guest: is definitely played into this. and when it comes to health care and higher education -- oftentimes what we forget is that americans really were not even doing that well before the recession and. even when we had better numbers on the employment front, a lot of americans it is important to listen to these issues and know how not have been savings makes you more susceptible to rest. host: open " the slow-motion collapse" that is in the magazine. thank you. coming up, it is the senate banking committee on where ben bernanke will testify today. it is a semi annual report from

congress. we will hear on the economy and possibly to hear from bernanke on the libor rate. senator charles schumer coming in. that is it for this edition of "washington journal." another edition comes your way at 7:00 a.m. tomorrow. we will see you then. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012]

>> i called the hearing to order. today we welcome chairman bernanke back to the committee to deliver the semiannual monetary policy report. the financial crisis still weighs heavily on the financial system today. while on the lawn this depression -- while on the longest depression, and the economy has grown steadily. we have come a long way.

there is still a lot of work left to be done to get our economy back to the point where this is readily available. while the economy is not going as fast as we would like, it is important to recognize that it would not be growing at all if congress and the federal reserve had not taken action for financial stability. the wall street reform act created a framework for a financial system that works in the consumers' interest and allows -- never again allows a bank bailout. it ordered barclays to pay a $200 million penalty for it libor manipulation. we need tougher rules in place and strong adequately funded thelatory irules to enforce

rules. some say the cost is too high. those same critics say to under and ignore the reality were caused by ineffective regulations. that is why we created the wall street reform act and why we are sitting today before the crisis. any cost that wall street bears rom playing by the rules pales to the trillions of dollars lost. as they recognize the second anniversary of the wall street reform act, i look forward to hearing from chairman bernanke

on how these efforts have further stabilize the financial system. the policy makers can make the financial system more stable. the the eurozone economy remains fragile. i would like to hear it on the progress that is being made in the eurozone and how policy makers can protect the economy from the potential fallout if the situation were to worsen. while the fed's role is important, we need to the knowledge that they cannot solve all of the economy's problems. the housing market has been

holding back the economy for too long. i ask this committees to support efforts to give responsible homeowners their response ability to refinance their mortgages. this legislation is fair because it helps homeowners who have andn playing by the rules eliminate barriers and is a cost-effective way to jump-start the economy. it keeps more workers' paychecks in the pocket. congress also need to reach a sensible resolution to the fiscal cliff problem at the end of the year. planport the president's to extend tax cuts to the middle-class. today's hearing underlines the importance of effective

oversight which has been a leading priority of mine as chairman of the committee. in past 80 months, we have conducted frequent hearings. in the coming weeks, we will conduct oversight hearings with secretary geithner in his role as the head of the oversight council and with the director of the consumer financial bureau. i have welcomed the steps chairman bernanke has taken to make this more transparent and release communications. i also believe the wall street reform act enhancements to the fed transparency and oversight has had a positive in sight. i now turn to center craig crapo. senate

>> the u.s. economy continues to face significant challenges with the eurozone, a tax cliff, and our broader fiscal crisis which includes the need to address the impending solvency of the entitlement programs. a disappointing 8000 jobs were added in june, holding unemployment steady at 8.20. he warned congress what would happen if it did not address the fiscal cliff. knowing that this would have a significant impact on the recovery. according to cbo, if all the tax and spending measures under

current law were to occur together, the economy would grow at just 0.5% compared to 4.4% expectation absent to these investors. one of the largest private owners of u.s. debt said we have until 2016 to contain our borrowing before bond investors dried up interest rates. others suggest the timetable could be much sooner. the lack of economic growth has some to call for further expansion of the $2.90 trillion balance sheet through a third round of quantitative easing. there are a lot of questions about how effective the first two rounds of quantitative easing has been, what their long-term effects will be, and what additional route could be. i am interested in learning what could be done. following the june fomc meeting,

at the fed would continue the extension program. i am interested in learning what had been the result so far and what of the expectations are going forward. another drag are the hundreds of dodd/frank rules that will increase capital formation in the long run and in the short term add to the climate of uncertainty and complexity. the concern i hear most is that regulators do not understand the cumulative affect of the hundreds of proposed rules and that there is a lack of coordination. that is why it is important that the regulators perform cost- benefit analysis so that we can understand how these rules will affect the economy as a whole and impact our global competitiveness. we need to have rules that are strong enough to protect our economy that can adapt to market

conditions to promote credit availability and spur job growth. but many of my colleagues, i am learning about issues related to the setting of the london interbank offer for libor which serves as a big mark for trillions of dollars of loans and derivatives including the cost of many mortgages in united states. barclays agreed to pay porringer $50 million fine to settle manipulation -- a $450 million fine to settle manipulation charges. investigations that banks manipulated the libor process are continuing. questions are being asked whether regulators took sufficient action. i look forward to hearing from chairman bernanke on all of these issues. >> thank you. to preserve time for questions,

opening the balancstatements wie limited to senator crap. o. the record will be open for the next seven days. with that, i would like to welcome chairman bernanke. he is currently serving a second term as chairman of the board of governors of the federal reserve system. his first term began under president bush in 2006. before that, he was chairman of the council of economic advisers and served as a member of the board of governors of the federal reserve system. please begin your testimony. >> thank you. i am pleased to present the semiannual monetary policy report to the congress. i will begin with a discussion

of current economic conditions and the outlook before turning to monetary policy. the u.s. economy has continued to recover. economic activity has appeared to decelerate somewhat. after rising at an annual rate in the second half, real gdp increased at a two% rate in the first quarter of 2012. indicators point to a smaller gain in the second quarter. conditions in the labor market improved during the latter part of 2011 and earlier this year, with the unemployment rate falling. after running at nearly $200,000 per month, the average increase in payroll employment shrank to $75,000 per month during the second quarter. -- $275,000 per month during the second quarter. the weather can account for only a part of this loss of momentum now could job creation.

the jobless rate has leveled out at just over eight%. household spending has continued to events. a somewhat slower rate of growth in the second quarter. declines in energy prices are providing support. households remain concerned about their employment and income prospects and their level of confidence remains relatively low. we have seen modest signs of improvement in housing. in part because of the starkly -- of historic low interest rates. some measures have shown up in recent months. a number of factors continue to impede progress. on the demand side, many buyers are deterred about worries of their own finances. other prospective home buyers did not obtain mortgages due to

tight lending standards or because their current mortgages are under water. on the supply side, and large number of vacant homes boosted by the inflow continues to divert demand from new construction. after posting strong gains over the second half of 2011, manufacturing production has also slowed in recent bonds. the rise in real business spending and software appears to have accelerated from the double-digit to a more moderate rate of growth over the first part of this year. forward looking indicators of demand suggests further weakness ahead. slowing growth and production appears to reflect economic stresses in europe which together with some of cooling in the economies of other trading partners is restraining demand

for u.s. exports. at the time of the june meeting of the market committee, fomc, we projected that under the assumption of a proper monetary policy economic growth will likely continue at a moderate pace and then pick up very gradually. specifically, our projections on the real gdp had a tendency of 1.9 certification-2.4% and 2.2%-to plan a server 2013. these forecasts are lower than we made in -- 1.9% - 2.4% and 2.2% - 2.8% in 2013. the recovery is held back by tight borrowing conditions and the restraining effects of fiscal policy and fiscal

uncertainty. although the housing market has shown improvement, at the contribution to the recovery is less than has been typical. these headwinds should fade over time allowing the economy to grow semi rapidly and the unemployed rate to decline to a normal level. given that growth is projected to not be above the needed, the reduction in the employment rate seems to be slow. the tendency for participants has the unemployment rate at 7% or higher at the end of 2014. the committee made comparatively strong changes. over the first three months of 2012, at the price index expenditures rose about 3.5% at an annual rate boosted by and large increase in prices that reflected the higher cost of crude oil.

the sharp drop in crude oil prices has brought inflation down. in all the price index, it rose at 1.5 serve in the first five months of this year compared to a two-point 5% as a whole. -- 2.5% as a whole. it will be at a below the 2% level with the mandate in 2013 and 2014. participants of the fomc meeting indicated a higher degree of uncertainty than normal and that the rest to economic growth have increased. i would like to highlight the two main sources of risk. the first is the euro area banking crisis. the second is the u.s. fiscal situation. financial strains in the euro area moderated in response to steps by the european authorities including the provision of three-year bank

financing. tensions in euro area of financial market intensified more recently, reflecting political uncertainties in greece and losses as spanish banks which return questions about the resilience of the euro area banking system more broadly. euro area authorities have responded by announcing a number of measures including funding for the recapitalization of spain's troubled banks, greater flexibility in the financial backstop including the flexibility to recapitalize directly, and movement toward a unified supervision of the euro area banks. even with these announcements, the economy remains under significant stress was spillover affect on conditions in the rest of the world including the united states. the possibility that the

situation will worsen further remains a significant risks to the outlook. the federal reserve remains in close communication with our european counterparts. we believe the european authorities have strong incentives and sufficient resources to resolve the crisis. at the same time, we have been focusing on the resilience of our financial system including those that might emanate from europe. the capital and liquidity positions have improved substantially in recent years. we have been working with firms to ensure they are taking steps to manage the risk. european development have resulted in a disruption of global financial markets and to oppose the challenges to our financial system and economy. the second important risk is the domestic fiscal situation. u.s. fiscal policies are on an

unsustainable path. development of a credible medium term plan to be a high priority. fiscal decision should take into account the fragility of the recovery. recovery could be endangered by the confluence of tax increases and spending reductions that will take place next year. the cbo has estimated it the full range were about to take affect, a scenario referred to as the fiscal cliff would occur early next year. your job so be created in 2013. these -- fewer jobs would be created in 2013. as you recall, market volatility in spite and confidence fell last summer in part on the you debate of the increase on the debt ceiling. similar effects could ensue as

fiscal ones come into play. the most effective way the congress could support the economy right now would be to address the fiscal challenges in a way that takes into account the need for sustainability and the fragility of the recovery. doing so earlier would help reduce uncertainty and boost household and business confidence. in view of the weaker economic the fomc decided to ease monetary policy by continuing the maturity extension program through the end of the year. this combined sales of short term treasury securities with longer term treasury securities. it puts upward pressure on the prices of those securities.

by removing additional longer- term securities from the markets, and the asset purchases have private investors longer- term assets such as mortgage- backed securities helping to raise their prices and lower their yields making broader positions more accommodative. economic growth is also being supported by the low levels of a target range of zero to 1.4%. as i reported in february, at the fomc extended the guidance at its january meeting noting -- is likely to warn low-level. 2014. the committee has maintained this forward guidance at the subsequent meetings. reflecting concerns about slow

progress and the downside risk to the economic outlook, the committee made clear that it is prepared to take further action as appropriate to promote a stronger recovery and sustained improvement in conditions in the context of price stability. thank you. i would be pleased to take your questions. >> thank you for your testimony. we will now begin the question of our witness. will the clerk please put by minutes on the clerk for each member? -- put five minutes on the clerk for each member? i will lead off with a question about the libor scandal. last week you released documents showing that the fed provided early warnings on manipulation in libor market. then timothy geithner your race concerns with president bush's working group on performed

recommendations to the british authorities. can you tell the american people what did you know, when did you know if, and what did you do about it? what can we do to restore confidence? >> thank you. libor is a critical benchmark two contracts. the actions of traders and banks that have been disclosed are not only very troubling but they have the effect of undermining public confidence. regarding the federal reserve's role, and the federal reserve bank of new york takes [inaudible] it was in the process when it received information about libor submissions, notably a phone call on april level of 2008 in which a trader in barclays told an employee of the federal

reserve that he thought that barclays was underreporting its rate. about that same time, stories began to appear in the media. there was an april 16 story. i would like to make two preliminary points before talking about their response to that information. the information the fed received was about the banks possibly cementing lower ranks in order to appear -- submitting lower ranks and ordered to appear less week. the transcripts of the phone calls have no reference to the manipulation of rates for profit by derivatives traders as alleged by the recent decision. the second point i would like to make is that this issue was complicated during the crisis by the fact that there were very few transactions than occurring

overnight. banks are asked to report what they would pay their borrowing at a certain term. it may have been that transactions were not taking place. we will get more information on that as the investigations continue. it is clear that be on these disclosures that the libor system is structurally flawed. part of the response was to address those flaws. the federal reserve bank of new york after receiving this information responded quickly and set up an internal group to address the issue. it informs all the relevant authorities in both the u.k. and the united states, notably on may 1 president timothy geithner brief to the working group -- briefed the working group.

they briefed the treasury on may 6. it was followed up with enter agency staff briefings to provide more information to the various agencies. they also followed up with the bank of england and the united kingdom. there was active effort to report to all of the relevant policy makers and enforcement agencies the information that had been received. the second step that the federal reserve bank took was to develop recommendations to address structural problems with libor that i mentioned before. the new york fed released a memorandum list of suggested changes that they submitted to the bank of england on june 1 and following earlier discussions with the bank of england. there are also communications with the british bankers' association which is a private

group that constructs libor prior to june 1. the federal reserve bank of new york took the lead. they released information. they are looking for additional information. we were supporting -- in supporting mode. we provided reports related to the construction of libor. our staff were in contact with the sea stc -- cftc. i think it is important to note that following the federal reserve bank of new york's disclosures to the appropriate authority that there was a rapid follow up. the cftc was making increase as early as april 2008. it sent requests to banks.

they initiated inquiry in 2009. the european commission and a range of regulators are also investigating. we know about the june 27 settlement with barclays. there was a substantial respond by the -- response by the federal reserve bank of new york that information led the investigation. it also contributed to thinking about how to better structure the libor panel and the libor information collection to avoid some weaknesses that became evident. >> what are the factors that led you to support the extension of the so-called operation twist program and what changes in

economic conditions might lead to a stronger policy response in the future? if extensions of operation twist are not possible, was other policy tools are available if the fed decided to provide additional monetary support? >> the federal reserve in december 2008 brought rate down close to zero. we have had to rely on a number of less conventional policy tools to achieve accommodation. those included quantitative easing programs and the operation twist as i discussed in my remarks. it provides extra financial accommodation for the recovery. the other type of tools we had include communication tools notably our forward guidance which gives the market some

sense of how long we think rates will be kept at their current low levels. those are the principal types of tools that we have. we're looking very carefully at the economy, trying to judge whether or not the loss of momentum we have seen recently is indoor rink and whether the economy is likely to continue -- is enduring and whether the economy is likely to continue satisfactory market conditions. if that does not occur, we have to consider additional steps. we looked at a range of possible tools. mostly involving the balance sheet and communication. in the committee meet in a couple of weeks. we will be discussing those tools. we have not come to a specific choice. we are looking for ways to address the weakness in the economy should more action be needed to promote a sustained recovery in the labor market.

>> thank you. ever since the dodd/frank conference there has been a debate whether non-bank financial users were exempt from requirements. chairman dodd and chairman lincoln acknowledged it was not perfect and tried to clarify the intent with a joint letter. they stated the legislation does not authorize regulators to impose margin on end users. in april 2011 they issued a joint proposal that requires them to post a martian to their bank repay a margin to their bank. it stems -- been to post a margin to repay their bank. distance from title 7. i offered an amendment to fill

intent by providing an exemption from margin requirements for not untithe financial end users. but passed the house by a vote of 370-24. is it accurate that banking regulators view the plain language as requiring them to impose some requirement unless congress changes the status sheet? >> we believe the statute requires us to impose some requirement. we tried to mitigate the effect as much as possible by allowing for exemptions when the credit risk was viewed as being sufficiently small. many small and users would be exempt in practice. >> do you agree the non financials and users of hedging does not contribute to systemic risk and the benefits -- and

that the economy benefits and that it is appropriate for congress to provide an exemption for non-financial end users that qualified? >> i agree that they benefit and the economy benefits from the use of derivatives. it seems to be the sense of a large portion of congress that the exemption should be made explicit. we're very comfortable with that proposal. >> thank you. i want to shift gears back to the question that the chairman asked with regard to what you asked about what tools you still have and how he may approach them. you still have some possible tools to deal with. there is a lot of speculation and concern about whether you another run the

quantitative easing. there are questions about how effective it has been and what more can be done. can you discuss for us how effective you feel the quantitative easing has been and whether you feel it is a tool you should consider going forward? >> we ran out of space to lower short-term rates. we have to look to other tools. we have used asset purchases as a way of providing additional support to the economy. economists differ on terms of how effective the tools have been. my own assessment is that the quantitative easing has been effective in promoting strength in the economy. it was most evidence in q e one

-- qe1. qe2 was effective at addressing what was beginning to become a worrisome amount of risk of deflationary in the fall of 2010. it was addressed. my view is that it also contributed to economic growth. it is hard to judge. it depends on what you think would have happened in the absence. there is questions about side effects, risks that might be associated. i think they should not be used likely. my own view is that these tools

to do have a capacity to support the economy. what we will be looking at is really two things. the first is whether or not there is a sustained recovery going on. the other issue with the price stability, notably we would want to react against any increase in inflation risk. >> thank you. >> thank you very much. let me return for a moment to the issue of libor. can you give us and the millions of americans -- [inaudible] that the current libor is reliable, that the changes that

were made have been put in place and that this is an index that is reliable and not being subject to manipulation going forward? >> i cannot give that with full confidence. the british bankers' association did not adopt most of the suggestions that were made by the federal reserve bank of new york. it is likely that concerns are less because we are no longer in a crisis. that was when transactions to many were not taking place. i would like to see additional reforms to the libor process. it'll continue to be this. there are a number of people looking at alternative benchmarks like the overnight index swap rates or other types

of interest rate that has an advantage over libor as opposed to simply reported rates. >> what steps are you taking right now? your relationship with the bank of england. what are you doing. this index is appropriate. i encourage you to study the alternatives. the libor is so deeply embedded in situ thousands of contractual arrangements that it'll be hard to next week shift to something else. >> we need to continue advocating for reforms to the

libor process. it affects -- our ability to influence that is limited. two of the banks have reported that they have been asked for information by investigating agencies. we are following that very carefully. we will see what happens. be able to supply any help we can. >> let me turn to the monetary issue. the federal reserve has been in some cases pursuing aggressive monetary policy while fiscal policy has not kept up. i presume you are prepared to continue to do that given unemployment numbers, etc.

that is regardless of what we are doing on the fiscal and. >> we do the best we can. we will continue to do that. we would appreciate other policymakers playing appropriate roles for themselves as well. >> one of the comment you made is that there will be a need next year for continued stimulus if we're going to reduce unemployment, which is one of your mandates, and that if we reach a solution that is heavy on cuts to spending, heavy on entitlements, that would not provide stimulus. it would further impact on

employment in the country. is that an accurate assessment? >> the position we have taken is that the first cut is do no harm. what we need is a strategy which addresses the long run sustainable -- sustainability issues. if the fiscal cliff is allowed to happen, it will certainly have major negative effects on the recovery. many other observers have made similar recommendations. we feel that is reasonable. >> some of the specific issues we face at the end of the year are filling a gap in the 2013 in terms of spending and revenues. if that 2013, if we avoid the cliff by taking another route and it decreases spending and

other stimulative effect, would your view be that we could have avoided a cliff but still find ourselves in a perilous economic situation? >> it is a question of the time frame. in the near term, we already have a lot of fiscal drag from state and local governments. some coming from the federal side. in no way am i saying that we should not be making strong efforts to achieve long-term sustainability and make a credible plan as soon as possible. it to the matter -- it will be better to make is soon to allow the recovery to air its need in the short term. >> thank you. thank you for being here. i was listening to the last

here. i know you talked about the fiscal cliff. the spending reduction is $1.20 trillion over the next seven years. we spent about 45-$47 trillion of taxpayer money over the next 10-years. while i agree that we should come up with a better solution that deals with the entitlements and revenues, are you seriously considering that we're considering a billion dollars in reductions, are you concerned that small amount of spending reduction is something that is going to damage the economy? >> the fiscal cliff -- >> i am talking about spending. >> a smaller fiscal contraction

will have a smaller effect. i do not want to make a judgment. a smaller reduction in fiscal -- in the fiscal position would have less effect than a larger one. >> as a look at the economy, which cannot also say that the best thing we can do is for us to have real balanced fiscal reform. is that not the thing that would cost our economy to take off more than anything else and alleviate the uncertainty people have? >> this reform is very important not only to control the deficit but also the quality of fiscal policy. what are we spending our money on tax those things are important. the way the current law is written, we have the maximum impact in the short run on

january 21. much less is happening over the next decade or two. i am not advocating an overall increase in fiscal spending. i am saying that the timing should be adjusted to allow the recovery more space to continue but to make a serious effort to improve our fiscal policy over the next decade. >> i agree that we should have a better policy than we have now. most people are trying to seek that. it is unbelievable that we have not already done that. on the other hand for us to potentially kick the can down the road on sequestration creates even more if we do not come up with another solution, which i hope we will. to say that you are recommending that we kick the can down the road and make us look even more irresponsible to me is work been

the $108 million that may be reduced out of the spending. do you understand what i am saying? >> yes. delaying everything would be a very bad outcome. >> i think the actions you are taking, and i understand you have a dual mandate, i think we should have a single, i know that it creates bipolar activity. you're trying to juggle two. we created that and not you. the actions you are taking really take -- i know qe2 was in response to deflation -- it takes the impetus of us to act responsibly. i wish we had a chairman of the fed that will say we're not doing anything else. we are pushing broke. it is up to you to act responsibly to deal with these fiscal issues.

are you tempted to ever say that to congress? >> i do not think that is my response ability. i focus on maximum employment and price stability, and not hold threats over congress. >> a very politic answer. i would say that you had members that are concerned about the policy that you are putting in place been disruptive. >> we have a range of views on the committee. >> let me ask differently. if we were to ask responsibly and do something in a balanced way that dealt with not only the next 10 years but the 20 or 30, would that alleviate the need possibly for the fed to consider additional quantitative easing? >> possibly. the fiscal issues are a major

concern and downside risk. if congress addressed those issues, it is very possible that would abrogate any need to take further action. >> you have been a little vague on what additional tools that you have a. i know the whole world watches when you speak. it does appear that most of the tool kit utilized at this moment, if you were to consider additional tools, what would be the range of options that might exist with rates being where they are today? what else is there that the fed can responsibly do since the fed is the biggest lender to the federal government already, more ?han china and japan jac >> i do not want to give any signal that we're choosing one or another. it includes programs that could

include treasuries or mortgage- backed securities. those are the two things we are allowed to buy. we could use our discount window for lending purposes. that is another possibility. we could use communication to talk about our future plans regarding rates or our balance sheet. a possibility we haven't discussed is cutting the interest rate we pay in excess reserves. there are a range of things we can do. each test costs and benefits. >> thank you for your service and being here. >> thank you. i do thank you for your service. i think you have done a superb job in one of the most difficult times to be chairman. i do not quite agree with my good friend mr. corker. i think you have tell congress what you want us to do in your own way of doing it. last month use said "more

comfortable if congress took off some of the birding in terms of helping the economic recovery." human stimulus. i agree with you. under current conditions fiscal policy should be our first choice. it would be more effective. we can talk all we want. everyone gives speeches but we do not do anything. we have had a hard time getting the cooperation necessary to get anything done on the fiscal side. we tried tax cuts which supposedly our colleagues on the other side like. we tried infrastructure. we have tried support for state and local governments when jobs are declining. we have run into opposition on all fronts. just last week a tax credit for job creation and accelerated

depreciation. we got no support. the bottom line is very simple. we're not going to get the fiscal relief we want over the next short while. giving the realities when the president last fall compose fiscal support, which to me is the right way to go, he did not a single vote. we know the reality. we know the realities, particularly in this election year. the fed is the only game in town. i would urge you to take whatever action you think would support a stronger economic recovery. you have received criticism for

efforts to help the economy. republican leadership in the house and senate even as they were blocking jobs bills sent a letter opposing more monetary support. i would urge you now more than ever to take whatever actions are warranted by economic conditions in the minutes of your last fomc meeting the forecast was revised down. the unemployment rate remained elevated. not a single member forecasted inflation above the to certain targets. the progression is stickier than anyone thought. the fed has a dual mandate to guard against inflation and also to keep unemployment -- to keep

employment up and unemployment down. these conditions was certainly motivate the fed to seriously consider taking further action to bolster the economy. what is your thought? >> we take this seriously. we will act and and a political, a non-partisan manner to do what is right for the economy. we said we were prepared to take further action. the complication is that we are dealing with less conventional tools. we had to make assessments. it is very important that we see sustained progress in the labor market. these are the things we will be looking at as the committee meets later this month and summer. >> you used qe1 and qe2 but you

have other tools. >> yes. >> do you believe the danger for inflation is quite low? >> our projection is that it will be close to or below our 2% target. not everyone agrees with that. my opinion is that risk is low right now. as i mentioned, it is a modest rise, not a large risk, of going the other direction. >> you certainly agree that unemployment has been too high and is sticky and we are having a much rougher time than we ever imagined getting unemployment down. >> that is true. >> get to work, mr. chairman.

>> thank you. thank you for being here. it is interesting to hear my colleagues talk. they seemed puzzled why our temporary gimmicks to not seem to work. by any analysis of the cliff was created by all of these temporary policies that expire at the same time. we are throwing a lot on new. at the same time, it appears we're forcing you into a temporary short term idea. i am concerned, you mentioned as costs we doits - not talk about on our side as well as keeping the interest rates low. you are well aware that keeping interest rates where they are

are costing americans about $400 billion a year in lost interest on any savings that they might have. so there is a real cost, and over the last four years, probably about $1 trillion, so people putting aside dollars are losing the the value on their dollar, so there is a cost to that stimulus effect. also, on quantitative easing, which you are clearly considering, the federal reserve bank of new york estimates that 50% of the value of s&p over the last decade is related to fed action and the buildup around fed action of quantitative easing. my concern now is that what we are seeing is not an increase in the value of stocks, but a

projection on the loss of value in our dollar. when we talk about no inflation, i think what we are talking about is no visible inflation at this time because if we are printing more money to buy debt, and you would agree the federal reserve has bought over half of our debt in the past couple of years, we are diluting the value of our dollar over time. while it might not show off today or tomorrow, it is inevitable that it will show up and we see that as a reflection in the price of stocks because that does not reflect long-term projection in value and profits as much as it does play in the market and what is coming out of the federal reserve. my concern now is another announcement of quantitative easing, which might inflate the stock market temporarily, but

another short-term effort that could help implement in the short term but actually reduce the value of the dollar and therefore everything we work for you in the country. so, how are you gauging the cost of another round of quantitative easing? >> well, let me respond to the specifics the race. on savings we understand that low interest rates are a hardship for many people. the reason that interest rates are low, of course, is that we are trying to promote a recovery in the economy. if people hold fixed income treasurys like cd's or bonds, but they also hold stocks or corporate bonds, or small businesses -- other assets that depend on the strength of the economy.

raising interest rates might help some folks, but if it cost the economy to weaken, it would be bad for investors broadly speaking. when we are trying to do, as our mandate suggests, is strengthen the economy, which in turn should make america more attractive to invest in and provide higher returns for everyone investing in the united states. on the dollar and inflation i appreciate your concern, and that is something we pay close attention to, but we have not seen inflation and the dollar has been stronger recently. we are comfortable that we have the tools to unwind these policies in a way that will not threaten inflation, but as i said to senator schumer, we take both sides of the mandate seriously, and as we are looking to help to reduce unemployment we also want to be confident

that we maintain price stability in united states and thus far we have been successful. >> the dollar is stronger relative to the euro, but compared to values inside the united states it does cause concerns that this point. again, i appreciate what you do. i would just ask caution in diluting our dollar further for temporary action. thank you. >> senator menendez. >> thank you, mr. chairman. thank you, chairman bernanke for your service. i want to speak about interest rate manipulations by large banks since the fed plays a key role in insuring the integrity of rates that affect small businesses, cities and towns across the country. i look at the most recent set of allegations on the libor

manipulation and once again it exposes a culture of greed, cheating, lying, at least one large bank, and probably many more which is why nine of my colleagues and i wrote to you and the department of justice asking for a robust investigation in the role of these banks and how this alternately effected consumers in this country, investors in this country, cities in this country, because libor is far more than a benchmark. it is a significant indicator that is used. the federal reserve bank of cleveland found that 45% of prime adjustable mortgages are linked to libor. 80% of sub-prime use libor as a benchmark. this is a huge issue. it goes to the integrity of our

financial system and the lack of faith that the american public and many of have in the system. i'm looking at the internal e- mail in 2007 and 2005, with derivative traders asking other employees to submit false survey responses to benefit their trading positions, changing them, preferring certain libor outcomes on certain days -- sometimes for it to be higher, sometimes lower -- depending on how it would benefit their position. now, i look at this and i say to myself this is about trying to manipulate a key economic indicator for the purpose of profit. am i wrong? >> no. i agree absolutely. this is not acceptable behavior.

>> but me ask you, clearly banks like libor were trying to profit from libor manipulation but that came at the expense of the public in general. >> it is an interesting question. you mentioned borrowers. they may have benefited because libor was under-reported. we will probably find out through lawsuits and investigations. >> if you were caught in the time when they wanted to hire libor, and that was a time of adjustment, you have a detriment. investors had a detrimental in not low in libor, but if it is lower, things are working well. >> i am not defending it. it is a major problem for our

financial system and confidence in the financial system and we need to address it. >> how do we address it? some of my colleagues bristle at regulation, but it seems this is an industry that will not work with the integrity that the public deserves. we're talking about pension fund investments, mutual fund investments, and the consequences to consumers. and i am sure we're talking about billions, not trillions in effect. so, for example, do you think we need additional internal controls and fire walls between reporting personnel so we do not have this work to manipulate? i would like to hear what it is we are going to do now that we know all of this? what will we do to ensure the integrity of this banking

system? >> first, this will have to be an international effort. libor is constructed by a u.k. organization and it is constructed for 10 different currencies. it has to be international. there are two approaches. one would be to fix libor, make changes to it, increased visibility, reduce the ability of individual banks or individuals to defect libor and increase the reporting process. that is one strategy. the other strategy would be going from what is essentially a reported rate to an observable market rate as the index and there are a number of possible candidates that might ultimately replace libor. as you point out, libor is deeply ingrained in many

contracts so it will not be simple to make that change but i agree we need to address the problem. >> i look forward to the fed's leadership and suggestions about how we make a system that cannot be manipulated that has consequences to millions of consumers, investors, pension funds, municipalities, counties, governments -- all effected by libor. it might need to be international, but we need to understand what we need to do in the united states. >> center better. >> thank you, mr. chairman. from everything i have read about libor issue, it seems that since 2008, when the potential reporting was learned about, it reacted on the policy

side with various recommendations with british counterparts. i have not seen anything about it reacting as a regulator of u.s. large banks. did it do anything to investigate whether u.s. banks were guilty of the same practice? >> what it did was it informed the responsible authorities at the cftc in particular, very quickly, and the bank of new york made a presentation to the president's working group that provided supporting information, as did the board. the investigations took place but they were taken up quickly not by the fed, who is a safety and soundness regulator, but by authorities who had more direct responsibility for those issues. i do not know.

i have to say the federal reserve bank of new york is still investigating the situation itself. i do not know what communications or conversations were had with the three u.s. banks on the panel, but the enforcement actions were taken by cftc, and sec. >> do we know definitively that no u.s. banks were guilty of the same manipulation? >> we do not know that. >> that goes back to my concern. if we do not know that, it seems as if somebody dropped the ball that we are four years later and we do not know that. >> two banks have reported that they have been asked to disclose information to the ins to that -- investigative agencies, so the robust processes under way. >> four years later. my point is knowledge of this happened in 2008 and neither

the new york federal other regulators gave a significant investigation so we could no one way or the other as we speak today four years later that the u.s. banks did not do the same thing. am i missing something? >> only again, i think the responsibility of the new york fed was to make sure the appropriate authorities had the information, which is what they did. >> you think it was a reasonable responsibility for the new york fed to follow up and say if u.s. banks do the same thing? >> i do not know what conversations they had. the u.s. fed is the regulator of some banks. there are others. >> certainly, the new york fed is it primarily -- primary regulator with regard to the banks to engage jim libor that

we are talking about, correct? >> two of the three. >> right. the fed is in the process of will making with regard to " predominantly engaged in financial activities" under dodd-frank. the rule that has been published and the fed is now taking comments on seems to absolutely ignore a specific criteria that we in congress placed in dodd- frank in section 102-a6. it is very specific, using an 85% test, and it seems to me the rule the fed is in the process of adopting ignores that specific metric. how can the fed adopted a rule that ignores specific statutory language.

>> we would not want to do that, and i will check on that question for you. >> if you could check on that, again, it is 102-a6, and i believe the fed ignores a specific metro, which i would call the 85% rule. >> thank you. >> thank you very much. finally. capital standards for the largest banks, as i have read your comments in the past, it seems you support somewhat larger capital requirements for mega banks, but you seem to think where we are headed, 9.5% under bezel 3, is roughly the corporate parent is that a fair assessment? >> there is an international -- roughly the estimate.

is that a fair assessment? >> there is an international standard based on formulas and calculations that try to establish parity across banks across the world. >> when i am asking is, to the extent that that opposes higher capital standards on the largest u.s. banks, do you think they're good enough to insure stability and protection in the future? >> i think they're very useful, very important. basel three in general will increase everybody's capital and the quality of capital, which means the largest banks have additional capital, but it will not just the capital. it will be the market discipline that comes from a 40, liquidity requirements, -- of 40, liquid

requirements and so on. it is important that we address to the to fail, and this is one way for banks to take into account the. size imposes a cost to the rest of society -- account that the bank's size and poses a cost to the rest of society. will continue to have international discussions. it is our approach to have consistent requirements with international standards for capital requirement, and these numbers were based on calculations that drew from the crisis we are always open to further discussion -- crisis. we are always open to further discussion and looking to see how the effects work through the system going forward. we will get a chance to see what the impact is on banks and credit costs. >> my time is up, but i would encourage you to look at that, and place stability ahead of --

i understand the desire for uniformity across the globe, but it should not trump what is best for -- . >> you're looking for higher capital requirements. >> yes. >> senator akaka. >> thank you, mr. chairman, and let me welcome chairman bernanke to the committee, and thank you for your tireless leadership in these challenging times. recent economic events in europe and china show us how dependent the united states is on the international markets when it comes to our economic recovery. despite concerns about the overall rate of recovery, some sectors are beginning to turn around and we are beginning to see some bright spots as

indicated in your opening statement. hawaii, for example, had record tourism numbers in may, and nationally we see spending by foreign travelers continuing to rise, helping to reduce our deficit. my questions are how do you think that current policies and those regarding tourism and exports have effected the recovery? also, do you have any suggestions on how to further encourage growth in these areas? >> well, first, senator, tourism has been something of a bright spot. has been. we have seen improvements in not just hawaii, but a number of

places from the country and you mention the international trade deficit. people might not appreciate that when a foreigner visits hawaii, that counts as a u.s. export because we are exporting tourism services and the export of tourism services has been growing quickly, something like 14% in the last year, faster than other exports. it contributes to our trade balance as well as overall economic activity. it is a positive. with respect to policies that address it, i think there are incentives where we see individual states, for example, compete with each other to attract visitors, but we can consider issues like visa policies. we can look at any tax or other

implications that might affect the cost of tourism. so, it is an area where there is a lot of benefit and scope for economic benefit to hawaii and the rest of the country. it has so far, as i said, been a bright spot among the various service industries that we have. >> thank you. as you know, i am concerned with the well-being of consumers. during previous hearings we have discussed the importance of improving financial literacy, to empower consumers while we were to grow the economy. my question is what ways have you seen financial decision making by individual americans improve during this recovery,

and what more needs to be done, do you think? >> well, there are two sides to improving decision making. there is education, and that effort has continued. the federal reserve is continuing efforts towards promoting literacy and economic education. i have a meeting with teachers across the country and i will talk about financial literacy, answering their questions and about how to introduce students to these topics. some of the activities we have has moved over to the cfpb, but they are also engaged in those activities. education is one side. on the other side, it is important that disclosures and the types of products that are offered are such that people

have a reasonable chance of understanding what it is they are buying or investing in. the federal reserve pioneered, a few years ago, the use of consumer testing to improve disclosures for credit card statements and a variety of other disclosures, and we hope to see that activity continued. in general, the experience of the crisis has made people more aware of the need to be financially literate, and schools more aware and cautious. it is an ongoing battle. we cannot declare victory. we have to work to make sure that both kids in school and adults making financial decisions have access to good advice and education. >> thank you very much for your responses, mr. chairman. >> senator johanns. >> mr. chairman, good to see you

again. the four tests that you have testified about today -- the forecasts that you have testified about today, i assume do not factor in the results of the fiscal cliff that is headed our way between now and the end of the year. >> that is correct. >> because of the fact that all of the various items included in the so-called fiscal cliff would take affirmative action by congress to pull us back, which typically means 60 votes in the senate, a majority in the house and a presidential signature, my assumption is if that does not happen that we did get -- we get caught in a situation where those forecasts would be revised and it would be even

more pessimistic than your testimony today. would that be correct? >> absolutely. >> as you think about the $1 trillion sequestered, returning to the 2001, 2003 tax policy, the estate tax and all of the various factors we are looking at between now and the end of the year, if you were to give their recommendation on where to act, would it be on everything or is there a priority? >> i think the choice is between spending and taxes, the mix and the kinds of taxes and so on his congressional responsibility, but i am pointing to the collective impact of all of these things happening at the same time. there might be different ways to mitigate the effect and there

are different views, which is a problem because you need to come to some type of an agreement. i do not have a specific recommendation other than to think about not just individual policies but the collective impact if they all happen at the same time. >> but me talk about the mitigation part of this -- let me talk about the mitigation part of this. some of us on this banking committee have been meeting for many, many months, and for some members over a year, talking about an approach. i would guess the best way to describe back is the outline for the approach is the simpson- bowles plan, which came out one year ago. thinking about that plan, would you be comfortable in testifying today that it would at least be

an acceptable alternative for what we're facing between now and end of the year if congress could adopt that approach? >> well, it does have a profile that seems reasonable in terms of addressing longer-term sustainability over the longer time period, but again, i do not want to endorse individual components, in part because choices between taxing and spending our congressional prerogatives and also because the simpson-bowles plan is not complete. it does not say anything about health care, for example, and how those costs are under control, but it does have features that have been addressed in other plans that introduced fiscal discipline in a rigorous way but over a longer time to allow economy to adjust more easily -- the economy to

adjust more easily. >> mr. chairman, i think if the average citizen were to listen in on the political debate that will happen between now and november, and that debate is appropriate because that is how democracy's work, you would get very discouraged. having said that, if congress were to put a plan in place, simpson-bowles, or another approach that provided the stimulus, maybe for some time, and in my judgment pulled back on the sequestered, provided economic stability in terms of tax policy and revenue policy, stabilizing things with a view towards dealing with the deficit over time, what kind of signal would that send to the marketplace, and do you think it would be a positive signal? >> it would be very positive.

it would reduce uncertainty. it would address an important problem. it would show the ability of our political system to deliver results. you might recall that when the united states government was downgraded last summer the punitive reason was concerned about the ability of congress to come to a solution, not a lack of resources. it was an issue about whether the congress can work together to deliver a satisfactory outcome. so, i think, something like that, even if it was only an outline, a set of guideposts that congress would fill in as it went forward, i think that would go a long way to reducing uncertainty, increasing confidence and addressing one of the biggest longer-term problems. >> thank you, mr. chairman. >> senator brown. >> thank you. nice to see, mr. bernanke.

dodd-frank has given congress more authority to oversee banks and we all have no authority to make sure firm rules are in place, they are followed and that actors are published. unfortunately, as we all know, since 2008 we've seen too many examples of wall street breaking rules, laws and common standards of ethical behavior. i follow up on some issues that senator visitor talked about. i want to run through for the sake of repetition to recognize what these are -- investment losses, sec enforcement actions, municipalities selling credit derivatives, five of the nation's servicers found to a forged documents, the nation's largest bank in january halted consumer debt collection lawsuits over concerns on poorly maintained and inaccurate

paperwork, the largest bank has lost $5.8 billion on large, complex derivatives trades as it appears there in place in this reported losses. 16 banks are suspected of manipulating libor. in june, one publication reported on a criminal rigging trial so that banks could under- pay for municipal bonds. two weeks ago, former employers of the largest bank in the nation told "the new york times" the company told them to steer clients toward their own funds because they were more profitable for the bank even though they have lower returns and other funds. this goes on and on, not to mention wrongdoing institutions over the -- over which the fed

has no jurisdiction -- mf global, a problematic facebook ipo, was to its biggest banks sharing secret information -- no wonder public does not trust you or us. i do not know any other answer other than to put out there and again say so many of our biggest banks are too big to manage and today to regulate. i think this behavior shows they are too big to manage and today to regulate. >> there have been many bad practices. i agree. many of them are tied to the crisis and access. i think those are bad for business and it is important to address those issues through enforcement. part of the reason you could make such a long list is because so many of these things have

been turned up by various enforcement's. >> and perhaps many have not. >> that is true. >> you said this is bad business. for a lot of them, it has been good business. it has been embarrassing to some, but it has meant bigger profits and bonuses, and to say it is bad business from an economic viewpoint, perhaps it is not good for our economy, there have been rewards for some of the bad actors. >> it is short-sided. it is not the way you build a long-term relationship with customers and have long term profits. with banks, the big issue is too big to fail. if you comfort -- if you comfort them, they might be too big to break up. there was a story about the

benefits of providing shareholders with additional value. what dodd-frank does is provide a blueprint for attacking too big to fail, which includes the liquidation of authority, which provides a way to do that sensibly. i think it is important to attack too big to fail, and we are addressing that through capital, liquidation authorities, living wills, and i think if banks are exposed to the discipline of the market, we will see some breakups. >> living wills seemed to take effect in the non-financial world close to somebody's death bed, and i do not think these

living wills will address the issue, nor does this other regulations seem to address the issues of this litany of problems that i mentioned. in the end, if the banks can be regulated, debt includes the occ, and i they're not up to the job, or complicity in wall street's activities. i beg of you to restore confidence, because east simply have not yet. >> i agree. >> senator toomey. >> thank you chairman. thank you for being here, chairman bernanke. you have the knowledge there is a range of views on the efficacy of the policies you have been pursuing, and you would agree there is a range of issues on

the risks of the policies, and i am sympathetic to the effected we have giving you a dual mandate which i think intrinsically creates a risk of being put in a position of dealing with a conflict of goals. i know you and i disagree on this. i feel strongly the problems facing our economy are not monetary in nature. the result from the ongoing de- leveraging that we are suffering through, a regulatory avalanche, unsustainable fiscal policy, and the threat of huge tax increases and so to address this with ever easier monetary policy are worried about the unintended consequences, including the fact that it has the effect of masking the true cost of these deficits and making it easier for us to continue this in prudent policy. i want to reiterate that point, but i would like to eschew about this libor scandal.

i am -- ask you about this libor scandal and about what little confidence remains in our financial system. i am concerned about the direct impact to american citizens, including my constituents. i think about the city of bethlehem where they were receiving floating rates based on libor and i wonder if they were receiving payments that were lower than what they should have gone. you mentioned in your testimony or perhaps in answer to a question that fed officials became aware of barclays manipulating this index in 2008, and "the wall street journal" has an editorial that recounts an e-mail exchange, where perhaps it was a telephone exchange, between a barclays and play and a fed official. when did you become aware that there was a lack of integrity and the reporting of libor rates? >> on your first point, there is

not as much disagreement as you imply. monetary policy is not a panacea. it is not the ideal policy in many cases. we look for too involved with other parties. on the telephone contacts, just note that these were phone calls made by junior employees whose job it was to call and get market color, information on what was happening in the markets. on one of those calls it was clear the fed and 40, the -- employee did not know how libor was constructed. there were issues on how that was communicated. i learned about it to my recollection at the time when it became covered in the media, which would of been april, 2008. >> here is what i do not

understand. i know you fully appreciate the importance of this index, how widely used it is for all kinds of transactions and how the american financial system -- i do not want to sit it is dependent on it, but it is integrated -- i understand you and other regulators understood there were problems with the integrity of this, perhaps even systemic problems, yet everyone about these transactions to continue. did not don on someone to say -- did not don on someone to say we should consider a different way? did that conversation happen with any financial institutions or the public? >> well, financial institutions are not the only participants. crux of all making it more brought? >> so, -- >> how about making it more broad?

>> so, i think the best way to address the problem and given the issues in the crisis, the best way to address the problem in the near term would be to reform the way the numbers were collected so the libor rate that was set would be an accurate representation. >> i agree, and you mentioned observable market transactions would seem like a better way to do it. the question is why did we allow it to go on the old way when we knew it was flawed for four years. >> because the federal reserve has no ability to change it. >> you have enormous influence. >> we have been in communication with the british bankers' association. they made some changes. not as much as we would like. it is not that market participants do not understand how it is collected. it is a freely chosen rate. >> i am not sure that market

participants were aware of the problem with the integrity is -- integrity of the mechanism and the way it is established, and there are other ways to establish this floating rate that would not have other problems. i am surprised this was allowed to continue for so long when the problem with the integrity was known. >> center, the new york fed took the lead in making suggestions and how to clean up the libor process. >> thank you. >> senator kohl. >> chairman bernanke, last july, we discussed how the united states is experiencing a jobless recovery and you agree the long- term unemployment was a major problem and recommended congress to look at ways to help the long-term unemployed through training and education. the federal reserve has its own mandate to keep unemployment low and we contingency disappointing jobs numbers. i am sure we agree the

consequences of long-term unemployment are enormous. over the past year, why has the fed not released a third round of quantitative easing, and could you expand on your current maturity program? >> certainly. briefly, we have taken a wide range of extraordinary actions to support the economy. in june, we took the step of continuing the maturities extension program, which has many features of quantitative easing in that involves -- in that it involves support to the economy, and we made clear we are prepared to take further actions. we are looking to see if we get sustainable improvements in labor markets. if we are not, we will have to seriously consider taking additional action. the reason there is any question is really, ken, the range of

views about at -- again, the range of views about efficacy and cost associated with these measures, but that said, as i said in june, we are prepared to take further action and we will evaluate our options as we go forward. >> i appreciate that, however given that the unemployment has remained over 8% for 41 months, long enough for it to be clear, now was the time to be more aggressive, i believe, in your approach to unemployment, and i think we agree the consequences of long-term unemployment are too great for this to go on very much longer. on libor, mr. bernanke, when chief executive of a national bank said "libor is the banking industry's tobacco moment," citing the settlement cost

american tobacco companies over two hundred $20 billion. could you foresee a scenario where banks would seek taxpayer assistance to compensate parties that were victims of libor rating? do you believe the potential court cases against banks that participated in libor manipulation could result in another federally negotiated settlement? >> well, there are many court cases already in progress. i think it is too soon to make a guess at what the outcome of those cases will be, but there have been a few estimates by private analysts of the potential costs, but those are admittedly back-of-the-envelope calculations. i think we have to let this play out. we do not know what the costs will be, and i really do not think it is responsible for me to guess until we get more information about the impact of

these actions on the edge low libor rates and the implications on the rates that people paid. it is obviously very serious, but i think it is too early to judge what the cost will be. >> yes. recent press reports indicate that the scandal could cost the banking industry millions if not trillions of dollars. as you know, there is no appetite here or anywhere else to do another bailout for the banks given the increasing amount of money that is at stake. i would urge you to work closely with the justice department when the time comes, and i think you would agree that you will. >> if we could contribute to a global settlement, as we did in the case of the servicers, we would, of course. >> thank you. thank you mr. chairman. >> senator moran. >> thank you. chairman bernanke, thank you for

your testimony. in the advance of the financial crisis in 2008, many observers said it came out of the blue, as a surprise. what is it a you are worried about that we ought to pay attention to that has the potential of being the next crisis to the economy of the united states? i often read about credit card debt, student loan debt. what are the things you are most worried about, and what are we doing to mediate the problem? >> well, i think the items, and i mentioned these in my testimony, would first be the european sovereign and banking situation, which remains unresolved and there is financial stress and she did with that and some distance

before they get to 8 -- associated with that, and there is some distance before they get to a solution. that poses an ongoing drag on our economy, and although i have every hope and expectation european leaders will find solutions there is the risk of a more serious financial blow up and i do not want to take all of your time, though we have taken appropriate steps to strengthen our banks in the united states and provide -- to prepare for whatever event might happen. the other, briefly, is the domestic situation we have been talking about fiscally, and it is important that in the short term congress works effectively to address the debt limit, the fiscal cliff and those issues, and establish a plan for fiscal stability. >> at what point do we have a sense of whether the european crisis will have huge consequences for the u.s.

economy? what time frame are we on where we know if europe has appropriately responded to resolve their own problem? >> we appear to be in a muddling through environment, which is costing everybody, europe more so than us. many countries in europe are already in a recession. based on what i can observe, it seems like it could take a very long time because the structure and the institutional changes that year to try to make are not ones to take quickly. they recently agreed to create a single bank regulator for eurozone bank's. to do the, and i do not have the inside information, but it could take time, going into next year, before they have a single bank regulator. likewise, they are trying to

establish fiscal rules and agreements. they made some progress there, but given that there are 17 governments that have to agree to every major change, it could be some time before they have come to a fully satisfactory fiscal arrangement. it appears to be something that could go on for a while, unfortunately. >> but me ask a more specific, more narrow question the kauffman foundation is a foundation in kansas city that considers the entrepreneurship, and their statistics demonstrate that companies that are less than five years old accounted for nearly all of the net new jobs created in the u.s. economy. new businesses create an average of 3 million jobs each year. unfortunately, our census bureau indicates the start of the engine is slowing down. in 2010, three and 94,000 new businesses were started in the

united states -- 394,000 new businesses were started in the united states, the lowest since 1977. i would like to hear your opinion on what policies congress administration should pursue to return to the days to where the united states is at the forefront of innovation and entrepreneurship. >> those facts are, i believe, correct. young companies are big to jitters because if they are successful they grow quickly and at -- are big job creators because if they are successful they grow quickly and ed and 40's. it is difficult to measure start -- employees. it is difficult to measure start-ups. i think it is clear, both because of the weak economic conditions and problems related to the availability of credit, venture capital, and effected

many entrepreneurs -- the fact that many entrepreneurs use equity in their home as startup capital, it is very possible that those companies are not starting up the rate that they have in the past. i do not have a really good program here to suggest other than to try to create as favorable of a tax environment, a credit environment as possible for startup firms to write regulations in a way that serve their purpose but allow small firms to flourish. according to international agencies to calculate these things, the u.s. has a small business-friendly environment here in terms of cost and time required to start up a small

business. it is not like we are in bad shape on that, but any improvement that would make it easier for small businesses to get the necessary capital, to meet the regulatory and other requirements and to avoid early tax burdens -- all of those things are obviously approaches that could help these companies start up and provide employment. >> mr. chairman, thank you. one would think we would have significant startups particularly in light of unemployment, which creates the opportunity for the necessity for people to create business on their own thank you. >> senator warner -- on their own. thank you. >> senator warner. >> thank you. the end is near. i would argue that we do have legislation to address start

activity, as well as the addition of talent. i commend senator moran's and leadership on this issue. i know most of my colleagues have left, but i would also point out that because of the actions we took in this congress in dodd-frank and otherwise we have seen an increase in capital and american banks in excess of three entered billion dollars more in capital reserves -- $300 billion more in capital reserves and that is out the banking industry relative to some banks under assault around the world. i would like to commend you on your continuing to urge us to act on fiscal policies. waiting for congress is a little bit like "waiting for the del." hopefully we will see action later this year. my first question would be, as we grapple with this issue of trying to get an appropriate balance of revenue and

entitlement reform to generate the four trillion dollars to drive our debt-to-gdp ratio to go down, and because you have talked about having the ability to face these things in, i sometimes scratch my head because what is best of the american people is smaller than what is best of the people in the u.k., europe, india and elsewhere where they are going to policy changes. have you done any kind of sizing of what the $4 trillion deal relative to the size of the american economy and what is being asked of the american people as opposed to the rest of the world to get fiscal houses in order? >> i am not done that i -- that exercise, but in terms of gdp, some of the fiscal shifts in countries like spain, portugal

and italy are substantial and in the near term, which is partly why they are so weak in the near term as economies. it is true that the near-term fiscal step that is being taken it is larger in these countries are under a fiscal stress, but i'm not quite sure what the implication of that is. we are lucky that we can borrow at a low interest rate. we are not currently in the same situation as a greece or 8 portugal, and therefore if we can intelligently combined a gradual glide path with a strong, credible plan for stabilizing our deficits in the longer term we can avoid that type of painful contraction and do it more gradually. >> it almost seems to me that it is remarkable, and i guess this is why congress has record low

levels of approval, that we cannot step up and do our job relative to what is the best of other people around the world. -- asked of other people around the world. one of the things we have talked about is additional actions to stimulate the economy, and for those that question taken these actions, if we look at the european central bank's recent actions, the bank of england, the chinese financial institutions, what effect of their stimulus activities or loosening activities does that have on the world economy and in terms of your decision making? >> well, there has been a global slowdown. a lot of it emanates from europe, which through export demand is effecting asia and other parts of the world -- the united states as well. there has been some slowing in asia as well. chinese gdp statistics said the

weaker this year than previous years. part of that was intentional as they saw to cool the housing market and address inflation concerns. there is a slowing in the global economy. to the extent that actions taken by our trading partners strengthen those economies, it will help us on the margin because it will increase our markets and provide an overall, a better economic environment. i would say that this point, compared to what we saw in the aftermath of the crisis, nothing is happening globally of that kind of scale. there are relatively modest steps being taken in both of those jurisdictions to try to offset some of the slowing. >> but those actions are similar to what you might take in the fed. i guess the point that i would make is that there seems to be a consensus opinion of around major economies around the world

to take the stimulus of actions. >> the world is in an easing cycle, that is correct, and in terms of specific actions, the u.k., for example, has added to its quantitative easing program and has been doing other things as well. the united states federal reserve is not the only central bank that has been using these policies as a tool to strengthen their economy. >> thank you, mr. chairman. >> senator warren. >> our live coverage of chairman bernanke's testimony continues at c-span.org. we have and asking you to send comments to us on twitter. ohio rights in the -- time to bail out consumer cities, not libor. lumi says the fed chairman needs to answer the question why is it ok to harm the elderly who rely

on interest rates for income and savings? another said i do not know why bernanke is there. he cannot be touched or enlightened. we heard chairman bernanke say the u.s. economy has weakened and the federal reserve is ready to take further action to bolster growth it conditions did not improve. the fed chief is on capitol hill again tomorrow to talk to the house financial-services committee. you can see live coverage at 10:00 eastern on c-span3. if the u.s. house is about to dabble in the. the members began the day with the morning hours, a time set aside for speeches on any topic. legislative work begins at 2:00 p.m. eastern. the house has five bills scheduled today, include authorization for state department programs in 2013, approval of the u.s. loan guarantee for israel up to $9 billion, and allowing the

defense department to transfer surplus weapons to israel. any votes on those bills will take place at 6:30 p.m. eastern, giving time for members to return from their break. live coverage of the house here on c-span. representatives will be in order. 9 chair lays before the house a communication from the speaker. the secretary: the speaker's rooms, washington, d.c., july 17, 20 12, i hereby appoint the honorable john culberson to act as speaker pro tempore on this day. signed, john a. boehner, speaker of the house of representatives. the speaker pro tempore: the chair will received a message. the messenger: mr. speaker, a message from the president of the united states. the secretary: mr. speaker. the speaker pro tempore: mr. secretary. the secretary: i am directed by the president of the united states to deliver to the house of representatives a message m writing. -- a message in writing.

the speaker pro tempore: pursuant to the order of the house of january 17, 2012, the chair will now recognize members from lists submitted by the majority and minority leaders for morning hour debate. the chair now lays before the house a communication. the clerk: the honorable the speaker, house of representatives. sir, pursuant to the permission granted in clause 2-h of rule 2 of the rules of the u.s. house of representatives, the clerk received the following message from the secretary of the senate on july 16, 2012, at 2:12 p.m., that the senate passed with an amendment h.r. 2527. with best wishes i am, signed sincerely, karen l. haas. the speaker pro tempore: pursuant to clause 4 of rule 1, the following enrolled bill was signed by speaker pro tempore lewis on friday, july 13, 2012. the clerk: h.r. 3902, to amend the district of columbia home

rule act to revise the timing of special elections for local office in the district of columbia. the speaker pro tempore: pursuant to clause 12-a of rule 1, the chair declares the united states house of representatives in recess until 2:00 p.m. today. >> the house is coming back in at 2:00 eastern for legislative business. five bills on the schedule today. federal reserve chairman ben bernanke is still live speaking to the senate banking committee. we are going to go back to the hearing. >> a spending program that comes in more gradually over a period of time, but also is tied to a plan, a credible plan, to achieve fiscal sustainability in the medium term would be -- is what i'm recommending. is something that would avoid this very, very sharp change in

the government's fiscal position one day, january 1, 2013. >> let me see if i can squeeze in one more thing. you know, about -- unemployment rates unacceptably high. you expect 7% or more by the end of 2014. in january, 2002, unemployment rate, 5.7%. october of 2003, unemployment rate 6%. by october, 2004, down to 5.5%. boy, wouldn't we love to see that kind of unemployment house in the united states of america. down to 4.9% by august, 2005. 4.4%, unemployment rate, these are actual figures by october of 2006. as late as may of 2007, unemployment rate of 4.4%. and then, of course, by the end of 2008, it's up to 7.3%.

we hear a lot of discussion and a lot of warnings by people in the city about not going back to those disastrous policies that got us into the situation we're in in the first place. the fact is we had relatively low and un-- and a relatively acceptable unemployment rate for much of the decade until 2008, and we had real -- we had real g.d.p. growth in 2006, 2007 and 2008, isn't that correct? >> in 2008, yes. >> what happened in 2008? was it tax cuts for the rich? >> no, we had a major financial crisis, as you know. and it created a global recession. >> right. >> very deep one. >> thank you very much. >> senator merkley. >> thank you, mr. chairman. thank you, chairman. in your opening comments, you

mentioned housing refinancing and families that are underwater. we have about eight million families whose mortgages are under water. some can refinance through harp but it's been a pretty small number, only about 200,000 so far. in part because the complexity with second mortgages. if families who are under water could refinance from those higher rates to lower rates, could that be a significant factor and substantial tool, if you will, in helping to move the construction economy forward and stabilizing those eight million families? >> if that were possible, it would be helpful, because it would both reduce the payments and reduce defaults and foirks and improve the -- foreclosures and improve the income of the people who could refinance. >> thank you, mr. chairman. i want to switch to another comment. i believe you made in response to chairman johnson and i didn't catch the exact words but i believe you said you had emails about fixing interest

rates to make the banks look more healthy but we didn't have emails to conclusion of derivative traders or something. could you help clarify what you said there? >> yes, there have been two somewhat types of violations. one, which was very much -- it was most intense during the crisis was banks underreporting the cost of their borrowing in order to avoid looking weak in the market. that's the kind of information that people were talking about in the markets and that the new york fed heard about in 2008. the other kind of activity is the kind that the investigations have just recently revealed in the case of bark lays in -- barclay's in the very large fine in which there was clear evidence of individual traders conspiring with others to manipulate the

lie bore submissions in order to -- libor submissions in order to profit from the short-term derivative trades. i am not making judgment but just a different activity. and i was only making the point that it was the -- only the former that came to the attention of the new york fed. >> and so in terms of the platter, the collaboration between the traders and those who are reporting the libor rates, when did that first come to the attention of the fed? >> not until relatively recently. this was something that was discovered by the joint investigation of the cftc. i think the s.e.c. was involved. the d.o.j. and the british authorities. >> thank you. i was very struck to read some of these emails such as, hi, mate.

we need a really low three-month fix. it could potentially cost a fortune. or another trader who wrote, we need a 4.17 fix on the one-month flow. one-month low fix. we need a -- the print is small for me. 4.41 fix on the three-month high fix. and certainly this type of activity, does this constitute fraud? does this fall into a criminal area as well as just really unacceptable manipulation, if you will? >> based on what i know about it. what i read about it, it does seem to be so, yes. >> i think the point my colleague, senator demint, was making earlier, when you know someone has a thumb on the scale, isn't there a responsibility to alert the customers about that thumb being on the scale? i know that you all did send this advice to the bank of england or to others that

there's ways to fix the thumb on the scale, get the thumb off the scale, but if you had it to do over again, would you talk to the people getting mortgages based on libor and so forth that something is not quite here and you should be aware of our concerns? >> well, it's important that people know about it, but i'm not sure i would agree this was something unknown. the financial press was full of stories about it, and the reform proposals that the new york fed made were also reported in the press so i think there was a good bit of knowledge, at least among more sophisticated investors about the problem. >> i do think the municipalities that were involved are feeling that perhaps they weren't as aware of the thumb on the scale as they might have been but that will all be sorted out in due course. >> that's right.

>> if my colleagues will bear with me for 30 seconds. an issue i want to follow-up with you on which is related to the growing role of banks in providing crude oil to refineries and then buying the products. we have goldman that is doing this with a refinery operating in three states. jpmorgan is doing this with the largest east coast supplier. morgan stanley is doing it in a few states with p.b.f. it reminds me of the situation -- and i mean no -- at this point there is no sign of wrongdoing of any kind, but it reminds me of the potential for problems that occurred when enron was both supplying electricity and running electricity trading markets. because we have that here. we have now the banks involved as a supplier and purchaser of large quantity its but we also have them -- quantities but we also have them involved in trading because regulators have

exempted the spot markets from the volcker firewall. is this an issue that we should be concerned about, this substantial conflict of interest of being a supplier and involved in the trading side? >> am i mistaken, senator? i thought the statute exempted the spot market as opposed to the regulation. >> let's follow-up on that because there's also a lot of letters that have been submitted on the future spot markets, if you will. not futures themselves. i believe that that is a gray area. >> well, except insofar as the statute exsempts certain activity, i would think proprietary trading in this area would be part of the volcker rule. >> it does give regulators authority over that. >> we'll look into that. >> thank you.

>> thank you, mr. chairman. i could have gotten the frog out of the throat two hours in the hearing. mr. chairman, thank you for being here and thank you for your testimony. i want to make one observation and i have a couple of questions because there have been traces of a discussion in here today about the nature of the economic growth we need to see in this country. it really is not just about g.d.p. growth. it's about job growth and wage growth in the united states and whether we can recouple those things together. they decoupled in the last recovery. they are not coupled in this recovery. as you observed, there are things that we can do in our tax code and our regulatory code and our statutes that would provide an ecosystem that would differ on that promise again for the american people. we've been having a hard time getting to that conversation in this congress, but we need to. that's the fundamental work in my view, why we were sent here.

we spend a lot of time talking about how to avert crisis now, and you're a historian of the great depression, i know. i think 100 years from now if we don't get our act together here no historian will be able to fairly record your tenure without saying you came to the senate and to the congress and you very clearly said, here are the things i am most worried about and if you don't deal with it you risk a real disaster. i'd like to hear on that score a little more about what you say in your testimony are the strong incentives to resolve the crisis that the europeans have, the i.m.f., as you know, came out with a report yesterday about the challenge they face. they have a lot of political dysfunction there as we do here, but they also have, as you pointed out, a less elegant institutional arrangement right now for dealing with it.

>> no, that's right. they have both economic and political incentives. the european union and all those europeanwide institutions that include now the common currency area were created after world war ii in part to try to avoid any future war on the european continent. and obviously that's been an extremely important objective that people put a lot of weight on. and so closer political union is something that many european leaders consider to be important. and so this is part of maintaining the currency and achieving stability there as part of that. in addition, the -- both the north and the south, so to speak, benefit from the common currency. in particular, for example, the germans are -- have an exchange rate in the euro which is probably weaker than they would have if they had a deutsche

mark. and therefore they have a weaker currency, more competitive currency, and a -- if you will, a captive market for selling their exports which -- both of which would not be there if the euro zone was not an integrated stable structure. even from the point of view of the germans who have the most concern about the potential fiscal costs of grader coordination within the euro zone, they both have substantial economic reasons to make this happen. throughout europe, the general opinion polls in most cases is people would still have the euro despite all the problems that they've been facing. now, as you point out, there are many difficult political problems. you have 17 different -- we have one congress here. we have difficulty coming to the -- >> i can't even imagine. >> they have 17 different parliaments and they have a treaty which requires broad, if not unanimous agreement, and so

there are some very substantial problems in getting to agreement. >> let me, because i want the senator from north carolina not have to wait on me, let me come to the second point. the stuff that's actually in our control. this is your testimony today, page 6. the most effective way that the congress could help to support the economy right now would be to work to address the nation's fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery. doing so earlier rather than later would help reduce uncertainty and boost household and business confidence. tell us what that 100-year record if we don't do this? >> well, in the short term -- >> and i mean short and medium and long. >> as i'm saying, as the c.b.o. and others pointed out, if the fiscal cliff is allowed to happen as it's now programmed in the law it would probably knock the recovery back into a recession and cost a lot of

jobs and would greatly delay the recovery that we're hoping to facilitate. in the longer term, the -- it is simply not possible for deficits to continue along the path that they are currently projected. so either some solution would be -- have to be found that could be very, very painful at some point in the future because of the size of the cuts. we are talking about comparing us to europe and some of the countries that are making very, very deep cuts right now and how painful that is. either we would have to have those kinds of cuts or we might face a financial crisis where interest rates would rise, as we're seeing now in europe, and that would feed through through other interest rates like mortgages and other kinds of rates. and it would be very costly to our economy. so both in the short term and in the longer term, it's important for us as a nation to create a fiscal policy that achieves both the short term and long-term objectives.

>> i wish i had more time but i'll come back to you with other questions. thank you, mr. chairman. >> senator haggan. >> thank you, mr. chairman. and thank you, chairman bernanke for enduring the long hearing today. and i do want to say thank you, too, for your great work and your sacrifice. i understand that -- we talked a lot about libor today. libor is simply a benchmark that lenders voluntarily use to represent the cost of borrowing by large banks. there are other alternative metrics and you mentioned that in your earlier testimony that financial institutions could use benchmarks for loans and derivative contracts such as commercial paper rates, the fid fund rates and the yield on u.s. treasury have all been mentioned as alternative benchmarks to libor but each have shortcomings. could you discuss some of these

alternatives and do you have which might be a prmble benchmark? >> as you -- preferable benchmark? >> one that's been considered is the so-called general collateral repoe rate, rate at which repurchase agreements are made. it is a thick market. a lot of trades take place and trades take place at a different maturity which is important. so that would be a possibility that people are considering. another possibility is the o.i.s. rate, the so-called overnight index swap rate which is a measure of expected central bank interest rates essentially. it's like a measure of the market-based measure of the longer term federal funds rate. and it has some advantages as well. i think the main thing that distinguishes these rates, the ones you mentioned and repo

rates and li bimbingsor is there is observe -- libor is there is no ambiguity and there is no issues raised by the libor process which is varyfying whether the reported rates are indeed accurate. >> could you see the markets going to a different rate other than libor for the multitude of -- >> i suspect they will seriously be considered unless, of course, measures are taken to restore confidence in libor. the problem, of course, we have enormous amounts of existing contracts. not just derivative contracts but a variety of other kinds of loans and securities which are based on libor. and until those are negotiated away or they expire, we have this huge legacy issue of libor-based financial contracts. so it might be -- it's just like the quirky typewriter.

it's not very efficient but everybody is used to it so it's hard to change. you might have the same phenomenon there. if we do have libor, we need to make sure it has the confidence of the people in the market. >> thank you. in section 944 of dodd-frank, governors along with other federal agencies to jointly prescribe regulating -- prescribing regulations that require securitizers to retain credit risk. the proposed rule was issued in march of 2011, and the period was subsequently extended. could you describe the role of the federal reserve bank of new york and its staff are playing in the drafting and completion of -- completion of that rule? >> well, we sometimes draw on reserve banks for specialized expertise. for example, in the

securitization laws -- rules, we try to look at existing arrangements for credit risk retention for different types of markets and people in new york who deal with those markets on a regular basis would be helpful in providing that kind of information. but the -- of course, the responsibility for drawing up the regulations and making the financial determination lies with the board of governors in washington and although we may use expertise from new york, it's a board decision. >> thank you. last question. when discussing the nonstandard monetary policy tools that the fmoc is implementing, you've consistently said the level of accommodation that the economy is receiving is based on the total stock of outstanding securities in your portfolio. and in june, the fmoc announced it was taking steps to extend

the maturity of its treasury portfolio rather than expand its size or change its composition. could you discuss why they would extend the treasury portfolio and not acquire additional mortgage-backed securities which would have the added benefit of supporting the housing sector? >> well, when we say that the stock is what matters, we are referring to the stock of longer term securities specifically, and so what this is doing is replacing very short-term securities with longer term securities, iness creasing our stock of longer term securities, putting downward pressure on longer term have rates and pushing -- by taking duration risks out of the market pushing them in related assets like corporate bonds and lowering the yields as well. this was an effective step, and it was a relatively natural one since the previous program was just coming to an end in june so we extended it for six months.

but we continue to look at alternative approaches, including approaches that involve buying m.b.s. and trying to assess both the efficacy costs and risks of those programs as well as the outlook and the extent to which we can get a better outcome in the u.s. economy. >> in the fmoc's last policy statement, the committee indicated that it was prepared to take additional steps if it didn't see a continued improvement in the labor market. my question is what would you describe as an improvement in the labor market, what would that look like? and it's my understanding that the fmoc doesn't project unemployment to fall much below the current levels before 2013. >> well, we want to see unemployment going down. we don't want to see it going up. we want to see continued improvement. we had significant improvement between the fall of 2011 and early this year. lately we've been leveled out,

and we'd like to see the economy return to a situation where we're making progress on unemployment. >> i think about each and every day. thank you, mr. chairman. >> chairman bernanke, i want to thank you for your testimony today on the fed's economic forecast and its -- and other things. this hearing is adjourned. >> thank you. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012]

>> we will look at some tweets about mr. bernanke's testimony. we need more education, especially in financial areas. cutting it as fast as they can. mr. chairman, print money from nothing. >> a group called a committee for a responsible budget is trying to get the congress and president to reach a deficit reduction deal. c-span3 will have live coverage at 2:00 eastern as the group announces its campaign. the speakers include bob

zellic, former senator judd gregg and former chief of staff bowles. >> if i'm president, job one for me will be creating jobs. let me say that again. my agenda is not to put in place the series of policies that get me a lot of attention and applause. my policy will be, number one, create jobs for the american people. i do not have a hidden agenda. [applause] and i submit to you this. if you want a president who will make things better in the african-american community, you are looking at him. [applause] you take a look. >> republican presidential candidate mitt romney and vice president joe biden spoke at the naacp national convention in houston. >> just close your eyes and imagine. imagine what the romney justice department will look like.

imagine when his senior advisor on constitutional issues is robert bork. imagine the recommendations for who is likely to be picked as attorney general of the civil rights division or those other incredibly important positions at justice. >> watch their entire speeches online at the c-span video library. as we wait for the house to come back in at 2:00 for legislative business, a look now at the defense department spending and the sequestration budget cuts that take effect in january. a center released results of the survey in which americans were given defense information and were asked to give their own pentagon budget. they cut the defense spending by 18%. this is about an hour, 15 minutes. >> good morning.

i'm here with matt leatherman from simpson and jeff smith from the center for public integrity who's held up on the train as i was held up on the red line this morning as i'm sure some of you are familiar with. well, as you all know, defense spending is -- has been foreground on the hill and in the news for some time now. and with the potential for significant cuts associated with the squegs ration agreement, it's a -- sequestration agreement, it's a lively topic whether it is or is not a good idea for the u.s. to consider significant cuts to defense. and this is one of the -- this is a key factor that drove jeff smith at the center for public integrity to propose this study. now, the study that we did

isn't simply a standard poll. it's what's called a public consultation. and public consultation, you give people information, key information and they hear arguments on both sides of the issue. it's sort of like going to a debate where you consider and deliberate and then come to a conclusion. now, what's interesting is if we look at standard polls, it's not -- it's somewhat ambiguous. the findings seem somewhat contradictory. if you just ask people straight up, do you or don't you want to cut defense, in most cases majority doesn't want to cut defense. but if you bring up the context of the deficit, well, maybe as many as half do. then what's particularly interesting in polls where they are given more information about the size of the budget, how much it is relative to other items in the budget, then you do find majorities wanting

to cut it. so information seems to be a key variable. now, we did a study a little over a year ago where we gave people the discretionary budget and they saw how it was distributed and they were able to redistribute it as they saw fit. and in that context they made rather substantial cuts to defense. they -- on average they cut it 18%. but there were comments made, well, but they didn't see all the perspectives. they only saw the perspective of the discretionary budget. what if they had seen how much it is as a percentage of g.d.p. and how that's going down, what if they saw how it was relative -- how much it is relative to social security and medicare? and most of all, what if they heard the key arguments for why it's important to not cut defense, what would they do then? so all of these were incorporated, all these suggestions were incorporated

into our design, and we talked to people across the spectrum as we developed different frameworks for presenting the defense budget to people and for the different arguments that were presented pro and con. now, the process of doing this was challenging. we wanted to break the defense budget down, not just one big number, and divide it up in some ways that were meaningful to people so people could understand and for this yeoman's effort went to matt leatherman who worked with us to divide the defense budget up in a way we thought people could relate to based on our previous experience with them. so moving forward, the survey was done with a company called knowledge networks. this is a unique company. it was started by two stanford professors. it's sort of the gold standard among survey methodologists.

the survey is drawn by a probability based process, telephone and mail and people who do not have internet access are then given internet access and then the whole process is conducted over the internet. it has particular advantages, particularly for the kind of experiment we did in this because people take as much time as they want to look at the material, to reread the statements and then they can work with an actual budget which is what they did. it was done in april. sample size was 665 people. so the first thing we wanted to do was to give them information about the magnitude of defense spending, and first we presented -- we said, there will be different ways of looking at it and the first one we presented was the discretionary budget and this is one people had seen before. in this context it seemed like a lot and they cut it

substantially. they cut other areas as well but they cut defense more. now, we asked them, is the amount of defense spending for 2012 more than what you expected, about what you expected or smaller? 60% said more than they expected. this suggests that people tend to underestimate the defense budget. need to look at it from other perspectives. it we compared it to social security and medicare which has often been emphasized is the perspective that would elicit a different response. and when we asked in this case, was it more or less than you expected, it was more divided. 45% said it was more than they expected. 41% about what they expected. 14 less. so we have a more mixed response. basically people not real surprised. then we presented it -- spending historically with this graph breaking out war spending

in afghanistan and iraq. here again we asked whether this was more or less than they expected and 60% said it was more than they expected. then we asked -- we presented the amount of defense spending as a percentage of the economy, the g.d.p. over time. as you can see, this number has been going down quite a lot because the economy was growing, the percentage of the economy devoted to the defense budget has been going down. and this one was -- the largest number was less than they expected, 40%. so then we presented defense spending relative to potential enemies and allies and we used as potential enemies, china, russia, north korea and iran and then on the ally side, nato, japan and south korea.

and here again, the majority said there was more than they expected, 56%. so the next thing we wanted to do was to actually go -- take them to that process that's like a debate where they can hear arguments pro and con. so we had four pairs of arguments. i am going to show you briefly three of them and i can't read them all because we don't have time but they're in the materials that we brought. we have full copies of the report for anybody who wants it. so the -- here's one key one. and the one that among the people we talked to in the national security community thought was most often cited as the key argument. the united states is exceptional and should be leading the world, not following it. u.s. military power has been a major stabilizing force that's contributed to global peace.

the u.s. should have the ability to quickly and decisively project overwhelming military power anywhere in the world. cutting defense spending would undermine the -- then we said, how convincing do you find? 61% found it convincing. democrats were more divided. republicans overwhelmingly found it convincing. but then we combafe the other side. of this -- but then we gave the other side.

i will quickly skim over the other ones. you can read them more closely. another argument against it is national defense was first priority. can it be shortchanged? called for in the constitution. so on. it's just 4% of the economy. it's been going down. again, 58% found this convincing. large majority of republicans and again democrats kind of divided slightly to the negative side. defense budget increases the deficit on the other side of this. majority 63% found this convincing. bipartisan.

though republicans were kind of more divided on it. and then when it's also very popular, policy circles, the cuts would cause job losses. that's very foregrown in the news these days, as you know, and that actually interestingly got the lowest numbers saying it was convincing. still majority, 54%, but not that big. democrats divided. 6-10 republicans found it convincing. the one that got the most overall was the argument in favor of cutting based on the waste in the defense budget. and that got overwhelming majority bipartisan that clearly there's room to reduce the national budget without affecting u.s. security given the amount of waste in the defense budget. so after going through these hearing both sides, you know, both sides saying, yeah, that

makes sense, yeah, that makes sense. the story of the rabbis, people come in and one person presents his side of the dispute and he goes, yeah, you're right. and then hears the other side and then says, yeah, you're right. somebody says, wait a minute, they can't both be right. and he says, yeah, you're right. so in the end they have to make a decision. in the end they have to take some action, and this was basically to set what level of defense spending they thought should occur for 2013. and they could specify down to the dollar. they had to fill it in actually. and first of all, let's look at how many cut, kept are the same level or increased. overall 78% cut it. 67% of republicans and 90% of democrats. and on average overall they cut it $127 billion. republicans cut it $83 billion,

and democrats $115 billion. we also discussed the area of afghanistan. they got an explanation what was going on there and they got one pro and one con argument for cutting or not cutting it relative to the 2013 budget, though, and here they cut it quite a lot. $35 billion or 40%. and this again was bipartisan with democrats cutting more. now, then we wanted to go, ok, what if they really have to think through all of the things that the defense budget does where they -- you know, ok, big number, defense, that's a lot. what if they had to break it down and make their own budget? and would they cut in some areas more than others? so we carried the framework, one that people could relate to. airpower divided into existing

and new capabilities, ground forces, existing new, nuclear weapons. special operations forces and missile defense. then for each of these areas, they were introduced, they got an explanation for what they were like, what it involved and then a pro and con argument on spending. now, i'm just going to give you a quick example. let's explore america's airpower capability, bombers, cargo and the personnel to maintain and operate them. these forces give the u.s. capability to control airspace, strike hostile forces or other targets on the ground and help protect u.s. ground forces. planes and satellites providing intelligence. this is not an argument. it obviously is kind of an argument in the sense it tells you all the good things it does. and then we say, here's the amount the u.s. is spending in 2012 on operating, maintaining, replacing current airpower capabilities. $113 billion. and then for developing new

capabilities, r&d, building and testing prootypes, $30 billion. they hear an argument against reducing airpower spending. could limit our ability to strike any farget on short notice and with precision, so on. the role it played in tracking and targeting al qaeda. things like that. and 77% found it convincing. then on the other side, america's airpower is already the most powerful and advanced in the world. china's air force is several decades behind. and nonetheless, the defense industry is always coming up with new fancier and expensive technologies. enough is enough. and majority found that convincing. interestingly, when we went through the areas, the arguments against cutting did better than they did when we talked about defense spending overall.

and in this case, for example, a majority of republicans do not find it convincing. so then after going through that process they made -- they specified what they thought the spending levels should be. so here's -- i'm not going to go through all the areas but you can see them if you want in terms of the arguments given and so on. summarizing what they did overall. first, the area -- the changes by percentage. well, the biggest cut was to nuclear weapons. which was cut 27%. followed by ground forces -- existing ground forces and new naval forces. ground forces cut 23%. new naval forces cut 20%. and all areas were cut on average except one which was new capabilities for ground forces. i imagine that has to do with the sense of wanting to protect the troops.

putting it in terms of dollar amounts, the biggest cuts were to existing ground forces which were cut an average of $36 billion and followed by existing airpower which was cut $19 billion. in dollar amounts, new ground forces capabilities were increased approximately $1 billion. so putting all these areas together, they were cut on average 18%. interestingly, the same as the number they came to when they did the budget exercise without all the information. and republicans cut on average 12%. democrats 22%. now, we also wanted to look at the issue of tricare and personnel costs. i don't want to spend a lot of time on this. the proposals that were

presented are much more detailed than what i'm covering here, but making co-pays more typical for drug prescriptions, increasing premiums for retirees under 65, raising the cap for cost on retirees, and they were told the dollar amount associated with each one, the dollar amount, the savings. and making the co-pays more typical, that got a majority, 6: 10 favored it. but a clite majority opposed, increasing premiums and larger majority opposed raising caps for cost on retirees. then we looked at a number of proposals for cutting costs related to personnel. slowing the growth of tax-exempt allowances, changing military pensions, capping the military wage increases. it's a lot more detail in what was presented. i am giving you a quick overhead. and these did a little better.

clear majority favored slowing the growth of taxes exempt allowances, slight changing military pensions. but a majority opposed capping military wage increases. so putting it all together. the cuts to the nine different areas and the savings that came from tricare and personnel costs, basically overall on average you got $103.5 billion cut. republicans cut $74 brs, and democrats $124 billion. now, there's one other question you might have in the back of your head. wait a minute, maybe some of those people cut a whole lot and that changed the average and that's true. some cut more. so one key question is, what would the majority of people be willing to agree to and that's a slightly lower number and it's overall it's $8 billion that would -- $83 billion specify cuts of $$83 billion or more. republicans $50 billion or more. democrats $106 billion or more.

we wanted to go through specific weapons systems to see how they felt about those. and the numbers here are those who favor canceling or eliminating and majorities favored canceling a new aircraft carrier, reducing the number from 11 to 10. 54% favored canceling the joint strike fighter. 52% favored canceling the next generation bomber. and -- but majorities opposed eliminating the v-22 os prix. and 60% opposed the idea of eliminating bombers as part of the nuclear triad. so another interesting question, if we see all of the conflict in congress on many of these issues, are there differences between the views of people who live in red districts as compared to people who live in blue districts? so we divided everybody in the

whole sample according to whether they lived in red districts or blue districts. and basically the short answer is not much. in red districts 74% made cuts. in blue districts 80% made cuts. so little bit of a difference but not much. in terms of the average change, overall as you know 18% made cuts but in red districts fewer, probably the cuts were slightly lower, on average of 15%. and blue districts 22%. then -- but interestingly when it came to military health care in red districts people cut more than they did in blue districts. now, another question that people asked us since we first developed the study was, well,

our views different in districts where people have high levels of defense spending where it could really have some impact on their economy. and we broke it down into 10th and the top 10th has really big numbers and the significantly more than the next one down. so it's really focalized in a fairly small number of districts so it was important to break it down. and basically the short answer, again, here is -- well, the answer here is no. there is no significant variance based on the level of defense spending by districts. i'm just going to show you one number. and sorry these numbers got kind of screwed up. but -- so there's -- you have the top 10. actually, the top 10th had the highest -- the highest levels of cuts.

22%. and the next one down, 14%. and the next one down 14%. and it biopsy up. and basically statistically this is just noise. there is no pattern here. there is no -- there is no significant variation and, again, that top 10th one is the one where there is really big money and that had one of the highest levels of cuts. so -- and this is -- this is just one number. but if you go through all the different parts of the budget, the different areas, the pattern -- there's just no -- there's no significant pattern there. so i'm going to pass that over to matt now. >> i want to first say thanks to all of you coming. i'm matt leatherman. we are a project that

specializes in national security spending and strategy analysis. this is our first foray in public opinion polling so we want to thank steven for bringing us along and jeff for having the idea of doing this. my role was not as methologist but rather someone that could take the 2012 defense appropriations and carve it up in a way that's -- in steven's presentation were the ways that we divided ourselves. it also then helps the pro and con statements associated with each of the areas as well as the context statements that preceded them. that work is done. so now my job in this affair is as the context guy. what does all of this mean when you apply it? and i'm going to walk you through that in several different ways. i am going to start with the big context and then talk a little bit about the innovation that was within our survey. address a little bit some surprises that i found and then conclude by applying it to the

f.y. 2013 appropriation process which probably is on everyone's mind at the moment. the big context that i found in this survey was that preferences were similar to the pentagon strategy but stricter than its spending plan. both sides of that coin are significant. both the similarity and the dissimilarity. it's easy to focus on tutsnd n pattern in whihe de. i'll walk you throh what i think is four emples of where that's most impornt the first has to do with war in iraq and afghanistan. the war in iraq is already over. major definition a part of our national security strategy now is concluding the war in afghanistan and moving away from that type of conflict in the future. it was the president who in late april or early may was in kabul and said an era of war that began here will also end here. specifically in 2014.

preferences as you saw were consistent with that. they cut the oversea contingency operation of the budget down to $53 billion. for context in 2012, that number was $115 billion. it's been requested in 2013 as $89 billion. so they're more than halfway below the 2012 value, 40% below the request. again, similar to but stricter than, right? when you cut back on those types of conflicts, it also allows you to make changes in your structure and the pentagon has proposed that as well. the strategy said we are not going to be sized for lengthy stability operations. as a consequence of that you can change the size if you're a ground force. both the army and marine corps will be restored to approximately their prewar strength. we also saw that flavor in our survey. it was the ground -- the existing ground force that responded the cuts the most. they cut it by $23%.

that's more than the cut they made to the air force. 17%. and more than the cut they made to the navy of 13%. so you're seeing a similar sort of preference being expressed there. now, when the pentagon made the decision to downsize the army and marine corps, move away from counterinsurgency and stability operations, there was a consequence of that and that is putting more stress and more priority on special operations forces. when secretary pennetta testified on the hill with the release of the 13 requests, he said that the pentagon has an intention to protect or even increase special operations forces. then admiral olson said they are looking for a force between 60,000 strong, more than we have now. respondents in our survey still cut special operations forces. it was the lowest cuts they made, though, and they centered their agreement or their consensus around this statement

that special operations forces are less expensive, more rapid and more precise than their counterparts. and so, again, a stricter budget decision, but when it comes to the preference being expressed, very similar to the pentagon's strategy. then the last of the four i am going to itemize for you, when you prioritize something like special operations forces, there's usually something also that's being deprioritized. in the strategy document, there was a statement being -- that was made that keyed a lot of people's interest. it may be possible to deter with smarle nuclear force. that's been an obama administration priority. not surprising seeing the document. they'll pursue that if the president wins a second term. this is something our respondents agreed with as well. it was a 27% cut. the largest of all of the cuts made to nuclear forces. so the bottom line when it comes to the big context issues, according to our survey and my analysis of it,

policymakers are moving in the right track with respect to people's preferences but they're doing so too tentatively. again, it was an average cut of $104 billion or thereby 18% that people made pretty substantial difference to the conversation you see going on here right now. just on an administrative note, i will point out to you sitting out front is an op-ed that i made so you can see the statistics that goes along with it. next is the owen innovation that our survey made. respondents expressed all of these views but they expressed them by responding to service shares and other budget categories, not to the strategy. and that's significant. most often people will think in strategic terms rather than in spending terms. so why did we do that? strategy and spending have a connection that's important but not absolute. the services build the budget. that's how d.o.d. engages it. there's a subtext there that

bureaucratic politics meater and inertia matters. this was the inspiration why we moved in this matter. there's no surprise that the defense budget looks like this over the past 40 years. you see the shares are very stable. they're stable within a percent and a half. and roughly equally divided for that entire 40-year period. now, in that time frame, the national defense strategy of the united states has changed significantly on several different occasions. if the strategy spending connection was total, you'd expect to see this varied far more than it has. the fact that it hasn't suggests that something else is going on here, the service inputs are significant and other things are significant. this is the reason why we chose to design the survey the way that we did, ask people to approximate those sorts of issues and our hope was when they responded their answers

will be relevant to how this lays out. whether it should change, whether it should not change or whether we not anticipated something. our findings back that up. respondents do want this to change. again, they had ground being cut by 23%. air by 17%. navy by 13%. so an indicator moving forward, both of whether respondents' preferences are being implemented and whether strategies having the desire to influence spending is whether this picture changes. i wouldn't bet on it. there was a statement that army secretary mchugh made middle of last year, it's been a tradition of dividing the budget. he is not expecting that will or should change. when it came to the f.y. 2013 request, the army share of the budget increased. it increased more than the navy's share. the air force's decreased. so as you see all these so as you see all these strategic things being