safe and well underwritten and that invests aors will be happy y even without the risk retention. on terms of the mortgage market, most of e mortgage market is still fannie and freddie at this point. and so we know directly what is happening there, which is that they are continuing to keep pretty tight standards in terms of de facto 20% down, pretty high fico scores, so conditions -- terms and conditions foretting a mortgage are quite tight, particularly relative to the excessively loose terms that were in play before the crisis. my own guess is that for the most part that impring the economy will cause lenders to be, you know, a little bit less

restrictive. but on the other hand, as we move towards a fully privatized market, you ow, gses become less and less important, you know, the private sector may decide to keep, you know, to keep terms moderately tight. so currently the terms are pretty tight. that is a problem for the housing market. i expectome modest improvement, but probably not anything dramatic in the near term. we continue to work on the qrm and i think that will be a constructive addition to the housing financerograms that we have. >> i'm sure you'll continue to be hearing from us that are really concerned about not making it so restrictive that we can't have -- as many well qualified loans as possible.

obviously recognizing that there does need to be a good definition of that. >> okay. thank you. >> also the fomc used connecticconventio conventional monetary polls to promoe promote economic recovery and price stability. you've been talking about the quantitative easing and the purchase of government bonds with newly printed money has made monetary policy more compcated. and as we still don't know the long-term effects of this policy may have and more importantly what effects unwinding these policies may have, i understand that these tools, especially the asset purchases, will take time to unwind and that economic conditions will dictate much of the deision-making. a recent study by a group fed economists constructed a baseline scenario for unwinding the large scale asset purcses that would see the fed's $2.6 trillion billion sheet normalize

in side and composition by 2017. do you agree with this baseline trajectory and what are the factors that will influence this trajectory towards balance sheet normalization and will the price stability or maximum employment drive the decision-making? >> well, senator, we had had earlier discussions about the pace of normalization and one concern we had was not to sl off our securities so quickly that it would disrupt the ma market. the sense was that most likely it would be a relatively slow process and one that would be clearly announced in advance and so that markets would be able to anticipate. what i need to emphasize here is that does not mean that qe will continue for 2017 or easy money will ctinue to 2017. we have tools that will allow us to tighten monetary policy in more or less the normal way, even if the balance sheet remains large. for example, we have the authority to pay interest on reserves by raising the rate

that we pay on reserves to banks, we can effectively raise the short-term money market rate and that will work through the financial system just pretty much the same way that a higher federal funds rate target will work. so there are different i was for us to unwind. obviously ultimately as senator shelby pointed out, it is important for us to get back to a more normal size of our balance sheet. we will do so. but the pace at which we do that is not -- does not constrain us from tightening monetary policy at the appropriate time. as i was trying to explain als to senator shelby, the criterion we'll be using will be first we want to be sure that price stability is maintained, that inflation remains low and stable, and in doing that we'll have to look ahead to where inflation is going, not just where it's been, but also to the extent that's consistent with that, we want to make sure that recovery is self-sustaining, that the private sector is -- is leading the recovery so that the

artificial support from the fed and from fiscaluthorities and so on can be withdrawn and that the private economy lead the recovery. >> thank you, mr. chairman. >> senator warner. >> am next? >> yes. >> thank you. let me see if i understand an answer that i believe you gave, senator merkley. you said the commercial mortgage-backed security market is coming back to a small extent. >> correct. >> and i assume that's a good thing. >> yes because that's an important source of finance for a commercial real estate. given the banks are not expaing their balance sheets, we need alternative sources of finance. >> right. and i got information from cr

yesterday that was compared to residential mortgage-backed secuties. that market is virtually dead, is that correct? >> yes. >> would it be a good thing if that came back? >> well, i would think so. although it is important to remember that a lot of bad lending took place through that -- through that market and helped contribute to the crisis. but conditional on underiting standards or other oversight that makes the loans created through that process sufficiently good quality, then, again, it would be good to have multiple sources of financing for the housing market. >> okay. and that's what i'm -- that's what my question is sort of directed toward as to what standards you might recommend in that regard. you know, most of us have had to go to school since 2008 on this

whole issue of mortgage-backed securities. what we learned i that as they were leading up to 2008, they were outside many of the s.e.c.'s regulatory structures because they were privately placed transactions. and so with regard to the definition of delinquency or being in default, or the classification of the mortgages or how those mortgages are worked out when they get in trouble, there were not tho standards in place because generally they were considered ansactions involving the big board. so would it be hpful and what suggestions would you have in this regard of having standards,

greater disclosures and structural reforms put in place to perhaps revivehe private mortgage-backed security market and bring back more private mortgage capital into the residential market. >> well, a number of steps were taken in the dodd-frank act that tried to address this. for example, one of the problems in the crisis was conflicts of interest or shopping arnd for credit ratings. and so the -- there are some new regulations, regulatory authorities, s.e.c., to reduce those -- reduce those conflicts of interest and the credit rating agencies have been reworking their models for securitized products. and so the -- the -- what we saw in the crisis where firms would take a whole bunch of lousy mortgages and then use financi

engineering to mke them into aaa securities, that should not be possible anymore if the credit rating agencies are forced to meetcertain standards. secondly -- >> let me intersect. >> sure. >> have we adequately addressed that issue in dodd-frank? >> before i can answer that question, i would like to see the full panoply of steps that the s.e.c. takes. i know they're serious about trying to address particularly the shoing around problem where a securitizer would try different agencies until they found one who gave them the rating they wanted. so with more disclosures on that, for example, would be helpful. then just talking to senator hagan about the qrn, the called residential mortgage, which would set standards for high quality mortgages, and mortgages that didn't meet that would have to have a skin in the game

credit risketention element. that's provided by dodd-frank. i think that supervisors will be paying more attention to this in the future and we should pay more attention to it. and finally one thing that the fed reserve is very interested in and we have been talking about this with congress and other agencies is to have national servicing standards. that turns out to be an important part of the process of making sure that people who do run into trouble are able to get restructured mortgages and our ance to keep our home. so there are a number of things in the bill, but i -- i think as we go forward, we want to make sure that we have sufficient oversight that we can assure that the mortgages are of good quality. i think thats the gses begin to pull back, as they will, we

will see private label mortgage-backed securities coming back into the market, but it is pretty limited right now. there is some. >> my time is expired. would you take for the record the question of some recommendations about how to go further on structural changes that might make the mortgage-backed security market more viable with regard to residents? certainly. >> thank you. >> senator warner. >> thank you, mr. chairman. mr. chairman, good to see you again as well. i think one of the comments you madearer we all need to bear and some level of mind that while you had to take some extraordinary actions, when ywe reflect back where we were spring 2009 and how big a ditch we were in and the prognostications at that point, while clearly employment numbers is not where we would like, some other recovery has been fraly

more dramatic and i think many of us would even predict. one thing -- i have two issues want to raise in my short time, one thing i think and hopefully we will have a wise way to avoid a government shutdown right now, but i do think at times within the public, there is some confusion between the issues around shutdown and an issue that we will have to address in the next few months around the debt ceiling limit. and as we heard from your testimony and i absolutely believe we need to put in place a long-term plan to deal with our debt and deficit and i'm proud of the bipartisan work that is being done on that, but as we are still kind of in this hopefully strengthening recovery, can you, in as plain a language as a central banker could -- can make clear what the ramifications would be? maybe to an average american or to our economic recovery, if we

were to default on -- and not raise that debt ceiling limit anthe ramifications that would have to our general recovery and to an average american family, two or three examples. >> well, it would be extremely dangerous and very likely recovery ending event. first, it would almost certainly create a new financial crisis as firms that rely on receiving their interest and principal do not receive it. and theye unable to make payments and so that would caade through the financial markets. then there would be a massive loss of confidence in the u.s. treasury securities, the deepest, most liquid market in the world. interest rates would spike. and that would, in turn, affect, you know, many other assets as well as treasuries.

so the near term effect would be a sharp resumption of the kinds of instabilities we sa in 2008. even if we were able, somehow, say because it was only 20 minutes long or something like that, even if we were able to avoid those kinds of effects, very likely the interest rate that lender would demand of the u.s. to finance our debt going forward would be higher, reflecting the greater riskiness and uncertainty associated with funding u.s. government. and that would make our fiscal problems all the more severe because interest payments are part of the deficit. it means that cuts would have to be sharper and tax increases larger and those things themselves would also be a negative for the recovery. so broadly speaking it would be, i think, a very bad outcome for the u.s. economy. >> it would be safeto say that two years of extraordinary

actions, many of them politically unpopular, could all be washed away, whatever recovery we have got could all be put in jeopardy if we as members of congress and the american public doesn't realize there is a major distinction between the questions around debt ceiling limit and, you know, equally important questions around government shutdown. government shutdown compared to messing with the debt ceiling limit could have dramatically different ramifications. >> we have never had a failure to raise the debt limit, we had a number of government shutdowns and they have created problems, but they haven't been as destructive as a debt limit failure would be. >> all right. well, being sensitiv to those of us on the end who have been waiting a while, try to get my last question in and observe the time limit, one thing i know -- i won't try to pin you down on the deficit commission report, you won't go on to specifics. i would like to ask, there are

many folks here who feel we can solve this crisis on the spending side. the nature and size of this challenge is so great, do you believe that we can really get there without having an open mind on both sides of the balance sheet? >> well, hope there will be an open mind and plenty of discussion about all possible ways orward, certainly. so certainly i can't disagree with that. >> but both spending and revenues have to be part of this discussion. >> i hope there will be an open mind and discussion of all options including reforms of the tax code, including restructuring of spending and the like. yes. >> wish i had another 30 seconds. >> senator moran. >>r. chairman, thank you very much. chairman bernanke, thank you for the opportunity to question and ma comments. mr. menendez asked earlier about, i think, at least from my

perspective that thecrux of his point was that despite signifant monetary policy changes designed to put additional dollars into the banking system, loans do not -- are not being made. credit is not being extended to the degree that we need to increase the onomy. and i'm interested in knowing whether that is accurate. still trying to assume our goal is still trying to increase loan demand and do you think the regulatory environment that particularly community banks face has a consequence in the fact that credit is not being extended and is there something we should do? >> well, first, the qe-2 is not intended to work primarily through banks. it is intended to work through broader markets and we have seen, for example, very open corporate bond markets in part because of the monetary policy actions we have taken.

so that's not the direct object of the qe and what we have seen is easier, broader credit conditions as opposed to bank lending specifically. we have tried to address the bank lending issues in different ways from a supervisory perspective and i don't want to take all your time, but we have a long list of steps we have taken in terms of guidance, in terms of examining tradin in terms ofoutreach to try to make banks appreciate and make our own examiners appreciate that what we're looking for here is appropriate balance. on one hand, we don't want bank making bad loans. on the other hand, it is good for everybody if they make loans to credit worthy borrowers. we're encouraging that and encouraging our examiners to encourage that. my sense is that although credit conditions are still tight that they are improving. i mentioned that in my testimony. we have seen, for example, in our surveys banks that terms and conditions have stopped tight enning and have been to loosen a bit. many banks have fro duce e intr

programs like second look programs for new loans. my sense that this year we'll see some improvement, not anything like we saw before the crisis and that's in fact a good thing, but we'll see improvement in bank lending. we'll continue to follow that carefully. it is a very high priority for us. >> i raised this top nick your last appearance with other regulators before our committee and i would again tell you that bankers continue to suggest that the ability to make loans is significantly hampered by the regulatory environment. and most instances the suggestion at least is that those regulations are not keeping them from making bad loans, keeping them from making good loans. and so, again, i would encourage the fed to pursue what you outline as your current course of action in a more significant or strenuous way. often your policy is criticized on qe-2 and dog so the comparisens made to japan. and i would like to note your

thoughts about the correlation between what occurred in the japanese economy and its central bank's response and yours and our economy and then you indicated earlier that long term our deficits aren't sustainable and you had some conversation with my colleagues here on the committee about not extending the debt ceiling, for example. what are the precipitating factors that you are concerned about? i know every central banker has got to portray confidence and what are the things that are out there that may make this, when you say long term not sustainable, long term becomes significantly shorter term? what are the things in the world economy that may -- that we ought to keep our eye on that may change the time frame in which we have to operate? >> first, let me say on your bank issue that we do have an ombudsman. i would encourage any bank with concerns about federal federal reserve examiners to get

in touch with us. we will try to follow through on that. >> thank you. >> on japan, the japanese did a lot of things earlier because they had a bubble and a colpse earlier than we did, but you know, we have focused our purchases, one important difference is that we have instead of simply focusing on bank reserves which have not been lent out vry much, which in fact, you know, we don't want it to be excessively lent out in the sense that we wantt to be controlled, otherwise it would tend to create higher money supply and pose an inflation risk. what we've done instead is focus on longer term securities, taking duration out of the market and that has the effect of pushing investors into other types of investments and for example, again, making the corporate bond market more attractive, making the stock market stronger and the like. so our approach has been

somewhat different than what the japanese took, but we have faced, you know, the same concern that following a financial crisis, recovery can be quite slow and deflation can be a risk. we saw those things happening last summer and that's why we decided to take additional steps as we have. terms of what could bring the fiscal crisis into the present, it's very hard to know. there's no way really to judge when markets will change their mind. currently of course, ten-year bonds are still 3.5% and currently, they seem to still have the confidence of the bond markets. i think what would be a real problem would be if investors saw not so much the economic capacity but the political capacity of the united states as being inadequate to address these problems. if it became clear that these problems were not going to be adequately addressed because we were just in a perpetual gridlock, i think that would raise significant concerns, it would risk bringing these things, these problems, forward

into the present. >> mr. chairman, thank you. i think we often in congress tend to criticize the fed when so much of this as you said earlier is determined by decisions made here on spending deficits and revenues. thank you, mr. chairman. >> thank you. >> senator? >> thank you, mr. chairman. thank you, mr. chairman. first question relates to coentration limits in your role as the fsoc group. section 622 prohibits any firms whose total liabilities are greater than 10% of all financial firms liabilities from merging with or acquiring another company. i'm concerne the way those numbers arealculated could put u.s. companies at a competitive disadvantage. that's because for u.s. companies, the number in the numerator includes all liabilities worldwide but for all non-u.scompanies, only their u.s. liabilities. that means if a u.s. company and

swiss company simultaneously bought a brazilian bank, the concentration ratio for the u.s. company would go up and the ratio for the swiss company would go down. as iunderstand it, the committee has the ability to change that and make it fairer. what are your thoughts and what should fsoc do? >> i fully agree with your concern. it is unfair in the sense that as you say, a foreign bank that has operations in the u.s. could purchase a domestic u.s. bank where a u.s. bank of the same size could not buy that bank. >> or a foreign bank of the same size. >> or a foreign bank. i may be mistaken but my understanding is that we didn't have discretion -- >> you do. >> well, i will look at that. because i do think it's a problem. >> the fsoc, the statute says

fsoc can take competitivens into account and b, that any rules are subject to the recommendations of fsoc. so you have some discretion and i hope you will. second issue. you have persistently, wisely, in my view,ou defer to congress on taxing and spending but i want to ask you a more general question about the when of deficit reduction rather than the how, about the timing of our efforts to reduce the deficit. last month when you were testifying before the house budget committee, you said the following, i'm quoting. the very -- this very moment is not time to radically reduce our spending or raise our taxes, because the economy is still in a recovery mode and needs that support. now, private economists seem to agree. mark zandy yesterday in his report said too much cutting too soon would be counterproductive and would be taking an unnecessary chance with recovery. do you agree with those sentiments? >> yes. if i may add a small qualification -- >> no.

don't do that. >> only -- thank you, senator. only that it is impoant to be showing progress and therefore, i hopehat we'll take a longerm perspective and do things that will be persuasive to the market over time. we are committed to -- >> i don't disagree with that caveat at all. that's a fair caveat. but in the short term, we better be careful not to snuff out this nascent recovery by doing too much cutting in the words of zandy. that's correct, in your opinion? >> yes. >> okay. do you also agree, he said that cuts, significant cuts could cause job loss, those cuts would create job loss. i don't mean overall job loss, macro, but those cuts could. you age with that? >> the cuts would presumably lower overall dema and the economy would have some effect on growth and employment. >> good. the answer is yes. >> yes. >> thank you, mr. chairman.

>> senator kirk. >> thank you, mr. chairman. i would just like to briefly comment for you on the work th time is different by rinehart rogoff. what did you think? >> he's one of my long-term colleagues and friends. i have great respect for both him and miss rinehart. i think it's a very interesting piece of work. it's particularly instructive because it uses a lot of historical episodes, data, as opposed to purely theoretical approach to the problem. >> it's an important piece of work. you were effusive in your praise at least on amazon, i saw. i thought the title is important because every central banker, economic official says this time is different. yet the basic themes of debasing a currency, inflation, lack of spending discipline, rinehart and rogoff highlight the

similarity of poor action by bankers and governments to destroy their economy through a lack of discipline. it's an important lesson for us. we have a report from the national council of state legislators that talk about financial stress now in 12 american states. just recently the state of illinois borrowed another $3.7 billion, paying 50 basis points moreo borrow than corporate debt at the lowest investment grade. you ani talked earlier about the potential of states posing a systemic risk to our economy. you feel that they could pose a systemic risk? >> it's possible but currently, while states are facing very tough financial conditions, at least as long as the recovery continues, they are seeing higher tax revenues and that will at least be helpful to some of them in trying to address

these problems. but obviously, this is something we have to watch carefully. >> certainly a panic in the state and municipal bond market could trigger a systemic risk, in your view? >> if it was sufficiently severe, yes. >> when you have expressed opposition to any federal bailout of the stas, that is correct? >> i think that it's a congressional federal matter. it's not a federal reserve matter. the federal reserve is not going to be involvedn that. if congress wants to address it -- >> what would your view be to accelerate federal borrowing to give money to the states? >> again, i think that's a congressional decision. if you're going to increasing borrowing, though, obviously it bears its own risks, obviously. >> i think tremendous. would you regard the proposal to

defer state payments of principal and debts on loans made from the federal governnt as a state bailout? >> well, it has -- to some extent, it has -- it has fiscal implications for the federal government. >> i would think so. also, maybe we could use a language that is more clear in your testimony on page five, you talked about we are considering providing additional monetary accommodation through further asset purchases. in november the committee announced it intended to purchase an additional $600 billion in longer term financial securities in the middle of this year. in more layman's terms, you're talking about lending money to the u.s. government, correct? >> well, not exactly because we are buying the securities on the secondary market so somebody's already lent the money directly but yes, we are holdg government debt. >> my point exactly. section 14 of the federal rerve act legally prevents you from -- this would say from

buying newly issued securities which in a more layman's term would be lending directly to the u.s. government. >> that's why we're not doing that. >> right. instead, what you do is others lend to the u.s. government and then you buy their loans. >> we do that all the time. even in mo normal conditions. >> correct. in modern times,the fed has always held treasury securities as part of normal operations but now under qe-2 it's a $600 billion commitment. but the crs goes on to say the effect of the fed's purchase of treasury securities on federal budget is similar to monetization, whether the fed buys securities on the secondary market or directly from treary. when the fed holds treasury securities, treasury must pay interest tthe fed as it would to any private investor. these interest pments after expenses become part othe profits of the fed. the fed in turn remits 95% of the profits to the treasury,

where it is added to the general revenues. it concludes in essence the fed has made an interest-free loan to the treasury because almost all of the interest paid by the treasury to the fed is subsequently sent back to the treasury. would you agree with that? >> yes. we've remitted $125 billion to the treasury in the last two years. it's important to understand that what we're doing is not fiscal spending. it is in fact, you know, purchasing securities which we'll then sell back to the market. >> so because of section 14 of the act, maybe the simple way of saying it is others are lending money to the federal government, you are purchasing those loans, and then the interest payments being made to you, because you're now the holder or the official maker of the loan, are then remitted back to the treasury, so maybe in layman's terms, this is one part of the 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 liabilitcost as well 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 crs says, involves buying and selling treasury securities. we couldn't have currency outstanding if we didn't have securities to back them up. >> although iwould 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 banks issued currency. we didn't have a national currency. >> i just might say it's possible for a country 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. thfirst will be about rising oil prices. the second question will be about interchange fees. first, mr. chairman, we all agree that the rising price of oil 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 wouldn't prices be lower? i would like your comment after i make my second question to you. terchange fees. the issue of interchange fees is very controversial, as you know. in the recent wall street reform

bill, congress exempt 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. it is a global market and there are non-opec producers. what opec does try to do is set 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 theaw 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. ether or not there wilbe any effect on the interchange fees charged by small banks remains to be seen there are really i think two issues. one is whether theet 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 by the bill, there may be some general downward pressure on interchange fees just 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 we 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 kinds of debit -- that receive the exemption. can you say the goal you are trying hard to achieve when you write e 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 dictate the pricing policies of the networks and it was part of the goal of 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 pressures arising from multiple 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 you tell us absolutely that there will be no quantitati 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 coress and i think oftentimes we may look to you to help prove some consensus so i've

got a couple just general quesons. 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 smulus 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 esstial services like military but as we're looking at raising taxes

versus cutting 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 onrom there just to ask a couple other questions. government spending and debt, borrowing obviously tightens credit and 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 th. 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 zone. those were the weakness of the economy and the deflation risk were the things that motivad

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 what the federal reserve will do with quantitative easing in the future, if we continue on r 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 increaseonfidence. so i urge you to continueo address the fiscal issue. our quantitative easing policy which is just anoth form of monetary policy, is trying to

address the recovery of the economy right now which is still under wa 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 our policy. >> the quantitative easing, 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 treasury 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 f 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 not debasing the currency, that the dollar'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 that and it did deliver price stability over very long periods of time but over shorter periods 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 ere 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. 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 service our debt's about , even if the debt lit were not raised, ongoing tax revenue amounts to nearly 70% of the projected spending. so as much as i acknowledge that it would be extremely disruptive so i'm hoping we will have an appropriate and timely 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 understand 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 necessarily just 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 treasury 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 securities and derivative i have to tell you the market knows the difference between delaying a payment to the guys who cut the grass on the mall and failure to make a bond payment. it's a huge difference and 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 liquidit that'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 at growth 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 ese 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 quantitate 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, nminal 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 sense way below zero in our interest rate and therefore, we need some method other than just nrmal interest rate changes to -- >> do you know if mr. taylor believes that? >> well, there are different versions of thetaylor 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 understaing 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 look at history, ones that are justified by modeling analysis, ma of them suggest that we should be well below zerond 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, what 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 u, we take the inflation issue very, very riously, 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 queion about qe-2. he says does the artificial

support for the bond market and equities from qe-2 mean that we're looking at asset price bubbles that may come to an end before the year is 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. we 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 lk 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 noted 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 that they 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. financiamarkets. >> 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 the capital standards are insufficient to prevent another crisis? or do we not know yet? >> several 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 improvemen in addition, the risk weights against which capital is calculated on the liabilities -- i'm sorry, onhe assets held by the banks are much more sensitive 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 theonsensus of about 7% high quality capital based on looking at worstase 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 addional capital to the most syemically 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 beeve that it's very important that any bank are strong regulators, strong capital and good strong management will generall survive?

>> yes. cept 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 work? >> 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 ve 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. >> thank you. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> german bernanke will be back on the capitol hill -- chairman

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