributions they are supposed to be making to the system. when plans are underfunded on paper, it led to some states to generate anestrus without doing the math.

-- generate enhancements without doing the math. in 2001, new jersey granted a 9% benefit increase without figuring out what it would cost them. that is one of the things the governor is trying to adjust right now. it violates another principle. you can secure a guaranteed investment with a high risk stream of investments. in the short term, you'll realize more volatility in your investments. yet, that promise is due within 15 years. they are basically trying to secure a guaranteed payout with a high risk investment. that is the flaw that logic. -- flawed logic. joshua row uses the 8% discount rate. he says that even if we grant that, we are looking at funds starting to run out of assets by the end of the decade. new jersey's actuary released a paper using the 8.25% discount rate in the police officer's plan. they say they have 12 years.

>> mr. cummings, you're recognized for five minutes. >> i want to thank you and are ranking member for working but are simply to address this problem. -- working in a bipartisan way to address this problem. ms. lav, it is interesting after listening to the vice chairman of our subcommittee, that the national governor's association -- that is the republican and democratic governors to their chairman and vice-chairman -- said on february 4, 2011, "allowing states to declare for bankruptcy is not an authority in the state leader has asked for or would likely use. -- any state leader as ask for nor would likely use. the reported bankruptcy proposals suggest that a

bankruptcy court is better able to overcome political differences, restore fiscal stability, and manage the finances of the states. these assertions are false and that threaten state and local finances." de you agree that the state bankruptcy proposal threatens the fabric of state and local finances?

they give mr. chairman and thank you chairman bernanke.

>> chairman reilly, ranking member van hollen -- >> can you pull your mic closer to? >> how is that? >> that's better. >> thank you for inviting me. i'm pleased that this opportunity to offer my views on the economic outlook on monetary policy and issues pertaining to the federal budget. the economic recovery that began in the 2009 appears to have strengthened in the past few months. although the unemployment rate remains high. initial phases of the recovery which occurred in the second half of 2009 in early 2010 was in large part a tribute both to the stabilization of the financial system, the ethics of expansionary monetary and fiscal policies and a strong boost to production from businesses rebuilding their depleted inventories. but economic growth slowed significantly last spring and concerns about our ability of the recovery intensified as the

impetus from inventory building and stimulus diminished and as europe's fiscal and banking problems broiled into financial markets but more recently we have seen evidence that a self-sustaining recovery in consumer and business spending may be taking hold. notably real consumer spending rose at an annual rate of more than 4% in the fourth quarter. although strong sales of motor vehicles account for significant portion of this pickup, the recent gains of consumer spending at. reasonably broad-based. business investment in new equipment and software increased robustly throughout much of last year as firms replace aging equipment, and as the demand for their products and services expanded. construction remains weak though reflecting an overhang of bacon and foreclosed homes, and continued poor fundamentals for most types of commercial real estate. overall, improving household and business confidence, and more

supportive financial conditions, including an apparently increasingly willingness of banks to lend seem likely to result in a more rapid pace of economic recovery in 2011 than we saw last year. while indicators of production have been encouraging on balance, the job market has improved only slowly. following the loss of about eight points 75 jobs from 2008-2009 private sector would expand by little more than 1 million in 2010. however this game was barely sufficient to accommodate the info of recent graduates to the labor force, and, therefore, not enough to significantly a road a wide margin of slack that remains in the labor market. notably declines of the unemployment rate in december and january, together with improvement in indicators of job openings and firms hiring plans, to provide some grounds for optimism on the employment front. even so without the growth likely to be moderate for a

while and employers reportedly still reluctant to add to payrolls, it will be several years before the unemployment rate is returned to a more normal level. until we see a sustained period of stronger job creation we cannot consider the recovery to be truly established. on the inflation front we've recently seen increases in some highly visible prices, notably gasoline. indeed, prices in many agricultural products have risen lately large as a result of the very strong demand from fast-growing emerging market economies coupled in some cases with constraints on supply. nonetheless overall inflation is still quite low and longer-term inflation expectations have remained stable. over the 12 months ending in december prices for all the business services consumed by households increased by only one point to present, down from 2.4% over the previous 12 months. to assess underlying trends in

inflation congress also followed alternative measures of inflation. one is called core inflation which excludes the more volatile food and energy components and, therefore, can be a better predictor of where overall inflation is headed. core inflation was on 0.7% in 2010 compared with about 2.5% 2007 the year before the recession began. wage growth has slowed as well with average hourly earnings increasing only 1.7% last year. these downward trends in wage and price inflation are not surprising given the substantial slack in the economy. although the growth rate of economic activity appears likely to pick up issue the unemployment rate probably will remain elevated for some time. in addition inflation is expected to persist below the levels of the federal reserve policymakers have judged to be consistent over the longer-term with a statutory mandate to foster maximum employment and price stability. under such conditions the federal reserve would typically

ease monetary policy by reducing its target for the federal funds rate. however the target range for the federal funds rate has been near zero since december 2008 leaving essentially no room for further reductions. as a consequence they have been using alternative tool to provide additional monetary accommodation. in particular over the past two years the federal reserve has further ease monetary conditions by purchasing longer-term securities, specifically treasury, agency and agency mortgage-backed securities on the open market. these purchases are settled through the banking system with a result of depository institutions now hold a very high level of reserve balances with the federal reserve. although large-scale purchases and longer-term securities are a different monetary policy tool than the more familiar approach of targeting the federal funds rate, the two types of policies affect the economy in similar ways. conventional monetary policy easing works by lowering market expectations to future path to

future rate which in turn reduces the current level of longer-term interest rates and contribute to an easing in conditions. these changes by reducing bobbling costs and raising asset prices bolster household and business spending and increase economic activity. by comparison the federal reserve purchases of longer-term security do not affect short-term interest rates which remain close to zero, but instead put downward pressure direct on longer-term interest rates. by easing conditions and credit at financial markets these actions encourage spending by households and businesses through essentially the same channels as conventional monetary policy thereby strengthening the economic recovery. indeed, a wide range of market indicators suggest the federal reserve's security purchases have been effective in easing financial conditions lending that these actions are providing significant support to job creation and economic growth. my colleagues and i have said

that we will review the asset purchase program regularly in light of incoming information and well adjusted as needed to promote maximum employment and stable prices. in particular we remain unwaveringly committed to price stability and we are confident that we have the tools to be able to smoothly and effectively exit from the current highly accommodative policy stands at the appropriate time. our ability to pay interest on balances held federal reserve bank will allow us to put upward pressure on short-term market rates and tighten monetary policy when needed even if bank reserves remain high. moreover, we have developed additional tools that will allow us to drink or and mobilize bank reserves as needed to facilitate the smooth withdrawal of policy accommodation when conditions warrant. if necessary we could also tighten the policy by redeeming or selling securities. as the imaging before the budget committee it is worth emphasizing that the fed's purchase of a longer-term

securities are not comparable to ordinary government spending. in executing these transactions the federal reserve requires financial assets, not goods and services. these purchases do not add to the government's deficit or debt. ultimately, at the appropriate time the federal reserve will normalize its balance sheet by selling these assets back into the market or allowing them to run off. in the interim the interest that the federal reserve earns from its securities holdings as to the feds. in 2009 and 2010 those totaled about $125 million. fiscal policymakers also faced significant challenges. our position is determined a presciently since the onset of the financial crisis and the recession. to a significant extent this decoration is the result of the effects of the weak economy on revenues and outlays, along with the actions the administration and congress took to ease the recession and steady financial

markets. however, even after economic and financial conditions return to normal the federal budget will remain on an unsustainable path with the budget gap become an increasingly large over time unless the congress and ask significant in fiscal programs. for example, under plausible assumptions about fiscal policies might evolve in the absence of major legislative changes, the cbo projects the deficit to fall from its current level of about 9% of gdp to 5% of gdp by 2015, and enterprise to about 6.5% of gdp by the end of the decade. in subsequent years the budget situation is projected to deteriorate even more rapidly with federal debt held by the public reaching almost 90% of gdp by 2020 and 150% by 2030, up from about 60% at the end of fiscal year 2010. the long-term fiscal challenge is confronting the nation are especially daunting because they're mostly the product a powerful underlying trends, not

short-term or temporary factors. the two most important driving forces behind the budget deficit are the aging of the population and rapidly rising health care costs. indeed, the cbo projects that federal health spending will roughly double as a percentage of gdp over the next 25 years. the ability to control health care spending while providing high quality care to those who need it will be critical for bringing the federal budget onto a sustainable path. the cbo's long-term budget projections by design did not account for the likely adverse economic effects of such high debt and deficit. but if government debt and deficits were to grow at a pace envisioned the economic and financial effects would be severe. sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners with adverse long run fx and u.s. output incomes as standards of living. moreover, diminishing investor confidence the deficit will be brought under control would

ultimately lead to sharply rising interest rates and government debt and potentially to broader financial turmoil. in a vicious circle high and rising interest rates would cause debt service payments on the federal debt to grow even faster resulting in further increases of debt to gdp ratios and making fiscal adjustment all the more difficult. in thinking about achieving fiscal sustainability it's useful to apply the concept of the primary budget deficit which is a government budget deficit excluding interest payments on the national debt. to stabilize the ration of federal debt to gdp a useful benchmark for assessing fiscal sustainability of the primary budget deficit must be reduced to zero. under the cbo projection that i noted earlier the primary budget deficit is expected to be 2% of gdp in 2015, and rise to almost 3% of gdp in 2020 and 6% in 2030. these projections provide a gauge of the adjustments that

will be necessary to attain fiscal sustainability. to put the budget on a sustainable trajectory, either -- some combination will have to be taken to eventually close these primary budget gaps. by definition the unsustainable trajectory of deficit to debt that the cbo outlines cannot actually happen because creditors will never be willing to lend to a government with debt relative to national income that is rising without limit. one way or the other fiscal adjustment to stabilize the federal budget must occur at some point. the question is whether these are just as will take place through a careful and deliberative process, that gives people adequate time to adjust to change into government programs and tax policies. or whether new fiscal adjustment will come instead as a rapid and painful response to a looming or actual fiscal crisis. acting now to develop a credible program to reduce future deficit

would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increase consumer and business confidence. plans recently put forward by the president's national commission of fiscal responsibility and reform and other prominent groups provide useful starting point for a much-needed national conversation there although these proposals differ on many details they demonstrate that realistic solutions to our fiscal problems still exist to of course economic growth is affected not only by the levels of taxes and spending, but also by the composition and structure. i hope that in addressing our long-term fiscal challenges the congress and administration will undertake these forms of the government tax policies and spending priorities than serving on to reduce the deficit, but also to enhance the long-term growth potential of our economy. for example, by reducing disincentives to work and save, by encouraging investment in the skills over workforce as well as

machinery and equipment, by promoting research and development, and by providing necessary public infrastructure. our nation can't recently expect to grow its way out of our fiscal imbalances. but a more productive economy will ease the trade-offs that we face. thank you, mr. chairman, ranking member. i would be very pleased to take a question. >> thank you, mr. chairman. first let me lead off with what you concluded. just to summarize, you do believe that one of the best things we can do for short-term economic growth is to put out a plan that actually stabilizes our fiscal picture, but actually gets our liabilities under control and shows with confidence that we have the right trajectory because we have addressed the programs which are spending programs that are getting out of control, is that the case? >> that's correct. >> i want to talk to you about qe2. last time you came to the committee to testify you said that qe2 is not an exercise in

monetizing the debt. now, the question basically is this. i understand from your perspective use a qe2 is not monetizing the debt because it is not causing runaway inflation because the money you are creating is not yet circulate in a broader economy come is being held as bank reserves. but isn't this sort of a distinction without a difference? it seems to me the argument here is that the intention of qe2 is what we are to be focusing on because the intention is to bring rates down and economic growth. and, therefore, the intention is what should matter here, but this is debt monetization. so isn't that a distinction without a different? >> no, sir. is monetization would involve a permanent increase in the money supply to basically pay the government's bills to money creation, what we're doing here is a temporary measure which will be reversed so that at the end of this process the money supply will be normalized, the

amount of fed's balance sheet will be normalized and there'll be no permanent increase either in money outstanding in the fed balance sheet or in inflation spent if we get this wrong and credibility is diminished because of these moves and expectations for around price increases than we do have a big interest rate problem. if you look to our fiscal side of it, just raising interest rates under a normal average predictions will just be vicious to our balance sheet. the interest payment alone in the current budget window which assumes an extremely low interest rates through the decade go from -- to a trillion at the end of the budget bill. if interest rates move up from the current projections, which i think long bonds are about four to 5% of the budget window, that's about one to anywhere from six to $10 in extra interest payments. basically this is all based on confidence that what you're doing and saying the be done. in confidence and credibility is critical in all of us. what i'm trying to get at is,

just take a look at today's "wall street journal." inflation worries spread. you've got basically inflation jitters spread to emerging markets. in brazil, the government reported tuesday it wishes accelerating. we've got my inflation popping up in other parts of the world. after all, many countries tightened the county to the u.s. dollar. my basic question is, what extent do you think the fed's monetary policy stance has contributed to these global inflationary pressures? has this contribute to the hot money flows abroad that have led to some of these imbalances that are not fully appreciated when we examine the cost of benefits under current qe2 monetary policy stance? >> mr. chairman, your first sentence under the headline was very revealing. the inflation is taking place in emerging markets because that's where the growth is. that's where the demand is and that's where some cases the economy are overheating. it's the responsibly of the emerging markets to emerging markets to set the monetary and exchange rate policies in a way that will keep their economies on a stable path.

the increases in oil prices, for example, are entirely due according to international energy agency to increases in demand coming from emerging markets. they are not coming from the united states. so the bulk of the increase in commodity prices is a global phenomenon in the united states, inflation made here in the u.s. is very, very low. of course, that's a serious problem but monetary policy can't do anything about bad weather in russia or increase in demand for oil in brazil and china. what we can do is try to get stable prices and growth here in the united states. >> so as you look at some of the leading indicators, the yield curve for instance, commodity prices, it does not send you a warning that inflation is building in america? or are you still looking at core inflation as your main guidepost measuring whether or not monetary policy is keeping prices in check? my basic question is, my concern is using your model, my fear is

you're going to catch it before the cow is out of the bar. he was a inflation after it's been launched, and given that you have a huge balance sheet, given that we're basically in uncharted territory with respect to the great recession and the responses that you put out there, that we're going to catch this after it's too late. could you please give us a sense of what else you're looking at to gauge inflation in america, other than core inflation which as you know there's a big debate as to whether that's a proper to use or not, even the ecb uses broader definitions of inflation. so where are you looking outside of your core inflation to give you a gauge as to how to set monetary policy to prevent inflation from actually being unhinged here in america's? >> mr. chairman, let me say first that there'll be no doubt that we are unwittingly committed to maintaining price stability that is a very, very strong goal and objective. we will do so. in terms of what we're looking

at first of all, overall inflation including food energy is still very low, about 1%. but looking forward to that the but credibility in the yield curve if you look for example, at inflation break evens which are a measure in the inflation index on market of what the markets think inflation is going to be, the five your breakeven is about 2%, to .1% the last i looked. there's not really indication in financial markets that in the united states, there's an expectation of inflation. that being said we will look very carefully not only at output gap and those things that you mention, but also at commodity prices, interest rates and all the other indicators that will help us assess when inflation is becoming a problem. it is always an issue as you know, mr. chairman, that in the recovery did you have to pick the right moment to begin removing accommodation, taking away the punch bowl. and we face that problem as the central bank always does. we are committed to making sure that we do it at the right time.

>> when you see this yield curve that is taking place recently, do you see that as market participants showing some concerns about future inflation, or do you see that as signs that economic recovery is beginning to take root? >> the inflation break evens have risen since we began the qe2 program in august but it was a very low levels to about normal levels. the bulk of the increase has been in the real side of the interest rate which means that like the stock market the bond market is expecting greater future growth and is more optimistic about the u.s. economy, and i think that's a good thing and i think our policies have contributed to that. >> we have a bigger punch bowl that would normally have in these times, and if we're in a cyclical situation, i don't think concerns would be as great as they are right now but part of our pop as you mentioned on fiscal policies it is structural. we have a tidal wave debt we're running into, interest rates begin to leave, we have a

serious problem on our hands. and it just gets to a vicious cycle like you described. the punch bowl, your assets, your balance sheets, had he done a stress test on the fed's balance sheet assets as an exit strategy occurs with higher interest rates that perhaps result from what's been going on? so had he done a stress test on your balance sheet? and what level of losses do you think are acceptable as you withdraw? >> we have done multiple stress tests. under most likely scenarios, the fiscal implications of the balance sheet are positive, that we've are returned in in the last two years $125 billion to the treasury, and given our low level of costs, low cost of financing, under those plausible scenarios we will continue to be, the policy will continue to be possible. that's not the main objective of the. the objective is to strengthen the economy.

if short-term interest rates were to rise exceptionally high, much more than we anticipate, then it could be that the remittances to the treasury will go down for a time. but in that case it probably also be the case of the economy was much stronger than expected and tax revenues would more than compensate for the loss. so our sense is that on the net expectation from the fiscal side is that this will be constructive and reduce the federal deficit. >> it could go on for a long time but want to be fair to my colleagues. mr. van haute? >> thank you for tesla. obviously deny states is part of the global marketplace but your job, your mandate at the fed is to watch out for the american economy, is that right? >> yes, sir. >> your testimony is that you are vigilant about looking out for inflation pressures but your assessment right now is that we do not have inflation problem in the united states, is that direct? >> we do not now have a problem but i want to repeat that we are

extending vigilant and will be careful to make sure that we don't wait too long. >> and your policy known as qe2 and qe1, qe2 was referenced. by your assessment, how many american jobs has that saved or created? >> it's very difficult to know precisely. there has been a number of studies which have tried to assess using macroeconomic models and so on. a very careful study done by federal system reserve economist just the total job impact of all of the key we programmed including qe1, including the reinvestment, including qe2 could be up to 3 million jobs. it could be less, it could be more. but the important thing to understand is that it is not insignificant. it is an important contribution to growth and job creation, and we are at a situation would have almost half of the unemployed being out of work for more than six months. and the longer the people stay out of work the more difficult it's going to be for them to

come back and rejoin the labor force at a decent wage and to return to the previous employment. >> as i understand that was a credible study in your view. >> it is and have been other studies as well which are comparable. >> just focusing on qe2, my understanding is that just with respect to that, those monetary decisions that that create or save between 60,700,000 jobs come is that correct? >> the same study, prospectively in part to the $600 billion qe2 about 700,000 jobs. let me just emphasize that these are simulation studies, but they do indicate that the potential impact is significant. >> mr. chairman, simulation studies of what the fed and we all do, right? >> correct. >> with respect to that policy come if you did not have those tools at your disposal and are

not able to use them, i assumed that would mean that you would not be able to take action to save or create 3 million jobs, is that correct? >> correct because her interest rate is basically down to zero. >> i want to return to debt ceiling because of this congress will face a very important decision coming up. at last week at the national press club you indicated the failure to raise the debt ceiling would be quote catastrophic for our economy and financial system. i assume you have the same opinion to take? >> yes, sir. >> you also indicated at the national press club that it would be a mistake for in your view, for the congress to use the debt ceiling as a quote 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 to take? >> to be clear it's very important to address these

issues, but the risks of not raising the debt ceiling is that interest would not be paid on outstanding government debt. and if the tranny defaulted it would have extraordinarily bad consequences for our financial system and it would mean that we would face higher interest rates indefinitely because creditors wouldn't trust us to make our interest payments. >> i mean, it would be reckless from an economic and financial perspective to allow, to essentially -- default on our debts and question the credit worthiness and full faith and credit of the united states, correct? >> we do not want to default on our debts. >> had had an opportunity look at some of the legislative proposals that have been introduced on the senate and house side that would purport to try and delay those payments? have you seen secretary geithner's comments in response of? >> we have just begun to look at the issue of whether or not you could reorder, prioritize

payments so that the debt interest would be paid but other things not be paid. this has not been done before, and our early assessment is they would be some difficulties in just a purely operational point of view. for example, you would have to differentiate between social security payments which would not be going out versus interest payments to individuals holding savings bonds which would be going out, and that might cause some operational issues. so we do have concerns on that score. >> some of these proposals would actually allow the full faith and credit of the united states to extend to some of our foreign creditors like china and other governments, but not the u.s. businesses and american citizens. let me ask you a quick question on the fiscal policy. because i think we all agree that the congress should act now to put in place a plan to get our deficit and debt under control. we need to come up with a plan

to put this country on a sustainable is the path. and as you indicated, you referenced the bipartisan commission, the president's commission and your remarks. the office of the plant observed adequate innertube -- the commission recommends waiting until 2012 and enacting a problematic spending cuts. let me just ask you this, mr. chairman. if you were to take a lot of investment out of the economy at this particular point when it is fragile, could that create a drag on the economy and have an impact on jobs and? >> if it were large enough a good, but on the other side i just want to emphasize that the deficit reductions approach should be one to take a long-term perspective, that you're looking at a long-term window and addressing the whole trajectory of spending rather than looking only at the very short-term.

>> okay, and i agree with that, mr. chairman. i was pleased to see new testimony that you believe that certain investments, national investments in our economy in fact lead to productivity and growth. although some are trying to turn investments into a dirty word, but as you indicate here, investment in our public infrastructure, investments in education and investments in science and research can, in fact, have a positive productive impact on economic growth, is that correct? >> if they are well done, yes. >> something tells me we'll have a big debate over the definition of investment over the next two years. mr. garrett. >> thank you, mr. chairman. falling on a couple of those questions before you hit other ones, so, mr. ryan was asking initial questions and your response back to monetary policy, whether monetary, monetizing the debt and like your actions have been

short-term in nature. as opposed to permanent actions which could if i understood you would be effectively monetizing the debt. it is in the question becomes if you had implemented permanent, there's nothing that would preclude the fed somewhere down the road to undo the action later on if you are not bound by your decisions today. so anything that is permanent is also changeable by the fed, correct? is nothing permit you to do today that you could not undo the? >> the key here is expectations and the markets don't expect inflation which means they expect us to undo this process at the appropriate time. >> to what you have is a definition between, difference between one's interpretation of what is permanent and that is temporary. i would imagine no fed chairman would ever come to this table and say i am engaging permanent monetizing of the debt. that no might how they would describe to us they would describe it as i've only taken a temporary action to get over to

this period that we're in right now, isn't that right? >> that's what we're doing is a temperate action but, of course, the fed always buy securities for various reasons. that's how we create the currency that americans use everyday. >> but this is outside of the norm as far as your balance sheet. >> that's right. >> part of your opening comments, one of the good signs right now is consumer spending is going along which is the economy going forward, right bucks isn't that part because that's exactly what you're doing, whether we can't permanent or temporary because of that cheap money that is after that is encouraging all of us to say that it is cheaper to bar right now so i can actually increase my consumer spending. >> that's how monetary policy works all the time, not just now. >> in the area of housing, you said the age-old question of what caused us to get into a situation, and it was only monetary policy, paraphrasing here, that got us into this situation under the old line that he did three comments in a room you will come up with four different debt and -- four

different definitions. when you were saying that about three quarters of economists in the opposite of that. it was a cheap money, cheap monetary policy that was bringing us into this situation. so you disagree on that point with a number of other economists, the low cost of money that exacerbate the housing problem, right? >> right. >> but you are using on the other hand to say we'll use that exact same post a basically cheap money to do what? to try to drive up the cost of the housing in order to pull us out of this economic mess, right? >> right, but housing isn't responding at all to the policy. >> but that's her ultimate goal here. people will be up to start buying houses again and we will hit the bottom and housing prices will go back up again. >> again, that's how monetary policy works. >> i am in this quantity. on one hand using in the past, it didn't cause the problem because monetary policy wasn't driving the cost of the housing

and causing a problem that we have here. you are going to use that exact same point a to say it does have a significant or should we hope so have a significant impact on monetary policy. so i'm at a quandary as to which is that? will have an impact in the future? why giving us could have impact now? >> it should have an effect that is proportionate to the interest-interest rate change now i'm in the housing bubble we saw earlier in the decade was far greater that could explain by the monetary policies at the time which is one the reasons why i don't because monetary policy was a major source of that bubble. >> very quickly, last minute and 15 seconds. significant reductions for addressing the short-term spending aspects be good for the market and economy despite some of the critics on the other side that say it may be detrimental to overall growth? >> again, i think it's really a question of the long-term plan. to the extent does a long-term plan it could be helpful, yes.

>> moody's is looking at us at what we're doing in washington. i suppose are optimistic because they cannot a month ago with a report looking at the fiscal health, looking of three categories. the debt, revenue and interest payment revenue. they said if you succeed, they conclude it would expect to say both constructive efforts to reduce the current deficit as well as constructive effort and control long-term growth and entitlement spending. i guess they're optimistic that's what washington does. are you optimistic that we'll be up to make those hard choices even if they make some significant cuts in spending right now? >> i'm not certain and that's why i'm making this case, that i hope people, that takes is a the responsibility to address this problem. >> i yield back. >> thank you very much for your service, mr. chairman. while that may be true that there are only two certainties in life, death and taxes, i would think that a close third

would be 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 here in the house also 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 survey are working in that direction. as you know we put guidance out in 2010 and we're working to follow the requirements of the dodd-frank act to put out additional restrictions. >> i know there have been some

discussion that that public report that you testify to us about and your general counsel testified about would now be kept secret. but it is your intent to make it fully public to the american people? >> that's my understanding, yes. >> and you think that will happen very soon? >> i believe so but i would like to get back to you if i might on the exact date. >> please do, especially if any part of it will be kept secret as some have suggested. i think that would be, that kind of reversal would be very troubling. and judo. moving to the issue of consumer financial protection bureau, created in the wall street reform law, you're very for me with it to on the american people with information that they need to make informed financial decisions. many question whether that euro should be located within the federal reserve, and given concern about independence of the bureau and ability to fulfill its mandate.

with it set to begin operations shortly in july, and with no consumer financial protections bureau director yet nominated, can you provide us assurances that it will be sufficiently strong and independent to fulfill its mandate to offer consumer protection to the american people for the many credit abuses that they have faced in the past? >> congressman, the cfpb is located in the federal reserve on in a narrow sense that the federal reserve pays the bills. we have no oversight or control, the controller is coming coming from the treasury and i think they are the ones who would be most appropriateoñppation of ? you were just kind of the

landlord and the paymaster? >> we're doing our best to help them get set up. there's a lot to be done in terms of just hiring people in setting up an i.t. system and so on, but in terms of policy making and so on, 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, sir. that's not part of our responsibly under dodd-frank. >> another major issue that perhaps involves the treasury some and involves to some is the future of freddie mac and fannie mae. some concern that perhaps most, if not all of their functions would again be turned over to a new large financial enterprise. what is your general approach to the future of these two institutions and? >> well, as you know, the treasury as promising as a set of proposals very soon and it

will be interesting to see what they provide. there are various possibilities that we could do, including making them a government utility or privatizing them which would be to alternatives. one suggestion which i have made in previous remarks is that if the government is involved in providing credit guarantees, it should do so only as a deep backstop. that is, the first losses should be borne by the originators of the mortgages or by the securitizers. the government if it does provide backstop insurance should do so for an actuarial fair fee, premium. and that would be essentially allowed the government to provide a backstop in situations like we had the last few years where the housing market comes under enormous stress. >> thank you. thank you, mr. chairman. >> mr. campbell. >> thank you chairman ryan and chairman bernanke. something's economics are

typical ends somethings are structural. you mentioned earlier today that you thought that unemployment are. no, the other point would remain elevated for an extended period of time. how much of our current high unemployment in your view 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 and i would say that the bulk of it is still cyclical. risk is that if it goes on long enough and it will start becoming structural as people lose their skills and their connection to the labor force. >> is it fair to say that you control only over monetary policy, not fiscal policy and government policy, and that it to the extent that unemployment is structural and that is something truly out of your per day to deal with, qe2 or any other form of monetary policy? >> that's correct. >> i'd like to talk what mr. ryan refer to a minute ago about this spending and investing a lot of talk these days about what we need to grow the economy is spending,

government spending, spending by individuals, spending by consumers but to me there's a great distinction, the term investors thrown around a great deal but an investment means that someone puts money to work expecting a monetary return, and that's very different from spending. in order to achieve long-term growth, stable employment growth, don't we need -- isn't investment from a true definition and saving where we should be trying to hit rather than just focusing on consumer spending? or government spending. you mentioned earlier today that we should remove the disincentive to saving and should we be removing disincentives to saving and investment to get us long-term growth on both private and public sectors because i mentioned the tax code to reduce incentives for productive activity, it's very important for both individuals and for businesses and for investment. the government does have some role in providing infrastructure

and education and so on. obvious a, but the way that done and the level it is done as a matter for congress to decide. >> do you believe that we currently, you mention mentioned disincentives, savings. do we have disincentives in place to block saving or investment from the private sector that could add to growth? >> i think to be a lot of agreement that our tax code is very complex and is not conducive to the most productive activities in many cases. >> switching to qe2, the flavor of the day as it were. had a full and limited qe2 get? >> no, sir. we announced an intention to purpose 600 billion between november and june, and so we are, you know, about halfway through. >> halfway through. what are the metrics -- when qe2

finishes, in june and you mentioned you could reverse or whatever, what are the metrics that you are following that lead you either to believe you should have qe three are that you should reverse qe2 of? >> well, first is the question of efficacy and we are seeing the intended result in terms of financial markets, in terms of financial conditions. so in that respect we think is being successful. 's intense looking forward we'll be trying to assess whether the recovery is on a sustainable track and things have moved in that direction, which is encouraging, and will be trying to assess whether inflation is low and stable at around 2% are a bit less which we think is about the right level and most of the central banks think is about the right level. and looking forward if that appears to be the director we are on, and additional action would not be necessary. we are still in a situation where the recovery does not seem

to established and deflation risk remains a concern then we would have to think about additional measures. >> once the trigger that causes reversal of? >> if the economy begins to grow very quickly and inflation risk begins to rise, then we would reverse it. >> okay. the final question i think, mr. ryan alluded to this article, there's been fairly significant moves in the tenure and 30 year treasury yields just recently. what do you think is causing that and does it, and are you concerned? >> no, i'm not concerned. i think, i think it reflects primarily increasing optimism about the u.s. economy and its natural for the term structure to move in that way when investors become more optimistic about growth. >> thank you. >> mr. blumenauer. >> thank you for joining us again. you come in -- you come at a

time when there are lots of people including in congress who are very interested in helping you do your job better, critiquing it may be, may be undertaking some things that would constrain direct control. but i got from your message that there are a couple of things that congress should be focusing on that is our primary job. one, because we're all in the business of making sure that confidence in the united states government, meeting its obligations, not putting an undue clout over it, and then he referenced the aging population and health care, which again is within our purview. there have been, no secret, a lot of suggestions that as we approach the debt ceiling, and there is widely acknowledged, no one disputes the need to extend

it, there are discussions about conditions and terms under which some of it might have a change of schedule debt repayment, has this been your experience both as head of the federal reserve and as an economist and a scholar, has this been the routine? has congress done this regularly in the past? >> well, there have been in the past political battles. both parties have done this over whether not to raise the debt limit. >> i'm talking has congress ever in the past establish conditions on limitations on the debt ceiling, or the sequencing, changing the order of business so we do not just honor our obligations to make sure that there is adequate speed is your talk about prioritization of payment. know, that hasn't. that's not happen to my

knowledge. >> hasn't been conditions attached to debt ceiling increases in the past? >> i don't know if there've been direct conditions. there has been negotiations about budgetary matters which have preceded those conditions. >> setting that aside, we will always do that. that's our job. i think that is appropriate and when we will get down to cases in terms of cutting and i think there may be some bipartisan initiatives that would implement some of the recommendations. ..

>> i think that's critical. >> i think it's clear -- well, i'll just say, i appreciate you have some limitations in terms what you say, but i think it's obvious, if we're playing games with something as routine as this, holding out the prospect, that we're not actually going to meet our obligations, and even if it's seriously considered, not negotiations, not disagreeing about elements, but considering that as the nuclear weapon, that has got to shape that confidence. you mentioned health care, and that is something in 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

actually put teeth into what we're doing and get down to cases who actually change that health care curve. from your perspective, are we better off actually following through on the commitment to deal with health care reform and dealing with long term costs, or making this just one of these areas that we continually talk about push back and forth and make no progress? >> it's out of my purview to support or not support a specific plan, but i do think it's very important and essential to the long term fiscal situation that we address the cost for the private economy and also for the federal budget that are going to be increasingly a dominant part of our spending. >> thank you, sir.

>> thank you, very much. you said in february, the federal reserve would not bail out state and local governments. is that because you have no intention of bailing out local governments or you can't physically do it because of the law? >> i would say both. [laughter] >> you mentioned at the very end of your testimony that enhancing long term growth potential of our economy, "by reducing disincentives to work." what are the disincentives you mentioned? >> i'm speaking on the tax code and transfer programs that create essentially very high tax rates on earned income to the extent that we can simplify our tax code, reduce rates, broaden the base, eliminate complexity, ect., in ways that will make it

more financially attractive for people to work, save, invest, and so on. it's good for the economy. >> anything beyond the tax treatment that falls into that category from your perspective? >> again, tax and transfer policies would be ones. i don't know what else you're thinking of, but those are the two i would focus on. >> thank you. cbo reports fannie and freddie uses fair budgets accounting to measure the financial impact of the two gse's. more yofer, are that federal entities, but treats the mortgages they guarantees as obligations of the government scoring them on a market risk present value basis. do you agree with this budgetary treatment? >> it's important that we take into account in our budgetary planning the perspective costs of fannie and freddie. now, there are different ways to do thatment as i understand it,

fannie and freddie are not fully consolidated with the federal budget, and the decision is made to make separation between the two institutions. as we think about the situation, the cost being incurred are obviously something important to keep in mind. >> the feds are the biggest treasuries over the last several months and report ised fetes passed china. does that distort the bond markets and create dependency and something the fed should be worried about? >> we've been very careful not to distort the bond market. we've paid attention to that issue. we monitored functions, made sure we don't own too high of fractions of any particular issue of any government bonds, and our clear sense is that the treasury markets are functioning very normally, very liquid, and

that we don't see our policy, which again, is a temporary policy as creating any particular problems for the market itself. >> there have -- mr. chairman, there have been discussions out there in the newspapers and whatnot, other countries pegging oil and whatnot to something other than the dollar. what type of concern do you have about this? do you see this as a reality or just -- >> there's not -- the price -- sorry, the currency in which is invoiced is not of much consequence. another question, though, a broader question is what currency is the reserve currency, the currency countries hold their international reserves in, and the fact the u.s. dollar share of 50%-plus is stable, and i really don't see any likely change in that. in fact, seeing the problems of

euro, ect., the growth and dollar have been looking attractive more than the other currencies of the world. >> thank you, mr. chairman, i yield back. >> mr. mccullen. >> thank you for being here, mr. beer -- mr. beer -- i look forward to hearing some of your advice, suggestions, and ideas on how we move forward with getting out of the great recession, and i want to be part of a solution, and we hear a lot of talk here in congress about spending, but i'm also concerned about a lot of tax perks that lobbyists have been very successful in getting for

special interests in our tax code, and i think that we need to put everything on the table, but having said that, today, we focus on spending quite a bit as questions have come through. in fact, i'm going to para phrase a tea party slogan, the department doesn't have a revenue problem, but a spending problem. chairman ryan put forward his best budget that cuts from the budget. the republican target reduces the fy11 projected deficit by about 2.5%. that leaves 97.5% of the deficit in tact. now, in an extreme scenario if all 176 republicans study committee members would have their way and take control, they would be allowed to cut four

times what chairman ryan's best effort is, but that only still represents 10% of the federal budget deficit for fy11 still leaving more than 1.3 trillion. it seems clear to me that the deficit is not just a spending problem. is it possible to reduce the federal deficit to responsible levels without capping or cutting defense spending and without looking at the tax perks that many corporations and lobbyists have been successful in getting? now, my second question is with the types of cuts being discussed, do you think that we need to be insightful 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 gutting investments in education, infrastructure, and r and d. they may put us at a

disadvantage. >> on your second question, obviously it's important that the deficits be brought under control, but it's not a matter of total spending and revenue. it's also how smart is the spending and the tax code? is it a way that's constructive for growth and competitiveness? i urge the congress not only to take about total budget numbers, but think about the various programs and tax provisions to make sure they are growth friendly, and that's a very important part of your job. in particular, you mentioned perks, ect.. i think one direction that at least should be considered would be 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 is now soon going to be the highest in the industrial world so that the

decisions made by corporations are based, you know, not on tax distortions, but rather on the economics of where, for example, they should locate their plants and so on, so i do think that growth friendliness is a very important part of this, and that lower rates and broader base is something that most economists agree is a good direction to go in the tax code. on short run versus long run, again, i understand there's a lot of focus on this year's budget. without commenting directly on that i do think 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 the perspective deficits are rising over a long period of time, i would hope that a good bit of your discussion will be about the long term over the 10-20 year horizon to the extent that

you can change programs that will have long term effects on spending and revenues. that will be a more effective and credible program and one that focuses. >> thank you, mr. chairman. as you know, we're setting the subject, we setting the spending in ways that issues with the tax code and addresses any tax perks, but i can't make a decision in isolation, so i look to all of us to put everything on the table so that we make a well-rounded decision as we move forward with the budget. mr. chairman, i look forward to working with you. >> our budget is the first effort of getting fiscal control in this place. >> thank you, chairperson ryan, and thank you for coming in today. i'm one of the new freshman members. i worked in the private sector

owning my own business. my questions today relate to two central areas. one is the debt ceiling, to hopefully get understanding there, and then also your take on lending to small business and medium sized businesses. first of all, in order to better understand -- it might be reckless for the u.s. government to default on debt. would you agree that's a true statement? >> certainly. >> is it not also reckless to have the level of uncontrolled spending that the american people are witnessing by this congress in the last 20 years or so? >> absolutely, and i don't mean to imply you shouldn't be addressing that, just do it in a separate measure. >> okay, understood. as a business owner, often the lenders would impose their own debt limit on many companies if we were reckless in the spending and balance sheets didn't look

very good. at some point, they impose their own debt limits. is it not likely at some point that lenders to the u.s. government will impose a debt ceiling of their own? >> the bankers definitely, but it's really a spending limit, saying you can't spend anymore. you already made decisions about what the government will spend and what revenues it will collect. that implies a deficit that has to be financed. if you set a limit that's too low, that means you can't borrow money you already spent, so it's really extraneous thing. once you set spending and taxes, you are essentially defining how much you have to borrow. if you don't allow the government to borrow that, then, again, the only out way to do that is not to make the required interest payments which your banker wouldn't like that i'm sure. >> correct, sure. or the other alternative is

increase revenue or decrease spending so you don't exceed debt; correct? >> sure, sure. >> you just mentioned moments ago it's important to look at a 10 or 20 year horizon. the american people are cynical we're able to do that in such a way that 20 years from now we're still having this same discussion over again, and i think the fear that the american people have is that at some point lenders will say to us that's all we're lending or price this at a place that's so catastrophic to the economy. >> that's a risk. >> a legitimate risk over the next decade? >> yes. >> as do i. thank you for that comment. it is almost a con straint stream of constituents coming in my office since i arrived in dc discussing the difficulty they're having finding financing

and lending. their ability to borrow has been restricted in the last 24 months. can you talk about what it might take for local medium banks to once again loan money? what's causing the restriction? >> well, first, part of it came from the fact that banks after the crisis were deleveraging and cutting back themselves. part was from the economy being weak and borrowers didn't look attractive and their cash flows were less attractive than they were before the crisis. there's supply and demand elements of that. beth of those things i think are looking better. banks have increased their capital. they are feeling much more stable, much more liquid, and our sense, and we do surveys, is that banks are, while they have

tight standard, are at least beginning to ease the standards and looking more actively to find good borrowers. i think that's improving somewhat, and likewise, as the economy strengthens, and seeing increase z in commercial real estate that small businesses use as collateral, there will be more small businesses that can qualify for credit. things are getting better slowly. the federal reserve is working very hard with banks and small businesses to make sure from the regulatory point of view we are not preventing banks from making loans they should make. we want them to make good loans and we have been clear about that in our instructions to banks and training of our examiners. >> thank you very much. thank you, chairman ryan. >> thank you, mr. chairman. welcome, mr. chairman. on your speech to the national press club on february 3, you

noted unemployment, the key indicator for the well-being of the american people, will remain high and these conditions will only improve grat #* gradually. you noted the debt is unsustainable. you went off to state that among the course corrections needed to address these problems are investments in the skills of the work force which i'm going to simply call education and policy changes to reduce our deficits and debt. two questions. my first question is record to the latter. the current rules of the house have taken the war on terror off budget meaning the cost of our conflicts in the middle east associated with the war on terror can be financed with debt. afghanistan alone represents a cost of approximately $10 million per hour or $235 a day. this is our country's largest

long term investment. would the savings resulted from ending combat operations associated with the war on terror reduce deficits? >> if those expenditures were not necessary, they would reduce deficits. i'm not qualified to comment on whether or not, you know, we should be engaging in that conflict. >> but the budgetary action that was taken that we put it aside in the past called supplement, what impact does that have on our debt and our deficit? >> clearly, additional spending for military or any other purpose all else equal adds to the deficit. >> so if there's no revenue to sustain in it, we take it off budget. we're essentially creating an automatic deficit and then a debt. >> that's right. >> thank you. my second question, mr. chairman, is i think it's very important to note among other up

vestments -- investments in machinery, promoting r and d and rebuilding public infrastructure, you think allows education as an area of public investment to promote economic growth. would you explain to the committee how public investment education promotes economic growth? >> well, one of the key elements in economic growth and a lot of economists have identified is the skills of the work force, and i would like to say that there are a lot of ways to inpart skills. there's k-12 education and college certainly, but there's junior college, technical schools, on the job training, a variety of ways, and that's always been a strength of the united states. we have a diverse set of ways to help people get training, but i think that should be something we should be paying close

attention to. it may or may not be a matter of money, but a matter of spending more wisely, but clearly, one of the concerns we have about our society is the increase in inequality between the richest and the poorest, and there are many reasons for that, but no doubt the largest reason is that there's a part of our society which is not receiving the training that they need to get good paying jobs, and that's going to be a problem for us, and it's a problem for our economy. >> was education, i'll probably call that an investment, and making that investment in education would be something that we can count upon as far as a return on our investments, and if we have an education system, what kind of impact do you think it would have on our return on

investments relative to the entire picture that we have before us today? >> well, it's very important to have a good education system, and we're not doing well on that count and to help people get skills. there's a lot of dispute about exactly how to accomplish that, and, you know, we could talk about that for quite a long time. i think we need to think as the country about how we can both increase the quality of our training and also make sure that it's broadly spread, that everyone has a chance to get the skills they need. >> okay, and i understand that education comes in a lot of forms in our investment in r and d, and the other programs we have, but the system of education and the department of education seems to be one place where we can focus on this very complex problem of equity and equal distribution of resources. would you agree on that or do you have other comments on

that? >> well, department of education is certainly one place to help review and understand what's working and what's not working. i think as a country we're having a crisis in confidence that we know how to provide broad based skills, so i think that's really part of the problem. it's not just resources, but also how do we do this better? it's not clear that our models are working very well right now. >> i appreciate your comments. thank you, mr. chairman. >> thank you, mr. chairman, i appreciate the children being here today, and i have questions particularly on the issue of job creation, and i'm a little confused from the testimony. on the one hand you do indicate we're in a period of economic recovery; is that correct? >> yes. >> on the other hand, you do indicate that the unemployment rate is apparently not where you'd like it to be.

what is the targeted unemployment rate that you would be comfortable with? >> well, the fmoc, federal market committee makes sense of what the long term unemployment rate, and those projections are between 5%-6%. that would be a more normal level. i want to be clear that doesn't mean we maintain maximum monetary policy accommodation. we have to withdrawal that accommodation at some point before we get there. that would be the area we hope to get back to. >> 5%-6%? is there a projected time period where that might occur? >> at the rate we're going, it takes 2.5% real growth just to keep even because you need that much growth just to make jobs for the new entrance to the

labor force. if we were to average hypothetically 4.5% growth, which is quite ambitious, it would still take us another four years or so to get down to the 5%-6% range. it would take a long time. >> how long would it take at 2.5%? >> it would very, very slow. >> our current rate of growth is what? >> in the last quarter it was 3.2%, and we're looking for 2011 to be between 3%-4%. that should bring unemployment down for the year, but not quickly. >> how long would it take at 3% to reach the 5% goal? >> that would lower unemployment by about three to four tenths a year. that would be about ten years. >> ten years and you still think your policies are promoting

success, that we're still projecting 10 years until we reach the levels? >> not projecting, you asked about the 4th quarter. we think it will pick up in 2011 and further in 2012 depending on a variety of circumstances. >> mr. chairman, and i appreciate that, and we're all hopeful it does that, but one thing you note is ultimately at the appropriate time the federal reserve will normalize the sheets back into the market. a couple questions about that. if you believe in a thriverring economic recovery, can you believe information why you believe a sell off would not have the opposite effect? >> well, it's the same pattern that we always see with monetary policy is that low interest rates stimulate the economy. one the economy has a self-sustaining, you know, once

it sort of reached escaped velocity so to speak, then that monetary fuel can be withdrawn and usually out with raising short term interest rates, and in this case, it raises short term interest rates and reduces the size the balance sheet. as the economy gets stronger and develops moe money temperature, it needs less monetary support, and we have to withdrawal it other we risk inflation as chairman ryan was concern the about. >> so even though we're kind of looking at 4% growth, maybe 3%, and you're comfortable it won't take long to return to normal employment levels, you're not for certain, but could it be five years to reach normal levels? >> could be five years, i hope it's less than that. >> i do too. my concern is that on the one hand you claim the policy is

driving economic growth even though it's very, very slow from what would be the target, my fear would be that the reverse policy would potentially have that other effect. last thing, quick question. i know you picked $600 billion. why did you pick that versus 500 or $750 billion for the target in >> we tried to make an assessment of asking the hypothetical question if we could lower the federal funds rate, how much would we lower it? a powerful monetary policy action in normal times is a 75 point basis cut in the federal funds rate. we estimate that the impact on the whole structure of interest rates is equivalent to a 75 point basis cut. on that criteria, it seemed it was about enough to be a significant boost, but not one

that was successive. >> thank you, thrch. >> ms. moore is next. >> thank you. i've seen you several times on the the committees, but i've had low ranking, it's hard to get the opportunity to actually ask you a question. i want to thank you for the last question because that was curious about how you say in your testimony on page four that exit from the current highly accommodative policy at an appropriate time would be very easy, and i think you may have answered my question when you spoke with him. qe1 and qe2 have been very important i think in terms of preventing a financial catastrophe, and qe-2 is supported by a lot of

economists, chamber of commerce endorsed it, chairman of manufacturing, and as a matter of fact, the manufacturer if my district, harley davidson, is really grateful for qe-2 in terms of boosting their exports, but you have been accused of everything from creating an environment for invasion with this qe-2 policy, everything from that to causing the riots in egypt, so i can't -- i would like for you, you know, because it's, you know, commodities are traded on dollars. they say that food prizes, commodities have gone up and speculation on commodities have risen, and so this qe2 policy really has been very imflammatory respect to

destabilizing the region. can you please respond to that? >> i'd be glad to. first of all, it doesn't matter what commodities are priced in. what matters is the currency of the country making the purchases, and they don't ewe dollars in egypt, but egyptian pounds. when the dollar weakens, that makes the pounds stronger. the real issue in egypt is the fact that egypt is the world's leading importer of wheat, and we've just seen very bad harvests in russia and eastern europe, their primary sources of wheat. that's what's really happening on the agriculture side there's been droughts and other problems around the world that have affected crops. monetary policy can't add one bushel of corn to the world.

that's determined by agriculture productivity and weather and other factors. we've seen on the agriculture said that a combination of the plight issues like weather, crops, and increased demand for the rapidly growing emerging markets have put pressure on those supplies, and that's where that's coming from. i think monetary policy in the united states has really very little to do with the price of wheat in egypt. >> good. with respect to your creating environment for the increased inflation with qe2 in creating an inflation bubble here in the united states, i guess my -- and traders being weary over the inflation threats, i'm wondering what your response is to qe2 because you say that you can exit this monetary accommodation. can you talk about what, you know, because eventually you

have to raise interest rates. walk us through how you will exit this without creating inflation. >> well, first actual inflation and current inflation are low in the unite. before, the five year hips break even, the measure of market expectations of inflation, is a little over 2% which is where we'd like to be. obviously, we can't continue this level of monetary situations because it would create inflation concerns, and we have to unwind some of this stimulus. in terms of how we do it, of course, the difficult question is choosing the right moment. when we decided when to do that, we can raise interest rates as normal. raise interest rates paid to banks that in turn make them unwilling to lend and short term money masks below that rate. we raise the short term interest

rate pretty much as we always do when tightening monetary policy. in addition, we have a number of tools that i've talked about in great detail before and that can help us drain federal reserves. we've been testing a time deposit program where by banks lock up their loans with the fed for a period of time instead of having them available whenever they want them. we have the tools to do it. as always, we have to make the right call as of when the balance of risk is starting to shift and we think the economy is strong enough and the inflation has risen and it's time to take action to avoid problems down the road. it's really not all that different from normal monetary policy in that respect. >> thank you very much, sir. >> turns out i'm next. mr. chairman, thank you for being here. earlier today 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 that interest would not be paid on the debt. in january, you told the senate budget committee that we're not seeing extraordinary express in the markets that suggests investors are still reasonably confident there's not default among major boar roars. one reason they believe that is because most states have rules that put debt repayment and interest payments at a high priority among many other obligations of the state and localities. would it be a good idea if the federal government did the staple thing? >> well, it would reduce the debt limit. that's for sure. you haven't done that yet, of course. i would like to just comment that it would take some time to change our systems and computers and so on to change that

prioritization in the appropriate way, but that would change the risks sorted with debt limit. again, let me be clear, you would need notice to make that practical. >> but would yowl recommend -- you recommend it as a long term reform? >> frankly, again, i would just prefer you put the debt limit issue aside and address directly the long term fiscal props which i admit and agree are serious and need to be address. i'm not saying you don't need to address the problems, but that particular device, you know, at least under current law has some risks in terms of the possibility that we would default on debt. >> what's the percentage of the u.s. debt held by the public and american investors? >> less than half i think, roughly half, yeah, yeah. >> what's the percentage of the

u.s. debt held by china? >> about a quarter. >> a quarter of the total debt held by the public is about 9.5%. >> maybe, if you -- as numbers you may be right. i think they hold more than $2 trillion of u.s. treasury, and that would be closer to 20%-25%. >> oh, okay. nevertheless, giving priority to debt repayment, we are favoring american investors? >> well, certainly, more importantly the financial markets globally are where we borrow. if investors lose confidence in us, they won't lend to us and we'll have a fiscal crisis immediately. >> which means guaranteeing our debt service provides greater confidence to the investors, would it not? >> subject to the ability to

make that eskive in a -- effective in a short time. >> you testified as the economy begins to grow rapidly and inflation rises, the federal reserve would then resers the easing, -- reverse the easing. how does the fed intend to train $1 trillion in excess reserves? >> well, first, we can raise interest rates without draining reserves. as i mention, raising the interest rate to banks, but we have at least three other tools. >> if i can pause there, how much would you have to increase? >> we want to raise the -- say we wanted to raise the short term interest rate to 1%, then if we paid 1% on excess reserves to banks, they would not be willing to lend money to the money market at less than 1%, and that achieves our octoberive right -- objective right there. there are other tools including time deposits, reverse repos,

asset sales, and perhaps others. >> as you do that, what's the impact on the economy? >> it will be a tightening of monetary policy. again, interest rates go up. that slows the economy, but that is what monetary policy, that's what taking away the punch bowl always does, the accommodation is no longer needed, the economy can move forward on its own. the point is to normalize financial conditions so that you can get back to a healthy growth path without inflation. >> there are some of us who are here long enough to remember a day when we had not only double digit unemployment, but double digit inflation. what can you tell us to relay our fears? >> well, i can also mention that since the early 80s, between the early 80s and 2007 when central banks began to understand the

critical importance of keeping inflation low, the u.s. economy had low inflation, and a stable economy. that was a 25 year experience. the difference is that 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 ms. caskill. >> thank you very much. not like many countries in the country, my home state of florida was hit by the great recession. it seemed like it started earlier in florida in 2007 because the housing bubble burst, and we were so tied to real estate development, and the job losses happened so quickly. at the end of 2008 and early 2009, and we're still in the

double digits in florida. in your testimony, you say there's some optimism on the unemployment front, but we need more. i think folks at home look at the economic indicators, and they see there's plenty of hope out there, corporate profits are way up, consumer spending is up, we've had six great quarters of economic growth, but the bottom line for families is that job. they need the twister job growth. the economic drivers in my area support the airport, the universities and research centers, the public schools, small businesses and tourism, and businesses, and all of them benefited by the recovery act investments. those are coming to an end now, and business owners and others in the community are torn. they are hearing this

schizophrenic message from washington. they understand that we've all got to live within our means, and they do it every day, but they also understand that those infrastructure investments and phening the -- keeping the colleges and universities healthy and able to do the research simply attracts private investment and allows them to hire in the long run. they are hearing a lot of talk of we've got to cut spending, cut spending, cut spending, but they are also at the same time clam moriing for -- clammoring for government help. they need all the private businesses to continue there. what can you share with them on

this schizophrenia between investment and living within our means and where we should be heading there in future budget years? >> it's not an easy problem. you know, the reason the federal reserve is doing what we're doing is to promote job creation that we any is a very serious concern, but florida, like california and nevada and a few other states, were particularly hard hit because of the real estate decline. we do have to live within our means, but 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 limit. you know, we don't have any choice about that. that's just something we have to do. as i tried to indicate in my remarks in the end, that doesn't mean we can't think about the money that we are spending. can we do it better?

can we use the money more affectively? can we use the money in ways that are more growth promoting? we need to think hard about health care costs that are so very high and see if there's savings there for example that can be put into more growth friendly type of investments. i appreciate your quandary. you know, we'd like to be able to undertake all these different projects, but in the longer term, we have to have a budget that is reasonably in balance. >> so it would be helpful for me and others to explain what you've said in your testimony regarding the long term fiscal challenges confronting the nation are the two most important driving forces behind the deficit are the aging of the population and rapidly rising health care costs, and this cbo projections of federal spending

on health care programs will double as a percentage of gdp over the next 25 years and maybe explain to business owners there that rely on certain infrastructure investments, investments in education and innovation that the strategy is working together to continue to make those strategic investments, but look at the long term issues surrounding health care and the aging population. >> yes. >> thank you very much. i yield. >> mr. forrest. >> thank you, mr. chairman. thank you for joining us today and i appreciate your service to the federal reserve. the first principle is there's a national debt level for any organization, be it a country, a company, a family, whatever that cannot be exceeded without substantial turmoil. i think you talked about that in the past, the turmoil our country will face if we continue to live beyond our means. the second principle is that interest rates are made up of

two components. the first component is expected inflation. the second component is a risk premium that investors want to receive for the per perceived risk of the instrument. treasury rates have gone up quite a bit in the last few months. your testimony today says that expected inflation is going to be low. well, that implies a substantial increase in risk premium which further implies we are getting close to a national debt limit. my question for you is what is the natural debt limit of the united states government, and you can answer with an absolute number that means you should be in las vegas gambling, or is a percentage of gdp, so i'd like help with that, please. >> first on interest rates is a third component also which is the expectation of future short rates which in turn is tied to growth. one important reason that rates have gone up so much and stock

market has gone up so much is markets are becoming more on the mystic about growth in the u.s. economy. that's a good thing. there could be part of the growth that is related to concerns about government fiscal policy which is the other part of your question. there's no magic number for what ratio to debt gdp is the limit. if we look around the world we see that countries in the 60-70 range, which is where we are now, are generally comfortable or greese that is at 1 -- greece that is at 100 and japan at 200 is concerning. you want space for a recession or war or another emergency, but i hope that we can stabilize the debt to gdp ratio somewhere not too much higher than we are now would be the ideal thing, but i don't think there's a magic number.

the higher it gets, the more of our annual appropriations are going to pay the interest on the debt, and that's in a way, a drain to what government could otherwise be doing. >> thank you. question number two is you said today that we are on an unsustainable path, but in testimony or in interviews you gave back in june of last year, you indicated that you felt like it was inappropriate to reduce spending or increase taxes at that point in time, but still, you want a deficit to reduce, so you put us -- let me rephrase that. if you're in our seat, there's no many tools left. what direction do you go first? reduce spending, raise taxes, what's the recommended approach? >> well, spending versus tax or the composition of spending and taxes is a congressional prerogative and congressional speedometer, but what i think is the -- responsibility, but what i think is the right way to do this

which on the one hand doesn't put too much pressure on recovery, but at the same time makes cred l progress in the budget in a sustainable fiscal trajectory is to talk about longer term windows and talk about the 10 year window, for example, and take actions that are credible to cut spending perhaps in the near term, but cuts spending more as you go forward in time or raise taxes if that's the decision congress makes, so this is a long term problem. you know, the numbers that we look at go out to 2035 and 2050. that's when the problem really gets basically just unbearable, so anything that can be done now to change that path, change that trajectory going forward in the next one or two decades, those are the things that will be affective and have a good impact on the current economy and current interest rates and

restore confidence in the current fiscal policy. >> thank you. i yield back. >> thank you, mr. chairman. thank you for your expertise that you lend to this economic recovery. when you came before this committee last june, you predicted that the economic growth rate or gdp would rise to an annual rate of just over 3% for the last month of 2010, and that it very well could increase over the course of 2011. that's fairly a double digit turn around from the 6% downturn we witnessed at the end of president bush's administration. has your forecast in your opinion proven accurate in terms of how you calculated it and it's baht lome line result -- bottom line results? >> well, we were disappointed last summer as the economy

slowed down, and that's why in august, essential, we basically, you know, began to take the steps towards this second round of so-called quantitative easing. since we've done that, the markets have stengthenned again, and the outlook has improved, and so it does look at the numbers you gave k you know, the fourth quarter was 3.2 percent, and looking forward in 2011, most forecasters think between 2%-4% is about right. these things are very uncertain, but that does seem to be about where we at this point were predicting. now, we hear on the hill here in washington and in congress and certainly within the microcosm of a budget committee in the house different philosophical approaches or responses to best

grow the recovery of our economy. that being said, some of our colleagues from, you know, friends across the ail have been -- aisle have been very enthusiastic about the numbers and the growth is directly related to the outcome of the november elections. i would ask is there, within your calculations of the projections, was there a result in the november election that goided whatever your forecast would be? in other words, did you need to know who would win the elections? >> we don't take election results into account in our forecasting, but i couldn't really make a judgment on that. i agree with you it's more policy driven than politics, and so can you cite for us what did go into your calculation, your forecast on growth and employment and specifically can you emphasize the main elements

that we need to focus on in other words to best drive numbers to help the economy improve and become more stable? >> well, in terms of what happened since the late summer, there have been two policy initiatives. the federal reserves, the qe2 which real came into effect in august which is when we began to reinvest our maturing securities and we indicated we were seriously thinking of security purchases, and the other is the agreement that took place in the lame duck session about extending tax cuts and creating a payroll tax rebate and so on, so those two things, i think, have been positive in terms of near term growth. going forward, it's much more difficult because the fiscal space and monetary space and both sets of policies have less room to operate than they would

have under normal circumstances, so as i was saying for ms. castor, i think it's important to think about the composition of what you're doing. is it growth friendly? is it going to increase confidence? look for things that will, you know, increase productivity for example. >> thank you. i appreciate your expertise and hope in the spirit of bipartisan and the growth of consumer and investor confidence we can move forward with a progressive policy that will bolster this economic recovery and lead to the best way to move forward. final question on the meanian annual wage for american workers falling to some $26,000. that means about half of our work force is making less than $26,000. at the end of 2010, we okayed a

plan that raised taxes on those individuals who make under $20,000 a year while relieving the tax burden on the wealthiest families. the first payments came home in mid-january. i've been hearing from dismayed and outwaged constituents on that outcome. if we continue to finance tax breaks for the top 1% at the expense of the bottom 50% of wage earners, how will that impact on the consumer spending out that that you noted is necessary to help lead us out of the economic woes? >> the distributional aspects of taxes are con contentious. i can't give you the answer you want because i think ultimately both disci'ses about equity and decisions also about efficiency that go into those tax code decisions, so i'm going it leave that particular decision to the

congress only note that you have to pay attention to the overall revenue collection as part of the plan for restoring budget balance over time. sorry. >> thank you very much. >> mr. langford. >> thank you for coming. i'm sure it's your favorite day of the week every time you get to come to the hill and spend time with us. thank you for doing that. in oklahoma where i represent, there's a large number of community banks i chatted with that are frustrated with the regulatory environment that's coming down. they feel like some of the largest banks in america made mistakes, and they are blamed for it. lending slowed down dramatically. personal perspective for you. where do you think the community banks stand as far as a need to circle around their capital requirements and change rules from discretionary now which is what the rule is now. how do we free up the flow of

money in lend k in smaller community banks and rural communities? >> well, first, community banks have shown their worth in this lending crisis. as many larger banks withdrew from small communities or small business lending, a lot of community banks stepped up and began to make more loans, and that just shows the value of their personal connections and knowledge of the local community and so on. i absolutely agree with you that small banks should not bear and can want bear the same burden of regulations that the largest banks bear. they don't pose the same risk to the financial system for example. >> right. >> so what the federal reserve is doing there are several parts. first, we have added new committees and advisory groups to our regular routine where the board meets with outside committees to create special roles for community banks, so we have a new subcommittee on

community banking. we have a counsel of community bankers that meet with the board and talk about their issues, and we want to make particularly sure as we implement the dodd-frank implications, for example, aimed at large systemically critical banks, that rewith attentive to small banks, and we do want to do that. this is for all banks, you know, that we recognize in some cases after a crisis that bank examiners can become conservative because they don't want their bank to fail and be responsible for that, and as a result they put pressure on banks to make what would otherwise be good loans. we have done all we can to fite against that by issuing guidance to our examiners and to the banks that we want loans to be made for credit worthy borrowers, by training examiners with meeting all across the country. we are focused on that issue. i think we've made progress.

what i'm hearing and there's been surveys is modest improvement in the terms of the lending environment for smaller business and some growth among community banks. >> well, let me say from the oklahoma perspective there's been growth in the area, but it's modest. there's continued frustration with individuals who say i need to lept and i have -- lend, and there's folks who want to borrow, but i'm tapped out. regulators tell me this, and i'm stuck. people want to expand and hiver people and currently the bank is hiring more compliance officers and doing less lending. that's a bad formula for what is functional for us. >> i agree with you. >> dealing with unemployment and there's times in different quarters you deal with inflation. how do you balance this quarter with more inflation, and this quarter is more on unemployment

numbers. how do y'all make that decision? >> we do it based on a variety of models and other things that help us project forward where we think the economy is going to go. this shows unemployment is likely to stay high for some time as i said earlierment inflation, we know about the commodity increases, but not with standing that, underlying inflation looks to be low. based on that, we think accommodative policies are still warranted. ..

>> thank you, mr. chairman. >> mr. ryan. >> thank you, chairman ryan. thank you, dr. bernanke. one of the mandates for the fed is to keep unemployment low. there's some folks in town who think that that should no longer be the role of the fed. how would you have negotiated this crisis and where would we be today if he did not have that mandate? >> well, our policies would have probably been somewhat similar because from both sides, we had both high unemployment and low inflation so b