government lending another part of the government money which would not lead to long-term confidence once the american people understood the basics a little bit better. >> should be added that we also have a funding cost and as interest rates go up, we'll have a liability cost as wel as an asset cost so it may or may not be a return to the treasury. monetary policy even in the most normal times is the crssays, involves buying and selling treasury securities. we couldn't have currency outstanding if we didn't have securities to back them up. >> althoh i would say we had a currency for many parts of our history without any federal debt. >> when was that? >> under the jackson administration. >> so this was before the civil war. this was during the period where individual banksssued currency. we didn't have a national currency. >> i just might say it's possible for a coury to have a currency without a trillion dollar debt. >> yes. >> thank you, mr. chairman.

>> senator? >> thank you, mr. chairman. chairman bernanke, i would like to ask you two questions. the first wille about rising oil prices. the second question will be about interchange fees. first, mr. chairman, we all agree that the rising price of l will slow the economic recovery. to me, one of the most anti-competitive forces in the world which raises the price of oil are the price fixing activities of the 12 member nations of opec oil cartel. i have a bill, mr. chairman, called nopec that will for the first time make the actions of opec subject to u.s. antitrust law. this bipartisan bill passed the senate four years ago with 70 votes. mr. chairman, if this price fixing cartel did not exist, wouldn't the market function better and wouldn't oil prices

be lower? i would like your comment after i make my second question to you. interchange fees. the issue of interchange fees is very controversial, as you know. in the recent wall street reform bill, congress expted small banks and credit unions so that they would not be impacted by any attempt to regulate interchange fees. small banks are still worried they will be discriminated against. you and your staff are smart people, so can you see to it that the interests of small banks and credit unions are protected when you write the interchange rule? >> senator, on the first one, on opec, it's difficult to tell how much impact on the price opec has. is a global market and there are non-opec producers. what opec does try to do is s production quotas which is true. that is restrictive. but they are violated to some

extent because it's very hard to monitor them. i don't honestly know how big an effect opec has on oil prices. on the interchange fees, we are following the law and we are certainly exempting the small banks and credit unions from the limits and other restrictions on the interchange fees that they can charge. whether or not there will be any effect on the interchange fees charged by small banks remains to be seen. there are really think two issues. one is whether the net works which are not required to differentiate in their payments to small banks and to others, whether they do have a two-tier pricing system or whether they find it for one reason or another inconvenient or uneconomic to do so. the other factor which may affect the interchange fees for

smaller institutions is the fact that with the route the network competition that's required the bill, there may be some general downward pressure on interchange fees jt coming from the fact that the more competition in the marketplace, and that may affect small banks to some extent. so i think there are some things can't fully control. that being said, we are certainly trying to write the rule in a way that will achieve congress's intention and provide exemptions for banks under $10 billion and for the other nds of debit -- that receive the exemption. can you say the goal you are trying hard to achieve when you write the rule is something you are going to exert tremendous effort and energy on in order to see to it that you do meet that goal? >> we will do everything we can but there are certain areas where we don't have control.

for example, we can't dicta the pricing policies of the networks and it was part of the goalf the bill to put competitive pressure on interchange fees in general and congress chose not to exempt smaller institutions from that particular provision so they are still subject to the competitive pressuresarising from multie networks but again, we understand the intent of congress and will do everything that's been given to us via the statute to try to achieve that objective. >> thank you so much. thank you, mr. chairman. >> senator demint. >> thank you, mr. chairman. mr. chairman, thank you for being here. just a quick follow-up on senator kirk's question. can u tell us absolutely that there will be no quantitative easing for debts and no buying of state debt by the federal

reserve? >> i can say that, yes. >> good. thank you. there are a lot of different economic and political philosophies here in the congress and i think oftentimes we may look to you to help provide some consensus so i've got a couple just general questions. do you generally agree that the private sector is more efficient allocator of resources than the government? >> in most spheres. there are a few areas where the government plays an important role like defense, for example. >> sure. but so generally, a dollar left in the private sector is -- provides a greater economic multiplier than a dollar taken by government and spent. >> again, there are some areas where the government plays an important role. >> sure. just generally, could we generally conclude that government taxing and spending is not as an effective stimulus to the economy as money that's kept and spent and invested in the private sector? >> i wouldn't want to conclude -- sounds like the

conclusion of your argument is that taxes should be zero. i wouldn't argue that. >> no. but generally, as far as -- i'm not talking about essential services like military but as we're looking at raisg taxes versusutting spending and the debates we're going through now, i think a basic underlying economic philosophy is the private sector is the more efficient allocator of resources. building a consensus here is very difficult and we're often talking about the facts rather than true causes but i'll move on frothere just to ask a couple other questions. government spending and debt, borrowing obviously tightens credit a that brings about, forces your hand to some degree with the quantitative easing. is that a simple way to explain? if we weren't in debt you wouldn't need to do the qe, right? >> i'm not sure about that. the recession was tied primarily to the financial crisis which

drove the economy into a deep recession, and that in turn led to inflation falling towards deflation ne. the were the weakness of the economy and the deflation risk were the things that motivated us. >> but if there was no debt problem, then you would be looking at other ways to stimulate the economy than actually buying federal reserve notes, is that right? excuse me, treasury notes? >> well, if there were no debt to buy, we would have to find some other way to do it. >> right. what i'm trying to get at is when is enough, enough as far as wh the federal reserve will do with quantitative easing in the future, if we continue on our path or even cut the projected deficits in half, do you expect to continue to buy more and more treasury notes? >> well, first, if you were able to do that, i think it would be helpful for the economy. it would probably lower interest

rates, it would probably increase confidence. so i urge you to continue to address the fiscal issue. our quantitative easing policy which is just another form of monetary policy, is trying to address the recovery of the economy right now which is still under way. as i said in my testimony, it looks like a self-sustaining recovery is beginning to take place and so that's encouraging. but what we'll be looking at is the state of the economy. our mandate from congress is to look at inflation and employment and so those are the things that we'll be looking at as we determine how to withdraw or maintain o policy. >> the quantitative easin monetizing of debt or however we term that, has caused some concern about our currency, long-term value of our currency, and it's caused a lot of us to look at ways to create a more

substantial or more soundness and stability to our monetary policy. in 1981, former chairman greenspan wrote in "wall street journal" about an idea of using five-year notes payable in gold that the federal reserve would issue or excuse me, the treasy department, payable in gold or dollars to create some standard as just a test, and a lot of folks are talking about some form of standard -- some way to create some boundaries for our monetary policy. have you given any thought to the idea of a gold standard or ways like that, issuing bonds payable in gold that would begin to create some standard for our currency? >> first, i would just say that federal reserve is t debasing the currency, that the doll's

value is roughly the same as it was before the crisis, in foreign exchange markets, that inflation is low and that's the buying power of the dollar. i think those concerns are somewhat overstated. in fact, way overstated. on the gold standard, i have done a lot of study of tt and it did deliver price stability over very long periods of time but over shorter perds of time, it caused wide swings in prices related to changes in demand or supply of gold. so i don't think it's a panacea and there are also other practical problems like the fact we don't have enough gold to support our money supply. >> the question is about just the bond. that's what greenspan was talking about. is that something that you've given any thought to? >> i really haven't analyzed that particular point. i don't think that a full-fledged gold standard would be practical at this point. >> i realize i'm running out of time. apologize, mr. chairman. thank you.

>> senator? >> thank you, mr. chairman. thank you, chairman bernanke, for your patience. i think i'm last so that must be a bit of a relief. i would like to very briefly, if we could, go back to this discussion we had earlier about the debt limit because i think it's a huge mistake and factually incorrect for some to suggest that failure to immediately raise the debt limit is equal to a default on our debt. i'm not accusing you of saying that but i know others have. i'm sure you're well aware that the total fraction of government, projected government spending next year that would be necessary to serviceur debt's about 6%, even if the debt limit were not raised, ongoing tax revenue amounts to nearly 70% of the projectespending. so as much as i acknowledge that it would be extremely disruptive so i'm hoping we will have an appropriate and tily increase in the debt limit, given that there is so vastly much more in

revenue than what's necessary to honor our debt obligations, seems to me that a treasury secretary would have to willfully choose to default on our bonds and it's unfathomable to me that any treasury secretary would make such an imprudent decision. my brief question, if i could, do you acknowledge that markets unrstand the difference between an unfortunate and temporary delay in a payment to a vendor which they have seen before on the one hand versus failure to make an interest or principal payment on our treasury securities, which we have never done before? >> my concern is that it's not necessariljust a question of willful decision. there are technical problems associated with making payments including the fact that notwithstanding the facts that the data that you gave, on a day-to-day basis, the amount of principal and interest which is

due might exceed the free cash that the treasu has so i'm worried about this -- i'm worried about the assurance that we wouldn't in fact risk failing to pay the debt. >> i want to get back to this point but as a former bond trader who earned a living trading fixed income curities and derivatives, i have to tell you the market knows the difference between delaying a payment to the gu who cut the grass on the mall and failure to make a bond payment. it's a huge difference a i really don't think we should be even pretending that there's any equivalence between those two. on the qe-2, let me preface by saying i thought that many of the extraordinary measures that you guys took in 2008, didn't agree with all of them but i felt that -- i did agree with many and i recognized that they were decisions being made during a crisis. but we're not in a financial crisis now. we're in a subpar economic recovery, way subpar in terms of

job growth, and we're all disappointed by it. but what concerns me is that the problems that i perceive affecting our economy are not fundamentally monetary in nature. doesn't seem to me that we have a lack of money supply, that we have a lack of liquiditythat's driving the biggest problems that we have. when i look at some of the conventional ways of looking at monetary policy, whether you look at the taylor rule, whether you look atgrowth by some measures of money supply or whether you look at commodity prices, the breadth and scope of which has been i think stunning. you look at all these things and many of them suggest that at a minimum, we are planting the seeds of serious inflation down the road. i also worry that excessive expansion of the money supply creates the illusion of growth but not real growth. so i guess my concern is, if the economy remains weak, are there any -- what measures of

inflation, are there any changes in asset prices that would cause you to decide that despite a weak economy, we need to pull back on this quantitative easing? >> first, i think that many of the nominal indicators that someone like milton friedman would look at did suggest the need for more monetary stimulus. for example, nominal gdp has grown very slowly. growth in the money supply is a fact, not talking about the reserves held by banks which are basically idle but if you look at m-1 and m-2, those have grown pretty slowly. the taylor rule suggests that we should be at some senseay below zero in our interest rate and therefore, we need some method other than just normal interest rate changes to -- >> do you know if mr. taylor believes that? >> well, there are different versions of the taylor rule. there's no particular reason to pick the one he picked in 1993. in fact, he preferred a different one in 1999 which if

he used that one, gives you a much different answer. >> my understanding is his view of his own rule it that it would call for a higher fed funds rate than we have now. >> again, there are many ways of looking at that rule and i think that ones that lookt history, ones that are juified by modeling analysis, many of them suggest that we should be well below zero and i just would disagree that that's the only way to look at it. anyway, i think there is some basis for doing that. i'm sorry, the last part of your question was? >> whether -- in the context of even unfortunately slow economic growth, should that persist, wh kind of inflation indication -- >> we are committed -- some economists, a few economists have suggested temporarily raising inflation above normal levels in order, as a way of trying to stimulate the economy. we have rejected that approach

and we are committed to not letting inflation go above sort of the normal level of around 2%. in the medium term. so we are looking very carefully at indicators of inflation, including actual inflation, including commodity prices, including the spreads between nominal and index bonds which is a measure of inflation compensation, looking at surveys, business pricing plans, household inflation expectations. we look at a whole variety of things and i just want to assure you, we take the inflation issue very, very seriously, and we do not have the illusion that allowing inflation to get high is in any way a constructive thing to do and we are not going to do that. >> my time has expired. thank you, mr. chairman. >> thank you. senator shelby has a couple additional questions. >> thank you for your indulgence, mr. chairman.

in a recent article, dr. martin feldstein, who is well known former president of the national bureau of economic research, asked an important question about qe-2. he says does the artificial support for the bd market and equities from qe-2 mean that we're looking at asset price bubbles that may come to an end before the yeais over. chairman bernanke, what data do you examine to calculate the risk of creating asset bubbles within qe-2? is that a real concern? >> it is something, senator, that we pay a great deal of attention to. have created a new office called the office of financial stability which is providing regular reports and data to the fomc as well as to the supervisors. if you look at most indicators of equity markets, bond markets and the like, while of course nobody can know for sure, there seems little evidence of any

significant bubbles. where there have been concerns, a few people have nted the increase in farmland prices, for example. we have been following that carefully and we have been in substantial contact with the banks that lend, agricultural banks that lend to farmers to make sure thathey are appropriately managing that risk. so we are very attentive to that. i do not believe at this point that there is a dangerous bubble in u.s. financial markets. >> shifting over to capital standards. your counterpart at the bank of england recently gave a speech in which he stated that the new capital standards are quote, insufficient to prevent another crisis. he went on to say that capital requirements should be several orders of magnitude higher. do you agree with governor

king's view that thecapital standards are insufficient to prevent another crisis? or do we not know yet? >>everal orders of magnitude would mean 700% capital. the capital is a multiple of what it was and also of higher quality because it's common equity. >> it's a big improvement. >> it's a substantial improvement. in addition, the risk weights against which capital is calculated on the liabilities -- i'm sorry, on the assets held by the banks are much more seitive to risk and less liberal than in the earlier version. so there's been a substantial improvement in the amount of capital and quality of capital that banks have. in addition, we are looking as required, both by the agreement

and by dodd-frank to have additional capital for systemically significant banks. we're looking at how best to do that. we based our -- we agreed with the consensus of about 7% high quality capital based on looking at worst case losses to banks over the last 50 years, and it was our assessment that in particular, that that amount of capital would have prevented any banks from failing in a crisis that we just suffered through. so although there's more to be done in terms of adding some additional capital to the most systemically significant banks, i do think that we've made a lot of progress and i don't agree with the view that this is likely to lead to another crisis. >> do you believe that it's very

important that any bank are strong regulators, strong capital and good strong management will generally survive? >> yes. except in the worst economic conditions. i should add we added a leverage ratio which now will be international, not just for the united states. >> how would that rk? >> well, there's a leverage ratio which will apply to risk weighted assets and it's currently in an observation period but the previous situation was one in which only the united states banks were required to have a minimum amount of capital as a fraction of total assets and now all banks, including european and other competitors, will have to have that. the other thing we're doing is adding liquidity requirements. in the crisis, a lot of the problems arose when banks that were technically solvent were

unable to meet their short-term liquidity demands and we want to address that as well. i think these will be much stronger than we had before. overall. >> thank you, mr. chairman. >> thanks again to my colleagues and chairman bernanke for being here today. economic growth is one of this committee's top priorities and we will do all we can to formulate policies that help support a sustainable -- senator, do you have any additional questions? >> are you wrapping it up? i'll submit them in writing. >> that helps us support sustainable economic recovery. i will remind my colleagues that we will leave the record open for the next seven days for members to submit their questions for chairman bernanke. this hearing is adjourned. >> thankou.

[captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> ben bernanke is back on capitol hill tomorrow for the second time this week. he will testify about the u.s. economy in the house financial- services committee hearing beginning at 10:00 a.m. eastern. you can watch it on our website, c-span.org. up next, wisconsin gov. scott walker lays out his budget

plans. then an extension on government funding debate coming up on c- span. later, hillary clinton testifies about u.s. priorities around the world. >> the people of libya had made themselves clear. it is time for gaddafi to go. now, without further violence or delay. >> as the unrest in libya and the world -- in the middle east continues, leaders speak out about the future of the muammar gaddafi e-lead libya. watch what you want when you want at the c-span video library. now, wisconsin gov. scott walker lays out his budget plans for the next two years. it includes $1 billion in cuts for schools and government. it would also bargaining rights

for public union workers. this was reported at the state capitol in madison. >> it's my honor to introduce governor, now is the olest. myri, tt wker,he goor of isnsi [aus >> my friend, scott walker. >> thank you. thank you. speaker fitzgerald, speaker pro tem kramer, president ellis,

majority leader fitzgerald, minority leader barca, supreme court justices, constitutional officers, tribal leaders, members of the cabinet, distinguished guests, members of the wisconsin state legislature, and most importantly, fellow citizens of wisconsin. each and every one of us gathered in this chamber today hold the first set of the vote -- of believes -- believes that we are passionate about sharing and serve to guide our actions. each of us have a vision for a better tomorrow in wisconsin. we all share something in common, an unrivaled passion for the state in the people who call it home. we all want wisconsin to be the very best that it can be. it because our experiences are unique and our beliefs diverse, and our paths may diverge as we tackle today is challenges. but even at the hyatt -- the

height of our differences, we can and must keep our promise to the people of wisconsin that they will always come first. democracy does not just expect differences, it demands them. it's the manner in which we discuss and resolve the differences that leads to both bold solutions and innovative reforms. i ask that wenie te ndfuofrifrce suis i the congs, weks ad mns. ch eled toest hw wr lef tit