were the marvelous history of the american dream. we want you to be there to again learned lessons of madison, henry, jefferson, mason, and the other founders. we want you to walk in the footsteps of the founders. williamsburg, va., as you know was the cornerstone of democracy. after three fires, in 17 of for the capital was moved to williamsburg where it remained until the 1780's where it moved to the current capitol in richmond. great things have happened there over the years including the swearing in of thomas jefferson. i have a great job following in those tremendous footsteps. there are buildings that are alive and well and maintained in

colonial williamsburg. we're going have some tremendous things that we will show you. it has been called the cradle of democracy over all the things i just mentioned but most recently it has been called the is of a condominium. thank you-- the silicon dominion. thank you, cnbc. you will get to see some great things. we will have a dinner at the colonial capital that is now some 300 years old. we will have fireworks over the old palace and you will see the capital were the oldest continuously legislating body, the virginia reassembly, began meeting in the 1700's that date back to 1619. i hope you get a great sense of the foundations of our nation which we are all proud to carry on as governors today. you also get to go to busch

gardens, so please bring your families, come early, bring your wallets. we will show you a great time in virginia. i hope you get to see some of our both ray got to sample some of our great virginia wine. napa valley is for auto parts, not for wine. thank you for that. we will show you some of the other things that has made virginia a great state. we have more veterans than any other state, the second highest concentration of technology workers and you will get a little those of all of that. we are really looking forward to welcoming you and your families. those of you in the audience, bring our businesses and keep them there when you come. i will close with this. the founders of america were the same founders of virginia. that is sustainable values. i grew up 1 mile from mount

vernon. the first inaugural address he said something like "quite often. "the mile from heaven can never be expended -- expected which haven't itself has ordained -- heaven itself has ordained." i hope you can come and walk in the footsteps. we will commit to williamsburg next year. thank you very much. [applause] >> we are looking forward to it and thank you very much for your willingness to host us. it will be great. i look forward to the great wine, by the way. it has been my honor to serve as chair of the national governors association. it has been a challenging year all of us as governors. we have welcomed in 29 members,

a historic event. in the process, we have all gotten to know each other and as a result of our meetings here, we know what we stand for. we know what we can do. and i just tell me what a pleasure and honor it has been for me to serve-chair. i have something to use, if i could become but i would be remiss because you do not often get to see what i get to see. i have to tell you that i think we are blessed to have the staffer from the national governors association. our new executive has come in hitting the ground running. he is a great leader and will do a fantastic job. it has been my pleasure to work with him, so thank you, dan. to our legislative director and his entire team, they have been wonderful from the year. to the director of the center for best practices and his team from thank you to each and every one of you and to jodie.

but they are all absolutely the best in my opinion. would you please give them a round of applause? [applause] executive committees do not often work hard. sometimes it is by name only. this one did. i would like to thank all the members of the executive committee. daniels, patrick, kristy, -- christie, thank you all. daniels, purdue, thanks to each and every one. this is a perfect dovetail of what you will hear about in just a minute what governor item and will talk about -- heideman will talk about. you have led the way in very important issues for us. if you could indulge me for just

a brief moment, it is not easy to be the first mic in the state of washington and to lead the first spouse's group. my husband stepped up to msay it would not be just visiting beer parlors. thank you for all that you did. [applause] my personal staff person, and i think all of your staff was very well, we have worked tirelessly with your staff, he is the best. mark, thank you for all that you do. [applause] in a minute, i will have gov. mcdonald tell us the results of the nominating committee for the

new organization. i saved my comments until now about my colleague. we really did not know each other until we met to welcome the new governors. from the moment i met him and his wonderful wife, it has been the definition of a partnership. absolutely bipartisan. he has stood with me at every juncture. every decision we have made together, that does not always happen in this organization. he is going to be a great leader of this organization, and i can tell you, my friends or democrats, my friends or republicans, this is the kind of leader this organization needs as we go into yet another challenging year for the governors of this great nation. to you and your wonderful life, thank you for all that you have done over the course of the last year. [applause] gov. mcdonald, if you would please report on the nominations

committee. >> the nominations, it is my pleasure to nominate the following governors to serve in leadership for the national governors association for 2011- 2012. governor patrick of massachusetts, gov. daniels of minnesota, gov. christie of the new jersey, the governor of colorado, the governor of oklahoma, the governor of washington the governor of delaware, and gov. dave heinemen. a vote that these nominations be considered en bloc. >> and has been moved and seconded for the members of the committee, vice chair, and chair as set forward by the committee. all those in favor? those opposed? governor, thank you for stepping up in leadership.

governors, thank you. job well done. i look forward to your great leadership over the next year. thank you, dave. [applause] >> thank you very much. i do not know what else to say. we did not know each other very well. it has been a partnership. we have worked together. we spoke on the telephone. sally and i have thoroughly enjoyed our relationship with chris and first mike. he came out to omaha for the spouse's meeting, but mostly i want to share with you what a superb role model she has been for our organization and for anyone who wants to be the chair of a national organization with varied interests. she listened to all of us. she worked with all of us. we have been able to strengthen the nga because of her leadership.

it is a special honor -- whoa. [laughter] it still works. it is an honor to present this plaque to you. we are so proud of you and what you have done for our organization. [applause] she mentioned we could not do it without our spouses, suave and like my wife to come forward and -- so i would like my wife to come forward and first mike. it has been a great personal relationship, so we want to present his personal gift to you for all that you have done. thank you. [applause]

i was just telling first mike when he was coming to omaha, i thought it would be a good idea of we would play golf. i was told by the first lady of nebraska that it would not be a good idea for us to play golf all the rest of them were engaged in the spouse's meeting. we were not able to do that, but we will do that yet this fall because once again, as i have told many of you, the university of washington will play nebraska in football, so we hope you'll both come and let us win that game. i am very excited to continue the work that chris and i started together. i look forward to working with our new vice chair. for those of you who do not know, jack and i served together as state treasurers. we are friends. we know each other, and we are committed to enhancing the role and influence, and importance of

the nga. the rest of this speech was about 30 minutes in length. with a lot of common sense, i have condensed this to 3 minutes. for all of the tough and difficult issues that states face today -- boosting economic growth remains our most important and most challenging one. economic growth is key to our success as governors which is why my initiative will be growing state economies. this initiative will provide governors and other state policy makers with a set of policy options that have been shown to foster business growth. a major emphasis will be on understanding how a small business becomes a fast-growing firm and what policies support the transformation. high-growth businesses are one of the driving forces of a modern global economy. as governors look to the strategies to strengthen economic performance, we must

emphasize policies that help the private sector growth and creating new job opportunities for our citizens. that is what this initiative will be all about. the key thing i want to tell you today is that we want to be able to share, by the time we reach virginia next year, a set of policies and ideas that will help each and every governor as they have lost their unknown -- economic growth in their individual states. not everyone will apply to every state. in order to do that, we will host four summits across america, one in hartford, conn., nashville, tenn., seattle, washington, and the final in omaha, nebraska. we want to bring all of them permission together from governors, real business leaders, academic research into a white paper next year that we can share with all of you as we figure out how to continue to grow our state economies.

this initiative will help us identify the best remedies to strengthen state economic performance and signal to our citizens that we understand job creation, prosperity, and economic competitiveness as our top priorities today and going forward. i look forward to working with each of you on this initiative. we all want to thank you for your involvement in the nga. thank you fort's, a wonderful conference. we have all enjoyed this. we are adjourned. [applause] [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011]

>> the national governors' association summer meeting at wrapping up the passing of the gavel to next year's chair, governor heinemen of nebraska. we saw a speech and q&a with author thomas friedman on education and competitiveness which can see again at 6:30 p.m. eastern on c-span. and on line any time thaat c- span.org. >> on newsmakers, chairman of the national governors association talks about the issues facing states and this weekend's meeting of the nga at 6:00 p.m. eastern on c-span. >> this is the main reading room at the library of congress.

it is specifically set aside for research. do you know which photographed the library considers its most famous? you will find out answers about this unique library in lacy's band's original documentary, "the library of congress." we will tour the iconic jefferson building. we will show treasure's founder in the special collections including the original thomas jefferson library and presidential papers from george washington to calvin coolidge and learn how the library is using technology to discover hidden secrets and preserve its holdings for future generations. join us for the library of congress monday night at 8:00 p.m. eastern and pacific on c- span. this is considered the most famous photograph of the library of congress. >> on thursday, federal reserve

chairman ben bernanke said failure to raise the debt ceiling would result in higher interest rates, slower economic growth, and an even bigger national debt. mr. bernanke testified before the senate banking committee. this is two hours, 15 minutes. >> i called this hearing to order. we are pleased to welcome chairman bernanke who will deliver the federal reserve's semi-annual report to the congress. his testimony comes at an important moment. while our economy is recovering from the disaster created by the

financial crisis, the recovery is far from complete. employment is unacceptably low and the unemployment rate remains at 9.2%. the high levels of unemployment are matched by output that is significantly lower than it was thought to be. the cbo estimates of potential gdp showed that the economy is 5.6% below what it could be producing. of course, the housing market, which is an important source of wealth for many families and our economy, has yet to recover from the collapse of the pricing bubble. although prices are down significantly from the 2006 peak levels, inventory of vacant houses remains high and

residential investment is below pre-bubble levels. in addition to these domestic economic problems, there are concerns about how the european sovereign debt crisis will evolve and what effect it may have on our financial markets and institutions. determining the best policy responses to such a complicated set of economic circumstances is no easy matter. one thing is certain and. we need to put the financial markets safeguards of the dog frank act -- dodd-frank act in place as soon as possible. chairman bernanke, i look forward to your insight on these issues and to discussing the policy course the federal reserve is taking. to reserve time for statements

-- questions, opening statements will be limited. i now turn to ranking member shall be. >> thank you, mr. chairman. -- i turn to ranking member shelby. the fomc announced the end of the second round of quantitative easing, or qe2. ben bernanke claimed that because of qe2 that we no longer have a risk for inflation. the 12-month change in the consumer price index, 1.1%, reached 3.6% in may. the rise in inflation, however, reveals that the fed's most challenging tasks still remains ahead, i believe. the fed balance sheet is at about $2.90 trillion while the federal fund rate has been

effectively 0 for more than 2.5 years. as a result, the stage is set for a resurgence of inflation if the fed is not really careful. the task confronting the fed is how to on wind its massive balance sheet without sparking more inflation or damaging the economy -- a real task in itself. unfortunately, the dismal performance of our economy and our record federal deficit will make this exceedingly difficult in the years ahead. chairman bernanke, i believe, must also contend with the consequences of the administration's economic policies. its failure to adopt a pro- growth plan or restrain spending has but the fed in a corner. if the fed is to curb inflation, and ultimately have to raise interest rates, but the absence of economic growth will likely make such a move painful.

if the fed does not raise interest rates, higher inflation is almost assured and federal borrowing costs could soar worsening the already worsening the budget crisis that we have. the last thing our economy needs is an inflation scare. the economic history of the 1970's should show as it is more painful to get inflation under control than to keep it in check in the first place. history also demonstrates that the fed's monetary policy usually remains to lose for two long. accordingly, the markets are watching to see chairman bernanke has not only a credible plan but also the will to take difficult actions necessary to prevent inflation. today's hearing is chairman bernanke an opportunity to reassure our markets by explaining to the american people how the fed intends to navigate through this difficult time.

during his last testimony come i was pleased that he explicitly stated the fed price stability targets around 2%. today, are like to know more about how the fed plans to achieve this target. what is the acceptable range around 2% inflation target? the fed think the recent inflation data, showing inflation above 3%, violates this target? if inflation is above target, how does the fed planned to reduce it? in addition, i would like to know how the ongoing turmoil in the european union could impact monetary policy here. in particular, will the euro crisis further constrain the fed's ability to maintain price stability? more transparency, we believe, is needed in how the fed plans to unwind its balance sheet. although the fomc has terminated qe2, they have

planned to reinvest principal payments from existing security holdings. chairman bernanke testimony here further indicates that the fomc may considering other around of quantitative easing if a weak economy continues. as a result, the fed's balance sheet could balloon to waive above $3 trillion. the fed may be going in the wrong direction. recent fomc meeting minutes show that that is developing plans to redress the balance sheet. i hope chairman bernanke can shed more light on the options the fed is considering and when the fed will begin this difficult task. finally, i would like to commend chairman bernanke on his decision will press conferences after fomc meetings. this is an important step that recognizes that the fed can no

longer make policies behind closed doors. this is a positive development because the fed policies will be more effective if they are understood and supported by the public. -- this step also recognizes that the fed's siccative history of -- that's antiquated history -- fete's history of antiquated practices -- fed's history of antiquated practices based to stop. the public has a right to expect both transparency and accountability. the fed still has far to go in the opening up. i hope chairman bernanke will continue as efforts to modernize the fed boss transparency. i believe american people to live it -- deserve nothing less. thank you, mr. chairman. >> chairman bernanke, before you began your testimony, we want to -- begin your testimony, i want to let you know that i may have to excuse myself during today's hearing. the appropriations subcommittee -- i may need to be on the floor this morning as we began debate -- begin debate on this bill.

senator reid will take over the gavel. thank you. chairman bernanke, please begin. >> thank you, mr. chairman, ranking member shelby, and other members of the committee, i am pleased to present a report to -- the federal reserve's semiannual monetary policy report the congress. i will start with current outlook, and return to policy. -- with economic conditions, the outlook, and return to policythe u.s. economy is continuing to recover, but the pace of expansion has been modest. after increasing at an annual rate of 2.25%, real gdp growth is at 2% growth in the first half of this year. incoming data suggest that the pace of recovery remains soft.

at the same time, the unemployment rate is -- has moved back above 9%. in part, the recent weaker than expected economic performance appears to be the result of several actors that are likely to be temporary. notably, the run-up in prices of energy, especially gasoline and food, has reduced consumer purchasing power. the supply chain disruptions that occurred following the earthquake in japan caused u.s. motor vehicle producers to curtail assembly. looking forward, however, the apparent stabilization of oil and other commodities should ease the pressure and a vehicle manufacturers report they are making significant progress in overcoming part shortages and will increase production this summer. in light of these developments, the most recent projections of the federal reserve board compared in conjunction -- the reserve board reflect their projection that the pace will pick up in the coming quarters. projections that, if realized,

would constitute a better performance than we have seen so far this year. fomc participants continue to see the economic -- economy -- economic recovery strengthening with a real increase in gdp picking up to 3.5% in 2013. -- a 3.5% to 4.2% in 2013. at the same time, the central tennessee for projections of gdp -- tendencies for projections of gdp growth for 2011 and 2012 were marked down 0.5%, suggesting that participants saw first part of the slowdown as persistent -- saw at least some part of the first-half slowdown as persistent for a while. among the head when space in the economy of the slow growth in consumer spending, even after accounting for the effects of energy prices, the housing sector, limited access to credit for small help -- poor

households and small businesses, -- for some households and small businesses, and fiscal tightening from all levels of governments. fomc participants expect that over time the jobless rate will decline, yet slowly. the central tendencies forecast for the unemployment rate was 8.6% to 8.9% for the first -- fourth quarter of this year. 7% to 7.5% at the end of 2013. recent data at the test to the-- attests to the continuing weakness of the labour market. the unemployment rate increased to 9.2% in june and gains in non-farm payroll employment were below expectations for

consecutive months. but the more than 8.5 million jobs lost in the recession, 1.75 million have been regained. workers report that would like -- that they would like to be working full-time, but can only obtain part-time work. nearly half of those unemployed have been out of work for six months, the highest ratio since the post world war ii period. this places large ships on the -- severe economic hardships on the unemployed and their americans and leased to the erosion of skills -- this place is hardships on the unemployed and it leads to the erosion of skills. it reduces the purpose of our economy. -- the productive ability -- the productivity of our economy. the ability and willingness of consumers to spend will be eight -- an important determinant for the pace of discovery in the coming quarters. gains were largely offset by higher prices for gasoline and other commodities. households report they have little confidence in the recovery and their own income

prospects. the ongoing weakness in home values is holding out household down wealth and weighing on consumer sentiment brigid household debt -- sentiment. household debt burdens or declining. -- are declining. credit cards and other loans are down significantly. the number of homeowners having a more just payment for the first time is decreasing. the pickups in job creation should bolster real household income, cacophonous, and spending in the medium run. residential construction activity remains at an extremely low level. demands for homes have been depressed by many of the same factors that have held down spending more generally. including poor consumer sentiment. mortgage interest rates are near record lows, but access to mortgage credit continues to be constrained. many potential home buyers remain concerned about buying

into a falling market. the weak demand for homes, the substantial backlog for properties are keeping downward -- backlog of vacant properties for sale are keeping downward pressure on house prices. two bright spots have been exports and business investment in equipment and software creat. demand for u.s.-made capital goods for domestic and foreign firms has supported domestic production throughout the recovery so far. exports increased solidly in the first quarter. the data on nwew -- neworders received that the trend will continue in recent months. -- new orders received shows that the trend will continue in recent months. corporate profits have been strong. access to capital markets have been able to refinance. conditions for businesses have continued to ease, although the ability -- availability of

credit has been limited for small firms. inflation has picked up so far this year. the price index for personal consumption expenditures rose at an annual rate of more than 4% in the first five months of 2011. and 2.5% on an accelerated basis. much of the celebration was the -- acceleration was the result -- result of higher prices for oil and other commodities in for imported goods. prices of motor vehicles increased sharply. most of the recent rise in inflation appears likely to be transitory. fomc partisan reasons -- participants expect inflation to subside at about 2% or a bit less, which is consistent with our demand of maximum employment and price stability. the central tendency for the rate of increase for the index was 2.5% for 2011 as a whole. which implies a significant to inflation in the second half of

the year. in 2012 and 2013, the central tendency for the inflation forecast was 1.5% to 2%. reasons to expect inflation to moderate include -- the substantial slack in u.s. labour and products markets, which is made it debacle for -- which has made it difficult for workers to obtain wage gains, and burns to pass to a higher cost. higher expectations are measured by surveys of households. turning to monetary policy, it is our judgment that the pace of the economic recovery will likely remain moderate. the unemployment rate will consequently decline only gradually. inflation will subside. bad as the basis for our decision to maintain a highly accommodative -- and that is the basis for our decision to maintain a highly accommodative monetary policy. policy currently consist of two

parts. first, the target range for the federal funds rate remains at 0.14%. the committee expects that economic conditions are likely to warrant exceptional levels -- exceptionally low levels of the federal funds rate for an extended time. the second component of monetary policy is to increase the federal reserve's holding of longer-term securities, an approach -- long-term -- an approach undertaken because the federal funds rate could not be lowered meaningfully any further. this has boosted the price of long-term securities. it has caused yields to be lower than they would have been otherwise. the acquisition of longer-term treasury securities cause of longer-term treasury yields to be lower than they would have been otherwise. by removing substantial quantities of longer-term treasury securities to market, the fed's purchases induced private investors. the fed policy asset purchase program has served to reduce the yields an increase the prices of -- and increase the

prices of those other assets as well. the net result of these actions are lower borrowing costs and easier financial conditions throughout the economy. we know from experience that when the economy is operating below its potential, easier financial conditions tend to report -- can to promote more rapid economic growth. a number of recent studies and federal reserve analyses suggest that all else being equal, the second round of asset purchases probably lowered interest rates 30 basis points. by approximately 10 to 30 basis points. our analysis indicates that a reduction in long-term interest rates would be roughly equivalent in terms of its effect on the economy. in june we completed the planned purchases of longer- term -- $600 billion in longer- term treasury securities that we initiated in november while continuing to reinvest the proceeds. although we are no longer expanding our security holdings, the evidence suggests

that the degree of accommodations is determined primarily by the mix of securities that the federal reserve holds rather than by the current pace of new purchases. even with the end of net new purchases, maintaining our holdings of the securities continued to put downward -- should continue to put downward pressure on market interest rates than would otherwise be -- on market interest rates and continued to provide more accommodative conditions than would otherwise be the case. it is worth emphasizing that our program involves purchase of securities, not government spending. we will unwind those purchases. interest on the securities is being remitted to the u.s. treasury. when we began this program, we did not expected to be a panacea -- expect it to be a panacea for the country but economic -- the country's

economic problems. however, developments with respect to both components of our dual mandate was needed. in that context, we believe that -- believed that the program would help reduce the risk of inflation and provide a neat -- a needed boost to the economy and job creation. the program had the intended attacks of reducing the risk of -- in effect of reducing the risk of inflation in shoring up economic activity. in the months following the august announcement of our policy, we grew to more normal levels, suggesting that the perceived risk of deflation has receded markedly. this is a significant achievement. -- projected inflation it can be -- protracted deflationary can be in -- deflation can be quite costly. with respect to employment, our

expectations are relatively modest. even including the disappointing ratings in may and june from a private payroll gains have averaged 160,000 jobs per month in the first half of 2011, compared with about 80,000 from may to august, 2010. this is consistent with our -- consistent with our expectations for employment gains. will monitor the labor market -- we will monitor the labor market closely. once the temporary shop that has -- shock that has been holding down economic activity passes, we expect to see stronger economic activity and job creation. given the range of uncertainty about the strength of recovery and prospects for inflation over the medium term, the federal reserve remains prepared to respond.

on the one and come out the -- on the one hand, the possibility remains that the recent economic weakness may prove more persistent than expected. we may need more policy support. even with the federal funds rate close to zero, we have a number of ways we could look at these conditions further predicted -- further. -- we could act to ease financial conditions further. another approach would be initiating more securities purchases or increasing the average maturity of our holdings. we could reduce the rate of interest paid to banks on their reserves, thereby putting further downward pressure on short-term interest rates. our experience with these policies remains relatively limited. employing them would entail potential risks in costs. prudent planning requires that we examine the efficacy of these and other alternatives for bestowing additional stimulus as conditions warrant. on the other hand, the economy could evolve in a way that would

warrant a move toward less accommodative policy. the committee has been giving careful considerations as reported in the meetings of the june meeting, it has reached a broad consensus about the sixth -- about the steps it expects to follow when the normalization of policy becomes appropriate. in brief, when economic conditions warrant, we will cease the reinvestment of principal payments on securities, thereby allowing the federal reserve balance sheet to begin shrinking. at the same time, the committee will modify the court's guidance -- the forward guidance in its statement. subsequent steps would include increases in the federal funds rate target. from that point on, changing the level or range of the federal funds rate target would be our primary means of adjusting monetary policy in response to economic development. sometime after the first increase in the federal funds rate charges, the committee -- rate target, the committee

expects to initiate sales of securities from its portfolio. this will be fully communicated to the public in advance. once sales began, it is expected -- began, it is expected that the pace -- once sales begin, it is expected that the pace will be gradual and steady, but could be adjusted up or down in response to material challenges over time, the security portfolio is expected to be reduced to the minimum levels consistent with the sufficient sedimentation of monetary policy. of course, conditions can change. choosing the time to begin policy alimentation, should that be the next direction -- we will carefully consider both parts are dual mandate. -- of our dual mandate. thank you. i am please do take your -- to take your questions.

>> thank you for your testimony. we would now begin the -- we will now begin the questioning of our witness. please put five minutes on the-- on the clock for each member further questions. the fed has pursued policies to stimulate the economy. although the fed continues to hold short-term interest rates near 0, it has ended efforts to reduce longer-term rates to quantitative easing. -- through quantitative easing. given the high rate of unemployment and the relatively slow growth, why not start out another round of accommodative easing, qe3? >> our policies are already very highly accommodative. we have a zero interest rate. the continue to put downward -- they continued to put downward pressure on interest rates in the market. i think the important point to make is that the situation today is somewhat different than it was in august of 2010 when we began to initiate discussion

of burger purchases of securities. at that time, inflation was dropping. inflation expectations were dropping. it looked like inflation was -- deflation was becoming a risk to the economy. at the same time, over the summer the recovery looks like -- looked like it was appalling. -- stalling. we were down to 80,000 jobs per month. with both unemployment and inflation being missed in both directions, monetary accommodation was clearly needed. so, we took that step. today, the situation is more complex. inflation is higher and closer to our target. we are not certain about near- term developments in the economy. we would like to see if the economy does pick up, as we are projecting. we're not prepared, at this point, to take further action.

>> your note that a fiscal -- in your testimony, you note that fiscal tightening at all levels of government is one of the head winds facing the economic recovery. can you explain whether this means that additional short- term fiscal expansion could help us return to full employment and increase overall confidence in the economy? >> mr. chairman, i think our fiscal planning and policy needs to be integrated in the sense that we look at both the short run and the long run at the same time. the congress and the administration are currently looking to make major changes in our spending. deficit projections over the next decade or so. i think it is important that we bring down our deficit so that we will have a sustainable fiscal policy going forward. i want to emphasize that is very important. at the same time, that is a long-term process. it needs to take place over a number of years. i only suggest that as congress looks at the timing and

composition of changes to the budget, that it does take into account that in the very near term that the recovery is still rather fragile. sharp and excessive cuts in the short term would be potentially damaging to the recovery. it is up to congress what further action to take. i guess i could suggest that there is intermediate steps between fiscal stimulus and cuts. that would be, for example, some focus programs addressing some areas of the economy which are particularly stressed, like unemployment or housing, for example. >> as you acknowledge in your testimony, the economy is stubbornly depressed. residential investment is more than a third below its 1997 levels. inventory of homes that are for -- that are vacant and for sale remain elevated. do you see policy solutions that would help resolve the

problems in the housing market? >> mr. chairman, you are absolutely right that the weakness in the housing market is one of the major sources of the slow recovery. normally in an expansion you see the housing market strengthening, adding jobs, and creating new opportunities. we are not seeing that, in because you mentioned, th of the big overhang of foreclosed homes, which are weighing on prices. it is a vicious circle. people do not want to buy because prices are falling. prices are falling because people do not want to buy. there are a number of things we are doing. we are keeping mortgage rates globe. -- low. this works to try to modify -- there is work to try to modify mortgages. i think it is worth looking at that area. one area where more work needs to be done is housing finance. we have not begun to clarify

for the market out housing finance -- the market and the public housing finance -- how housing finance will be conducted in the future. mi her area i suggest he mighwe ght think about is the overhang of distressed houses. for example, fanny, freddie, and the bank's own about half a million homes right now, which are basically sitting there on the market and which are pressing down prices and reducing appraisals and making the housing market much weaker than it otherwise would be. that is another area to look at. there are various things that one could do to approach that. i agree with you that the housing market is, in some sense, the epicenter of the problem we're having at the moment. >> if there is no agreement on raising the federal debt limit, what would be the effects on financial markets and the real economy if we were to default on our obligations?

>> i think it would be a calamitous outcome. it would create a very severe financial shock that would affect the u.s. economy and the global economy. treasury securities are critical to the entire financial system. they are used in many different ways. for example, as collateral for margin. default on those securities would throw the financial system into chaos. in any case, what would be the case is that we would destroy the trust and confidence that global investors have in u.s. treasury securities has been e safests being thu assets and the world. we are already seeing the threats of downgrades from ratings agencies. this is a tremendous asset to the united states -- the quality and reputation of our treasury securities and real benefits from it with low interest rates.

i would urge congress to take every step possible to avoid defaulting on the debt. or creating even any significant probability of defaulting on the debt. >> senator shelby. mr. chairman, tell us why our economy is not moving. our jobs are not growing. unemployment is going in the wrong direction. 9.2% is the official unemployment rates now. -- right now. according to labor department, if you bring in people looking -- who have quit looking for a job, it is about 16%. that is very high. i think it does not bode well for the future to all of us. -- for all of us. why is all of this -- is it just the housing bubble? which is severe.

is it the housing bubble and the reckless lending that puts a lot of our banks in jeopardy? tell us what it all is and how do we get out of it? is it reckless spending? all of this? >> that you have almost answered -- senator, you have almost answered your question. them and not as well as you could -- >> not as well as you could. >> i talked about the disaster in japan and the developments in the middle east. we do think we will see some much better growth, although -- somewhat better growth, although we are still forecasting is very difficult going forward. it has been a very slow recovery and there are a number of reasons for that. one is the aftermath of the housing bubble. so many houses are empty and prices have fallen so much and that has created no new construction and housing.

-- in housing. it means that people have lost wealth because they no longer have any equity in their homes. that has been a major factor. we know from research that recoveries after financial crises can be slow because it takes time for the credit system to become operative again. while there is improvement in the banking system, there are still some constraints in consumer and small-business lending. the consumer has been very cautious, trying to build back up their wealth, concerned about the durability of the recovery, worried about their own financial prospects. even though the high price of gasoline and food has taken away some purchasing power, even beyond that, as i mentioned, competence is pretty low and consumers -- confidence is pretty low and consumers are not showing confidence in terms of spending.

in the near-term, there is withdraw all of fiscal stimulus -- the job numbers last friday, for example, the private numbers were better than the headline numbers because part of this report was a loss of 40,000 state and local jobs. those governments are being forced to contract. it is all perfectly possible to want to change the composition of public and private job composition. that is perfectly understandable. in the short run, as jobs are lost and not replaced elsewhere, it creates pressure on the economy. >> are you basically telling us that we are not going to have a robust recovery in the next six months, eight months, 10 months? >> we are expecting improvement, but we are not expecting something like would normally follow a recession. >> let's talk about the european crisis for a minute. we're all familiar with this to some extent. greece, portugal, ireland, italy, others, it seems to me

that they are sitting on a financial-related time bomb over there. do you believe that the european union will stay together? can it stay together with some smaller countries fragile economies basically never paying their debt back? what will happen? how will it impact us? >> first, the european leadership places a great value on maintaining the euro area and maintaining the euro political integration which has taken place in the postwar period it. -- postwar period. they are making extraordinary efforts to address these problems. the problems are not entirely economic. the three countries that you mentioned are a small part of

the economy. they involve how are you going to address these problems in these countries. one approach is to try to do it completely through austerity, to have the countries cut and cut and see if they can make it. there be a little bit of temporary assistance. -- with a little bit of temporary assistance. another strategy would be to get more direct assistance from other countries, but that is very unpopular. >> that is not a solution to the problem. >> if the better off countries were to basically helps solve the problems of the small countries, it would solve their immediate issue. there need to be structural -- austerity and fiscal reforms -- reforms and so on to make sure the country stay on a healthier -- countries stay on the healthier path in the future. there are different ways to approach it. it is really a political issue as much as an economic issue. it is causing a good bit of anxiety in markets and that has

been affecting our economy both last summer and recently as well. we are spending a lot of time evaluating the exposures of u.s. financial institutions to these countries, including money-market mutual funds, the direct exposure to the three countries you mentioned are quite small and manageable. we would not expect those direct impacts to be the critical channel if there were problems, a default, for example. nevertheless, the u.s. economy is at risk from those developments because we're therwere there to be a significt deterioration in conditions in europe, we would see a general increase in risk aversion, declining asset prices, a lot of volatility in the market. we would suffer from that more general financials a tuition than we would from the direct exposure to those sovereign

countries -- financial situation than we went from the direct exposure to those sovereign countries. >> thank you, mr. chairman. >> thank you very much, mr. chairman. following that senator johnson's question about the fault -- default on our outstanding obligations, some have suggested that if we cannot resolve the debt ceiling limit, we simply prioritize payments. we would presumably pay on some treasuries as long as we can, pay principal and interest. that requires us to not pay on things like military pay and social security. just in the context of the financial sector, up with that fix the problem? -- would not fix the problem? -- would that fix the problem, simply not having the debt limit expanded and trying to pay as long as we can on our securities? >> it is the treasury's area to determine how they will manage this. they had been pretty clear that they do not think it is appropriate or feasible to prioritize.

as the fiscal agent, the federal reserve simply does what they tell us to do. there are some operational issues that arise if you were to try to do it. the treasury is the determinant of this and they are pretty clear that they do not think it is a workable solution. that being said, whether the fault is -- whether the default is on securities or payments we of medicare recipients, it will constitute a default of some type on obligations incurred by the u.s. government and it will certainly have an impact on both the economy and on confidence. what inference should investors take from the fact that the u.s. is not paying its bills and that it cannot resolve the issues? there is not really any solution other than finding a way to solve these problems to address the fiscal issues and to raise the debt limit at the

appropriate time. >> let me explore a little bit. moody's has suggested that they are putting us on a watch, what is clearly behind them if that we do not get past the debt limit ceiling, they will downgrade us. not only u.s. treasuries, but moody's has indicated fannie mae and freddie mac paper and we have also placed a possible downgrade securities -- -- either guaranteed by, backed by, in some other way supported by the u.s. government. essentially, they will downgrade things we do not even know yet. maybe you know. what does this do in terms of interest rates across the board? raise them? >> the combination of

downgrades, but we are already seeing it, by the way. we are still some weeks from the deadline. we are seeing now -- loss of investor confidence could potentially raise interest rates quite significantly and the erotic aspect is that we're -- ironic aspect of that is that we are all -- all interested in reducing the deficit, if you raise interest rates, your interest costco up -- interest costs go up substantially and you are regressing rather than progress in. >> a failure to raise the debt ceiling would be the most significant immediate increase in the deficit that we're likely to see. the one act that would dramatically increase the deficit. >> it would be a self-inflicted wound. >> let me ask about something else. as you have talked about fiscal crisis and jobs crisis, what is your perception in the scenario -- presumption in this scenario about jobs? are we likely to see people going out and hiring? in a situation of technical or real default?

>> we have a recent example. in 2008, when the financial system froze up, we saw a -- an immediate and severe contraction of the global economy. even if things did not get that bad, it is hard to predict what is going to happen, but if interest rates rise, that will -- clearly reduced investment on -- that will clearly reduce investment. certain -- reduced investment. if the government is reducing its payments by 40%, that will have an impact as well. i could only conclude that this would be very bad for jobs. >> another area we discovered was a huge and explosive problem. that was the situation of derivatives. i would presume that there are a lot of credit default swaps written on many of these securities, etc., and if they

are downgraded, that could be a condition of default. that could require additional collateral. do you have any idea on the institutions that you regulate potential exposure they would have as credit ratings fault? or if there is a default and the market? is it in the trillions? >> there are many knock on a facts from default. ratings throughout the entire system. cds directly on treasuries as opposed to other securities are actually not that big. it would take an action to invoke the credit event. that could be a problem for some institutions. but it would not be the biggest problem. >> but your point is that this could be a self-inflicted wound doing more damage to the deficit down has been done to date? -- to the visit than has been done -- to the deficit men has

been done to date? -- your point is that this could be a self-inflicted wound doing more damage to the deficit then has been done to date? >> it is not an option that we should be considering. >> thank you. >> thank you, mr. chairman. i will follow-up on this for just a moment and then i want to move on to some other issues. to make the observation that the market perceives and consequences are starkly different between the u.s. government failing to make an interest payment on a bond or on the other hand, bloating some -- delaying the reimbursement to a vendor or failing to cut the grass at the monument. these are very different events. the month of august has scheduled about $30 billion of interest payments. the treasury is sitting on a $94 billion portfolio of mortgage-backed securities. we expect a minimum of $125 billion in tax revenue. i did not know if anybody -- i have argued that we certainly would be much better off reaching an agreement and

raising the debt ceiling prior to august 2. but there is a big difference between a payment default on our debts and the other kinds of payment disruptions. i think this administration would be wise to send an unambiguous message to the market that under no circumstances would they tolerate a default on our debts, which is entirely under their control to prevent. i acknowledge that that is the realm of the treasury and it is not irresponsibility. what i would like to address is what is under your round. -- your realm. the things you have done under difficult circumstances have

only had the best motivation, but i am concerned about the expansion in power of the central bank. the unusual step that we have taken, the enormous discretion that the fed now has and exercises. my concern is that this distorts markets intentionally and also introduce is enormous uncertainty as to how the fed will behave. the fed becomes the biggest player in driving the bond market, the equity markets, and this is a dangerous place that we have come to and i hope that we revert as soon as possible to the more normal role that the fed has played. one of the unintended consequences of this unusual policy seems to me if we take the very low interest rates, it seems to me that this contributes to enabling congress to run excessive deficits. our debt is cheaper to finance. the treasury has chosen unwisely. the net effect is that we are not yet paine the real market price -- paying the real market price for this huge debts. -- debt. i do not think that is your

intention to facilitate this fiscal irresponsibility, but it is the unintended consequence of these extremely low interest rates. that is just one example. to your testimony, you've raised the possibility that if economic circumstances warranted, you would consider it opened the door to an additional round of securities purchases. my concern is that what is wrong with this economy is not fundamentally monetary policy. it is other things. i would just ask you to comment on what you see that is wrong with our economy that qe3 with six. -- would fix. what is your theory that another round of securities purchases would generate the economic growth that we lack? >> to go back to facilitation issue, our goal is to try to meet our mandate of maximum employment and price stability.

that is why we monitor monetary policies. i do not think our policies would bring about a lack of confidence. >> people still think that they have confidence in our government's ability to make its payments. these asset purchases, i recognize they are unconventional. they work more or less in terms of the effects on the economy, the same way thatsame wain ordinary monetary policy works. you may be entirely correct that it might not be particularly affected given the configuration -- effective given the configuration of problems that we have. credit is not being extended. or the problems rise from other

sectors that are not responsive to interest-rate. those are things they will take into account, senator. we're not proposing anything today. the main message is that this is a serious situation. it involves significant loss of human and economic potential. the federal reserve has a mandate and we want to meet that mandate and to do that, we want to make sure that we have the options when they become necessary. at this point, we are not proposing to undertake that option. >> thank you, mr. chairman. >> thank you, mr. chairman. good morning. i appreciate you joining us again today. i want to thank you very much for your strong leadership. you continue to do an excellent

job under very difficult circumstances. we all understand the importance of preventing a government default. many americans, however, seem not to share this urgency. a gallup poll in may found that only 19% of americans would want their member of congress to vote for a debt ceiling increase. 34% did not even know enough about the issues to answer the question. another poll showed that americans are more concerned about controlling spending than they are about the government default. we do explain how a government -- could you please explain specifically how a government

default would affect the -- everyday lives of working-class americans? >> i would be glad to. i made an analogy yesterday. some people say it is all about sitting down at the kitchen table, making sure your income and spending are equal. " that is true for the long run. the debt ceiling is really about pain for bills that we have -- paying for bills that we have already incurred. putting that aside, not increasing the debt ceiling and allowing default on the dead would have very real -- on the debt would have very real consequences for average americans. interest rates would jump. treasury rates are the benchmark of interest rates. mortgage rates and all other interest rates would rise.

of course, that would also increase the federal deficit because we have to pay the interest part of that. if the treasury cut back as it would be required to do, it would mean that there would be a significant reduction in both the payments and benefits, payments for services, so people would see that in terms of their medicare check or whatever other benefits they are getting. without much delay, this would also slow the economy and the job situation will get worse. in almost every area, where people have concerns, all of -- jobs, interest rates, credit, availability of government payments, benefits, all of those things would be affected in relatively short order. >> thank you for briefly explaining all of that.

chairman, it even though home -- chairman bernanke, even though home prices have only slightly declined, high-cost housing areas like hawaii are still feeling the full effects of a week housing market. -- weak housing market. mortgage credit is still limited and the concern for the future is that mortgages are performing -- bank-retained mortgages are performing worse than those backed by the government. below midst -- allow limits are -- the loan limits are scheduled to step down later this year. do you think it is a good idea to allow the limits to decrease? how might lower limits might affect the housing market and ownership opportunities?

>> it it is a trade-off as always. the increase in the loan limits was made on an emergency basis to try to address the housing crisis. the administration -- or the gse's are making the determination that it is time to begin to wean a little bit the mortgage market from those higher-conforming limits. i think the question got in terms of the effect on the housing market, it is, -- the question is, in terms of the effect on the housing market, how are they priced in hawaii? nationally, there has been some improvement in the willingness of banks to make jumbo loans. the differential, which at one point was more than 100 basis points, is much closer to 25 basis points or 35 basis points at this point.

that will incur some extra cost on borrowers on large mortgages. i do not think they will be squeezed out of the markets. there are some trade-offs that gse's and congress are looking at. >> senator cook. >> i have three quick issues i want to raise with you. my understanding is that according to richard marcus in "financial review" august 1989, we had a default -- technical default on april 26, 1979 when the united states could not pay individual bondholders holding treasuries on time. their was an increase -- and there was an increase in borrowing costs of60 paces -- 60

basis points to the federal government. when we defaulted last time, 1979. i understand that italy just tried to borrow money twice today. they are a five-year benchmark, -- their five-year benchmark had a 21% increase in the cost of borrowing. it just went out at 4.9%. they set a record on their 15- year borrowing. they paid the highest interest rate ever and we are seeing a real m-1 decline in italy. should we have a kind of greek- style bailout for spain and italy? the congressional research service estimates that the imf is 60 the -- the imf is $50 billion short. lastly, i am worried about long- term finances of illinois and california. given their pension liability ies, ill. being the lowest paid pensions in the united states,

do you see a systemic risk posed by these two states to bondunicipal finance of bonand sector? i lay all three of those issues out for your comments. >> thank you. it is true that in 1979, mostly because of mechanical problems, operational problems, there were a few treasury bills that did not receive interest rates -- interest payments on time. industry did go up, but it is -- interest rates did go up, but it is not entirely clear whether it was due to the default or whether it was due to some other factors. i do not think it is comparable to the current situation because this was a couple of isolated issues. the wall street journal did not even reports that this had -- report that this had happened. people did not even generally know that it had happened. it was not viewed as something that was as broad base risk to the financial markets. on italy, it is true that there

has been some market jitters there. the kind of concern that you worry about is exactly this kind of vicious circle that we are worried about in the case of the united states where loss of confidence raises interest rates. that makes the deficit worse. it makes it difficult to get fiscal stability. my sense of italy is that the first line of defense is for them to take the necessary steps. it is true that they had a very high debt to gdp ratio. but it does have some strengths. it currently has a primary surplus that has -- so its fiscal position is much better than greece, for example. its banks e in decent shape. they have taken some extra capital in recently. it has a well diversified economy. the first line of defense there will be for italy to try to

address the concerns that the market has. in terms of explicit that, -- debt, states don't generally have the same kinds of levels of debt that the federal government or the european government have. they rely on federal money for social security, medical care, and other things. there are some states that are having more difficulty. -- watch those very carefully -- we watch those very carefully. we also looked at the exposures -- look at the exposures of banks and other institutions to those states. we do not see any immediate risk there, but it is true that a number of states do need to be thinking about their longer- term step -- sustainability

given the unfunded liabilities they have four state pensions and health -- at lower state pensions and health -- for state pensions and health care programs as well. but we are monitoring that situation and we do not think it is analogous to the european situation. >> what about the adequacy of the imf? are you concerned that we will run about 50 billion short? >> spain and italy are much bigger economies than the three that have already been addressed. in that case, that if we came to that point, and i do not anticipate that happening, but i think the europeans would have to make a very substantial contribution to stabilize those countries. >> [inaudible] >> thank you very much, mr. chairman. nice to have you with us this morning. i would like to ask you about our job situation and our recovery and their interrelationships. we have a jobless recovery, by

many people's estimates. even as the economy seems to be getting better, and profits and corporations are stronger, hiring is not been what we -- has not been what we wanted it to be. wages are not what we want them to be. the wage picture, in particular, is disturbing because the average wages in this country's family income has not moved in many years. as companies continue to progress and not higher, what -- that what we're finding is they're able to do business at a higher level with the same number of employees and, in some cases, even fewer employees. how do we turn this around? when is this going to get turned around? in other times, there was a much more direct correlation between

economic activity, rising profits and growth, and hiring and wages. we do not seem to have that connection today. i would like you to comment on that and what that portends for us, even as business gets better. >> i can only agree with your diagnosis. we have high unemployment that is improving very slowly in terms of jobs three games. -- jobs being gained. it has the potential for a very long run consequences because of the long-term unemployed. those folks are going to find it much harder to find new work or work that was comparable to the work they had before. wages are very stagnant and that is affecting consumer confidence. i agree completely. this is a major problem. there has been a tendency in the last 20 years or so for recoveries to be more jobless in the earlier postwar period.

we saw the same thing in the 1990's and the beginning of the last decade. there's a little bit of an irony here, which is productivity gains are a really good thing. it helps to make a country rich over time. over short periods, in this crisis over -- a lot of firms -- in this crisis, for example, a lot of firms got scared and they reduced their labor forces. in doing so, they increased productivity remarkably, but given below levels of demand, -- given the low levels of demand, that means their demand for workers is not as strong as we would like. there is also ongoing uncertainty about the durability of the recovery and about the economic environment, including fiscal issues that we have been talking about. if i had the answer, i would give it to you. the federal reserve has been providing as much accommodative support as we can to meet our

dual mandate. i do think it would be worth congress looking at some specific issues related to the unemployed. i am concerned about the long run implication of the long-term unemployment. are there things that congress could do to help people improve their skills? or to find more opportunities? those are questions that could be passed. -- asked. >> it is troubling that wages have stagnated. unless they can find a way to turn that around, we are looking at a troubling future, to say the least. the economy is driven by consumer demand and if wages are not increasing in spite of a stronger economy, we are facing a very troubling future, wouldn't you say? >> it is a 30-year trend. one part of its is skills and --

it is skills and preparation. we have a globalized, highly technological society and those people who are prepared for it can do very well. it used to be that if you had a high-school education, you could have a decent job. but that is not the case. we will have to address those education deficit and help -- deficit and help -- deficits and help people get the skills. >> consolidation of the banking industry is not new, but it is something that i am thinking about at this time. last week in wisconsin, their largest and oldest bank has been purchased by a national bank. one concern i have with larger banks moving into wisconsin is what impact that will have on local customers, small businesses, and farmers. we have seen evidence of mergers -- evidence that mergers of small banks can be good for small business, but when a

large national bank buys the smaller bank, small-business loans tend to decrease. that is the statistic. as more national banks acquire regional banks, what can we do to see that they keep lending to small businesses? if the federal reserve looking -- is the federal reserve >> yes, senator, we are. we and the department of justice are typically involved in approving the mergers and acquisitions, and when we do that, one of the key exercises we do is we look at the concentration of big and services within the local area, within a city, within a county, and we want to be sure that we take into account all of the banking services, thrips, and others that are in the area, that any other merger acquisition does not create a situation where one firm dominates that market, and so, we do pay a lot of attention to

making sure there is competition, that consumers and businesses have alternatives to go to within their local market when we approved those mergers. hot -- it is true that larger banks, particularly recently, have been not as forthcoming with small businesses, some local banks, community banks, and we see a lot of advantage, of course, to community banks, and we are very supportive of community banks. >> we would like to see a healthy banking system. >> mr. chairman, good to see you

again. as we have been working the challenges of the debt ceiling before august 2, and maybe august to is august 3 or august 4, isla and trying to do as deep a died as i can understand the cash flow in the financial requirements of the united states government, and so i am hoping i can use my five minutes to offer hopefully some insight on that, but i would like your reaction to a couple of things that i think i have identified here that are enormously important. the first thing, i looked at the indebtedness of the united states, the treasury as we issue, and on august 4, we need to roll over $90.80 billion, august 11 $93.30 billion.

26.6 1 billion later more. august 25, 112, and august 31, 60.8. whatever that for reason, there is no solution to this raising the debt ceiling issued through august, and we are constantly in the market, as you know, trying to deal with the treasury situation. we have got the that we have to roll over. what is the market reaction going to be just in terms of this? it just seems to me that if i were a big trader in treasuries, i would want a better deal. i would want more interest. i would want something from the united states government, because all of a sudden, there is an element of political risk that has been injected that

maybe there will not be enough consensus to deal with this. what is your reaction to this? >> senator, you're absolutely right could we know what our interest payments are going to be, but we have to roll over large amounts of treasuries, and it could be that investors demand higher interest rates, basically we will be short. the price that will be paid will be less than we need to borrow, so that is another source of uncertainty in terms of what we're going to 0 from the coffers of the treasury, so, yes, i think it is very uncertain. we're seeing already downgrade threat and so on. but it is entirely possible that a loss of confidence or political risk, those concerns we see in europe, we see around the world, could raise interest rates and would effectively therefore make it more difficult or at least more expensive to

roll over the debt going forward. now, in terms of that rollover -- >> now, my understanding about the rollover, we cannot avoid that. in other words, as these dates come up, we have got to deal with them. is that a correct assumption, or are there alternatives i do not know about? when the principal comes up, we have to roll it over or sell other bonds to meet that amount. >> impact -- >> there is so much conversation about whether the treasury can do that in social security recipients will get paid or whenever the two recent point is, but i was looking at an analysis that was done, again, for august. it anticipates revenues of $172.40 billion.

i it meant there could be some give and take on that. outflows, in other words requirements for money, of $306 billion plus. so obviously, we know we are borrowing 40 cents on every dollar. less is coming in than we have got obligations for august. i looked of the requirements in august, interest on treasuries, social security, medicare $50 billion, defense payments $31 billion, the unemployment benefits $12 billion, so if you just paid those items, you would spend $172 billion, in other words, you would have spent the money that has come in, and since we have not raised the debt ceiling, that is it. there is a whole list of items

under those that are not getting paid, and he may move some of those up, but that is pretty awful. we have not made payroll for the federal government. that does not include military pay, although many would argue that should be above the line. how would the market regard us? let's say we could deal with this treasury issue. how would the market regard us not paying this long list of other financial obligations? they are not securities, but they are truly financial obligations. >> welcome center, nobody knows with certainty, which is part of the reason why we should not be taking this risk in the first place, but it seems to me very reasonable to expect that a government that shows it is unwilling to pay its bills, pay its obligations, would engender some distrust in the markets, and we would still see some

response of interest rates and increased financial volatility. i should say once again that this is a hypothetical discussion, because treasury takes the view that it is not appropriate or feasible to prioritize in the strict way that you described. >> i would just wrapped up with one last comment. because my time has expired. for me, this is mathematics, so much when it comes in, so much money goes out. it is mathematics. it is not magic. my hopes is that between now and whatever date, treasury, you, others will descend upon the hill to do what i have done. to avoid some of the discussion that, quite honestly, maybe is not just fully accurate, and i do not want to accuse anybody of anything, but i think this would be very helpful to understand

the math. >> thank you, mr. chairman. senator bennett. >> thank you, mr. chairman. i want to follow up. mr. chairman, i do not mean this in a technical sense, but is there not a huge risk that if we announce to the world that we cannot raise the debt ceiling, that we are so politically dysfunctional that there is no plan, that the market would street cred our lack of payment on any of these obligations -- that we would see interest rates rise very quickly as a result of that? >> again, nobody knows for sure, but that is a possibility, and i would just add that nobody does not think that the united states cannot pay its debt. it is a political risk, not an economic risk. >> it is a political risk. no major in the state of colorado would threaten to jeopardize the credit rating of his city. he would be run out on a rail for doing it, and we find

ourselves in this position. i wanted to ask a question -- by the way, we are not focus ticket on the things, which is what the people in my state want to know, which is how to retrieve an income where median income is rising instead of falling and how to create jobs, so i appreciate it. moody's said yesterday, quote, an actual default would fundamentally alter the moody's assessment of the timeliness of future payments, and a aaa rating would likely no longer be appropriate. can you remember the last time a credit rating agency threatened to downgrade the u.s. debt? >> it happened recently. before this? >> it happened recently in the same context. >> the current context, yes. >> what was the last time before this debate about raising the debt ceiling? >> i do not think that has happened in the 20th century. >> we are now in the 21st

century, so it has not happened in the 21st century, and it has not happened in the 20th century. this congress has put us in a position where credit ratings are actually threatening our credit ratings. >> that is right. >> can you think of an asset that is more important to us than our credit rating? >> there are many assets, >> that gives us more competitive advantage? >> it is immensely important that we have a conference of the world in terms of willingness to hold treasuries, to trade in treasuries, to maintain a liquid market in treasuries for the stability of the dollar. haute it is a very important asset, and losing that credit rating is, again, i think it is a self-inflicted wound. >> mr. chairman, am i over time? can we reset it?

thank you. sorry. i want to come back to the question of what the effect of losing that credit rating would be. not on our interest costs in the government, because the effect would obviously be devastating, but the people living in the state of colorado, we generally talk about interest rates, if you could specifically say to people in my state, what does it mean when i go to buy a car or to get a bank loan or to buy my house or to go to the grocery store? what is the effect on me is people wake-up in august 2011, and our debt has been downgraded by these rating agencies and we do not have a political path forward to address the program could >> well, treasuries are

the benchmark security. most other interest rates are priced off of treasuries, so if five years to tenure yields were to go up, then you expect to see mortgage rates go up by two percentage points, and likewise with other borrowing costs that firms and households face. there was also very likely be, you know, an impact on the economy, which would affect jobs and consumer income, as well. >> what you mean by a fact? >> i interest rates, -- higher interest rates. >> it would lead to higher and in point. soviet a prime rate is 9%. >> correct. >> can you think of a greater self-inflicted wounds that we could manage to accomplish through artists functionality and to drive our unemployment rate higher picks >> we

certainly do not want to take action to threaten our credit rating which would drive up our interest rates, which is counterproductive to the goal of reducing the deficit. >> which is where i was going. if all you cared about, if the sun rose in the morning and set at night, and the only thing you're thinking about was our deficit, which is of huge concern to me, and i have spent a lot of time on the floor talking about it. i have kids or i am worried about, and we have got to get ahold of it, really, in a bipartisan way, can think of anything that would be more destructive to my desire to pay down the deficit and to fail to raise the debt ceiling -- the debt ceiling? >> you tax my imagination. >> even economists have imaginations. but in all seriousness, in all seriousness, i am deeply concerned about the fiscal condition of this country. i am deeply concerned about the

deficit. can you think of anything i could do that would be more problematic than jeopardize our credit rating? >> that would certainly be a very negative thing. by the way, this is at the same time when europe is dealing with these fiscal issues, so there is a lot of uncertainty. >> exactly. and here is the last thing. we're just emerging from the worst recession since the great depression, and we went into this recession, we went straight off of the cliff. a lot of people did not predict it. a lot of people could not see that it was coming. how do you assess the risk that if we end up driving this car over the cliff with our eyes wide open, which they are, that we could see a downturn in our economy at a point when our deficit is already at $1.50 trillion, which it was not.

when your balance sheet is now $3 trillion, which it was not before the last downturn, that this economic crisis could be at least as bad as the one we just came out of and that the policy responses that are available to you and to the treasury and to the congress are actually more limited at this point because we're still recovering from the last crisis? can you talk about through a little bit? what will it look like on the other side if we actually do get to replace where we find ourselves in this unpredictable -- >> higher interest rates and financial volatility, but you actually make an additional point, which i think is worth emphasizing. the higher interest rates add to the deficit, but the slowdown in economic activity would further impacted. it really is going the wrong direction in terms of fiscal

stability. >> thank you, mr. chairman. i apologize for going over. >> i will continue as has been the tradition this morning to use you as a prop to make our own points, but think you for your willingness to participate in that manner. the fact is that all of this talk about the debt ceiling is farcical of this moment. i think we all know that our leadership has concocted a scheme where folks on the other side of the aisle can continue to appeal to their constituencies for the 2012 election, and on our side, we can continue to call spending to be an issue for us in the election and basically by virtue of concocting this scheme, we are not going to make any tough decisions. we all know that, and maybe the debt ceiling was the wrong place for us to be making that argument, but let me move to the other side of this. it is obvious that the debt ceiling is going to be

increased. it is probable and not much is going to occur as relates to spending, and i would say that the flip side of this is that people have to be waking up at some point when they go through this short-term hurdle and say, on the other hand, if the u.s. government does not do something as relates to spending, then the credit rating agencies, some have already referred back not this a -- debt ceiling issue as being major, would you agree? >> the debt ceiling needs to be addressed, but we also do need to address sustainability of our fiscal position, -- >> so since you are a proper, in your answering the way we all want you to answer, i guess the debt ceiling is probably not the best place for us to deal with this issue. where is the best place for congress to actually deal with issues of spending? >> well, for the legislative and

consultation process that the founders -- >> is it called the budget? >> well, except for one thing. >> the answer is supposed to be yes if you are inappropriate prop for us. the answer is yes, but we would need to think about this both in the current year and longer. >> so let me just -- -- -- we basically, and i do not know what the most common joke is around the set, most of us around here would love to hear it, and maybe you do not want to do with a microphone today, but basically we have thankless members. the united states senate has basically caused this great nation to be in decline because we are not willing to deal with the tough issues that we need to deal with, so some people resorted to the debt ceiling, and we've obviously figured out a political solution to that

that worked out well for both sides to campaign in 2012, but the fact is, we have not dealt with the budget now for some time. the majority party can actually be mostly criticized for that, but i do not want to do that. i think both sides are critical because now we're moving to a spending bill today without a budget. answer this has been a lot of fun for everybody to use you as a prop up the debt ceiling, but the fact is we're all sort of to the promised -- two bit ponds and all of this. -- pawns in all of this. we have to make tough decisions when we budget and per your does, so in order to protect majorities', you know, we do not go through that process. how do you think, being the good prob that you are, how do you

think the financial analysts in view our inability to make those tough decisions? >> well, as i indicated, i think they view this whole situation, both the debt ceiling situation and the long-term fiscal stability situation, as being a political issue and not an economic issue. the question is whether or not we can come together and find real solutions. i think, you know, some of the discussions that have been had suggest some very large scale fixes could be undertaken. i am not describing one or the other, but we need to do something very significant just to keep our debt to gdp ratio from rising over the next decade, and then after that, we have and tug hulett issues, as well, so we need to do something big, strong. >> i had dinner monday night with a number of my colleagues on both sides of the aisle, and i will not mention who they

were to in tune them, but we were talking about how dysfunctional this place is, but today, i will use this opportunity to point out that we're moving towards a spending bill. so any of us who complained about how dysfunctional, my friend used the word dysfunctional, and i use it often, unfortunately, anybody who complains how dysfunctional u.s. government is today, and is moving our country into decline, who would then vote for a spending bill without a budget are basically accomplices in allowing us to move toward the place you're talking about with a credit rating agencies are going to be downgrading us because we do not make tough decisions. my time is up, and i appreciate, basically when there is the second day of humphrey-hawkins, there is not much to talk about in what we want to put forth. i thank you for your service, and i respect you, and i appreciate the way it the said

has been with me very open, very transparent. you have shared confidences that i have kept confidential, and i have appreciated that. i will tell you that i find the activism at the fed right now, a major turn off, and i am very concerned, and as one person coup i think we have had a good relationship, i want to tell you that i am very quickly moving to camp that wants to clip the wings of the fed, because i do believe that the activism there is distorted of the market, and i do believe that the dual mandate that we have set up is causing new, something is causing you to do a lot of things that i think will create some long-term damage, so just know that while i respect you, and i respect certainly the people who work with you, and i appreciate the kindness, i am

extremely turned off by your activism. >> senator menendez. >> chairman bernanke, think you again for the service to our country. we have both several times spoken of the 2008 crisis and the reality that put forward that had congress not active, we may be would not have been on the verge of a deeper recession. with that as a backdrop, a look at past recoveries that were first lead by a surge in the home market, home building, and then by the easing of credit, and with the high number of distressed times on the market creating a crippled housing construction sector, and with financial firms rebuilding their capital base, is this the best recovery we could have expected? and, secondly, given those persistent problems, do you

really think or are their policies that can create a strong recovery with many more jobs? >> i do not see any solutions. obviously, i would have recommended them if i saw them. the federal reserve, the senator alluded to activism. i think what we're trying to do is to fulfill our mandate which is to provide as much support as possible for recovery, and on the fiscal side, i recognize there are some real tensions because there were being scope for targeted programs to help some of the issues that we have in housing and otherwise, but i understand also the concerns in both sides of the aisle about the long-term fiscal stability of the country in the need to address those issues, so it is a difficult situation. we do not have that i can see any substantial unused capacity

to increase the recovery, speed the recovery. and so it is a difficult situation stemming from where we started because there is always a starting point. >> i will get a combination of tax cuts, depriving the treasury of enormous amounts of money at a time when we have two wars raging abroad in afghanistan and iraq also not paid for and new entitlement programs passed in congress that is on page four, and wall street instead of being a free market was a free for all market, and that is what we're coming out of, so i am wondering, your answer to me suggests that there is no more monetary policy that is going to come forward that could, in essence, seeking faster, more robust recovery with greater

jobs? >> well, as i said in my testimony, given that there is a lot of uncertainty about how the economy will lead off, we have to keep all options on the table. both for tightening and easing. we are doing that, but we are already providing an exceptional amount of accommodation, and as you know, recovery is still pretty slow. >> i want to turn to the question of the debt ceiling. that was discussed quite a bit. i find it interesting under the years of president bush, the debt ceiling was raised to a tune of about $5.40 trillion during this period of time. i did not hear the same comments then that raising the debt ceiling was not something necessary to do, that in essence having the nation be a deadbeat is ok, and i find it alarming that there are people running for high office in this country and others already in

significant positions that suggest that there is no great concern to allowing the nation to be a deadbeat, to default to, at no consequences, and so, in pursuit of a solution, you know we have had these efforts to have severe cut, but to consider entitlement changes, as well, but i wonder whether entitlement changes should not also the question of entitlements -- somehow, it seems that revenues are now entitlements, as well. it seems that those who are the wealthiest in the country, a major entities like the oil and gas industry getting $21 billion in tax breaks when they're going to make $144 billion in profits this year alone, we cannot touch them, so it seems to me we have a new class of entitlements. is it not in order to solve this problem really going to acquire

real shared sacrifice? because i look at gdp in this country, and about 70% of it is driven by domestic consumer demand, and if there are no jobs, there is no demand, and if we're going to put this on the backs of middle-class families, i do not know how we're going to drive this economy based on your previous comment that there may not be more monetary policy out there. is it not better to have a shared sacrifice that is shared across the board to try to solve these questions, as they confront the nation? >> well, senator, i think you can appreciate that i do not want to inject myself into these negotiations which are very difficult and delicate, but i do hope there will be discussion about the trade talks. >> do you believe that only one section of american society should bear the burden put is an overwhelmingly going to be the middle class in what affects their lives with cuts and may

affect their pockets more at the end of the day in which that is the way to achieve the right this policy for the country? >> well, i think we want to have shared sacrifice. we also want to make sure we have a strong economy. there are a whole bunch of issues there. again, these are not issues that pure economic analysis can answer. this is a values issue, and this is what you want to the officials are supposed to be doing, and i cannot do that for you. >> i am not looking for you to do that. large corporations, let the oil and gas companies, whether it be the wealthiest millionaires and billionaires in the country, they are entitled to keep those tax breaks, but middle-class working families seem to be called upon for the burden of the resolution of this problem, and to me, that is both a moral

problem, but is a fiscal issue by which we achieve the balance we need. thank you mr. chairman. >> thank you, mr. chairman. thank you, mr. chairman, for being here. moody's, in their recent outlook said that a credible agreement on substantial debt as it reduction would support a continued stable outlook. lack of such an agreement could prompt moody's to change its outlook to negative on the aaa rating. do you think that sort of statement about the planned deficit-reduction is indicative of the entire market? >> yes, i do. as i have said, there are two prongs here. one is to navigate this debt ceiling issue without any kind of destruction, but the other, with that being successful, kick in the can down the road in terms of our long term fiscal

situation -- so i very much support a strong fiscal deal. >> .right, and i have asked you previously how quickly this lack of a sustainable fiscal pest could have serious consequences, and i believe, i do not want to put words in your mouth, but if you do not know, it's certainly could be sooner rather and later. could you make a comment on that now? we're seeing this around the world. interest rates start to rise, and then you get a vicious

circle. >> this showdown in negotiation, increasing the debt ceiling with no significant change in terms of our fiscal path, how do you think the markets will die just that? >> welcome i am sorry the two things but linked together the way that they did, but i would very much like to see both parts of this work, both addressing the debt ceiling -- it seems like an opportunity we have not had for a while to address long-term fiscal issues. i do not know how quickly or what degree the parties will respond, but i think they are looking to washington to show that they can manage their spending in control deficits over a long period of time. >> what you said a minute ago is part of my point. we have been talking about this event for months, and it has build up smartly or dumbly,

rightly or wrongly, as an opportunity to do something, so particularly with that build up in that context, ellis' my gut is if we extend the debt limit and essentially do nothing for fiscal sustainability, the markets will have some sort of meaningful negative reaction, as reflected in the moody's statement. would you agree with that or not? >> it is possible. >> returning to monetary policy and possibly qe3, what would you point to in terms of success with qe1 or qe2 with success in convincing us that a third round is advisable? >> well, qe1 was in 2009 at a

very, very weak point in the recovery. it was an absolute trough of the economy. the stock-market was about half where it is now. the first round seemed to restore confidence in financial markets and helped the economy grow quickly the latter part of that year, and it was not the only contributor to recovery and improved financial conditions, but i think it was a significant contributor. qe2, as it was called, was first signaled in august of last year. at that time, we were missing our mandate in the same direction on both parts of the mandate. employment was very weak, growth was weak. unemployment might start to rise again, and inflation was actually falling down to a very low level, and this was

something we had not experienced here since the 1930's that deflation can be a very pernicious situation, so our policies, which are admittedly different from the normal ones, but they work about the same way, a lower interest rates, the strength and asset prices, and they provide more incentive for people to borrow, spend, and invest. it seems to, first of all, as senator shelby mentioned, has addressed the inflation issue, and we think by the second half of the year, we will be on target in terms of where we want to be with inflation, and all the job creation has not been all we would like it to be, it has been consistent with expectations of about 700,000 jobs over two years, so we are moving in the right direction. if our forecasts are right, and if inflation stabilizes for the second half of the year, some of these years of hyperinflation

will have shown not to have been accurate, so we think it has been constructive. that being said, we are trying to maintain flexibility with easing and tightening, but recognize that monetary policy is not a panacea, and we hope that congress will be addressing these issues. >> mr. chairman, one more question to finish out. thank you. in an effort of promoting growth, promoting recovery, what do you think the impact would be if we announced today letting the bush tax cuts to expire in 2012 for the top tax brackets, so, essentially, a tax increase for those brackets? what do you think the impact on the economy will be? >> i can really assess that. it will have some affect on

higher marginal rates and incentives. higher rates would also take some consumer spending out of the economy. on the other hand, we have all been talking about the importance of addressing the overall debt situation, and that would work in the different direction. as i said to senator menendez, those kinds of specific policy decisions are going to have to be worked out by the folks who are elected to do that. >> senator? >> thank you, mr. chairman, and, mr. bernanke, thank you for your testimony, and thank you for your hard work and all that you are doing right now. >> thank you. >> 10 years in the state senate in north carolina, our budget, we did everything possible to keep a aaa credit rating in the state because we knew the consequences if we did not, the increase of our interest rates on our debt, and i just think

the american people deserve better than what they are seeing right now from the lack of inaction, the inability for democrats and republicans to come together right now and help solve this issue, so i am extremely concerned about it, as i know the american people are, and i think that feeling to create -- raise the debt ceiling will cause problems for our economy, which you have been discussing today, and problems that might require accommodative monetary policy from the fed, and understand that the federal funds rate cannot be lowered in any other meaningful way and that one of the fed responses to an economic weakness would be to initiate more security purchases, and i was just wondering, can you help me understand what the fed would do, how you would respond " if we went into default, and could the fed deal with the treasury's

that had defaulted? >> well, the last question, that is really an fomc decision, and i would have to leave that -- leave that to the broader group. we would preserve the operation malady of the system. we participate in securities transfers and so on, but i want to eliminate any expectation that the fed through any mechanism could offset the impact of a default on the government debt. i think it'd be very destructive, and while the fed would do what it could, again, i do not think it is fair to of any expectations that we could offset the impact of that. >> how would this impact the fed ability to conduct monetary policy? >> well, it would immediately offset a lot of benefits of our policy by causing interest rates to rise, and that would affect

the state of the economy. it would also likely create disorderly conditions in money markets and so on where we do actually moved interest rates around, so it would be counterproductive, certainly, to the goal of restoring a healthy economy. >> what happens to the fed income and its distributions to the treasury if the treasury stops making timely payments? >> well, that part, i guess, is kind of a wash, buzz -- because we reserve payments from the treasury and remit most of it back to the treasury, so i think our greater concerns would be the impact on the financial markets. i think it is important to understand the treasuries are not just a buy and hold assets. they are used for liquidity, for hedging, for a whole variety of

different functions. they are the fundamental element that keeps the financial system moving, and so there would be a great deal of disruption in the private sector, in the financial markets, and i think that is where the main problems would occur. >> chairman bernanke, i cannot tell you last week when the bureau of labor statistics released the employment report, and there were over 430,000 people unemployed in my state now that are looking for work, and the bottom line, the creation of 18,000 new jobs nationwide is obviously very disappointing to everybody. i am very concerned, too, about the persistently high unemployment rate among veterans. we have quite a few veterans in north carolina, and over 13% of these veterans are currently unemployed right now, and it seems we have got is a serious

problem in the short run when it comes to unemployment. we have all been talking about that today, too. there is the longer term fiscal imbalance that we are attempting to address. what can be done in the short term to boost demand and help get our citizens back to work? and i would be interested to hear what you think of different policies that maybe have worked in the past or policies and thoughts that you might have going forward. >> well, we were very disappointed, as well. we think it is partly temporary. we hope it will be better going forward. we have to think of this -- fiscal policy as a whole. it is a complicated problem because we're trying to maintain several objectives at a time. one is that we want to a long- term stabilization of our fiscal policy, reduce deficits. we want to do that in a way that it will produce growth. we want a better tax system. we want good investments made by the federal government, etc.. i also think we need to be able

careful about the very short- term, because the recovery is still fragile, and, you know, very short cuts in the very short term could pose some risk to their recovery, so i hope that all of those different goals can be combined in trying to solve this overall problem. again, the fed is doing what it can to support the recovery. congress might want to look at some targeted programs. for example, one of the issues we have been talking about is the effect on skills of long- term unemployment. veterans perhaps seven out of the labour force for a while coming back. so one thing to look at, and, again, there are many ways to do this, using the private sector and so on, is to look " we can do to help unemployed workers refresh their skills so they will be eligible for appointment

when opportunities arise. >> i actually have a bill on that, and i was not using you for a prop on that. thank you. >> thank you, and thank you, chairman, for your testimony today and also yesterday, which i watched part of. i think a number of us on both sides of the table are asking the question that is on the mind of americans, and that is where is the recovery? why is the economy not doing any better? in your testimony, on page two, you city open market committee participants see the first half slow down as persisting for a while, and he mentioned at least four headwinds. number one, slow-growth in consumer spending, number two, continued depressed housing sector, number three, still limited access to credit for some households and small

businesses, and number four, fiscal tightening of all levels of the government. let me ask you, is it not a fact that another headwind affecting our economy and helping to cause the slowdown to persist is the daunting slew of regulatory requirements, particularly on financial institutions, in the past few years? we have got the basel capital requirements. multiple new regulations under dodd-frank, and has any attempt been made by the fed or some other entity to add up the cue

would cost of these regulatory burdens? >> well, what the federal reserve does is for each role that we promulgate, we do a cost-benefit analysis, which is part of up practice and is required by law, which we published, and we do our very best to make sure that we interpret a statute in a way that will be effective but will also minimize the cost on the financial system, so we are doing will begin to assess the costs and benefits. it is a very difficult balance. i agree. on the one hand, we certainly want to have credit flowing, and we want to have a strong financial sector, and i think we will have a strong financial sector, but we cannot forget where we were three years ago when the financial system almost collapsed, and, of course, we're still seeing the damage from

to applywe're trying rules and a way that will minimize the risk of another crisis and still permit good loans to be made to creditworthy borrowers. >> you can see the credit is not flowing as it should be. >> in some areas, it is, but in small business and some household areas, not as we would like. part of it is the financial condition of the borrowers because they suffered through the recession, where the value of their house as collateral has fallen. certainly, there is still some tightness in some areas, that is correct. >> and small businesses, that is where jobs are created. >> small business is an important part of job creation, yes. >> i appreciate that you said that you do a cost-benefit analysis on each individual

regulation. how about looking at a cost- benefit analysis of the cumulative effect of all of the regulations? taken together, it is possible that you might find at some point the expected benefits of addressing the problems of 2008 -- become such a burden that actually the cost is too great, and credit shut down. >> to do that, we would have to understand interactions, and we do try to understand the interaction between different rules, but, again, that is difficult. i understand your point and am sympathetic with your point, but once again, we do know that i financial crisis can be extraordinarily costly, so we

want to take that into account, as well. >> and one final question. do you see any particular negative affect to the increase in the debt ceiling, given the negotiating impasse that has occurred so far? would it be particularly advantageous to our credit rating if we agreed to a ceiling lasting until early next year? for example? >> well, it would certainly be advantageous not to put us in a situation where we are threatening to defraud or not make other payments. >> it would be better than no agreement at all, would it not? >> as the senator pointed out,

or senator vitter, the other part of this is also want to make substantial progress on the long-term fiscal situation, and if the rating agencies thought we were just abandoning that effort, that would not be so good, either, so we want to make a convincing case that we are continuing to try to find solutions to our fiscal issues. >> i would share that. i think, speaking for this side of the aisle, we would continue that, but, clearly, rather than have the situation blow up in the short term, that is not something you'd walk and the room about, is it? >> well, again, my first best is that the debt limit its increased promptly and that we have a real solution for our longer-term fiscal problems. >> thank you. thank you, mr. chairman. >> senator? >> thank you, senator, and thank

you for being here, chairman bernanke. real quickly, i think we all understand we have a fiscal problem in the country. we cannot keep kicking the can down the road. we need stability and dependability. we need a long-term plan. correct? >> correct. >> thank you. i want to talk about housing. in particular concern continues to the housing market. i know it is a concern to you, and it is weighing on our ability to recover, and i think he said it was at the epicenter of the problem. some are square in the middle of this. they have taking -- taken a role in creating it. they did not seem very interested in solving the problem until they were associated with the problems, to a large extent. we learned about robo signing, not double checking the facts, in some cases selling mortgages they did not even own.

the result has been, in my state, and i think probably throw the country, you would know better than i, we have some folks been foreclosed on without good reason. in fact, that kind of attitude is not healthy for a recovery, and it is not going to cut it. we have got a number of reports about different settlements, addressing liabilities with toxic mortgages. when bank recently announced $20 billion, and there's another report of $30 billion between state and federal prosecutors. it is apparent to me, and i would like to get your opinion on this, some of the same guys we bail out in the interest of stabilizing the markets are the ones who have made the housing market far worse than it has to be. the market is tied in a massive knot.

you performed a second round of stress tests earlier this year, correct? to withstand tough conditions. can you give me an idea of the scope and magnitude of this problem and its threat for the housing market? the second round of stress tests, if they have indicated whether these services have the ability to get their act together and do things better positive for the housing industry. >> bloops pimped -- >> we had an investigation in the concerns joining with the other banking agencies, and as you know, many bad practices. i agree with your characterization. it is just very core business, very poor practices, in terms of making sure that consumers were contacted, that they were appropriately treated, that all of the illegalities were observed, etc..

the federal reserve, together with other agencies, has imposed an order on the servicers to fix up their act, to go back and looked at every foreclosure going back for some number of years and to compensate anybody who was injured by their practices, and they will be imposing civil penalties at some point. >> i will tell you of some of the folks that done with my office, and, by the way, they should not have to call a senator's office to get results, but i can give you an example of a man who was widowed and was about to be kicked out of this house within weeks of doing it with but -- by one of the servicers. absolutely ridiculous. i think we need to hold people accountable. the housing market. is in a knot.

what can you do to help on wind it? >> well, from the fed perspective, we are obviously trying to keep mortgage rates low and to encourage lending, an appropriate balance of lending between making sure that loans are safe and sound but making sure that creditworthy bars have access to credit. i the one area i think congress might want to take a look, one of the basic problems is we have such a large overhang of empty, distress sales, foreclosed upon houses. that is pulling down prices. that is pulling down appraisals. as i mentioned earlier, there are about one half a million of these comes indeed reo not all -- in the reo books of fannie and freddie. it is hurting neighborhoods in cities. i think that is an area worth looking at. can we find a way to try to reduce debt overhang or to try to provide incentives for investors to convert them,

something like that. i think that is one of the things that the fed cannot directly address but which could be addressed by some focused program. >> ok. do you any idea -- we talked about excess housing for a while. how much overhang are you talking about? >> that is just the reo. there are a couple million houses that are vacant. >> how many do we have normally in a robust economy? >> probably one-third of that. i do not know the exact number. >> do you have any idea of how many homes are under water at this point? >> -- newland >> thank you very much, mr. chairman. i appreciated. thank you, senator. >> senator. >> thank you, mr. chairman. mr. chairman and mr. chairman. first, i would like to talk

about deficit-reduction, and the senator touched on this, but i want to clarify. leader mcconnell, as you know, has proposed a plan that would allow the debt ceiling to be lifted without accomplishing any debt reduction. many of us have conflicted feelings about this approach, because on the one hand, it would assure that we do not default, but on the other, it does not make any headway in reducing our debt, which will cause problems. i like to say that we are able landfall -- blindfolded man walking towards a cliff. some people think it is 5 yards away, or some people think it is 50 yards away, but we are headed that way. at any rate, the mcconnell plans says ok, deal with the ceiling, no progress on debt. what do you think would be more reassuring note? just raising the debt ceiling

corporate raising the debt ceiling and achieving some deficit-reduction at the same time? >> as i said to the senator, there is two prongs with this. one is to avoid hurting our credit, and the other is to make reductions. >> that is the outcome some of us are working towards right now. so i appreciate that, because to do one without the other does not make much sense. this is about prioritizing interest payments. many of our republican colleagues here in the senate today, one on the committee, they seem to feel we can avoid default by reprioritize in interest payments on the debt, pay back just the debt we know but not all of the other obligations, whether it is paying our troops or paying the faa, the guys in the towers so our airplanes can go, our food inspectors, our border control, our fbi, but if we do not raise

the debt ceiling after august 2, that would require us to stop paying almost half of our other bills, even if you pay back the debt. is that not justified by another name? and, in fact, would not the credit agencies likely downgrade our credit rating anyway if we missed payments on our other obligations? >> i think the downgrade is possible. i do not know for sure. any of those things would involve -- >> you don't agree that in a sense that is the ball? >> the treasury is pretty clear that they don't think that is appropriate. >> would that not hurt the economy? if we stop paying $170 billion

worth of obligations, some estimate could reduce the gdp by a significant percent. is that right? >> sure, of course. >> i am not going to put words in your mouth but it seems to me you are saying the center is way off base. for a smart guy, to say we can pay the obligations and not pay the rest and that is just fine, , i am sort of surprised at it. in today's wall street journal, its stated that standard and poor's said it would likely downgrade u.s. debt if we missed obligations on other payments, so they agree with you. next, a short-term extension. some around here, have advocated shorter-term extensions of the debt ceiling so we would have to

do this every few months. of course markets would believe that the fault is off the table, better than not doing anything, but do you agree that eventually the market would start to get nervous that we cannot find the political will to get a meaningful deal together and might start to view us a little more like europe? wood is in the troubling signal to the markets? >> it is important both to raise the debt ceiling to avoid these kinds of problems but also important to show we can make problems on the long-term deficit. >> i am not talking about the long-term deficit. i am talking about renewal of the debt ceiling by such a little amount that month after month we have to come back and redo it. isn't it preferable to do it in as large an amount as possible, just from the debt ceiling point of view? >> there are political and tactical issues that i do not want to get into here, but we want to get as big a deal as we

can to show that we are serious. >> how would you characterize a one-month extension of the debt ceiling compared to doing it to 2012 or 2013? >> the risk is that you would lose credibility in the markets about your willingness to carry through. if you did that, it would be important to send signals somehow that you have a plan. >> better to do through 2013 than a month at a time? >> the sooner the better. >> thank you, mr. chairman. >> thank you, senator schumer. who is the largest holder of over treasury debt? is it the chinese government or chinese institutions? you have a lot of it.

>> right after the fed would be the chinese. >> as an individual institution, the central bank that holds the reserves of china. >> so effectively, if we were to be paying our debt and not paying our social security payments, we would be principally paying the chinese central bank in new up paying americans? >> that is right, but if we did not do that, we would suffer financial consequences. >> i completely concur. i think the solution is to properly raised the debt ceiling, deal with the fiscal issues of the deficit that we face, and we are trying to do that, but just ironically, when you do this prioritization, the irony is that the priority is to the chinese central bank and lower on the pecking order would practically be seniors and

social security recipients and maybe even bill -- american military personnel. at this point, you do not believe it is even feasible. >> thank you again not only for your testimony today but for your service to the nation in very difficult and challenging times. with that, the hearing is adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011]

>> next, discussion on how democrats nationally feel about the policies of president obama. this portion is about 25 minutes. c-span.org/history. >> "washington journal" continues. >> think progress dot org you thofrment also the vice president of the center for american progress. appreciate your time. let me share with you this headline from the washington examiner. the president's prospects with regard to re-election. is this moment and maybe this week a make or break moment for the president? caller: i think so. heading into a deadline of august second and the deal has

got to happen this week in order for the nations economic rate together survive. i think the bond agencies have h said you have to have long-term repercussions so it's important they get that deal this week and you have to strike that grand bargain. that's where president obama said you have to go over the long-term. in order to have scant debt reduction you have to have taxes particularly on the wealthy. paying an among the lowest they have. and order to sustain some of the programs you want. social medicare through the system and you have to have revenue base to do that. the grant bargain is a good s sign. host: but tea party activities and parties say there's no way. guest: that's how they got

elected right. all the tea party people had to stand against spending s and sa they weren't going to raise taxes where it provides very little room to compromise and it's a concern to have them at the table in negotiations because they want to act as if there's no repercussions on the principled positions if we were to go down that root the nation's economy would slide in a deeper recession. we have to cut social medicare and continue to have low taxes on the wealthy and corporations. it's just a vision for america that i think is unjust. fundamentally unjust in which your asking the working class the middle class of america to bear the burden of all the pain and asking the wealth yes to do none of it and that's the concern we have.

host: 20% to social security and 20% to medicaid and medicare. almost half you have to have five or six interest on the debt if there's a grand bargain. should changes to the medicare, medicaid program be included and maybe changes to social security and when the retirement age kicks? guest: yes. particularly to means that mean use ask those that are wealthiest to receive less of a benefit as they retire. and also they would contribute a little bit more. as they are paying into the program and i think that those are very responsible ways to go about it. the concerns would be raising the eligibility age. your asking people to work longer in a tougher environment and giving a lower benefit to lower income seniors and it's going to force the elderly people that have given money into the program to i think to

renege on the promise. i think raising the eligibility age is an area we don't want to go. there's reforms including means testing and changing some of the tax structure around it that would be fair in this environment. ho host but if it's phased in 20 or 30-year would that be reasonable? guest: yeah if people have the expectation that they know what they're paying into at the time you get into a fairer environment, right? but the harder question, do you tell people in their middle ages 40-50 you've been paying in with expectations to require you retiring at a certain age that so sorry. all bets are off. you don't get the benefit because we're not tough enough to tell a few wealthy individuals or others to pay more. i think if we go down that road

where we're changing entitlement reform we have to do it fairly across the board. it can't be put all the pain on social security and medicare and never ask the wealthy corporations and individuals making over $250,000 to up the antea little bit on their end. host: the president speaking to you and the news conference that the pain must be spread across the board. here's more. >> this is tough on the democratic sign and side too. i would be willing to see happen. there's some democrats that think that's absolutely unacceptable and that's where i have a selling is trying to sell some of our party. if you're a progressive you should be concerned about debt and deficit just as much as you're a conservative. the reason is, if the only thing we're talking about over the

next year or two years or five years is debt and deficit, then it's very hard to start talking about how to make investments in community colleges so our kid as trained and how to actually rebuild 2,000,000 of crumbling infrastructure. if you care about making investments in our kids in making investments in infrastructure and basic research then you should want our fiscal house in order. so that every time we propose a new initiative. somebody doesn't throw up the hands and say, ah, more big spending. more government. host: yet this response. the way obama explains it is he sticks this debt on the american people and says now we must pay it back. how with no jobs. unemployment at 9 point 2% nation wide?

guest: if you're looking at the current economic state it's struggling. we're still at over 9%. only 18,000 created last month. in this environment we need investment in america. we need to build infrastructure and create jobs and preserve some important programs for people falling through the crack so i think that we have to have a vision for america that has some justice involved in it. i think the struggle for the president is he's dealing with some party who is are completely in flexible and uncompromising but in addition know that, have a vision for a different kind of america. it's a competing visions of government and one, which we protect everyone and raise all votes and we have what i would deem a group on society asking everyone to contribute to a little collective and everyone

derives collective benefit and you increase your standard of well-being and happiness. that's the society we want to live in. not one that's got theirs and mine and i don't care what you will get. those for competing visions that obama has had to fight for. you look at where you got to this point where the president should be credited or to blame for the significant part. increasing higher under him. it's worth going back to figure out he and how he not her. when the house republicans wanted what was the first thing they did. they demanded we find a compromise in the bush tax cut. president obama agreed at that time. december of 2010 agreed to an extension or the very wealthy which costs us about 35 billion over the next two-years so expired now in 2010.

that's for the very wealthy. in order to pay for that. nobody paid for that at the time. house republicans coming into office. nobody demanded a sacrifice so. then we go along and get into april of 2010. what happens then? we're trying to fund the government and the house republicans warn we're going to shut down the entire thing. eventually obama agrees in april of 2010 and agrees to/38 billion in spending. about the same amount we gave to the wealthy in this country and we're slashing it for basic programs at that point in time and now you flash forward from that point and here we are again going through the same conversation of whether or not we'll let the economy spiral in if we don't give the

republicans everything they want if you look at the long-term. the president has been consistent in demanding fair sacrifice and having revenues on the tail and republicans have been clear about their priorities. demand a pain and sacrifices from the lower middle income folks. host: more information logging on to distinct progress dot org. also with the center for american progress. the committee to preserve out with the latest political spot aimed at that issue. let's look. today's seniors understand the benefits of social and medicare. they know these programs will be just as important for future generations so high is washington talking about benefit cut? stand with us and tell congress, don't cut social security and medicare. because we pay into these programs with every paycheck and

americans of all ages need the security. need the benefits they provide. host: seeing a lot on both sides of the issue. guest: i'm helpful and supportive of their efforts and think that's the right approach. not that you want to appose any change in social security or medicare because you want the economy or the nation to sink into a deeper recession is how the republicans frame it. you want to preserve those benefits because they're a key central part of why america is a stable and emerging successful economy. in order to have an a flourishing workforce you have to have a safety net for people in their elderly ages to keep them out of poverty and that's one of the reasons the we have medicare to keep them out of desperateication and it's important to remember the vision

of why we're protecting the important programs. .

to say.

>> good morning. caller: something was stated that is not quite accurate. most republicans realize that it has to be an even keel approach. most republicans are silenced by a big minority -- it does not explain escaut he simply as it

should be explained. as far as the debt limit, i would like both of you gentlemen to let the entire country know, -- i am sick of this nonsense. we finally have a president that wants to act like an adult. and how many times did these guys vote to raise the debt ceiling? this is political posturing to the detriment of this country. we need adults. i will not be associated with this childish nonsense and political posturing.

john boehner is trying to be an adult. the most ironic thing is -- this situation should not have gone this far. host: thanks for the call. the giese section of the washington post -- "g" section of the washington post is this editorial. guest: 75% of republicans favor obama's approach.

most republicans support this approach. some are very reasonable than that. there are increases in the debt limit. we noted that the current leadership voted to raise the -- the fact that we are talking about this novel reproached -- [unintelligible]

this is something that we normally do. the fact that we are in this situation where we will not raise it, because we need spending cuts is totally different, because congress recognizes that the debt limit is paying the obligation. congress has passed bills where we have allocated money. now you have to pay the bill. host: we were looking into has contributed to it other than the president. can you ask your guest but he thinks about an initiative like one company?

guest: they organized a somewhere around 200,000 followers, people demanding that the obama administration not cave on medicare and a social security and not of these followers have lots of money and manpower supporting the campaign one time around. they will not contribute their effort, time, it money. i believe the posture is probably helpful to the president. he is getting serious push back from the left. we have to move in that direction. he is getting serious heat, not

just for political purposes but others behind it. we have to keep people of of poverty. host: would you ban any contributions for you personally if he goes to medicare or social security? guest: if we do not have any tax raises and it depends of what kinds of change we are talking about. i think we can find an approach that is aggressive in nature, but i would have to look at the details he would be proposing. host: i find it curious that wealthy liberals find ways to pay for problems created by ever

government. guest: it is a fact that corporate income -- the united states, the second to the west in the world at collecting the percentage. corporations are avoiding taxes altogether in a variety of different ways. some are receiving -- getting money back from the government. that is for the privilege of doing business in the united states of america. they are laying off thousands of

people. they are demanding and asking for a huge taxpayer subsidies for them, but not paying any taxes. most people join country clubs, and gems, and others feel they are proud to pay their monthly dues, because they want to be part of that special relationship or community where they receive benefits. people should feel the same kind of honor and respect to live in a wonderful and free society to appease the benefits that we do, we have to be willing to invest in it. we should not have an aversion to paying some amount of taxes. host: democrats line.

caller: i am on my disability. that is also have to live off of. president cute tax thes payouts and rich? guest: that is what i was saying. we are heading into a difficult time. we should not cut her benefits and not as corporations to pay a little bit more. it is not the type of just society that i want to live in and that most americans want to live in. live in.