balance between the short and long term. >> but is 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 stimlative effects, would your view be that we could have avoid add cliff but still find ourselves in a very perilous situation because employment will continue to decline? >> it's a question of the timeframe. in the very near term we already have a lot of fiscal drag coming from state and local governments, for example, as you know. and some coming from inevitably from the federal side. so in no way am i saying that we shouldn't be making a strong

efforts to achieve long term sustainability and make a credible plan as soon as possible for doing that. but it 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. president. >> senator corker. >> thank you, mr. president. and thank you for being here. i was listening tot 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 is $1.2 trillion over the next 10 years that the sec stration amounts to. we're going to spend about $45 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 is much larger, are you seriously

concerned that we're talking about $108 billion next year in 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 -- >> i'm talking about just the spending piece. it's hard for me to believe -- >> a smaller fiscal contraction will have a smaller effect. but i don't want to make a judgment i realize it's very contentious taxes versus spending i don't want to get into that. but clearly a smaller reduction in fiscal position would have less effect on the economy than a larger one. >> but as we look at the economy -- would you not also say that the best thing we could do to stimulate the economy including any actions that that 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 that the investing community? >> fiscal reform is very important not only the control of deficits over the long period, but also the quality of fiscal policy. what are we spending our money on? what does the tax code look like? 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. >> i agree that we should have a better policy than we now have and i think most of the people on this dais are trying to seek that and it is

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 sec stration 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 sec stration, and make us look even more irresponsible to me is worse than the $108 billion that might be reduced out of the spending the federal government is going to be doing the next year. do you understand what i'm saying? >> yes, sir. and just delaying everything to say we're not going to do it and put it off a year i think would be a bad outcome. >> i think the actions that you're taking at the fed -- and i understand you have a dual mandate. i think we should have a single mandate and i know we've talked about that. i know that it creates bipe pole lar activity because you are trying to juggle it too -- and we've created that not you. but i think the actions that

you're taking really take the or you're potentially considering. i know qe 2 was in response to potential deflation. i think further action actually take the impetus on us to act responsibly. and i wish we had a chairman of the fed that sometimes would say look we're not doing anything else. we're pushing rope. and it's up to you to act responsibly to deal with these fiscal issues. quit looking to us. i mean, are you tempted to ever 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. >> very politic answer. i would say that 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 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 ten years but the 20 and 30 which most of the plans have been in the main stream do that, would that alleviate the need possibly for the fed to consider additional quantitative easing? >> well, possibly. as i said, the fiscal issues are a major concern, a major downside risk. and if congress addressed those issues that the outlook was better, then certainly very possible that that would abrogate any need to take further action. >> you've been a little 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 toole 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 else is there that the fed can 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 responsibilities and i don't want to give any signal that we're choosing one -- >> what are they? >> the logical range includes different types of programs that could include treasuries or mortgage backed securities. those are the two things we are allowed to buy. we could also use our discount window for lending purposes but 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 that 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. president. i too thank you for your service. i think you've done a superb job in one of most difficulty periods to be chairman of e 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, quote, you would 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 is not deficit reduction, he metropolitan some kind of stimulus which is the opposite side. now, i agree with you under krnt conditions fiscal policy should be our first choice. it would be more effective. unfortunately, we can talk all we want. everyone gives speeches 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 thing that is our colleagues have often supported, the tax credit for job creation, and accelerated depreciation for capital purchases 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 drucks which to me is the right way to go a ten-year plan that reduces our deficit but a

one-or two year plan that pumps the economy up a little bit, he didn't get a single republican vote. and we know the reality. can't do it because it's not bipartisan. so given the political reamounts, particularly in this election year, i'm afraid the fed is the only game in town. and i would urge you to take whatever actions you think would be most helpful in supporting a stronger economic recovery. you've received some harsh criticism for past 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 more monetary 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 meeting notes that the forecast for real g.d.p. growth was revised down, tun employment rate remained elevated and consumer price inflation declined.

moreover, the economy showed that not a single member of the committee thought employment would be back to normal levels by the end of 2014, not a single member forecast inflation even modsly above your 2% target in the time frame. so the recession is deeper, more prolonged and stickier than anyone thought. and let's remember, the fed has a dual mandate first and foremost to guard against inplation but also to keep employment up and unemployment down. so to me these conditions would certainly motivate the fed to seriously consider taking further action to bolster the economy. what's your opinion about that? >> we take the dual mandate very seriously. we will act in an apolitical nonpartisan manner to do what is 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 is 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 late they are summer. >> and you still do so, you've used qe -qe 2. but you still have some 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 that risk is reasonably low right now. and indeed, as i mentioned,

it's a modest risk, not a large risk. but a modest risk of going in the other direction. >> and you certainly agree that unemployment has been too high and is sticky and despite two false starts we're having a much rougher time than we ever imagined getting unemployment down? >> yes. that's true. >> so get to work, mr. president. -- mr. chairman. >> senator demint. >> thank you, mr. chairman, for being here. it's interesting to hear my colleagues talk. and they seem puzzled why a short-term temporary stimulus gimmicks seem to work. by any analysis the cliff that's 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 that we're forcing you into kind of a temporary short

term ideas. and i'm concerned that you've mentioned cost and benefits that some of the things that you're clearly considering such as quantitative easing. as costs that 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 $40 o 0 billion a year in lost interest on any savings that they might have. so there is real costs. and over the last four years probably about $1 trillion in loss. so people who are actually trying to save and put aside dollars are on a negative tread mill in the sense that they're losing the value on their dollars. so there's a cost to that stimulus effect. and also quantitative easing which you're clearly considering our own federal

reserve bank of new york estimates that about 50% of the value of s and p over the last decade is related to fed action. and the buildup around fed action of quantitative easing. and my concern now is that what we're seeing is not an increase in the value of stock. but a projection in the loss of value of our dollar. and while we talk about that no inflation, i think what we're talking about is no visible inflation at this time because clearly if we're printeding more money to buy more of our national debt -- and i think you'll agree the federal reserve through intermediaries has bought over half of our debt the last coup of of years -- we have delude diluting the value of our dollar over time. and while it may not show up today or tomorrow, it's inevitable that i will will show up. and i think we see that in the

reflection of the price of stocks because it's obvious that that doesn't reflect long term projections of value and profits as much as it does playing the market and what is coming out of the federal reserve. so my concern very much now is another announcement of quantitative easing which might inflate the stock market temporarily. but another short-term effort that might help employment in the short term but actually reduce the value of the dollar and therefore everything we work for here in the country. so how are you gauging the cost of another round of quantitative easing? >> well, let me respond tot specific that is you raised. on savings, we understand the low i want rest rates are a hardship for many people. the reason that interest rates

are low of course is that we're trying to promote a recovery in the economy. people who save hold fixed income types of securities like cds or treasury bonds but they also hold stocks or corporate bonds or small businesses or other types of assets which depend on the strength of the economy. and if raising interest rates might help some folks but if it caused the economy to weaken considerably it would be bad for investors broadly speaking. so what we're trying to do of course as our mandate suggests is to strengthen the economy which in turn should make america more attractive place to invest, provide higher returns for everyone, investing in the united states. on the thrar and inflation, i appreciate your concern and that is obviously one of the things we pay very close attention to. we have not seen inflation yet though. and the dollar has been in fact

recently a good bit stronger. and we are comfortable that we have the tools to unwind these policies in a way that will not threaten inflation. but we take, as i said, to senator schumer we take potesdz sides of the mandate very seriously and as we are looking to try to help reduce unemployment we're also -- we want to be confident that we maintain price stability in the united states and thus far we've been successful to doing that. >> the dollar is stronger, relative to the euro. but comparedive values inside the united states just causes some concerns at this point. but again, i appreciate what you do. i will just ask caution in diluting our dollar even further for temporary action. >> senator menendez. >> thank you, mr. chairman.

thank you chairman bernanke for your service. i want to speak to you about the interest rate manipulations by large banks since the fed plays a key role in insuring the integrity of interest rates that affect consumers, small businesses and cities and towns across the country. you know, i look at these most recent set of allegations on the libor manipulation and once again it exposes to me a culture of greed, a culture of cheating, of lying, at least at one large bank and probably many more. which is why nine of my colleagues and i wrote to you and other banking regulators in the department of justice the last week asking for a robust investigation in the role of these banks and how this ultimately affected consumers in this country, investors in this country, cities in this country, because libor is a

very -- it's far more than a benchmark. it's a very significant indicator here that's used. i know that the federal reserve bank of cleveland found that 45% of prime adjustable rate mortgages are indexed to libor, 0% of the subprime arns use libor as a benchmark. so this is a huge -- a huge issue. and it again goes tot integrity of our financial system and the lack of faith i think increasingly that the american public and for that fact many of us are having in the system. i look at the internal e-mails during 2005 and 2007 and the bar clays derivative traders asking other employees to submit false survey responses in order to benefit their trading positions. changing them prefering certain libor outcomes on certain days sometimes for it to be higher

sometimes for it to be lower depending upon how it would benefit their position. now, i look at this and i say to myself, this is about trying to manipulate a key economic indicate for the purposes of profit. am i wrong on that? >> no. i agree absolutely. this is unacceptable behavior. >> well, let me ask you clearly then banks like bar clay are trying to profit from the libor manipulation. but that profit came not at -- it came at the expense of the public in general. >> some of the public. it's an interesting question. you mentioned borrowers may have benefited because libor was underreported. we'll probably find out via a number of lawsuits that have been filed and investigations. >> but if you got caught in that period of time in which

the traders wanted a higher libor and that was the time when your adjustment was going on, you had a detriment to yourself. investors obviously had a detriment in not knowing the integrity of the institutions, not knowing -- if it is lower it means things are working pretty well. if it goes higher that's like a warning sign. >> i think it's a major problem for our financial system and for the confidence in the financial system. and we need to address it. >> how do we address it? for example, i know that some of my colleagues here bristle at regulation. but it seems that this is an industry that on its own won't work with the integrity that the public deserves. i mean, we're talking about pension fund investments, investments by regular investors as well as the consequences to consumers. i'm sure that we're talking about billions in effect if not trillions in effect. so for example, do you think

that we need additional internal controls or fire walls between reporting personnel and trading employees at these banks so that we don't have this work to manipulate as one example of -- i would like to hear what is it that we are going to do now that we know all of this and may have known it before -- what are we going to do to ensure the integrity of the banking system? >> well, first it is going to have to be an international effort because this is a british -- libor is constructed by the u.k. orization and of course libor is constructed for about 10 different curnssizz as well. so it has to be an international effort. i think there is broadly two approaches. one would be to fix libor to make changes to it to increase dwissibility, to reduce the ability of individual banks or traders to affect the overall libor and to increase monitoring of the reporting

process that is done. so that would be one strategy. the other strategy, which many people are thinking about, is going from what is essentially a reported rate to an observeable market rate as the index and there are a number of possible candidates that have been advanced that might ultimately replace libor as you point out though libor is very deeply ingrained in many contracts and so that change will be not a simple one to make. but i agree with you that we need to address this problem. >> well, i look forward to the fed's leadership in this regard suggestions of how we in fact make a system that cannot be manipulated that has consequences to millions of consumers, investors, pension fuppeds, municipalities, counties, governments, all affect bid libor. so it ma be an international response that we need but we need to understand what we can do here in the united states to ensure for these investors and these consumers.

>> senator vitter. >> thank you mr. chairman. it seems when the new york fed learned of this potential scandal, potential misreporting, it reacted on the policy side with various discussions, recommendatns, with their british counterparts. i haven't seen anything about it reacting as a regulator of u.s. large banks. did it do anything to investigate whether u.s. banks were guilty of the same practice? >> what it dizz was it informed the responsible authorities the cftc in particular very quickly

they -- the bank of new york made a presentation to the president's working group that included the ftc and cftc provided information as did the board. so the investigations took place but they were taken up quite quickly by not the fed which is a safety and soundness regulator but by the authorities that had the most direct responsibility for those issues. i don't know -- i have to say that the federal reserve back in new york is still investigating the situation itself digging up documents and the like. i don't know what communications or conversations with had with the three u.s. banks on the panel but the actual enforcement actions were taken by cfdc and -- >> so as we sit here today do we know that no u.s. banks were guilty of the same manipulation? >> no, we don't know that. >> it seems to me that goes back to my question and my concern. if we don't know that it seems

like somebody dropped the bag. the fact that we're four years later and we don't know that. >> as i said, two banks have reported that they've been asked for to disclose information tot investigating agencies. so the process is certainly robust process is certainly under way. >> if it's under way four years later. my point is that knowledge of this occurred in 2008 and neither the new york fed nor other regulators did a sufficient investigate so that we could know one way or the other as we speak today four years later that the u.s. banks didn't do the same thing. am i missing something? >> only that again i think the responsibility of the new york fed was to make sure that the appropriate authorities had the information, which is what they did. >> do you think it was a reasonable responsibility for the new york fed to follow up and say did u.s. banks that we are primary regulator of do the

same thing? >> i don't know what conversations they had. of course, the new york fed is the regulator of some banks and of holding companies. there are other regulatorors like the occ and so on. >> but certainly the new york fed is the primary regulator of the biggest banks with regard to u.s. banks engaged in libor that we're talking about. correct? >> two of the three. right. >> let me move on to another topic that i'm concerned about. the fed is in the process of rule making with regard to the term predominantly engaged in financial activities. under d.o.d. frank. the rule that's been published and the fed is now taking comments on seems to me absolutely ignores a very specific criteria that we in congress place in dodd frank in

section 102 a 6 it was i know about it because it was a vitter-prior amendment and it was very specific. it uses an 5% test. it seems to me the rule of the fed is in the process of adopting ignores that specific metric. how can the fed adopt a rule that ignores specific statutory language? >> we wouldn't want to do that and i will check on that question for you. >> if you could check on that again it's 102 a 6. and i believe the fed rule that's been published for comment ignores a specific metric in the law which i would short term call the 85% rule which was the vitter-pryor amendment which is in final law. >> thank you for that. >> finally, capital standards for the largest banks. as i've read your comments in the past, it seems to me that

you support somewhat larger capital requirements for mega banks. but that you seem to think where we're headed about 9.5% under basl 3 is roughly appropriate. is that a fair summary or not snrrel, there's an international standard which has a grad ated -- it starts at virtually 0 for the medium sized banks and increases up to the largest banks but it's based on some form louisiana and some calculations that try to establish parrot with banks around the world. >> i guess what i'm asking is that to the extent that imposes higher capital standards on the largest u.s. banks do you think those higher standards are good enough to ensure stability in the future and protection in the future?

>> i think they're very useful, very important. basl in general is going to increase the quality of capital. this will mean the largest banks have even additional capital. but it is not just capital. it is also going to be the market discipline that comes from orderly liquidation authority, stronger supervision, liquidity requirements and so on. i think it's extremely porpt that we address too big to fail. and this is one way to make banks take into account that their own size does impose a cost on the rest of society and make them respond to that. beyond the path we're on, do you think we should be looking at higher capital requirements for the biggest banks? >> well, we'll continue to have international discussions. it's been our approach to have system with the international standards. but -- and these numbers were based on calculations that drew

from the crisis. but we're always open to further discussions. and we'll see how it affects the higher capital were tot credit system as we go forward. we're phasing this in relatively slowly so we'll gt a chance to see what the impacts are. >> my time is up but i encourage you to look at that and to place safety and stability ahead of -- i understand the desire for uniformity across the globe but i don't think it should trump what is best for -- you're looking for higher capital requirements. >> senator corker. >> thank you very much plup. let me -- mr. president. let me add my welcome tot committee and to thank you very much for your tireless leadership in these challenging times.

recent economic events in europe and china show us how dependent the united states is on the international markets when we consider economic recovery. despite concerns about the overall rate of recovery, some sectors are beginning to turn around and we're beginning to see some bright spots as indicated in your opening statement. hawaii, for example, had record tourism numbers in may and nationally we see spending by foreign travelers continue to rise helping to reduce our deficit. my questions are, how do you think that current policies and those regarding tourism and exports have affected the

recovery? and also, how 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. it has been, we've seen improvements in tourism and not just hawaii but a number of places around the country. and you mentioned the international trade deficit people may not appreciate that when a foreigner comes and visits hawaii, that actually counts as a u.s. export because we're exporting the tourism services. and the export of tourism services has actually been growing very quickly something like 14% last year faster than other types of exports. so it contributes to our trade balance as well as to overall

economic activity. so it is a positive. with respect to policies that address it, you know, i think there's a lot of incentives why we see the individual states for example compete with each other to try to attract visitors. but we can consider issues like visa policies. we can look at any tax or other implication that is might affect the cost of tourism. so it's an area where i think there's a lot of pen fit, a lot of scope for economic benefit to hawaii and the rest of the country. and it has so far been, as i said, a bright spot in among the various service industries that we have. >> thank you. as you know, i'm concerned with the well being of consumers

during previous hearings you and i have discussed the importance of improving financial literacy to empower consumers while we work to grow the economy. so my question is, what ways have you seen financial decision making by individual americans improve during this recovery? and what more needs to be done do you think? >> well, there's two sides to improving decision making. on the one hand, there's education and that effort has continued. the federal reserve is continuing its efforts towards promoting financial literacy and economic education. i have an upcoming meeting with teachers across the country and i will be talking about financial literacy and answering their questions and talking about how to introduce

students to these topics. some of the activity that is we had moved over tot cfpb which has some personnel and some functions went over there but they are also engaged. in those activities. so education is one side. on the other side, it's important that disdelosures and the types of products that are offered are such that people have a reasonable chance of understanding what it is that they're buying or investing in. the federal reserve pioneered a few years ago the use of consumer testing to improve disclosures for credit card statements and a variety of other types of disclosures and we hope to see that type of activity continue. i think in general that the expersons of the crisis has made many people more aware of the need to be financially literate. schools more aware. and more cautious as well.

but it's an ongoing battle. it's not something that we can declare -- we can't declare victory. we have to continue to work to try to make sure that both kids and schools and also adults who are making financial decisions have access to good advice and good education. >> thank you very much for your responses. mr. chairman. >> senator johans. >> good to see you again. the forecast that you have testified about to today, i'm assuming do not factor in the results of the fiscal cliff that is headed our way between now and the end of the year. is that a safe assumption? >> that's correct. >> so because of the fact that all of the various items that are included in the so-called fiscal cliff would take affirm

tiff action by congress to pull us back, which typically means 60 votes in the senate, a majority in the house, presidential signature, my assumption is that if that doesn't happen, that we get caught in a situation where those forecasts would be revised yet again. and it would be even more pessimistic than your testimony today. would that be correct? >> absolutely. >> as you think about the sec ster, $1 trillion sec ster, as you think about returning to the 01-03 tax policy, as you think about the estate tax and all of the various factors that we're looking at between now and the end of the year, is there -- if you were to give a recommendation to congress as to where to act, would it be act on everything?

or is there a priority that you would set for action? >> no. i think the choices between spending and taxes and the mix and the kinds of taxes and so on, i think that's really a congressional responsibility. i'm just pointing to the collective expabt of all these different things happening at the same time and that there may be many different ways to mitigate that effect and i'm sure members of congress have different views on the with best way to do that which is one of the problems because we're going to have to come to some kind of agreement. so no i don't have a specific yemmedation other that think to think about the individual policies but their collective impact if they all happen at the same time. >> let me talk to you a little bit about the mitigation peeze of this. as you know, some of us -- in fact some of this on this banking committee, have been meeting for many, many months, in fact for some members they've been meeting for over a

year, talking about an approach . and i would guess the best way of descryb that is the outline for the approach is the simpson-bowles plan which came out over a year ago. thinking about that plan, would you be comfortable in testifying today that that at least is an acceptable alternative to what we're facing between now and the end of the year in congress could see its way to adopting that approach? >> well, it does have a profile that seems reasonable in terms of addressing longer termed sustainability over the longer period. but again, i don't want to endorse the individual components in part because again choices between taxes and spending are a congressional prerogative and also because the bowls simple son plan isn't

a complete plan it doesn't say much about health care and how those costs will be controlled. but it does have the feature that like many other plans that have been suggested -- and there are others as well, that introduce this fiscal discipline in a rigorous way but over a longer period of time to allow the economy to adjust more easily. >> mr. chairman, i think if the average citizen were to listen in on the political debate that will occur between now and november and political debate is certainly appropriate, that's how democracies work. you would get very discouraged. but having said that, give us your thoughts. if congress were able to put a plan in place, whether it's bowls simpson or another approach that provided that stimulus maybe, for a period of

time in my judgment pull back on the sec ster, provided economic stability in terms of tax policy and revenue policy and started stabilizing things with a view toward trying to deal with the deficit over a period of time, what kind of signal would that send tot market place and do you think that would be a positive signal? >> it would be very positive. it would reduce a lot of the urn certainty that we see. it would address a very important problem. and it would show the ability of our political system to deliver important results. you may recall that when the united states government was downgraded last summer, it was the punitive reason was the concern about the ability of congress to come to a solution not a lack of resource force the country as a whole but it really was this 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 guidelines or guide posts 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 our biggest longer term problems. >> thank you, mr. president. >> senator brown. >> senator mr. chairman. chairman bernanke, nice to see you. as you know, as a result of dodd frank, the federal reserve has gained a great deal more authority to oversee u.s. banks, regulators we know all of us agree bipartisansy we have a responsibility to ensure that firm rules are in place that rules are being followed that bad actors are being punished. unfortunately, as we all know and read day after day since 2008 we have seen too many examples of wall street again breaking rules and laws and common standards of ethical behavior. i follow up on some issues that senator vitter talked about. and i just want to run through for the sake of repetition because it's so important to

continue to recognize what these problems are. investor lawsuits, s.e.c. enforcement actions over mortgage backed securities, municipalities sold overpriced credit derivatives bankrupting some of them, five servicers found to have forged documents. the nation's largest bank in january halted all consumer debt collection lawsuits over concerns about poorly maintained and inaccurate paperwork. the nation's largest bank has lost $5. billion to date. the regulators didn't know about or looked the other way. it appears their employees misreported losses, 16 global banks are suspected of manipulating libor that is used as a benchmark for mortgages and credit cards and student loans. as you know, even derivatives. in june one publicication reporter in a criminal bid rigging trial exposed illegal practices by wall street banks so that banks could underpay

for bonds. two weeks ago former employees told the "new york times" the company urged them to steer clients to their own mutual funds because they were more profitable for the banks even though they paid investors lower returns and other funds. the federal energy regulatory commission's investigating whether the biggest u.s. bank manipulated prices in the energy market. this goes on and on. not including institutions over which the fed has no regulation. and now the analysts at wall street biggest banks are sharing secret information. no wonder the public doesn't trust you or us or any of the banks on wall street, the bank regulatory system. so i don't know any other answer other than to put out there -- and again say i think so many of our biggest banks are too big to manage and too big to regulate. i think this behavior shows that they're too big to manage

and too big to regulate. true? >> there have been many bad practices i agree, many afthem are tied to the crisis period, period of excess. i think that's bad business. i think it's important for us to address those issues through enforcement. and of course part of the reason -- i'm not overclaiming here but part of the reason you could make such a long list is that so many of these things have been turned up. >> and perhaps many haven't. >> perhaps many haven't. that's true. >> mr. chairman, i apologize to interrupt and it's not really fair but you said this is bad business. for a lot of them it has been kind of good business. it's been embarrassing to some but it's also meant bigger profits and bigger bonuses and to say it's bad business from an academic viewpoint from a person at princeton perhaps but it's not good for our economy but it's been far too many rewards for some of the bad

actors. >> it's very short sighted. it is not the way you build a long term relationship with customers or long term profits. on the size of banks, i think the real issue is too big to fail. if you conquer too big to fail then there will be strong market pressures for banks that are too big to manage, too big to operate, to break up. there was a story about that in the media this morning about the benefits of providing shareholders with additional value by breaking up in situations where you don't have good controls and you don't have good synergies between different parts of the banks. so what dodd frank does is provide a blueprint for attacking too big to fail. and that includes the liquidation authority, it includes the living wills, which by the way do provide a blueprint if you want to brake up banks, the living wills provides some information about how you would do that in a sensible way. so i think it's very important

to attack too big to fail and we're addressing that through capital, through supervision, through orderly liquidation authorities, through living wills. and i think if banks are really exposed to the discipline of the market, that we'll see some breakups of banks. >> lig will seem to take effect at least in the nonfinancial world only on close to somebody's death bed and i don't think that these living wills address the issue nor does this other regulation seem other kinds of regulations seem to address the issues of all of this litany of problems i mentioned. in the end, if these banks can be regulated then it seems clear to me that includes the far captured by the regulators occ that they're either not up to the job or they're complicit in wall street's activities. i guess i beg of you to figure out how we're going to restore confidence to the american people and the financial

markets. >> that's a high priority. i agree. thank you. >> senator too manyie. >> thank you, mr. president. and thank you chairman bernanke for being here. i just wanted to touch briefly on moptry policy before moving on to the libor scandal. and you acknowledge that there's a range of views about the efficacy of the policy that you've been pursuing. i'm sure you would also acnong that there's a range of views about the risks that you've associated with the policies that you've been pursuing. and i acknowledge that i'm sympathetic that we've given you a dual mandate which i think creates the risk that you'll be put in a position where you'll have to deal with a conflict over two conflicting goals. but i want to stress and i know we disagree, we've had this conversation. but i feel strongly that the problems facing our economy are not monetary in nature. it's they result from this ongoing delerging process that we are suffering through, a regulatory avalanche completely unsustainable fiscal policy which you've acknowledged and

the threat of huge tax increases. so to address this with ever easier monetary policy i worry very much 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 very imprudent fiscal policy. so i just want to reiterate that point. but what i would like to ask you about, if i could, is this scandal. and i will tell you i'm very dispoibd about this. i'm disturbed about the destruction of what little confidence might remain in our financial system. i'm very concerned about the direct impact to american citizens inscluding my constituents among many. i think of the city of beth lehem that engaged in interest rate swaps where they were paying a fixed rate and i wond wler they were systemically receiving payments lower than what they should have gotten because of this. you had mentiond in your testimony or perhaps in answer to a question that fed officials became aware of bark

lay's manipulating this indesm in april of 2008. the journal has an editorial in which they recount an e-mail exchange that occurred in 2007 perhaps a phone conversation between a bar clays employee and a fed official. i just wonder when did you become aware that there was some lack of integrity in the reporting of libor rates? >> so let me first on your first point let me just say that there's not as much disagreement as you compli. it is not the ideal tool in many cases and we look forward to having partnerships with other parts of economic policy. on the telephone contacts, just note that these were phone calls and these were calls made by junior employees who were -- whose job was to call and get market color, get information on what was happening in the markets. in one of those calls it was

clear that the person calling the fed employee not an official, the fed employee not know what it was or how it was constructed so there were some issues about how that was communicated. in any case, i learned about it to my recollection in at the time when it became cord in the media which would have been i guess in april of 2008. >> here's what i don't 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 don't want to say it's dependent on it but it's totally integrated on this. and you and many other regulators understood that there were serious questions about the integrity of this. perhaps even systemic problems with the integrity of this. and yet everybody allowed these transactions to continue did t not occur to somebody to bring

the financial institutions together and say hey you probably ought to consider a different way of establishing your floating rate resets? because there's this integrity problem? did that conversation happen with any financial institutions or the public? >> well, financial institutions don't aren't the only participants in this libor based market. >> how about making it more broad though? >> i think the best way to address the problem and given all the issues occurring during the crisis at that point in time, the best way to address the problem in the near term would be to reform the way that those thurms were collect sod that the libor rate that was set would be in fact an accurate representation. >> my question though, and you mentioned observeable market transactions would seem like a bet ware of doing it. that sounds sensible to me. the question is why have we allowed it to go on the old way when we knew it was flawed for the last four years? with trillions of dollars of

transactions? >> because the federal reserve has no ability to change it. >> you have enormous influence over the institutions. >> we have been in communication with the british bankers association. they made some changes but not as much as we would like. it is in fact, it's not that market participants don't understand how this thing is collected. it is a freely chosen rate. we're uncomfortable with it. we talked to the bank of england. >> but i'm not sure that market participants were familiar with the integrity. there were other ways you could establish a perfectly viable floating rate that wouldn't have these problems. i'm just very surprised that this was allowed to continue for so long when the problem with the integrity was known. >> well, again, senator, the fed took the lead in making i think some very good suggestions about how to clean up the libor process. >> thank you. >> senator cole. >> chairman bernanke, last july

we discussed how the united states is experiencing a jobless recovery. you agreed then that the long term unemployment was a major problem and recommended congress take a look at ways to help the unemployed do things like training and education. of course the federal reserve has its own mandate to keep unemployment low and we continued to see very disappointing jobs numbers. i'm sure we agree the consequences of long term unemployment are enormous. so why has the fed been so slow to tackle unemployment over the past year? why hasn't the fed issued a third round of quantitative easing? and could you expand on your current maturity extension program? >> certainly. so far just briefly of course we have taken a wide range of extraordinary actions to support the economy. in june, we took the step of continuing the maturity extension program which has many of the features of

quantitative easing in that it involves purchases of long term securities which provides additional support to the economy. and we made clear that we are prepared to take further actions and we are looking to see if we're going to get sustainable improvements in labor markets. if we're not getting sustainable improvements we'll have to seriously consider taking additional action. the reason that there's any question is really again the range of views about efficacy cost and risk associated with these nonconventional measures. but that being said, as we said in june we are prepared to take further action. and we will evaluate our options as we go forward. >> i appreciate that. however, given that unemployment has remained over % for 41 months, a long enough time for it to be clear, now is the time to be more aggressive, i believe, in your approach, to

unemployment. and i think we agree the consequences of lodge term unemployment are too great for this to go on very much longer. on libor mr. bernanke one chief executive of a multinational bank was quoted in the economist as saying that libor is the banking industry's tobacco moment. citinging the 19r9 federally negotiated settlement that cost american tobacco companies over $200 billion. can you foresee a scenario where banks would seek any type of taxpayer assistance in order to compensate priorities that were victims of libor rigging? do you believe that potential court cases against banks that participated in libor manipulation could indeed result in another federally negotiated settlement? >> well, there are many court cases already in progress. i think it's too soon to make any guess at what the outcome

of those court cases will be. there have been a few estimates by private analysts of potential cost but those are admittedly very much back of the envelope types of calculations. so i think we have to let this play out. i don't know what the costs will be. and i really don't think it's responsible for me to guess until we get more information about the impact of these actions on the actual libor rate and the implications of that for rates that people paid. so it's obviously very serious. but i think it's too early to judge what the cost will be. >> and recent reports indicate that the scandal could cost the banking industry millions if not trillions of dollars. and as you know, there's no appetite here or anywhere else to do another bailout for the banks given the increasing amount of money that is at stake i would urge you to work

when the time comes. cloastly, with the justice department on this. and i think you would agree that you will. if we can contribute to a global settlement as we did in the case of the servicers, we would of course. >> thank you. > thank you. thank you mr. chairman. >> senator moran. >> thank you. chairman bernanke, thank you for your testimony. in the advance of the financial crisis in 2008, many observers said it came out of the blue, as a surprise. what is it a you are worried about that we ought to pay attention to that has the potential of being the next crisis to the economy of the united states? i often read about credit card debt, student loan debt.

what are the things you are most worried about, and what are we doing to mediate the problem? >> well, i think the items, and i mentioned these in my testimony, would first be the european sovereign and banking situation, which remains unresolved and there is financial stress and she did with that and some distance before they get to 8 -- associated with that, and there is some distance before they get to a solution. that poses an ongoing drag on our economy, and although i have every hope and expectation european leaders will find solutions there is the risk of a more serious financial blow up and i do not want to take all of your time, though we have taken appropriate steps to strengthen our banks in the united states and provide -- to prepare for whatever event might happen. the other, briefly, is the domestic situation we have been

talking about fiscally, and it is important that in the short term congress works effectively to address the debt limit, the fiscal cliff and those issues, and establish a plan for fiscal stability. >> at what point do we have a sense of whether the european crisis will have huge consequences for the u.s. economy? what time frame are we on where we know if europe has appropriately responded to resolve their own problem? >> we appear to be in a muddling through environment, which is costing everybody, europe more so than us. many countries in europe are already in a recession. based on what i can observe, it seems like it could take a very long time because the structure and the institutional changes that year to try to make are not ones to take quickly.

they recently agreed to create a single bank regulator for eurozone bank's. to do the, and i do not have the inside information, but it could take time, going into next year, before they have a single bank regulator. likewise, they are trying to establish fiscal rules and agreements. they made some progress there, but given that there are 17 governments that have to agree to every major change, it could be some time before they have come to a fully satisfactory fiscal arrangement. it appears to be something that could go on for a while, unfortunately. >> but me ask a more specific, more narrow question the kauffman foundation is a foundation in kansas city that considers the entrepreneurship, and their statistics demonstrate that companies that

are less than five years old accounted for nearly all of the net new jobs created in the u.s. economy. new businesses create an average of 3 million jobs each year. unfortunately, our census bureau indicates the start of the engine is slowing down. in 2010, three and 94,000 new businesses were started in the united states -- 394,000 new businesses were started in the united states, the lowest since 1977. i would like to hear your opinion on what policies congress administration should pursue to return to the days to where the united states is at the forefront of innovation and entrepreneurship. >> those facts are, i believe, correct. young companies are big to jitters because if they are

successful they grow quickly and at -- are big job creators because if they are successful they grow quickly and ed and 40's. it is difficult to measure start -- employees. it is difficult to measure start-ups. i think it is clear, both because of the weak economic conditions and problems related to the availability of credit, venture capital, and effected many entrepreneurs -- the fact that many entrepreneurs use equity in their home as startup capital, it is very possible that those companies are not starting up the rate that they have in the past. i do not have a really good program here to suggest other than to try to create as favorable of a tax environment, a credit environment as possible for startup firms to write regulations in a way that serve their purpose but allow small firms to flourish. according to international

agencies to calculate these things, the u.s. has a small business-friendly environment here in terms of cost and time required to start up a small business. it is not like we are in bad shape on that, but any improvement that would make it easier for small businesses to get the necessary capital, to meet the regulatory and other requirements and to avoid early tax burdens -- all of those things are obviously approaches that could help these companies start up and provide employment. >> mr. chairman, thank you. one would think we would have significant startups particularly in light of

unemployment, which creates the opportunity for the necessity for people to create business on their own thank you. >> senator warner -- on their own. thank you. >> senator warner. >> thank you. the end is near. i would argue that we do have legislation to address start activity, as well as the addition of talent. i commend senator moran's and leadership on this issue. i know most of my colleagues have left, but i would also point out that because of the actions we took in this congress in dodd-frank and otherwise we have seen an increase in capital and american banks in excess of three entered billion dollars more in capital reserves -- $300 billion more in capital reserves and that is out the banking industry relative to some banks under assault around the world. i would like to commend you on your continuing to urge us to

act on fiscal policies. waiting for congress is a little bit like "waiting for the del." hopefully we will see action later this year. my first question would be, as we grapple with this issue of trying to get an appropriate balance of revenue and entitlement reform to generate the four trillion dollars to drive our debt-to-gdp ratio to go down, and because you have talked about having the ability to face these things in, i sometimes scratch my head because what is best of the american people is smaller than what is best of the people in the u.k., europe, india and elsewhere where they are going to policy changes. have you done any kind of sizing of what the $4 trillion deal relative to the size of the american economy and what is being asked of the american people as opposed to the rest of the world to get fiscal

houses in order? >> i am not done that i -- that exercise, but in terms of gdp, some of the fiscal shifts in countries like spain, portugal and italy are substantial and in the near term, which is partly why they are so weak in the near term as economies. it is true that the near-term fiscal step that is being taken it is larger in these countries are under a fiscal stress, but i'm not quite sure what the implication of that is. we are lucky that we can borrow at a low interest rate. we are not currently in the same situation as a greece or 8 portugal, and therefore if we can intelligently combined a gradual glide path with a strong, credible plan for stabilizing our deficits in the longer term we can avoid that type of painful contraction and do it more gradually.

>> it almost seems to me that it is remarkable, and i guess this is why congress has record low levels of approval, that we cannot step up and do our job relative to what is the best of other people around the world. -- asked of other people around the world. one of the things we have talked about is additional actions to stimulate the economy, and for those that question taken these actions, if we look at the european central bank's recent actions, the bank of england, the chinese financial institutions, what effect of their stimulus activities or loosening

activities does that have on the world economy and in terms of your decision making? >> well, there has been a global slowdown. a lot of it emanates from europe, which through export demand is effecting asia and other parts of the world -- the united states as well. there has been some slowing in asia as well. chinese gdp statistics said the weaker this year than previous years. part of that was intentional as they saw to cool the housing market and address inflation concerns. there is a slowing in the global economy. to the extent that actions taken by our trading partners strengthen those economies, it will help us on the margin because it will increase our markets and provide an overall, a better economic environment. i would say that this point, compared to what we saw in the

aftermath of the crisis, nothing is happening globally of that kind of scale. there are relatively modest steps being taken in both of those jurisdictions to try to offset some of the slowing. >> but those actions are similar to what you might take in the fed. i guess the point that i would make is that there seems to be a consensus opinion of around major economies around the world to take the stimulus of actions. >> the world is in an easing cycle, that is correct, and in terms of specific actions, the u.k., for example, has added to its quantitative easing program and has been doing other things as well. the united states federal reserve is not the only central bank that has been using these policies as a tool to strengthen their economy. >> thank you, mr. chairman. >> senator warner.

>> i appreciate the fact that you have talked about fiscal policy as well as monetary policy and the overall economy. you know that your forecast is lower than it was in january. you say you now forecast that we will have over 7% unemployment through the end of 2014. i think we will all agree that this is not the kind of economic growth we need and that americans have had in the past. if taxes are raised on individuals making over $250,000, many of whom are small business people for the job

creators, what effect will that have on the projection you have in your written testimony? >> we have not done a specific exercise. i have been focusing on the overall size of the fiscal shock, that includes the expiration of the 2003 tax cuts, ui payments and the sequestration. you put all those things together, you get a shot that is 4.5% of gdp. >> the president came out and reiterated last week that we simply raise taxes on 250,000 dollars and above. i think you will agree in terms of the federal debt that that is a relatively small amount. that would affect job creators and make your numbers worth,

the-numbers worse, wouldn't it? >> it could if it reduced aggregate demand. as often is the case in tax policy, you have efficiency and growth concerns. you also have equity concerns and all of those things feed into tax conditions. >> i realize it is hard to predict with certainty. i would simply suggest to you that you are correct in saying it could have an adverse effect. let me ask you about the fiscal sought -- fiscal shock. we have to do something. senator jon kyl and became came up with a proposal to deal with sequestration -- senators kyl and mccain came up with a

proposal to deal with sequestration. it would have saved $127 billion in spending by simply doing two things. number one, freezing pay for federal workers until june, 2014. the second would have been a 5% reduction in the federal work force, not a five% reduction in federal spending. by hiring only two workers to replace every three that are leaking through attrition. this reduction would take up to 10 years to achieve. that is not the sort of things you view as a fiscal shock, is it? we can restore that kind of modest spending reduction to

save us from the meat axe approach of sequestration at the end of the year. >> without endorsing a specific program, a spending program that comes in -- >> a spending program that comes in more gradually over a period of time, but also is tied to a plan, a credible plan, to achieve fiscal sustainability in the medium term would be -- is what i'm recommending. is something that would avoid this very, very sharp change in the government's fiscal position one day, january 1, 2013. >> let me see if i can squeeze in one more thing. you know, about -- unemployment rates unacceptably high. you expect 7% or more by the end of 2014. in january, 2002, unemployment rate, 5.7%. october of 2003, unemployment rate 6%. by october, 2004, down to 5.5%.

boy, wouldn't we love to see that kind of unemployment house in the united states of america. down to 4.9% by august, 2005. 4.4%, unemployment rate, these are actual figures by october of 2006. as late as may of 2007, unemployment rate of 4.4%. and then, of course, by the end of 2008, it's up to 7.3%. we hear a lot of discussion and a lot of warnings by people in the city about not going back to those disastrous policies that got us into the situation we're in in the first place. the fact is we had relatively low and un-- and a relatively acceptable unemployment rate for much of the decade until 2008, and we had real -- we had real g.d.p. growth in 2006, 2007 and 2008, isn't that correct?

>> in 2008, yes. >> what happened in 2008? was it tax cuts for the rich? >> no, we had a major financial crisis, as you know. and it created a global recession. >> right. >> very deep one. >> thank you very much. >> senator merkley. >> thank you, mr. chairman. thank you, chairman. in your opening comments, you mentioned housing refinancing and families that are underwater. we have about eight million families whose mortgages are under water. some can refinance through harp but it's been a pretty small number, only about 200,000 so far.

in part because the complexity with second mortgages. if families who are under water could refinance from those higher rates to lower rates, could that be a significant factor and substantial tool, if you will, in helping to move the construction economy forward and stabilizing those eight million families? >> if that were possible, it would be helpful, because it would both reduce the payments and reduce defaults and foreclosures and improve the income of the people who could refinance. >> thank you, mr. chairman. i want to switch to another

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

i am not making judgment but just a different activity. and i was only making the point that it was the -- only the former that came to the attention of the new york fed. >> and so in terms of the platter, the collaboration between the traders and those who are reporting the libor rates, when did that first come to the attention of the fed? >> not until relatively recently. this was something that was discovered by the joint investigation of the cftc. i think the s.e.c. was involved. the d.o.j. and the british authorities. >> thank you. i was very struck to read some of these emails such as, hi, mate. we need a really low three- month fix. it could potentially cost a fortune. or another trader who wrote, we need a 4.17 fix on the one- month flow. one-month low fix. we need a -- the print is small for me. 4.41 fix on the three-month high fix. and certainly this type of activity, does this constitute fraud? does this fall into a criminal area as well as just really

unacceptable manipulation, if you will? >> based on what i know about it. what i read about it, it does seem to be so, yes. >> i think the point my colleague, senator demint, was making earlier, when you know someone has a thb on the scale, isn't there a responsibility to alert the customers about that thumb being on the scale? i know that you all did send this advice to the bank of england or to others that there's ways to fix the thumb on the scale, get the thumb off the scale, but if you had it to do over again, would you talk to the people getting mortgages based on libor and so forth that something is not quite here and you should be aware of our concerns? >> well, it's important that people know about it, but i'm not sure i would agree this was something unknown. the financial press was full of stories about it, and the reform proposals that the new york fed made were also reported

in the press so i think there was a good bit of knowledge, at least among more sophisticated investors about the problem. >> i do think the municipalities that were involved are feeling that perhaps they weren't as aware of the thumb on the scale as they might have been but that will all be sorted out in due course. >> that's right. >> if my colleagues will bear with me for 30 seconds. an issue i want to follow-up with you on which is related to the growing role of banks in providing crude oil to refineries and then buying the products. we have goldman that is doing this with a refinery operating in three states. jpmorgan is doing this with the largest east coast supplier. morgan stanley is doing it in a

few states with p.b.f. it reminds me of the situation -- and i mean no -- at this point there is no sign of wrongdoing of any kind, but it reminds me of the potential for problems that occurred when enron was both supplying electricity and running electricity trading markets. because we have that here. we have now the banks involved as a supplier and purchaser of large quantity its but we also have them -- quantities but we also have them involved in trading because regulators have exempted the spot markets from the volcker firewall. is this an issue that we should

be concerned about, this substantial conflict of interest of being a supplier and involved in the trading side? >> am i mistaken, senator? i thought the statute exempted the spot market as opposed to the regulation. >> let's follow-up on that because there's also a lot of letters that have been submitted on the future spot markets, if you will. not futures themselves. i believe that that is a gray area. >> well, except insofar as the statute exempts certain activity, i would think proprietary trading in this area would be part of the volcker rule. >> it does give regulators authority over that. >> we'll look into that. >> thank you. >> thank you, mr. chairman. i could have gotten the frog out of the throat two hours in the hearing. mr. chairman, thank you for being here and thank you for your testimony. i want to make one observation and i have a couple of questions because there have been traces of a discussion in here today

about the nature of the economic growth we need to see in this country. it really is not just about g.d.p. growth. it's about job growth and wage growth in the united states and whether we can recouple those things together. they decoupled in the last recovery. they are not coupled in this recovery. as you observed, there are things that we can do in our tax code and our regulatory code and our statutes that would provide an ecosystem that would differ on that promise again for the american people. we've been having a hard time getting to that conversation in this congress, but we need to. that's the fundamental work in my view, why we were sent here. we spend a lot of time talking about how to avert crisis now, and you're a historian of the great depression, i know. i think 100 years from now if we don't get our act together here no historian will be able to fairly record your tenure without saying you came to the senate and to the congress and you very clearly said, here are the things i am most worried about and if you don't deal with it you risk a real disaster.

i'd like to hear on that score a little more about what you say in your testimony are the strong incentives to resolve the crisis that the europeans have, the i.m.f., as you know, came out with a report yesterday about the challenge they face. they have a lot of political dysfunction there as we do here, but they also have, as you pointed out, a less elegant institutional arrangement right now for dealing with it. >> no, that's right. they have both economic and political incentives. the european union and all those european-wide institutions that include now the common currency area were created after world war ii in part to try to avoid any future war on the european continent. and obviously that's been an extremely important objective that people put a lot of weight on. and so closer political union is something that many european leaders consider to be

important. and so this is part of maintaining the currency and achieving stability there as part of that. in addition, the -- both the north and the south, so to speak, benefit from the common currency. in particular, for example, the germans are -- have an exchange rate in the euro which is probably weaker than they would have if they had a deutsche mark. and therefore they have a weaker currency, more competitive currency, and a -- if you will, a captive market for selling their exports which -- both of which would not be there if the euro zone was not an integrated stable structure. even from the point of view of the germans who have the most concern about the potential fiscal costs of grader coordination within the euro zone, they both have substantial economic reasons to make this happen.

throughout europe, the general opinion polls in most cases is people would still have the euro despite all the problems that they've been facing. now, as you point out, there are many difficult political problems. you have 17 different -- we have one congress here. we have difficulty coming to the -- >> i can't even imagine. >> they have 17 different parliaments and they have a treaty which requires broad, if not unanimous agreement, and so there are some very substantial problems in getting to agreement. >> let me, because i want the senator from north carolina not have to wait on me, let me come to the second point. the stuff that's actually in our control. this is your testimony today, page 6. the most effective way that the congress could help to support the economy right now would be to work to address the nation's fiscal challenges in a way that

takes into account both the need for long-run sustainability and the fragility of the recovery. doing so earlier rather than later would help reduce uncertainty and boost household and business confidence. tell us what that 100-year record if we don't do this? >> well, in the short term -- >> and i mean short and medium and long. >> as i'm saying, as the c.b.o. and others pointed out, if the fiscal cliff is allowed to happen as it's now programmed in the law it would probably knock the recovery back into a recession and cost a lot of jobs and would greatly delay the recovery that we're hoping to facilitate. in the longer term, the -- it is simply not possible for deficits to continue along the path that they are currently projected. so either some solution would be -- have to be found that could be very, very painful at some point in the future because of the size of the cuts. we are talking about comparing us to europe and some of the

countries that are making very, very deep cuts right now and how painful that is. either we would have to have those kinds of cuts or we might face a financial crisis where interest rates would rise, as we're seeing now in europe, and that would feed through through other interest rates like mortgages and other kinds of rates. and it would be very costly to our economy. so both in the short term and in the longer term, it's important for us as a nation to create a fiscal policy that achieves both the short term and long-term objectives. >> i wish i had more time but i'll come back to you with other questions. thank you, mr. chairman. >> senator hagan. >> thank you, mr. chairman. and thank you, chairman bernanke for enduring the long hearing today. and i do want to say thank you, too, for your great work and your sacrifice. i understand that -- we talked a lot about libor today. libor is simply a benchmark that lenders voluntarily use to

represent the cost of borrowing by large banks. there are other alternative metrics and you mentioned that in your earlier testimony that financial institutions could use benchmarks for loans and derivative contracts such as commercial paper rates, the fid fund rates and the yield on u.s. treasury have all been mentioned as alternative benchmarks to libor but each have shortcomings. could you discuss some of these alternatives and do you have which might be a prmble benchmark? >> as you -- preferable benchmark? >> one that's been considered is the so-called general collateral repoe rate, rate at which repurchase agreements are made. it is a thick market. a lot of trades take place and trades take place at a different maturity which is important. so that would be a possibility that people are considering. another possibility is the o.i.s. rate, the so-called overnight index swap rate which

is a measure of expected central bank interest rates essentially. it's like a measure of the market-based measure of the longer term federal funds rate. and it has some advantages as well. i think the main thing that distinguishes these rates, the ones you mentioned and repo rates and libor is there is no ambiguity and there is no issues raised by the libor process which is verifying whether the reported rates are indeed accurate. >> could you see the markets going to a different rate other than libor for the multitude of -- >> i suspect they will seriously be considered unless, of course, measures are taken to restore confidence in libor.

the problem, of course, we have enormous amounts of existing contracts. not just derivative contracts but a variety of other kinds of loans and securities which are based on libor. and until those are negotiated away or they expire, we have this huge legacy issue of libor- based financial contracts. so it might be -- it's just like the quirky typewriter. it's not very efficient but everybody is used to it so it's hard to change. you might have the same phenomenon there. if we do have libor, we need to make sure it has the confidence of the people in the market. >> thank you. in section 944 of dodd-frank, governors along with other federal agencies to jointly prescribe regulating -- prescribing regulations that require securitizers to retain credit risk.

the proposed rule was issued in march of 2011, and the period was subsequently extended. could you describe the role of the federal reserve bank of new york and its staff are playing in the drafting and completion of -- completion of that rule? >> well, we sometimes draw on reserve banks for specialized expertise. for example, in the securitization laws -- rules, we try to look at existing arrangements for credit risk retention for different types of markets and people in new york who deal with those markets on a regular basis would be helpful in providing that kind of information. but the -- of course, the responsibility for drawing up the regulations and making the financial determination lies with the board of governors in washington and although we may use expertise from new york,

it's a board decision. >> thank you. last question. when discussing the nonstandard monetary policy tools that the fmoc is implementing, you've consistently said the level of accommodation that the economy is receiving is based on the total stock of outstanding securities in your portfolio. and in june, the fmoc announced it was taking steps to extend the maturity of its treasury portfolio rather than expand its size or change its composition. could you discuss why they would extend the treasury portfolio and not acquire additional mortgage-backed securities which would have the added benefit of supporting the housing sector? >> well, when we say that the stock is what matters, we are referring to the stock of longer term securities specifically, and so what this

is doing is replacing very short-term securities with longer term securities, increasing our stock of longer term securities, putting downward pressure on longer term have rates and pushing -- by taking duration risks out of the market pushing them in related assets like corporate bonds and lowering the yields as well. this was an effective step, and it was a relatively natural one since the previous program was just coming to an end in june so we extended it for six months. but we continue to look at alternative approaches, including approaches that invoe buying m.b.s. and trying to assess both the efficacy costs and risks of those programs as well as the outlook and the extent to which we can get a better outcome in the u.s. economy.

>> in the fmoc's last policy statement, the committee indicated that it was prepared to take additional steps if it didn't see a continued improvement in the labor market. my question is what would you describe as an improvement in the labor market, what would that look like? and it's my understanding that the fmoc doesn't project unemployment to fall much below the current levels before 2013. >> well, we want to see unemployment going down. we don't want to see it going up. we want to see continued improvement. we had significant improvement between the fall of 2011 and early this year. lately we've been leveled out, and we'd like to see the economy return to a situation where we're making progress on unemployment. >> i think about each and every day. thank you, mr. chairman. >> chairman bernanke, i want to thank you for your testimony today on the fed's economic forecast and its -- and other things. this hearing is adjourned. [captioning performed by national captioning institute]

[captions copyright national cable satellite corp. 2012] >> thank you. >> president obama boarded air force one at andrews air force base headed to colorado to meet families bereaved after a mass

shooting at a theater. the victims ranged