i hate to say this, richard nixon is the father of minority business development. inside his minority business -- the hill established the small business administration. he used the >> lives sunday, august 5 at noon eastern, your questions, calls and e-mails for the author of "surviving and thriving." >> federal reserve chairman ben bernanke says the u.s. may go back into recession if congress does not deal with automatic spending cuts and tax rate changes. schedule to go into effect at the end of the year.

he is on capitol hill this week for his semiannual testimony before congress. he was before the senate banking committee for 2.5 hours.

>> i called the hearing to order. today we welcome chairman bernanke back to the committee to deliver the semiannual monetary policy report. the financial crisis still weighs heavily on the financial system today. while on the longest depression, and the economy has grown steadily. we have come a long way. there is still a lot of work left to be done to get our economy back to the point where this is readily available. while the economy is not going as fast as we would like, it is

important to recognize that it would not be growing at all if congress and the federal reserve had not taken action for financial stability. the wall street reform act created a framework for a financial system that works in the consumers' interest and never again allows a bank bailout. it ordered barclays to pay a $200 million penalty for its libor manipulation. we need tougher rules in place and strong adequately funded regulatory rules to enforce the rules. some say the cost is too high. those same critics say to under fund this and ignore the reality were caused by

ineffective regulations. that is why we created the wall street reform act and why we are sitting today before the crisis. any cost that wall street bears from playing by the rules pales to the trillions of dollars lost. as they recognize the second anniversary of the wall street reform act, i look forward to hearing from chairman bernanke on how these efforts have further stabilize the financial system.

the policy makers can make the financial system more stable. the eurozone economy remains fragile. i would like to hear it on the progress that is being made in the eurozone and how policy makers can protect the economy from the potential fallout if the situation were to worsen. while the fed's role is important, we need to the knowledge that they cannot solve all of the economy's problems. the housing market has been holding back the economy for too long. i asked this committee to support efforts to give responsible homeowners their

response ability to refinance their mortgages. this legislation is fair because it helps homeowners who have been playing by the rules and eliminate barriers and is a cost-effective way to jump- start the economy. it keeps more workers' paychecks in the pocket. congress also needs to reach a sensible resolution to the fiscal cliff problem at the end of the year. i support the president's plan to extend tax cuts to the middle-class. today's hearing underlines the importance of effective oversight which has been a leading priority of mine as chairman of the committee. in past 18 months, we have conducted frequent hearings. in the coming weeks, we will

conduct oversight hearings with secretary geithner in his role as the head of the oversight council and with the director of the consumer financial bureau. i have welcomed the steps chairman bernanke has taken to make this more transparent and release communications. i also believe the wall street reform act enhancements to the fed transparency and oversight has had a positive in sight. i now turn to senator crapo.

>> the u.s. economy continues to face significant challenges with the eurozone, a tax cliff, and our broader fiscal crisis which includes the need to address the impending solvency of the entitlement programs. a disappointing 8000 jobs were added in june, holding unemployment steady at 8.2%. he warned congress what would happen if it did not address the fiscal cliff, knowing that this would have a significant impact on the recovery. according to cbo, if all the tax and spending measures under current law were to occur together, the economy would grow at just 0.5% compared to 4.4% expectation absent to these investors. one of the largest private

owners of u.s. debt said we have until 2016 to contain our borrowing before bond investors dried up interest rates. others suggest the timetable could be much sooner. the lack of economic growth has some to call for further expansion of the $2.90 trillion balance sheet through a third round of quantitative easing. there are a lot of questions about how effective the first two rounds of quantitative easing has been, what their long-term effects will be, and what additional route could be. i am interested in learning what could be done. following the june fomc meeting, the fed would continue the extension program. i am interested in learning what had been the result so far and what of the expectations are going forward.

another drag are the hundreds of dodd/frank rules that will increase capital formation in the long run and in the short term add to the climate of uncertainty and complexity. the concern i hear most is that regulators do not understand the cumulative affect of the hundreds of proposed rules and that there is a lack of coordination. that is why it is important that the regulators perform cost-benefit analysis so that we can understand how these rules will affect the economy as a whole and impact our global competitiveness. we need to have rules that are strong enough to protect our economy that can adapt to market conditions to promote credit availability and spur job growth.

but many of my colleagues, i am learning about issues related to the setting of the london interbank offer for libor which serves as a big mark for trillions of dollars of loans and derivatives including the cost of many mortgages in united states. barclays agreed to pay a $450 million fine to settle manipulation charges. investigations that banks manipulated the libor process are continuing. questions are being asked whether regulators took sufficient action. i look forward to hearing from chairman bernanke on all of these issues. >> thank you. to preserve time for questions, opening statements will be limited to senator crapo. the record will be open for the next seven days.

with that, i would like to welcome chairman bernanke. he is currently serving a second term as chairman of the board of governors of the federal reserve system. his first term began under president bush in 2006. before that, he was chairman of the council of economic advisers and served as a member of the board of governors of the federal reserve system. please begin your testimony. >> thank you. >> i'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 open 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 impacts 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 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 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 structurally 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 treasury, 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 following up 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 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 choice at this point. and should action be needed to promote 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 clarify 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 deficit 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 dais 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 response to potential deflation, i think further actions actually take the 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? downsideit's a major 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 reasonably 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. mys interesting to hear 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 is a real cost, and over the last four years, probably about $1 trillion, so people putting aside dollars are losing the the value on their dollar, so there is a cost to that stimulus effect. also, on quantitative easing, which you are clearly considering, the federal reserve bank of new york estimates that 50% of the value of s&p over the last decade is related to fed action and the buildup around fed action of quantitative easing. my concern now is that what we are seeing is not an increase in the value of stocks, but a projection on the loss of value in our dollar.

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

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

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

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

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

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

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

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

organization and it is constructed for 10 different currencies. it has to be international. there are two approaches. one would be to fix libor, make changes to it, increased visibility, reduce the ability of individual banks or individuals to defect libor and increase the reporting process. that is one strategy. the other strategy would be going from what is essentially a reported rate to an observable market rate as the index and there are a number of possible candidates that might ultimately replace libor. as you point out, libor is deeply ingrained in many contracts so it will not be simple to make that change but i

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

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

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

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

the fed is in the process of will making with regard to "predominantly engaged in financial activities" under dodd-frank. the rule that has been published and the fed is now taking comments on seems to absolutely ignore a specific criteria that we in congress placed in dodd-frank in section 102-a6. it is very specific, using an 85% test, and it seems to me the rule the fed is in the process of adopting ignores that specific metric. how can the fed adopted a rule that ignores specific statutory language. >> we would not want to do that, and i will check on that

question for you. >> if you could check on that, again, it is 102-a6, and i believe the fed ignores a specific metro, which i would call the 85% rule. >> thank you. >> thank you very much. finally. capital standards for the largest banks, as i have read your comments in the past, it seems you support somewhat larger capital requirements for mega banks, but you seem to think where we are headed, 9.5% under bezel 3, is roughly the corporate parent is that a fair assessment? >> there is an international -- roughly the estimate. is that a fair assessment? >> there is an international

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

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

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

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

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

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

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

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

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

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

i do not have a specific recommendation other than to think about not just individual policies but the collective impact if they all happen at the same time. >> but me talk about the mitigation part of this -- let me talk about the mitigation part of this. some of us on this banking committee have been meeting for many, many months, and for some members over a year, talking about an approach. i would guess the best way to describe back is the outline for the approach is the simpson- bowles plan, which came out one year ago. thinking about that plan, would you be comfortable in testifying today that it would at least be an acceptable alternative for what we're facing between now and end of the year if congress could adopt that approach?

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

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

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

and we all have no authority to make sure firm rules are in place, they are followed and that actors are published. unfortunately, as we all know, since 2008 we've seen too many examples of wall street breaking rules, laws and common standards of ethical behavior. i follow up on some issues that senator visitor talked about. i want to run through for the sake of repetition to recognize what these are -- investment losses, sec enforcement actions, municipalities selling credit derivatives, five of the nation's servicers found to a forged documents, the nation's largest bank in january halted consumer debt collection lawsuits over concerns on poorly maintained and inaccurate paperwork, the largest bank has lost $5.8

billion on large, complex derivatives trades as it appears there in place in this reported losses. 16 banks are suspected of manipulating libor. in june, one publication reported on a criminal rigging trial so that banks could under-pay for municipal bonds. two weeks ago, former employers of the largest bank in the nation told "the new york times" the company told them to steer clients toward their own funds because they were more profitable for the bank even though they have lower returns and other funds. this goes on and on, not to mention wrongdoing institutions over the -- over which the fed has no jurisdiction -- mf

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

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

what dodd-frank does is provide a blueprint for attacking too big to fail, which includes the liquidation of authority, which provides a way to do that sensibly. i think it is important to attack too big to fail, and we are addressing that through capital, liquidation authorities, living wills, and i think if banks are exposed to the discipline of the market, we will see some breakups. >> living wills seemed to take effect in the non-financial world close to somebody's death bed, and i do not think these living wills will address the issue, nor does this other

regulations seem to address the issues of this litany of problems that i mentioned. in the end, if the banks can be regulated, debt includes the occ, and i they're not up to the job, or complicity in wall street's activities. i beg of you to restore confidence, because east simply have not yet. >> i agree. >> senator toomey. >> thank you chairman. thank you for being here, chairman bernanke. you have the knowledge there is a range of views on the efficacy of the policies you have been pursuing, and you would agree there is a range of issues on the risks of the policies, and i am sympathetic to the effected we have giving

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

financial system. i am concerned about the direct impact to american citizens, including my constituents. i think about the city of bethlehem where they were receiving floating rates based on libor and i wonder if they were receiving payments that were lower than what they should have gone. you mentioned in your testimony or perhaps in answer to a question that fed officials became aware of barclays manipulating this index in 2008, and "the wall street journal" has an editorial that recounts an e-mail exchange, where perhaps it was a telephone exchange, between a barclays and play and a fed official. when did you become aware that there was a lack of integrity and the reporting of libor rates? >> on your first point, there is not as much disagreement as you imply.

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

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

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

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

of quantitative easing, and could you expand on your current maturity program? >> certainly. briefly, we have taken a wide range of extraordinary actions to support the economy. in june, we took the step of continuing the maturities extension program, which has many features of quantitative easing in that involves -- in that it involves support to the economy, and we made clear we are prepared to take further actions. we are looking to see if we get sustainable improvements in labor markets. if we are not, we will have to seriously consider taking additional action. the reason there is any question is really, ken, the range of views about at -- again, the range of views about efficacy and cost associated

with these measures, but that said, as i said in june, we are prepared to take further action and we will evaluate our options as we go forward. >> i appreciate that, however given that the unemployment has remained over 8% for 41 months, long enough for it to be clear, now was the time to be more aggressive, i believe, in your approach to unemployment, and i think we agree the consequences of long-term unemployment are too great for this to go on very much longer. on libor, mr. bernanke, when chief executive of a national bank said "libor is the banking industry's tobacco moment," citing the settlement cost american tobacco companies over two hundred $20 billion. could you foresee a scenario

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

implications on the rates that people paid. it is obviously very serious, but i think it is too early to judge what the cost will be. >> yes. recent press reports indicate that the scandal could cost the banking industry millions if not trillions of dollars. as you know, there is no appetite here or anywhere else to do another bailout for the banks given the increasing amount of money that is at stake. i would urge you to work closely with the justice department when the time comes, and i think you would agree that you will. >> if we could contribute to a global settlement, as we did in the case of the servicers, we would, of course. >> thank you. thank you mr. chairman. >> senator moran. >> thank you. chairman bernanke, thank you for your testimony. in the advance of the financial crisis in 2008, many observers said it came out of the blue,

as a surprise. what is it a you are worried about that we ought to pay attention to that has the potential of being the next crisis to the economy of the united states? i often read about credit card debt, student loan debt. what are the things you are most worried about, and what are we doing to mediate the problem? >> well, i think the items, and i mentioned these in my testimony, would first be the european sovereign and banking situation, which remains unresolved and there is financial stress and she did with that and some distance before they get to 8 -- associated with that, and there is some distance before they get to a solution. that poses an ongoing drag on

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

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

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

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

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

shape on that, but any improvement that would make it easier for small businesses to get the necessary capital, to meet the regulatory and other requirements and to avoid early tax burdens -- all of those things are obviously approaches that could help these companies start up and provide employment. >> mr. chairman, thank you. one would think we would have significant startups particularly in light of unemployment, which creates the opportunity for the necessity for people to create business on their own thank you. >> senator warner -- on their own. thank you. >> senator warner. >> thank you. the end is near. i would argue that we do have legislation to address start activity, as well as the addition of talent. andmmend senator moran's

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

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

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

around the world. one of the things we have talked about is additional actions to stimulate the economy, and for those that question taken these actions, if we look at the european central bank's recent actions, the bank of england, the chinese financial institutions, what effect of their stimulus activities or loosening activities does that have on the world economy and in terms of your decision making? >> well, there has been a global slowdown. a lot of it emanates from europe, which through export demand is effecting asia and other parts of the world -- the united states as well. there has been some slowing in asia as well. chinese gdp statistics said the weaker this year than previous years. part of that was intentional as they saw to cool the housing

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

cycle, that is correct, and in terms of specific actions, the u.k., for example, has added to its quantitative easing program and has been doing other things as well. the united states federal reserve is not the only central bank that has been using these policies as a tool to strengthen their economy. >> thank you, mr. chairman. >> senator warner. >> thank you very much, chairman bernanke. thank you for being here. i have been listening to most of this in my office on television. i appreciate that you have talked about this policy, as well as monetary policy, and the overall economy. you know that that -- your forecast is lower than it was back in january. you say that you now forecast that we will have more than 7%

unemployment on up through the end of 2014. we all agree that this is not the kind of economic growth that 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, job creators, what effect will that have on the projection that you have in your written testimony? >> i have not -- we have not done that specific exercise. i have been focusing on the overall fiscal shock -- that includes the expiration of all of the 2001-2003 tax cuts, as well as the end of the payroll tax cuts, payments, and the

sequestration. put all those things together -- you get a shock that is 4.5% of g.d.p.. >> the president reiterated last week his request that we simply raise taxes on $250,000 and above -- i think you will agree that, in terms of the federal deficit, that is a relatively small amount. that would be a job on job creators and would make a number is worse, would it not? >> it could. if it reduced incentives and reduce aggregate demand, both of those channels -- but as is often the case in tax policy, to have efficiency and growth concerns, and also equity concerns. all of this things feed into tax decisions. >> i understand it is hard to predict certainty. we have seen that over time. i would simply suggest to you that you are correct in saying

that it could have an adverse effect. let me ask you about the fiscal shock. we got to do something on the spending side. i know that you say the economy is fragile and that you do not want it to happen quite so quickly. senator mccain came up with a proposal to deal with sequestration.

[captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012] and then i can wrapup. the future of the u.s.-mexican border is going to change significantly for a number of reasons. first and most importantly, the changes that are taking place in mexico today are the foundation together with the independent efforts of the migration institute, the woodrow wilson center to sketch a dramatic change in the socio- economic conditions that, for the most part, served as a push out of mexico, together with a magnetic pull to the united states with higher wages and more economic activity. but the decline in the fertility rate to 2.41% is a further

decline in the last decade compared to the 1970's, when large scale illegal immigration to united states really began for the first time in our bilateral history, suggests that the number of people in that age gap that applied so much labor to the united states, that group of young men -- for the most part, although not exclusively men -- from the age of 20 to 28 is not available. when you look at that in the mexican economy and other conditions affecting the use, including the increase of the youth literacy rates, secondary school enrollment, and most

dramatically, the growth of the mexican economy, you begin to see that the push and pull factor that defined this border for the last few decades is changing and changing dramatically. when that happens over the next 10 years to 15 years in i'm most important white. for many -- -- most important way. the first impact of the industrial revolution is to move immigrants off the land into the city's. in places where there was insufficient employment, it led to the migration patterns like we have seen in the 1960's, 1970's, and 1980's. we also see the conditions of education and health increase, so we see the number of mexicans under the official

poverty line in mexico declined from 69% in the 1990's to just over 51% to the. -- today. dramatic and impressive economic growth. what that will mean as we go forward, we will see a decrease in the number of mexicans who are coming across the border and we will see something that the pew data showed for the first time. this is the flow from the united states to mexico in 1995 to 2000. it is just under the -- just

under six times the flow. over the last five years, we have seen something remarkable. for the first time, we see a net outflow of mexicans voluntarily immigrating from united states to mexico, along with the number of people coming into united states from mexico. it suggests that more and more people come up migrants have determined -- people, migrants have determined not to attempt a further reentry. the implications are very dramatic for both countries.

the problem, so-called problem of the mexican illegal immigration really begins in the 1970's and comes pronounced -- becomes pronounced in the 1980's and 1990's. we see the number of mexican- born population in the united states declining. that number is expected to continue. so, too, with the mexican-born population in the united states. we see the number decrease by just under 1 million in terms of the last number of years. we see them remaining relatively stable. so, can i go to the two slides? do you have the picture? so, go to the next one first, if you don't mind.

this is what the border look like in 1993. this is in southern california, by the pacific ocean. this is in san diego. you can see water over here. this is what it looks like today with roadwork and infrastructure. the next picture though, for all the enforcement pictures, it does affect the quality of life between our two people's. -- peoples. this is the story when it was not so difficult to cross.

this is the largest border crossing area in the world. that is the next challenge for the american people. for the american -- for the american people, the people of mexico. we must realize the extent to which our continental force and our economic competitiveness as a nation requires that we solve this. we were able to solve, increasingly with the cooperation of the government of mexico, the problem of illicit activity at the border having to do with the close of migrants. i suggest that this is the next great project.

to build a border that works from the standpoint of commerce, as well as the passage of people lawfully back and forth. why don't i stop it there and pick it up with the panel? >> thank you. that was a fabulous presentation. i think he will get some questions on how we turn this into something that is different five years from now. but let me turn it over to my colleague, and we will have a few questions for the secretary. thank you very much. raise your hand and identify yourself, please. >> alright. thank you at very much, mr. secretary. we will have a question and

answer priod right now, -- period right now, and then we will have a panel discussion. if you will identify yourself, we have a microphone going around. yes? >> back here? well, i wanted to raise the fairly obvious question the senator from san diego had raised at lunch. that is, how you develop, how do you stimulate developing infrastructure that we need on both sides of the border to expedite both travel for tourism and trade? >> two answers in brief. one is the way we have to change the way we process traffic and people. we segments low risk traffic from high-risk traffic or that

traffic about which we do not know enough to make a judgment. the second is we need to build infrastructure in less cumbersome way is -- ways. the night states and mexico have opened up three ports of entry on the -- the united states and mexico have opened at three ports of entry on the u.s.-mexican border. while we rely on the government to build large projects were to rebuild the bridge of the americas in el paso, we need to build into the calculus of public-private partnership that did of building -- method of building infrastructure. one example that is currently being worked on is in seen diego-tijuana.

p rodriguez airfield -- the rodriguez airfield is immediately on the borderline. a group of entrepreneurs secured a permit from the state department and a permit from mexico to build a bridge that would basically go from the san diego side right into the airport. a fee would be charged, but it would expedite what is expected to be 2 million who will use rodriguez airfield to travel to latin america. so, change the cargo and passengers and the pedestrians. supplement the public approach -- appropriations and construction projects with public-private partnerships. >> thank you.

do you have another question or comment? >> not at this time, mr. secretary. [laughter] >> we have a question here. >> hi, i'm claire, a u.s. policy master students. we talked about canada and some of the successes on the canadian border. is there any plan to get some of those in terms of the mexican border? >> in terms of revenged -- re- engineering those, yes. the same processes are being worked through. the obama administration is working with the mexican administration. they will do a pre inspection. which means stationing of u.s. customs border official in

canada, in mexico so that cargo crossing from mexico into the united states will be pre- inspected in mexico. of the targeting and risk- management can be accomplished before the crossing of the border, and what that then permits is a cargo can immediately enter the u.s. transport network, the interstate system, without stopping at the american port of entry. so, yes, the pre-inspection is being discussed with mexican authorities. as well as with canadian authorities, with the intent being in the not too distant future, an auto manufacturer of parts in southern ontario would

be able to have those parts delivered to a u.s. assembly plant or one in mexico without stopping at any of the borders, and yet been fully secure because of the pre-inspection and the targeting that has taken place, the monitoring that is taking place as the product moves from canada into mexico and to the united states. >> alright. thank you so much, mr. secretary, for your wonderful work. i think we will move into the second section, the panel. thank you very much. [applause] >> could we switch right here? thank you. and we can swap you guys out? would you like to go first? >> sure.

>> so, joining us today is professor chappell lawson from mit. on this issue and the issue of u.s.-mexico relations, he has worked for some time. we're happy to have you with us today. >> can people see? i am very grateful to be

included with the wilson center, taking other academic ideas and turning them into policy or making policies' strong enough to withstand academic criticism. is a wonderful institution. most of what i am going to say is going to build on points that alan already made. years ago, a debate erupted in united states about how to handle trucks crossing into united states from canada. the discussion was whether the truck could be physically over the line over the bridge and brought on to the u.s. side where it could be inspected, or the truck could not enter the u.s. at all and had to be

subjected to secondary inspection in the middle of the bridge, there by backing up traffic for miles. you'll be happy to know that sanity prevailed. and of course, the way we work now is not the way he used to be. we face the same basic challenge in order management. supply chains, they are flexible, trans global. they are constantly changing. so, borders are not. borders are fixed. orders do not reflect economic realities, trading -- borders and not reflect economic realities, trading patterns. this is a hard issue to manage. managing trade and travel is a key aspect of international competitiveness.

we have to figure out the right regime. the countries that do not figure this out will lose. we will talk about this at the end. this applies not only to goods and people, but other aspects of the order management like natural resources. i am going to focus specifically on two thanks. one is the issue to which secretary bersin eluded. if we have time, i will come back to talking about natural resources management, at the end of the presentation. the idea here though is the goal of order management should be to facilitate lawful trade and travel -- border management should be to facilitate lawful trade and travel. we keep up bad things well good things can get let in. we go from managing lines to

managing goods and people. to shift from the unilateral approach to one that enhances public safety for all three care -- three countries and north america. the first test to do with segmentation. problem is -- the problem is, people are complying, 97%, 99% of travelers'. they are compliant with all existing laws. and most of the violations that do exist are minor. someone with an orange in the trunk of their car for getting to declare as they drive across the border from tijuana. not drug-trafficking. as a result, finding something bad -- drugs, illegal migrants,

people with outstanding warrants, whatever it is -- in this massive flow of people across the border is like finding a needle in a haystack. or maybe a better metaphor is finding a chromium-colored needle in a stack of silver needles. every person crossing the border and is subjected to the same high level of screening for inspection. obviously an enormously difficult and wasteful undertaking, both in terms of the amount of energy expended to be compliant and not devoted to things that you suspect might be useful, but also the negative impact on law enforcement, saying over and over again things that are legitimate and

getting accustomed to finding notes in the trunk of a car that is bad -- nothing in the trunk of a car that is bad. how do we get ourselves out of this needle in the haystack? take that large purple aero at the last -- arrow at the left, and put it on things that we know to be bad. a piece of cargo crossing the border. and b, things that we suspect might be higher risk, even though we're not totally certain, right? and that should protect further scrutiny. in the case of goods and people.

the same principles of risk- management apply to people. there will be a segment of traffic or a segment of individuals about which we simply know very little. it might be an unfamiliar shipper, a broker we have never heard of, a person we have never heard of. the goal will be to find out enough information to classify that person. do not expand law enforcement resources on those that we know are at the bottom. the challenge is to blow off the hay. to get out of the system all of those people that we know are safe and all the cargo that we know is a reliable. the pharmaceuticals that get sent on exactly the same day in exactly the same quantity every month.

that's not a risky shipment. so, merck should be in some intrusted shipper program. best is the program that is analogous shipping. global entry for people who come -- you are not risks. we want to spend no law enforcement resources on you so we can spend it on the 20-year- old who has recently traveled to pakistan. that is an extra level of scrutiny from people in this

room. the strategy is take the haystack, blow off some of the hay. the second strategy would be -- i don't have a slight here -- the slide here. marshalling all the information available to the u.s. government, including information held by state, local, tribal, or foreign partners agreed to bear at the moment of query to decide whether that person crossing the border or that shipment entering the united states deserves further scrutiny. finding effectively a score or rating or some metric that allows us to classify that shipment or that person as

higher or lower risk. and focusing law enforcement resources on a relatively small percentage of travelers and goods that set off alarm bells and the system in some way or another. we can talk about exactly how that targeting regiment can be built or approved, and i believe we can make it incredibly effective without compromising the civil liberties. we can come back to that. the general principle here is that the good people of the system, don't devoting resources on them, and focusing on the others and spending all your law enforcement time on those. better risk segmentation. the second has to do with international collaboration, in this case within north america between north america and canada and the united states and mexico.

and shifting the focus from thinking about each sovereign entity protecting itself from scary crossings to enhancing public safety and prosperity in the north american region as a whole. let me just give you one example. there is no point in building a port of entry on one side of the border if there is no port of entry on the other side of the border. you can have a gold-plated, beautiful port of entry in the united states, but if the port of entry on the mexican side is decrepit or not functioning, you are in trouble. if the port of entry on both sides is terrific but on one side there is a super highway with eight lanes, but on the other side you have a pot hole dirt road, you don't have much of a port of entry.

what she wanted financial collaboration on the collateral -- what you want is financial collaboration on the planning. just thinking about defending our own borders to securing flows across the border the north america. what does the ideal port of entry look like? i take the example of canada. of believe we can take many smaller steps along this path in our relationship with mexico. here we have the perfect port of entry, a big open space in the middle, and in the middle of the open space is a dotted red line. on one side of the building you have canadian officers and on the other side you have american officers. one can yell or talk to the other officer immediately, and entry into one country, which by definition is an exit from the other country, so there is

no need for any kind of double processing. you should be able to do both. if the canadian officers and the mexican officers and u.s. officers are looking to screened with were less the same information. there may be some information the canadians don't want to share immediately or automatically with their counterparts or vice versa, but basically all the other in permission is the same. they are located in the same space, looking at the same information that able to communicate with each other in real time. pedestrians or cars or whatever just passing through this port of entry in have joined by u.s. and mexican or u.s. and canadian officers. just to give you a sense of all little steps one could take along the path to this ideal.

on the vertical axis -- i am a professor at mit so i have to have a slides with vertical axis, etc. on the horizontal axis we have a greater joint this in operations. one can imagine a tremendous amount of jointness in operations. investigative referrals would be one example. it could have a tremendous amount of sharing of information without much jointness. the communications systems can talk to each other, but they don't meet every day. and everything in between. you have cross deputized officers may be occupying the same building.

the worst aspects of the status quo applied across the border. in the middle there are all these more modest measures. the officers from both sides meet regularly to discuss how to keep the port of entry running if there is an accident or shooting at the port of entry or some other incident like an overturned truck, whatever. but they meet regularly to discuss and develop protocols. coordinated hours, coordinated propofol, some source of -- coordinated protocol. significantly reduce significant amounts of shared data, for instance, license plates on cars.

the idea is that we are taking steps in the direction of greater jointness. we have made significant steps of with canada and mexico. i have now been out of government as long as i was in government. maybe we are not proceeding with the alacrity that we would have hoped. north america's increasing -- facing increasing international competition with the supply chain. a big hit for our economy with regards to other international supply chains, even europe and turkey, if we get it wrong. i think the goal should be forced to move much more rapidly to consolidate these sorts of changes.

you have now heard the vision. i won't go into detail about all the obstacles along the way, but you have a sense of what measures we could take. i talked about flows and travel of people. managing the order is a lot more expensive and complicated than just travel and security. i will give another example before i close. sometimes a picture says a thousand words. here is an aerial the audio of the juarez and el pass so area. -- el paso area. for many years it has been the most dangerous city in the western hemisphere. it is a single urban area in the middle of the desert, bisected by a narrow ribbon of blue, a river that separates -- separates the mexican side of this population center from the american side of this population center.

in what world health care management would make sense to inoculate the northeastern part of this area and not the southwestern part of this area from influenza? there is simply none. in what world would be rational to have a water treatment plant that just serve one part of this city and not the other part of the city, or an electrical generation plant. it is the same thing. or an offer that spanned the border and actually works and commerce -- an aquifer that span the city but was managed independently on both sides. both sides basically sticking a straw in the same cup and not coordinating the way they do it. in the world doesn't make sense. collaborative management would be about figuring out a way to jointly manage resources,

natural and otherwise, in areas that are effectively single city's spending the frontier. i am probably running out of time. some of the key issues of the 21st century, security of global supply chains, travel networks, migration, natural resource management, these are the heady, important issues. i don't thinks the should be particularly partisan issues. all the things i have suggested should be bipartisan. they should be regarded as just making common-sense, not as a matter of politics. i am not totally ignorant of the political realities in washington. i sincerely believe that all the plans we put forward about collaborative border management an enhanced risk segmentation could be implemented by both

parties. >> before i pass it over to my colleague who is the co-author of the paper i am about to present, he is also co-author of a report about security. i would go ahead and present our work, specifically on the economic issues. ae report chapter's called state of trade, competitiveness, an economics. you can get a copy of that outside. it will be part of a larger report we are putting together that is more comprehensive and will come out later this fall. the wood for a war project will

work at the woodrow wilson center -- we worked at the woodrow wilson center as well as in tijuana. we make up something called the border research partnership. we get support from u.s. aid. thank you for being here with us today in making a lot of this possible. jumping right into our research and findings, just to show the overall picture, a starting point is very simple. bilateral trade between the united states and mexico matters to both the united states and mexico. it is of enormous importance to both sides. we have gone to this milestone,

and service trade numbers are not out yet for 2011 but i think we've got into this milestone of a half trillion dollars of goods and services and trade between the two countries last year. just enormous. obviously important to the mexico -- to mexico but also extremely important to the united states. craig has quintupled since 1993 -- trade has quintupled since 1993. oh wanted to remember as we move forward that it is growth and trade, this rule line that grew steadily. there are some terms that mark defining points in the way the border has been managed and in our economic relationship between the two countries as a whole. you can see around the 2001 marker, there was a slowdown in growth of trade. another of around the economic crisis in the united states that produced an enormous recession in mexico, even stronger than in the united states.

a huge bid in 2009 and the recovery with remarkable growth happening in the last couple of years -- a huge dip in 2009. the flow of people back and forth across the border is also a trade and has a huge impact on our economy's, both nationally and especially locally in the border region. mexico has the second-largest number of tourists entering the united states of any country and the fourth largest in terms of spending. i think those numbers don't actually reflect the entirety of what is happening. if you have been to the border or live-in and border community, where the city's, there is really no difference if you live in tijuana or san diego. it is a single urban area. all you do when you cross the border is maybe take out a different bank card.

mexico is one of the largest spenders in tourism dollars in the united states. that cross -- cross border retail is the lifeblood of a lot of border towns. this is a vital part of the border economy is how these crossings work. you need border crossings that work to maintain this cross border retell that is happening all the time. this shows the projected los of highway traffic, a trade coming across the u.s.-mexico border. these transportation corridors is where trade is happening. 80% of trade crosses the southwest border could 75% of bilateral trade crosses by truck.

it is the point at the border where they cross that are the key to managing the flow of goods throughout the region. a lot of it is coming from the industrial heartland, the midwest, the united states automakers. detroit, is the largest city exporting goods to mexico. that is the auto industry, obviously, but the east coast is also a huge. the point here is that we also produce goods together. we don't just trade finished products with one another. for example, as we create a car, the idea is somewhere between six or seven or more times, parts that are inside that car have crossed back and forth across the border as that car is being made.

we have imports from mexico to the united states, 40% of the content was actually generated here in the united states. as opposed to 4% from china. if we buy something from mexico, 40% of what we are paying mexico stays right here in the united states because those parts were built and generated in the united states. derrek or american manufacturing jobs -- there are american manufacturing jobs attached to the imports into the united states. it is a different nature than our trade with any other part of the world. our economies are connected in a way that is different than with any other part of the world, except perhaps canada, where we have a similar connection. it means that our destinies are linked in a certain way. we experience growth and recession together.

more than just ups and downs cyclical, our long-term competitiveness is also linked. any action that improve the competitiveness of mexico has an impact on the competitiveness of the united states, because 40% of the content comes from the united states. that means a similar situation, if we export a car to the world. what matters is the price we can generate that car at together. we need to think about how we can together make our economy more competitive. it also has another consequence. this back-and-forth of production sharing has a multiplying effect on any difficulties you have across the border. you have goods crossing the border six or seven times as they are being created. every minute you have to wait in line to cross the border multiplies it by six or seven. every dollar you have to spend pulling out customs forms, multiplied that by six or seven. we think of them a small delays, small challenges. with a huge multiplier effect to come up with several billions

of dollars of consequences to our economy. trade is growing, so you would expect that we have a number of crosses between the two countries' growing in a similar manner. you would expect the number of people crossing the border is growing over the years, but that is not the case. we saw that trucks, which is the bottom line here, grew from 2.9 million a year to four 0.5 -- 4.5 million after nafta was implemented. but it has relatively trail of. even as we are seeing this huge growth in trade, there is not a corresponding growth in the number of trucks crossing the

border. for some reason, these companies are having to figure out ways to pack more value into each truck. i think that is because they are having a harder time getting goods across the border. there is an incentive to use more efficient use of your resources because it is more challenging to get them across the border. in the other numbers, the green line in the middle as pedestrians coming across the border. the most dramatic is the passenger vehicles which is how most people across the border. it grew significantly throughout the 1990's and has declined significantly, especially since 2006-2007. several factors play into how these lines get drawn. not least of which would be the security situation in northern mexico. it has caused people to stay put, to move back and forth

across the border or less and less. you have the economic crisis that hit both sides of the bore very strongly and cause another decline. we have not seen the return in traffic yet. we will have to see what happens. the point is that the border has thickened over the years. it has resulted in congestion and that congestion has a cost. lots of studies have been done about what that cost is. the take away is a very simple, it costs several billions of dollars to our economies. i would taking in these numbers with a grain of salt, but nonetheless we see study after study finding significant economic costs to increases in congestion at the border. it means we need solutions. we need more efficient border management but we need to do

that without giving up the security gains that we have in place since 9/11. there has been a change in the way the border has been managed and that has created gains in the security at the border and points of entry. we cannot give those up. nobody is going to say we should trade one for the other. the point is we need to find a way that one does not come at the cost of the other. creative ways to have gains in both security and efficiency happening at the same time. during the bush administration in the u.s., that was called a smart border agreement. we had them with both canada and mexico. we said we can have security gains and efficiency gains. the 21st century border means a lot of different things. would it really was was a strong declaration of the two administration's and the

architects of it saying that we can make gains on competitiveness, on efficiency, without giving up on the side of security. we can do both at the same time. in border communities, there is a big focus on the need for infrastructure investment. cvp has said there is approximately $6 billion deficit or need for more infrastructure to fully modernize the border. in the current budgetary environment, which is very constrained and restricted, we don't need to just have people coming to washington say my border community needs more money. we need a message that is more fine-tuned. we need to talk about a new

strategy, ways to have better use of the resources that we have. it means a strategy and that is exactly what the concept of the 21st century border is. we have these trusted traveler and shipper programs that offer gains in efficiency by expediting the traffic at low risk and help with gains in security by having more resources to focus on the traffic that has been unknown or a higher level of risk. i guess i should say, i think the name of the game in post 9/11 security is intelligence. if they want to enter the united states, we need to know who they are. these programs are companies and individuals just walking up to the u.s. government saying let me tell you who i am. that we give you intelligence. you walk up to a window and an

office in you do that. to the extent that these programs can be a free source of massive amounts of intelligence, who is entering a the united states, i think we would be crazy not to invest and put a lot of value in to them. importers and exporters don't have to wait in long lines and disrupt their supply chains across the border pick that and therefore focus more intense attention on the traffic. we saw growth in the enrollment from 9% of total traffic crossing the border to 18%. that is good progress. war could be done there. a higher goal could be shot for. the program for companies to it trusted supply chains is also up steadily increasing in enrollment. the program for truck drivers which carry most of the goods

across the border has not had that same corresponding increase. there was an increase but there has been perhaps a decrease over time in the number of truckers involved in those programs. it means we need to focus more attention on what is happening and ask ourselves why is that happening? the drivers themselves with other cost enrolling in that program but they sometimes do not see the benefits. you need to figure out ways to have the incentives to meet the requirements that are there to get involved. you need to be promoting these programs. that has happened -- more in some areas of the board and others. in the case of san diego and tijuana, the enrolment levels

there seem to be much higher than some of the other areas along the border. that gives us an example to look at and say how can we do a better job of getting people enrolled in these programs. the final issue of want to talk about is focused on the ports of entry themselves and the areas between the ports of entry. mark rosenblum is in the audience today and have to give him credit for this slide. the green on the chart is the border patrol. there is the border patrol that monitors the area between the ports of entry and areas where blue uniforms modeled the areas at the ports of entry. we of seen a buildup in the area between ports of entry without the corresponding build up there at the ports of entry

themselves. that buildup between the ports of entry has led to something that does move the flows and even reduced the flow to a certain extent. we have invested in that and now the time has come where reconstruct thinking about the ports of entry and we have an opportunity to invest in the ports of entry. it seems a lot of the harder drugs are coming through the ports of entry. a lot of illicit traffic comes through the ports of entry. the risks are as much or more at the ports of entry asks between the ports of entry. we have already talked about other ways, several different proposals and the paper of how you can improve border management.

a lot of them have been touched on such as public-private partnerships. i encourage you to take a look it that, but i will leave it there for now and we can pick things back up in question and answer. i will pass things on to my colleague now. he is associate director at arizona state university and a great colleague and partner on all our border work here at wilson center. >> i am derrek lee, pulling double duty, i worked on the state of competitiveness project with kris wilson. it was a lot of fun to work on it. u.s.-mexico cross border trade is very counterintuitive.

not many americans know how important mexico is to our nation's economy. eric olson asked me to collaborate with him on our upcoming state of the border report. the chapter that chris talked about this part of this. this is another chapter in that report that we will roll out this fall. i am still optimistic that we can do that. one thing you will see is how if you have not seen it already in these three fantastic presentations is out interconnected these issues are. that makes a really tough policy area to work on and move the ball down the field on. thanks very much to eric and chris for the kind invitation, inviting me back to the wilson center, the mexico institute. thanks for the support on this

and related projects. i appreciate the secretary for his insightful comments and his service to the united states as well as his willingness to take on some of the lease straightforward policy areas known to mankind. superintendent of public instruction in california was more difficult than your past job, but it is really remarkable the positions you have had and how difficult these policy areas are. these chapters are meant as snapshots and to try to break down a large, complex topic for a broad audience and at some insight and value to the various segments of the audience. we try to get a number of people in audiences.

this is not an academic project. we are not writing to a large literature. this is not going to take 18 months to publish. the purpose of this is to set a baseline for measuring border security. this chapter sets a baseline for measuring border security between the u.s. and mexico, from an independent analysis. our plan is to reexamine the issues on a simi regular basis and make judgments for the methodology and criteria as needed. to initiate the process with a settled on four major areas and a broad, catchall area including major related factors. these include the incidence of terror related activity, levels of violence on both sides of the border, an assessment of how these might be linked to drugs, money, and firearms at the border. a number of related and often subjective factors.

we have the hard evidence on one side, but what you quickly realize and working in this area is there is a whole nother -- another whole area of subjective factors that influence how this policy area is perceived and talked about in the public debate. these include a number of things, local politics, including a very fierce state level politics such as we find in arizona. feel free to ask any questions you would like about arizona. rule of law efforts in mexico and issues related to perceived

security and cross border collaboration. also discussing in future reports security strategies, border patrol just came out with a new strategy, 2012-2016, that supplants the current one. mexico hasn't ruled out specific strategies from the federal level to deal with the violence in the border region as an example. the impact of technology is a fascinating area about which we have done a couple of reports and have made some very surprising discoveries, we think. you can see all that influences what we talk about when we talk about border security policy. our principal finding, one thing we tried to get across to as many people as we can when we

talk about this issue is that the state of border security, really when you look at it closely, it is as varied and asymmetrical less the border itself. it is a very, very large geographical area. it is an arguable point whether or region really exist. you could make a good argument that if it does not exist, it it is basically a collection of integrated north-south trade corridors that happen to find themselves along an international boundary. they compete with each other ferociously. the opinion on where you are, urban versus rural. the security situation in major cities along the border, which we touched on earlier, is quite different than the situation in the rural areas. the rural areas.