>> there were two sides, union and confederate who fought against each other in 1862. here they are at age 100, sitting on the porch. >> we have one to the east. the gate to the west is marked 903. they really reflect >> look for the history of modern culture of our next stop in jefferson city, missouri, july 7th and date on c-span 2 and 3. >> federal reserve chairman ben bernanke said that the economy continued growing at a moderate pace but that lawmakers --

speaking before the joint economic committee, this is about two hours. >> the hearing will come to order. thank you for being here. we're grateful for your presence in testimony. after my opening statement, we will have the vice chair go through his statement. with the may jobs report, is clear washington needs to continue the focused on creating jobs. today's hearing is especially timely for that reason.

the transportation bill is one opportunity to create jobs. we need to get that legislation out of conference and signed into law. we know that transportation infrastructure is critical to our national competitiveness. it passed with 74 votes in the senate and would create 3 million jobs. we should do more with firms that expand the payrolls. this would provide a 10% tax credit for any increases to the payroll tax base, hiring workers, increasing hours, or raising wages of existing

employees. this cuts the deficit by some $23 billion and i think that's tremendous bipartisan support. the provides critical support to rural america, part of the company -- country that was hard hit and still has major challenges. we have physical challenges to tackle in a bipartisan manner as well. the automatic spending cuts contained the budget control act of 2011 along with the expiration of tax cuts to present a significant economic headwind in 2013.

chairman bernanke has expressed a risks about these so-called fiscal cliff can present to the recovery. i know some of us share that concern. let's be clear that there are right ways and wrong ways to balance the budget. have to be smart about the cuts we make rather than make a bad situation even worse. that means we should not increase taxes on middle-income families. we should all agree on tackling the huge deficits that america faces. we need to continue to cut spending. you cannot reduce the deficit by spending tens of billions of dollars on tax cuts for the very wealthy. i would like to address very briefly currency manipulation,

but especially on behalf of china and a dozen has such harmful impact on american economy and jobs. we recently learned they allowed to weaken in may since any month since 2005. chairman bernanke has testified that allowing the yuan to appreciate would be good for the chinese economy as well. the chinese government manipulates their currencies so that there could sell for less than it should. some people may think it is some far off theoretical issue. it is not. when china achieves, we lose jobs. -- when china cheats, we lose jobs. i urge my colleagues to pass the neck -- currency exchange legislation that deals with this issue. we want to get that out of the house. our economy while in the better

shape is recovering from the great recession. with unemployment above 8%, the labor market still needs to heal. europe continues to wrestle with debt issues as well. we know that. which will continue to impact the u.s. financial markets and the global economy. against this backdrop, it is clear we need to stay focused on promoting stronger economic recovery and that means jobs. thank you for your testimony and i will turn to vice chairman brady. >> thank you for holding this hearing and thank you, chairman bernanke for appearing at this critical juncture to discuss america's economic outlook. while we're all anxious for signs of a strong, sustainable recovery, the recent jobs report for may was grim. with employers -- job growth over the past two months has dropped by two-thirds from the first quarter of the year. business and consumer confidence is down.

first quarter gdp estimates were revised downward. 4.5 years after the recession began, americans are enduring the 40th straight month of our rates at or above 8%. this is a post-war ii record. the rest of the drop high of 10% in october of 2009 is attributable to americans dropping of the workforce. the labor force participation rate is gripping a 30-year low. without the severe drop in the number of workers since the rig ocean -- recession began, employment would be at 11%. our economy has struggled to

grow at an annualized average quarterly increase of 2.4%. to place in perspective of the 10 economic recovery since world ii lasting more than a year, this recovery ranks regrettably 10. and last is unacceptable by any standards. because our economy is not flying strong and steady at 50,000 feet as it should be at this point, or rather flying low and slow, we are vulnerable to external shocks. the economic crisis in europe has intensified in recent weeks and brick banks are depleting eligible collateral. not just greece but the european union as a whole appears to be in recession.

questions of whether greaser other member states will exit the euro, currencies are dominating the news. we hope you'll get your perspective including the likelihood of a greek exit from the eurozone. and the consequences of these possible events for the european union, the u.s., and the rest of the world. when you appeared before this committee last october in response to a question about the tools you are considering to mitigate and avert the impact on the nine states, you testified you believed european central bank has enormous capacity to provide liquidity to european banks that traditional currency swaps can provide dollar funding for global dollar money markets.

the main line of defense is adequate supervision of well- capitalized american banks with the fed's standing ready to provide as much liquidity against collateral as needed as the lender of last resort to the american banking system. is that still your assessment and are you considering any tools beyond those? in addition, american taxpayers and lawmakers like their counterparts in germany, are becoming increasingly concerned they will be asked to bail out, however indirectly, struggling european governments and banks. there is a growing concern that u.s. treasury will try to bail out the eurozone either directly. the fed has a challenge as well explaining to a skeptical congress why swap lines with the european central bank will not turn into an indirect bailout of eurozone countries. at the same time, european economies are weakening and growth is slowing in china and india. given the prospects of global slowdown, some economists are speculating the federal reserve may initiate a third round of quantitative easing. during the questions i would like to discuss with you whether and under what conditions the federal reserve would consider launching a third round of quantitative easing. it is my belief the fed has done all i can do and perhaps done too much. further quantitative easing will not stimulate growth and

create jobs. there exists a real risk the massive amount of liquidity the fed has injected into the economy could trigger higher inflation before the fed can execute its exit strategy. another round of fed intervention will increase uncertainty among job trainers while ignoring below -- the reason. which is sound, timely, fiscal policy. the businesses are not looking back on -- holding back on hiring -- they are holding back for fear of what the government will do to them. the obsessive push for higher taxes, the unsustainable structural federal debt and deficit along with the flood of red tape and fear the consequences of the president's new health care law, these are the two drugs on the economy. no matter what action the fed takes, without strong leadership by the president today and action by congress now

on these fiscal issues, americans will not -- americans will not see the jobs our economy we deserve. the accumulation of debt is a toxic brew that can spark a debt-driven economic crisis here at home unless the u.s. soon reverse course. last january, the federal open market committee adopted and put in target -- by doing so, the fed has taken an important step toward establishing a rules based monetary policy going forward that should help to achieve price stability and protect the purchasing power of the dollar over time. your adoption of the target raises many questions. is it -- is a 2% target the

minimum or maximum? how will the federal reserve tolerates the deviance from the range before taking action? my -- i will request further clarification on this monetary policy statement in more depth. thank you for appearing before the committee. i look forward to your testimony. >> thank you. two housekeeping matters. we will keep to our time limits more strictly sometimes than we do because of the number of members here. the senate has a vote at 10:30 a.m. and i do not think that will change. we will accommodate members for that reason. let me briefly introduce chairman bernanke. he began a second term as chairman of the board of governors of the federal reserve system on february 1,

2010. dr. bernanke serves as chairman of the federal open market committee, the principle of this -- principal policy-making body. he took office in 2006 when he began a 14-year term as a member of the board. he was chairman of the president's council of economic advisers from june 2005 through january of 2006 prior -- 2006. he was a chaired professor at princeton and has been a professor of economics and public affairs at princeton since 1985. >> thinking. i appreciate this opportunity to discuss the economic outlook and policy. economic growth has continued at a moderate rate so far this year. real gdp rose at an annual rate of 2% in this quarter after increasing at a 3% pace in the fourth quarter of 2011. growth last quarter was supported by further gains in private domestic demand which more than offset a drag from decline in government spending. labor market conditions

improved in the latter part of 2011 and earlier this year. the unemployment rate has fallen one percentage point since last august. payroll employment increased 225,000 per month on average during the first three months of this year, up from 150,000 jobs added to -- in 2011. in april and may, however, reported pace of job gains slowed to an average of 75,000 per month. the unemployment rate picked up. this apparent slowing in the labor market may have been exaggerated by issues related to seasonal adjustment and the unusually warm weather this past winter. it may also be the case that the large gains seen earlier last year and this year were associated with some catch-up in a hiring on part of the players that pared their work forces aggressively after the recession. the deceleration may indicate

this catch up has largely been completed and consequently, more rapid gains in economic activity will be required to achieve significant further improvement in labor market conditions. economic growth appears poised to continue at a moderate pace over coming quarters, supported in part by accommodative monetary policy. in particular, increases in household spending have been relatively well sustained. income growth has remained quite modest but the recent decline in energy prices should provide some offsetting left to real purchasing power. while the most recent ratings have been mixed, consumer sentiment is nonetheless up noticeably from its levels late last year. despite economic difficulties in europe, demand for u.s.

exports has held up as well. the u.s. business sector is profitable and has become more competitive in international markets. however, some of the factors that are restraining the economy persist. notably, households and businesses appear quite cautious about the economy. for example according to surveys, households continue to rate their income prospects as relatively poor and do not expect economic conditions to improve significantly. concerns about developments in europe, u.s. fiscal policy, and the strength and sustainability of recovery have left some firms has been to expand

capacity. the depressed housing market has been an important drag on the recovery. despite historically low mortgage rates and high levels of affordability, many prospective -- prospective home buyers cannot obtain mortgages as standards have been impaired. at the same time, all large stock of faith -- of vacant houses and a backlog of foreclosures will add further to the supply of vacant homes. a few encouraging signs in housing have appeared recently including some pickup in sales and construction, improvements of homebuilder sentiment, and the apparent stabilization of home prices in some areas. banking and financial conditions have improved significantly since the deficit and crisis. myth -- recent stress tests conducted by the federal reserve to the balance sheets of the 19th u.s. banks show those firms have added $300 billion to their capital since 2009. the tests also show that even in extremely adverse

hypothetical economic scenarios, most firms remain able to provide credit to u.s. households and businesses. lending terms and standards have become less restrictive in recent quarters although some bar or such a small businesses and as noted, potential home buyers with less than perfect credit, are still reporting difficulties in obtaining loans. concerns about sovereign debt and the health of banks and the number of your area countries create strains in financial markets read the crisis has affected the u.s. economy added -- by acting as a drag on exports, wearing a business and consumer confidence, and pressuring markets and institutions. european policy makers are taking a number of actions to address the crisis but more will be needed to stabilize euro area banks, calm market fears about finances, to be workable fiscal framework for the euro area, and lay the foundations for longer-term economic growth. u.s. banks have greatly improved their financial strength in recent years as i noted earlier.

nevertheless, the situation poses a significant bricks -- risks to the economy and must be monitored closely. as always, the federal reserve remains prepared to take action is needed to protect the u.s. financial system and economy in the event financial stresses escalade. another factor is the drug be exerted by fiscal policy. reflecting on going budgetary pressures, real spending by 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. -- full employment. 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. because it has such a harmful impact on the american economy and american jobs. we recently learned china allowed its currency to weaken in may than -- more than in any of the month since 2005. allowing the one to appreciate would be good for the u.s. and

china. the economy as well. the chinese government manipulates their currencies so that there could sell for less than it should. some people may think it is some far off theoretical issue. it is not. when china achieves, we lose jobs. i urge my colleagues to pass the neck -- currency exchange legislation that deals with this issue. we want to get that out of the house. our economy while in the better shape is recovering from the great recession. with unemployment above 8%, the labor market still needs to heal. europe continues to wrestle with debt issues as well. we know that. which will continue to impact the u.s. financial markets and the global economy. against this backdrop, it is clear we need to stay focused on promoting stronger economic

recovery and that means jobs. thank you for your testimony and i will turn to vice chairman brady. >> thank you for holding this hearing and thank you, chairman bernanke for appearing at this critical juncture to discuss america's economic outlook. while we're all anxious for signs of a strong, sustainable recovery, the recent jobs report for may was grim. with employers -- job growth over the past two months has dropped by two-thirds from the first quarter of the year. business and consumer confidence is down. first quarter gdp estimates were revised downward. 4.5 years after the recession began, americans are enduring the 40th straight month of our rates at or above 8%. this is a post-war ii record. the rest of the drop high of 10% in october of 2009 is attributable to americans dropping of the workforce. the labor force participation rate is gripping a 30-year low. without the severe drop in the

number of workers since the rig ocean -- recession began, employment would be at 11%. our economy has struggled to grow at an annualized average quarterly increase of 2.4%. to place in perspective of the 10 economic recovery since world ii lasting more than a year, this recovery ranks regrettably 10. and last is unacceptable by any standards. because our economy is not flying strong and steady at 50,000 feet as it should be at this point, or rather flying low and slow, we are vulnerable to external shocks. the economic crisis in europe has intensified in recent weeks and brick banks are depleting eligible collateral. not just greece but the european union as a whole appears to be in recession. questions of whether greaser other member states will exit the euro, currencies are dominating the news. we hope you'll get your perspective including the likelihood of a greek exit from the eurozone. and the consequences of these possible events for the european union, the u.s., and the rest of the world. if that analysis correct, in order to see continued improvement, we will need to see growth at or above the trending

rate fell growth. that is the essential decision and the essential question we have to look at. will there be enough growth going forward to make material progress on the unemployment rate. my colleagues and by are still working on our own assessment. staff is working on their updated forecast. we will have a new round between now and the meeting. that is, i think, a key question. if we decide further action is required, then we also have to decide what action is appropriate or what communication is appropriate. we have a range of options. we do have options that we can consider. looking at those, we're going to have to make some difficult assessments, both about how effective they would be and whether there are costs and

risks associated with those steps. the key questions we're basing our will economic growth be sufficient improvement. >> i want to mess give up the so-called fiscal cliff that you have spoken to a number of times. with the matters we have to confront in a matter of months, tax cuts, the automatic spending cuts put

in by last year's control act, the expiration, and a whole host of other challenges, can you assess the impact on the economy just on one of those items, specifically, on the tax cuts for middle-income people were to expire. just that particular question, if you could make an assessment. that >> the potential expiration -- of that. >> the potential expiration to the bush tax cuts would be the single biggest item in the fiscal cliff. and it would have -- if everything else held constant, it would have an adverse effect

on spending and growth in the economy. it would be significant. in saying that, again, talking about the size of the fiscal impact of that, i am not necessarily saying that the right thing to do is to extend those cuts. there could be other steps to take that would have a similar impact. but that is the single biggest component of the so-called clipper. iff.he so-called cle the law permits us to purchase

government agency securities. i wouldn't want to take anything off the table at this juncture. but want to emphasize again that there are two steps. the first is to determine whether we think that growth would be adequate to need further improvements in employment and we will be assessing the price stability mandate and the outlook -- we have a number of different options and we would have to consider each of them. >> the long term interest rates, other than the financial crisis, we haven't seen this bubble

since the 1950's. do you think it is holding back their economy? >> could the actions of the federal reserve achieve additional financial accommodation? putting aside potential bad side-effects, the costs that might be associated with that, i recognize that rates are quite low and that clearly needs consideration. i think we do have tools that will allow us to get further accommodation in the economy and provide some support it is not quite the same thing to say that the problem of the u.s. economy is lack of financial accommodation. it is a different thing to say that and to say that, of the

main problem is coming from elsewhere, that the government can use the tools it has. i have said before that monetary policy is not a panacea. it would be better to have a broad base policy effort in a variety of issues. that would be much more comfortable if congress would take some of this burden from us and address those issues. >> my belief is that i wish to take a third down -- a third round of quantitative easing off the table. her wish to look at the market in the eye and say that the fed has done all it can, perhaps too much. i want you to look at this president and congress in the eye and say that it is time for you to do your job. get your tax policy right. we balance your regulations so that your recruiting job creation. and mitigate uncertainty and concern over the presence of the

new -- concern over the president's new health care law. i wish you would. back home, on main street, those are the elements that are holding the economy back. until we get that right, no action from the fed will get this recovery moving in a way that we will be satisfied. on europe, a lot of concerns about what will happen with greece as far as exiting the euro, what type of contagion will occur in europe. earlier, last october, you said that the tools are providing liquidity to the currency swap, insuring american banks are in a stronger position and being there to provide liquidity. are there any other tools then that that you're considering? >> you have a pretty good list there.

we did the swaps, as you know. they were very helpful in reducing stress in dollar- funding market. there need seems to be declining. i would like to emphasize that, on the banking side, we have worked really hard to make sure that the banks and the financial system would be resistant to shocks coming from across the atlantic, including our stress tests, which have shown very strong capital positions, liquidity positions. our ongoing review of banks exposed europe -- we try to make sure that we are quite prepared as possible for the system. the federal reserve retains broad base of 32 retain the quality -- brought based

liquidity. >> thank you, mr. chairman. i want to go back to -- i want to go back to something you just said to my colleague in the senate. you were talking about extending the bush tax cuts would help. what other steps might be helpful? >> i think i am was enough not to tell you the into to that question. what i am saying is that the

concern here in the short term is that all of these measures together will amount to a withdrawal of spending and an increase in taxation depending on how you count between 3% and 5% of gdp impact on the near- term recovery. whatever benefits you might see in those programs and in the very long term. what i am saying is that, steps should be taken to mitigate that overall impact. if no action is taken -- what is particularly striking is that this is all preprogrammed. if you will go on vacation, it will still happen. it is important to be thinking about that and looking to see how you might address the concern at the appropriate time.

>> that leads me into my second question. i hear this out a lot. i hear it on television and among my colleagues and from people back home, that we are all headed toward the grease centers are geared to some people, the grease situation is, hey, we spent too much -- the retired early, there are not enough workers, not enough economy going to sustain the people who are living on payments, if you will, mostly from the taxpayers. then there were other people who are saying that the greek situation is that you cut too much spending in your turn to collect taxes too fast and the -- spending and you are trying to collect taxes too fast and it is a vicious cycle going on. my question for you for those

people who say we are headed for the great situation, what you think the greek situation is? is it really true that we are nearing in any form that? i see this in a totally different matter. are we really subject to what is going on increase with the type of real economy that we have? >> no, i think the united states and greece are extremely different. greece is a very small economy. the causes of the crisis very clever bit from country to country. greece was one country that overspent and overboard. that is a major reason it is currently in such trouble. the united states is a large and diverse economy with deep financial markets. great credibility with two

hundred years of paying our debt, which, by the way, is a strength that we should not squander if at all possible. that being said -- i don't think that we're in a great situation. the evidence for that is that we're currently paying 1.5% for our money when we can borrow at any price. i don't think we should be complacent. we have a situation which is not sustainable and we do need to be thinking very 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 for his five minutes. >> thank you. chairman bernanke.

from my perspective, qe3 would affect interest rates potentially and potentially liquidity, either with her obstacles to growth. if interest rates are too low and there's plenty of liquidity. in considering a qe3, if the decision were made to do it, in what way does someone believe that it will help the current economic situation? >> again, putting aside the question over whether we need further steps, putting aside the question of the adverse side effects in the risk and costs in any of the given policies, our analysis is that the quantitative easing programs we

did in the past did ease financial conditions through lower interest rates. they lowered the spread between private rates and government rates. even given a level of security with interest rates. we have lowered mortgage rates which will increase wealth effects for consumers in general, we continue to believe that, while some may think that the effects are less powerful than they were in 2009, we continue to believe that, potentially, cocotte these sorts of measures could still add some additional accommodation to the different parts of the economy.

>> let me move over to europe if i can. in your testimony, you said that we should monitor the situation and that the federal reserve remains prepared to take action. what should we as policy makers be monitoring and what action might we be prepared to consider or to take? in europe, we cannot control their fiscal policy, other money politics -- there money policy, nor their political decisions. how can we put up a fire wall or

can we? what things might we be prepared to do? you mentioned you were doing what you can. to minimize the impact on the u.s. economy? >> congress and the administration have not agreed to any kind of direct support to europe. i think the main thing said congress should do is strengthen our own economy. the more momentum, the stronger our economy, the better able we would be to withstand the financial spillover with the problems in europe that would get our fiscal situation clarified, taking appropriate steps to help troubled parts of our economy from the employment market to the housing market, to

whatever else you would be looking at. again, i think my bottom line is that there is not a whole lot that can be done that i can think of to attenuate the problems in europe. we obviously have to monitor it very carefully. what we can do is make sure we are strong and prepared here in the united states. >> are the risks to our economy in europe greater today than they were five years ago? >> this problem has been going on for more than two years. there were periods of greater intensity and less intensity. earlier this year, particularly 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.

but for a number reasons, including the greek election, which raise questions whether greece would meet the requirements of its program and concerns about spain and italy and the banking system and so on, the risks have risen pretty significantly recently. i'm not quite sure if it is at the highest point is has been, but it isn't the point where -- but it is at the point where it appears to take additional effective steps to contain the problem. rep cummingsnize from maryland. >> it is good to see you again. when you appeared before this committee last october, you testified that, in mr. sessions, the housing sector is usually "a big part of the recovery process."

you testified that many people are under water and that the loss of equity is that they're less willing to spend and addressing the housing situation is very, very important. in january, the federal reserve issued a report "continued weakness in the housing market poses a significant barrier to more vigorous economic recovery." chairman bernanke, i assume you still believe that addressing the housing crisis is critical to resolving our economic situation. is that correct? >> yes. >> and experts across the political spectrum believe that one key tool is traded principal reductions for underwater mortgages because it helps homeowners and taxpayers save money by avoiding default. mr. chairman coming 2008, you said "in this environment,

principal reductions can restore some equity for the homeowner, maybe -- and may be more effective means of avoiding foreclosure." a lot of people has considered these reductions as helping only homeowners. explain why it could help the taxpayers, too. >> i think we have made some progress on this. first of all, the housing market looks to be stabilizing, which, if true, would be good news. going forward, it would be helpful to the recovery. there has been a lot of effort since i gave that speech to try to modify mortgages, to try to reduce foreclosures and so on. some of that has taken the form of principal reduction, notably fannie and freddie deciding that

some principal reduction or at least they're looking at principal reduction as a tool for reducing foreclosures and principal reduction is part of the settlement with the large servicers. we will get some more evidence on this very soon. the board of governors does not have official position on principal reduction as a means of modifying mortgages or avoid foreclosure. there is a limited amount of resources. you want to consider if reducing payments is more effective in some cases than reducing principal owed. so i think there is some important questions there. generally speaking, i think the point that are assigned to make a few years ago is that, while we all focus on the help that

gives to foreclosures help the homeowner, it also reduces losses to the lender, supports the market and supports the broader economy. if we can avoid foreclosures and good in a cost-efficient way, then there are benefits more broader than the help to the individual homeowner. >> last november, william testified and he said, "we think that we can decide these programs for home buyers who have mortgages that are under water and set them to continue to pay on those mortgages by giving them some program of principal reduction." of the sick, the devil is in the details. so you have to have good program -- obviously, the devil is in the details. so you have to have a good program design.

do you agree with mr. dudley that it targeted principal reduction program could be designed in a way that would be net-present value positive? >> president dudley was speaking for himself. he does not have official position on that. to have an equity-sharing arrangement whereby there future gains, those would go back to the lender. it depends very much on the way the principal reduction is structured. no doubt, there are some situations where that could be the most effective method of averting a necessary

foreclosures. we should look at that and a whole range of tools for averting foreclosures and look at other issues, like the conversion of homes to really address the housing issues in the market. >> thank you. >> i want to talk about a different topic, his somewhat esoteric topic that may never be of much interest to a lot of folks, but it is to me. no one to talk about the derivatives market, in particular the interest-rate swap. if i got my numbers correctly, the notion of size, the size of this market has grown $682 billion since 1987 to over $400 trillion today. that allies and underlying market growth value.

there was a federal reserve of new york report that said otc derivatives actions -- it was very difficult to measure, very difficult to see, very difficult to value, and most of the transactions are over the counter and not in the broader strangest. the lack of comprehensive transaction data has been a barrier to understanding how the otc derivatives market operates. as i was reading it, 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. the first question is should we be concerned about this market and its lack of transparency? >> it is probably one of the most important derivatives markets and we pay a lot of attention to recommend to the ftc and the cftc.

i think it is important to say first, on the one hand, that those numbers that you cite 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 so that many of them are vanilla swaps that are pretty easy for regulators and participants in the market to understand. in some ways, it doesn't pose the risk that credit default swaps during the crisis posed. all that being said, i agree with the general thrust, which is that we have seen 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 as possible of swaps on centrally-cleared central does counterparty-type exchanges and increase transparency so that members of the public will have more information. i agree with you that it is an important objective. >> does the size of this overall market give a false impression of the demand for overall debt? >> interest-rate swaps are basically ways in which participants can convert, for example, a fixed interest payment which is floating in the pants of some indicator. it is really just customizing the flow of interest received or interest paid. you can have enormous amounts

of interest-rate swaps based on a relatively modest amount of underlying debt. so 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 rates. >> the size of the market and the risks of the financial institutions, i think it is mostly large financial institutions that plan is market -- given the losses that they could incur given the rapid swings in interest rates, does that impair your ability to perform your job, to exercise independence in monetary policy? >> no, i don't think it does. the underlying instruments, credit instruments, are still the same. it is just a way of sharing the risk or the pattern of interest receipts and payments.

i should have said that, to the extent that interest rate swaps are not traded with counterparties, when they're treated during the counter, the regulators are also working to make sure that there are sufficient margins posted on both sides of the swaps if there are rapid changes in the valley of the swaps and both parties will be protected. also, in fact, this afternoon, we will have a meeting at the federal reserve to discuss maltol 3 -- discuss wall tile -- discuss volatile 3, the 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 the margin that they face as they transact with counterparties. it is important for us to take steps to make sure that individual banks are not exposed unduly to large swings in interest rates, for example. the counterexample is aig, which is taking a huge one-way bet. when it lost the bet, it lost enormous amounts of money that nearly brought down the company. we want to -- we want to avoid a situation like that. we want as much central counterparty trading as possible. >> thank you, mr. chairman. >> thank you, mr. chairman, for being here. i continue to work with a bipartisan group of senators. there are some 45 of us trying to come up with a comprehensive

solution for the debt. we have made some headway. it would be a mix of spending cuts and revenue to get to that $4 trillion figure in 10 years in debt reduction. you made it clear that you believe we need to do something significant to address these fiscal challenges. i do think a balanced approach would be the best way to do it with a mix of the spending cuts and the revenue. >> first of all, i congratulate you >> congratulations on these efforts. it's not my place to advise on the particular mix of spending and tax changes. i hope you will understand that. that there's a bipartisan effort involved. >> i remember the last time you did talk at a hearing about how with we failed to act again and went to the brink, as happened last summer with the debt

ceiling, that it clearly credit problems with our economy in the fiscal situation. >> the debt ceiling of a somewhat separate issue. it is a strange thing that congress can approve to spend $5 and tax $3 but can not approve the $2 issuance of debt which is implied. no other country has the debt limit world that we have. it would have adverse events. it would knock down consumer confidence, quite noticeably. that it is somewhat separate issue, but i urge congress to come to an agreement on that well in advance. to do this on a sustainable basis is perhaps one of the most

important things, as can be working on. >> many look at action since late 2008, short-term interest rates have been held on zero. this has been in an effort to support our economy. do these past actions in for new in the current economic situation as you make your decision? >> we did not have much of the knicks. except for looking at japan. we have some model-based analysis from the effects of the broader economy. there's still a lot of uncertainty about the effectiveness of these tools then the channels in which they work.

and is often the case that is less effective than it would normally be because of various constraints. >> my state is doing better than a lot of the unemployment rates at 5.6%, but there's still a lot of people hurting. looking at past recoveries, there's a correlation between economic growth and hiring. we do not seem to have that correlation today. >> the pace of improvements in the labour market from last summer through about march was surprisingly strong given the

tepid rate in economic activity and it was a puzzle. one hypothesis is that there was a burst of what may have been excess of layoffs during the recession. they had laid off too many workers. the improvements in the unemployment rate going forward may be quite limited to that is a question that we really have to think about. >> thank you. >> senator demint.

>> thank you, mr. chairman, for being here. my experience in business and politics tells me that most of the time when we're trying to solve problems we are treating the symptoms. i'm worried about that in our political policy. it is clear that our current policy did not cause the recession. there were implemented in a downturn during the 1990's. the problem clearly came from a loose credit policy that resulted in subprime mortgages and types of securities. we have not really address that in that we over a drastic from talking to a lot of businesses, home builders, real tors the we a constricted credit to such a degree that local banks that do not have the flexibility to deal with their economy because the various agencies are telling them what has to be in their portfolio.

we are not addressing that problem that will allow the flexibility. we have tried unprecedented bank bailouts, government spending, federal monetary activism, and it's not working. the national debt has increased 50% but the interest has only increased about 2%. some of the things you're doing in the federal and reserve is giving us a false sense of security. you bought over 75% of the debt that we created which mask to the real problem and, i think,

probably gives us a debt- interest rate that is much lower than it would be. on the other side, if you do not keep treasury yields low, banks are going to park the free money we are giving them in treasuries. it seems like we are caught in a catch-22 where we ought to work both sides to keep interest rates abnormally low and will continue to buy treasuries or we will be paying so much on our national debt that the fiscal problems we're looking at will complicate overnight. we are on one side doing things that do not appear to address the new problem and we now seem

to be in a quagmire and we cannot get out of it. i'm sure you have a totally different take on that, but you'd have to agree that the activism has been unprecedented and a reason to cause at least some concern. >> it was a terrible crisis and required a strong response. the reason the cape -- but the reason we keep interest rates low is not to help this, but we think it will help to keep inflation near the 2% target. that is our objective. the deficit over the last three

years has been over $1 trillion per year, about 9% of gdp. if we were to raise interest rates by a full percentage point ignoring the fact that it would not reprise, it would still only raise the annual deficit by something in little over $100 billion. >> over 10 years, but that is real money. >> know, per year. that's what the current deficit is now. >> but that is over 10 years, we're talking real money. >> $1 trillion here, $1 trillion there. i would agree. what i'm saying is that the situation, the deficits are so large over the next few years in respect of the level of interest

rate, i would think congress would have motivation to address that and, whether or not the interest rates are currently 1.5% or 2.5%, it does not make much difference. >> this is one of the other points. we were paring pro-growth policies with more of spending. austerity is bad, we are telling the europeans, but you're saying this debt is creating a potentially huge crisis saying that we need to keep spending. what is the real signal here? >> >> tax relief would also help in the same way. i said in my remarks and a number of times that he do not just want to do short run and

ignore the long run. you do not want to do long run to ignore the short run. we need at least a "do no harm" policy. it would combine this with a strong and credible plan for investment remedial term. in principle, that would be the best way to go. >> senator sanders. >> mr. bernanke, thank you for being with us. i'm going to try to be as brief as i can. i have three questions. the first deals with conflict of interest that the fed. as you know, jamie dimon is the ceo of jpmorgan chase, the largest financial institution in this country. during the fed bailout, $16

trillion of low-interest loans are given out to every financial institution in this country. jpmorgan chase received over $300 billion of these loans. the american people could see a conflict of interest when you have the head of the largest financial institution in america sitting on the new york fed, which is supposed to be regulating the fed, regulating these financial institutions. many people, including myself, see this as the fox guarding the henhouse. we need real reform in the fed to make sure it is representing the middle class, the small businesses, rather than just wall street and big money interests. we do suggest representatives

of a financial institutions get off the fed and be replaced by members of the general public? >> to raise an important point. this is not something the federal reserve created. this is in the statute. use of this is the governance of the federal reserve and, more specifically, bankers would be on the board. >> 6 out of nine are on the board. >> that is in the law. what we have done is try to make something useful out of that. first of all, we have taken a lot of actions to negate conflict of interest. under dodd-frank, -- >> i wrote that provision. >> it also found that 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 this decision. i will answer your question, though. the answer is congress set this up. we made it into something useful and viable to get information from a. >> your quite right. this is something congress established a long time ago and i think it's time to change it. in america today, we have the most unequal distribution of wealth and income of any major country, worse than before the great depression. 400 individuals are more wealth than the bottom 150 million americans. you have the top 1% owning 40% of the wealth of america. the bottom 60% owned only 2% of

the wealth in america. in terms of income, the last reports suggested in 2010, 93% of all newman come went to the top 1% -- 93% of all the new income went to the top 1%. it does not mean a thing of all the income is going to the top 1%. you believe we can see an expanding middle class that we continue to have that kind of an equitable distribution of wealth in america? >> it is not about bringing down the 1% of bringing up the lower 99%. how can you make middle class in comes higher and more secure? this has been a trend going on for 35 years and is related to a lot of factors including globalization, the technical changes that have made high- school education simply less

valuable. i would be very much in favor of measures to strengthen the middle-class and help average americans to better using education and other things which i think would be very constructive. >> last question. you have six of the largest financial institutions in this country that have come together, assets that equal two- thirds of the g.d.p. of america, over $9 trillion. you have some people on the regional fed beginning to talk about the need to break up these huge financial institutions which have so much economic and political power. it two-thirds of the credit cards and over half of the mortgages are here. if roosevelt were here, he would be talking about breaking up these financial institutions. how do feel about the need to

finally break the these up that have so much financial and political power? >> there not very specific. does it mean make everything community banks? make them a little smaller? seven like to see a plan to see what is really meant by that. -- i would like to see a plan. i think it is incredibly important to end it too big to fail. it involves taking away the advantages of size and that means banks will be allowed to fail but through a safe method that avoids the effect on the broader financial markets through the authority that it created through the fdic. it means large banks will have higher capital requirements, tupper's supervision, will be subject to a whole set of rules that smaller banks will not face. i will guess that if the size of

the bank is motivated by too big to fail, if we take that away, then market forces themselves will make it attractive for banks to downsize, rationalize, and so on. an additional tool that we have from dodd-frank are living wills which require them to give was information about their complex structures. for the purposes of being able to be brought into receivership, we simplify the structure to avoid these very complex interconnected types of situations that i think are as much a problem. >> thank you. >> thank you, mr. chairman and thank you, mr. chairman. on page four, you talked about inflation. use a with regards to longer- term inflation that the

expectations among investors have changed little net since last fall and we are lower than one year ago. product market should continue to restrain inflationary pressures. let me ask you a question about the reverse of that. we have gotten some bad employment numbers. india has posted its lowest growth in nine years. many's the china is on the verge of a manufacturing downturn. a lot of people are saying that we are at a stalling speed year

in the united states. what is the risk of spending too much time worrying about inflation and ending up potentially in a deflationary near recession perhaps prompted by a shock from europe that cannot pull it together? what are your concerns about that? what is the fed thinking about that? and that's something we should worry about? is it something you are worrying about? what kind of guidance can give us? >> when we set our definition of price stability as 2% inflation, we want that in both directions. we do not want inflation above that or below that. we want to avoid it. when the principal motivations for so-called qe2 was to avoid deflationary pressures to bring

that back to target. there are some signs in europe. china cut interest rates today. some of the emerging markets have seen some slowdown. reflect -- respected to inflation, we think it is, at this point, probably a low probability risk. inflation seems to be pretty stable, close to 2%. we have not seen much of an inclination of declining inflation, particularly when you look at the non-commodity prices or look at the expectations. that concern right now is not very much in the forefront of our concerns.

>> what would a shop on the system be? war in the middle east, europe coming apart, what would that analysis be? >> it depends on what the shot is and its ramifications. the shock in the middle east would cause oil to go up and that would be inflationary and slow the economy further because it would be like a tax increase on consumers paying more for gas and less for other things. in the situation which we hope that will not occur in which there is a busy escalation, it will depend on exactly how that happens. the effects will likely be

fairly moderate. this to put stress on our institutions, reduce funding, and it continued to slow the economy. >> given the fragile world we're looking out, do you sleep well at night? >> do i sleep? >> do you sleep well at night. >> i generally sleep pretty well. but i have a lot to do during the day. i need to be well rested. [laughter] >> thank you, mr. chairman. >> representative malone. i would like to respectfully

speak in opposition to the point of view put forward by my colleagues on the other side of the aisle in strong opposition to q.e. 3. the fed it should use whatever tool recovery is to provide support for our fragile economy. we need to insure against any down returns that would hurt housing, an appointment, and all the other areas in our economies. it is important coming up on your june 17 meeting that you act forcefully to help our economy, given the fact that china has cut its benchmark lending rate. already in response to that, the price of gold has gone up. the dollar has fallen. i would like to hear your comments on china. will china be buying our treasury notes now with the the

economic downturn and what appears in their economy combined with the news from the past month that the euro-zone debt and banking crisis seems to have deteriorated? can you comment even further on china specifically and the impact china will have in the overall, our economy? they have been a partner in financial recovery and your comments on china. >> part of the slowdown is policy induced, intentional. in particular, china took a number of actions to try to avoid what looked to be a building bubble -- and they have in general tried to slow growth both to achieve a more sustainable pace of growth and also as a part of a process for

trying to switch from an export-led economy to one that has a greater emphasis on domestic demand. so there has been some slowing there. we watch that very carefully. so far, i do not think the change in chinese prospects on net are enough to be concerning to the united states, particularly since there are some offsetting factors, notably when china slows it brings down all prices and that is actually a positive for the u.s. economy. i think there greater concerns for us right now are still coming from europe, even as the

situation is still being managed. we are seeing, of course, you can see every day the volatility and large movements in stock prices and asset prices and the uncertainty that generates. so that is a concern. >> i would also like to ask a question about the fiscal clip that we confront next year if curtain laws -- current laws governing taxes to maintain in the bush tax cuts expired. also the payroll tax cut expires, the federal unemployment insurance expires and the automatic spending cuts mandated by the budget control act would take effect. cbo tells us this will cause the economy to fall into a

recession. it also tells us that if we continue all current policies, we can avoid a recession but that our long-term budget situation will continue to deteriorate. certainly neither of these outcomes are satisfactory. what would happen if we fail to achieve a budget agreement in a lame-duck session and all of fiscal priorities kicked in? >> i agree very much with the cbo's general analysis there. if no action were taken and the fiscal clip were to kick in its full size, i think it would be very likely that the economy would begin to contract or possibly go into recession and unemployment would rise. that is something we want to avoid if at all possible. at the same time, i am not advocating on doing all these measures and simply ignoring

the distant future. as i have said before, what we need is a combination of a sensible policies that allow the recovery to continue over the next year or two with a long-term credible plan for putting our budget on a sustainable path toward >> thank you my time is expired. >> representative burgess. >> welcome to our committee again. i want to pick up where senator demint used the word quagmire. senator coats used the word -- i'm concerned about some of these same things. the vice chair of the fed yesterday at the boston economic club described adverse shocks that could push the economy into territory where a downward spiral would be difficult to arrest. i am not an economist, but that sounds bad. is that right? >> the concern she is expressing is that if growth is not sufficiently strong that it would not take too much to put us back into, either a recession or a slowdown. >> so i will not admit to having trouble sleeping every night. but what does bother me at

night is the been brothers. when i wake up at 3:00 a.m., that is what i worry about -- what bothers me at night is lehman brothers. she sums it up pretty well. this is reported on cnbc this morning. when they played that clip it caught my attention because this is one of the things that has bothered me since september, 2008. i see a lot of parallels as we crews into this summer season. gas prices have moderated. maybe you could take that off the table a little bit. presidential election year coming up. the economy still in tough shape as it recovers -- has not recovered.

we see all this stuff happening in europe. you said on page 3 of your testimony at the bottom of >> sure. first of all, we are already taking some actions, important action, notably that we are working to ensure that banks have adequate capital and liquidity. and as i noted banks are now much better capitalized prior to lehman which is helpful. >> you said our banks. you really can't control what's happening in banks in europe. is that correct? >>ically not. no. >> and we can't do a stress test. timentsdzy geithner can't do a stress test. we're asked to help with the situation in europe. what assurance do you have or can you give us, can you tell us that we can give the american people people that we're doing that due diligence? or is that help just not available? that one of the things that's just not within your realm of

being able to help? >> well, i think the u.s. government position has been reasonably that europe has the resources necessary to achieve stability. i think the main problems over there are political rather than economic. there's a lot of different -- 17 countries involved and a lot of different interests. so i'm not sure there's much the united states can do other than be supportive and try to provide whatever advice and verbal help that we can do. but -- >> this isn't a get well card. >> send them a get we will card. >> but what the federal reserve can do is try to protect our own country and we're doing that by trying to strengthen our financial system, by making sure at least by monitoring on a regular basis the exposures that our financial institutions have to europe both direct and indirect and how they're

henled. we've done this, which was i think a useful thing that we did to help stabilize the money markets, the bank funding markets over there. i think the main thing that we have not done yet but could do if financial conditions got sufficiently severe would be to use our authority to the discount window or through our 13-3 authority to lend to financial institutions against collateral to make sure that lack of liquidity was not a reason that they would collapse or at least stop lending. that's the main tool that we obviously have in reserve that we could use, if we will use if financial conditions call for it. >> are there any u.s. banks whose capital could be seriously jeopardized by what's happening in europe that then could push a lehman type scenario to the forefront? >> we've been monitoring the direct exposeshrs and for the

most parent our banks are far less than european sovereign debt than are the european banks which is why there's such a difficult interaction between the sovereign debt problems and the banking problems in europe. that being said, if there's widespread contagion, hard to predict operating through financial markets, operating through the potential problems of a large european institution, whatever that might be, then we can't really foresee or guarantee that there might not be this serious stress on some financial institution in which case federal reserve with the experience we had in 2008 is certainly going to do what's necessary to try to mitigate that problem. i don't mean to be representative saying there is no problem. there is a risk. and all we can do is prepare

for it the best we can. >> representative hitchie. >> thank you very much mr. chairman. mr. bernanke, thank you very much. everything that you've done and for all the thing that is you're engaged in and for also being with us here today to talk about is the issues. i think that we've come a long way considering the financial meltdown that occurred back in 2007. but we've still got a long way to go after that. i think there are still some things that congress must do to ensure we do not go down the same path as our european counterparts. i think that's an interesting set of circumstances. the end of the recession our economy has steadily improved. we're still working hard on that. we have created 4 million private sector jobs and unemployment has steadily decreased to 8.2% now. president obama i think

deserves enormous credit for turning the economy around. if it had not been his action and those of the democratic majority, i have no doubt our country would have fallen into a deeper economic depression. so we obviously have a long way to go but the president is on the right path. the fed's aggressive action and monetary policies that have stimulated the economy have also been instrumental getting our economy back on track. but we have a long way to go. europe on the other hand has been a total disaster. europe has clearly proven that austerity was the wrong policy to pursue during a recession if you look at greece and spain, 20 and 24% unemployment in those two countries. britain has shown zero economic growth over the course of the past year. so naturally i'm surprised that with such strikingly different recoveries occurring between

the united states and europe, so many united states lawmakers will continue to support the same types of policies that are utilized in europe. what do you think are the key lessons that we should learn from europe's failed monetary policy, particularly austerity? what do you think the united states is most at risk in the context of that situation of repeating? >> there are structural differences. you have 17 different countries . there are in fact some very serious situations like greece for example probably has no optional alternative but to try to cut its deficits. so there are some important differences. i think though that the main

message i would take is the one i've been trying to sell here for the last couple of hours. which is that sensible fiscal policy is one that takes into account both the short run needs of the economy not to lose fiscal support sharply and rapidly during a period of fragile recovery while at the same time combining that with a medium term plan to -- we do have to address these fiscal sustainability issues. so i don't think it's inconsistent to do both of those things. and that's where i would differ at least with a few of the countries in europe. but again, the situation is much more complicated in the countries that have capacity to expand their budgets for example like germany much less need than the countries like greece which have very little

capacity to spend more and borrow more. >> germany is the another example. but the other things are negative examples that we have to deal with and we have to be acting i think in a very positive way according to what you've been talking about. also, when president obama acted in 2009 and 2010 to turn around our economy, since then since that happened, the house has basically done nothing significant to revive our economy. as a result, the fed has really led the efforts to help get our economy back on track. however, we have nearly exhausted all the fed's tools to nurture our economy back to health. congress needs to step up to the plate. clearly, our actions back in 2009 and 2010 turned things around. but more needs to be done. more needs to be done

effectively and strongly. we can't allow the european austerity model and allow growth just tonight to fail and have it fail on us. the american jobs act is a prime example unfortunately of stalled legislation in the house that would inject nearly $450 billion worth of tax cuts, jobs, business opportunities, all of those things into our economy very, very positive and very, very strong if it were put into place. i think it has been a major mistake to sit on legislation when it could be helping so many people. so do you think congress as has carried its fair share of the burden with regards to stimulating economic activity? and do you think legislation such as the american jobs act is important to help the fed stimulate job growth and economic activity? >> well, i certainly agree, as

i've said before, that monetary policy cannot carry this burden by itself. we need good policies over a range of areas from congress. you know i'm not going to endorse a specific program. but i hope the congresses work together to address their problems across the economy and -- in a number of different sectors and i hope that congress will work collaboratively to try to address some of those problems. >> thank you. >> representative duffy. >> thank you, mr. president. and good morning. i want to -- mr. chairman. i want to talk about too big to fail. we heard this was going to be our silver bullet to address this issue of too big to fail and make sure that the taxpayers won't hold the bag should one of these institutions fail i guess i would argue that dodd frank hasn't fully and completely addressed the issue of too big

to fail and it still exists. i think it's come up more recently as we look at what's happened in europe. but what's happened here is jp morgan in regards to a $2 billion loss and some have argued that the voker rule would have addressed -- had been implemented -- it would have addressed this massive loss from jp morgan. one of my concerns though is as you look at the volume consider rule and you look at these trades it becomes very difficult to determine what is back hoe hedging. so if you sit in the classroom it might be easy to look through the voker rule but in practice isn't it very difficult to use the rule to stop the issue of jp morgan? >> well, i need to say in the specific case we're still investigating and i don't want

to talk very much about the specific case. but in general yes differentiating protery trading for atlanta hedging and market making activities is inherently difficult and regulators are looking at 19,000 comment letters and trying to look at doing that. the one comment i would make commy colleague made yesterday is that one requirement of the voker rule is that being very extensive documentation for complex hedges as well as auditting and appropriate incentives for the executives involved in the activities of the traders. so at a minimum, if the rule had been in place we would have known a lot more about this whole situation and that might have been helpful. >> in the classroom theory i agree with. i'm not opposed to that. i'm concerned about the implementation. but spt really the silver lining is that there was no

taxpayer loss here. jp has the appropriate capital requirements to hold the loss which is what you're going to be talking about. isn't the real issue here not thousands of new rules and a ,000 page bill but really increasing the capital requirements of the banks, making sure that they have more skin in the game and that the taxpayer isn't going to bear that loss but the investors in the banks are going to be responsible? >> i agree with you entirely. the reason for high capital requirements and we're looking to greatly increase capital requirements is because we're not going to be able to dissipate everything that could happen. and the good news here is that jp morgan's losses are a very small fraction of their very substantial capital base. share holders as you say but not any risk that the firm will fail and the taxpayers will be in danger in any way. so yes capital is extremely important and i agree with you 100% on that.

>> so in essence we increase those ratios. and i had mentioned -- but you would agree with the surcharge, making sure that the larger banks are required to hold more capital? >> yes. >> ok. just -- i know you have to do this. but when you talk to us what you say can be open to interpretation. but as you're talking about taxes specifically, are you telling us if we allow nothing to happen and we see all of these taxes increase, the bush tax cuts, the obama tax cuts go away, there is going to be a direct impact on economic growth and job creation? >> i'm looking not just to the taxes but also the sec ster and the end of the payroll tax and everything else. yes, i think -- of course, economic forecasting is an imperfect science but everything we understand about

fiscal policies would be a significant short term effect. yes. >> so in essence -- you're not here to advise us be if you were you're telling us extend them? >> i would tell you to try to avoid a situation in which you have a massive cut in spending and increase in spending all hithing at one moment as opposed to trying to spread them out over time that will create less short term drag on the u.s. economy. rir appreciate your testimony and yield back. >> thank you. senator lee. >> thank you very much mr. chairman and thank you for joining us today. what are some of the risks that accompany quantity fative easing? could you walk us through those as you approach a decision like that one? >> well, i think the preliminary thing to say is that since we have less experience with quantitative

easing our estimates are understanding of the efficacy and exactly how much is needed and so on are less than the traditional monetary policy. but in terms of potential side effects, a number have been identified but i think the two that we would pay most attention to first there are some who believe that greatly extending our balance sheet would make the exit strategy more difficult and that therefore inflation is more likely and that might lead to inflation expectations to go up which might be a problem. i want to be clear that we are very confident that we can exit in a timely way from our balance sheet strategy and that there is in fact no justification for such a ksh. but nevertheless some people might have that concern. so that is one issue. >> no justification for which concern? >> that inflation will rise excessively because we can't get out of our balance sheet situation. >> go ahead to your second point. >> the second one has to do

with financial stability. the question is does the prospect of very low interest rates for a long time, does it create problems for certain types of firms like life insurance companies or pension funds? does it induce successive risk taking? does it lead to effects that could be counter productive in the longer term? there we do extensive monitoring analysis to try to identify any such problems but it's always possible that we might miss something. >> ok. and it sounds like you're not discounting, you're not refuturing the possibility that it can have inflationary effects. you're just saying that you think you can time it in such a way that it's less likely to? >> one is our timing of when we take monetary policy back to a normal stance and any monetary policy easing episode there's always the question of whether the feds get things exactly right. too soon too late and it's

always the case that if the feds wait too long you could get some inflation effect. but i'm talking about here is the question of whether it is technically possible to undo the balance sheet expansion in a timely way. we are very confident that we have the technical tools to bring the balance sheet down to a more normal level, to bring the reserves down at the -- when we decide it's time to tighten the monetary policy. so the technical side we have we think we're quite comfortable with. it's always the case under most normal traditional monetary policies that the timing of the stimulation is difficult. and it's always possible that you could either undershoot or overshoot. and that's unavoidable. with remember tri yield rates being at all time historic lows, i think it becomes difficult to dispute that at some point in the next few years we'll start to see a

normalization, we'll start to see yield rates return to their historic averages, perhaps. do you have any sense and can you offer us any insight as to when we might expect to see that happen? >> well, we've indicated that we expect to keep short-term rates low until late 2014 at least. but even then, rates might be rising if in fact we are removing short-term rates productions at that point since loan rates include expectations of short rates even beyond that window you could be seeing some movement by then. we do expect of course rates to normalize over time. but the exact timing is very difficult to judge because it depends very much on the recovery of the economy and while we see the economy moving in a moderate pace in the right

direction, the point at which we are comfortable that it's time to withdraw monetary stimulus is obviously quite uncertain. >> is there a risk of a sharper rebound the longer you keep the rates low? >> i don't think so. it is true that the quantitative easing measures have pushed down so-called term premium on longer term ratesd and if those were to normalize quickly that would make the increase in rates a little faster than might other wise be the case. but we have stress tested both our economic models and our financial portfolio. i mean, the financial portfolios of financial institutions. and we don't see at this point any risk to the economic

recovery or to financial stability of that return of interest rates to more normal levels. but it's obviously again something we need to pay close attention to. >> thank you, chairman bernanke. i see my time has expired. >> thank you very much. thank you for your testimony. for the members the record will remain open for five business days to submit either additional questions or of course a statement and we are adjourned.

>> "new york times" editor gretchen morganson called for more prosecutions for those responsible for the 2008 financial crisis. she won a pulitzer for her coverage on wall street and she called the damage to taxpayers titanic warning that if the behavior is not stopped with criminal prosecution, it will get worse. get worse. this is about an hour.