pay nor the resources to manage. yesterday, the commissioner of wartime contract issued a report entitled "iraq cannot or mission?" forgotten it continues it is inevitable that some capabilities of the sacrifice altogether. the funds will be wasted. the number one recommendation is that congress ensure adequate funding to sustain critical areas and iraq. hr1 that passed the house in february to mad of the cuts

funding overall and makes specific cuts to the major programs. the 16% cut for state and usaid would be devastating to our national security appeared in this is the definition of penny wise. after investing so much blood, we must give them the basic resources they need to relieve the military of their mission and ensure a future prosperity. the state department is more affordable than the operation led by the defense department. as a bastion can the notes, it will save $51 billion in fiscal year 2012.

they are seeking a $2.5 billion increase in the budget. it is about 4% of the funds letter being spent. they believe they will carry out its mission. it is important for the committee to scrutinize this transition. we must also look at the context of the budget cuts that would undermine the ability to successfully achieved new responsibility. we certainly have to watch every penny and where it goes and that it is wisely spent. we should not be guaranteeing success by undermining it. it maintains the contract. >> thank you. welcome to members of both sides of the aisle.

members will have seven day system of opening statements. i appreciate you all being with us here today. the panel includes grant green. mr. stewart of belle and is the inspector general. mr. frank and bill -- kendall. all witnesses will be sworn in. please, rise and raise your right hand. >> to u.s. currency tested money

will be the truth, the whole truth, and nothing but the church? >> thank you. >> all witnesses answered in the affirmative. we will move to opening statements. alydar appreciated if you keep your verbal comments to 5 minutes. you should have a live there. i would appreciate it if he could wrap up your comments. we have this nice and beautiful room. to make sure the button is pushed so we can all hear you. thank you. >> midmorning. b -- good morning. i am a former acting co-chair of the commission on iraq and afghanistan. a participating with me is

commencing co-chairman michael tebow. i will talk about a few points. i am a retired u.s. army officer. i am an executive secretary to the national security council. he was also a army and served 35 years in the department of defense. he is also worked in the private sector as a consultant. we are here on behalf of all the commissioners to approve release of a special report to the congress which we have titled "iraq, the forgotten mission. we have brought a printed copies with us today. the report reflects bipartisan

consensus. we requested be included in the committee's hearing record. this poses the question, it is a state department ready? the short answer is no. sustaining an expanded u.s. diplomatic presence in iraq will require the state to take on thousands of additional employees that is neither have the funds to pay for our resources to manage. we base the recommendations on the research syrinx as well as to trips -- on the research as well as atwo trips.

our observations have led to a special report. the department of defense has been working on identifying transition needs in dealing with hundreds of tasks and medical hair. it will require reconfiguring it still occupied by the u.s. military. all of these activities will require increased contract thing

as well as additional funding. this is a particularly problematic thing when you consider it the mason -- the reason department acknowledges that. contracts have it. contracts are often well into the performance days. it has languished even as contacting has grown. they have a need to restore government capacity. it occurs in many other departments and agencies. besides the challenges, other

looming problems for the d.o.t. transition is it time. 10 months from today, all but a handful of u.s. military personnel will be gone. the state needs in many new contracts. many contracts must be launched quickly and should have already been launched. we can all agree the stakes are high. we can all agree that as members of the commission we are confining our observation back to the contract required after 2011. we are not planning on being plan are urging congress provide everything that the state

department has requested. considering the extent of contrasting waste and abuse, we would encourage the department and lawmakers to examine the plan closely to seek more economies and safeguards for taxpayer dollars. we are simply pointing out that the declared coordinated policy of our government to expand the role and visibility in iraq after the u.s. military departs has large and unavoidable consequences. it must be recognized. our special report spells out our concerns in more detail. we will close by quoting the three recommendations. congress ensures adequate funding to sustain operations in critical areas including this

need for operational contract support. the department of state expand the organic capabilities to meet heighten need for personnel. the secretaries of state and defense extended their collaborative planning for the transition including execution of an agreement to establish a senior level coordinator and a decision maker to guy progress and address major issues as a resolution may exceed the authorities of department zero working groups. >> feel free. you can submit this testimony into the record. we have gone over seven minutes. i would like to transition. >> thank you. i believe we will go to mr. bell

and then. >> very good. thank you for this opportunity to testify on the crucial question before you today. is the state department prepared to sustain and engage in the city of the camp programs necessary to support iraq over the next year? this is not a perennial issue. this is a national security issue. let me provide three premises that put my answers in context. the united states will continue to support iraq next year. we have a crucial interest at play. the state department will be in the lead there. it one need to implement programs that it can execute so

that the interests are protected. to meet that mission next year over the next five years will require substantial resources. much lessen their resources expected over the past eight years. they were spending $75 billion last year. it was on maintaining its mission in iraq. the state department will spend a fraction of that. is the state department ready to manage their programs? no. so evidently know. there is significant execution underway regarding transition. will they be ready on january 1?

time will tell. do they have capacity to extricate the problems? yes. there are concerns we have raised about contract management. there is no doubt about the truth. they are the largest in the history. he is issued a number of audits the raise concerns about the capacity of acquisition and management and the ability to keep track of money and break it down to the core matter. as it made improvements? yes. he acknowledged that and points to important state -- steps. notably is it evaluation results. one of the things they most need

to do is to ensure they have sufficient number of officers representatives that are taking track. we have to spend substantial resources. it is substantial. we must do word that money in an effective way to ensure the taxpayers money is being well spent. i just returned from a trip numbers 29. i met with the ambassador. and met with the iraqi leadership. they are concerned about what it will be like after the troops withdraw. the concerns come from security. one thing that is predictable is

that it is unpredictable. it is difficult to judge today what the environment will be like. the state department is planning a worst-case scenario. the capacity to operate will be limited. they are carrying out audits of the program specifically of quick response funds. there are crucial elements that must be improved. corruption is as bad as it has ever been. he told me two weeks ago he cannot convict a senior official. they can still immunized any employee. these are unacceptable standards. you'll have to continue to ring gauge heavily.

they are improving the fledgling democracy. we recommend to things. it is regarding the use of the substantial funds. for any of these large contracts that the state might some day plan, you see what the tactical uses are. you have transparency. they said i said they had the resources in place. >> thank you.

thank you for inviting me to discuss the preparations for the transition from a military to civilian led presence. our efforts are critical in supporting an iraq that the sovereign and self-reliant. the request will provide resources for the diplomatic platform because that will put it in advance. shortchanging our presence now would undercut our enduring national interest. between 2010 and 12, the drawdown must save the taxpayers $51 billion of the operating budget request will only increase by 2.5 billion. the funding needs will increase because of the civilian transition. the overall cost.

kossel decrease. it could severely affect the transition. i would like to address the management programs. there are eight key components. security all personnel will be under cheap admission authorities. they are responsible for all state department sites. applications were state -- and security will coordinate movements.

diplomatic security will have sole responsibility. the movement has already been awarded. we are finalizing an agreement. we are coordinating on a system. we will have tactical radio communications. we will establish a robust medical units. these units will stabilize trauma cases. they will be moved to jordan and kuwait. we expect to award a by the 20th of may.

our success depends on contracting efforts. iraq is a non permissive environment. we cannot hire local staff. we are heavily dependent on contractors. we have developed a strategy for live support, security, communications and facility. we will leverage dod resources. one is the civil augmentation. he will also be using it for food and fuel. i take the irresponsibility

seriously. -- i take the responsibility seriously. we will engage heavily. our contracting team draws on headquarters expertise. there are multiple levels of technical oversight. since 2008, when it hired 102 additional staff. we will have over 200 direct state department professionals. we are not using contractors by default. they are addressing a transitory need.

let me be clear. we will transition. already nine -- 92% of our force ising ph. we have grow best ones under way. >> thank you pays --. . >> thank you for the opportunity. we are discussing the challenges associated with the department of state in iraq. ask you to conclude my statement.

we are engaged in operation in new done. -- donna -- operation new dawn. we are committed to executing our role. we have undertaken an approach to support it. the role it will play is not unusual. the scale and complexity present a huge undertaking.

we are responsible for the success of construction components. they have established a steering committee. they meet biweekly. direct the dissipation is there -- direct for dissipation is there. november 2010, they are serving as a liaison.

these activities have been overseen. they are developing practical solutions. each team is establishing new parameters. these actions are occurring and varying degrees. they are researching the infrastructure. i visited in october. they are discussing plans for a transition.

they conducted visits to a future state departments. they did not have the capacity to do handle the requirements. they will provide functions. it was released january 2011. food distribution will continue. still provide maintenance contracts. they will provide contracts and support.

the synchronized informations systems are there. they have been investigated as a personal management tool that they would use. the state will reimburse for all of these services provided. dod has request for all the items ranging from medical equipment to rocket protection. it could be bored -- equipping board has been processed. we are learning it in place of it to provide a greater level protection. we took the requirement for systems which would have cost $9

million and found a solution that would provide for less than 1 million total. there is a penchant for four more to be available. the rules of engagement have been established. items are being established at no cost. there is funding for defense services. non excess items are being provided. dod will consider learning more on a case by case basis. the chancers are being completed. i just want to say we are very well aware of the challenges.

they doing the things they need. in where beyond the planning phase. we are on track. thank you. we will have to move to the portion more members will be about five minutes for questioning. we will alternates. i would ask members to try to maintain the 5 minute rule. there is some discussion with the inspector general,

conversations that members that had in iraq, it is our understanding that the state department and department of defense had been tightening up. they are providing access to the member mentioned they have. they have restricted this access. there was the granting of access to documents it. is this something he will be forthcoming with. >> we deal with the inspector general. we provide in the nation to the agency.

there have been worked out in response to congressional mandates. we provide the offices with all material that they are entitled to. >> there is a new operating procedure. it creates a delay of having to fill the 45 page document alex. >> i apologize. i am unaware of anyone to withhold it. our policy is to be the same. to have to take this for the record? >> perhaps you can adjust the concern. >> i address this.

they have worked over the last week. we resolved the concerns we had. it would appear so. we get substantial information's from the embassy. ambassador geoffrey has become very forthcoming. it is clear. fore's responsible reporting on any contracts. this is the congressional mandate. we have had some problems over the last six months regarding getting information about the reconstruction team transition.

my time is short as well. my concern is that the access has not been growing. it has been shrinking. the timing is critical. we will continue to follow it. in july, the state department identified 13 lost functionality is.

they are going to the state department. one is how you are going to gear up. these a difficult things to do. >> on the other hand, there are another seven that simply make no sense. this is not something they should take on.

it is back to the opposition. >> ellen l. recognize the ranking member. >> thank you very much. i think he gave is a pretty good idea here.

>> the answer is yes. i do not have the kind of written plans. it provides a contract. that is my plan. >> but when you have a plan, i take it as a guess that you will submit that for us. >> we will certainly submit it for review. everything is on going. everything -- every day we make decisions. it is so we can have enough time to put at it. >> it is an excellent idea.

>> we will work on it. we have plans that are dependent upon appropriations. >> i can certify that we have been certified. the budget request isn't urging concerned because the state department does not get the money they have requested.

en added it was critical. there'll be a lot more casualties. despite these pleas, last month the house passed a bill to cut the request for fiscal year 2011. secretary clinton testified it would inhibit the ability. would the 16% cut -- how would it impact your ability? >> we would not be able to perform the mission that has been tasks. >> inmate is number one

recommendation. but it would be mission failure. it was released yesterday. the state department expands the needs. it goes on to say that shorter staff conducts oversight of the contacts that are needed to successfully take the reins of the operations. some will be for sensitive missions such as handling ordinances. it increases.

it will have oversight. >> and includes the pre-award cause and the previously mentioned oversight. they not only need the money but the ability to implement the program. >> thank you. >> thank you. it is my pleasure to read a that is the gentle man -- to recognize the gentleman from ohio.

>> explain to the american people -- there are 17,000 new workers, people employed in iraq. 16,000 of them are contractors. that is not make any sense to enable me pay contractors a lot more money than we paid government employees. can you explain how you justify that? >> on two grounds. first of all, the general accounting office did a study which i will make sure you received that shows the state department use of contractors in protective security operations save the u.s. government money in the long term. we have 8 surge issue here.

we need aviation support. we need medical support. where hiring employees for a 30 year career for a need for aviation or particular security or explosive ordinance explosive. it is the good government. it is not good for the taxpayer. >> it is best done for the long haul would be a use of

contractors services. >> they have been unable to determine the number of contractors. has all having it, how state developed rejections? we have analyzed each of those major functions. we have done a little table of organization. we have a table of organization.

that is what we give to the contractor. when they provide as personnel, we use a data base. >> what does that number of contractors we have? cu>> she said he cannot account for them. >> that is correct. >> but you do not know what that number is? >> i've brought our planning numbers for the transition. i did not bring with me the charts.

200 managers were oversight a private security contractors. >> it may be sufficient today. i do not disagree with secretary kennedy. if you look at the number of contractors that the state department will require post 2011, they do not have enough oversight today to oversee a manager says contractors in the way they should be. one thing this commission has found is a huge difference in

the number of contacting of acquisition personnel on board in every agency we have looked at and a number of contracts that are being awarded. we have this lack of general oversight. they need a lot more oversight. they needed on the grounds. >> we will now recognize the breaking member of the full committee. >> as i listen to this testimony, i want to thank you. we all understand the need to tighten our belts. we have already spent eight years, one trillion dollars in

lost 4000 american lives in trying to help iraq. we applaud our military for all they are doing. this is not only irresponsible, but it is a clear and present danger to our national security. as i listen to you, you were ask questions if you had to take the cuts. we would be in deep trouble. >> we would not be able to execute the mission that we had been given.

>> another term for that with the mission familiar? >> yes. on february 21, at what risk are we fixing the overt reliance? in the report, at the identified several practices that hamper it for a contract. you testified that they are considering bids for several functionality is that are vital to this successful transition. the state begins to the process. what steps are you taking to expand competition?

we are engaged in competitive bid. for the construction. it is using competitive competition. air aviation contract was awarded by competitive competition. we access them through the a economy. we are using competitive competition. >> do we have appropriate oversight? we had the testimony that we had contractors overseeing contractors. >> we do not have contractors

overseeing contractors. >> a good appeared >> we have increased the staff of are contacting headquarters. we are deploying 200 u.s. government diplomat personnel to oversee the conversation. we will have been overseen the medical contract. we will have logistic people overseeing it. we are deploying additional officers. there will oversee every single one. >> we want the american taxpayers' dollars to be spent effectively. it is very difficult when you have a contract overseeing a contractor and we lose control over the billions of dollars we are spending. the commission on wartime contacting testified that they do not have adequate resources.

cwc found it was not adequate for financial waste and u.s. policy objectives. today bowen testified that he has concerns about the resources provided. do you believe the state has the resources necessary to oversee the very large contracts in programs the state will be responsible for it? >> it is. we have it in place. it is carrying out the full program. it depends on the president's budget request. >> i see my time is expired.

thank you. >> the chair will now recognize the texas for five minutes. you are in new member. welcome. >> thank you. as a new member, and not an expert in foreign affairs and never having been to iraq, i am troubled by what i'm hearing here. my impression comes from what i see on television and read in newspapers. we are talking about an unprecedented logistical situation for the state department. we are talking about on manned air vehicles. we are talking about a recovering bodies. we are talking about trauma medical facility. we are talking about hefty defenses against attacks and not being able to the gasoline or

groceries. i know the bush administration set a hard deadline. i will adjust this to thedod. it does not sound like we are ready for the military to get out of their if the situation requires this level of which is will support. has anyone talked to the iraqi government and said to you begin might be a bid idea for us to stay longer until this is more stable? >> that is a very good question. the decision to draw down their forces by the end of this year was a mutual decision with the government of iraq. we honor the commitments we have made to carry out the drawdown in irresponsible way. -- in a responsible way.

they are capable of managing security for the country as we go forward. they have taken responsibility step-by-step. we transitioned to fool a rocky responsibility on december 1 of last year. -- to fall in rocky -- to fall an iraqi responsibility in december of last year. we have seen them respond in a professional way. we depend more and more on them for hours security. with the effort that has been described here. we are aiming to equip our state department colleagues for success. that is why they emphasize the

need for providing them with the resources they need. iraq is serving as an example. i think the bush administration as an acting this. if they cannot provide groceries, i am not sure we aren't there yet. are you aware of any request for anybody within the government? >> i met with a number of senior officials. they indicated there is openness.

they spoke about the possibility. this is not have much time. this symbol 31st will be there. >> and not related to the policy matters. i'm just about delta time. yields back.manly er

>> welcome to your new position. i am struggling was something i heard when i was visiting. we are being briefed. they can san want to make sure we have it right. there was a sense there. we have to make things perfect. less visit one that is not facing this. it remained taints the security. i think we are talking about a bridge too far. corruption is as best as it has

ever been. -- is as bad as it has ever been. i do not know of corruption will change our that you have plans for the next infinite numbers of years. it is almost impossible. nothing has changed. >> any other agencies that have expressed concern stacks could you elaborate?

>> we have been receiving stellar cooperation in iraq and the united states from the department of defense. they are providing us the equipment on loan. they are permitting us to ride. we have now crossed that barrier.

>> i will talk about the economic situation.

the unemployment rate is still high. it is attributed to a number of factors including the stabilization of the financial system, monetary policy end inventory rebuilding. economic growth slowed in the spring and summer of last year including european debt issues. we have seen increases evidence that a self sustaining recovery may be taking hold. i make special note of consumer spending. we also had good gains in the u.s. manufacturing output. my projection is that we will see stronger economic growth. the federal report says rejection speed -- projections.

it is higher than projections made in november. despite the improvement in the growth of output, it is only improving slowly. we do see some grounds for optimism. there are declines in the new unemployment claims. the signal wall for unemployment to come down to desired levels -- it has still taken a while for unemployment to come down to desired levels. until we see a sustained job

creation, we do not see the recovery as being truly established. the housing sector remains weak. inflation has been declining over all. it weighs 1.2% as of january, down from 2.5% of the year. associated with that is slow wage growth. . there is a range of 1% to 2%. we get similar forecast from

private sectors. expectations are to stay low. some of these come from the middle east. aids isn't strong growth and market. i in no way of one to understate the hardstand did understate the hardships. the-i in no way want to understate the hardships. the rate of pass through tends

to be quite low. material imports are only a small part of production. expectations have been well anchored. they would represent a threat. it is to best support the ongoing recovery of price stability. i talked about monetary policy. i talked earlier about the slowdown we saw last spring. over the spring and summer, we

saw slowing growth to the level which was not sufficient to produce -- to reduce unemployment. at the same time, we saw inflation falling to very low levels. markets were expressing concerns about deflationary. what we did is to provide monetary policy of accommodation by buying longer-term security in the open market. we had a program that lasted from december 2008 through march 2010. it appears to have a lot of success.

without inflation, we would decide to return to a more accommodating strategy. we began to reinvest the securities that were running up so we would keep our balance sheet constant in size. we began to indicate the weeper looking to possibly expand our balance sheet to additional ones. we announced our positions. a lot has been said about qe2. it works very much the same way

ordinary might trade policy works. the lower interest rates helped increase demand and production. we get a very similar applied to me by treasuries directly. i think the first round was very successful. in august, we have seen considerable improvement in financial markets.

there were significant gains in the equity market. there were spread in the corporate bond market. inflation expectations have normalized. we have seen less volatility. they have upgraded their expectations of growth in 2011. we are reviewing the assets program meeting by looking.

the bourke-white a willa -- we were quite aware of the need to accommodate. we have all the tools we need to do that even if the researchers remain high. it allows us to make decisions longer term. the ft said is that we need to be transparent. it is becoming increasingly

selo. i am submitting the report. after five years, we are the only central bank that provides that time frame. we have also been very transparent about our balance sheet and operations. we provided the special settings. most of it is largely closed down. in addition, we provided 21,000 transactions.

these have been reviewed. the evidence seems to be the programs are not only will brunn they were helpful and stabilizing at -- only well run, but they were helpful and stabilizing it. we continue to work closely with the congressional oversight panel. all of them are looking at our books to make sure everything is as it should be. we are cooperating with that effort. we will seek ways to increase their transparency. we believe it is the side of this to make good long-term policy decisions. thank you for allowing me to speak. >> thank you.

before we start with our questions, the federal reserve chairman has informed us that people need to leave at 1:00 p.m. today to accommodate other appointments. >> where uighur is where people start when he returns. we will go through seniority. -- where he starts is where people will start when he returns. we will go through seniority. >> at this time, i yield myself five minutes for questions.

the chairman has consistently told members of congress that reducing the deficit will have both long-term and short-term benefits for the economy. a credible deficit reduction plan will require difficult choices. chairman ben bernanke has stated that congress must act. a year ago, in his testimony, he said it is very important for congress and the administration to come to some kind of plan that will show how the united states is going to bring itself back to a sustainable position. it would be very helpful to

mark his confidence. we have more flexibility in the short term. that is in response to a question i have. featured deficits would not only enhance economic growth in the long run, it would yield substantial and near-term benefits in terms of long-term interest rates and business confidence. it will lead to more jobs. by definition, the deficits and

debts that they outlined cannot actually have been. creditors will never be able to bring to the government debt relative to national income that is rising. normally, i would ask what we do. he has said that we need to get our physical house in order. the federal reserve is in charge of monetary policy. i think that is appropriate. the exhibit the -- the executive branch is in charge of physical policy. our failure to address fiscal policy in a responsible manner,

how does that make your job -- they are charged to manage monetary policy. i stand by this statement. if the federal deficit remains on an unsustainable path, we could see a sharp increase in interest rates which would be both bad for recovery and bad for financial stability. while i understand these are difficult decisions, i do think

we need to look forward. others will be setting up the proposal. it will be constructive for congress to lay out a plan. one rule of thumb is cutting enough that the right ratio of debt to gdp is rising. it is rising quickly. i think the federal reserve would be applied or criticized.

it gives us a chance to act. we are not taken advantage of that. it limits the options. we need to point the finger back at yourself. >> thank you for that thoughtful statement. i appreciate this. we have to appreciate the federal reserve. we need a long-term one. if we are able to do immediate and long term, you do it in the short term. that is what he said. the private sector has been growing jobs.

a medium and long-term plan is very important. we will not achieve a credible and long term grant for reducing deficits if we continue to extend the military from any significant reductions. it is now over $700 billion. i share the need to reduce the deficit. it is enormously costly. it continues to cost us tens of billions of dollars.

i am not impressed. i been struck by my colleague who have talked about how military spending create jobs. only the military does job creation. i was also stress that the house recently boasted to do this from car and bombers. >> this could have been doubled. we could have saved 300. there are inconsistencies in the spending cuts.

we have heard people speculate that the problem -- that it is the different than it was in 2008. there is a very limited set of choices. what was the reaction to the notion? >> be at is not fully implemented. it has suffered back capital liquidity. there is tougher supervision. there are living wills and the ability to break it.

it is something that you and i talked about. wouldn't it be nice if we had an alternative mechanism that would allow the government to wind down a financial firm without costing the taxpayers. those things are in the process of development. we may come back to congress. it does give you the basics for doing that. we talked about the winding down most of those things. what has been the net cost to the united states taxpayer?

the financial stabilization policy included interventions with aig. assuming that the treasury can sell the shares is something close to the current market price. the entire program will be a net profit positive. the monetary policy in has also been profitable. we have turned over $125 billion of profits. that was not the purpose. we have managed it well enough that the taxpayer can feel that

they've gotten their money back. >> thank you. >> thank you. let me say a word about the deficit. it was a concern of mine in the early 70's. after the breakdown, we would have been less spending and deficits. we have had that. i reject the monetary economics things. i'm sure we will continue with these problems. the reason why -- congress is at fault. they spend too much money. the congress in fetters some

biotic. it has to accommodate. it facilitates this spending until we realize this. i think the fed is involved with our deficit. it is true. congress's irresponsibility ought to cut the spending. inflation is exploding. we are going to have one heck of the problem in the future. monetary policy used to be the key to economic management. monetary policy stated that the job but the fed is to get a stable price. there is nothing stable of about

it. unemployment stays. if we were honest with ourselves, it is over 20%. we are deceiving ourselves. i think it is a total failure. how can you manage monetary policy? if we do not have a definition of a dollar. everyone knows the federal reserve is a dollar. you create a note. i would like to know if you know when it became known that -- i want a definition. that tends to be the real job. we won a measurement of value. we have made a mistake.

there is no way to maintain this. the stock market,at' it would have taken 44 ounces of gold. in 1980, it would have taken 1.5 ounces of gold. today is back down to 8 ounces. the stock market is going to crash. you and i will have a disagreement on this. central banks hold gold. treasury hold gold. it is history. it is the market place. gold is the long term that you. how can new printer this? what is your definition of a dollar?

>> to raise an important point. our mandate is price stability. my definition is what it can buy. they want to buy food and gasoline. it is the buying power of the dollar that is important. after the 1970's, there is a lot of instability. inflation was high. i know you have talked about your relationship. inflation in the united states has been low and stable. in terms of the unemployment, unemployment is unsatisfactory

now. my view is that it is due to the financial crisis. it had a lot to do with problems in the private market and the supervisor regulatory. putting that aside, it has been much greater. >> mrs. waters is recognized for five minutes. >> of the light to thank you. thank you for coming in to testify to help us understand exactly what you are doing. there was some discussion about whether and not the budget cuts would be a major drain on the economy. we basically said it was not

major. it had a negative impact. i think the study show that the government jobs would be lost. overall, 700,000 jobs would be lost. could you explain to us what you meant. what are you talking about in real numbers? >> we are trying to analyze this. this issue was raised by some other analysis. i am not familiar with those i'm not sure we are making the same assumptions. our sense is that $60 billion of cuts spread out in the normal

way is the reduction. does not mean a an immediate reduction in the spending. it would reduce growth. given the size, this would translate into a couple hundred thousand jobs. i think the numbers are a little high. >> there are a couple hundred thousand jobs. and a sluggish economy, that is important. let me get to an interview. with 60 minutes, he noticed that it does created into societies. this is extremely important.

i have been focused on a recent study. it demonstrated that it increased more than four times since 1984. the study pointed to our nation's tax policy as the main culprit. i talk to you many times about the capital. there is a lot about access to capital. i am really concerned that it seems to be flushed with cash. i am concerned that minorities were targeted.

our home was the most that many of us had. can you elaborate on why inequality is bad for america? it exacerbated and equality. >> it is part of the american ideal that everyone has opportunities to advance themselves economically. i take it as self evident that it will be one that it is not as broadly spread as it should be. from people will suffer deprivation. i hope we could move toward a more equal society. my own view is that education

has a lot to do with it. public and private schools has a great deal of variation and equality. there is the amount of time the students spend in school. given the globalize society, it will lead to increasing differences in wealth. tax policy can help. it is progressive taxes. taken help close the gaps. fundamentally, i need to have opportunity. it requires them to have the education and skills. >> thank you. i want to follow up on a line of questioning.

when i talk to ceos, this is a great concern, when i believe has economic growth. i will cut today while i was putting on my tie. he stated his number one concern was the national debt. a year ago, they said it could be helpful to put the nation on an exit. most recently, you would use it as critical threat. with the passage, at the you have a greater concern about the nation's trajectory? do you hear what i hear from job creators? this is becoming a greater impediment to economic growth today.

>> it remains a very big risk for the same reasons i described before. it affects confidence and expectations. it remains a very serious problem in terms of progress. it has become a more central issue. we have seen results of the commissions. so far, we have not seen any concrete measures. there are concerns that it will leave us on an unsustainable path. hyundai have the opportunity to discuss qe2. -- you and i had a different opportunity qe discussed2.

folks i talk to have a greater concern about the trajectory and uncertainty of the regulatory burden. that is what i'm hearing. i think there are limits to what monetary policy can achieve. there is a big on roughly $2 trillion of excess capital. we appear to be a wash and liquidity. a number of respective economists have indicated concern as well. i look in your testimony.

today, to any conditions you see anticipate a q e three? >> that has to be a decision on our mandate. what we would like to see is a sustainable recovery. we do not want to see the economy falling back. we are looking very closely at inflation. i want to be sure you understand that i am very attentive to inflation. that will be a major consideration. it will determine how to manage this policy. >> a number of people and economists are concerned that the fed is monetizing the debt. we have an opportunity to

discuss this. i understand the arguments. let's talk about perception. there is movement with the world reserve currency when no longer be the dollar. dg has been to see that piece this morning? -- did he have been to see that piece this morning? >> there is the perception that the u.s. is monetizing debt. he believes the dollar will follow -- will fall roughly 20%.

regardless of the reality of your actions, if the perception causes the dollar to no longer be the world's reserve currency, what are the implications of it? >> first, i do not see any evidence that that is happening let's be clear about that. if the dollar was no longer the reserve currency, it would probably mean that we would have to pay higher interest rates to finance the federal debt. that would be a negative, obviously. on the other hand, we might not suffer some of the capital inflows that contributed to the boom and bust in the recent crisis. again, there was also a countervailing argument in the journal this morning as well. i just do not see at this point that there is a major shift away from the dollar. i would also add, on the commodities prices come first,

the fears of some foreign governments that but we were reducing the value of the dollar, it is not true. the dollar has not moved much at all. and the commodities have moved just as much and other currencies as in the dollar. i take those commodity price increases seriously. it is not a dollar phenomenon. >> thank you for being here. under the full employment act, the federal reserve has four benchmarks for the economy. one is price stability. currently, in economics statistics show an increase in

energy prices. what can or will the fed do to try to stabilize the price in the energy sector? is there anything that can be done? >> you have to distinguish between the prices of individual goods and services, like gasoline, for example, and the overall price level, what people pay for all the goods and services that they buy. again, i recognize that the increases in gas prices are troubling for a lot of people. but they are not inflation per se. the inflation rate right now is 1.2% for all goods and services. the main risk from a price stability point of view would be if higher gas prices, for example, would get -- would start feeding into the broader

grasp -- because people became to expect higher inflation, they can demand higher wage increases or those costs that are regularly pass on price -- -- by producers and overall inflation would begin to rise. that is the point where we would begin to become concerned. that is when we would take monetary policy actions to avoid any significant increase in overall inflation. the relative price of oil, again, is primarily due to global supply and demand. it is important to note that the united states is consuming less oil today, importing less oil and producing more oil. the demand is coming from the outset of the united states, particularly the emerging markets. there is a limited amount of what the fed can do about oil prices alone. we have to make sure that this does not feed into overall inflation. we will make sure that doesn't happen. >> one of the other benchmarks

is full employment. carla, unemployment is high, even though the economy is growing. currently, congress is proposing additional cuts in the federal budget. are you concerned that these cuts might undermine the fed's efforts to ensure a reduction in the employment rate? do you see any correlation? >> taken on their own, the short term cuts would probably lead to some reduced growth in employment in the short run. my preference is to see whatever

changes are made to the budget in the short run, coupled with a long-term credible plan, that will persuade markets that there will be real progress made against the deficit over the next five years to 10 years. i think that gives a lot of benefits to the current recovery without the short run job affecting impact of near- term changes in spending. i do not object to beginning the process of reducing the deficit now. but it would be much more effective if there is a longer term plan underlying those cuts. >> longer term, you mean a more comprehensive approach to reducing the deficit through possibly increase revenues coming into the treasury as well as reductions in the budgets

throughout the federal government. >> is a to congress exactly how to do it. it is hard in any case. but we have to make sure that the deficit does not continue to spiral upward. it is very destabilizing a that is -- as it is. >> thank you. i yield back. >> thank you. mr. chairman, are you familiar with the term "debt saturation >> -- debt saturation?" >> no, but i can figure out what it means. [laughter] >> back in 1960, a dollar in debt equated to a dollar in increased productivity or gdp in

this country. from 1960 until the present, this economy at every level, both governments, individuals, and companies have been leveraging themselves. where we are today is that we're to the point where we have reached that saturation. for basically every new dollar in debt, in some cases, there is a-increase in gdp. a lot of companies, even though they would like to borrow money, they do not have the capacity to borrow because new borrowing breeds of new debt service and a lot of them do not have the income to service that debt. if you look at our revenues, they are a little over $2 trillion. our debt services rising to about half a trillion dollars and headed up. when you look at our monetary policy and our fiscal policy in this country right now, it is

all about borrowing and spending. we're wondering why this is not working. one of the reasons is that there's not the capacity to service new debt. we look at companies that i talked to, they're building up cash on their balance sheets. when you look at quantitative easing, that you have done, that many did not go out to the economy. a lot of folks are hoping for those moneys in reserves in your bank. you're beginning to see families and businesses the leverage. they understand that they have reached -- families and businesses deleverage. they now stand they have reached the point of saturation. but the government has not. i was troubled by that last unemployment number. but when you look at what i

think is the real unemployment number, that number went up. if the money is not going out, why would we continue policy of the fed borrowing more money and try to put more money in the system when the system seems to be pretty leveraged up. i do not see the benefits of the. >> congressman, you are right. the economy got over leveraged during the crisis. household borrowed too much. some firms borrowed too much. one of the reasons that the recovery is slow is that the deleveraging process is going on. with respect to the federal reserve, what the fed is doing, for so, we're by securities in the open market, which we will subsequently sell back into the

market. we are not making a permanent change in our balance sheet. aid to the, the effectiveness is not felt primarily through the reserves in the banking sector. as we buy securities in the open market, we both lower term premiums in the open market and push investors into other kinds of investments, like stock market, or corporate bonds and the like. the results to show that bond yields have lowered relative to the treasuries. it does affect people's behavior and contributes to a growing economy. with the fed is doing is not the same as government spending. we're buying securities, which are assets that pay interest. at the proper time, we will sell those back into the marketplace and return to work previous balance sheet. >> i would disagree a little

bit. the monetary policy you have right now is basically at zero. you cannot go lower than that. we are really trying to encourage people to borrow because we have interest rates at a very low rate. it is not working. even in your own testimony, you said that we are not quite sure willwhat we're doing contribute to the little bump in the economy. i am worried that the bump we're getting is that some portions of the economy do understand what is going on and they're taking actions to correct their balance sheets. families are lowering their credit card debt. but the policies that we have, both at the fed and in this congress of borrowing and spending do not work. they have a negative impact. the more that we borrow from

this point on in this economy, particularly in the government level, will begin to diminish our gdp and not increase it. >> thank you. >> mr. bernanke, which to prepare -- compare and contrast the recovery that is under way in germany with ours? are there any lessons there? are there any deficits we should be taking to achieve journey's results? -- to achieve germany's results? >> that is a tough question. germany did not have quite as -- they did not have as much job losses we did. that is because of the policies they had to subsidize firms to keep workers on, even when they were not fully utilized. i think the recovery in germany

has brought them about back to where they were before the crisis, which is comparable to what happened in the united states. germany has benefited, unlike the u.s., substantially from the rebound in global economic activity because they are very much a trade-oriented/export- oriented economy. they worked long time to develop those markets. if i were draw -- if i were to draw a lesson, the lesson would be that we need to do what we can to increase our competitiveness, to increase our efficiency, and to improve our ability to compete in global markets. i think the be good for jobs and growth in the longer term. but i do not want to overstate the difference. i do not think that germany overall has had a stronger recovery than the united states from this cycle.

>> speaking about the international economy, it does appear that the eu will not rule. the volcker rol it is unclear whether or not they will adopt the standard of transparency for derivatives are . are you concerned about the regulatory arbitrage in the united states in terms of competitiveness? to your about making standards as close as possible for derivatives. you're right. i do not think that europe is planning to adopt the volcker rule. that will create some competitiveness disadvantage. congressman that once because

you believe -- and congress made that choice because it would increase the safety of the banks and the trade-off that congress decided to make. in the past, there have been other differences. for example, our banking system operated on a leverage ratio for a long time whereas europeans did not have one. under basel 3, a leverage ratio would be extended to foreign banks as well as u.s. banks. but you're right, there will be a difference in capacity. >> there is the possibility that capital requirements may be tougher in the u.s. under our regulatory dodd-franc requirements -- dodd-frank

requirements. will that give as it did -- will let it is a disadvantage? >> the mentally requires the capital be greater than it was as of last summer. >> that is good news. in your most sobering comment, "until we see a sustained period of job creation, we can consider the recovery to be truly established." i would like you to comment on how we reconcile the reality of a jobless recovery. with persistent stagnant wages, 90% of workers over the past 20 years with the statement that the recession is over in a sense, with such high employment and sustained stagnant wages, it appears, for 90% of our population. >> the recession is only in men -- is only over in a technical

sense. it does not mean that we are back to normal by any means. growth has been about enough to accommodate the new entrants to the labor force. therefore, the effects on the unemployment rate have been very moderate. says demand for labor is weak, then it is weak as well. >> mr. chairman, it was reported yesterday that the fed has worked to broker a deal with regard to dog-franc -- with dodd-frank and the issue of servicing agreements. >> we have been working -- i do not know the exact status. but we have been working with the fdic to come up with some kind of agreement. >> the rubble on that, i guess,

they got together at -- the rub on that, i guess, the get together. you know what the legal requirement is to service them within the cure and -- during the q r m? >> the banking agencies' ability to qualify a residential mortgage, according to the definition of a more rigid a certain quality, to avoid the need for retained risk. >> is there anything in there really that goes to the language of servicing? i do not think that was in dog- -frank.- in dodd = >> i will have to give back to on that. the servicing is part of the mortgage contract. >> what rights does the bar

have? in particular, a mortgage which can be restructured efficiently is a better quality mortgage than one that cannot be altered. >> if you can get back to us on that point, that would be great. back on this whole issue of the market, back in october, you should the report with risk retention issues. risk retention is not a panacea as far as dealing with this. reforms should be tailored by as class is. retention could impact on credit availability. as i understand it, there will be a phase-in of this while it goes through. does it make sense, if we realize we are dealing with this and different as a class as and you will say that it could impact credit availability. really, the regulators go-slow and maybe see how the different

asses-pack cigarette markets evolve before they precipitously makes the rules before hand on these things. >> we certainly want to get it right. but our study took into account the current practices, how these markets have operated. there is usually good reasons for why markets have evolved a certain way. our proposals try not to radically change the current practices in those markets. >> right. but there is a phase-in for one year for the rts, two years for the serious and so on. does that not give you or us the regulators an opportunity to examine how they evolved during that period. one-size-fits-all are now for all lasted class's regardless of how it phases in later ron. >> yes. we end up being very sensitive. >> going back to the other issue of the day, qeii and monetary

policy, some intimated that qe2, $600 billion, is pull the thin air. but the reason the fed has done this is because inflation is running under 1% right now. should the market be confident these the inflation starts to rise and the fed will be ready to sell off or on one the $600 billion of qeii? >> in the short run -- up to 5% of 2008, we had a time of- inflation for awhile and commodities prices went up and went down. >> so it is a short time that you see before the unwinding occurs. >> right.

during the summer of 2008, we had a spike in oil prices. later in the year, we saw a negative inflation as commodities prices collapsed. our objective is to hit low and stable inflation in the medium term to the extent that we have entirely flexure wary territories -- and fluctuate -- influctuary territories. we have learned the senate -- we have learned the lesson of the 1970's. we will not allow inflation to get above low and stable levels. >> i guess my question is how long it takes before you intact -- enacted the unwinding. >> it depends a lot on whether

inflation expectations remain anchored and what happened to the broader basket. oil prices alone and nothing much else moving would not require a response. >> chairman bernanke, the federal reserve has stated that low inflation and goes around 1.7% to 2% will be helpful to assess monetary policy in the comic recovery. tot role should they play maintain inflation at these levels? >> the inflation rate is mostly the responsibility of the federal reserve and take responsibility for that. monetary policy determines inflation in the medium to long term. i think that the congress, at looking at the fiscal policy,

and it's a look at two issues. one is the short term, making sure that there will not do anything that will derail the current recovery. at the same time, digging over a medium-to-long-term. , taking the necessary steps to cut the deficit and restore stability and restore confidence in the markets that our fiscal policy will be sound. i would focus not on inflation. i would focus on the medium term prospects for the fiscal trajectory with attention to the current recovery as well. >> thank you. >> mr. chairman, a common refrain among critics of the frank is that it has contributed to the crunch among

small businesses. your testimony of for this committee took note of the growing credit crisis. especially for small businesses. do you believe that financial regulatory reforms from the dodd-frank act is inhibiting loan availability for small businesses. would you say that? >> we have had credit instability for a couple of years now. another of many community bankers have concerns, legitimate or not, about the regulatory impact of dodd-frank. so far, nothing has really happened. that is a very difficult problem, the availability of credit. the fed has been working very hard with the banks and our examiners to make sure that good loans it made. but the main problem at this point is caution on the part of

the banks and on the part of the bar wars in many cases with financial problems that make them less qualify for credit. >> but we do know that the federal reserve survey of senior loan officers, the latest one that was released right after the dot-franc -- dodd-frank is affecting small businesses. >> the federal reserve stated that it will continue with the status quo of the neared 0% on the federal fed funds rate for the foreseeable future. beginning to communicate on an exhortation that the federal real it will remain an exceptionally low level for a spare and a -- four expended.

time could be increased. >> the language of the communication is one way that we used to provide additional policy support to the economy, which, in our judgment, it still needs. the economy's recovery it has not firmly established. with bank monetary policies to be supportive -- we think monetary policy needs to be supportive. if it waits too long, that could lead to inflation. then we would have to unwind the language, the asset purchases, the interest-rate policy, all of those things will have to be unwound at the corporate time. at this point, it is not creating inflation. but it would if we did not unwind it at the appropriate time. >> thank you. >> i appreciate you being here

today. i would make a comment that roswell, new mexico is in my district and there are more people that believe that aliens landed in roswell than those who believe that inflation is at 1.6%. they do not buy this non inflating. earlier this week, we got a report that drill pipe and heavy construction medal for the boyle is not ready because many people are concerned about what the future price will be. there are people out there who are being affected. i am interested in your comment on page 3. mortgages are difficult to obtain. you have any speculation? to know why that might be? >> partly because fannie and freddie have tightened up their

standards and more generally because lenders are quite uncertain about where house prices -- about where where house prices will go. debacle, theket's crisis, what we're seeing is that lenders are requiring unusually high down payments, high iq scores, and so people without those qualifications are just not able to get mortgages. >> just recently, i talked with a young couple. they've just graduated from college. they both have good jobs but they can get financing grid we had a conference call with the new mexico bankers and they said that the safety and soundness reviews were not problematic. it is the compliance reviews and things that used to simply get written up other exceptions. now they have a $50,000

potential file. why would we loan money on houses on a typographical error or the failure to convict -- to track the flood plain since knows time in some of these- areas that we have had flood insurance claims. we're pay for people on the coastlines. new mexico flood insurance is not a big deal. but if you make one little mistake, you will get a $50,000 fine. why would you loan money? if you're getting a chance to talk to those people on the other side of the aisle, the regulators, you might hit to them that the compliance reviews are scaring the daylights out of people when the suggested it -- you suggested written nothing to report. i am looking forward to evaluate the it our ability to respond to crises. i the way have responded to the crisis.

who was the pilots' seat in this? was that the treasurer or the fed? >> we cooperated. >> who made the decision? we bail that fannie and freddie. we bailed out stearns. who with the decision to let lehman fail? >> i was not personally in that meeting. i was in washington were these discussions are taking place in new york. but my belief and understanding is that it was not a decision, but inevitability. but could not find any way to avoid failure. if we could have, we would have. >> it was inevitable for bear stearns to disappear as well. there was the indication that fannie and freddie or really sound. in fact, it was the ad hoc

nature of the implementation that created great instability in the markets and the price of stocks began to fall as people said that we cannot trust it. we need to be predictable in this and we bet to be -- we better be practical about this and we need it. i believe that is severely impacted the lot -- the length and the death of what was going on. we did everything we could given the limited tools we have. we did find new ways it solves the bear stearns problem. what i think leave and just treated was that five we have allowed the firms that brought as -- to figure out as well, we

could've seen a far worse recession than the one we had. >> thank you. >> the time of the gentleman has expired. we'll start with the gentlewoman from north carolina. >> thank you for being here. chairman bernanke, you know and i am sure that the folks at the fed know that, as chair of the monetary policy subcommittee for the last couple of years, i gained a healthy respect for the work that you all were doing. i think unlv -- i think you will all to way get this job at getting us together at one. and i want to applaud the work of your staff on that front.

i really want to go outside the box in the bed. i have some concerns about things that are further down the road that i think would really be difficult, economic, fiscal, social impacts to how the economy -- to the economy. to what extent are you all doing things in these areas, studying or looking down the road to anticipate some of these issues? there are to them that i want to talk about. -- there are two of them that i want to talk about. one is climate change. this will result in dramatic weather swings at the extremes

that will have a devastating impacts, economically, that make new orleans look like small potatoes. in the west, in the gulf, in florida, in places where just the two points or three points of temperature change have dramatic impacts on whether conditions. the second is on the growing gap between well off in this country and people who are not well off in this country. the gap is growing. i think we are about to

experience a greater growth because this whole fannie and freddie discussion and the way it is being shipped now will result in fewer and fewer people of modest wealth and incomes being able to be home owners. the great bulk of low-income and moderate-income people 12th is in home-equity, not in stocks, not -- low-income and moderate income people's wealth is in home-equity, not in stocks. the gap is specifically in their

rubric of monetary control. what work or research, if any, is the fed doing to anticipate the impacts of either one of those things? >> congressman, on the climate change, there has been good economic work done on this by people like bill norcal and others. i am sure that we have staff who are familiar with that work. we usually do not have the capacity to do a great deal of work on this, as far as i am aware at the federal reserve. the story is somewhat different with the inequality issued. within the sphere of our duties, we're looking at things like access to banks and access to wealth creation, education and

labor skills, all of which fall within our financial, real sorry, and labor market responsibilities. -- financial, regulatory, and labor market responsibilities. looking at the long-term consequences of inequality, the components to liver markets and financial markets, we have people looking at those issues. >> the time of the gentleman has expired. w>> thank you for your service o the country. we appreciate that. it is the challenge. i wanted to ask you today about the municipal bond market. it has been a concern of a number of us here and in number of policy proposals have been put forward to bring

transparency to that market place in terms of state indebtedness and municipal indebtedness, especially with their pension programs. i am not asking you to comment about wisconsin or any of that going on, but do you believe the municipal bond market could pose a systemic risk to our nation's recovery? >> it could in principle. i understand that municipalities are facing difficult budgetary situations. recently, tax revenues have been coming up in some sectors of the economy. and the painful cuts of our been made in many states and municipalities. i think that the states and localities are making progress to address those issues.

that being said, i would applaud any efforts to improve transparency and clarity. it would help investors, certainly, and it would force the states and municipalities themselves to address these problems more head-on, i think. >> of. such as bessie would be helpful. in terms of the municipal bond market, is this something that the fed actively seized or reviews what is happening and the impact it could have on treasurys? >> we review essentially every major market and this is one of them. we have people who are paying attention to the developments there. recently, things have improved a bit. my sense is that it has improved a bit lately because of a better economy and progress being made on the budget. >> i want to shift a little bit. this is something that our last

hearing on the implementation of derivatives regulation, international harmonization, when we look at the derivatives peace and the implementation of derivatives legislation, the regulators implementing the derivatives piece of the dodd- frank act, we see major markets around the world are not coming along as fast as we are. you can see that europe is maybe a year behind us. is that a concern? is that something that you are trying to bring other central banks around to this? >> in many of these cases, the commodities futures trading commission is taking the lead in terms of trying to harmonize transparency rules, record- keeping rules, operational rules for clearing houses and exchanges and the like.

there are some differences, which i do not think will be reconciled. europe is not following the link an amendment approach, but the pushout of derivatives. that will create some differences in the competitive position of american and other banks. it is difficult to assess at this point has significant that will be. >> in terms of ensuring that there is some harmonization where our market regulation is moving, are these conversations that you have actively had with other central banks? >> yes. we are having those. there are international committees, for example, the bezel committees, which look at these issues and try to establish global standards. as we set rules for financial

market utilities, we take into account these global standards. so there is an attempt there to try to create harmonization. >> thank you. i yield back. >> thank you. >> the chair recognizes the gentleman from california. >> i want to commend you on your monetary easing policy. i know not all of my colleagues agree. but the economy is a patient in critical condition but the traditional medicines are not available. you can lower short-term interest rates. the fact is that you have come up with a new and inventing of medicine at a time when the easy thing to do for you would have been to walk away from the patient and say, oh well, everything that can be done has been done at least by the fed. so you have shown courage. you have shown innovation. i hope this new experimental

medicine of yours works. on to focus on stay barring. people invest in state funds. some politicians are talking about allow us to go bankrupt and these politicians do not even want the bondholders to lose money. they just hate the public employee unions so much that they have lost sight of the reason that we do not lets this go bankrupt, which is to encourage people to lend money to states. what affect would have if there was real serious discussion and we were close to passing a bill allowing states to go bankrupt? what affect would have if a state actually went bankrupt on the ability of all 50 states to borrow at their present time and in coming years? >> that is really hard to judge.

even the states cannot go bankrupt, they can be called. that has happened, 150 years ago, so municipal bondholders tried to assess the risks that there will be a default. the bankruptcy idea is a very complex one because of states' rights issues. you have to raise the question of whether a bankruptcy judge can tell lacy to raise taxes. there are legal questions at the beginning of that debate. again, i am sorry. i cannot really judge what the bankruptcy judge would have on that condition. it would depend on the condition of the states and the rules and the interest payments. >> i would point out that the

strictures around this country do not want us to give them the ability to go bankrupt. right now, fannie and freddie are paying 10% dividend. the tarp banks paid a 5% dividend or an annual payment. i am not sure that, on a net basis, you'll actually collect anything from any and freddie. why should we have -- from frannie and freddie -- from fannie and freddie. >> as with the capital injection programs and the like, it was set up to be paid back. given the government preferred stock and by having a dividend, of course, as you know, fannie and freddie had is still required injections of money. they have not made any significant progress at paid it

back. as -- at paying it back. >> if you go to the market, if and is our 30 cents a pound, nobody winces. everybody buys more onions print everybody thinks the prices are going up. your predecessor testified that the cpi overstates the inflation rate by three-quarters of one point, perhaps a point, or even more. do you think that is a growth analysis or does the cpi best reflect inflation given quality improvements in other products? >> you are correct. the professional economists, including the ones at the bureau of labor statistics, conclude that the cpi probably does overstate actual inflation, although they have made progress in addressing some of the

issues that were identified a year ago. that being said, we understand the visibility of gas prices and food prices and we want to be sure that people's expectations are not adversely affected. it is important to note that, according to the michigan survey of consumers, long-term inflation expectations have been basically flat. they have not moved, not withstanding a plot -- notwithstanding ups and downs in gas prices. >> flat screen tvs or any other direction. i yield back. >> mr. campbell from california. >> thank you. rather than ask you about the consequences of the actions that you and the federal reserve are taking, i will ask you about the consequences of the inaction that we, congress, are doing relative to our fiscal problem.

they all alluded to some of your prior comments relative to our fiscal trajectory. what if we don't act? what if you do not set any long- term sustainable policy or production? what if we run up a $1.50 trillion this year and $1.60 trillion next year and north of one trillion dollars. it would be close to $5 trillion in deficit over the next six months. what impact does that have on jobs, the economy, on interest- rate, on everything? >> it is hard to know exactly what the timing would be. we do know that eventually lenders would decide that the united states was not a good credit risk and interest-rate would spike. that would slow the recovery or slow the economy.

it would great financial stress for not only holders of treasuries, but holders of other fixed-income assets. it would have effects on confidence. it would cause people to expect higher taxes in the future. it is hard to say exactly when the conference gets lost. we have seen in other countries -- just recently, we have seen examples where, on tuesday everything was ok, but on wednesday there was the fear that maybe the process was breaking down and there would not be sufficient progress and you saw sharp increases in interest rates and loss of confidence in that country's economy and fiscal policy. >> over the next three years, it could happen, right? if we are running up that's sort of towards $5 trillion, no one knows exactly when the markets

might react that way, but it is not necessarily something that is 10 years away, isn't it? >> no. the way i think about it is that the markets are less looking at our economy because we have the capacity to address these problems. they're looking more the political will and decision making and an extended period of congress -- i hate to put this on you because i know these are hard problems -- but an extended period congress these issues whiche would cause uncertainty in the market. >> we get into a spiral, do we not? the interest rates go up and increases the interest on our debt which increases the deficit which increases the interest rates which reduces -- i mean, we have potentially got into a spiral that makes it

difficult to recover without significant economic damage. is that right? >> congress has a sterile term called that dynamics, which is exactly what you have described. things spiral out of control. that is right. >> if we continue to not to do with the problem, as we have been, at all in any long term or sustainable manner, then it could have a very bad fiscal results in not a too long a time. >> i have said that a number of times. i agree with that. but, as you point out, we do not know exactly when. >> right. mr. chairman, i appreciate your comments. and i appreciate your candor on this. it seems to me that members of congress, politicians in general, are generally risk averse. in 2008, when we were in the

midst of that crisis, we seemed to not be willing to act to solve the problem until the consequences of that problem exceeded what we perceive to be the political consequences of inaction. right now, unfortunately, it seems to me that, in this town, the political consequences of action seem to be greater than those of inaction. as we did back in 2008, eventually, we made people aware that the spot -- that the prospects for the problem were very strong and minutes and we increased the level of rhetoric we used in order to emphasize the problem, that we will need to do that to get this place to act. i yield back. >> the time of the gentleman has expired. the chair recognizes the

gentleman from new york for five minutes. >> thank you. i have a number of questions on different topics that i want to ask. before i get there, my concern is that, as we look at this and a talk about being in deficit and we have to fix it, it seems to me that we talk about cutting and we have to make sure that everybody feels some of the pain. as we deal with the current str, etc., because of some of the deals we have made prior, the only way we're talking about balancing this budget right now is on the cutting side. generally, you also have cutting and revenue. some kind of way, when you have both, it helps eliminate the deficit because you're cutting and you have more money coming in also and that kind of levels out the playing field so that everybody feels some pain.

if we are going to create a situation where all americans are feeling better about the current situation, it seems to me that everybody has to feel some pain. part of the problem that we have is that some people feel pain and others will say, as for my city in new york, the others are getting huge bonuses. yet, nobody is lending money, but somebody else is making money. we are not really having the kind of balance needed so that there is pain felt on all sides so that we can move and have the kind of agreement that we need to have so that we can move forward. we still have individuals who are losing their homes. it is hard to talk to those individuals about them losing more when they have lost everything they already have. and it appears to them that others on the other side are not losing anything. in fact, they're back to where they were.

they're still making money. they're making more money than they ever made. that causes politics to take place so that we're not doing what we should be doing for the benefit of the country as a whole. i am not saying that this is left of their right. we're not pulling this thing together so that we have something that is down the middle that moves us forward. this brings me to my first question to you. i want to get something clarified. yesterday, in your statement on cr on thet of the sea ar economy, was it based on your emphasis on the cuts in the economy. because of a discrepancy, goldman sacks he met with an opinion of what you would do to the economy. i was just wondering what was your statement based upon?

>> it was based on a rough and ready economic -- econometric model. without any real attention to the composition of that, we did not really get into the break down. >> bright. that is what i kind of figured. let me ask another question. let me go off on something that i think hopefully we can work in a bipartisan manner in this committee to deal with in a statement that you may also recently. it deals with interchange. two weeks ago, you told the senate committee that you thought the smaller changes in the fee regulations may not in fact work. i believe that is what to city.

what will the impact on community banks and credit unions be if that exemption fails? >> we do not know whether it will work or not, as i said. if it does not work and the reduction in interchange fees and up applying or partially apply to smaller banks and credit unions, of this, it will cut their earnings from that program. unless they can recoup through other fees or charges to their depositors. >> your opinion in this area becomes very critical. this is something that i think we can work on. going back and forth and dealing with the fed pause recent rulings with the interest for change -- the interest rates and some of the banks. we look at the merchant side.

as we move forward on this committee, we're having some dialogue, i hope, across the aisles so we can or together to solve the problem. i am out of time already. >> the time of the gentleman has expired. the chair recognizes the gentleman from florida, mr. posey. >> thank you. chairman bernanke, on to compliment you on your forthrightness. it is something that, unfortunately, we do not see very much of on the side of the table. thank you for being so frank with us when you appear before us. >> in your statement, you indicated that, until we see a sustained period of terror procreation, which cannot consider this recovery to be truly established. is that this says that despite the claims from the academics to the contrary, this indicates that the recession has not yet

bottomed out? >> again, the recession is a technical term. it means that the claim -- that the decline has stopped. we have been this risk would be consumers would see unemployment going back up. today with this confidence. he would have decreasing grass that it would stall out. if that is the risk. >> i assume part of the goal is to provide an influx of capital in the economy to ensure that have adequate capital to lynn for commercial purposes and a staff. i learned to call your attention to a proposed regulation that could have a devastating impact.

the irs r ule would force banks to hand over information on foreign deposits. the irs would turn it over to the home country. it could be between 200 and $400 billion. that could in the very harmful to our economy. i'm wondering if you agree that it is a bad idea. it was bad in 2001. i wonder if you think it is a bad idea right now. >> a hesitate to make a

judgment. it is the case that the united states has a negotiated with switzerland to get more information about americans bank accounts. that is being used for tax evasion. aegis said i was forthright. i have no comments. >> it is a proposed roll at this point. what switzerland does this have the business. i will leave it at that. i will touch on the second issue. i have had personal story is about it happening in my district.

i know it is not a bad dream. i discussed it was secretary geithner yesterday. there is over regulation. in their opinion, a performing loan option not be a performing loan. it causes the bank to take it off the books and make you earn interest on it. he knows the consequences is very damaging. i am told they have been dreaded -- have been told not to micromanage the services. i am wondering what we can do about it. we have made enormous efforts to train them and issue guidances. we tried real hard.

i know it does not always work. we are trying. i would recommend to call the federal reserve's examiner. we do have one that will follow through. they do not have to worry about any kind of retaliation. we will try to follow through if there are specific concerns. please, let us hear from them. >> de realize how serious a problem it is? i am grateful that you do. >> of the time has inspired. i have to make sure i heard you right. did i hear you correctly that all the wi