state and local governments has continued to decline. real federal government spending has also declined since the third quarter of last year and the future course of fiscal policy remains quite uncertain as i will discuss shortly. with regard to inflation, large increases in energy prices caused the price index for personal exemption to rise at an annual rate of 3% over the first three months of the year. oil prices and retail gasoline prices have since retraced those earlier increases. in any case, increases to the price of oil or other commodities are not likely to result in increases in overall inflation so long as business and household expectations become stable. longer-term inflation expectations have been quite well anchored according to surveys of households and economic forecasters and has derived from financial market information. the five-year forward measure of inflation computation

derived from yields and nominal and inflation protected treasury securities suggests that expectations among investors have changed little since last fall and are lower than one year ago. meanwhile, the substantial resources slack should continue to restrain inflationary pressures. given these conditions, inflation is expected to remain at or slightly below the 2% rate that the federal community just as consistent with our mandate to foster maximum employment in a stable crisis -- and as stable prices. with unemployment high and the outlook for inflation subdued and in the presence of significant risk to the outlook, the fomc is maintaining a highly accommodative stance of monetary policy. the target range of means -- remains at zero to 4%. the committee has indicated it anticipates economic conditions are likely to warrant low levels of the federal funds rate

at least through 2014. the federal reserve has been conducting a program announced last september to link in the average security -- maturity of its security holdings by purchase of longer-term treasury securities and selling an equal amount of treasury securities. the committee continues to reinvest principal receipts from its holding of agency debt and agency mortgage-backed securities and to roll over its maturing treasury holdings at auction. these policies are supported -- supporting the recovery by putting down pressure on longer-term interest rates and by making broader financial conditions more accommodative. the committee reviews the size and composition of its securities holdings readily and is prepared to adjust those holdings as a program to promote a stronger recovery in the context of price stability. the economy. the performance over the medium and longer term will depend on

the course of fiscal policy. fiscal policy makers face daunting challenges. they should keep three objectives in mind as they do so. first to promote economic growth and stability. the federal budget made -- must be put on a sustainable path. the federal budget deficit, 9% of gdp, is likely to narrow as the economic recovery needs to -- needs higher tax revenues. nevertheless, the cbo projects its -- if current policies continue, the deficit would close to 5% of gdp in 2017 when the economy is expected to be near full plumbing. under current policies and economic assumptions, the cbo projects the structural budget gap and the ratio of debt to gdp will trend upward thereafter. reflecting rapidly escalating health expenditures and the aging of the population. this dynamic is not sustainable. at best, rapidly rising levels

of debt will lead to reduced rates of capital formation and increasing foreign indebtedness. it will provoke a fiscal crisis that could have severe consequences. fiscal policy must be placed on a sustainable path that results in a stable or declining ratio of federal debt to gdp. even as fiscal policy makers address sustainability, a second objective should be to avoid unnecessarily impeding economic recovery. a severe fiscal tightening, would pose a segment and risks to the economy. uncertainty about the resolution of these fiscal issues could undermine business and household confidence. fortunately, avoiding the fiscal cliff and achieving

sustainability are mutually reinforcing agendas. preventing a sudden and severe contraction in fiscal policy will support full employment which should aid long-term sustainability. a credible fiscal plan to put the budget on a sustainable path will help keep longer-term interest rates low and improve household and business confidence thereby supporting economic performance today. a third objective for fiscal policy is to promote a stronger economy in the medium and long- term to the careful design of tax policy and spending programs. to the fullest extent possible, federal spending policy should increase incentives, encourage investment, and work-force skills, stimulate private capital formation, promote research and development, and provide necessary public infrastructure. we can expect our economy to grow its way out of federal and balances without significant

adjustment in federal policies, and more productive economy will ease the trade offs that are faced by fiscal policy makers. thank you, mr. chairman, i will be glad to take your questions. >> i will start with the first round of questions. based upon three news items -- china announced today that it has cut its benchmark lending rate for the first time in nearly four years in order to reverse an economic slowdown. the european central bank hinted it would take no further action to aid the faltering european economy. two federal reserve board governors have hinted that additional action by the federal reserve -- based upon those three items and based upon your

testimony, the basic question i have for you -- is the federal reserve planning to take any additional actions in the short term for economic growth and create jobs? >> >> i think china and your face rather different economic situations than we do. we have to make our judgments based on what is happening in the united states. looking forward to our meeting in about 10 or 11 days, i think the main question we have to address has to do with the likely strength of the economy going forward. as i discussed in my testimony, the weakness in labor markets in the last couple of months may reflect the end of a catch-up period where employers were offsetting the very sharp declines in employment that occurred during and after the recession.

if that analysis is correct, going forward, in order to see continued improvement in employment and lower on implied rate, we will need to see growth at or above the trend rate of growth that is the essential decision and the central question that we have to look at -- will there be enough growth going forward to make material progress on the unemployment rate? my colleagues and i are still working on our on assessments. staff is working on their updated forecast and we will have a new round of economic projections by all the participants in the fomc in the meeting and i think that is the key question. if we decide that further action is required, we also have to decide what action is appropriate or what communication is appropriate. we have a range of options. we have the traditional reduction of short-term interest

rates but that is no longer feasible. we have options we can consider looking at those options, we will have to make some difficult assessments about how effective they would be and whether there are costs associated with those steps that would outweigh the benefits they might achieve. i cannot directly answer your question. it is too soon for me to do that. we have a committee meeting where we will evaluate this question but the key question we will be facing is -- will economic growth be sufficient to achieve continued progress in the labour market? our mandate for maximum employment says we should be looking to try to achieve continued improvement. >> thank you, that gives us a sense of how you are approaching the question. let me ask you about the so- called fiscal cliff. a lot of americans have a sense of a book when you wind up --

have a sense of it but when you line up the question of tax cuts, the automatic spending cuts that were put into place by last year's budget control act, the payroll tax cut expiration, federal unemployment sure it's expires and a whole host of other challenges -- can you assess the impact on the economy just on one of those items and specifically if the tax cuts for middle income folks were to expire? just that particular question, if you can make an assessment of that? >> the potential expiration -- and i'm not sure i can break it down to the different components but the potential expiration of the so-called bush tax cuts is the single biggest item in the

fiscal cliff. if everything else held constant, it would have an adverse affect on spending and growth in the economy that would be significant. in saying that, i am talking about the size of the fiscal impact of that. i'm not necessarily saying that the right thing to do is to extend those cuts. there could be other steps that would have a similar impact but that is the single biggest component of the so-called cliff. >> in keeping with my orders are and time, i will turn to vice chairman brady. >> you mention the options of quantitative easing. would that are ground become

blind to treasuries? >> -- would the third round be confined to treasuries? >> still law permits us to purchase treasurys and government agency securities. those are the securities that we have purchased in the past can and i wouldn't want to take anything off the table at this juncture. i want to emphasize that there are two steps -- the first is to determine whether we think growth will be adequate to lead to further improvement in employment and that the same time, we will assess the price stability mandate and the outlook for inflation. if we determine that further action is at least potentially warranted, we have a number of different options we would have to consider. at this point, i really cannot say that believing is completely off the table. >> my more direct question is

the long-term interest rates, other than the financial crisis, we have not seen this since the 1950's. is that will impact our economy? >> if additional stimulus is needed, could the actions of the federal reserve achieve additional financial accommodation? putting aside potential bad side effects that might be associated with that, i recognize that rates are quite low so that clearly is a consideration. i think we do have methods and tools that will allow us to get further accommodation and the economy and provide some support. it is not quite the same thing to say that the problem of the u.s. economy is not lack of

financial accommodation. or to say that if the main problems are coming from elsewhere that the federal reserve might provide support from using the tools it has. i have said this before that monetary policy is not a panacea. it would be better to have a broad base policy effort addressing a whole variety of issues. congress has considered many of these issues. i would be much more comfortable if congress would take some of this burden from us and address those issues. >> that is the point i would like to make. my belief is i wish you would take the third round of quantitative easing off the table. i wish you luck the market in the eye and say the fed has done all it can, perhaps too much. i wish you would look at this president and congress in the eye and say it is time to do your job.

it is your tax policy, your financial house, rebalance your regulation so that you are encouraging job creation and to mitigate uncertainty and concern over the president's new health care policy. i'm not asking you to say that today but i wish you would. back home on main street, i believe those of the elements that are holding this economy back and until we get that right, no action from the fed will get this recovery moving in a way we would all be satisfied with. may i ask very quickly on europe -- there are concerns of what will happen with crease exiting the euro and what type of contagion will occur in europe. earlier you said the tools you believe are important are providing liquidity through the currency swap and injuring american banks are in strong financial condition and being there to provide liquidity.

are there any other tools that you are considering should that contagion reach us from europe? >> no, you have a pretty good list there. we did the swaps, as you know and they were very helpful in reducing stress in dollar funding markets and have been coming down significantly from $110 billion to $20 billion. they seem to be declining. i would like to emphasize that on the banking side, we have worked hard to make sure the banks and financial system would be resilient to shocks coming from across the atlantic including our stress tests which have such as shown strong liquidity positions. our ongoing reviews and exposure of banks to europe cause us to provide steps that we are prepared in the financial system. as i said in my remarks, the

federal reserve retains broad based authority to provide liquidity against collateral in the event of intense financial stress which is retained in dodd-frank in its role as liquidity provider of last resort. we stand ready to do what ever to protect our financial system. >> thank you mr. chairman for being with us today. - want to go back to = something you just said to my colleague from the senate. you were talking about one of the biggest portions of that fiscal cliff with the expiration of the bush tax cuts but you say you're not advocating that necessarily. you say there are other things that can be done. could you tell us what those other steps might be?

is there a to do list? i think i know them. >> i am was an of not to tell you. -- i'm wise enough not to tell you. the concern in the short term is that all of these measures together if they occur will amount to a withdrawal of spending and an increase in taxation depending on how you count between 3 and 5% of gdp. it would have a significant impact on the near-term recovery. whatever benefits you might see in those programs in the long term. i am saying that in ways that are up to congress, steps should be taken to mitigate that overall impact in a combination of tax reductions and spending increases which is up to you. if no action is taken -- what is striking is that this is all

pre-programmed. if you'll go on vacation, it will still happen. it is important to be thinking about that and working with your college to see how you might address that concern at the appropriate time. >> i hear this a lot on television and among my colleagues and from people back home that we are headed toward the greece situation. that situation is you spent too much and you retired early. there are not enough workers and not enough of the economy going to sustain the people who are living on payments, if you will come mostly from the taxpayers. then there are other people who say that the greece situation

is you cut too much spending and you are trying to collect taxes too fast and the economy has contracted and as almost like a vicious cycle. for those people who say we are headed towards greece situation, what do you think it is text is it true that we are mirror anding that? i see it in a different manner. are we subject was going on in greece with the real economy we have? >> no, i think the united states and greece are extremely different economies. greece is a small economy. the causes of the crisis vary quite a bit from country to country. greece was a country that overspent and over borrowed. that is a major reason why it is currently in such trouble.

the united states is a large diversity, with deep financial markets, international reserve currency, independent monetary policy, great credibility after 200 years of paying our debts which, by the way, is a strength we should not squander if at all possible. that being said, i don't think we're in a greek situation. the evidence for that is that we're currently paying 1.5% for 10-your money where priests cannot borrow any price essentially. --greece can't borrow at any price, essentially we have a situation that is not sustainable and will need to think seriously about how to put the fiscal budget, the federal budget on a path that will be sustainable in the longer-term. >> thank you. because we have so many members,

i will yield back my time and i will call on mr. campbell from california. >> thank you. you made it quite clear that the so-called qe3 is a decision that will not be made for 11 days or so from my perspective, a qe3 would affect interest rates potentially and potentially liquidity neither of which it seems are obstacles to growth, interest rates being historical low and it seems to be plenty of liquidity. in considering a qe3, get the decision were made to do it, in what way do we -- does someone believe it would help the current economic situation? >> again, putting aside the question of whether we need further steps and putting aside

the question of the adverse side effects of costs that might be associated certain policies, our analysis is that the quantitative easing programs we did in the past did ease financial conditions. they lowered interest rates, they lowered the spread between private rates and government rates. even given a level of treasury securities, it could lower the rate paid by corporations. we have lower mortgage rates, which has raised the stock prices and therefore welcomed a fax for consumers -- and wealth effects for consumers. we continue to believe that while some may think the effects are less powerful than they were in 2009, we continue to believe that potentially these

sorts of measures could still add some additional accommodations, some additional support to the economy but then again, as you point out, maybe some diminishing returns and that would be a consideration we have to look at as we try to analyze what our options are. >> let me move over to europe, if i can. you said we should monitor the situation and the federal reserve remains prepared to take action and to outline what some of that action should be. what should we as policy makers be monitoring text what action might we be prepared to consider or take? in europe, we cannot control their fiscal or monetary policy or their political decisions. if there were to be a rapid

deterioration of some situation in europe the of the currency or the banks or whatever, how can we put up a fire wall or can we or what might -- what things white -- might we be prepared to do to minimize the impact on the u.s. economy? >> congress and the administration have not agreed to any kind of direct support to europe. the administration has not asked for additional imf funds, for example. the main thing congress could do is to strengthen our own economy. the more momentum and a stronger our economy, the better able we would be to withstand the financial spillover from problems in europe. bachus back to my earlier point about getting our fiscal

situation -- that goes back to my earlier point lead getting our fiscal situation in order and taking steps to help get the troubled parts of our economy from the employment market to the housing market to whatever else you would be looking at. i think my bottom line here is that there is not a whole lot that can be done that i can think of to attenuate the problems in europe. we have to monitor it very carefully. the best thing we can do is try to make sure we are strong and prepared in the united states. >> are the risks to our economy from your greater today than there were six months ago? >> the risks have waxed and waned. this problem has been going on for more than two years. the crisis has been going on for more than two years and there have been periods of greater and less intensity. early this year, following the

long-term refinancing operations conducted by the european central bank as well as the debt restructuring of greece, the situation calmed down notably for a while. for a number of reasons including the great election which raised questions about whether greece would meet the requirements of its program and concerns about spain and italy and the banking system, the stresses have risen significantly in the recent month or two. i'm not quite sure whether it is at the highest point been but it is certainly at a point where it is important for european leaders to take additional effective steps to contain the problem. >> i will recognize rep cummings from maryland's. >> thank you very much.

when you appeared before this committee last october, you testified that in most recessions, the housing sector is usually a big part of the recovery process. you testified that many people are under water and a loss of equity means they are poor, they are less willing to spend, and addressing the housing situation is very, very important. in january, the federal reserve issued report on current conditions and the housing situation in a u.s. it says continued weakness in the housing market poses a significant barrier to more vigorous economic recovery. i assume you still believe that addressing the housing crisis is critical to resolving our economic situation, is that correct? >> yes. >> economists and experts across the political spectrum believe that one key tool to addressing the housing crisis is to target

principle reductions from the war mortgages because they helped homeowners avoid default. in 2008, you said in this environment, principal reductions that restores some equity for the homeowner may be relatively more effective means of avoiding delinquency and/or closure. a lot of people have characterized principle reductions as help in all my homeowners. can you explain why in some cases they actually could help taxpayers, too? >> i think we have made some progress. the housing market looks to be stabilizing which if true would be good news. going forward, it would be helpful to recovery. there has been a lot of effort since i gave that speech to try

to modify mortgages and try to reduce foreclosures and some of that has taken the form of principal reduction, notably finney and freddie have decided that some principal reduction is a tool for reducing foreclosures and principal reduction is part of the settlement with the large servicers. we will get more evidence on this very soon. the board of governors does not have an official position on principal reduction versus other means of modifying mortgages or other was a boarding foreclosure. -- or avoiding foreclosure. you want to consider whether reducing payments is more effective in some cases than reducing principal owed. i think there's an important

question there. generally speaking, the point that i was trying to make a few years ago was while we all focused on the avoidance of an unnecessary foreclosures put pressure on homeowners, if successfully done, it reduces loss to the lender, it supports the housing market, and that in turn helped the broader economy. to the extent we can avoid unnecessary foreclosures and do so in a cost-efficient way, there are benefits that are broader than just help to the individual homeowner. >> last november, william dudley, the president of the federal reserve in new york testified and he said "we think you can devise a program for home buyers who have mortgages under water to incentivize them to pay on those mortgages to give them some principal

reduction." obviously, the devil is in the details. we're confident one can design a program which would be beneficial and net positive taxpayer. do you agree that a target principal reduction program could be designed in a way that could be met positive? >> president dudley was speaking for himself. the board does not have an official position on that. i agree that the devil is in the details. a lot would depend on what the criteria are, being eligible for principal reduction and how it would be structured. some think a useful approach would be to give principal reduction but to have an equity sharing arrangement whereby if there are future games, those would go back to the lender.

it depends very much on the way that principal reduction is structured. no doubt there are some situations where that would be the most effective method of purging unnecessary foreclosures. we should look at that but look at the whole range of tools for averting unnecessary foreclosures and look at other issues like the conversion of foreclosed homes to rentals, steps to improve access to credit of mortgage borrowers and so on to really address the whole range of issues in the housing market. >> thank you very much. >> i want to talk about a different topic today that is somewhat esoteric and i want to talk all about the interest rate derivatives market and specifically the market for interest-rate swaps. apparently, the notion of the size of this market has grown from $682 billion in 1987 to

over $400 trillion to date. it implies a large underlying growth of market value to this particular market. there was a federal reserve of new york report back in march that he essentially said this market was very difficult to measure and very difficult to value and multiple transactions appeared over the counter and not in the broader exchanges. it said the lack of comprehensive transaction data has been a barrier to understanding how otc derivatives market operates. it struck me that a lot of those words could be used to describe what happened with the mortgage- backed securities that we had back in 2008. should we be concerned about this market and its lack of

transparency? >> it is probably one of the most important derivatives market and we pay attention to it. it is important to say on the one hand that those numbers that you resent greatly overstate the actual exposures that the people involved in the swap are facing. those are just notional values. it is also true that interest rate swaps are typically among the most straightforward and simple to understand of derivatives. many of them are vanilla swabs that are pretty easy for regulators and participants in the market to understand. in some ways, it does not pose the risk that credit defaults walks during the crisis posed. that being said, i agree with

the general thrust which is that we have seen that over-the- counter derivatives can be dangerous and following the spirit of financial reform from this congress, we, and our fellow regulators, are working to put as big a share of -- as possible of swaps onto centrally-cleared central counterparty thai exchange's and to increase the transparency so regulators and the public will have more information. we're working in that direction and i agree is an important objective. >> does the size of its overall market give a false impression to the church demand for debt? -- give a true demand for debt? >> this is a way in which participants can convert a fixed interest payment which is floating and depends on some

indicator. it is really a way of customizing the flow interest received your interest. paid you could have enormous amounts of interest rate swaps based on a relatively modest amount of underlying debt. i don't think it overstates the amount of actual debt in the market. it is really a hedging tool for market participants who want to customize the flow of their payments and receipts and interest rate than it does the size of the market and the risk of some of the larger financial institutions -- >> mostly just large financial institutions play in this market and giving the losses they could incur, does that somehow compare your ability to perform your job? does it compare your ability to exercise independent monetary policy? >> no, i don't think it does

because the underlying instruments, credit instruments are still the same. it is just a way of sharing the risk for the pattern of interest receipts and payments. i should have said that to the extent that interest rate swaps are not traded on central counterparty isies. the regulators are working to make sure that there is sufficient margin posted on both sides of the swap so that if there are rapid changes in the value of the swaps that both parties would be protected and also, in fact, this afternoon, we will have a meeting of the federal reserve to discuss basel 3 and our discussion will include capital requirements for

the market book including derivatives. in other words, even over-the- counter financial institutions will be protected by the capital they hold and by the margin that they place when they transact with counterparties. it is important for us to take steps to make sure that individual banks are not exposed on duly to large swings in interest rates. the counter examples a isig which took a huge one-way bet and when it lost, but lost enormous amounts of money which nearly brought down the company. we want to avoid a situation like that and that means as much central counterparty trading as possible and adequate capital and margin for over-the- counter transactions. >> thank you very much.

>> thank you, mr. chairman for being here. i work with a bipartisan group of senators, like 45 of us, trying to come up with a solution and we have made some headway. it would be a mix of spending cuts and revenues to get to that $4 trillion figure in four years. you made it clear you believe we need to do something significant to address these fiscal challenges. i think a balanced approach would be the best way to do it with a mix of spending cuts and revenue. >> i congratulate you on these efforts. i'm glad to see people are working hard on this. it is really not my place to advise congress on the particular mix of spending and tax changes. i hope you will understand that. i am glad to see that there is a bipartisan effort involved in

trying to address this important problem. >> the last time we talked, you talked about if we fail to act again and went to the brink as happened last summer with the debt ceiling that that clearly created some problems with our economy and the fiscal situation in this country. >> the debt ceiling is a somewhat separate issue. it is a strange thing that congress can approve to spend $5 and tax $3 and not approve the $2 issuance of debt. no other country i know of has anything like the debt limit role we have. the brinksmanship last summer over the debt limit had very significant adverse effects for financial markets and for our economy. it really knocked down consumer confidence. that is a somewhat separate issue but i urge congress to come to agreement on that and

not pushes to the 12th hour. trying to put our fiscal situation on a sustainable basis is perhaps one of the most important things that congress could be working on. >> when you look at the last action by the fed in 2000 a with short-term interest rates z all thatero and $2 trillion has been pushed into the u.s. economy, due to past -- to the past actions inform you in the current economic situation? >> yes, obviously, when we began these nonstandard actions, we did not have the benefit of very much experience except looking at japan. cleanout out more actual data and experiments and we can observe the actions of of these on financial markets. we have some model basis

analysis on the broader economy. there is still a lot of uncertainty about the effectiveness of these tools and the channels for which they work and it is also the case that monetary policy is less effective than it would normally be because of various constraints on lending and so on. having had that experience, it has certainly made us better informed and better prepared to use these tools necessary. >> my state is doing better than many states where unemployment is at 5.6% but there are people hurting. one thing i have noticed is in past recoveries, we have seen a more direct corollary between economic growth and higher in don't seem to have that correlation today. what has changed and do you think we could do more to address that issue? >> in fact, the pace of

improvement in the labour market from last summer through, say, march was surprisingly strong given the relatively tepid rate of growth and economic activity. it was a puzzle that we try to understand. i gave a speech about this in march and one hypothesis is that there was a burst of? direct hiring that reflected the reflected a reversal of success of laos during the recession, where firms have laid off too many workers and were catching up. if that is true, which we do not know for sure because there are many things going on, if that is true, the implication is that if growth stays near the potential rate of growth, say 2.5%, the improvement in the unemployment rate going forward might be

quite limited. that is a question that we really have to think about. >> thank you. >> thank you, mr. chairman for being here. my experience in business and politics tells me that most of the time when we try to solve problems, we are treating symptoms and i am more about that with our political policy and monetary policy. it is pretty clear that our tax rates did not cause the recession. there were implemented during the downturn in the early 1990's. we had six years of growth. the problem clearly came from a loose credit policy that resulted in subprime mortgages and toxic securities. we have not really addressed that except it appears we over- address that in talking to many businesses and home builders and realtors that we have

constricted credit to such a degree that local banks that don't have the flexibility to deal with their local economy because the federal government and various agencies are telling them what has to be in their portfolio. maybe the solution is much simpler. not addressing that problem. i don't work think we have addressed a big part of the cause. instead, we have tried unprecedented bank bailouts and government spending an unprecedented monetary activism and it is not working. i am concerned about that. the thing i am really concerned about now is since 2008, the national debt has increased about 50% but the interest paid on that debt has increased about 2%. some of the things you're doing in the federal reserve is giving

us a false sense of security. last year, i think you bought 75% of the debt that we created which masks the real problem. it probably gives us a debt interest rate that is much lower than it would be. part of my concern now is that to haveide you appear to keep our interest rates low. on the other side, if you don't keep yields low, banks will part the money in treasurys and it seems you are caught in a catch- 22 where you have to work both sides of this to keep interest rates abnormally low and you have to continue to buy treasurys or we will be paying some much on our national debt that the fiscal problems we're

looking at will complicate overnight. doing the things that don't appear to address the root causes of our problem. we seem to now be in a quagmire that we cannot get out of. i'm sure you have a totally different take on that but i think you would have to agree that the activism has been unprecedented and reason to cause at least some concern. >> of course there has been a whole range of approaches and responses to this crisis which was a terrible crisis and required a strong response. i would comment on your point about interest rates and the federal debt -- the reason we keep interest rates low is not to accommodate congressional fiscal policy. the reason is we think it will help the economy recover a bit faster and keep inflation near

our two% target. i would question whether low interest rates are in some way enabling fiscal deficits. the deficit over the last few years has been over $1 trillion per year, as you know, about 9% of gdp. if we raise interest rates by a full percentage point, ignoring the fact that most debt as of longer duration re-price, that would only raise the annual deficit by something a little over $100 billion. >> $1 trillion over tenures is real money. >> $1 trillion in one year is what the current deficit is. >> if it is $100 billion, it would be $1 trillion over 10 years. $1 trillion here, $1 trillion there.

the situation, the deficits are so large going out over the next few years, in respect of the level of interest rates, i would think congress would have plenty of motivation to address that and whether or not interest rates are currently 1.5% for 10 years, it does not make them as different. >> there is one other point -- we are according pro-growth economic policy with more government spending. our president is talking about that with the europeans and austerity is bad and on one hand, you tell us this debt is creating a potentially huge crisis yet you are telling us that we need to keep spending with more debt. what is the real signal here? >> it is not necessarily more spending.

appropriate tax relief would also help in the same way. i have always said as i said in my remarks, you don't want to just two short run stuff and ignore the long run. you don't want to do longer run stuff and ignore the shorts stepper you need a balanced program, one that would do no harm and avoid derailing the recovery in the short term but combined that with a strong and credible plan for reducing the deficit over the medium term. i think that is the best policy and it may be difficult to achieve but in principle that would be the best way to go. >> thank you. >> we have a bipartisan agreement to keep on time. >> centre sanders -- >> thank you for being with us. i will try to be as brief as i can. i have three questions -- #one, the first one deals with conflicts of interest at the fed. as you know, jamie dimon is the

ceo and chairman of j.p. morgan chase which is the largest financial institution in this country. during the fed bail out when $16 trillion and low-interest loans occurred and were given out to every financial a citizen in this country, j.p. morgan chase received over $300 billion of those loans. the american people, i believe, perceived conflict of interest when you have, among others, the head of the largest financial institution in america sitting on the new york fed which is presumably supposed to be regulating the fed -- these financial institutions. many people including myself see this as a situation where the fox is guarding the hen house and we need real reform in the fed to make sure it is representing the middle class and small business of this country rather than just the big

money interests. would you be supportive of legislation i have introduced which says representatives of financial institutions get off of the fed and baby replaced by folks from the general public? >> you raise an important point which is that this is not something the federal reserve created. this is in the statute. congress in the federal reserve acts said this is the governing for the federal reserve and the bankers would be on the board. >> 6 out of nine in the regional banks are from the banking industry. >> that's correct in that envelope. -- that is in ample law. we have tried to make something useful out of that. we have taken a lot of actions to negate conflict of interest and under dodd-frank, the gao pointed out some appearances of

conflicts. >> i wrote to that position and i congratulate you. it also found there were no actual conflict of interest because there is a fire wall so that the bankers do not have any information or ability to influence supervisory decisions. the answer to your question is that congress set this up and we have made it something useful and get information from a pot of congress wants to change it, of course, we will work with your to find alternatives. >> thank you and you're quite right, is something congress established a long time ago and it is time to change it. my second question is -- in america today, we have the most unequal distribution of wealth and income of any major country on earth, worse than at any time in our country's history before the great depression. we have 400 individuals owning more wealth and 150 million

americans and the top 1% of america on a wealth of america and the bottom 60% owned only 2% of the wealth in america. last report i have seen in terms of income suggests that in 2010, 93% of all new income from the previous year went to the top 1%. we can talk about economic growth all you want but to the average person, it does not mean a damn thing of all that new income is going to the top 1%. do you believe we can see an expanding middle class if we continue to have that kind of an equitable distribution of wealth and income? >> it is not so much a question of bringing down the top 1% as it is bringing up the lower 99%. how can you strengthen the middle-class? how to make the incomes higher and more secure? this has been a trend that has

been going on for 35 years and is related to a lot of factors including globalization, the technical change which has made a high school education less valuable. i would be very much in favor of measures to strengthen the middle class and tell average americans do better and things like education would be very constructive. >> last question -- you have six of the largest financial institutions, wall street banks, which have together, assets of $9 trillion. you have so folks -- you have some folks and the regional fed beginning to talk about the need to break up these huge financial institutions which have so much economic and political power.

they write 2/3 of the credit cards and half of the mortgages. if teddy roosevelt were here, he would be talking about breaking up these financial institutions. how do you feel about the need to finally break up these large financial institutions that have so much economic and political power? >> a lot of these people say they want to break up the banks and are not specific. his that mean making them a little smaller making them all community banks? i would like to see a plan that clarifies what is meant by that. the dodd-frank act put forward a strategy for to endingo big to fail. that is incredibly important. that strategy involves taking away advantages of size. banks would be allowed to fill but through a safe method that would avoid the effects on the broader financial market through the orderly liquidation authority. it means that large banks will

have higher capital requirements, tougher supervision, will be subject to a whole set of rules that smaller banks will not face. i will guess that if the size of banks is motivated by too big to fail that if we take that away, market forces themselves would make it attractive for banks to downsize and rationalize. an additional tool we have from dodd-frank is the so-called living will which would require banks to give this information about their complex structures. one approach would be to ask banks for the purposes of being able to be brought into receivership of necessary is to simplify their structures and avoid these complex interconnected types of situations that i think are as much a problem as size. [captioning performed by national captioning institute] [captions copyright national

cable satellite corp. 2012] >> more about the house and the senate in the cspan directorate. there is information on cabinet members, supreme court justices, and the nation's governors and you can pick up a copy for $12.95 plus shipping and handling c-span.org @/shop. coming up on c-span, "washington journal" live with today's headlines and phone calls and at 9:00 p.m. eastern, the house of representatives begins consideration on 2013 spending for the legislative branch. on c-span 2 at 9:30 eastern, the house ways and means committee hearing on tax cuts scheduled to expire january 1. on "washington journal" our first guest is michael hirsch, will talk about