said, it's important to keep an eye on that as well. there's a bit of inconsistency there. we'll see whether that changes over the coming decade. a brief word about what surprised me in the survey. the first is we couldn't take it for granted there people would in fact differentiate between these services. that could turned out to be ineffective. i was pleasantly surprised they did, they did have different ideas about how air, ground and naval should be budgeted. . i was also surprised there was not a clear pattern how they treat current and fuhr spending. i thought people might choose to cut current spending and maintain or increase future spending with the idea there being a hedge. we can afford to take on more risk now but manage things in the future. none of that didn't happen, it's just there wasn't a pattern i observed between how they treated those two different category -- categories. also i was surprised by how the

high beneficiary districts of defense spending had different opinions than those elsewhere in the spectrum. that caught me offguard. applying it to the f.y. 2013 cycle sticking with the surprised themes. i was not surprised to see red and blue districts don't have major differences among them. there's an idea percolating in washington right now that democrats favor defense cuts and republicans don't. that hasn't been substaniated by the evidence to the best i can tell. this is a national defense budget in inflation adjusted terms, the top line includes war cost, the bottom line is base budget. when you adjust for inflation, our national defense budget has been declining for the past two years. that's this congress. even the high end of the appropriations, which is right

now the house side, were enacted, it would still be a nominal freeze and again adjusting for inflation a cut that would be year three of cuts. we are already two years into this bill down, a third year is coming, irrespective of what position is enacted. also worth noting despite the heartache, this congress was the one that passed the budget control act which cut defense spending. that includes both republicans and democrats. finally as you saw in the slide earlier, the ebbs and flows of defense spending have crossed administrations of both parties historically. it was president eisenhower who cut after the korean war. it was nixon and ford who cut after the vietnam war. budget authority with the cold war began falling under the reagan administration. continued through the bush administration and continued through the clinton administration. portraying this as a stark partisan difference to me at least doesn't seem to be true.

the evidence doesn't back it up. i referenced history, and history is important. we do have ebbs and flows in our defense budget. what we don't have is plateaus. plateau right now is where the pentagon thinks it's going. it's projected out flat budgets for future years defense plan. were that to happen we are on a path that would have taken us about 6% below peak year spending, fiscal year 2010. historically budgets go down by 30% in build down times. while it may not be a strictly partisan difference, we do have a disjoint right now between where we have typically gone with defense cuts and where we presently are. i would note that the pressures on this are a lot deeper than just the budget control act. that's occupying a lot of attention right now, but two things are underlying it. the first is we are ending the wars. again that was something the administration at the pentagon stressed but our respondents

seemed to favor in their spending decision, and also the debt reduction is important irrespective of the legislative vehicle that enacts it. the simpson-bowles debt reduction commission both saw $4 trillion of either revenue increase or spending cut needed in order to get our fiscal position in a stable spot, budget control act is a $2.1 trillion measure. which means that in all likelihood something is going to come after it. you are going to have to have something that will substitute for see quester, but national defense will still be part of that conversation. that's my big final take away. america -- american views as expressed in this survey are a big reason why after the election you are likely to see further reductions made to the national defense budget. put that in another way, national defense is going to remain on the table even in the debate to avoid see questering it.

with -- sequestering it. with that i turn it over to jeff smith. >> sorry i came late. perils of mass transit. this was not a typical survey as everyone has said. it didn't ask respondents whether they wish to cut the defense budget. instead it pushed them into a context in which policymakers actually make judgments, where they get some information. there are pro and conarguments and rend' verdict. because this can be dangerous ground, we build in safeguards. the survey asked the same question over and over again but in slightly different ways and different context. with the express aim of seeing if the answer came back the same way each time. it told people how much america spends on defense with five different ways of sparing that to other expenses and asked each time are you surprigsed? and this is what happens in the real world, people get a lot of information. their opinions can be shaped by the frame in which the conversation is is occurring

rather than supplying one frame, we gave five and sat back and watched what difference it made. then it asked, how much should we be spending? the respondents gave an answer. the survey provided neutral or balanced information about nine key areas of defense spending and when they were given a chance to be set spending tallies for each of these programs, the net tally, kim out to be very close what people said at the top of the survey. asked the same questions in different ways, they gave more or less the same answer. secondly, the survey didn't push people into corners. they weren't forced to choose between two competing options. it asked, for example, what people thought was the best way -- what people thought was the best way to cut the deficit. and it gave them the chance to say they wanted to cut defense, nondefense, or raise taxes or any combination. they dew point have to pick just one. -- they didn't have to pick just one. they picked defense cuts the most. how authoritative are these results?

there are a lot that matches rather than challenges what we previously understood. more democrats support cutting defense budget and more deeply than republicans, although not by a lot as it turns out. people like spending on special forces, they like the idea of a missile defense more than they like spending on nuclear arms. they are weary in this time of austerity about spending on big-ticket items like $1 trillion fighter jet and new aircraft carrier. so does this matter? i would argue it does because even if those polled don't have access to the same information, our military officials have, they don't see the same classified data used to help validate military requirements, they still have formed some strock opinions, opinions that were surprisingly widely held. political outcomes are sometimes determined by what noise the minorities want, it's interesting to call attention to some of the strongest views. so here just graphed out some of

the opinions that people felt -- where people held these views most strongly. the u.s. -- the pro arguments, pro defense spending arguments, u.s. is exceptional and we live in a hostile world. defense matters more than the deficit. and defense jobs are important. these were some of the most friendly held views. you have to look at the cons, the arguments against defense spending, you see they all were -- these were one of the most strongly held and more strongly held in the pro arguments. defense worsens the deficit, we spend more than enemies. don't be the world policemen. and there is a waste in the defense budget. these are summaries, of long full paragraphs that people had a chance to read when they took the poll. i urge you to look at the actual language, these are summaries. i want to call attention to this viewpoint because it was the most widely held of all the view

points in the poll. 80% of all republicans and 86% of democrats basically said that members of congress often approve unnecessary spending for their districts or keep unneeded bases opened just to benefit their own supporters. military branches buy duplicates of weapons, they do a poor job of tracking where the money goes, defense contractors purr suede lawmakers to approve weapons that aren't needed by giving them large campaign contributions and other personal benefits. this is the way the system works according to the vast majority of those that we polled. this view is strongly held by democrats and republicans and it was the most strongly held view of all the options that we gave people a chance to express or say that they shared that point of view. so this survey i believe is a genuine reflection of where the public wants its leaders to go

in broad strokes. the cuts that have been settled on so far are just the beginning as matt and steve had said. the last thing i would mention is the survey results have been widely circulated and so far they have not been challenged. generally approving accounts have appeared in more than 70 publicationings including "washington post," cnn, hufferington post, financial times, "time" magazine, national journal, "daily beast." with that i think we'll invite your questions. >> i wanted to ask, recently as candidates visited virginia, that virginia could be -- is a big swing state but mostly because it's a recipient of big defense dollars. your survey would sort of

disprove that headline i was wondering what your comments are on some of that coverage. >> it's important to remember that when you hear reporting about political activity, it doesn't necessarily mean that it represents public opinion. there are interests in virginia and those interests are being activated and those interests are making contributions to candidates and so on. but the individuals who are ultimately the voters, when you ask them to look at the big picture and give them the information, they come to pretty much the same conclusions. it's an interesting dynamic that in general people don't look out for themselves when they -- they are making judgments about public policy issues. but they will probably be influenced to some extent by the

way the money is being spent in virginia. so if one side has more money to spend, that can definitely have an impact. but it will probably not be so focused on the vote for romney, he's going to keep your -- save your job. i don't -- i would be surprised if there was a lot of advertising along those lines. >> i would add to that, it's been shown in a number of other polls this is not the issue, this occupying people's minds. so motivating an electorate around as your definitional issues likely not to be an effective strategy. in the hierarchy of things people are considering, this is not even near the top. i would also add a little bit of information to what stephen already said. this is a consultative survey. it hinges on providing people

information. once they have that information their attitudes are polled. we took a lot of pride in providing that information as dispassionately as it can be. but the information they receive matters and the information people in virginia and other parts of the country are receiving is not the same or framed the same way as you see in this survey. you should expect that to have some effect on their attitudes and their opinions. and then the last thing also worth noting is the effect that an organized minority opinion can have. just because this isn't necessarily the majority opinion doesn't even they are not well organized and influencing the political process. despite some of these attitudal things you see, organization also matters. >> i would add that actual data on job loss related to defense spending is very scarce. and good data is even more

scarce. there's been a survey done by the industry, by the aerospace industry that predicts a million jobs might be lost if this defense budget goes down, but it's not a peer reviewed study, it's not been done in any academically certifiable manner, and it predicts that the cuts would be far deeper than what obama has proposed. it doesn't look at a set of options right immediately on the table right now, it imagines a more serious set of cuts. there are other cuts -- there are other studies that say defense jobs are not the best -- they don't create the most benefit to the economy as a whole. and that if people were

re-employed from the defense industry, there would be other benefits, broader benefits to society. and so people don't when they are looking at this question, they tend to look at it narrowly. they don't tend to look at it broadly and look at the long-term consequences of shifting employment from one place to another. i think it's clear that the rhetoric about defense cuts and their impact on virginia will probably motivate the people who work in the defense industry in virginia to go to the polls and take a decision which might -- which they see as protecting their future, but the rest of virginians, i doubt, will have much impact on them. >> recently i think there was a project with the eastern seaboard missile defense that several -- majority of defense officials spoke out against congress passed it anyway. it will probably never actually

get passed or get to the senate, short of re-electing our officials what, are some ways you think we can eliminate unnecessary projects that 70% of the d.o.d. think are unnecessary, such as major missile defense projects on the eastern seaboard? >> i would first note that you're right. i don't even think it cleared the senate. it cleared the house but prospects in conference are poor and even poorer were it to somehow escape the hill. so i emphasize that not just for acknowledging the legislative record but to point out that's part of what deliberation is. in that sense the systems are sort of already working. it's again to reiterate what i said in my prepared remarks, it's also true that we are already on a cut path, we have been cutting for the paths two years, we are going to continue cutting inflation adjusted terms in 2013 if history is any guide

we are going to do it even well beyond that. so there's governors in place that are already regulating that. your question then that pertains to what about the specific projects that the hill or someone on the hill values but the pentagon doesn't? what can you do to rectify that? i first point out in some ways it's not a problem. the mrap was a probal, the mine resistant ambush protective vehicle was a program that the pentagon didn't initially prioritize. it was a program the hill prioritized because people were getting blown up by i.e.d.'s. there is a proper role for congress exercising its decisionmaking and imposing some things on executive institutions. how to deal with the rest. management, i think.

there's not a golden bullet that's going to resolve this problem permanently, but it's something you are going to have to wrestle with on a case by case basis and at least my opinion you are going to have to hope that the governors i have already outlined are sufficient that most of those things don't come into the budget. >> should probably clarify that when people presented arguments pro and con, the majorities respond favorably to both. so it's not that most people are carrying around a very discreet feeling of i think defense should be cut and i'm looking for signs that this candidate's for or against that. it's not that articulated. it's more because they go, oh, yeah, that's true. oh, yeah, that's true. now i have to make the hard

choice and then they make the hard choice. but they -- they do respond to arguments in favor of a weapons system. when congress says, here's the reason why we need to keep this weapons system, that would probably make sense to them. however we asked in a poll, when congress adds back money or adds back programs that the pentagon doesn't want, do you think that they are doing it for national security reasons or do you think they are doing it for some other reason? and the large majority said, some other reason. so when it's a question of -- again, if you present the argument, they'll probably go, well, maybe that makes sense. if they are told, well, the pentagon doesn't want it, that

will has a real impact. that kind of overrides whatever that argument might have been. >> realistically, the fact that 80% of americans thinks there is waste in the defense budget does not convince any of you we are not going to stop wasting the defense budget. that's not going to be the thing that changes the day if we are going to suddenly change our ways. >> it's just one of the views that underpins the conviction that the defense budget can come down without suffering a loss in serious military capability. so i -- it's not going to determine in the outcome but it is one of the factors and one of the viewpoints that influence the outcome -- overall outcome of the poll and the public's general sense that the defense budget can shrink without harming america's security. if everyone thought that money was being well spent

inefficiently and we were buying exactly what we needed for national security, you could imagine they would be a lot more nervous about seeing the budget decline. >> do you have any comparison showing how that was? spending has been reduced over the last six years probably. we don't have any earlier data that would show confidence is up or down. >> i'm not sure -- confidence is one thing. what that data would look like. i think jeff is right in the sense this is one of the reasons people feel comfortable cutting the budget, but i'm not sure that it's a guideline for how the budget would be cut. waste reduces down pretty quickly to other people's priorities. so when you are identifying what you consider to be waste worthy of cut, it's in there for a reason, somebody else put it there. it's their priority not yours. identifying which waste will be cut or even measuring how much waste there is -- the only

metric i guess you could use is looking at g.a.o.'s high-risk list for defense programs in observing that a number of them are chronically on the list. one of them is d.o.d. financial management systems which have not proven very successful in getting -- building ready to report its financial data. in fact those systems themselves have been in breach of regulations. that's an anecdote. i'm not sure you -- how you track it over time. >> i was wondering if you could restate a position if you see a potential for change because there has been talk of change. also i was wondering what information did you provide the respondents --

>> the information you can see exactly what was presented to them. and for each -- for nuclear weapons in general there was a pro argument that -- a con argument for a test that it played such a crucial role. it's our ultimate fallback. it's helped keep the nuclear weapons -- nuclear weapons have helped keep the peace and so on. and then there were arguments related to missile defense. surrounding the triade, reserving bombers in the triade -- we didn't have so many arguments there. we were mostly focusing on the core proposal. in general, this takes me to

another study we did where we asked people how many nuclear weapons they thought the united states had, and the -- the average estimate was about 200. and deliverable. and then we said how many do you think that the u.s. needs? and the average response was 100. so i do think that probably there is some potential for people getting more comfortable with a smaller nuclear force. indeed on a percentage basis, nuclear weapons were cut the most. spending on nuclear weapons were cut the most, 27%. americans do not particularly like nuclear weapons. in questions where they are asked what role nuclear weapons should play, even when presented -- this was included in our

argument, we should not reduce spending because the -- they have utility, any kind of war fighting context. not just for deterrence. of course the new developments in nuclear weapons are moving to or trying to make them more accurate, more limited so that they can have utility in a war fighting context. and that -- those kinds of arguments do not do well with the public. they think that generally nuclear weapons should be limited to a deterrent purpose. not -- not that they should never be used first by the united states. so that limits what their interest in developing those capabilities. specifically on the bombers, it

didn't do very well, the argument in favor of reducing -- eliminating the bomber leg of the try yacht. -- triade. i think that's just kind of a difficult concept for people. and it's not the first way that they would think about it. they like arms control. they like moving toward reductions. and they overwhelmingly endorse the ultimate goal of completely eliminating nuclear weapons. that's based on various polls that we and others have done. and they support developing an international regime with intrusive inspections and then gradually reducing step by step toward complete elimination. >> the specific bomber information people were given,

some people say that given how powerful nuclear weapons are, just two systems for delivering them is enough and we should save the money. others say it's better to have three ways to deliver them. and two, bombers have unique value because they can be recalled. so relaunched or ground launched missiles cannot be recalled. in that context people decided probably better to have three instead of two ways of delivering, but they also said that the idea of a new strategic bomber was not a good one. the poll results had people, majority favoring not a strong majority, but a majority nonetheless, in favor of canceling the development after new strategic bomber. it was more of a conceptual response than a specific i want a new bomber, let's go build one idea. and on nuclear weapons as a whole, the overall changes that

people made were to cut about a quarter of the budget now being spent on nuclear weapons. republicans were a little bit less. democrats were a little bit more. as n many of these. but still -- as on many of these. but still there was strong sentiment on members of both parties on cutting the nuclear weapons budget. >> the preferences which will shape the way the nuclear triade programs and other nuclear apparatus programs unfold, there's also budget realities that play. i'm going to first start by plugging another stimson report that just came out a month ago looking at the 10-year costs of the nuclear programs, including both military delivery vehicles and energy department's national nuclear security administration. a couple things worth noting in that 10-year plan. there is a next generation bomber in it and there's also a new lipids submarine that comes into play later in the -- new

ballistic missile submarine that comes into play later in the program. 8,200 aircraft, somewhere in the have a sinity of $55 million programs. you saw the air force chief of staff schwartz say now several months ago he was intentionally -- intensely aware of need for cost discipline in that program, even went so far to say they expected to lose the program if cost discipline wasn't maintained. we are going to get a really interesting case study in the next couple years about whether we are able to break off this cost curve with aircraft procurement or not. and the stakes are relatively high in the way of sitting chief of staff has framed it. the second part that have is the other leg, lipids submarines, which comes into -- ballistic missile submarines which comes into play later in the cycle but challenge the navy's shipbuilding budget. conversation doesn't seem to have been concluded yet as to whether the navy will be able to

successfully move those into a defensewide account or maintain them. at least the information i have seen suggests it will stay in the navy's accounts. it will create deep pressure on other aspects of navy shipbuilding and just using rough historical guides, usually those programs will be cut in size. there's preferences here favoring reductions in the size of the nuclear force. there's complexity in how the bomber fits into that. they don't want a new bomber. but then there is also budget reality already in play that suggests this is going to be tough to manage over the next decade. for detail on that look at stimson's other report. >> the budget, you address the international kind of spending initiative.

>> what other countries? >> for nuclear deterent. -- deterrent. >> we have not addressed what other countries spend if that's what you're asking. >> there is a part of the poll which people were given information about what the united states spends as a whole relative to what other countries spend, but not specifically on what the other nuclear powers spend on their own forces. >> i was wondering if you guys provide information and address the subject that u.s. spending in other countries were -- >> not as a stand alone question, no. >> you seem very confident we are heading toward a period of decline in defense spending and yet we have a presidential candidate, mitt romney, running very close to the president in recent polls saying he would reverse obama era cuts and on

top of that make big additions to the navy and other parts of the military. i'm wondering if you could talk more about the politics of the situation and what made you so confidence we are -- confident we are heading toward a decline. >> i'm not making such a prediction. the capacity of government to act in ways at odds with public opinion is well-known. and there's a kind of -- it's important to remember that you don't have a highly organized set of thoughts in people's minds. it's more when they -- when they look at the big picture, they come to that conclusion. that does create a political environment where the public is really quite receptive to cutting defense, and they are going to be increasing pressures -- there are going to be increasing pressures, budgetary

pressures, not just from this study but from the earlier study where they were presented the entire discretionary budget and allowed to make their own budget, defense constituted about half of all the cuts. so it's where people's minds go when they see the big picture. so given that we are going to have these political pressures toward cutting, there is a recepivity, nobody likes cutting anything. but when the pressure's there, that's where it comes out. now, i'm not making a prediction of exactly what the outcome will be, only that you've got the conditions that make it viable.

>> i'm not -- i don't think of myself so much as making a prediction as just an observation. it's july. we are well into the 13 appropriations cycle and we don't yet have a proposal from any of the budgetaryly relevant actors that would increase the budget. if the house appropriations defense subcommittee position is enacted, it's a nominal freeze, a real cut. that's the high end of the spectrum right now. unless something changes and a new position gets introduced, then fiscal 2013 will be lower than fiscal 2012. that's an observation. another observation, romney has taken that position out. he did so relatively firmly as part of the primary, the primary is over, and already you see language changing from within his camp about exactly how that will be implemented, how

quickly, things of that nature. all of it has the effect of softening the position. he's going to campaign on it. he's got to find a way to establish his national security bona fide and challenge the president. this is way to do it. he seems to be emphasizing it differently than during the primary session. and then the last observation is that these pressures aren't going away. as stephen said irrespective of who is president. and when you challenge those pressures, there's a number of ways that you can overcome this, but it's very difficult to do it without everything being on the table. including national defense. you are still talking about a fifth of your total budget and half of your discretionary budget. so whether it's obama or romney, that fact isn't going anywhere. >> the only thing i would add is that romney's not the only actor as my colleagues have basically pointed out. even if he wants to increase

defense budget, he's not a czar. he's part of a complicated political dynamic in washington and the senate will definitely have different ideas. democrats will have different ideas. even as matt has pointed out some of his fellow republicans will have different ideas. what comes out at the end is -- moreover, defense spending is regarded as a competitor for special spending. --social spending in the current budget dynamic. that competition was not going to disappear. the desire to cut the deficit is not going to disappear. what romney says is not, don't think, should be taken as a predict your of an outcome of a specific outcome. at best it could be -- it's going to change the current dynamic if he gets elected, it will change the current dynamic because you have one player in the system establishing a

different point of view than any of the players are expressing now except for maybe the chairman of the house armed services committee is basically pretty much alone in washington now as an important player who wants to increase the defense budget. >> congressional quarterly. picking up on the complicated political dynamic, you, could you talk about what you are going to be looking for as the house considers the 2013 spending bill, specific weapons systems, augmentations to budget and accounts and proposals? and also could you give us a sense of not only your opinion of the sequestration proposal, but how do you think the debate will turn out this year? a prediction.

>> i do not have a prediction. i will again share some thoughts on it. when it comes to the house appropriations bill on defense coming to the floor this week, i'm not expect -- watching any particular programs. there's a problem and that is that the appropriation is consistent with the budget committee's 302-b but not consistent with the budget control act which is aing statute at the moment. coincidentally neither is the administration's request nor the senate position, but somebody has to change. in other words, congress is going to have to amend the budget control act or all these positions are in excess of what is presently allowed. so i see this as part of the election cycle. the house is steaking out a position, house leadership is

taking out a position, they feel comfortable campaigning on. and they'll do so. the election will be contested and some people will win and some will lose. after that everyone's going to have to come back to washington and deal with the fact that either significant piece of legislation gets amended to permit them to have a conversation they are presently having, or that defense appropriation conversation just changes. i don't think i would hazard a guess on how that plays out. certainly possible you would even see both. as for sequestration, again an observation. congressional research service has a great report out where they looked at previous instances where sequester was a risk. bear in mind that this is not a new legislative issue, this is one that's been around for more than 20 years. there have been about five instances in that time frame where sequester was a

possibility. if memory serves me correctly, on three of those occasions it was just dismissed, congress decided not to do that. one of them it was a financial accounting error that turned out not to be a problem. then the size of the sequester was cut down enormously upon its implementation. that should factor in. it's meant to be a incentive for tough decisionmaking, at the same time it's an act of congress. congress can act again, they tend to do so, when these things come up. my expectation there will not be a sequester of defense costing $55 billion on january 2 of 2013. i expect something will have in that lame duck session that will change those terms so that defense may be continued to cut but certainly not at that level of suddenness.

>> i was just wondering if respondents republican or democrat based on party registration or you are just looking at basically what do they line? if that's true do you think that can skew some of the analysis? the results of it? because you are just merely looking at districts as a whole, not party lines? >> in the first part where we were breaking out republicans and democrats, that's based on what people say. what party do you associate yourself with. for the red, blue district analysis, it was driven entirely by where they live and who -- and the party of the current member of congress. in their district.

so it's pretty simple. very straightforward. >> they weren't necessarily registered party members but they just -- when you chose the respondents, they identified themselves. >> as republican or democrat. then we had information about where they lived. and then we could divide them according to where they lived. >> if defense cuts are implemented they are going to go the ways you mentioned? >> because of the way the system works, the chances the cuts will be made only in places that would be broadly identified as waste by some independent group sitting on the outside, are slim. i think that it's going -- there's a certain level of warfare that takes place among interested parties in a period

of decline. and the best team will be the one whose program survives. i mean best in terms of the strongest team. not best in terms of necessarily what's good for national security. so i'm kind of pessimistic that the shrewdest cuts will be made, but there's a chance. i know that people at the pentagon care very deeply about trying to out take the cuts in a responsible way, but they are as riven by this agreement, interservice rivalry and contractor pressure, as people are on the hill. the system rarely produces perfect outcomes. >> we appreciate everybody coming out today. >> there are copies of the full report if you'd like them.

[captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012] >> the house is coming in shortly about 15 minutes from now. five bills today, including authorization for state department programs in 2013. earlier today the senate agriculture committee held a hearing looking at the impact of the dodd-frank financial regulation law. include commodity futures training commission chairman and the head of the trading division at the securities and exchange commission. while we wait for the house to return, here's part of the event starting with f.t.c. chairman gary gents letter. >> good morning, chairwoman stabenow, and members of the committee. thank you for inviting me here to talk about the reforms. i also want to comment on the recent events related to pair fin. the commission has made significant progress in implementing congress' commonsense rules of the road bringing transparency to and lowering risk of the swaps

market. four years after the fact and two years after the pass ang of the dodd-frank act, americans are still struggling from the worst economic crisis experience since the great depression. eight million americans lost their jobs. millions of families lost their homes. and thousands of businesses shuttered. with 35 rules completed, we are increasingly moving from the rule writing process to the implementation of reforms and i look forward to discussing that with this committee and ranking member roberts' questions, very good questions, i want to go through. light will begin to shine on the swaps market this fall when around october swaps price and buying information will be publicly reported for the first time in real time. regulators will get their first full window into these markets. swap dealers will begin to register prohe visionally at first to come under comprehensive regulation and aggregate spot position limits will apply to both futures and swaps. we look forward to completing other swaps markets reforms this

year, including those related to determining swaps must be cleared and pretrade transparency to promote competition. as we finalized cross border guidance, we will recall the lessons of past crises. financial transactions executed offshore by u.s. financial institutions often send risk right back here to our shores. it was true in the london and cayman island anilates of a.i.g., lehman brothers, and a decade earlier courtroom capital management, all with affiliates. the recent events of j.p. morgan chase. why do they call it the london whale? executed in the london branch, a stark reminder. the center of the capital markets for kerr riffive contracts is another example of our global system of the hundreds of trillions of dollars derivatives transactions here and abroad are based on libor. people taking out small business

loans, credit cards, mortgages, often in the fine print there is a ref flens to this variable right called lie bore, as well as big companies doing -- libor, as well as big companies doing transactions. banks must not attempt to influence libor or other of its sister rates and they can't do it if they are concerned about the reputation and they can't do it if they are concerned about their profitablity. it's just wrong. and against the law. so if these key benchmarks are based on observable transactions, borrowers, and lenders, users around the world benefit. if these benchmarks are not based on honest admissions, we all lose. before i close i'd like to review the recent events. on july 10 the c.f.t.c. brought an action alleged $200 million proud in funds. simply put, the evidence alleged in these cases is that he he

embezzbled millions of dollars, manufactured phony bank statements, forged signatures, and created fake bank addresses. the charges against him are that he took customer response right out. back and lied about it for years. the future commission merchant registered the c.f.t.c. the self-regulatory organization responsible for frontline oversight is required to conduct periodic audits. in addition there's got to be an annual review by independentering c.p.a. just like the police cannot prevent all bank robberies, market regulators cannot prevent all financial fraud. having said that, the system failed to protect the customers and we all must do better. the commission has been actively working to improve protections of customer funds. we finalized four separate critical roles in this regard. we also worked with the national futures association and futures industry over these last seven or eight months and finalized

last week rules that are new, commonsense rules to protect customers. but the c.f.t.c. has been implementing also significant restructuring our oversight of intermediaries. we have hired new leadership of this division and stood up to new examination of group nine months ago. looking forward i believe it's critical that we further update our roles, giving regulators direct electronic access to all bank accounts and custodial accounts. now, we don't yet know the full facts of this circumstance, but we are committed at the c. cftc to conduct a full review of the self-regulatory functions oversight of future commissions mervants -- merchants looking openly for. we must do everything we can to strengthen our oversight programs and the protection of customer funds. like forward to taking your questions. >> welcome.

>> thank you chairman stabenow, ranking member roberts, and members of the committee. good morning, i'm robert cook and director of the securities and exchange commission's division of trading and markets. thank you for the opportunity to testify regarding title 7 of the dodd-frank act. as you know title 7 creates an entirely new regime for over-the-counter derivatives and directs the f.t.c. and cftc to write a number of rules. the f.c.c. has security over the security based swaps while the cftc has authority over all other swaps. my testimony today will provide an overview of the ftc's efforts to implement title 7 focusing on developments since chairman shapiro's testimony before this committee in december. since enactment of the dodd frank act two years ago, the f.c.c. has proposed most of the rules required by title 7 and we continue to work diligently in coordination with the cftc and other domestic and foreign regulators to implement all the

title's provisions. in june the f.c.c. issued a polity statement describing the order in which it exspecs compliance with the politician's final rules under title 7 and requesting public comment. the policy statement is divide food five broad categories and exspains how the compliance would be sequenced by describing the dependencies that exist within and among the categories. the f.c.c.'s approach aims to avoid the cost if all the rules were required simultaneous-l or haphazardly. it also emphasizes that those subject to the new requirements will be given adequate but not excessive time to come into compliance with them. i'm also pleased to report earlier this month the s.e.c. acting jointly with the cftc adopted final rules and interpretations, further defining further products, including swaps, security-based

swaps, and security-based swap agreements. and in april again jointly with the cftc, the s.e.c. adopted final rules and interpretations further defining certain entities subject to title 7 like securities-based swap dealers and providing guidance regarding the application of the dealer-trader distinction in identifying such entities. the rule also implemented the dodd-frank statutory exception for dealers. in a way that recognizes different types of security-based swaps. and then -- that includes a phase-in design to promote the orderly rollout of the security based swap dealers. the completion of these two joint rule makings is a significant milestone in the journey towards a complete implementation of title 7. beyond these rules, the s.e.c. also this year adopted rules that establish procedures for its review of certain actions undertaken by clearing agencies, including their submission of information to the s.e.c. about the security-based swaps they plan to accept for clearing.

the rules also require clearing agencies that are designated as systemically important under the dodd-frank act to submit advanced notice of changes to the rules, procedures, or operation that is could materially affect the nature and level of risk at those clearing agencies. moving forward the s.e.c. expects soon to complete the last of the core elements of our proposal phase, rules related to the financial responsibility of security-based swap dealers and major security-based swap participants. further, we intend to propose in a single holistic rule making, rules and interpret fifth guidance in the implementations of title 7. we'll be informed by discussions with the cftc and fellow regulators. i expect the proposal will address the international implications of title 7 with respect to each of the major registration categories covered by title 7 relating to market intermediaries and infrastructures for securities based swaps. as well as with respect to the

transaction related requirements under title 7 in connection with reporting, clearing, and trade execution for security-based swaps. this publication is intended in part to give investors, market participants, foreign regulators, and other interested parties an opportunity to consider as an intergrated whole our approach to the registration and regulation ever foreign entities engaged in cross border transactions involving u.s. persons. the commission therefore anticipates that this release will be published before the underlying rules addressed in it are finalized so that the comments received can be taken into account in addressing the final rules. in conclusion, as we continue to implement title 7, we look forward to continuing to work with congress, our fellow regulators, both at home and abroad, and members of the public. thank you for the opportunity to share our progress and current thinking on the implementation of title 7. i'll be happy to answer any questions. >> thank you very much to both of you. chairman against letter --

genslerer there are a lot of things we want to talk about, all important, both in determines of the dodd-frank implementation on title 7 as well as what has happened since then. let me start by asking something related to m.f. global and to the financial group because there is no question that these efforts are devastating to the futures markets. they point to regulatory gaps. you spoke about that in your opening statements and that some things were being done. earlier this year before m.f. global i had asked that those involved as market participants give us recommendations and what should be -- we should be doing what, they should be doing, you should be doing, we'll be doing a hearing on august 1 specifically on that. but i'd like to know from your perspective what is happening as you are making changes, what else are you doing to protect consumers, instill confidence in the integrity of the futures market?

i get asked all the time at home by farmers, grain elevator operators, should i use the futures markets anymore because of their concern about what's happened and their lack of confidence. what are we doing to repair what is really viewed as a broken regulatory system at this point? >> excellent question. we pulled together market participants in early february in two full days of round tables and out of that good recommendations came forward that the national futures association and we finalized last week around three areas. one was the use of the firm's money that sometimes they put into the customer fund. this is call the excess funds that you remember so well from last fall. that can only be removed if it's more than 25%. removed with signatures of the chief executive officer, chief financial officer, some other

senior management, and reported directly to the regulators. we closed a significant gap that existed for over 20 years in our rules about foreign futures accounts. there was two methodologies to compute, i'm not entirely sure why the 1980's one was picked, we have closed that gap as well. those are very important changes. but also we have in front of commissioners now, a series of recommendations to go further than that. one of them that i highlighted in my opening statement, i really believe that the regulators, the chicago mercantile exchange, the national futures association, should have direct and daily electronic access to see what's in the bank accounts, to see what's in the custodial accounts, not relying somewhere on -- of course the events of paragrin were about falsifying bank statements and forging signatures and so forth. we are not going to be able to stop every fraud, but to have the regulators have direct

access on a daily basis is a critical reform. but we need to go further. >> on that point. is that one of the changes you'll be making because of the technology available today? i don't know why we are not requiring real time oversight of the futures commissions merchants at this point. >> it is. i think it's a critical reform. it's one we have talked to the c.m.a. and futures industry association about. i'm hoping it will have broad sport. we they'd -- support. we need to put it out to public comment. >> talk a little bit about -- obviously criticism about the regulators failing to do your job and reacting to crises where than preventive efforts. could you speak broadly to that. >> well, we are an agency that ultimately has responsibility for the futures and now the swaps oversight. through statute we have to work

with self-regulatory functions. agencies. and that's been appropriate for decades. it's a multidecade approach. i think the s.e.c. has it similarly. they are the frontline regulators and we oversee them as well. but i do think that we need to do more. we need to do more than review -- and review that relationship and make sure we are doing the right things at the cftc when we examine the examiners, as the second line of defense, to ensure their audits are full and don't miss things, for instance. >> the house is coming back in. members will give one-minute speeches. then the chamber will recess and return at about 4:40 eastern for work for five includes, including authorization for state department programs in 2013. also approval of a u.s. loan guarantee for israel, up to $9 billion. and allowing the defense department to transfer surplus

weapons to israel. any requested votes on those bills will take place at 6:30 eastern time. coming up later in the week, the house debates a bill to require the president to report to congress on exactly what would be cut under sequestration, which starts in january. also defense department spending for next budget year. the house republican bill increases defense spending more than the president requested, and more than the budget company agreed to last year. now live to the house. efore us this day. .

we can see your deeds unfolding in our history and in every act of justice and kindness. bless those who have blessed us and be close to those in most need of your compassion and love. fear of you, o lord, is the beginning of wisdom. bless the members of this people's house with such wisdom as they resume the work of this assembly, guide them to grow in understanding in attaining solutions to our nation's needs that are with truth and justice. may all that is done here this day be for your greater honor and glory. amen. . the speaker pro tempore: the chair has examined the journal of the last day's proceedings and announces to the house his approval thereof. pursuant to clause 1 of rule 1, the journal stands approved. the pledge of allegiance will

be led by the gentleman from texas, mr. burgess. mr. burgess: i pledge allegiance to the flag of the united states of america and to the republic for which it stands, one nation under god, indivisible, with liberty and justice for all. the speaker pro tempore: the chair will entertain requests for one-minute speeches. for what purpose does the gentleman from south carolina seek recognition? mr. wilson: unanimous consent to address the house for one minute. revise and extend my remarks. the speaker pro tempore: without objection. the gentleman from south carolina is recognized for one minute. mr. wilson: mr. speaker, the hill newspaper published its special report a few years -- weeks ago bringing more attention to the very real threat of defense sequestration. many people are under the false impression that defense spending represents a significantly larger portion of the federal budget than it truly does. the current budget of the department of defense

represents 15.1% of the federal budget. this chart shows that the key fence spending has declined over the last 20 years. sequestration represents a $1.2 trillion cut. half of the $1.2 trillion comes from the defense budget. i do not believe that half of these cuts to come from 15.1% of the cugget. additionally, sequestration will affect all areas of our national economy. it is projected that sequestration could cost one million americans job, and cause the unemployment rate to rise by an entire percentage point. we should pass the bill by armed services committee chairman, buck mckeon, that addresses the issue without tax increases. it conclusion, god bless our troops, we will never forget september 11 and the global war on terrorism. congratulations, mary and jerry, of lexington, south carolina, on your 50th anniversary. the speaker pro tempore: for what purpose does the gentlelady from the district of columbia seek recognition? ms. norton: unanimous consent

to address the house for one minute. the speaker pro tempore: does the gentlelady seek unanimous consent? the jell is recognized for one minute. ms. norton: mr. speaker, my request to testify was summarily refused on a bill to be marked up tomorrow to deny only women in my district, the district of columbia, the right to an abortion after 20 weeks is guaranteed by roe vs. wade, so i testified for one moment -- one minute today. trent frank, the chairman and sponsor, must have thought one unfairness deserves another. the bill is of a piece of republican attacks all year to deny contraceptives, on health insurance, and defund planned parenthood. the bill is as unprincipled or it would apply -- it would not apply only to the district of columbia. recent figures show almost 3/4 of abortions in the district occurred under 10 weeks of

pregnancy only one past 21 weeks. i yield back the balance of my time. the speaker pro tempore: for what purpose does the gentleman from texas seek recognition? mr. burgess: mr. speaker, i ask unanimous consent to rise, address the house for one minute, rerned. the speaker pro tempore: without objection, the gentleman from texas is recognized for one minute. mr. burr gess: -- mr. burgess: thank you, mr. speaker. this year a common over-the-counter emergency asthma inhaler was forced off the pharmacy shelves due to an international treaty agreement. now patients who suffer from asthma find themselves awake at :00 a.m. with an unexpected attack, they don't have access to an immediate inhaler, they have a problem. it used to be a problem they could solve with a quick trip down to the 24-hour pharmacy. now they have to go to the emergency room. although a replacement inhaler has been before the approval board, they have taken to action. when a ban went into effect, most people expected the replacement would be available with no disruption, but this has not been the case. because of the f.d.a.'s intransigence, our patients

have nowhere to go. i don't no why the f.d.a. has not acted. i have asked them. they won't tell me. there is a simple solution. the environmental protection agency has within its authority the ability to waive the ban on the over-the-counter inhaler. allowing it to be sold. despite multiple letters to the e.p.a. and president obama and questions during committee hearings, they remain unresponsive. why has the e.p.a. not approved the waiver? again, you'll have to ask them. they are not telling me. the min kuhl amount of cloro flora bashin will have negligible effects on our ozone layer e. especially considering the limited supply left. the e.p.a. should be on the side of mishents. they need to stop this senseless war on asthmatics. i yield back. the speaker pro tempore: for what purpose does the gentlelady from florida seek recognition? does the gentlelady seek unanimous consent? the gentlelady is recognized for one minute.

ms. castor: mr. speaker, i rise today to honor an american hero who is being dressed back home in tampa bay, florida, today. staff sergeant saja was killed on july when his amored vehicle struck an improvised explosive twice. he was 31 years old. known as ricky, he was a graduate of latoe high school. he joined the army in 2000 and was assigned to the 978th military police company, 93rd military police battalion, fort bliss, texas. his mother said, since he was a child he wanted to defend his country. he very much loved liberty. he want add free country without war, without -- wanted a free country without war, without problems. he died like a hero fighting for his country, she said, not for his country but all of us in america. he loved his country very much.

he is survived by his wife sonny sunny, -- his wife, sunny, and two brothers. on behalf of the tampa bay community, i salute staff sergeant saja for his service and ultimate sacrifice to our great country. i ask that all americans recognize this remarkable patriot. the speaker pro tempore: for what purpose does the gentlelady from north carolina seek recognition? ms. foxx: i ask unanimous consent to address the house for one minute. revise and extend my remarks. the speaker pro tempore: without objection, the gentlelady from north carolina is recognized for one minute. ms. foxx: thank you, mr. speaker. as the nation sits beneath 41 straight months of unemployment above 8%, it remains painfully clear that the president's policies have failed and made our economy worse. and painfully is indeed the operative word, as we slog through the worst unemployment crisis since the great depression, americans continue to ask, where are the jobs? more than 23 million of our fellow americans are

unemployed. almost 500,000 net jobs have evaporated since the president's so-called stimulus was enacted. and entrepreneurship, that cornerstone of the american dream, has reached the 17-year low. this is president obama's record and these facts do not lie. house republicans have a plan for america's job creators to help get our nation back to work. dozens of bipartisan bills have passed the house and sitting on harry reid's doorstep. it's time he and the democrat controlled senate before the american people before politics and pass these bills. i yield back. the speaker pro tempore: for what purpose does the gentleman from texas seek recognition? does jeat seek unanimous consent? >> do i, sir. soil the gentleman is recognized for one minute. >> last month the united states lost one of its most pre-eminent economic minds, ms. schwartz, passed away at the age of 96. mr. brady: dr. schwartz had

considerable impact on how academics and others think about monetary policy. she was best known for co-authoring along with milton friedman, a monetary history of the united states. the book speaks to the worst depth of the great depression to the federal reserve's restricting the supply of money when it should have expanded it. its conclusions revolutionized our understanding of that era. and in did all the work and i got most of the recognition, friedman observed, who received the nobel prize in economic science in 197 . i ask the house join in paying tribute to this most inspiring woman and expressing both our gratitude and condolences to her family. the speaker pro tempore: the chair lays before the house a message. the clerk: to the congress of the united states, section 202-d of the national emergency act, 50 u.s.c. 1622-d provides for the automatic termination

of a national emergency unless within 90 days prior to the anniversary date of its declaration the president publishes in the federal register and transmits to the congress a notice stating that if the emergency is to continue in effect beyond the anniversary date, in accordance with this provision, i have sent the enclosed notice to the federal register for publication stating that the national emergency and related measures dealing with the former liberian regime of charles taylor are to continue beyond effect from july 22, 20 12, although liberia has made advances to promote democratcy, a special court for sierra leon, recently convicted charles taylor for war crimes and crimes against humidity, the actions and policies of the former lie brierian president and other persons in particular their unlawful depletion of liberian resources and removal from liberia and secreting of liberian funds and property could still challenge liberia's

efforts to strengthen its democracy and to orderly develop its political, administrative, and economic institutions and resources. these actions and policies continue to pose an unusual and extraordinary threat to the foreign policy of the united states. for this reason i have determined that it is necessary to continue the national emergency with respect to the former liberian regime of charles taylor. signed, barack obama, the white house, july 17, 2012. the speaker pro tempore: referred to the committee on foreign affairs and ordered printed. pursuant to clause 12-a of rule 1, the house will stand in recess subject to the call of the chair. >> the house is recessing until 4:40 eastern when members will debate five bills. live coverage as always here on c-span. homeland security secretary, janet napolitano, will be on capitol hill this week.

on thursday, she goes before the house judiciary committee for an annual review of the agency's actions over the past year. live coverage thursday morning at 10:00 eastern on c-span3. tomorrow is day two of federal reserve chairman ben bernanke capitol hill's testimony this week. he goes before the house financial services committee. you can see live coverage of his testimony at 10:00 eastern tomorrow on c-span3. earlier today, mr. bernanke testified on the senate side of the capitol hill before the senate banking committee. a headline in "the hill," he tries to avoid the fiscal cliff. here's mr. bernanke's testimony from today. >> i'm pleased to present the federal reserve's semi-annual policy before the congress. i'll discuss current economic conditions and the outlook

before turning to monetary policy. the u.s. economy has continued to recover but economic activity appears to have decelerated somewhat during the first half of this year. after rising at an annual rate of 2.5% in the second half of 2011, real g.d.p. rate increased at a 2% rate during the first quarter of 2012 and available indicators point to a still smaller gain in the second quarter. conditions in the labor market continued early this year with the unemployment rate falling about a percentage point over that period. however, after running at nearly 200,000 per month during the fourth and first quarters, the average increase in payroll employment shrank to 75,000 per month during the second quarter. issues related to seasonal adjustment and the unusually warm weather this past winter can account for part but only a part of this loss of momentum in job creation. at the same time the jobless

rate leveled out at just over 8%. household spending has continued to advance but recent data indicated a somewhat slower rate of growth during the second quarter. although declines in energy prices are now providing support to consumers' purchasing power, household's confidence remain relatively low. we have seen modest signs of improvement in housing. in part because of historically low mortgage rates, both new and existing home sales have been gradually trending upward since last summer, and some measures of house prices have turned up in recent months. construction has increased, especially in the multifamily sector. still, a number of factors continue to impede progress in the housing market. on demand side, many are deterred about worries of their own finances or about the economy more generally. other perspective homebuyers cannot get home mortgage loans

because their current mortgages are underwater, that is they owe more than their home is worth. on the supply side, the large number of vacant home boosted by the ongoing inflow of foreclosed properties continues to divert demand from new construction. after posting strong gains over the second half of 2011 and into the first quarter of 2012, manufacturing production has also slowed in recent months. similarly, the rise in real business spending on equipment and software appears to have decelerated from the double digit pace seen over the second half of 2011 to a more moderate rate of growth over the first part of this year. surveys of business conditions and capital spending plans suggest further weakness ahead. in part, slowing growth in production and capital investment appears to reflect economic stresses in europe which together with some cooling in the economies of other trading partners is restraining demand for u.s. exports. at the time of the june meeting

of the federal market committee, fmoc, my colleagues and i agreed that economic growth will likely continue at a moderate pace over coming quarters and then pick up very gradually. specifically, our projections for growth and real g.d.p. prepared for the meeting had a central tendency of 1.9% to 2.4% for this year and 2.2% to 2.8% for 2013. these forecasts are lower than when we made in january reflecting the generally disappointing tone of the recent incoming data. in addition, financial strains associated with the crisis in europe have increased since earlier this year which, as i already noted, are weighing on both global and domestic economic activity. the recovery in the united states continues to be healed by by a number of head winds including still tight borrowing conditions, and as i will discuss in more detail shortly, the restraining of fiscal policy and fiscal uncertainty.

moreover, although the housing market has shown improvement, the contribution of the sector to the recovery is less than has been typical of previous recoveries. these head winds should fade over time, allowing the economy to grow somewhat more rapidly and the unemployment rate to decline to a more normal level. however, given that growth is projected to be not above the rate needed, the reduction in the unemployment rate seems likely to be frustratingly slow. indeed, the central tendency of participant's forecasts now has the unemployment rate at 7% or higher at the end of 2014. the committee made comparatively small changes in june to its projections for inflation. over the first three months of 2012, the price index for personal consumption expenditures rose about 3.5% at annual rate, boost in large increases in energy prices that reflected the higher cost of crude oil. however, the sharp drop in crude oil prices in the past few months has brought

inflation down. in all, the p.e.c. price index rose at 1.5% over the first five months of this year compared with a 2.5% rice over 2011 as a whole. the central tendency of the committee's projections is inflation will be 1.2% to .7% this year and at or below the level to the statutory mandate in 2013 and 2014. participants of the june fmoc meeting indicated they see a higher degree of uncertainty about their forecast than normal and that the risks to economic growth have increased. i would like to highlight two main sources of risk. the first is the euro area fiscal and banking crisis and the second is the u.s. fiscal situation. earlier this year, financial strains in the euro area are moderated in response to a number of constructive steps by the european authorities, including the provision of three-year bank financing by the european central bank.

however, tensions in euro area financial markets intensified again more recently, reflecting political uncertainties in greece and news of losses at spanish banks, which in turn raised questions about spain's fiscal position and the resilience of the euro area banking system more broadly. euro area authorities have responded by announcing a number of measures, including funding -- including funding for the recapitalization of spain's troubled banks, greater flexibility in the use of european financial backstops, including potentially the flexibility to recapitalize banks directly rather than through loans to sovereigns, and movement toward unified supervision of euro area banks. even with these announcements, however, europe's financial markets and economy remain under significant stress with spillover effects on financial and economic conditions in the rest of the world including the united states. moreover, the possibility that the situation in europe will worsen further remains a significant risk to the

outlook. the federal reserve remains in close communication with our european counterparts. although the politics are complex, we believe that the european authorities have both strong incentives and sufficient resources to resolve the crisis. at the same time we've been focusing on improving the resilience of our financial system to severe shocks, including those that might emanate from europe. the capital and liquidity positions of u.s. banking institutions have improved substantially in recent years, and we've been working with u.s. financial firms to ensure that they are taking steps to manage the risks associated with their exposures to europe. that said, european developments that resulted in a significant disruption in global financial markets would inevitably pose significant challenges for our financial system and our economy. the second important risk to our recovery, as i mentioned, is the domestic fiscal situation. as is well-known, u.s. fiscal policies are on an unsustainable path and for

controlling deficits should be a high priority. at the same time, fiscal decisions should take into account the fragility of the recovery. that recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken. the congressional budget office has estimated that if the full range of tax increases and spending cuts were allowed to take effect, a scenario wide referred to as the fiscal cliff, a shallow recession would occur early next year and about 1.25 million fewer jobs will be created in 2013. these estimates do not incorporate the additional negative pects that is likely to result from public uncertainty about how these matters will be resolved. as you recall, market volatility spiked and confidence fell last summer in part as a result of the protracted debate about the necessary increase in the debt ceiling. similar effects could ensue as the debt ceiling and other fiscal issues come into clear review toward the end of the

year. 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. in view of the weaker economic outlook, subdued projected path of inflation and significant downside risk for risk, the fmoc continued its maturity extension program, or m.e.p., through the end of the year. the m.e.p. combined sales of short-term treasury so -- as a result, it decreases the supply of longer term treasury securities available to the public putting upward pressure on the prices of those securities and downward pressure on their yields without affecting the overall size of the federal reserve's balance sheet. by removing additional longer

term treasury securities from the market, the fed's asset purchases also have others to acquire corporate bonds and mortgage-backed securities, helping to raise their prices and lower their yields and therefore making broader financial situations more accommodative. economic growth is being supported by the exceptionally low level of the targeted federal funds rate of regarding the anticipated path of the funds rate. as i reported in my february testimony, the fmoc extended its forward guidance at its january meeting noting it expects economic conditions, including low rates of utilization are likely to warrant exceptionally low levels for the federal funds rate, at least through late 2014. the committee has maintained this qunlknl forward guidance at its subsequent meetings. reflecting its concerns about the slow pace of progress and the downside risk to the economic outlook, the committee

made clear at its june meeting that it has prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in the context of price stability. thank you. i'd be pleased to take your questions. >> thank you for your testimony. we will now begin the questioning of our witnesses. will the clerk please put five minutes on the clock for each member. chairman bernanke, i'm going to lead off for the question about the libor scandal. last week you released documents showing the fed provided early warnings on manipulation in the libor market. then the new york fed president, timothy geithner, raised concerns with president bush's presidential working group and offered firm

recommendations to the british authorities. can you tell the american people what did you know, when did you know it and what did you do about it? what can we do to restore kchts in this system? -- confidence in this system? >> thank you, mr. chairman. as you know, libor is a critical benchmark for many contracts so the actions of traders and banks that have been disclosed are not only very troubling in themselves but they have the effect of undermining public confidence in financial markets. regarding the federal reserve's role, the federal reserve bank of new york takes the lead in gathering market intelligence for the federal reserve system. it was in the process of gathering market intelligence when it received information about libor's submissions, notably phone call on april 11, 2008, in which a trader in barclay's new york told an employee of the federal reserve that he thought that barclay

was underreporting its rate. about that same time, stories began to appear in the media as well. there was an april 16 story in "the wall street journal" and "financial times" also had a number of stories. i'd like to make two preliminary points before talking about the federal reserve's response to that information. first, the information the fed received was about the bank's possibly submitting low rates in order to appear -- to avoid appearing weak during the period of the crisis. the transcripts of the phone calls that were released have no reference to the manipulation of rates for profit by derivatives traders as alleged by the recent decision. the second point i'd like to make is this issue was complicated during the crisis by the fact that there were very few transactions occurring other than overnight.

and so banks were asked to report what they would pay if they were borrowing at a certain term. it may have been in many cases that transactions were not taking place at that term, we'll get more information on that as the investigations continue, but it's clear that beyond these disclosures that the libor system is structural ly flawed and part of the response is to look at the flaws. the federal bank of new york after receiving information after the market increase responded very quickly. it set up an internal working group to address the issue. importantly, it informed all the relevant authorities in both the u.k. and the united states. notably on may 1, president -- then-president geithner briefed the president's working group which consisted of the tresh reerks the fed, the fdic and the s.e.c. and other participants. the new york fed briefed the treasury separately on may 6.

the p.w.g. meeting provided more information to the various staffs of the vary yes, sir agencies and the new york fed also communicated with the f.s.a. and the bank of england in the united kingdom. so there was active effort to report to all the relevant policymakers and enforcement agencies the information that had been received. the second step that the federal reserve bank in new york took was to develop recommendations to address the structural problems with libor that i mentioned before. the new york fed released a memorandum, a list of suggested changes that they submitted to the bank of england on june 1 and followingup earlier discussions with the bank of england. there were also communications with the british bankers association which is the private group that constructs libor prior to june 1.

so the federal reserve bank of new york took the lead here. they released a good bit of information. they are looking for additional information. they will certainly release it when they find it. on the board side, we were on supporting mode. we provided an lytic support. notably about the issues related to the construction of libor. our staff were in contact with the cftc in april and may to provide analytical support, and governor crozzer in on the board of -- cors -- crosner on the board contacted britain at the time. following the bank of new york's disclosures to the appropriate authorities there was rapid follow-up. the cftc was making increase as early as april of 2008. it sent requests for information to u.s. banks in the fall of 2008. the s.e.c. initiated inquiry in

2009 and d.o.j. in 2010. currently the european commission and a range of other foreign regulators, including british regulators, of course are investigating and of course we know about the june 27 settlement with barclay's. so there was a substantial response by the federal reserve bank of new york, both in terms of informing all the appropriate authorities that information led to investigations. the federal reserve bank of new york also contributed substantially to thinking about how to better structure the libor panel and the libor information collection to avoid some of the weaknesses in the system that became evidence during the crisis. -- became evident during the crisis. >> chairman bernanke, 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 you to consider a stronger

policy response in the future? if further extensions of operation twist are not possible in the future, what other policy tools are available that the fed decided to provide additional monetary support? >> well, as you know, mr. chairman, the federal reserve in december of 2008 brought rates down close to zero, and since then we had to rely on a number of less conventional policy tools in order to achieve additional financial accommodation. and those included, of course, as was mentioned, quan tative easing programs -- quantitative easing programs and operation twist which i associated in my remarks also provides extra financial accommodations, provides support for the recovery. the other type of tools that we have include communication tools, notably our forward guidance which gives the markets some sense of where we think or how long we think that rates will be kept at their

current low level. so those are the principle types of tools that we have. we are looking very carefully at the economy, trying to judge whether or not the loss of momentum we've seen recently is enduring and whether or not the economy is likely to continue to make progress towards lower unemployment and more satisfactory labor market conditions. if that does not occur, you obviously we have to consider additional steps. we looked at a range of possible tools, mostly again involving the balance sheet and communication. the committee meets in a couple of weeks. we have not come to a specific specific choice at this point. and should action be needed to promode a sustained recovery in the labor market.

>> ever since the dodd-frank conference there has been debate whether nonfinancial end users were exempt from margin requirements. then chairman dodd and chairman lincoln acknowledged that the language for end users was not perfect and tried to clarify the intent of the language with a joint letter. in the letter they stated the legislation does not authorize the regulators to impose margin on end users. those exempt entities that use swaps to hedge or mitigate commercial risk. in april, 2011, prudential regulators issued a joint proposal that would in fact require nonfinancial end users to post margin to their bank counterparties. according to the proposed rule, the proposal to require margins stems directly from what they view to be a legal obligation under title 7. recently, i offered an amendment with senator johanns to fulfill congressional intent by providing an explicit exemption from margin

requirements from nonfinancial end users which qualify for the clearing exemption. the amendment is identical to the house bill which passed the house by a vote of 370-24. is it accurate, in your opinion, that regardless of congressional intent, the banking regulators view the plain language of the statute as requiring them to impose some kind of margin requirement on nonfinancial end users unless congress changes the statute? >> we believe they need to have some type of margin requirement. we allowed for exemptions when the credit risk associated with the margin was viewed as being sufficiently small. so many small end users would be exempt in practice. >> do you agree that nonfinancial end users hedging does not contribute to systemic risk, that the economy, the economic benefits from activity

-- excuse mother that the economy benefits from their hedging activity and that it's appropriate for congress to provide an explicit exemption from margin requirements from nonfinancial end users which clallify for the clearing exemption? >> i certainly agree nonfinancial end users benefit and that the economy benefits from the use of derivatives. it seems to be the sense of a large portion of the congress that exemption should be made explicit and speaking for the federal reserve, we're very comfortable with that proposal. >> well, thank you, mr. chairman. i want to shift gears for just a minute back to the question that the chairman asked with regard to what actions you can take. you indicated in your response to his question about what tools you still have and how you may approach them, that you still have some possible tools to deal with. there's obviously a lot of speculation and concern about whether you are considered -- excuse me -- considering

another round of quantitative easing. there is question of how effective and what more can be done. could you discuss for us a moment how you feel -- how effective you feel the quantitative easing has been so far and whether you feel it is one of those fools that you should seriously consider going forward? >> so as i mentioned to the chairman, we ran out of space to lower short-term rates in the normal way and we had to look for other tools. like a number of other major central banks, we've 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 and the operation twist, so-called, tools have been effective in easing financial conditions and in promoting strength in the economy. it was most evident in the so-called qe-1 by the beginning

of the recovery by a few days by the trough in the stock market. qe-2 was certainly effective at addressing what was beginning to become a worrysome amount of risk of -- worrisome amount of risk of deflation. my view and the view of our analysts at the fed is that it also contributed to economic growth. it's hard to judge because it depends on what you think would have happened in the absence of those actions. so there's a range of views about the efficacy of these programs. there's also questions about side effects, risks that might be associated with their use and therefore i think they shouldn't be used lightly. nevertheless, my own view is that these tools and other nonstandard tools still do have some kind of capacity to

support the economy. and what we'll be looking at and thinking about this i think really two things. the first is, as mentioned in our statement, whether or not there is in fact a sustained recovery going on in the labor market or are we stuck in the mud, so to speak, in terms of employment? that supports our maximum employment mandate. and the other issue would be price stability and notably we would certainly want to react against any increase in deflation risk. >> thank you. >> senator reid. >> thank you very much, mr. chairman, and thank you, chairman bernanke. let me return to the issue of libor. can you give us and the millions of americans that depend upon libor because it tells how much they have to pay for their car loan or student loan, etc., that the current libor is reliability, that the changes that were made or

suggested by the new york fed or others have been put in place and that this is an index that is in fact reliable and not being subject to manipulation going forward? >> i can't give that assurance with full confidence because the -- our british banker association did not adopt most of the suggestions that were made by the federal reserve bank of new york. made relatively small number of changes. i think it's likely that concerns are less now because we're no longer in the crisis period and as i mentioned was a period in which transactions and many maturities were not taking place. i would like to see additional reforms to the libor process, assuming that libor will continue to be a benchmark for financial contracts. alternatively, there are a number of people looking at alternative benchmarks like repo rates or the overnight index swap rate or other type of interest rates which have

the advantage over libor that they are market rates as opposed to simply reported rates. >> what steps are you taking, though, given that concern you've expressed right now? not retrospectively, how we got here and who did what to who, but to provide as much certainty as you can, either several banking institutions you directly regulate that contribute to libor, there is a europe relationship directly with the bank of england, what are you doing? not just you personally, but the federal reserve to ensure this index is appropriate? and, again, i'm -- i encourage you to study the alternatives, but the libor is deeply interwoven and embedded into thousands and thousands of contractual arrangements throughout the world that is going to be hard to next week shift to something else. >> well, again, i think we are and need to continue advocating for reforms to the libor process. it is constructed by a private

organization in the u.k. and so our direct ability to influence that is limited. with respect to the three banks in the united states which contribute to libor panel, two of those banks have reported in their s.e.c. filings that they have been asked for information by investigating agencies. we are following that very carefully. we'll see what happens and we will provide any support and help we can to those investigators. >> the federal reserve has been in some cases sort of pursuing aggressive monetary policy, why fiscal policy has not kept up in some respects. and i presume you are prepared to continue to do that given unemployment numbers, inflation, etc., that's regardless of what we're doing

on the fiscal end. >> our mandate tells us to do the best we can for employment and price stability and we will continue to do that. of course we would appreciate other policymakers playing appropriate roles themselves as well. >> one of the comments that you made, and i'll give you a chance to amplify it, is there will be a need, i think, in your view, 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, that is heavy perhaps on cuts to entitlements, that would not provide stimulus, in my view, and it could further impact unemployment in the country, is that an accurate

assessment? >> well, the position we've taken is i would say at a first cut is do no harm. what we need is a strategy which addresses the long-run sustainability issues. we can't forget about that. at the same time, if the fiscal cliff is allowed to happen, it will certainly have play jor negative affects on the economy. the c.b.o., the i.m.f. and many other observers have made similar recommendations, and we feel that's a reasonable balance between the short and long term. >> some of the specific issues that we face at the end of the year are filling a gap in the 2013 in terms of spending, in terms of revenues. and if that 2013, if we avoid the cliff by taking another route, but that route is significantly decreases spending, decreases other

stimulative effects, would your view be we could have avoided a cliff but still find ourselves in a very pearlous economic situation because employment will continue to decline? >> it's a question of the time frame. in the very near term, we have a lot of fiscal drag coming from state and local governments, as you know, and some coming inevitably from the federal side. so in no way am i saying we shouldn't be making strong efforts to achieve long-term sustainability and make a credible plan as soon as possible for doing that. but we would be better to make that plan soon but to have the effects come in more gradually to allow the recovery, the air it needs in the short term. >> thank you, mr. chairman. >> senator corker. >> thank you, mr. chairman. and thank you, mr. chairman, for being here. i was listening to the last dialogue there, and i know in

your statement you talked about the fiscal cliff that's coming up. and to be clear about the spending reductions, it's $1.2 trillion over the next 10 years that the sequestration amounts to. going to spend about $45 trillion to $47 trillion of taxpayer money over the next 10 years. and while i agree we should come up with a much better solution that deals with entitlements and revenues and hopefully something that's much larger, are you seriously concerned that, you know, we are talking about $108 billion next year in redeficit reductions, half between defense, half in other mandatory spending? you're seriously concerned that that small amount of spending reductions is something that's going to damage the economy? >> the fiscal cliff includes both the spending reductions and tax -- >> i'm talking about the spending piece. >> obviously a smaller fiscal contraction will have a smaller effect. i don't want to make a judgment

about -- i realize it's very contentious. taxes to spending. i don't want to get into that. but clearly a smaller reduction in fiscal -- in the fiscal position would have less effect on the economy than a larger one. >> but as we look at the economy -- i mean, would you not also say that the best thing we could do to stimulate the economy, including any actions the fed might take, is for us to have real fiscal, real balanced fiscal reform, is that not the thing that would cause our economy to take off more than anything else? and alleviate the uncertainty that people have in the investing community. >> fiscal reform is very important. not only control of deficits over the long period, but also the quality of fiscal policy. what are we spending our money on? what does our tax code look like? i think those things are extremely important. but i think the way the current law is written, we have the maximum impact right in the very short run. on january 1, 2013, and much

less happening over the next decade or the next two decades. so i'm not advocating an overall increase in fiscal spending or anything like that. i'm just saying that the timing should be adjusted to allow the recovery a little bit more space to continue but to make a serious effort to improve our fiscal policy over the next decade. >> so, look, i agree that we should have a better policy than we now have, and i think most of the people on this dias is trying to seek that and it's unbelievable to me that we haven't already done that. but i think on the other hand for us to potentially kick the can down the road on sequestration creates even more -- if we don't come up with another solution, which i hope we will, but to say that you are recommending in some ways that we kick the can down the road, not do sequestration and make us look even more irresponsible to me is worse than the $108 billion that might be reduced that the

federal government will be doing next year. do you understand what i'm saying? >> yes, sir. delaying everything, to say we are not going to do it, put it off for a year, would be a very bad outcome. >> i think the actions you're taking at the fed, and i understand you have a duo mandate. i think we should have a single mandate. we talked about that. i know it creates bipolar activity. you are trying to juggle the two we created that, not you. i think the actions that you're taking really take the -- potentially considering -- i know qu-2 was in sbons to potential deflation, i think further actions actually take the emptuss off us to act responsibly. i -- impetus off us to act responsibly. i wish we had a chairman sometimes to say, look, we are not doing anything else. we're pushing rope, and it's up to you to act responsibly to deal with these fiscal difficulties, quick looking to us. are you tempted ever to say that to congress?

would you not say that now? >> i don't think that's my responsibility. i've been assigned to do -- to focus on maximum employment and price stability, not to hold threats over congress' head. congress is in charge here, not the federal reserve. >> very politick answer. i would say you have members that are concerned about the policies that you're putting in place being disruptive. you do have members who are concerned about that, is that correct? >> we have a range of views on the committee, yes. >> and let me just -- let me ask it a different way. if we were to act responsibly and to do something in a balanced way that dealt with not only the next 10 years but the 20 and 30 which most of the plans that have been in the mainstream do that, would that alleviate the need possibly for the fed to consider additional quantitative easing? >> well, it's a major downside risk if congress addresses

those issues, if the economy was -- the outlook was better, then it's certainly very possible that would be aer gait any need to take for further action. >> you have been vague on what additional tools that you have, and i understand that. i know the whole world watches when you speak. it does appear that most of the tool kit is utilized at this moment. if you were to consider additional tools at the fed in the next meeting, what would be the range of options that might exist with rates being where they are today and operation twist being in effect? what is it fed could responsibly do since the fed is the biggest lender to the federal government already, far more than china and japan? >> well, there are a range of possibilities, and i don't want to, you know, give any signal that we're choosing one above the other. the logical range includes different types of purchase programs that include treasuries or include

treasuries and mortgage-backed securities. those are the two things we're allowed to buy. we could use our discount window for lending purposes, but, you know, that's another possibility. we could use communication to talk about our future plans regarding rates or our balance sheet. and a possibility that we have discussed in the past is cutting the interest rate we pay in excess reserves. that's a range of things we could do. each one of them has cost and benefits and that's an important part of the calculation. >> thank you for your service and being here. >> senator schumer. >> well, thank you, mr. chairman. i, too, thank you for your service. i think you've done a superb job in one of the most difficult periods to be chairman of the fed. now, i don't quite agree with my good friend, mr. corker. i think you have told congress what you want us to do in your own fed speak way of doing it. just last month you said, "you'd be more comfortable if congress took off some of the burden in terms of helping the

fed in our economic recovery." what he meant there was not deficit reduction. he meant stimulus. he have meant some kind of stimulus which is the opposite side of the fed. now, i agree with you. under current conditions, fiscal policy should be our first choice. it would be more effective. unfortunately, we can talk all we want. everyone gives speeches of how fiscal policy should be the way to go and we don't do anything. we've had a hard time getting the cooperation necessary to get anything done on the fiscal side. we've tried tax cuts. which supposedly our colleagues on the other side of the aisle like. we've tried increased investments in infrastructure, a traditional way of priming the pump. we've tried support for state and local governments where jobs are declining and we've run into opposition on all fronts. just last week on two things that our colleagues have often supported, a tax credit for job creation and accelerated for

capital depreciation, we got no support. so the bottom line is very simple. we're not going to get the fiscal relief we want. at least over the next short while. maybe after november we will. so given the political realities, and the president has been calling for this repeatedly. when the president last fall proposed short-term fiscal support combined with long-term deficit reduction, which to me is the right way to go. a 10 year plan which reduces our deficit but a one to two-year plan to pump up our economy, we didn't get a single republican vote. we note reality. can't do it if it's not bipartisan. so given the political realities, mr. chairman, particularly in this election year, i believe the fed is the only game in town and i would urge you to take whatever actions you'd think is most helpful in supporting a stronger economic recovery. you received some harsh criticism for passed efforts to help the economy. republican leadership in the

house and senate, even as they were blocking jobs bills in congress, sent you a letter opposing mormon tear support as well. well, i would urge you now more than ever to take whatever actions are warranted by the economic conditions regardless of the political pressure. to that end, the minutes of your last fmoc meeting said the forecast for real g.d.p. growth was done, the unemployment rate remained elevated and consumer price inflation appeared decline. not a single member of the committee thought employment would be back to normal levels by the end of 2014. not a single member forecasted inflation even modestly above your 2% target in the same time frame. so the recession is deeper, more prolonged and stickier than anyone thought. let's remember, the fed has a duo mandate, first and foremost, to guard against inflation, but also to keep unemployment up and -- sorry -- to keep employment up and unemployment down.

so to me, these conditions woos certainly motivate the fed to seriously consider taking further action to bolster the economy. what's your upon about that? >> we take the duo mandate very seriously. we will act in an apolitical nonpartisan manner, do what's necessary for the economy. we have said we're prepared to take further action. the complication, of course, is that we are dealing with less conventional tools and we have to make assessments about their efficacy and whatever costs and risks may be associated with them. but it's very important that we see sustained progress in the labor market and avoid deflation risk and those are the things we will be looking at as the committee meets later this month and later this summer. >> and you still -- you've used qe-1 and qe-2. you still have other tools in your tool kit? >> i believe we do, yes. >> ok.

and do you agree that at least for the next few years the danger of inflation is quite low? >> well, our projection of inflation is that it will be close to or below our 2% target, and, yes, so i think inflation risk is relatively low now. not everyone agrees with that, but my personal opinion is that risk is reasonableably low right now. and indeed as i mentioned, modest risk, not a large risk, but a modest risk of going in the other direction of course the deflationary side. >> you agree that inflation has been too high. despite two false starts we are having a much rougher time getting unemployment down? >> yes, that's true. >> so get to work, mr. chairman. >> senator demint. >> thank you. thank you, mr. chairman for

being here. it's interesting to hear my colleagues talk, and they seem puzzled why our short-term temporary stimulus gimmicks don't seem to work. by any analysis, the cliff at the end of this year was created by all of these temporary policies that expire at the same time. clearly we're throwing a lot on you, but at the same time it appears we're forcing you into a temporary short term idea. i'm concerned -- you mentioned cost and benefits that some of the things that you're clearly considering such as quantitative easing as a cost we don't talk about, at least on our side as well as keeping the interest rates low. i mean, you're 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's the real cost. and over the last four years, probably about $1 trillion in loss. so people who are actually trying to save and put aside dollars are on a negative treadmill in the sense they are losing the value on their dollars. so there's a cost to that stimulus effect. and also quantitative easing which you're clearly considering. our own federal reserve bank of new york estimates that about 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. and my concern now is that what we're seeing it's not an increase in the value of stock but the projection and the loss of value of our dollar. and while we talk about no

inflation, i think what we're talking about is no visible inflation at this time because clearly if we're printing more money to buy more of our national debt, and i think you'll agree the federal reserve, through intermediaries, have bought over half of our debt the last couple of years, we are diluting the value of our dollar over time. .

but they also hold stocks or corporate bonds or small businesses or other types of assets that depend on the strength of the economy. if raising interest rates may help some folks, it would be

bad for investors broadly speaking. what we're trying to do is strengthen the economy, making america a more attractive place to invest and providing higher returns for everyone investing in the united states. i appreciate your concern, and that's one of the things we pay close attention to, we have not seen inflation yet, though, and the dollar has been, in fact, a good bit stronger and we are comfortable that we had the tools to unwind these policies in a way that won't threaten inflation. but we take, as i said, to senator schumer, we take both sides of the mandate seriously. as we are looking to try to help reduce unemployment, we're also -- we also want to be confident that we maintain price stability in the united

states and thus far, we've been successful at doing that. >> the dollar is stronger relative to the euro but compared to values inside the united states, it caused some concerns at this point, but again, i appreciate what you do, i would just ask caution in diluting our dollar even further for temporary action. thank you. >> senator? >> thank you, thank you, chairman bernanke for your service. i want to talk to you about interest rate manipulation by large banks since the fed pays -- plays a key role in how those interest rates affect cities and towns across the country. i look at the most recent set of allegation on the libor manipulation and once again it exposes to me a culture of greed, a culture of cheating,

of lying, at least at one large bank and probably many more. which is why nine of my colleagues and i wrote to you and other banking regulators in the department of justice last week asking for a robust investigation in the role of these banks and how this ultimately affected consumers in this country, investors in this country, cities in this country, because libor is a very, it's far more than a benchmark. it's a very significant indicator here that's used. i know that the federal reserve bank of cleveland found that 45% of prime adjustable rate mortgages are indexed to libor. 80% of others use libor as a beverage marc. -- bertsch mark. -- beverage marc. -- benchmark.

it goes to the lack of faith that i think increasingly the american public and for that matter many of us are having in the system. i look at the internal emails during 2005 and 2007, barclays derivative traders, asking other employees to submit false survey responses in order to benefit their trading positions. changing them, preferring certain libor outcomes on certain days, sometimes for it to be higher, sometimes for it to be lower. depending upon 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 purposes of profit. am i wrong on that? >> no, i agree absolutely. this is unacceptable behavior. >> let me ask you, clearly, then, banks like barclay were

trying to profit from the libor manipulation but that profit came not at -- it came at the expense of the public in general. >> some of the public, it's an interesting question, you mentioned borrowers, borrowers may have benefited because libor was underreported. we'll probably find out, via a numb of lawsuit that was been filed and investigations. >> but if you got caught in that period of time in which traders wanted higher libor and that was when your adjustment was going on, you had a detriment. investors had a detriment in not knowing the integrity of the institutions, not knowing the libor, if it's lower, it means things are working pretty well, when it goes higher it's a warning sign, is it not? >> i'm not defending it. it's a major problem for our financial system and for the confidence in the financial system and we need to address it.

>> how do we address it? i know that some of my colleagues here have -- my colleagues here bristle at regulation but it seems that this is an industry that on its own won't work with the integrity the public deserves. we're talking about pension fund investments, mutual fund investments, investments by regular investors as well as the consequences to consumers. i'm sure we're talking about billions, in effect, if not trillions, in effect. so for example, do you think that we need adecisional internal controls or firewalls between reporting personnel and trading employees at the banks so we don't have this order to manipulate? i'd like to hear, what is it we are going to do, now that we know all of this, may have known it before, what are we going to do to ensure the integrity of this banking system?

>> first -- first, it has to be an international effort because this is a british, u.k. organization. libor was constructed from about 10 different currencies as well. i think there's broadly two approaches, one would be to fix libor, make changes to it, to increase visibility, to reduce the ability of individuals to affect overall libor and increase monitoring of the reporting process that's tone. that's one strategy. the other strategy, which many people are thinking about, is going from what is eensrblely a reported rate to an observable market rate as the index in their number -- and there are a number of possible candidates that have been advanced that might ultimately replace libor. as you pint out, though, libor is deeply ingrained in many contracts. that change will be not a simp one to make.

i agree we need to address this problem. >> i look forward to the feds' leadership in this regard, suggestions of how we in fact make a system that cannot be manipulated, that has consequences to millions of consumers, investors, pension funds, municipalities, counties, governments, all affected by libor. so it may be an international response we need, but we need to understand what we can do here in the united states to ensure for these investors and these consumers. >> senator werner. >> thank you, mr. chairman, thank you, chairman bernanke for your report. on the libor issue, from everything i've read, reports as well as dumont, it seems -- as well as documents, it seems when the new york fed found out about this potential scandal and misreporting, it reacted on the policy side with various discussions and recommendations

with their british counterparts. i haven't 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 id did -- what it did was it informed the responsible authority the cftc, in particular, very quickly. the bank of new york made a presentation to the president's working fwroup that included the s.e.c. and cftc, provided supporting information, as did the board. the investigations took place but they were taken up quite quickly by, not the fed, which is a safety and soundness regulator, but by the authorities that had the most direct responsibility for those issues. i don't know, i have to say, the federal reserve back in new

york is still investigationing the -- investigating the situation itself. i don't know what communications or conversations were had with the three u.s. banks on the panel but the actual enforcement actions were taken by s.e.c. and cftc. >> so do we know that no u.s. banks were guilty of the same manipulation? >> we don't know that. >> that seems to go back to my question and concern. if we dent know that, it seems like we dropped the ball. the fact that four years later, we don't know that. >> two banks reported they had been asked to disclose information to the investigating agencies so the process is certainly a robust -- a robust process is under way. >> it's under way four years later. my point is, knowledge of this occurred in 2008 and neither the new york fed nor other regulators did a sufficient

investigation so we could know one way or the other as we speak four years later that the u.s. banks didn't do the same thing. am i missing something? >> only that again, i think, this -- the responsibility of the new york fed was to make sure the appropriate authorities at the -- had the appropriate information and they did. >> do you think that they could follow up and say u.s.backs should do the same thing? >> i don't know what conversations they had. the new york fed is the regulator of some banks and holding companies. there are other regulators like the o.c.c. and so on. >> certainly the new york fed is a primary regulator of the biggest banks with regard to u.s. banks engaged in libor that we're talking about, correct? >> two of the three. >> let me move on to another

topic that i'm concerned about. the fed is in the process of rule making with regard to the term, quote, predominantly engaged in financial activity, close quote, under dodd-frank. the rule that's opinion published, and the fed is now taking comments on, seems to me absolutely ignores a very specific criteria that we in congress placed in the bill, it uses an 85% test. it seems the -- they ignore that particular measure, how can the fed adopt a rule that ignores specific statutory language? >> we wouldn't want to do that. i will check on that question for you.

>> if you could check on that, again, it's 102-a-6 and i believe the fed rule that's been published for comment ignores a specific metric in the law which i would short-term called the 5% rule, a visiter amendment which is in the final law. thank you for that. finally, capital standards for the largest banks, as i have read your comments in the past, it seems to me that you support somewhat larger capital requirements for mega banks but that you seem to think where we're headed, about 9.5%, about 2.5% more for the mega banks is roughly -- for thing me banks is roughly appropriate -- for the meg banks is roughly appropriate. >> it starts at virtually zero for the medium sized banks and

increased up to the largest banks. but it's based on some formulas and calculations that try to establish parity for banks around the world. >> i guess what i'm asking is, is that -- to the extent that imposes higher capital standards on the largest u.s. banks, do you think those higher standards are good enough to build stability in the future and protection in the future? >> i think they're very useful, very important ba sell three in general will increase everybody's capital and the quality of capital, meaning the largest banks have more capital. but it's not just capital. it's the market discipline that comes from orderly liquidation authority, stronger supervision, liquidity rirptes and so on. i think it's extremely important that we address too big to fail and this is one way to make banks take into account

that their own size does impose a cost on the rest of society and make them respond to that. >> beyond the path we're on, do you think we should be looking at higher capital requirements for the biggest banks? >> we continue to have international discussions, it's been our approach to try to have capital requirements that are broadly consistent with the international standards but -- and these numbers were based on calculations that drew from the crisis but we're always open to, you know, further discussions. we'll see how effects of the higher capital work to the credit system as we go forward. we're phasing this in relatively slowly, as you know, so we'll get a chance to see what the effect is on banks and credit costs. >> i encourage you to look at that and encourage you to place safety and stability ahead of -- i understand the desire for

uniformity across the globe but i don't think it should trump what is best for -- you're looking for higher capital requests. >> senator? >> thank you very much, mr. chairman. welcome to chairman bernanke, to the committee, and to thank you so much 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 economic recovery. despite concerns about the long rate of recovery, some sectors are beginning to turn around and we're beginning to see some bright spots as indicated in your opening statement.

hawaii, for example, has record tourism numbers in may and last year we see spending by foreign travelers continue to rise, helping to reduce our deficit. my question, how do you think that current policies and those regarding tourism and exports, have affected the recovery? also, do you have any suggestions on how to further encourage growth in these areas? >> first, senator, tourism has been something of a bright spot. it has been -- we've seen improvements in tourism, not just in hawaii but other places around the country, and you mentioned the international

trade deficit, people may not appreciate that when a foreigner comes and visits hawaii, that actually counts as a u.s. export because we're exporting the tourism services. and the export of tourism services has been growing very quickly, something like 4% in the last year, faster than other types of exports. so it contributes to our trade balance as well as to overall economic activity. so it is a positive. we can consider visa policies, we can, you know, look at any tax or other implications that might affect the cost of

tourism. so it's an area where i think there's a lot of benefit, a lot of scope for economic benefit to hawaii and the rest of the country and it has so far been, as i said, a bright spot among the various service industries that we have. >> thank you. as you know, i'm concerned with the well-being of consumers. during previous hearings, you and i have discussed the importance of improving financial literacy to empower consumers while we work to grow the economy. so 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's two sides to improving decision making. on we thun -- on the one hand, there's education, and that effort has continue. the federal reserve is continuing its efforts toward promoting financial literacy and education. i have upcoming meeting with teachers across the country and i'll be talking about financial literacy and answering their questions and talking about how to introduce students to these topics. some of the activities that we had move over to the cftp, which as some personnel and some functions went over there, but they are also engaged in those activities. so education is one side and the other side, it's important that disclosures and the type of products that are offered are such that people have a reasonable chance of understanding what it is that they're buying or investing in.

the federal reserve pioneered a few years ago, it pioneers the -- pioneered the use of consumer testing to improve disclosures for credit card statements and a variety of other types of disclosures and we hope to see that type of activity continue. i think in general that the experience of the crisis has made many people more aware of the need to be financially rit -- literate, and more cautious as well. it's an ongoing battle. it's not something that we can, we can't declare victory, we have to continue to work to make sure that both kids in school an also adults who are making financial decisions have access to good advice and good education. >> thank you very much for your responses, mr. chairman. >> senator johans. >> mr. chairman, good to see

you again. the forecast you have testified about today i'm assume dog not factor in the results of the fiscal cliff that is headed our way between now and the end of the year. is that a safe assumption? >> that's correct. >> so pause of the fact that all of the various itemshat are 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, presidential signature, my assumption is that if that doesn't happen, that we get caught in a situation where those forecasts would be revised yet again and it would be even more pessimistic than your testimony today. would that be correct? >> absolutely.

>> as you think about the sequester and returning to the 2001-2003 tax policy, as you think about the estate tax and all of the various factors that we're looking at between now and the end of the year, is there -- if you were to give a recommendation to congress of where to act, would it be act on everything? or is there a priority that you would set for action? >> no, i think the choices between spending and taxes and the mix and the kinds of taxes and so on, i think that's a congressional responsibility. i'm just pointing to the collective impact of all these different things happening at the same time and there may be many different ways to mitigate that effect and i'm sure members of congress have different views on the best way to do that, which is a problem because you have to come to

some kind of agreement, so no, i don't have a specific recommendation, other than to think about the, not just the individual policy bus their collective impact as they all happen at the same time. >> let me talk to you a little bit about the mitigation piece of this. as you know, some of us, in fact, some of us on this banking committee, have been meeting for many, many months, in fact, for some members, they've been meeting for over a year, talking about an approach. i would guess the best way to describe that is the outline for the approach is the simpson-bowles plan which came out a year ago. thinking about that plan, would you be comfortable in testifying today that that, at least, is an acceptable alternative to what we're facing between now and the end of the year if congress could see its way to adopting that

approach? >> well, it does have a profile that seems reasonable in terms of addressing longer term sustainability over the longer period. but again, i don't want to endorse the individual components in part because, again, choices between taxes and spending are congressional prerogatives and because the bowles-simpson plan, it's not a complete plan. it doesn't, for example, say much about health care and how those costs will be controlled. but it does have the feature that, like many other plans that have been suggested, and there are others, rivlin and others as well, that introduce this discipline, fiscal discipline in a rigorous way but over a longer period of time to allow the my to adjust, you know, more easily. >> mr. chairman, i think if the average citizen were to listen

in on the political debate that will occur between now and november, and political debate is certainly appropriate, that's how democracies work, you would get very discouraged. but having said that, give us your thoughts if congress were able to put a plan in place, whether it's bowles-simpson or another approach that provided that stimulus, maybe, for a period of time in my judgment, pull back on the sequester, provided economic stability in terms of tax policy and revenue policy and started stabilizing things with a view toward trying to deal with the deficit over a period of time, what kind of signal would that send to the marketplace? do you think that would be a positive signal? >> it would be very positive. it would reduce a lot of the uncertainty that we see. it would address a very important problem and it would

show the ability of our political system to deliver important results. you may recall that when the united states government was downgraded last summer, it was -- the putetative reason was the concern about the -- the putative reason was concern about the ability of congress to come to a decision, not the welcome of resources for the country as a whole but the 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, you know, instead of guidelines or guide posts that congress would fill in and say it was a win forward, that would go a long way toward reducing uncertainty, increasing confidence and addressing one of our beggest longer term problems. >> senator brown. >> thank you. chairman bernanke, it's nice to see you. as a result of dodd-frank, the federal reserve gained a lot

more power to enforce rules. unfortunately, as we all know and read day after tai after day, since 2008, we've seen too many examples of wall street again breaking rules and laws and common standards of ethical behavior. i follow up on some issues that senator visiter talked about and i just want -- senator visiter talked about and -- vitte talked about. i want to run through, because it's important to recognize what these problems are. lawsuits, municipalities sold overpriced credit derivatives, bankrupting some of them, five of the nation's largest servicers found to forge mortgage dumont document the largest bank halted all consumer debt collection, the nation's largest bank has lost

$5. billion on large, complex derivative trades, the regulators either didn't know about or looked the other way. it appears their employees misreported losses. 16 global banks are suspected of manipulating libor that is used as a benchmark for mortgages and credit cards and student loans. and as you know even derivities. in june, one publication reported on a criminal bid rigging trial, exposing illegal practices by in wall street firms so banks could underpay for municipal bonds. two weeks ago, two companies said they urged them to steer clients to their own funds because they were more profitable for the bank even though they paid investors lower amounts, we are investigating whether the biggest u.s. bank manipulated prices. not to mention wrong doing in institutions over which the fed has no jurisdiction, mfp

global, the problematic facebook i.p.o. and wall vote's biggest banks sharing secret television fings -- information. no wonder this epublic doesn't trust you or us or any of the banks, whether the banks on wall street, the bank regulatory system. i don't know any other answer, mr. chairman, other than to put out there, and again say, i think so many of our biggest banks are too big to manage and too big to regulate. i think this behavior shows they're too big to manage and too big to regulate. >> there have been many bad practices, i agree. many of them are tied to the crisis period, a peer of excess. i think that's bad business. i think it's important for us to address those issues through enforcement and of course part of the reason, i'm not over claiming here, but part of the reason you could make this long list is so many things have

been turned up by enforcement. >> and perhaps many haven't. >> that's true. >> i apologize for interrupting trks not really fair. you say it's bad business but for a lot of them it's been good business. it's been a way, it's been embarrassing to some but it's meant bigger and bigger profits and bigger and bigger bonuses. to say it's bad business from an academic viewpoint, it's not good for our economy but it's been good for some of the actors. >> it's very shortsighted, it's not the way you build a long-term relationship with customers or have long-term profits. on the size of banks, i think the issue is too big to fail. if you conquer too big to fail, there will be strong market pressures for banks that are too big to manage, too big to operate, to break up. there was a story about that in the media this morning about the benefits of providing shareholders with additional value by breaking up in

situations where you don't have good controls and don't have good synergies between different parts of the bank. what dodd-frank does is provides a blueprint for attacking too big to fail. that includes the liquidation authority, it includes the living wills, which by the way, provide a blueprint if you wanted to break up banks, the living wills provide some information about how you would do that in a sensible way. so that's one way to address that, and i think if banks are exposed to the difficult dwhroifs markets. >> living wills are for people close to their deathbed. i don't think these living wills address the issue, nor does this other regulation

seem, other kinds of regulations seem to address the issues of all of this litany of problems i mentioned. it seems clear to me that the fed and other regulators, that they're either not up to the job or complicit in wall street activities. >> thank you, chairman bernanke . i want to move on to the libor scandal. you say there's a question about the efficacy -- there's a reaning of views about the efficacy of policies you've been pursuing and i will acknowledge that i'm simp at the exto the fact that we've given you a dual mandate, which

i think intrinsically creates a risk that you'll be put in a position where you have to deal with a conflict over two conflicting goals. i want to strets, and i know you and i disagree on this, we've had this conversation, but i feel strongly that the problems facing our economy are not monetary in nature. they result from this ongoing deleveraging process we are suffering through a regulatory avenue lanche, completely unsustainable fiscal policy, which you acknowledged, and the threat of huge tax increases. to address this with ever easier monetary policy, i worry 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 fiscal policy. i want to reiterate that point but what i'd like to ask you about if i could is this libor scandal. i'm disturbed about this, i'm disturbed about the little

confidence that might remain in our financial system. i'm concerned about the direct impact to american citizens, including my constituents, among many, i think of the city of beth he mem that -- bethlehem that engaged in interest rates swaps, received floating rates based on libor and i wonder if they were receiving payments lower than what they should have gotten because of this. you mentioned in your testimony, or perhaps in answer to a question, that fed officials became aware of barclay's manipulating this index, in april of 2008, they have an edtorial in which they recount an email they had in august of 2007 or -- or perhaps a phone conversation between a barclays employee and fed official. when did you become aware that there was some lack of integrity in the reporting of libor rates? >> so, let me first, on your first point, let me say that there's not as much

disagreement as you imply. it is not a panacea, and we look forward to having partnerships with other parts of economic policy. on the telephone context, just note that these were phone calls and these were calls made by junior employees who were -- whose job was to call and get so-called market color, get information about what was happening in the markets. i think in one of those calls, it was clear to the person calling that the fed employee, not an official, the fed employee did not know what libor was or how it was kruked. there were some issues about how that was communicated. in any case, i learned about it, to my recollection, in tissue at the time when it became covered in the media, which would have been, i guess new york twill of 2008. >> here's what i don't understand. i know you fully appreciate the

importance of this index, how widely it's used for all kinds of transactions, and how the american financial system -- it's not totally dependent on it but it's totally integrated into this and you and other regulators understood that there were serious questions about the integrity of this, perhaps even systemic problems with the integrity of this, and yet everybody allow these transactions to continue, did it not occur to somebody to bring the financial institutions together and say, hey, you probably ought to consider a different way of establishing your floating rate reset? because there's an integrity problem? did that conversation happen with any financial institutions or the public? >> well, financial institutions don't, you know, aren't the only participants in this libor market. >> how about making it more broad? >> i think the best way to address the problem given all the issues occurring in the

crisis at that point in time, the best way to address the problem, at least in the near term would be to reform the way that these numbers were collected so that the libor rate that was set would be in fact -- >> i agree. my question, though, and you mentioned, observable market transactions would seem like a better way of doing it than a survey of banks. the question is, why have we allowed it to go on the old way when we knew it was flawed for the last four years? >> because the federal reserve has no ability to change it. >> you have enormous influence over the institutions engaged in this. >> we have been in communeuation -- communication with the british bankers association, they made some changes, not as much as we would like. it is, in fact, it is not that they don't understand how this is collected, it is a freely chosen rate, we're uncomfortable with it, we've talked to the bank of england -- >> i'm not sure market participants were aware of the

problem with the integrity of the mechanism in which it was established. there are other ways to establish a perfectly viable floating rate. i'm surprised this was allowed to continue for so long when the problem with the integrity was known. >> again, senator, the new york fed took the lead in making some good suggestion about how to clean up the libor process. >> thank you. >> senator kohl. >> chairman bernanke, last july we discussed how the -- how we're experiencing a jobless recovery. you agreed that long-term unemployment was a major problem and recommended congress look at ways to help the unmoed through training and education. of course the federal reserve has its own mandate to keep unemployment low and we continue to see very disappointing jobs numbers. i'm sure we agree the consequences of long-term unemployment are enormous. so why has the fed been so slow to tackle unemployment over the

past year? why hasn't the fed issued a third round of quantitative easing and could you expand on your current maturity extension program? >> certainly. so far, briefly, of course, we have taken a wide range of extraordinary actions to support the economy. in june we took the step of continuing the maturity extension program which has many of the features of quantitative easing in that it provides longer term security, additional support to the economy an we made clear that we were prepared -- prepared to take further actions. we were looking to see if we're going to get sustainable improvements in labor markets. if we're not getting sustainable improvements, we have to consider taking additional action. the reason that there's any question is really, again, the range of views about efficacy,

cost and risk associated with these nonconventional measures. but that being said, as we 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 unemployment has remained over 8% for 41 months, a long enough time for it to be clear, now is 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 much longer. on libor, mr. bernanke, one chief executive of a multinational bank was quoted in "the economist" as saying, quote, the libor is the banking industry's tobacco moment, unquote, citing the federally negotiated settle thats to the american tobacco companies over $200 billion.

can you foresee a scenario where banks with ill seek taxpayer assistance in order to compensate parties that were victims of libor rigging? do you believe that potential court cases against banks that participated in libor manipulation could indeed result in another federally negotiated settlement? >> well, there are many court cases already in prozpwress -- in progress. i think it's too soon to make any guess at what the outcome of those court cases will be. there have been a few estimates by private analysts of potential costs but those are admittedly very much back of the envelope types of call cue lages. i think we have to let this play out. i don't know what the cost will be. and i really don't think it's responsible for me to guess until we get more information about the impact of these actions on the actual libor rates and the implications of

that for rates that people paid. so it's obviously very serious but i think it's too early to judge what the cost will be. >> in recent press reports indicate that the scandal could cost the banking industry millions, if not trillions of dollars. and as you know, there's no appetite here or anywhere else to do another bailout for the banks. given the increasingment of money that is at stake, i would urge you to work when the time comes closely with justice department on this and i think you would agree that you will. >> if we can contribute to a global settlement as we did in the kiss of the servicers, we would, of course. >> thank you. thank you, mr. chairman. >> senator moran. >> chairman bernanke, thank you for your testimony. in advance of the practice -- crisis, the financial crisis of

2008, that leads to many observers of our country's economy, it came out of the blue, it came as a surprise. what is it that you're worried about now? what's out there now that we ought to be paying attention to that has the potential of being the next crisis to the economy of the united states? i often read about the credit card debt you read about student loan debt, what are the things that you're most worried about and what are we doing to remediate the problem? >> well, i think the two items, and i mention these in my testimony, would first be the european sovereign banking situation, which remains unresolved, still a lot of financial stress associated with that, and i think still some distance before they get to a solution.

that poses an ongoing drag on our economy and although i have every hope and expectation that the european leaders will find solutions there is the risk of a more serious financial blowup and we have been, i don't want to take all your time but we have been taking appropriate steps here in the united states to try strengthen our banks and provide tissue to prepare for whatever events might occur. the other, the domestic fiscal situation we have been talking about, i think it's important that in the short-term that congress work effectively to address the debt limit and the fiscal cliff and those issues and in the medium term establish a strong, credible plan for fiscal sustainability. >> at what component in time do we have a sense of whether the european crisis is going to have a huge -- is going to have huge consequences to the u.s. economy? what time frame are we on in which we know whether europe

has appropriately responded to resolve their own problem? >> well, we appear to be in a muddling through type of environment, which is costly to everybody. europe even more so than us. they're already in a recession, or at least many countries in europe are in a recession. i think it's based on all i can observe, it seems it could take a very long time because the structural and institutional changes europe is trying to make are not ones that take place quickly. for example, they've recently agreed in principle to create a single bank regulator for euro zone banks to do -- banks. to do that could well take, i don't have any inside information here but obviously it could take some time. could go into next year before they have a single bank regulator. likewise, they're trying toest pab tab lish, instead of fiscal rules and fiscal agreements, and they made some progress

there, but given that there's 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 quite a while, unfortunately. >> let me ask a more specific question a more narrow question. the kauffman foundation is a foundation in kansas city that considers entrepreneurship. its facts, its studies demonstrate that between 1980 and 2005 companies that are less than five years old accounted for nearly all the net new jobs created in the u.s. economy. in fact, new businesses create an average of three million jobs each year. unfortunately, our own census bureau now indicates that the startup en-in is slowing down. in 2010, there were about 394,000 new businesses started in the united states. this is the lowest level of new startups since 1977.

i'd like to hear your perspective on the importance of starups and what policies congress and the administration should pursue to return to the days in which the united states is at the forefront of innovation and entrepreneurship. >> well, those facts, i believe, are correct. young companies, so-called gazelles, are a big contributor to job creation because if they're successful they grow quickly and add a lot of employees. i don't know -- the data you cited, i don't know how accurate they are. it's obviously difficult to measure startups, many of them are very small enterprises but i think it's clear that both because of the weak economic conditions but also because of problems relating, for example, to availability of credit and venture capital and the fact that many entrepreneurs use

equity in their home as a form of startup capital, which is not -- not as available now as it was before the crisis, it's very plausible that those companies are not starting up at the rate they have in the past. i don't know a really good program here to suggest, other than to try to create as favorable a tax environment, as favorable a credit environment as possible for startup firms to write regulations in a way that serve their purpose but allow small firms to flour herb. according to the international agencies who calculate these sorts of things, the u.s. has a pretty small business friendly environment here in terms of cost and time required to start up a small business so it's not like we're in very bad shape on

that, but any kind of 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 those things are obviously approaches that can help these companies start up and provide environment. >> mr. chairman, thank you. one would think we'd have significant startups, particularly in light of the unemployment numbers, which increase the opportunity or necessity for someone to start a business on their own. chairman, thank you. >> senator warner. >> thank you, mr. chairman. chairman, the end is near. thank you for hanging in this morning. i would echo what my colleague, senator many moran, just said. we have legislation to try to promote these startup activities, startup 2.0, which addresses the issues you talked about as well as the issue of talent. we're in a global competition for talent and i commend

senator moran's leadership on this issue. we did make some movement on the access to capital earlier. i also -- i know most of my colleagues have left but would point out that for some of my colleagues because of the weaks took as this congress and dodd frank and otherwise, we have seen an increase in capital in american banks in excess of $00 billion more in capital reserves since the crisis and clearly i think that has helped our banking industry relative to some of our -- some banks around the world. i would to commend you for your continuing urging of us to act on fiscal policies. waiting for congress is a little bit like waiting for godot, hopefully we'll see some actions late they are year, a number of us have been working on this a number of things, i guess my first question would be, as we grapple with this issue of trying to get an appropriate balance of revenues and reform to generate the $4

trillion to drive our debt to g.d.p. ratio back down and because, as you pointed out, we can do this on a moderate -- we don't -- an intermediate basis and have the ability to phase these things in, i sometimes scratch my head because what is being asked of the american people is so much less than what's being asked of the folks within the u.k. or folks within europe or even folks in india and elsewhere where they are going through policy changes. have you done any kind of sizing of what a $4 trillion deal relative to our economy relative to what is being asked of folks around the rest of the world as they try to move forward and get their fiscal houses in order. >> i haven't done that exercise exactly but in terms of percentage of g.d.p., some of the fiscal shifts that are taking place in countries like spain, portugaling and italy are very substantial and in the

near term, which is part of the reason their economies are so weak in the near term, so it's certainly true in terms of the fiscal step that's being taken, it's larger in these countries which are under fiscal stress, but that's -- i'm not quite sure what the implication of that is. we're lucky that we can borrow at a very low interest rate. we're not currentry -- currently in the same situation as a greece or portugal and therefore if we can intelligently combine a gradual glide path with a strong, credible plan for stabilizing our deficits in the longer term, we can avoid that kind of painful contradiction and do it more gradually. >> it almost seems to me, it is remarkable, it's why congress is at such low levels of

approval, that we cannot do our job relative to what is being done around the world. i know we had some policy debate this morning on additional actions you may take to stimulate the economy. i fwess one question for those who question taking these actions if we look at the european central bank's recent actions in terms of if we look at the bank, if we look at the chinese financial institutions, what effect of their stimulus actives or loosening activities does that have on the world economy in terms of your decision making? >> well, there's been a global slow down. it's emanating, a lot of it emanating from europe, which through export demand is affecting asia and other parts of the world, the united states as well. there's been slowing in asia as well. the chinese g.d.p. statistics have been weak -- weaker this year than previous year.

partly that was intentional as they sought to cool their housing market and address inflation concerns. but there is a slowing of the economy. to the extent that actions taken by our trading partners strengthen their -- those economies, it will help us on the margins because it'll encrease our markets and provide an overall better economic environment. but i would say at this point that compared to what we saw during the aftermath of the crisis, nothing is happening globally on that kind of scale. there's 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 may take in the fed. i guess the point i would simply make is that this is -- there seems to be a consensus opinion around major economies around the world to take these types of stimlative actions. >> the world is in an easing

cycle, that's correct. in terms of specific actions, the u.k., for example, has been adding to its quantitative easing program and doing other things as well. the u.s. should be very clear, the united states, the federal reserve is not the only central bank using these unconventional policies as a tool to try to -- try to strengthen their economy. >> thank you, mr. chairman. >> senator? >> chairman bernanke, thank you for being here. i've been back in my office listening to most of this on television. i appreciate the fact that you have talked about fiscal policy as well as monetary policy and the overall economy. you note that your forecast is lower than it was back in january. and you said that you know forecast we'll have over 7% unemployment on through the end

of 2014. this -- i think we'll all agree, this is not the kind of economic growth we need and that americans have had in the past. if taxes are raised on individuals making over $250,000. many of whom are small business people, are job creators, what effect will that have on the projeck in your written testimony? >> i haven't done that specific -- we haven't done that specific exercise. i've been focusing on the overall size of fiscal shock that includes the exploration of all the 2001 and 2003 tax cuts as well as the enof the payroll tax cut, u.i., u.i. payments and the sequestration. you put all those things together and get a shock which about 4.5% of g.d.p.

>> but the president came out and reiterated last week his request that we simply raise taxes on $250,000 and above. i think you'll agree that in terms of the federal deficit that's a small amount that would be a tax on job creators and would make your numbers worse, wouldn't it? >> it could. if it reduced incentives and if it reduced average demand. both of those channels. but as often is the case in tax policy, you've got efficiency and growth concerns and you've also got equity concerns and all those things feed into tax decisions. >> i realize it's hard to predict with certainty and i think we've seen that over time but i would simply suggest to you that you're correct in sing that it could have an adverse

effect. let me ask you about the fiscal shock. i think we've got to do something on the spending side. i know what you're say, the economy is fragile and you don't want it to happen quite so quickly. senator kyl and senator mccain came up with a proposal to deal with sequestration. let me just ask you, it went over like a lead balloon, but let me ask you what your general impression is of the proposal. it would have raised -- it would have saved, rather, $127 billion in spending by simply doing two things. number one, freezing federal pay for federal workers until june of 2014. that would be the first thing. the second thing would have been a 5% reduction in the federal work force. not a 5% reduction in federal spending. but a 5% production in federal

work force -- reduction in federal work force. by hiring only two workers to replace every three that are leaving through attrition. now, this reduction would have taken up to 10 years to achieve. that's not the sort of thing that you view as a fiscal shock, is it? we could absorb that type of modest spending reduction to save us from the meat axe approach of sequestration at the end of this year. >> well, again, without endorsing a specific program, you know, 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. it would be something that would avoid this very, very sharp change in the government's

fiscal position, you know, on one day. on january 1, 2013. >> let me see if i can squeeze in one more thing. you know, unemployment rates. unacceptably high and you've predicted now 7% or more by the end of 2014. in january of 2002, unemployment rate, 5.7%. october of 2003, unemployment rate, 6%. by october of 2004, down to 5.5%. boy, wouldn't we love to see that kind of unemployment right now in the united states of america? down to 4.9% by august of 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 about people in this 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 a relatively acceptable unemployment rate for much of the decade, until 2008. we had real -- we had real g.d.p. growth in 2006, 2007 and 2008 isn't that correct? >> until the end of 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. >> right. thank you very much. >> senator americaly. >> i thank you, mr. tchare -- mr. chair, and thank you, chairman. on your opening comments you mentioned housing refinancing

and families that are underwater. we have eight million families whose mortgages are underwater. some can refinance through harp but it's been a pretty small number, only about 200,000 so far. in part because of the complexity with second mortgages. but if families who are underwater could refinance from those higher interest rates they're trapped in to lower interest rates, could that be a significant factor in, you know, a 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 -- reduce payments and therefore reduce defaults and foreclosures and it would 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 think you said you had emails about fixing the interest rates to make the banks look more healthy but we didn't have

emails related to collusion with derivative traders or something like that. could you help clarify what you said there? >> yes. there have been two somewhat different 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 barclays, involved this very large fine where there was clear evidence of individual traders conspiring with others to manipulate the libor

submissions in order to improve or increase their profits from short-term derivatives trades. that's a different type. i'm not -- i'm not making a judgment but just a different activity. and i was only making the point that it was -- only the former that came to the attention of the new york fed. >> and so in terms of the latter, the collaboration between the traders and those who were reporting the lieber 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. it was very stark to read some of these emails that were reported, such as high,mate. we have an unbelievably large set on monday. 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 -- it the print's a little 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 will you? >> based on what i know about it, what i've read about it, it does seem to be so, yes. >> i think the point that my colleague, senator mint, was making earlier, is 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 us 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 to do it all over again, would you also be alerting the customers, the municipalities, the folks getting mortgages based on libor and stuff, that something's not quite right 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 that this was something that was unknown. the financial press was full of stories about it. and the proposals that the new york fed made were also reported in the press. so i think that there was a good bit of knowledge at least among more sophisticated investors about this 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 i guess sorted out in due course. >> that's right. >> my colleague will bear with

me for 30 seconds, i just want to mention an issue i'll 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, j.p. morgan is doing it with the largest east coast supplier, morgan stanley is now doing it in several states with p.b.f. energy. it reminds me a little bit of the situation when, and i mean no -- at this point there's no sign of wrong doing of any kind, but it reminds me of the potential for a problem 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 quantities but we also have them involved in all kinds of trading in part because at this point regulators have exempted the spot markets, or least in the draft rules, from

the fire wall is this an issue that we should be concerned about? this substantial conflict of interest of being a supplier and also kind of, if you will, involved in the trading side? >> am i mistaken, senator, i thought that the statute exempted the spot market? as opposed to the regulation. >> let's follow up on that. >> let's follow up on that. >> let's follow up on. that because there's also a lot of letters have been submitted on the future spot markets, if you will, not futures themselves. the forward i think is the right term. >> correct. >> and i believe that that is a gray area. >> well, except in so far as the statute exempts certain activities, i assume the proprietary trading in this area would be subject to the volcker rule. >> the spot is not excluded in the statute, it does give regulators authority over that. >> we'll look at that. >> thank you. >> thank you, mr. chairman.

sir. would have thoughten i could get the frog out of my throat two hours into this hearing. thank you for your testimony. i want to make one observation and then i have a couple of questions there. have been traces of a suggestion in here today about the nature of the economic growth we need to see this in chi and it -- in this country and it really is not 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're not coupled in this recovery. and 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 deliver 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. but why we were sent here. we spent a lot of time talking

about how to avert crisis now. and you're a historian of the great depression, i know, and 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 that you came to the senate and to the congress and you very clearly said, here are the things i'm most worried about and if you don't deal with it, you risk a real disaster. one is europe, which you talked a little bit about. 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. came out with a report yesterday about some of the challenges they face. maybe i'll start there. what are the strong incentives to resolve the crisis? 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.

>> 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 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, is 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 a exchange rate in the euro which is probably weaker than they would have if they had a duetchmark and therefore they

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

substantial problems in getting to agreement. >> i want the senator from north carolina to 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 from a jilt of the recovery -- from a jillity of the recovery. doing so earlier rather than later would help reduce uncertainty and boost household and business confidence. tell white house that hundred-year history would record if we don't do this. >> in the short-term, and i mean -- >> short and medium and long. >> as i'm saying, as the c.b.o. and others have pointed out, if the fiscal cliff is allowed to happen as is now programmed into 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, it is simply not possible for deficits to continue along the path that they are currently projected. so either some solution would be -- would have to be found that could be very, very painful at some point in the future because of the size of the cuts. we were 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 kind of cuts or we would face a financial crisis where interest rates would rise as we're seeing now in europe and that would feed through to 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 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 higen. >> 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've talked a lot about libor today. but libor, as i understand it, is simply a benchmark that lenders voluntarily use to represent the cost of borrowing by large banks but there are alternative metrics and you mentioned that in your earlier tell. that financial institutions could -- testimony. that financial institutions could use as benchmarks for loan and drivetific contracts, such as commercial paper rates, the fed fund rates and the yield on u.s. treasury have all been mentioned as alternative benchmarks to libor but each has shortcomings. can you discuss some of these alternatives and do you have any that might be a preferable

benchmark? >> as you say there have been a number of different ones. one that has been considered is the so-called general collateral repo rate. the rate at which we purchase agreements that are done. it has the advantage of being a very sick market, a lot of trades take place. and trades take place at a number of different maturities which is also 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 rate and others from libor is of course that there are observable

transactions every day which means there's no ambiguity about what the rate is and there wouldn't be any of these issues raised by the lie brauer process that involve -- libor process. >> could you see the markets going to a different rate other than libor? for the multitude of -- >> i suspect they'll be seriously considered. unless of course measures are taken to restore confidence in libor. the problem is that of course we have enormous amounts of existing contracts, not just derivatives 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 typewriter.

it's not very efficient but everybody's used to it so it's hard to change. you might have the same phenomenon there. but if we are going to keep libor, it's important that it has the confidence of people in the markets. >> thank you. in section 941 of dodd-frank, requires the federal reserve board of governors, along with other federal agencies, to jointly prescribe regulating -- prescribing regulations that require securityizers to retain credit risk. the proposed rule was issued in march of 2011 and the comment period was subsequently extended. could you describe the role that the federal reserve bank of new york and its staff are playing in the drafting and completion of that rule? >> 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 have -- would be helpful in providing that kind of information. but the -- of course the responsibility for drawing up the regulations and making the final determination lies with the board of governors in washington. and although we may use some expertise from new york, it's a board decision. >> thank you. last question. when discussing the nonstandard monetary policy tools that the fomc is currently implementing, you have consistently said that 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 fomc announced that it was taking steps to extend the maturity of its

treasury portfolio rather than to expand its size or change its composition. can you discuss why the fomc would choose to extend the maturity of the treasury's portfolio and not require 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're 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, increasing our stock of longer term securities, putting downward pressure on longer term interest rates and pushing, by taking duration risk out of the market, pushing investors into related assets like corporate bonds and lowering the yields there as well. so 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 think we can get a better outcome in the u.s. economy. >> in the fomc'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? it's my understanding that the f.o. -- fomc doesn't project unemployment to fall much below the current levels before 2013. >> well, we'd want to see unemployment going down. we don't want to see it stuck, 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 earlier 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. >> that's what 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 recent actions. thank you. this hear something adjourned. >> thank you. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012]

>> reaction to the federal reserve chairman's comments today are online at c-span's twitter page. join the conversation and send your thoughts about ben bernanke's testimony at #fed chair. mr. bernanke testified today before the senate committee. tomorrow he goes before the house financial service committees to give his report on the economy. c-span 3 will have live coverage at 10:00 a.m. eastern. the house today will consider five bills including authorization for a state department programs over the next year. members will gavel in at about -- in about 15 minutes and about 4:40 eastern. we'll have live coverage. and later in the week, bills to

require the president to detail possible sequester cuts and defense department spending for next budget year. live house coverage here on c-span. this morning "washington journal" looked into u.s. manufacturing and whether made in the u.s.a. actually translates into jobs in the u.s. we'll show you as much of this as we can until the house gavels in. host: we're also joined by brian. he serves as their trade policy senior analyst. gentlemen, to both of you, thanks for coming on. the larger issue at stake is what's made in the u.s.a. how would you define that these days? guest: to answer your question of what's made in the u.s., almost everything. if you look at imports, well into the size of our economy, we

make about 86%, 84%, we import about 16% relative to the size of our economy. you compare that to china or mexico, most countries import a whole lot more than we do here in the united states. so, it's a situation where many products are made from parts all over the world. so it's not quite clear to many people i think how much we really do still make here in the united states. host: according to the heritage foundation, you're finding 16% of imports coming from the united states, when it comes to china, 26%. the european union at 39% and the world average overall at 28%. robert scott, the topic became big news when it came to the idea of the olympic uniforms. it goes to an underlying issue. would you agree with that assessment? guest: i think we have to ask what kind of goods are we importing? ed imports effect mostly the primarily sector and there they have a bigger footprint.

, so i think it is a much more significant issue, especially with apparel. here is the team u.s.a. and yet they're wearing uniforms that were made in china. and i think that was a real missed opportunity to promote made in the u.s.a. product which is i think we're perhaps the only country in the world that does not do that. host: is there a purely made in the u.s.a. product even these days, aside from imports and things like that? guest: yes, there are. i think they were looking at the blazers they were wearing and the -- you can get blazers and suits that are made here in the united states. i don't know any particular manufactures but there are u.s.-made brands. host: as far as what's made in the u.s. and what's purely done here, where's our strength and our liabilities when it comes to the topic? guest: i think the people in china should be outraged because

they're wearing uniforms with a u.s. capitalist corporate logo right over the top from nike. they're sending their money to a wall street company out of portland, oregon, and can you imagine if the tables were reversed? china's suing the uniforms together, ralph lauren, the company employees twice as many people in the united states as it does in other countries. i think the real question is, what kind of jobs do we want? do we want our kids to grow up to the to be the next ralph lauren, to be the next phil knight, or do we want them suing eight hours a day think? don't think those are the kinds of jobs we want to create in the united states. host: what will create the kind of jobs you were talking about previously? guest: we believe more economic freedom is by far the best way to encourage more job growth in the united states. if you look at a spectrum, over here you have countries that aren't very free and here you have countries that are free, the new zealands, the hong kongs, the singapores, i'm talking about economic freedom, that's where people are most

prosperous. where you have less economic freedom and more centralized control, whether it's in washington, d.c., or wherever the cap toll happens to be. people in those countries happen to be worse off. we need more freedom, not more centralized government crol. host: the idea of freedom when it comes to make things in the united states? guest: i think it's a great idea but in principle -- in practice if you look at the countries that have done well, international trade, they emphasize planning and carefully targeted investments in order to build up their productive capacity. for example, germany, germany invests heavily in training and work force development. they have managed their industrial structure and right now despite competition from china, germany has a large and growing trade surplus with the world as a whole. so, they're a country very similar to us, in fact their

wages are much higher. they have much more intrusive government regulations in germany, certainly than we have here be and yet they're much more successful. host: our two guests are going to talk about the ideas of what's made in the u.s.a. you can join the conversation by asking them questions or sending us a tweet or email. if you want to call us it's 202- 37-0001 for democrats. 202--- a tweet can be sent at cspanwj. when it looks to the topic of trade deficits, this is from the census bureau. china tops that list. when it comes to current deficits. that's joined by mexico, japan, germany and canada. what do those figures and those ranksings mean for things that are made in the u.s.? if they're imported, especially if they're imported? guest: well, i'd look at imports by industry and the import share of total consumption in the u.s.

ranges as high as 90% in text aisles and apparel and toys and foot wear and leather goods. we are almost entirely import consumers in those kinds of sectors. even in sectors like automobiles the figure is up to over 40%. so, this is the core of the manufacturing sector and if we want to rebuild manufacturing we're going to have to invest again in order to recover those kinds of jobs. guest: those figures are a little bit misleading with respect to china. you look at something like an ipod which says, made in china. it's stuck together in china. all the value comes from other countries. people in apple who designed it and market it and the retailers in the united states who sell it. we capture most of the value from that made in china product. and more fundamentally i think a big problem is the fact that the federal government spends so much and borrows so much money, borrows over 400 -- $4 lun billion or to put it another way, sold over $400 billion in

treasury bonds last year, that's money that people in other countries can't use it spend on u.s. exports because they're using it to finance government spending. that's the core problem that needs to be addressed. host: danny up for our guest. clyde: hello. caller: hello. what i want to say is what is made in the u.s.a.? well, at new year's i made the resolution, i'm 82 years old, retired engineer, and i made a resolution to not, unless entirely needed, not buy anything that wasn't made in the u.s.a. and i found everything, if you look. host: how much time and investment did it take you, danny? guest: that's fantastic. i love the idea that you were able to do that. but that had to be your choice. it shouldn't be the choice of somebody in washington, d.c. telling you how to spend your dollars.

this ridiculous wool sport coat i'm wear something made in the u.s.a. the reason it's made in the u.s.a. largely is because we have a 10% tariff on imported wool coats from other countries. so we make it here in the united states. host: you'd pay more for? ? guest: i pay more, somebody else pockets the money. people should have the freedom and most americans given the choice would choose to do business with their friends and neighbors. but i can afford maybe 10% more for my suit but what if you're talking about a single mother who is buying new shoes for her kids with a 0% tariff, t-shirts with a 20% tariff. those are the people that are hurt the worst by our trade policy. guest: i think it's laudable that danny is trying to buy american. i think we need more buy american kind of policies. but in fact our own government is moving in the opposite direction. negotiations are now taking place over the next major global free credit agreement, the so-called transpacific partnership, there are measures

that are going to outlaw any kind of labeling to identify country of origin. where things are made. and what could be more straightforward than giving people information about the goods that they're buying and if they're trying to outlaw that? host: what's the rationale behind that? guest: they don't want to let consumers discriminate between products made here or in mexico or in china. but in fact consumers ought to have that choice. and i think that's a fundamental rationale. we ought to re-examine. and i think another major piece of it and related is what's called the government procurement agreement which says that all government contracts have to be available for bid from providers from any country. we are the only country that honors that kind of contract and i think we ought to in fact re-examine that commitment and use our public investments to rebuild our own industries. guest: i half agree with that. i think we should encourage other countries to be open to u.s. products so that u.s.

taxpayers can get the best products at the best price. people in other countries have the opportunity to buy u.s., whether it's products to build their frath infrastructure and their rides -- infrastructure and their roads. host: part of this conversation will be as far as the presidential campaign is concerned about the idea of who sends jobs overseas. both the candidates have made claims about this and about the other. this is president obama. this was at a campaign event that took place in cincinnati on monday. he specifically addresses governor romney's tax proposals. let's hear it and then we'll get your thoughts on it. >> by eliminating taxes on corporations' foreign income, governor romney's plan would encourage companies to shift more of their operations to foreign tax havens, creating 800,000 jobs in those other countries. this shouldn't be a surprise because governor romney's experience has been investing in what were called pioneers of the

business of outsourcing. now he wants to give more tax breaks to companies that are shipping jobs overseas. so i want everybody to understand, ohio, i've got a different theory. we don't need a president who plans to ship more jobs overseas. we want to give more tax breaks to companies that are shipping jobs overseas. i want to give tax breaks to companies that are investing right here in ohio. that are investing in cincinnati. that are investing in hamilton county. i want to give incentives to companies that are investing in you, the american people, to put american jobs, making american jobs, that we're selling around the world, free progrets made in america. host: that's president obama from cincinnati. there's a story that talks about the topic in "the wall street journal" and it says that mr. romney, this is "the wall street journal," has endorsed a largely

territorial approach that would generate a lot of u.s.-based multinationals to longer paid u.s. taxes on overseas income. robert scott, you can comment on that. guest: i think that what the president is trying to do is to encourage firms to insource, to move investments back into the united states, to try to use tax policy tone courage them to do that. i think that's a wise move. right now what our tax policy does is it subsidizes companies that move production offshore and the proposals that candidate romney has made will increase the incentives to do that. so, i'm very concerned about these kinds of territorial tax policies and what they will do to offshore. the past decade alone, it's cut unemployment in the united states while they've expanded, added millions of jobs to their work force overseas. that has led to a loss of american jobs. guest: if you look at the big puckture of outsourcing, of insourcing, whatever you want to call it. in 2010, for every $1 that americans invested in other

countries, people in other countries invested $2 in the united states. if you look at the total stock of foreign investment in the united states, there's a net $4 trillion in foreign investment here in the united states, creating jobs. that's a good thing. again, i go back to the main principle which is we need to have more freedom, country which is are open to foreign investment, whether it's the united states or elsewhere, are the ones that are going to thrive. the ones that try to control things from the government, from the guys across the street, they're the ones who are going to suffer. host: so mr. romney's territorial approach as far as tax policy? guest: i think in general we don't want to subsidize other countries for moving to other countries. i'd look at more like agencies like opec, the overseas private investment corporation which is a good agency which guarantees investments if you go to another country and your property -- there's political unrest, the taxpayers will bail you out. those are the kinds of things we need to look at.

clyde: hi -- caller: hi. thank you for taking my call. i don't understand people when they start grouch being china taking our jobs and stuff because we would do it and plus who's doing it? it's the rich people that own these companies that's taking the jobs over. so i don't know why they blame obama because it's the rich doing it. so complain with them, not him. and these republicans that support these companies and take money from them to hurt us around here, i just don't understand it. i was a republican but i'm going over to democrat. guest: i think that's a common concern. look who owns ralph lauren and nike and look at who owns most of the fortune 500 companies. there are a lot of rich people. but the main owners are pension funds for teachers and firefighters and 401-k's and average americans who have mutual funds and investments.

that's the money they need to retire on. so this rhetoric of it's only good for the rich, we need to -- president obama's statement that if you had a successful company you didn't build it, but the government is responsible for it, i think that's just outrageous. host: winchester, ohio, good morning. independent line. caller: good morning. thank you for taking my call. i am a first-time caller. hello? host: go ahead, you're on. caller: yes. i think the republican and the democrat leaders in this country -- [inaudible] american people. they really hurt america. and what the american people want is a free, fair trade and balanced trade. and i am listening to all of our

leaders talking, especially mr. reid, he said, burn all the uniform for the olympians. and it just amused me. most of these people, they are speaking, they amuse me. go ahead and burn your ipad, go ahead and burn your tv. go ahead and burn your clothes. everything. you know, we should benefit from trade. but it has to be free, fair and balanced for the american people. guest: i agree with you. host: let mr. scott respond. guest: i think the caller makes three good points there. the trade ought to be free. it ought to be fair. and it ought to be balanced. and right now we have trade that's unrestricted but it's not fair and it's not balanced. and that's the problem. we have a massive trade deficit

of approximately $700 billion that displaces as many as five million jobs in the united states last year. and trade isn't fair. countries like china are manipulating their currency and that makes it artificially cheap and acts like a subsidy, everything they send to us. and tax on all of our exports to china and the rest of the world. and they engage in subsidies directly to their companies producing goods for exports. so that's not fair trade and we need step in and correct it. host: do you correct it? guest: we need to get much tougher with currency manipulation. we need to declare that china is a currency manipulater. there's also a bill that's been sitting in the house for six months now that would allow companies to ask for duties to be assessed against imports from china that are subsidized by manipulating currency. i think we also need to invest much more in fair trade

enforcement in the united states. we eyesed to depend on companies to do that. they're all invested now in china. they don't want to stop subsidies they're getting from the chinese government so we need to invest public money in enforcement of the fair trade laws and recognize that what's good for the united states, workers and the united states as a country, is sometimes different from what multinational countries like apple or general motors want. guest: i agree with the caller and robert that fair trade is a good thing. my definition of fair trade is you've got something you want to sell and i want to buy it, we agree on a price and that's a fair trade or vice versa. what's not fair is when you have people in washington, d.c., listening to lobbyists and by the way there's a reason that the richest counties in the country are surrounding washington, d.c., it's lobbyists coming to try and get special handouts for their companies. wlts high tariffs, whether it's subsidies. and that to me sun fair trade. fair trade is giving the people

the freedom to spend their money, to invest their money, to save their money without the government getting in the way. caller: i grew up in dayton, ohio, although i hadn't lived here in 40 years and i'm back here taking care of aging parents but when i was growing up in the 1950's and 1960's, i watched national cash register move south and other manufacturing in the dayton region move south first for cheaper labor. and then many of these manufacturing operations moved, clearly, we all know, overseas. and this happened around the country. but particularly in the rustbelt zone. so, how do both parties basically over decades sold the american worker and unions? people making fair wages, down the pike? they've profitted handsomely off of it. the ralph laurens and others at the top of the chain. so i wanted to ask about that. about both parties with trade

agreements, as an earlier call said obama has voted -- there hasn't been a trade agreement thank he hasn't liked. as well as lots of republicans. i also wanted to ask, what percentage, so, again, both parties in regard to what they call free trade, free trade for the ralph laurens of the world, could you talk about what percentage of a product now has to be, like, say you have a product and you guys both said, you know, parts are from all over the world. so what percentage of a product has to be made in the u.s. to then be labeled from the u.s.a. and could you also address like china, i think they charge 20% tariff or tax for u.s. products or other products that are brought into their country and we charge, the u.s. charges china 2%. host: we'll leave it there only because you put a lot out there. one of the point, how much of a product is made from other countries, there's a chart we have that was from a boeing 787

dreamliner but you have parts from the u.s.a., japan, the united kingdom and other places going into one specific product. that was more to her point. robert scott, what did you get from that? guest: one of the problems that boeing found when they decided to outsource production of all those parts to countries all over the world, to china, to january ja pan, to korea, to europe, is that when they went to put that plane together in seement, what they found is they had a bunch of parts laying on the floor that didn't fit together. so they were years over deadline in delivering that plane because of this grand outsourcing strategy. so i think companies are discovering that there's real hidden cost of this globalized production chain that we've been hearing about. and the real advantage is investing here in the united states. host: mr. riley. guest: you go to south carolina, there's a big b.m.w. factory. you go to alabama, they just announced that airbus is going to be hiring u.s. workers to help. there are toyotas, hyundais,

built in the united states because we have some of the best workers in the world, some of the most productive workers in the world. we need to focus on training and educating our work force so that we can continue to compete and if you've got problems in states like ohio or michigan, i think you really would ber off looking to your governors and legislators and looking at what kind of state policies you have that has caused these companies to move to texas or south carolina or other states. host: with those automakers that you define, is that clearly a made in the u.s.a. product? guest: it's clearly made in the u.s.a. product but it's made with parts from all over the world. how do you decide what's made in the united states? there are different rules for different types of products. how do you account for the profits that the retailers make? in the united states, selling an ipad, how do you account for the engineers and the final value in it can be very challenging, it's not as simple as it used to be maybe 20 or 30 years ago. guest: i think there's a simple

answer to that. cars that are made here, for example, that are designed by u.s. companies tend to have of much higher levels of domestic content, as much as 60%, 70% is made in the united states. if you look at some of the newer imports from korea, the hyundais and i canas, they may have as little as 10% or 15% u.s. content. you may have a made in the u.s.a. label but it means a different thing from a car made by a u.s. manufacturer. guest: i think that u.s.-made cars are a lot better today because of competition from toyota and hyundai and other companies. it's something that is good not just for consumers but it forces the u.s. to be more competitive. host: what is made in the u.s., if you're just joining us. our two guests, robert scott of the economic policy institute, and then we're joined by bryan riley of the heritage foundation , 15, 20 more minutes on this topic if you want to give us a call.

thank you for waiting. this is keith on our republican line. caller: good morning, gentlemen. thanks for eaning other questions and give me a couple of minutes. to answer that lady's question, i'm not an expert, but to my understanding, what they dish heard this like 20 years ago, it's assembled in america, the difference between made in america and assembled in america, and then like harley-davidson, if you say this to a biker he's going to get mat ahmadinejad at you, only 75% of the materials have to be made in america to be called made in america. i don't know if them rules have changed since then. like you said, it's complicated. but i believe in my opinion, please, i've been talking about this subject on c-span for over a year. cnbc has been reporting that there's three million skilled jobs available for the last two years, factory jobs and skilled labor, like welding and stuff. i'm not blaming anybody, back in the 1980's i believe our biggest

problem is raw materials, not accessing raw materials and our labor force has been trained to go to college and the biggest diploma is liberal arts and stuff which are very smart people but they don't do physical things. host: what's the question? caller: my question is how can we bring that back? china, if you look at china, where they set up factories, it's next to the raw materials, and their assembly line, there's three different buildings are parts are made and assembled at the end. they have a very strategic way of manufacturing. how come we get the education back to where people can do physical jobs and get our raw materials here in america? because it's really not the taxes, they pass that along in the cost of the product. host: thank you. this is off of twitter, victor says, and it goes to the caller's point, that the dirty little secret is that these company does want to come back here. the problem is on what terms and

at what can cost? robert scott. guest: exactly. one of the reasons they have so many shiny new factories in china is because all the subsidies they get from the chinese government. china, for example, recently announced they were going to invest $600 billion in clean energy technology and other kinds of green technology over the next decade. we simply can't touch that level of public investment. and that's an issue we have to address as a nation. but china also competes in other ways that are unfair. as i said, the biggest single thing that they do is to keep their currency undervalued by 25% to 30%, it's like a subsidy of that much on the exports and the tax of 25% to 30% on u.s. exports to china and the rest of the world. they also subsidize and dump their products here in this country. that's why multinationals are willing to go there and build factories that -- to go from raw materials to the finished product. but in fact some of the biggest exports from the united states to china are raw materials. our top export last year, two exports were scrap and steel and

scrap paper. and beyond that things like raw plastics and hard coal. so they're taking our commodities and turning them into finished goods. guest: i don't think we want to try to outsubsidize china. if you read about solyndra i understand why i suggest. that i agree with the call that are raw materials are so important, whether it's trying to find ways to free up resources here in the united states. i think we have a lot of untapped resources. or to look at importing. most of what we import is -- they're not finished goods from other countries. most of them are raw materials, are inputs. over half of what we import we use to make something else. so that's one reason that removing barriers to trade here in the united states and other countries is something that's going to benefit people here in the united states. i want to say one more thing since the caller was from florida. a perfect example. we pay 40% more for sugar in the united states than people in other countries do because your

florida sugar lobbyists are so powerful. and so we've got candy companies that have moved to can dap -- moved to canada and elsewhere. host: bureau of labor statistics and others, this chart shows from 1981 to 2011 about the types of employment trends that are going on. 81% jump, you look at these figures, in the service industry. and a minus 25% growth in the goods producing industries. my question is, where are we as far as when it comes to made in the u.s.a., we talk about goods, what about services? where are we with that? guest: the service sector is growing. there's a big difference in the type of services jobs we might be talking about. i grew up in kansas and there was a sign outside of town that said, every kansas farmer feeds 45 people and the next year it would say feeds 60 people and eventually it got up to over 100 people and they got tired of repainting over the time. that's because farmers got more and more productive. our manufacturing workers are more productive, can produce

more with less inputs and we have more people going into the service industry. that can be a good thing. i'd rather have more doctors and nurses and teachers than people running those sewing merchandizes. however manufacture something very important. it's the type of services jobs or the type of manufacturing jobs that i think we need to focus on. and by freeing up resources that have more doctors and architects and nurses, that's something we all should encourage. host: mr. scott. guest: what's happened in the last two decades is we've developed unbalanced economy. we've had tremendous groth in imports and our trade deficit and that has cost us, as i said, about five million to 5 1/2 million manufacturing jobs. what happened is those people were pushed into the services sector. so we got imbalance growth. we got too low growth to merchandize manufacturing, too much in services. where was that growth? at the margin there was greatest demand for workers in very low paid jobs like retail trade, wal-mart and restaurants, in home health care, these are not

growth industries of the future. they're minimum wage, dead-end jobs. they're not going to help people grow. host: cancun, mexico. this is chris on our independent line. thanks for calling. caller: you know the whole problem with all this outsourcing is, the companies that make billions in profits without having to hire any americans to do the work. you have companies like sprint that have outsourced over 50,000 customer service jobs to the philippines where they pay people $2 an hour. the people in the philippines are not taking out $100 a month for sprint service. americans are taking out $100 a month for sprint service. so here's sprint that's making all their wealth off of americans without having to hire any americans to do the work. and so this is what's creating this economic downfall. companies that are outsourcing them are making all their wealth off of those of us who are in america, who do have american

jobs, without having to hire any americans to do the work. host: mr. scott, americans doing the work. guest: this is -- i think the caller hits the nail right on the head. the problem is it's a multinational company that's making these decisions and i've looked at the activities of multinationals over the last decade, 1999 to 2009. in fact, 1999, u.s. multinationals used to export more than they imported. they created jobs here in the united states. but over the last decade they shifted into outsourcing mode, they've shipped factory as i broad. we lost some 62,000 manufacturing facilities in the last decade. and as i said, millions and millions of manufacturing jobs. and moved those jobs to other countries. and it has generated enormous profits for multinational companies. they're buying cheap inputs and putting them into products made in america and that's generating huge profits. it's contributed to the rise in the gap between the haves and

the have-nots which is one of the main issues that are driving the overall debate in this political campaign this year. is this huge growth in inequality. so it's directly regget related to offshoring. host: we cited the auto industry are there other country ises where you have foreign entities in the united states but employeing american workers? things of note. guest: there are over five million people in the united states that work for subsidiaries of foreign companies. and it's not just manufacturing. it's across the board. those jobs tend to pay better than the average u.s. wage. to me the number that jumps out is that five million jobs in the united states because somebody in another country wanted to invest here and create jobs in the united states. it doesn't go back to the government trying to micromanage and control what private individual can invest where. they're giving the people the freedom to operate wherever they want to, if we do that, we're going to have that -- that five million is going to become 10

million and 20 million in the future. host: if you want to add something, mr. scott? guest: i did. u.s. and foreign multinationals, i said earlier, foreign -- u.s. multinationals are responsible for about a quarter of our trade deficit overall. foreign multinationals invest here to sell products in the united states that they make at home. and in fact they are responsible for over half of our trade deficit in 2009. they may employ five million people here, they employ many more at home, making products to ship to this market. so, multinational trade is lose-lose for american workers. and that's i think the bottom line. host: here is jonsbrow, arkansas. leon our independent line. caller: i think one of our main problems that we have had since 1913 was the creation of the federal reserve. the private banks. and ever since then you can, you know, ron paul's been talking know, ron paul's been talking about this for years,