you will not have this stress that we have heard analysts say that we would have with the corn crop being reduced. i think it also would strike me -- there is a divide in the agriculture community with livestock producers and those who produce ethanol. that is something that has been happening for a while but the drought has brought out more division. >> can use decode this for us? >> listening to the secretary since he took office, there is a little concern when you have an intense situation like this a lot of the longer-term efforts to do things like build biofuel may end up being sidetracked by people concerned that the corn

production is tight. it is a difficult argument for him to fend off. there is pressure being felt. i have no doubt that there will thomas vilsackls a polyptych. >> this is something that has to be done. it is critical for planning and farmers. the secretary has been pushing this a lot. it sits with the house what they are going to do. >> you get multiple messages to those that are worried about food prices and politics. >> the department of agriculture is wide ranging.

we did not even get into the nutrition programs. there is a lot of underlying issues even beyond the ones that are picking up the usda right now that are creating a minefield. >> is that tough to negotiate? >> i do not think so. people have an instinct of what the farm community is and how it ties to an everyday life. food prices are on everybody's mind now. that is the number-one thing to hear. the impact on the farmers' market in food prices are related. it is not necessarily what message or multiple messages. you have to explain to each sector how the policy impact them. >> thank you so much for being with us this week.

[captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012] >> you can watch "newsmakers" later today at 6:00 eastern .irie i >> president obama travel to chicago yesterday what he will hold -- where he will hold campaign events. >> mitt romney announced that congressman paul ryan as his vice-presidential running mate yesterday. earlier this year, mr. wright and shared a house budget committee hearing -- ryan shared a house budget committee hearing. this portion is about 1.5 hours.

>> the hearing will come to order. welcome to this important here. i would like to think secretary

geithner for joining us. this is your second hearing this week. you are half way there. we know that defending this is no easy task. we appreciate your time. is not as hard as your job. >> could be a fun day. >> you have my sympathy. it is well known that one of your favorite things, and i enjoyed this, is planned beat no plan. it is used often to describe the need for policy makers for them to stay ahead of of then. you are ahead of the firestorm. i remember those days vividly. i remember your predecessor coming here talking about crises

and inflationary spirals. what came out of that was ugly legislation. the circumstances cannot be more difficult today. we faced a crisis that most people did not see coming. we are facing the most predictable crisis and our nation's history. you brought us this. this is no plan. this is no plan to restrain spending. it is no plan to save as from a debt crisis. why has fe president decided to duck from the drivers of the debt?

and some of cooperation, why have we seen be present back out on the bipartisan solutions? after house republicans put forward a serious solution and our budget, the president had an opportunity to defense alternatives. if there is a growing bipartisan consensus, there is one of contention issues like entitlement issues spent tax reformer -- issues and tax reform. they had a bipartisan history. it was under the clinton commission. a continues with the work done at the bi-partisan policy center.

it includes the work i have recently done with the senator from oregon. fundamental tax reform also has a bipartisan history. in 1986, i was in high school but i read the book, we did fundamental tax reform that lowered tax rates and broaden the base. the congressional sponsors were bill bradley. this is about those who are willing to tell the truth. this takes the latter approach it threatens our prosperity and it commits our children and our grandchildren to a diminished future. i do not know how you can conclude otherwise.

you probably would be the first to acknowledge that no plan is a plan in excel. having no plan means we are planning for a decline as a nation. the point is to find out why that future is apparently acceptable and this budget and this administration. as the secretary will testify, this represents a good plan and the debate we really have is not between plan and no plan. it is between two very different visions of how we move forward in country. what this budget does is three

essential things. one it helps to nurture a move forward are very fragile recovery. president obama was sworn in, it economy was a free fall. we now know we were in free fall. previoustioned the secretary was here it was a crisis. that was the crisis he inherited. we were losing over a hundred thousand jobs every month. the first thing they did was to put an end to that free-fall and begin to reverse its. we helped rescue the automobile industry. the reality is today with a

scene 3.5 million private sector jobs. that is good news. is it enough? probably not. we have a strategy to nurture that the continuing to help this and grow the economy. one piece of this, something i hope will be done later today, i extend the tax cuts. is very important provisions to the american people. that is not enough. the plan the president put forward, similar to the one of fronts of congress last september. if you look at the unemployment figures, you can continue to see layoffs in the public sector,

teachers losing their jobs. emergency responders. that is why the plan says we need to provide a little assistance to the states and also calls for $50 billion in infrastructure. it is absolutely necessary. we have over 13% employment. we have roads that need to be built. we have schools that need to be renovated. this is a win win. it is often curious to me to hear people say building an aircraft carrier helps create jobs. you have to make sure of the job creator. building a road is as well. why we would decide to not invest in our infrastructure which has been essential to economic growth is a mystery to

me. the president has put forward a good plan. what else does this budget do dax index critical investments of the future. look at the g i bill. it helped millions of americans get a better education. it has paid off. this helped lead to the internet. it helped the united states get a head start. we want to invest in this so we can maintain a competitive edge. this budget takes a balanced approach to reduce the deficit and a good way. it reduces it as a percent of the economy. it does this in the balanced approach. that is what a republican

colleagues objected. you have a plan. you have a balanced plan that says we're going to make some tough cuts in discretionary spending. the cut over 360 billion. they also do something else. the proposed tax reform and not just to simplify the code. they do it in a way that other bipartisan commissions have done to reduce our deficit. our republican friends have taken this position. not one penny from closing loopholes can go to deficit reduction. not one penny. that would be a reduction.

andthat would be a violation of the republicans. between no plan and plan. it is between irresponsible, balanced plan the president submitted -- be responsible, balance plan the president submitted any plan we have seen before -- it is between a responsible, balanced plan submitted by the president and the plan we have seen before. folks at the very high end of the income scale -- you are not asking them to go back to paying the same rates as they were during the clinton administration when the economy was booming. simple math -- you have to find it somewhere else. that but it took $700 million out of medicaid. 1/3 of medicaid cut. it places the risk of rising health-care costs on seniors through a plan that ends the medicare guaranteed. and it cuts import investments in infrastructure, education, science, and research.

those are the choices we have. mr. secretary, i know you will elaborate on the plan you have. i think it is a good plan. it is irresponsible plan, and it is a balanced plan. -- it is a responsible plan, and it is a balanced plan. >> i guess we will agree to disagree. >> thanks for giving me the chance to talk to you today about these important questions. i will talk about four things just briefly about the economy and the challenges we face there. then a bit on the near-term and paris on growth and jobs. i will lay out the broad strategy and the points on where we disagree. -- a bit on the near-term is imperative on growth and jobs. the economy is getting stronger, but we still have a lot of work ahead of us. despite the financial headwinds from the crisis has people bring down debt and we work through the housing construction bauble, despite the severe

cutbacks by the government, despite the crisis in europe, despite the oil crisis last spring, despite the terrible damage in confidence caused by the specter of default this summer, despite all these shocks and headwinds, the economy has grown at an annual rate of 2.5% since growth resumed in 2009. private employers have added 3.7 million jobs over the past 23 months. private investment in equipment and software is up by more than 30%. productivity has improved exports across the american economy from agriculture -- productivity has improved. exports across the american economy are expanding. americans are saving more and bringing down debt levels. the financial sector is in much better shape, helping to meet the growing demands for credit and capital. these improvements are signs of the underlying resilience of our economy, the resourcefulness of american workers and

businesses, and they are signs of the importance of the swift and forceful actions we took with the fed to stabilize the financial system and pull the economy out of the worst economic crisis since the great depression, but we still face a very significant economic challenges, particularly for the average working family in this country. americans are still living with the acute damage caused by the crisis. unemployment rate is still very high. millions of americans are living in poverty, looking for work, suffering from a fall in the value of their homes while struggling to save for retirement. for these reasons, the president's budget calls for additional support for economic growth and job creation alongside longer-term reforms to improve economic opportunity, improve long-term growth prospects and improve fiscal sustainability. i want to applaud the congressional leadership for the progress they have achieved, reaching an achievement to extend the

payroll tax cut and emergency unemployment insurance. this is my second point -- do not stop there. there are more things we can do with bipartisan support, things that have traditionally had bipartisan support. it would be good to make the economy stronger in the short term. just because we disagree now on the long-term shape of tax reform and entitlement reform, it does not have to get in the way of doing more things now that would help the economy in the short term. i will give you three examples -- more help to get construction workers back on the job with substantial infrastructure program would be good policy. helping americans refinance to take advantage of lower mortgage rates would be good policy. and better incentives for investing in the united states would be good policy. all those things are things that had brought bipartisan support in the past, and we should not let the disagreements we have on the ultimate shape of tax reform entitlement reform get in the way of those things now. so do not stop with the payroll

tax extension. beyond these immediate steps -- and this is my third point -- the president's budget lays out a strategy to strengthen economic growth and improved economic opportunity while reducing our deficits to more sustainable levels. i know the conventional wisdom is that this debate does not matter because congress is too divided to legislate in this election year, but this is a very important debate. it matters because it is about fundamental economic priorities, how to increase growth and opportunity, how to strengthen health care, how to return to live within our means. we have to make choices about how to use our resources more wisely, particularly given the millions of americans who will become eligible over the coming decades for medicare and social security. it is important because, as you all know, at the end of this year, we face the expiry of the bush tax cuts and the possible imposition of the sequestered. together, that will force us to come to an agreement on another

substantial down payment on fiscal reform. we need to get to work on how to build consensus on how to move forward in this case, even though we are so far apart on some of the fundamental choices. in the president's budget, we propose reform that would save $4 trillion over 10 years. $3 trillion on top of the caps on discretionary spending we agreed to in august. if congress were to enact these reforms, they would lower the deficit from just under 9% of gdp in 2011 to just under 3% of gdp in 2018. that would stabilize the overall debt burden as a share of the economy in the second half of the decade. that would put us back on the path towards fiscal sustainability and leave us much better positioned to confront the remaining challenges -- and they are formidable, still -- that build

in future decades as americans retire. under this plan, discretionary spending is expected to fall to its lowest level as a share of the economy since dwight eisenhower was president, and the president's proposal would also slow the rate of growth of spending in medicare and medicaid, both through the affordable care at reforms and the additional proposals we have laid on the budget for additional savings -- both through the affordable care act reforms any proposals we have laid on the budget for additional savings. the budget makes a series of targeted investment proposals in education, in innovation, in manufacturing and infrastructure. these are not expensive proposals. they are things we can afford, and we propose to pay for them

within a framework that reduces our deficits to more sustainable levels. in order to achieve this balance, the balance between significant, substantial deficit reduction over time, there is still room for investments that matter. we propose to raise a modest amount revenues for tax reform. the president's plan proposes roughly $2.50 in spending cuts for every dollar in revenue increases. these revenue increases would fall only on the top 2% of americans, not the rest of the 90% of americans. they would raise revenues by roughly 1% of gdp. -- not the rest of the 98% of americans. focusing these revenue proposals on the top 2% is, in our judgment, a more fair and better way to achieve fiscal sustainability, better for the economy, and better than the equivalent amount of cuts in things like benefits to middle- income seniors or in infrastructure and even defense spending. we proposed tax reforms that raise revenues not because we think it is good politics for us or because any of us like to do it.

we propose it because we do not believe it is possible to meet our national security needs to preserve a basic level of health care and retirement security to compete effectively in the global economy without some increase in revenues as part of a balanced plan. we illustrate in the budget a range of specific tax changes that could be added on to the present tax system to raise the necessary amount of revenue, but we think the best approach to get their -- there would be through comprehensive tax reform. we have outlined a general set of principles that would be designed to make the system more fair, more simple, to better invest in the united states. we will lay out in coming weeks a broad framework and object of that is better for the united states. we think that is a good place to start. i hope, as the chairman said at the beginning, there is the prospect of bipartisan consensus on the framework.

final point -- i know there are members of congress who are critical of these proposals and would prefer a different strategy. you should judge our plan against those alternatives. let me say where we agree and where i think we disagree. where we agree is that our fiscal deficits are unsustainable. they have to be brought down over time, or they will do a lot of damage to the country. we agreed that the commitments made to medicare and medicaid are unsustainable and unaffordable over the long run, but we disagree in some fundamental respects. some of you had suggested that we cut deeper and faster, with more severe austerity now. in our judgment, that would damage economic growth and reverse the gains we have

achieved at getting more americans back to work, and it would put more americans into poverty. a program of severe, immediate austerity now is not a growth strategy. we cannot cut away to economic growth -- we cannot cut our way to economic growth, and we have to be attentive to an economy still reeling from economic growth -- from economic crisis to make sure we do not hurt economic growth in the long term. second, probably for -- probably a more fundamental contrast, is there are those on your side to suggest we try restore fundamental balance without trying to raise additional revenue from anyone or cutting taxes for the period in our judgment, to do so would necessarily entail deep cuts in income for retirees and innovation. and cuts in defense spending that would hurt our national security interests. the choice we face is not about whether we should reduce our deficits -- we all know we have to do that.

it is about how quickly we do it, but it is fundamentally about whether to do it with a balanced plan that helps growth in the short run or with a plan that will place more of the burden on cuts in national security, medicare, low-income programs, education, innovation, infrastructure in ways that we think would be unfair and damaging to our interests as a country. these are tough reforms, but it is a balanced mix of spending cuts and tax increases. it gives us room to make investments that will improve opportunities for americans and will help protect our basic commitments to retirement, security, and health care with the elderly and poor. it provides substantial, immediate help for the average american alongside reforms to help restore long-term sustainability. it will not solve all our challenges. even if you embrace these proposals today, we could still be left with substantial additional challenges, but it

would put us in a much better position to meet those challenges. thank you, mr. chairman. i would be happy to try to respond to your questions. >> thank you. i guess we will just demonstrate how we agree to disagree on a few of those points. here is the question i want to get to -- do you think this budget averts the deterioration of our fiscal problems? >> we are not claiming it solves all the problems facing the country, but it does meet the critical, essential task of restoring our deficits to a more sustainable position for the next 10 years -- the critical, a central test -- the critical, essential test. our overall debt burden as a share of the economy starts to come down. we meet that and help lower the trajectory of costs, but we still would face, even with this framework, more work to do

in the long-term demographic challenge. >> bring out a chart 513 -- bring up chart 513. i do not see the rhetoric matching the results. you say that -- your budget says that the government position gradually deteriorates, that our fiscal condition deteriorated. these are your numbers. it shows exactly -- >> it shows exactly what i said, which is if you look at 2012, and destabilizes that debt burden as a share of the economy. you are right that as millions of americans retire, those costs in medicare and medicaid start to increase again.

that is why we are saying openly and directly to you that we will have some work to do. what you do it is, i think, in your budget -- although i know you have a new one coming -- is you would lower that path in ways that would substantially increase the burden of health care costs on middle-income seniors. although we agree with you we will have more work to do, but we will not adopt an approach that would undermine that basic benefit. >> go ahead and show slight -- slide a again. the red is the status quo, the baseline we are on. this is last year's budget. we cut it off at the end of the century because the economy, according to cbo, shuts down 92027. -- shuts down in 2027. >> you are talking about more than half a century, but if you

look at the gap between us, it is a pretty small gap, and that gap, which is all we are debating today, is one where you are achieving that slightly diminished path -- >> this is your time, so we will just take a long time. here is the point -- leaders are supposed to fix problems. we have a $99.4 trillion unfunded liability. our government is making promises to americans that it has no way of accounting for them. you are saying we are stabilizing it, but not thinking in the long run -- that means we are going to keep lying to people and keep all these empty promises going. you are the treasury secretary. we cannot make good on our bonds in the future, who will invest in our funds? we do not want to have a debt crisis, it comes down to

confidence and trajectory. we have confidence we are getting our fiscal situation under control, preventing the debt from getting to these catastrophic levels? to go back to the preceding chart, you are showing that you have no plan to get this debt under control. you are saying we will stabilize it, but then it will just shoot back up. my argument is that is europe. that is bringing us toward a european debt crisis because we are showing the world, the credit markets, seniors, people organizing their lives around promises being made to them today, that we do not have a plan to make good on this. >> maybe we are not disagree and in the sense that i have made it absolutely clear that what our budget does is get our deficits down to a sustainable path over the budget window. why do they take off again? why did they do that?

>> because we have 10,000 people retiring every day. >> right. we have millions of americans retiring every day, and that will drive substantial health care growth. what we do know is we do not like yours because what yours would do it is put an undue burden on a middle-income senior and substantially raise the burden for them for rising health-care costs. >> you are right, though, that governing is up about -- you have to make choices between the immediate and the urgent -- >> in the interests of time, we are fine the you do not like our path. that is what politicians -- republicans and democrats and differences of opinion -- are all about, but if we do not come up with a plan for this country, we will pull the rug out from people relying on these benefits. we provide more for the poor and middle-income and less for the wealthy, and we think that is the smart way to go on funding these important guaranteed programs. i do not put all that aside --

>> i do not think that is a fair description of your plan. >> actually, i do, but we could go back and forth on this. put all that aside. if we do not start showing the country that we have a plan to make good on its promises, to secure these health and retirement benefits, then we will have a debt crisis. let me try to go to something where we might have a little bit more agreement on. tax reform. i have enjoyed reading some of your quotes where you said there is a better way to do tax reform than say what you are proposing in the budget. i think you say a better way to do it is to lower rates and broaden basis broadenbases -- borade -- broaden bases. i could not agree more. we have had all of these bipartisan working groups. this is for my friends. go to slide 10. a lot of folks think that if we lower tax rates, the rich will just with everybody else off, that they will get away with murder. take a look at the facts --

when we have lowered tax rates since 1980, the share of the tax burden for the wealthier people has gone up. 1986 is a good example. the shares shot up, so the wealthy actually pay a higher proportion of the tax burden as those tax rates go down. why? three reasons -- we provided middle and lower income relief for families throughout that time. cutting top rates actually increased economic growth, but for mobility, and prosperity -- >> not so much, actually. >> i will get to the next one. we will show you an adjustment of that. third, we have taken away loopholes that benefit the well- off. >> also not so much. >> that is the point i'm trying to get to. in 1986, we closed loopholes. we went to a 21% rate in the decade alone. let's go to slide 14.

this is the cbo chart of the index of federal taxes. this is controlled for changes in income distribution, which goes to your earlier point. it shows that from 1980 to today, we are not lowering the distribution of the tax burden. it shows you that, like, after 1986, by closing loopholes and lowering rates, we can get better growth and the wealthier will pay a higher proportion of the burden, and that is controlling for changes in income distribution. the point i'm trying to make here is there ought to be a bipartisan element of compromise here because what we have shown -- for those who are worried about the distribution of the burden -- you can actually keep higher and people paying more of the tax burden and get a

better system -- you can actually keep higher end people paying more of the tax burden. it is time for a new round. that is my point. >> can i respond? i agree that we will need tax reform. we should all embrace the basic elements that what we need will lower rates and broaden the base. thinktalk about what i separates us still in terms of basic strategy. the dominant plants out there that have bipartisan support -- some said -- simpson-bowles, the senate 6 -- share in common with us a basic recognition that you need tax reform to find a way to generate a modest amount of higher revenue. in our proposal, in our budget, revenue as a share of gdp would rise modestly back up to around 20%.

that is slightly lower than where they end up in simpson- bowles, but a little higher than you will get through current law. i think in your free work last year, you show revenues rising to 19% of gdp. >> right. >> though you do not specifically increase revenue raising tax reform -- revenue- raising tax reform, you assume growth will bring that. i think the two main differences between how we think about this today -- but we have to test this when we set to get serious about it -- is an explicit commitment need from both sides as part of a balanced plan with tax reform that will raise gdp revenues. you have to ask yourself -- how do you want to allocate that burden?

in the previous proposals -- and we would take the same approach -- you will have to have effective tax rates, which, as you know, are very low -- you have to have effective tax rates go up modestly. we think they should go up really only for the top 2% of americans. >> time is cutting out, and he has to go to a signing thing. this is actually bipartisan. that is not what you are proposing in this budget. everything you are saying sounds great, but you are proposing to raise tax rates and add more complexity to the tax code. >> as i said in my opening remarks, in some ways, we are trying to motivate tax reform because we are saying -- i want to be clear. we are saying that if you have to raise as part of a balanced plan 1% of gdp in revenues, as every bi-partisan commission has said you have to do, and you are going to do it on top of the current tax system, here are some ways to do it.

but we are saying over and over again we think the best way to get there is through rate- lowering, base-broadening, more simple, more efficient, more fair. but the main, fundamental difference between us is if you guys can commit to raise revenue through tax reform, we will be on the way, but we will have a debate about who should bear that burden, and our judgment is the top 2% of americans should bear that burden through a higher tax rate. >> let me get you there, and i'm not trying to talk you, but this is what is frustrating -- your rhetoric never matches your action. not talking about you personally, but the administration. you are showing us a budget to raise tax rates and add complexity to the tax code. >> the burden of governing, when you propose a budget, as

you know is -- >> this is your fourth one. >> that is true. we have said, "here is what you have to do if you are going to get enough revenues to do this in a fair way." what we propose to do in this context is modestly increase the effective tax rate on the top 2%. >> the top effective rate goes to 44.6% on individuals. first of all, assume for the sake of argument that might, which this thing has been tested 1 million times. the point is you are raising effective marginal tax rates. in wisconsin, nine out of 10 businesses file as individuals. >> we will only raise them if you decide to agree to raise them and decide you would rather not do comprehensive tax reform. >> these things you say -- you are not putting into your

budget. this is the fourth budget where we hear all this happy talk about coming together. we do not see those proposals in black and white in your budget. >> one last thing -- we never claimed this budget included a comprehensive proposal for individual tax reform. never claimed it. we spend, as you know -- we spent four months working with republican leadership the summer on a way to get a balance plan with comprehensive tax reform to raise revenue alongside substantial savings in medicare and medicaid. we found in that process, frankly, that you were not really there yet, not quite ready. for that reason, we decided that we should do some foundation- laying and lay out some principles -- >> i do not even know how to respond to this.

>> is this on? again, welcome, mr. secretary. having been dissipated in some of those rounds, my sense is they basically collapsed because of the fundamental issue we are debating in this committee, which is whether or not to take a balanced approach to addressing our deficit challenge, and we did not have a partner to compromise with on a balanced approach. let me just say what the cochairs of the bipartisan sense and -- simpson-bowles commission said. in the framework you announced in april and what you submitted to the committee in september, the president embraced many of the goals and principles outlined by the fiscal commission and incorporates some of the policies we propose.

we are pleased that the president's latest budget continues to focus on deficit reduction and are also encouraged to see real, specific policies for them a tax expenditures, slowing health care cost growth, and reducing spending throughout the government -- specific policies for lowering tax expenditures. i think we would be able to accomplish some of these things. i would like to put up a chart to address this continuing myth that relatively small changes in the top marginal rates are the chief driver of job growth. that has just been proven false by history on numerous occasions. what you see years after the 1993 budget agreement with the top marginal rate was raised, you saw over 20 million jobs created during that time.

after the 2001, 2003 so-called bush tax cuts with a reduced the top rate, by the end of that time, you saw a net loss of jobs. obviously, there were lots of things going on, but the major point is that minor changes in the top marginal tax rate are not the primary drivers of growth in our economy. of course, the other benefit of that higher rate was, as the secretary said, it brought in more revenue, which meant at the end of that 10-year period was the last time we actually had a balanced budget, which helps contribute to long-term economic stability and growth. i think it is important to keep in mind these historical facts as we debate the whole question of tax policy. briefly, this shows the trajectory of the president's budget.

it is a plan -- it is irresponsible plan, and as the secretary pointed out, it gets the deficit below 3% of gdp at the end of a 10-year window -- it is a responsible plan. many have said this is a budget full of gimmicks. for those of you new to the committee, i want to show you what president obama's budget would look like if we used the so-called gimmicks that were used in the previous administration's budget, just because a lot has been made of that. what you see on the left -- of all the costs that were not counted in the bush budget -- in other words, the bush budget assumes that we were not going to fix the amt. they assumed that for 10 years, it would spring back into effect in you would have a tax increase on more than 25 million americans. so if you were to convert president obama's budget into the president bush methodology,

you get the problems. they assumed we would never take care of the dot fix. if you use the bush methodology, you get the following. the top line is the president's budget, using accounting techniques, percentage of gdp, and the blue line is what president obama is budget could claim if you use the bush administration accounting gimmicks, so the secretary has acknowledged that we have gotten a lot of work to do as we did with the demographic changes 10 years and beyond.

>> that tells you that the enemy is the omb. >> in this case, the omb actually did the way i think we would want them to do in terms of documenting the likely outcome. now, i just got to end with this, because i do have -- >> [unintelligible] >> i have to lead to design something with another group, but fundamentally, we have got to figure out a way to come together to resolve these issues. there are some basic disagreements. we believe it is important in the short term to continue to take measures that are described in the president's budget to boost job growth. i remember more than one year ago, our colleagues were pointing to the new government in the u.k. as an example of how we should proceed here. we should have an austerity budget. i think the secretary can talk about what the growth numbers are in the u.k. these days. they are not very good. it is a good thing we did not follow that proposal.

the second is a balanced approach. the secretary has pointed out that when you take the type of measures, that were in the chairman's budget last time. we need to find a way to reduce the growing health-care costs throughout the american health- care system. now, the reality is the affordable care act put in place a lot of mechanisms that we believe will begin to do that and will prove successful, but there is more work to be done there. i think what we need to do there is come together in a way that deals with the fundamental problem, not just shift the problem of medicare to senior citizens, and that is at the heart of what this is all about in trying to find a balanced approach, because if you do not ask the folks who have done well to put in more, then

you're going to have to take more and more of a middle-income and seniors. mr. secretary, with respect to the experience you have seen, those that have taken a strict austerity approach, what is that so far? >> as was pointed out that you can experience, we are not in the position anything like the rest of europe in this context in the extent that we enjoy still, and you can see it in the prices of u.s. financial assets, the enormous confidence around the world that this country, this congress, the city will ultimately find a way to put in place the more substantial fiscal reforms, so there is confidence out there in markets that ultimately congress is going to come together and do the right thing soon enough in this context, and you see that confidence in the u.s. financial markets. if we were able to buy it, we're going to try to change

this crisis and reduce that in two years or three years, we would kill this economy. you dramatically setback in a long-term reduction package you reducing another crisis. although there are some they will suggest we have to cut more now. >> thank you, mr. secretary. so let me get this straight, what your testimony has been so far. do you agree the tax system we have in this country is far too complex and not working, but you are not going to give us a new tax reform system now him that would be simpler but would rather in this budget give us a more complex tax system until later on in the term? >> i know you do not like the

current tax proposals. >> is it more complex? >> yes, you are going to have things that are complicated. it is better to do this through tax reform. >> you are giving us a proposal that is even more complex. >> it is just the nature of the beast in this context. >> mr. secretary, i would think of all people, especially you, would understand that our system is too complex for the individual to fill out their tax return, but prior to this, with a simpler tax system today rather than waiting until the end of your term. >> i think we are righting the fundamental difference. effective tax rate on somebody is going to go up again as you are raising revenues. >> mr. secretary, that is not

the question. >> the questiois, when are you going to give a simple tax reform? and your answer is that you are not. >> no, we are not. >> you're going to raise revenue with tax reform. >> that is what we spend so much time discussing with your leadership this summer. >> that is leadership. wait for other people to do something, and then we will react. >> you just spent about six months debating about defaulting on obligations that you gave us. if you want to call the leadership, that is fine. we can have that. it was in the spirit that we have to work this out in a bipartisan way.

we sat down with your leadership for months to try to work out whether we could find consensus. >> during all of those months, we never got from you the same thing you are telling us right now that you are not going to give to us? >> did the leadership share with you the things that we got? >> we did not get that from your either. >> on entitlement reform and tax reform. >> on tax reform, you did not. >> so where is your tax reform plan? that is why we are here today. >> if you want to bludgeon me into admitting that we are not going to give you a tax reform plan, i confess. we are not giving it to you. if you want to use your time for that, that is fine. >> my question is where is your entitlement reform plan? >> we have in the budget $360 billion of specific savings in

medicare and medicaid over the 10-year budget window, and an additional $250 million of other mandatory savings. >> mr. secretary, let me rephrase this. where is the long-term reform? >> we are not proposing to solve the problems in the country for the next 100 years because if we knew how to fix them for the next 10 years, people would have more confidence to work on them in the next 50 to 100 years. if we cannot fix them in the next 10 years, why are you fixed on the next century or millennium? >> my time, mr. secretary. you are taking shots at the plan that mr. ryan has proposed that does try to solve it over the long term, and are critical of those plans, significantly.

what you would like to have is a debate or a dialogue in that here is the plan that we have proposed, mr. ryan has proposed. where is the plan that you have proposed? >> you guys have got to make a decision. can i say one thing? you have to decide just for consistency. are you going to say you do not like our plan, which proves we have a plan, all right, or we do not have a plan. you cannot have it both ways. we are not claiming we are going to do what you would do to medicare. we are not going to do that. >> i am going to run this tight because we have and schedule. the federal reserve does not see it your way. ms. schwartz? >> thank you. i am not sure you have to gavel them through before their time is up. >> getting momentum. >> we were just finished with

hearing it. we will have another four minutes of a comfort zone. the fact is, there is a very different approach. you spoke very well and clearly about the fact that the president is putting forward a 10-year plan, and that is actually pretty good, given that we have such a tough time, seeing our way through it, stabilizing their deficit, and being able to make investments that ensure our economic competitiveness. that would be a very good economic outcome. disagreement the plan president put forward. wanting to just cut everything, to make the kind of investments that are going to assured the

american economic competitiveness. making research and development. to talk about what is in the budget but to mention it to the allied ideas, and to talk about what is very successful already, the tax credit. this was $1 billion that went to over 3000 companies, startup companies across this country, companies that are alive today working on therapies and devices.

i would like to see that be done again. this is one way to do it. the funding for nih and r&d. innovative businesses that use patents, and this has been tax policy in other nations that as been successful in drawing out new industries, it innovative industries, making products based on a patent, so i am more crime legislation that would do that here. i wanted to mention those two specifics and give you a couple of minutes to talk about in a really positive way how we are not only going to get out of this tough economy but we are going to continue to grow and be good economically.

>> i will take a look at those proposals and welcome your support from those. not just an eye age and medical discoveries, but across a range of parts of science crucial to technological development. energy, better incentives for investment. being a substantial infrastructure investment, so those things, innovation, infrastructure, a better investment. those four things -- indication, it innovation, investment, that is what we think should be the core of the strategy. if you look at the combined cost

.f them, they're very modest we come in the budget plan out how we propose to pay for those reforms. >> we will try to keep us more civil. i look forward to laying contrast to the other side. i appreciate what you said about the willingness of the administration that has reached out so often and not gotten any cooperation back. i will end on a positive note and the conference committee report. they did their work. they reached a compromise. i look forward to it.

>> my compliments. do not stop there. >> i agree with the overall captions and headline. >> some headlines will agree with, too. >> you talk about maintaining national security and it's in like another was to grow jobs in the economy. i do not think any of you get a kick from austria does this budget set out a specific plan of something to prevent the sequestration or the 10% cut in national defense? is there something where you are committing that you want to stop the sequestration so we do not take that 10% cut? >> a good question, and thanks for asking it. if you count the savings and

the cabs of discretionary spending and we agreed on in august, and there is the spending cuts and revenues, so the spending cuts alone are enough to meet the tests that you have to meet and the sequester, and are spending reduction proposals primarily are the 350 or so billion dollars that we would save from medicare and medicaid and the 250 million or more that we would say from other mandatory items. we believe that that mix of policies goes well beyond what you need to replace the sequestered and better than letting the sequestered it. >> so if that happens, is this the sequester repealed? >> i can remember exactly the way the legislation is written, but if congress were to increase performance that achieve more than the savings required by the sequester, than

the sequestered does not go into effect. >> and does that include tax increases. >> that is a question. we have a magnitude of savings proposals that would exceed the required amount to suspend the sequester. >> the first thing is, i just came from the armed services committee, and a top military administration is setting the sequester is a total and complete disaster. the second thing was jobs and the economy. one of the things with the tax increases is that you are going to repeal the depletion for hard mineral fossil fuels, i.e.

coal. they have been tough on them already in terms of permits. increasing the size of expanding -- makes it very hard. and now, increasing taxes on the coal companies. is that right? >> styling back, reducing the very generous subsidies we provide for a number of parts of the energy sector, and we think that is necessary. we think it is good energy policy and good economic policy, and i would remind you -- >> let me just get really practical. if you get rid of the allowance, it means the coal company taxes will go up, right? >> yes, they go up. >> they are running about 22%. what would happen if you get rid of that? >> i would have to respond to you in writing, but the average tax rate is in the high 20's, and the reason they did to pay only 22 or 18, whatever it is for the energy industry is because other businesses are paying more. it is not efficient.

it is not fair. it is better to have a flatter system. >> to remove it, it is basically going to shut down the coal industry. i know the president, i have a least heard it that he is favorable to that idea. if you continue the foot dragging on the permits, you increase the groundwater situation. you cannot mine underneath an intermittent stream or something that has no water in it in part of the year, and then you get rid of this depletion allowance. when you take the call out, there is nothing there. we have the same thing for things like sod farms, or if you take enough of that off,

there is no more topsoil. to me, it sounds like war on the private sector. >> we do not believe, congressman, that our proposal will have that risk, but i would be happy to talk to you more about what makes sense with this. >> thank you. mr. blumenauer. >> the debts we have just paid. >> it was not just some. >> we had people go home for the christmas holiday over the debate about the payroll tax. but actually, the people sometimes are hurt, and we watch folks come back from holiday and approve what had been essentially rejected, and we're going off to sign off on the conference committee that is extending it for the rest of the year unpaid for, which you

could not have imagined. i was struck with what our chairman said on tax reform. i thought that was a fascinating period, but i would like you to comment on a couple of differences. something that made a difference. i do not have they charts to put up that talk about the much higher performance of this economy when the tax rates were much higher. there are things like investing in education, infrastructure that matter deeply, but 1986, it did not have to wonder 35

members of the house of representatives who signed a pledge that they are not going to raise anybody's taxes on anything, because as you know, there were lots of changes in that reform that ended up raising taxes on a number of people despite cries that it was going to shut them down. it actually did not. reagan signed off on something that correlated, taxation on individual work and investment. there was a president to repeatedly raised taxes. ronald reagan raised a gas tax in 1982, one nickel a gallon, back when that was real money. so it seems to be one of the biggest differences from 1986 to now is that we have two parties

that were willing to make adjustments and raise taxes where necessary. they had some confidence going back and forth working together, though there were signs that things were off the table. i wonder if you could just elaborate from your vantage point, and the president and the speaker were making progress before somebody's chain was yanked, but if you want to talk about 1986 versus selling today, i would welcome your thoughts. >> the difference between 1986 as the president said a plan within a substantial increase on businesses in order to pay for a substantial tax cut on individuals, which he subsequently decided he had to reverse.

he reversed a substantial part of that individual tax credit in the coming years because he realized it was irresponsible and unsustainable. but i want to try to take the positive side of this debate, because -- >> please. >> the question is are we coming closer together or moving farther apart. the appropriations process -- really work at the end of last year. it took us longer than we

thought, but there was the payroll tax cut and the unemployment insurance. helping to refinance their mortgages, for example. there are some things we can agree on even while we are trying to narrow our differences on the other things. >> doctor? >> thank you, mr. chairman. mr. secretary, welcome. i think the american people by and large want us to get the job done, and there is a lot of misinformation and disinformation that comes out, and i have for some of it this afternoon. the fact of the matter on the payroll issue, there were some folks in town trying to solve this issue and some folks who fled. those that fled were our democratic colleagues in the senate. uncertainty in the market is destructive to job creation. i assume you agree. >> well, i guess, right now, there would be the weakness of

demand. >> uncertainty for employers, whether tax rate is going to be, what the context is going to be. when we talk to the job creators, they say they have to wait. >> what is hurting growth now is people still have too much debt. we are still working through the housing problems, and there is the triple storm, the triple threat of oil, japan, and europe this year. >> the uncertainty on the other side was a two-month fixed to these things. we had passed the house and 1- year holiday tax reduction, one year of unemployment benefits extension, and a two-year plug for the positions. i want to talk about small businesses. >> for 2% to 3% of small

businesses. >> i appreciate that. >> it employs 33 million people. those 2% employee 33 million people. >> i am not sure if those numbers are right, but that definition of small businesses includes things that many do not consider as being small businesses, including lawyers and private equity firms. half of those businesses you just refer to have income after expenses of more than $1 million. >> epically think -- the people who think those are small

businesses are the secretaries, and clark and a small outlet. they certainly know they are working for a small business, than when you raise taxes on the small business, you get less of what the small business does. >> how are they doing in the second half of the 1990's? >> we are not comparing them like that. we have a program of budget. increasing taxes to chase ever- increasing spending, is insanity, and the american people know it. >> are you sang the budget you're going to propose is going to have no increases in it? >> we do it in a neutral ways

that we close loopholes and broaden the base, lower the rates. >> raise revenue. >> we raise revenue of times that you can accommodate the changes. i am happy to be on the panel at the treasury department when you invite me down. i am happy to do that. mr. secretary, the fact the matter is, in this budget that you have, you increase taxes $1.90 trillion. $1.90 trillion. if your increase in taxes is to balance a budget, that is one thing. if your increases are to find this, that is what is so frustrating to the american people. >> that is a good question, but

that is not what we are doing. we're proposing to raise taxes for 1% of gdp over 10 years. >> $1.90 trillion. what you are saying is already in law. i would be happy to show it to you. >> i have got more time. >> you want to be out of here by 4:30, do you not? >> i think anybody watching your appearance here and listening to that would understand that we need different approaches over the next few years than we need of the next 40, and i

appreciate that very much. i would like to say or ask you, we have seen a lot of charts with lines going not 50, 60, 70 years. with changes in medical research, demographics, culture, world situation, how reasonably reliable do you think those projections are 40 years from now or 50 years from now? >> not an all. >> about as much as betting on the kentucky derby horse?

>> when the clinton administration left office in 2000, the cbo budgets of the next years of roughly $5 trillion, and we have swung from the projected surpluses to projected deficits in a range of about $8 trillion, so this gestures you what can happen in a short period of time when people make these choices or you face a crisis. 10 years as possible, 40 years is ridiculous. >> republicans have used this argument a lot, saying 2% of small-business owners represent 30% of small brush business income, and does not essentially undermine their point, because this very small percentage of small-business owners is making the lion's share of all of the income for small-business owners, and it is kind of hard to argue that 4.6%

more in taxes is going to be a real impediment to them. >> they may be rather small, but they are rather rich. if you're not point to raise revenues by allowing the effective tax rates to rise moderately for the top 2% of americans, who are you going to ask to pay more taxes, or whose benefits are you going to cut? that is a way to think of the trade-off. the reason this is so beneficial is a try to find that gdp and revenues, in this near- term period, medicare benefits, infrastructure, then you will do more damage for the demand to

their products. you'll have less products that they can sell. we think this is a better package for growth than the alternative if you are going to commit to dealing with the deficits. >> ok, cannot let you get away if you are talking about that. there is the accounting method that would have very dramatic effects on the distilling industry in my state and something that has become a growing export. yesterday, i asked whether or not in constructing the proposal that there is a consideration of the broader economic impact of and in that,

and, of course, i am particularly interested in the distilling industry. has there been a look at the economic impact? >> we have looked very carefully, as always do, at tnds affected, and in our view, it is modest and manageable, but nobody wants to see their taxes go of. who are we going to ask to pay for those special taxes? i understand the merits of them, but we face deficits, and we have to find a way to make the system more fair so that businesses in certain circumstances are paying the same effective tax rate. >> i know, for instance, one industry which does $3.40 billion pace something like $800 million in excise taxes, and heavily taxed industry. is there something we can look at that we can analyze? i know part of this was about oil and gas, and this is the

lion's share, but oil does not taste at all like bourbon, and i would be happy to demonstrate that for you. if you had that kind of analysis, i would love -- >> i would be happy to be as much information as i can in that context. >> are you calling upon the senate to pass your budget? >> i thought you were going to be asking that. i have heard this in the last few days. i am not a budget process expert, but i will offer a few things in response to that. the senate does not need a budget resolution in order to pass appropriations bills, pass tax cuts, pass tax reforms, pass entitlement reforms, pass savings. as you know, passed payroll tax cuts. we would like the senate and the house together to find more things they can do together that would improve this. >> i would love to hold hands with harry reid. it is a simple question. are you calling upon the united states senate to pass the president's budget? >> we are absolutely calling on the senate to in braes, the house as well, to embrace the

reforms we have in the budget. absolutely. >> are you calling upon the senate to pass the president's budget? >> can i answer your question? can i just say one thing? it is not the test for you to send the senate things that you know will not have bipartisan support. that is not a test of legislating. >> i am asking about a democratic president, president obama, and you as the secretary of treasury, are you calling upon the senate, which is controlled by the democrats, to vote on and pass your budget? >> absolutely, we would like the senate and house to act on the reforms that the president has in the budget, and that is what a budget is for, but i do

not think that is a test of legislating in a divided country with a divided government. >> so is it fair for me to say that you are saying you are not calling on the senate and house to pass the president's budget? >> you can say what i just said. we would like to see it happen. >> the senate has failed to pass a budget in more than 1000 days. it is -- >> if that is that you want to spend your time -- >> i do not want you to tell me how to do my job. we are doing our job. you can smile and laugh about it all that you want. >> i can help you with other questions, but i cannot help you with that one, because that is about the senate. >> this is the way become to reconciliation. that is how we worked things

out. they pass something, we pass something, and we come together, but if they refuse to do their job, and the white house is just going to sit here giddy with a little smirk. would you agree or disagree with this analysis? >> i have not seen that, but i will need to take a look at it. >> on page two of your testimony, and for members who are looking at this, you have this one particular sentence in here that i would take some issue with. it is the end of the paragraph on page two. "these savings are sufficient to stabilize our debt by 2015 and begin placing our debt on a downward path." what is troubling is when i look at the total, when president obama took office, it

is roughly $9 trillion. now it is predicted to be $26 trillion. the president has never put forward a budget that balances to actually pay down the debt. is that correct? >> we propose reforms, as i said, that would reduce the budget deficit to a level that is sustainable defined as the level that stabilizes the debt burden at an acceptable share of the economy and starts to bring that down. >> what percentage is acceptable? >> the deficit level you need to stabilize the debt has to be slightly below 3% of gdp, and if we do it in this time frame, that would stabilize the debt burden as a share of the economy, and we talk about this as net debt as a percentage of gdp, and that level is a manageable burden for us. but that is a start. if you do that, in the succeeding decades, those costs start to grow.

>> thank you. >> i'd like to talk about the 49 states, the attorneys general. in new jersey, homeowners will receive direct relief, with the majority going towards refinancing. however, the overall agreement of $17 billion for principal reduction is nothing compared to the $700 billion total in negative equity for homeowners in this country. that is to me and a big deal. in august 2010, the new york fed in its document found out that the principle write-down of a mortgage was 18%, it would cut the probability of default 40%. that is a big deal.

within one year, a modification. considering nearly half of all of our standing mortgages are owned by freddie mac and fannie mae, correct, my friend from new jersey? it seems to have a simple solution. tell me where it is not so simple. secretary donovan commented that we need to break the logjam of principle reductions. and as you know, a triple incentive has been offered to banks, mortgage companies willing to cut mortgage principle for underwater homeowners 3 jon vacation program. you have talked about this for some time, have you not? some other states, obviously. while the decline in the median price of a single-family house, home, outpaced the national

average by 3.7%, a drop. with one county having a 8% bergen county having an 8% drop last year. and even hired drop of 8.4% right next to it. the need for principal reduction for freddie and fannie failed mortgages is apparent. is it contained in the president's 2012 budget? if not, why not? >> it does not need to be in the budget. we believe they have the clear authority to provide principal reduction in cases where it is clearly beneficial to the taxpayer to do it. there are a range of types of mortgages with that is the case. -- where that is the case. we are working closely with the

fhfa to encourage them to take another look at the math because we think it is in the taxpayer's interest to do it. >> this is important. most of what we have done in the last six years has not helped this problem. i would lay before you that the few we have helped, we have had a few more added to that list. you know that well. this is going on and on. what hope does the taxpayer get if somebody can not meet the note and has to get out of his house, bring down the whole neighborhood, if he cannot pay his taxes, somebody else has to pay the taxes. this is dragging the entire economy. i do not see anything tangible. i will listen with the minute i have left. in this budget that addresses the deepest problem going on in america?

people work hard for their homes. we think is better to put them out so we lessen risk? that is where fannie and freddie and the other group is. >> i agree with you. i was saying we believe fhfa has the authority to do it in a way good for the taxpayer. our problem is we do not have the authority to compel them to do it. the senate wanted to keep them truly independent of the executive branch. that is our constraint. i think we can make progress. >> i hope so. finalld conclude in the m seconds i have this problem is never going to give us back to the promised land. oversight has not done the job. why freddie and fannie seem to be on holy ground, i do not

know. >> paul ryan was chosen by mitt romney yesterday to be his running mate in the presidential election. you can see more of his past appearances and speeches by visiting the c-span video library. nearly 400 appearances of the vice-presidential candidate are online, including his speeches from the house floor, his 2004 republican national convention appearance, and hearings he has chaired for the budget committee. you can click and share videos. this afternoon, live coverage of a campaign fund-raiser for president obama. he arrived in chicago yesterday where he is holding five campaign events. join us live at 4:30 on c-span. the newly chosen republican and vice president candidate returns home campaigning with mitt romney in wisconsin. they will make stops in north

carolina before heading to wisconsin. we will bring you that live tonight at 7:00 eastern. last week, federal reserve chairman ben bernanke said student loan debt does not pose the same threat to the financial system of mortgage debt did during the 2008 financial crisis. the fed chairman answer questions from educators across the country during a town hall- style meeting focusing on financial education. he urged state and local governments to maintain funding for education in general. this is about an hour.

>> thank you for joining us in washington, d.c. today for a conversation with federal reserve chairman ben bernanke. it will take questions from teachers about the economy. i work here at the board of governors. i look forward to moderating today's session. here in the board room of the federal reserve, we are pleased to host a group of 60 educators to teach economics and personal finance to young people. we're also joined via videoconference by educators from all over the country who are participating in local events at the regional reserve banks and work regional offices as well as those watching a webcast. the federal reserve system seeks to advance the conversation about the importance of financial education for young people. we also hope to provide insight into the federal reserve policy goals and activities so we can support the work you do with students as you stride to teach them how the decisions made by the central bank affect them, their families, and the economy. throughout our event today,

twitter users can follow the federal reserve and join the discussion about the events. today, we're honored to bring new federal reserve chairman, ben bernanke. before coming to the board of governors in 2002, he was a professor of economics and public affairs at princeton university. he also chaired the to part of economics in 1996-2002. he served as the governor of the federal reserve system from 2002-2005. in 2005, he became the chair of the president's council of economic advisers. he returned to the federal reserve as chairman of the board of governors in 2006. ben bernanke grew up in south carolina and received a b.a. in economics from car were university and a ph.d. in economics from the massachusetts institute of technology. he and his wife anna, also an educator, have two children. thank you joining us today, mr.

chairman. [applause] >> good afternoon and welcome. i am delighted to have the opportunity to speak today with educators throughout the country on the topic of financial education. thank you for your participation and for the important work you do. as an educator myself, i understand the profound effect that good teachers and a quality education have on the lives of our young people. today i hope you will learn from each other and share ways to best promote learning and, in particular, to help students achieve greater financial literacy. financial education supports not only individual well-being, but also the economic health of our nation. as the recent financial crisis

illustrates, consumers who can make informed decisions about financial products and services not only serve their own best interests, but, collectively, they also help promote broader economic stability. smart financial planning -- such as budgeting, saving for emergencies, and preparing for retirement -- can help households enjoy better lives while weathering financial shocks. financial education can play a key role in getting to these outcomes. research by federal reserve board staff members on the effectiveness of financial education for young military personnel, for instance, found that those who had taken a high school financial education course were more likely to save regularly.1 effective financial education is not just about teaching students about financial products or performing financial calculations. it also involves teaching them

the essential skills and concepts they will need to make major financial choices. high school students might not recall specific information from a lesson about loans a year later when they go to get their first car loan or student loan. however, if they understand and remember some basic ideas -- for instance, that it's important to shop around for a loan to get the lowest interest rate, to review the fees charged, and to know how to contact financial counselors and advisers -- they will be more likely to make a good decision. a particularly valuable lesson we can teach students is how to apply an economic way of thinking to their decisions. for instance, the topic of student loan debt and whether students are prepared to service that debt upon graduation has received increased attention lately. students with some exposure to economic thinking will be more likely to conceptualize their spending on postsecondary education as an investment in their own human capital and choose their school, course of study, means of paying for their education, and profession with

that thought in mind. likewise, the economic tool of cost-benefit analysis should help students make sounder personal and financial decisions. financial education also provides a context for students to develop important skills that can be applied more broadly. making good financial decisions requires that consumers seek out relevant information from trustworthy sources, and that they use critical thinking, quantitative reasoning, and decision-making skills. these competencies are also some of the fundamental abilities our schools seek to inculcate in our children. as with other types of education, the format and quality of the content matters a great deal. providing financial education that is realistic, interesting, and relevant can help students retain information and remain engaged. games and simulations can be particularly effective at

keeping students interested. for example, in 2010, i spoke at the opening of the junior achievement finance park in fairfax, virginia. this organization, as well as similar facilities throughout the country, allows students to play the role of a family head with financial challenges and opportunities, giving them a chance to practice financial decision-making in a realistic setting. students and their parents can become financially literate together through exercises such as intergenerational homework assignments, which reinforce the concepts taught in class. such strategies allow educators to help adults who until then may not have been exposed to financial concepts. to provide the most effective education, curriculums should also have clear standards and goals. to that end, the federal government's financial literacy and education commission, of which the federal reserve is a member, has identified five core competencies that should be covered by financial education: earning and income, spending, saving and investing,

borrowing, and protecting. behind each of these competencies is a set of related knowledge and skills, and corresponding behaviors. for example, in the category of earning and income, students are expected to know the difference between gross pay and net pay, and information about benefits and taxes. with this knowledge, they can understand their pay stubs and take full advantage of their workplace benefits. the five core competencies are reflected in the national standards for personal finance being developed by the council for economic education. several of our federal reserve system colleagues are working with the council on this project. while it is important to begin teaching financial skills to children and teenagers,

achieving and maintaining financial know-how is a lifelong undertaking. the types of financial decisions that people have to make -- from paying for school to buying a home to planning for retirement -- vary through the course of their lives, and thus we need to ensure that access to financial education is readily available at all stages of life. moreover, relevant, accurate, and reliable financial information must be readily available to consumers at the time they are making their decisions. given the ubiquity of smart phones, applications for mobile devices may be one effective method of delivering this just- in-time information at a relatively low cost. for example, our colleagues at the department of the treasury are currently running an app contest to design mobile tools to help americans make better financial choices. because financially capable consumers ultimately contribute

to a stable economic and financial system as well as improve their own financial situations, it's clear that the federal reserve has a significant stake in financial education. we demonstrate our commitment through numerous programs and resources offered by the federal reserve system staff and through partnerships our reserve banks have formed with local educators and institutions. for instance, the federal reserve bank of chicago, during its annual money smart week, conducts free classes and activities to help consumers better manage their personal finances. and the federal reserve bank of st. louis offers a broad selection of online personal finance courses that teachers can use along with their students. to find out more about what is happening in your area, i encourage you to visit the federal reserve system's education website, www.federalreserveeducation.org. i would again like to thank you for your participation today, and i look forward to your questions. thank you.

[applause] >> thank you, mr. chairman and now we will begin taking questions and the first one is from the miami branch. >> good afternoon, mr. chairman. i am in florida. thank you for the opportunity and here's my question -- what is your view of the current state of government budgets and what the implications for students in education? >> you have identified a key example of trade-offs which is what economics is all about. governments have been facing fiscal challenges for some time, it is not just something

that happened since the crisis. maybe some of you are aware of a study that just came up under the auspices of paul volcker that look at local and state government finances. it found that many governments are finding it very difficult to meet their long-term commitment for pensions and other benefits to their work force. during the recession and the crisis, of course, as the economy contracted and states and localities with balanced budgets, they cut back on their spending and if you look at employment over the last few years, even as the private sector has been adding jobs, state and local sector has been subtracting jobs and reducing the overall pace of gains in our labour market.

it is been a very tight situation for state and local government. on the other side, we have education which is the most basic kind of investment, the investment in human capital is the investment in our future and there is evidence that every year of education provide extra earnings power, extra job satisfaction, and adds to the overall social welfare of the tire economy. -- the entire economy. an official complication is that the quality of education and the amount we spend on education are not exactly correlate. there are other factors such as community support, quality of teachers, curriculum and so on so it is a complicated relationship. understanding very well that state and local governments, while things have been a little better lately, are still under a great deal of pressure. i hope making those decisions

and thinking where to put their limited dollars that state and local governments will keep in mind that we we want to be investing in our future with our young people who will be the workers, consumers, and citizens in decades ahead. >> next we will go to cleveland. >> i teach economics to students at mentor high school. how does the fed maintained a delicate balance between not having political party meetings are pressures and at the same time offer the best objectives of financial leadership for our country? >> good question -- one of the basic findings about central banks is that it helped the economy have a strong and independent central bank. the central bank that can make

monetary policy decisions without being influenced by short-term political pressures. the research shows that countries with independent central bank said lower inflation, more stable economies, and overall more confidence in their currency and so on. it is important to have that degree of independence. the reason for this is because monetary policy tends to work with a lag. you want decisions about monetary policy to be made by people not looking at elections a few months down the road looking at the long term saying was right for the economy. independent central banks are very important. we're in a democracy and, obviously, the central bank and federal reserve of the united states has to be accountable and transparent.

we are indeed non-partisan and try to make our decisions on technical analysis based on the economy and not political considerations. this is where we have the decisions about monetary policy and there's never any discussion about political issues. is about where the economy is and where it is going. given that we are independent and a lot of provisions such as the fact that governors are appointed for 14 years and the term of the chairman goes across presidential terms, there are many provisions that give the federal reserve independent decision making but the quid pro quo is that we have to be accountable and we are very accountable by law i testified twice a year in from of the house and the senate to explain what monetary policy is doing and i testified many more times than that.

our market committee meetings are followed by a stateme three weeks later and a deal with the members of congress and the white house and i'm responsive to people in government. for all those reasons, we try very hard to make sure we explain what we're doing and the elected folks were in the congress or the administration appreciate what we're trying to do. that is the balance will try to achieve. independence in order to make good decisions but accountability and transparency to make that independence consistent with our democratic framework. >> thank you, now we will go to a houston. >> i am in pasadena. what effect is the european price is having on the u.s.

economy? what would a centralized european fiscal policy have on the global economy? >> do you have one hour? [laughter] the european situation is very difficult. the basic problem is that like the states of the united states, they have a single monetary policy. there is one central bank that makes monetary policy for all 17 nations in the europe zone. unlike the united states, they don't have one fiscal policy for each country has its own parliament, it's on prime minister, and it's on fiscal policy. in the united states during a downturn, individual states know the federal government is there to pay social security and medicare and provide defense,

all of those broad government functions and each state and locality only have to deal with more local services it provides. in europe, each country is basically responsible for its own fiscal situation. since there are some countries that are weaker because they are involved in tightening their belts in a strong way, the results of that are a weaker economy in those countries and, indeed, most of europe is now suffering from a much weaker economy. on top of that, they're banking system is distressed by the fact that banks hold a lot of sovereign government debt which in turn is hurting the positions of the banks and reducing the amount of will -- lending their willing to do. the 17 countries are under a lot of economic stress.

there has been a lot of steps taken to try to address that by european leaders. there are strong incentives to address these problems. they want to maintain the political integrity, the european collaboration that has been going on now since world war ii. but it is very difficult and involves political crisis. -- choices. the effects on the u.s. are numerous. there are two basic types of channels by which the euro crisis is affecting us. first, europe is a major export destination. a weaker european economy means that both the u.s. borders and exporters from other countries are finding weaker markets. that is reducing demand for our products and slowing our economy. even more important is the fact that concerns about the european situation have created lots of stress and volatility in financial markets. and the stock markets and credit markets. those problems are affecting us here in the united states.

between financial cutbacks and the trade effects, the european crisis is slowing our economy. there are many other factors as well, including fiscal issues, credit tightness. the housing market and sell one. -- and so onbut this is one of the european situations -- one of the factors that is slowing the economic recovery. you asked about what happened in europe had a single fiscal authority that would put them in a much closer situation relative to the united states that would probably address many of the concerns they have. by getting to that point is very difficult. you have 17 different countries and each set of taxpayers want to make sure their own country is in being fairly treated. so it is a difficult, complex, political negotiation that has been going on now for a couple years. here.

we would like to go to omaha. i think they are calling in. hold on a second. >> i think you have a houston there. touchdown? [laughter] okay. i will give it another second. question. until we get them back in, we can go to washington, d.c. we have a teacher right here. let's go to d.c for the next question. >> good afternoon. i teach comparative politics and economics in sandy spring, maryland. how can we as educators emphasize the importance of understanding how the invisible hand that to our current crisis

while encouraging students to believe that the market can work? >> one of the most exciting moments in teaching economics is when kids understand the invisible hand idea. the idea that markets can achieve such complex economic outcomes without any kind of central planning. milton freeman have the example of saying think how complicated it is to deliver a pencil. you think of all the components -- the wood, rubber, paint and everything else and you get a pencil for $1 or whatever it costs. markets can do that because the invisible hand says even though each participant is working for their own interest only in there is no central planner involved, that markets still work somehow to deliver that

result. there is a lot of evidence that looking around the world, markets have played a tremendous role in creating the wealth. that we see in rich countries and emerging markets that are becoming rich. markets are an amazing thing. getting students to appreciate what markets can do is a very important part of teaching economics. that being said, the next level up is to understand that markets also have problems. there are market failures, there is a monopoly, there is externalities. many things that can go wrong in markets. understanding how to fix those problems is really an important key to thinking about economic policy in general. there were a number of places where markets or the combination of markets in government failed. in the financial crisis. for example, basic invisible hand economics assumes that

information is perfect. everybody understands basically what they are buying and selling. that was not always true obviously in the crisis when people were buying a complicated credit instruments that contained a variety of substandard credit products like the prime mortgages. and the people who bought that did not necessarily understand everything that was in those credit products. likewise, during the crisis, there was a huge uncertainty about which banks and financial institutions were in danger because it was hard to know what exposures were and what each institution held and what the rest were. -- what the risks were. another issue related to

financial markets is that unlike most industries, financial markets are prone to rise. -- runs. if people lose confidence in a particular institution and they are providing short-term deposits or funding to those institutions, they have an incentive to pull out their money as quickly as possible. if everybody does that, it is like everyone running to the exit in a crowded theater. nobody is better off. you create stress in the financial system. try to address the problem is why the federal reserve was created almost 100 years ago to provide support for the financial system during periods of crisis. i mentioned the too big to fail problem, a combination of government and market failure. institutions which are so big and complex, their failure would possibly bring down the financial system. there is a strong presumption in the market that the government will protect those

institutions. that means that the market is not allowed to work in a sense because people will lend money to those institutions are saying i did not have to worry about whether they are making good investments are taking too much risk because if they get into trouble, the government will protect them. that leads to bad allocation, increased risk in the system. to answer your question, let me close by saying market are a wonderful thing. it is important to understand that but the financial crisis showed there are ways in which markets did not always work well. it is just as important to understand that markets can fail as it is to understand that markets are powerful and can give good results in a lot of the time. >> let's go back to omaha. >> good afternoon. economics and current events go together. what current events would you consider essential that we covered in the classroom? as a follow-up to that, with everything going on in the

world, do you see any events on the horizon that teachers should be aware of and ready to talk with students about? >> we have had a lot of things happening in the economy in recent years. i think students who want to understand what they see around them, what they hear. what we have seen recently, very complex of that but such an -- certain parts of it can be explained. you can explain the problems with some time mortgages, for -- some prime mortgages. -- subprime mortgage is. example, which ties into financial literacy issues that we talked about. the financial crisis is clearly

something that kids would want to understand and the recession that followed as well. certainly they would want to understand fiscal policy, how is monetary policy being used in the current situation? what does the federal reserve do? fiscal policy is something that affects their lives in concrete ways. the decisions are being made about the long-term future of social security, for example. who will pay, who will benefit? that has a big effect on kids' futures. those are the kind of things that could interest them. some raise the question about europe. that is also something in the news and i know that people are interested in understanding what is going on there. these are complex issues and a

complete analysis will be tough to put into a class in but there are many elements and aspect that you can use to try to give a better sense of what is happening in these situations. i think going forward, there are many things you can look at from macro and micro economic. at the micro level, issues of pollution control and perhaps global warming interests students. what are the economics of that? what arethe economics of the demographics of our society, getting older. what are the implications of that for our economy and our young people's future? an interesting question now is why do countries compete to have the olympics in their country and is that an economically sensible thing to do or for national pride? there are lots of issues. look out the window. you will find things to talk about. and see what the students

themselves a raise. they will raise questions themselves. they have heard things in the media. >> thank you. now we will go to philadelphia. >> mr. chairman, i teach at germantown academy in fort washington, pennsylvania. my question is about federal reserve system itself. what do you think young people most need to know about the federal reserve and how it operates? >> the first thing they should know is what it is. [laughter] the federal reserve is of course it's very important economic institution and i think every informed citizens should know at least the basics of what the fed is and how it is structured and what it does. a good economics class will take students to look further. -- a little further.

it will explain what is monetary policy and how it works. i think the very basic thing that often gets lost is the difference between monetary policy and fiscal policy. monetary policy is a responsibility to the bed. -- to the fed. fiscal policy responsibility is to the administration and congress. those are very different. the work in different ways. understanding the distinction between those things is very important. the fed is also a regulator. and the fact that along with other banking regulators, we oversee banks try to help control the risks they take. what economic role does that play? all of that what probably have been sufficient a few years ago but recently, now getting to the ap class, a lot of things have happened. the fed has done things it had not done for a long time. over the last few years, we have been trying to ease

monetary policies to support the economy but it is already almost four years since the interest rate went almost to 0. we had been using other kinds of monetary policies involving the purchases of longer-term treasury securities, for example, sellinstead of buying short-term securities which is traditionally do in monetary policy, we are now doing longer-term asset purchases. kids in an advanced class would want to understand how that is conducted. even when short-term interest rates are close to zero. the other thing which is very important -- the federal reserve was founded in large part to deal with financial crises, to be available to support the financial system during periods of panic and try to stabilize the financial system. this function got a lot less

attention during most of the post war period and most of the people thought of the bed as primarily monetary policy institution. but with the crisis we have had recently and crises in other parts of the world, central banks have become much more engaged in supporting financial system and creating financial stability. and explaining that basic function is also very important. to summarize, basic structure and governance, monetary policy, distances between monetary and fiscal policy. -- distinction --those are the basics. that is what every citizen needs to know. and the most recent years, the fed as the new things, including buying longer-term securities to provide more monetary policies support and working to stabilize our financial system. those of more complex subtexts

but also of great interest. -- those are more complex subjects but also of great interest. >> now we're going to go to los angeles. here we go. >> mr. bernanke, i teach economics and business law in high school. what do you believe is the best way to anticipate another financial crisis? >> how to anticipate and prevent a financial crisis? [laughter] >> not an easy question. he obviously given the cost of the last financial crisis, we would like to do all we can to anticipate and prevent another financial crisis. if one happens, to mitigate its effects as much as possible. relatively speaking, the new regulatory structure has a two-

part strategy. the first is that we are now taking -- the financial regulators, the government in general, are taking a more systemic approach. before the crisis, every regulator had its own particular institution and a market that it was responsible for. nobody was there watching the system as a whole. the idea that regulators ought to work together to identify risks in the broader system was discussed even before the crisis but it is now part of what the new regulatory structure is trying to accomplish. so we have four examples of the call the financial stability oversight council which is -- it is known as fsoc, which consists of 10 major regulators,

including the federal reserve and some other regulators who do not have the votes. the fsoc's job is to look at the system as a whole, identify problems, see if there are risks that may threaten the system, are their weaknesses in the structure? gaps in regulation that need to be addressed? the federal reserve has its own office of financial stability which has a similar function to try to monitor the whole system and identify problems that might be rising. we work closely with the fsoc to look for new problems to see where there might be -- the next crisis might come from and take steps to provide a warning so we can collectively address those problems.

that is the first part which is to have a macro approach which is looking at the system as a whole, try to identify gaps and weaknesses and fix those as much as possible. we know perfectly well that we will not be able to identify every problem that comes along. the issues are very complex. historically, it just happens that very often need the private or public sector identifies the problem until it is upon us. the second part of the strategy is to make the system itself as resilient as possible. whatever happens, even if we do not identify or prevent it, the system will be stronger and able to survive and continue to provide credit, even in the face of a shock. there are many aspects of that. one example would be the new capital standards that had been agreed upon by not just the united states but essentially all the major countries in the world.

so-called basel 3 standard that would increase the amount of reserves capitol that the banks have. when banks, whenever they take significant losses relative to where they were before the last crisis, they will have lots of capital which can absorb those losses and prevent those losses from turning into a failure or a more broader banking panic. so greater capital, strong rules on derivatives trading, more liquidity for banks. do they have enough cash in hand? all those things are intended to make the system strong person -- stronger so that no matter what may happen, the system will be better prepared to observe the shop -- absorb the shock without going into crisis as we saw in 2008. >> now question from st. louis.

>> hi. i work for a special school district with mastodons. -- of st. louis county and the work with math students. my question -- should the public school system add more courses like economics and finance to the curriculum? >> we are all in favor of that. [laughter] there are lots of ways to do that. it is good to have students understand the basics of economics and finance and financial literacy. there are lots of ways to do it. one way to do it is if you're high school has ap courses. there are forces in micro and macro economics. -- there are courses in micro and macro economics. students who want to do that can do college preparatory work in economics. so you can do significant and serious economic forces if you

want. -- economics courses if you want. but i say that because there are lots of other ways to incorporate economics. when i took history in high school, i said this is all about kings and queens and wars. of course economics tells how people lived, how they make a living, how societies function, how markets function to read trade. all those aspects of history which are so important. integrating economics into history, integrating economics and to civics so that didn't understand the importance of -- so that students understand the important institutions like the federal of reserve and regulators and fiscal policy and so on. beyond that, is financial literacy. which is so very important for all students. i do not think or any students who should not be exposed to in these basic financial literacy concept. that can be done as an

individual course, as a part of a course, be combined with something like a junior achievement program which is very good to get kids interested in. or integrated into a math class for other kinds of contexts. so there are many ways to do it. it depends on your resources and the kinds of interests that didn't have. -- that students have. but if you think about what people do every day, what adults are required to do in terms of managing their finances and preparing for retirement, economics and financial literacy are critical parts of education. there are lots of ways to incorporate it. i hope everyone here will do that. i congratulate you for that and encourage you to keep making that effort. >> now a question from boston. >> could you share your thoughts on the current crisis

regarding the current student loan debt and, at the burden of currents in loan debts for our young people impact the economy in the future if the same bar hours are -- if the same bar were a not in a position to borrow for are things like automobiles are starting up new businesses? >>texted loan debt which is now student loan debt is a one of the largest categories of now debt of any type is a two edged sword. it is a very important way of increasing earnings power. it is an investment of human capital. we do not want to have a world in which talented students are unable to get additional education because they cannot

afford it. having a student debt market are student debt program helps everybody. that allows people to get the education and helps everybody of students go on and get additional preparation forit is very important to have this kind of restitution. -- institutionsit is a to edge sword. . it is a two-edged sword. if people make bad choices, burdened with debt, large amounts of it, you cannot discharge student debt in bankruptcy. basically, you've got it. if you acquire a lot of debt and your school does not prepare you for a good job, then you are really in trouble because you do not have the income but you have the debt. what i wouldn't rise on that is -- what i would first advise on a that just like any other that

is investment, when investing in your own capital, you have to be smart. you have to know what it is you are buying. those of you who do guidance counseling type work think of it as being an investment adviser. you're explaining to listed -- to the student among kind of job or career he expects to get out of your additional education, what are the graduation rates? does all this makes sense given how much debt you have to take. what kind of income can you expect to earn? that is not the only reason people take debt. and take additional education. but as an economic proposition, it is important to understand what is your buying. counseling should be an important part of the decision making process for kids taking out the debt because it sticks around for a long time. in terms of the economy, i

think the main issues there are fiscal issues, most student debt is now provided by the federal government. whatever losses or problems there may be on that side will be fiscal problems that will be borne by the taxpayer ultimately. there are also issues of students being burdened by debt if they deny use it in a smart -- if they don't use way to get themselves the kind smart of income they need to pay it off. so burden on future consumers and fiscal burdens for future taxpayers, those are some of the reasons to try to use debt wisely. i do not think that student debt is a financial stability issue to the same extent as mortgage debt was in the last crisis because most of it is

held not by a financial institution but by the federal government. >> now question from chicago. >> hello. this is helen roberts from the university of illinois at chicago. the center for economic education. i teach all ages. there is widespread misunderstanding about how the federal reserve supports the economy and the short run and long run effects of monetary policy. stephen sometimes think of the -- students sometimes think of fed is being in a position to solve all economic problems and some possibly the federal reserve is not doing enough to fix the economy. they blame it for addressing problems that really have the -- are the responsibility of fiscal policy. what does the federal reserve need to do to educate the public about the limits of monetary policies of people have

more realistic expectations? >> your basic point is absolutely right. the federal reserve is an important economic policy institution, monetary policy as well as financial regulation have a very important role to play in providing a stable economy. stability involving both growth and inclement and in terms of prices. -- and employment and in terms of prices. but as i've often said, monetary policy is not a panacea. it does not solve all problems. there are many issues that are more appropriately dealt with by the fiscal authorities to spending decisions for tax policies. beyond that, there are decisions made by trade policy makers, education policy makers, all the different areas of economic policy. i think it should be basic part of civics our government or whatever heading you put that

under that students understand that the government is not just congress and the administration. there are many other institutions. including the federal reserve but doesn't -- including regulators as well. and to have a sense of what these institutions do and have -- how to divide the responsibilities is very basic. a very basic bit of economic education. we have in putting together in this discussion to kinds of financial and economic education. the personal type of education where understanding better financial decisions and also the education that involves understanding how our society works to make you a better citizen and better able to understand what is happening in world events. this is in that latter category. a basic understanding of modern government involves

understanding the principal economic policy institutions and their division of labor. much our policy is very important. -- monetary policy is very important. the federal reserve is the primary institution involved in that. it has the important role of crises. -- stability in prices. it can be very helpful in helping to restore full employment and providing support for a recovery. but in particular, the long term types of things like providing a strong educational system, providing a good tax code, creating a free-trade, helping unemployed workers gain skills they need and so on, there are so many of these things which are really responsibilities of a wide variety of economic policy makers together with the private sector. so i basically agree with the point that it is important for

students to understand who does what and what the different types of policy can achieve. >> thank you. the next question is from minneapolis. we cannot hear you. >> good evening, mr. chairman. >> we can hear you now. >> i teach economics and government in albany. many of us work hard to teach the importance of saving and investing get interest rates return at historic lows. how can we teach students they will be rewarded for saving giving that returns on investments are currently so low? >> good question. obviously interest rates are very low. they are low for a good reason. [laughter] which is that our economy is

still in a fragile recovery and low interest rates are intended to help the economy recover and to restore a more normal levels of employment and growth in our economy. for investors, it is essential that the economy be strong overall. if you think about what investors invest in, some of it is in fixed income management like certificates of deposit or government bonds, but a lot of what people invest in our stocks and corporate debt and small businesses and a variety of other assets. those assets are not going to perform well unless the economy is strong. so the kind of return that you can get as an investor and as a saver depends on having a strong economy. there is really no shortcut to that and that is the reason why we have a low interest rates now as a way of trying to

restore that vitality that will give investors higher returns in the future. that is the reason that rates are low but of course they are low. that being said, there is an awful lot that can be taught, even with rates being lower. there are still many incentives to save if you want to buy a house. now since the financial crisis, down payment requirements are much higher than the work. -- than they were. if you want to go to college and increase your earning power, if you want to retire, all of the things that people want to plan for over their lives still require saving. you probably have to save more to get to a certain point. there is a lot to be learned about it. for example, if you're going to

be saving, he did not want to -- you don't want to save a dented just one form. say than just oneyou want to diversify and save form. it into different types of assets. you need to understand the trade-off between risk and return. you need to understand how taxes affect the returns to different types of assets. there is a great deal to be learned about how to save and how to invest. even in a low interest-rate environment. i think students find it pretty interesting to have for example and make believe portfolio make their investments and they can check the paper every morning and see how they did and they may learn that putting all their eggs and into one basket may not be the best idea. so there are many basic ideas like diversification and risk reduction that students can learn and would enjoy learning. >> we have one final question. once again we will go to a teacher from the richmond

district who is here in the room. >> good evening. -- good afternoon. i am from hanover county, virginia. we hear this upcoming generation will be the first generation worse off than their parents. i am a little school teacher and -- i am a middle school teacher my here -- and kids think are and invisible. -- think they are invincible. everything is far away and we think -- and they think we are ancient. they think you're our aged. do you think this generation will not be better off than their parents? if your own kids were middle schoolers today, what would you ask their teachers to do to help impart this important information to them? >> yet another very good question. [laughter] obviously. all kinds of things can happen in the world but my best guess is that our kids will be better off than we are.

there are a number of reasons for that. the first of that our living standards depend most fundamentally on gains in productivity. we are living in a world of livf technological change. the u.s. is at the forefront of that. we have some of the greatest universities in the world here and we are finding ways to commercialize the inventions and discoveries coming out of the universities in places like silicon valley and research triangle and d.c. technology will continue. the u.s. economy is well placed to take advantage of that. we have some entrepreneurial colter and market-oriented --

our egos is market oriented. we have flexible capital labor markets. i guess i would come back to one issue, our demographics. one of the challenges we face collectively is the fact that our society is getting older and this fraction of people who are retired and receive social security or medicare is increasing and that creates fiscal burdens and burdens on future taxpayers. the good news is that relative to most other industrial countries and compared to an emerging market economies, the demographics of the u.s. are not that bad. we have a very healthy immigration rate. we have a the fertility rate. our demographics are relatively favorable compared to a lot of other industrial countries.

that is another positive. there are many reasons to think that our society will be transformed by technology, products, markets. the u.s. will play an important role and that will give opportunities for our children to have higher standards of living than we did the. there are some important challenges. i already mentioned the fiscal challenges. our educational system, we need to keep improving it because it is not a question of -- it is both failing our students a and it is creating a lot of equality because you have some very good schools in the u.s. there is a different starting line for kids who are coming out of those different backgrounds. education, health care, a lot of

issues we have. in the near term, kids coming out of high school and college right now are not facing a good job market and that will make it more difficult for them to get into the workforce in to gain experience. there are lots of challenges. again, over the medium term, the features of the economy that have made it the richest in the world together with ongoing improvements in technology and the strengths we have in terms of our markets and our democracy, all of those things will be positive. in terms of advice, i think that the way the world is going towards a more globalized system where trade in services can flow very easily across borders to a highly technological society, the benefits of education will get greater in the greater. this is not going to be the kind of world in which unskilled

workers will do well. we need to have enough knowledge to adapt and accommodate the many changes that are happening and will happen in the coming years. the good news for you is that your product is becoming more valuable. [laughter] people who are smart will take every possible advantage of it. >> thank you. thank you for your great questions. that concludes our session for the day. we hope you have gained insight from this conversation that will help you in your work in the field of economic and personal finance education. on behalf of the federal reserve system, thank you to the participating teachers. we are pleased you could join us today. once again, we would like to thank chairman bernanke for taking the time to speak with us. thank you. [applause] [captioning performed by national captioning institute] [captions copyright national

cable satellite corp. 2012] >> this afternoon, live coverage of a campaign fund-raiser for president obama in chicago where he arrived yesterday. he will hold five defense. join us live at 4:30 p.m. here on c-span. the newly chosen republican vice-presidential candidate returns home today. paul ryan will be campaigning with mitt romney in wisconsin. they will stop in north carolina before heading to wisconsin, which we will bring you live at 7:00 p.m. eastern. president obama's counter- terrorism adviser defended the administration's use of drawn attacks in yemen. he said al qaeda militants in

the country remain a threat to the u.s.. he did not rule out u.s. involvement in syria in he called on congress to pass a cyber security bill. this is about one hour. >> welcome, everybody. welcome to the council on foreign relations meeting. i. margaret warner. most of your veterans. you know the ground rules. turn off your cell phones. i have been asked that you not even put it on vibrate because it will interfere with the sound system. this is on the record. a is my pleasure today to introduce today's guest, john brennan. he is a deputy national security adviser. the chief adviser for the president on counter-terrorism's

strategy and implementation -- he coordinate's the homeland security related activities throughout the executive branch in preparing for in responding to things like cyber threats. he will open today with a few remarks about u.s. policy from yemen. he and i will have a conversation for 50 minutes or so and we will open it up to questions. mr. brennan? >> -- [applause] >> thank you very much. thank you everyone for being here today. it is a pleasure to see so many familiar faces from inside and outside of the government who i hope are here because they are abiding and deeply rooted in yemen and u.s.-yemen relations. when the subject of yemen comes

up, it is often to the tune of the terrorist threat emanating from within its borders. for good reason. al qaeda -- aqap is its biggest affiliate. they have kidnapped and killed workers, targeted american interest, and terrorist attacks in the u.s. -- they have attempted to attack u.s. aviation. likewise, discussion of american counter-terrorism efforts tend to focus only exclusively on the use of one counter-terrorism tool in particular, targeted strikes. at the white house, we have always taken a broader view. yemen's challenges and u.s. policy -- two months ago, experts wrote an open letter to president obama arguing that there is a perception that the u.s. is singly focused on aqap. among their recommendation is

that u.s. officials publicly convey that the u.s. is making a commitment to yemen's political transition, economic development, and stability. each is in that spirit that to you here today. as someone who has come to know and admire yemen and its people over the last three decades -- i want to begin with a snapshot of where they are today. since assuming office, the president has made progress toward implementing key elements of the cooperation council agreement. as part of a military reorganization, powerful commanders, including some of the former president's family and supporters have been dismissed or reassigned. discussions are under way to bring the military under unified civilian demand -- command. two days ago, the president took the important step of issuing a decree that we have signed several brigades.

in addition, to organize a national dialogue, the president has appointed a committee with representatives from political parties, youth groups, organizations, and it people in the north. that is the first time this week. on the security front, there of an important gains against aqap. today, their flag no longer flies. one resident said it is like seeing doctors -- darkness lifted from our lives. also, businesses are reopening, public services have resumed and public servants are getting paid. the energy infrastructure is slowly being restored and that includes the matter of pipelines. at the same time, yemen

continues to face extraordinary challenges. violence remains a tragic reality. we saw this again in last week's meeting and in a suicide attack on saturday that killed dozens of innocent yemenis. it is one of the poorest countries on earth in conditions are compounded by last year's of people. most access -- lack access to basic services. unemployment is as high as 40%. chronic poverty is now estimated at 54%. 10 million people, nearly half of yemen's population go to bed hungry every night. one in 10 children does not live to the age of five. president obama understands that the challenges are great in the intertwined. he has insisted that our policy of the size government and development as much as security. and focus on a clear goal to

facilitate a democratic transition what helping him in advance reforms to support its citizens encounter aqap. you see our comprehensive approach in the numbers. assistance to yemen is more than $337 million. over have this money is $170 million for a political transition, humanitarian assistance, and development. let me repeat that. more than half of the assistance we provide to yemen is for political transition, humanitarian assistance, and development. in fact, this is the largest amount of civilian assistance the u.s. has ever provided to yemen. any suggestions that our policy is dominated by security efforts is simply not true. i want to walk through the key pillars of our approach. first, the u.s. has been and will remain a strong and active supporter of the political transition in yemen.

that is what president obama called on the president to step down after unrest erupted last year. having been said the -- we have worked hard to help sustain the transition, facilitate elections, and promote national dialogue. president obama issued an order authorizing sanctions against those who threaten the transition. going forward, we will push for the full implementation of the gtc agreement. we call on all yemenis to shove that they will put the national interest of yemen ahead of parochial concerns. in abide by the spirit of the agreement so that yemen can move towards a more inclusive democracy. as we support the transition,

our comprehensive approach has a second killer, helping to strengthen government and institutions upon which yemen's progress depends. despite decades of rule by one man, yemen has a foundation on which is building. the country has a tradition of opposition to political parties, a vibrant party, and leaders who plays national interest above politics, religion, sex, or pride. the president is one such leader. this year, i met with him twice and i have spoken to him numerous times. i have been impressed with his commitment to his nation, his integrity, and his willingness to make difficult decisions to move his country forward, even at great risk to himself. the yemenis people are indeed very fortunate to have him as their leader. we are hoping to strengthen the government institutions so they become more responsive, affected, and accountable to the people. we are partnering with ministries to expand the

essential services, improve the efficiency, combat corruption, and enhance transparency. we will support the reform of law enforcement and judicial institutions to strengthen the rule of law. beyond government, we are proud to continue our tradition of helping to strengthen the role of civil society to conduct parliamentary oversight, raise public awareness, in yemen's transition, and our women, provide leadership and training, and build the capacity of political parties to engage in peaceful, democratic discourse. of course, lasting political progress is impossible so long as half of the yemenis are malnourished and struggling to survive another day. that is why the third pillar of growth is immediate humanitarian relief. this year, the u.s. is providing nearly $110 million in assistance to yemen. most of it is through the u.n. humanitarian response plan. this makes the u.s. the single largest provider of humanitarian

assistance to yemen. these funds are allowing our u.n. and ngo partners to provide food and food vouchers, improve sanitation, safe drinking water, and basic health services to help meet other urgent needs. usaid is providing $74 million for food security, enabling unicef to scale up its assistance for starving children. with u.s. support, unicef and the the buteo completed a large- scale immunization campaign, which may have halted a polio outbreak that began last year. even with these efforts, so many yemenis remain in desperate need. we commend the european union for doubling its humanitarian aid to yemen and urge other donors to follow suit by controlling more to the u.n. humanitarian response plan, which has less than 6% in funding. this will provide life-saving relief to millions of yemenis. as we help address these needs,

we are partnering with the economic reforms and development necessary for long-term progress in yemen. the $68 million in transition assistance and economic development we are providing this year includes vital assistance to improve the delivery of basic services including health, education, and water. we are helping him and address its staggering health gap by renovating health services, providing equipment, training midwives in child health, and supporting community health education. we are helping more productive techniques and providing used with the job placement and entrepreneurial programs. we are promoting small businesses. we are encouraging efforts to stabilize the economy and undertake reforms that will help raise living standards and promote a more diversified economy. following yemen's success against aqap, usa ideas

supporting the effort to repair war-torn infrastructure and to rehabilitate communities. yemen must have a plan to address unemployment and poverty as well as develop and reform its economy. including by combating corrupt in its -- corruption so that donor funds do not go to private interests at the expense of the yemeni people. international donors want to know their contributions are not misappropriated and the projects they fun are part of a comprehensive plan. providing a vision of where yemen's leaders plan to take the country will help its friends invest wisely. this brings me to the final pillar of our comprehensive approach to yemen, improving security in combating the threats of aqap. yemen cannot succeed politically, economically, socially so long as the cancerous growth of aqap

remains. ultimately, the battle in yemen must be won by yemenis. the president and his government, including the defense minister and interior minister have made combating a top priority and have forced them out of southern yemen. so long as they seek to implement its murderous agenda, we will be a close partner with yemen in meeting this threat. just as our approach to yemen is multi-dimensional, our counter- terrorism approaches involve many different tools, diplomatic and intelligence, military, home and security, law enforcement, and justice. with our yemeni partners, we have put pressure on aqap. recruits have been disrupted. copper to deploy have been detained.

key leaders who have targeted u.s. in yemeni interests have met their demise, including the chief of external operations. of course, the tension has often focused on one counter-terrorism tool in particular. targeted strikes. sometimes, using remotely piloted aircraft, often referred to as joan -- drones. in yemen, our joint efforts have resulted in direct actions against aqap operatives. this spring, i addressed the subject of strikes and why they are legal and highly effective. all of our efforts are conducted in concert with the yemeni government. when direct action is taken, every effort is made to avoid any civilian casualties. we see little evidence that these actions are generating

widespread anti-american sentiment or recruiting for aqap. our yemeni partners are more eager to work with us. citizens to have been freed bare more eager. targeted strikes against the most senior in dangerous terrorists are not the problem, they are part of the solution. we're hoping yemen with its own security. we are helping to reform and restructure their military into a unified force under civilian control. the $159 million in security assistance, almost all of it is for training and equipment to build capacity. we are and powering the yemenis for it in challenge best driven -- intelligent-driven

operations. finally, i would note that our approach to yemen is reinforced by a broad support from the international community. drought yes -- the last year, saudi arabia, the g 10, the friends of yemen, the u.n. have come together to push for a peaceful solution of the crisis and to facilitate a successful transition. the international committee have threatened u.n. sanctions against those who undermined a transition, provide humanitarian relief, and offered assistance for the national dialogue. international partners have pledged a. saudi arabia alone offered 2.2 $5 billion on top of the significant grant -- 2.2 $5

billion on top of the significant grant. these are the pillars of our comprehensive approach to yemen. the play transition. strengthen government. provide humanitarian relief. encourage economic reform. improve security in combating aqap. taken together, our efforts send a message to the yemen people that the u.s. is committed to success. we share the vision that guide so many yemenis. a yemen where all citizens have a government that is democratic, responsive, and just. we are under dilution. given the tremendous challenges that human faces, progress will take many years. if we have learned anything in the past two years, it is that we should not underestimate the will of the yemeni people. despite the insurmountable obstacles, hundreds of thousands

of men and women took to the streets engaged in political and social movements for the first time in their lives and in so doing, helped pave the way for change with a, which a few years ago -- which a few years ago would have seemed impossible. not be future may determined by violence. the people of yemen have a long and hard working ethic. as they go forward in pursuit of the security, prosperity, and dignity they so richly deserve, they will have a partner in the u.s. thank you very much. [applause] >> thank you for that comprehensive laying out of u.s. policy to yemen. very interesting.

he mentioned a democratic and responsive government and more just. i wonder how that jives with saudi arabia. saudi arabia is very involved in partnering with the u.s. to what degree does saudia arabia allow the flourishing of a more vibrant democratic model in yemen with the kinds of institutions you site? >> saadia arabia has and more for yemen than any other country. it shares a border with yemen. they were one of the key drivers with in the gtc to force the

agreement that called for this political transition to take place in the embedded in that agreement is political reform. whenever i go to yemen, i will go to saudi arabia. sometimes before and after. what the saudis and yemenis want to do is make sure we are working together. i have found only support coming out of saudi arabia to this senior saudi officials before yemen to continue along this path. yemen has a history of having a vibrant civil society. political opposition -- >> -- >> they have political parties that have been there for quite some time. now moving into this new phase, the saudis want to make sure that yemen is able to take advantage of the foundations that it has already and to make sure it evolves in a peaceful way and one that is, i think,

consistent with what the area is trying to accomplish. >> your agenda was more than getting rid of the president? >> absolutely. the president agreed to step down before his term was up. he agreed to the agreement allowing elections to take place. the saudis realize that getting him out of the position is not a remarkable achievement. in order for yemen to go along the path of progress, we needed a much broader effort under way across the government. >> how would you compare it the two presidents in terms of partners to the u.s. in combating aqap? the u.s. used to read for to president solly as the great partner. >> we have had a partner with him and against aqap for a number of years.

there are ups and downs. there were times where there were strong disagreements about the need to have a sustained effort against aqap. there is a mix of politics and things that come to bear within yemen. i think the government before hadi would see how counter- terrorism activities would affect the political equities. that cannot be part of a counterterrorism effort. hai has a singular focus -- - hadi has a focus. he says al qaeda is killing yemeni men and women and children in he will battle them as much as he can. we have found there is a continuity of efforts and there

are not these other considerations. >> you are seeing him as a more dependable partner. >> there has been exceptional consistency since he has assumed office. >> i will not lead you into any more comparisons. let us move on to syria. increasing reports that extremists and al qaeda at links for coming in, joining of this rebel cause. could that threaten u.s. security interests? do you see a threat? >> al qaeda tries to take advantage of the environment going to political change or chaos. we have seen that they grew in iraq.

they have taken advantage of simaly and yemen because of the political problems there. syria is no different. the oppositionists have said they are concerned about the al qaeda types and they have said that they will not allow al qaeda to take advantage of their situation. we have to be very mindful that al qaeda is a worldwide enterprise and will be looking for opportunities to exploit. syria presents the opportunity. >> how does the funding model that is currently in operation -- that could contradict your aim. the u.s. in the west are not actively finding the rebels. it is left to the saudis. could that be self-defeating? >> we have done a number of

things in support of the opposition. i will not go into all of the details, but there is a provision. there is a lot of humanitarian assistance going on. we want to make sure we understand who the recipients are going to be. it could be communications equipment or other things that will coordinate their activities. policies in the u.s. government are clear. assad must go. what is happening in syria is outrageous. we are very much supportive of the efforts by the opposition -- >> the secular rebels are now complaining that they do not have the weapons and the firepower as some of these more

extreme level forces. >> when you look on the video footage on news programs, clearly there is a live reading rate in syria -- a lot of weaponry in syria. we are concerned about the extremist element. when you look at the syrian opposition, the overwhelming majority of them are not of al qaeda. they are truly trying to gain control of their lives and future and i think that is what we need to be able to do. it is a multi-pronged effort. we need to work with the countries in the area. the situation is tragic. we do not want to do anything that would unintentionally lead to greater bloodshed in the country. >> is the no-fly zone in the

northern part of the country where the rebels are beginning to gain control -- there is a territory beginning to take shape. can you foresee circumstances in which the west might protect them from assad? >> just like happen in libya, syria has been evolving over the past number of months. the u.s. government always looks at situations in and looks at what types of scenarios might unfold. then, accordingly, they look at what types of contingency plans might be able to deal with certain circumstances. rest assured that various options are being talked about in the press and sometimes been advocated. these are things that the u.s. government has been looking at very carefully, trying to understand the implications and

advantages and disadvantages. this president has kept us busy making sure we are able to do everything possible that will advance the interests of peace in syria and not do anything that will contribute to more violence. >> it is not a complete non- starter. it is on the table. >> i do not ever recall the president saying anything was off the table. >> let me move on to cyber security. this has been one of the president's top national security objectives to get this bill that would have put in some protections for the nation's critical infrastructure, oil and gas pipelines, electricity grid, water supplies, so forth. last thursday, the senate blocked the bill. what are the consequences? >> we will not have enhanced

authority to deal with what is increasingly serious cyber challenge to our nation and political infrastructure. we worked very hard to try to push forward and advance the cyber security provisions that were included in a bill that unfortunately did not advance last week. what of the implications? one of the things we need to do is to see what we can do to maybe put additional guidelines or policies in place. if the congress is not going to act on something like this, the president wants to be sure we are doing everything possible. the legislation calling for minimum performance standards on the cyber security front for critical infrastructure that the u.s. government would help develop with private industry. this standard would have to be followed by elements of the private sector that have responsibility.

obviously, there are a lot of people that came out and misrepresented what was in that bill. the critical infrastructure of this country is under threat. they are developing advanced technologies and we have to improve our defenses on this issue. president obama has called on us to keep pushing on congress and doing what we can under executive branch authorities. >> how serious are the threats? from theoretical vulnerability to actually being attacked. >> when you do in that assessment, you take a look at what the capabilities are. then it talks about the vulnerabilities of the target of the attack.

right now, i can tell you with great certainty that the vulnerabilities are there, the capabilities are there, so it is a question of intent. whether certain actors are going to operationalize the capabilities. we see intellectual property rights are just robbed. it is a system that is privately owned and privately operated space. the government is not trying to go in and regulate. clearly, the market has not developed in a way to satisfy cyber security requirements. if they did, we would not have billions of dollars in losses that companies are now writing off. the american people are going to be at risk.

the water we drink, the electricity that we depend upon, the hospital that requires that type of support. that is increasingly at risk. >> give us an example of a vulnerability. let's take the electricity grid. it has the vulnerability of being disabled or crippled. >> there are cyber intrusions that go in and operationally prepare the environment to map it, or understand it, infiltrate data, or then you understand it and take actions to destroy it. we are seeing a lot of intrusions and infiltrations'.

the next that is disruptive, disabling types of attacks. electric grids, water treatment facilities, mass transportation systems, railways or trains. if those intruders can determine how they can interfere in the command and control systems of these systems, they can do things. they can put trains onto the same tracks and bring down electric grids. >> who is most interested in doing this? >> bad guys. [laughter] >> define bad guys who would

want to cripple u.s. infrastructure. is in other countries? >> first of all, you look at foreign countries. some that have tremendous cyber capabilities. do they want to bring down critical infrastructure of the united states right now? no, because they rely on the economy for a number of reasons. there are certain foreign actors who would do it in an instant. they fortunately do not have the capability at this time. you also have international criminal groups. you can do things to increase your criminal intent by bringing down infrastructure. there can be all kinds of different reasons. >> when you say you were looking at what the executive branch can do without congressional action, are you talking about executive orders?

>> executive orders are a good vehicle to direct departments to do certain things so the nation is protected. the president prrity is to protect the safety of the american people as well as the prosperity of the american people. we delivered our legislative package to the hill last year. unfortunately, the senate bill went down last week. we can now wait. we are doing things in conjunction with others, working to make sure we can better safeguard our environment but also be able to respond and be resilient. if you take down some part of our critical infrastructure, you want to be able to recover very quickly. >> one final question before we go to the audience. this leak investigation that is going on. everybody has accused members

of the administration of leaking sensitive operation details for the president's political benefit. they cite the hunt for and raid for osama bin laden. they talk about a virus in iran, selecting drone target and the president's involvement. i think some have cited the foiled terrorist plot in yemen. what do you say in response to that? >> a couple things. there are investigations under way so we have to be respectful of that process. secondly, the president has made it clear that any leak of

information should be vigorously pursued and prosecuted if there was a violation of one's responsibilities in terms of protecting classified information. there have been some devastating leaks. it is unconscionable what has gone out. the president has made it clear to his senior team that for whatever reason if someone is trying to advance their own interests or the one to be able to cultivate a relationship with a reporter, there are very, very critical national security matters that require their to be protection of that information so it does not get out so we can keep the american people say. without a doubt, anybody who has released any of this information should be held to the requirements and if necessary deal with the judicial

system appropriately. >> there has been damage from some of these leaks. >> absolutely. there has been a conflation from people out there making claims about individuals who have leaked national security secrets for political purposes. it is easy to point fingers at the white house. frankly, i think a lot of the allegations are irresponsible. we need to make sure we are dealing with these issues in a very serious manner because the security of the united states is at risk. we want to be able to be as transparent as possible with the american people. you mentioned when there was this instance when there was an ied that al qaeda was trying to put on an aircraft.

unfortunately, information was leaked. when that operation came to a conclusion, we do have an obligation to tell the american people about what the threats are coming from al qaeda. it is mixing apples and oranges. we need to make sure leaks of national security secrets need to be pursued and prosecuted to the fullest extent of the law. that should not inhibit us from talking to people. the president feels strongly about engagement. i have said things about our counter-terrorism program in terms of what we do, our ethics and values as a people. i will be mindful of our national security matters. sometimes there is tension between these things. >> we are going to questions.

you all know the rules. let's start here. >> i was going to take the question back to yemen. he mentioned that it is one of the poorest countries in the world -- you mentioned that it is one of the poorest countries in the world and will be increasingly water insecure. you did not mention anything that we are doing to assist in that or direct that. i wonder if you could comment on what is a significant issue in that poor country. >> i think i did mention water a couple times but did not mention specific projects. it is part of our program to look at ways where water can become more available. the water tables are being depleted in yemen rapidly. you have a population growing exponentially.

as you mentioned, it is one of the most water consuming crops in the world. there are a number of things and we have talked to the yemenis and the saudis. that is not a question of building more plants along the coast. it is also a question of trying to develop communities that have a better opportunity. the population of yemen is concentrated in some real densely populated areas in just a handful of cities. so, water development and projects that are going to allow them to address their longer-term water requirements is absolutely the central. we would like to try to work with the world bank so we can have some aid that will address

the infrastructure deficiencies that exist in yemen. even their existing water system is sub-optimal. i think there are greater efficiencies that can be put into the system. saudi arabia has similar types of issues, but their population is not as concentrated in these urban centers without the availability of desalinated water. the way to address the water problem has to be multifaceted. some of it is going to be developing communities in other areas, and also a combination of what types of projects will be

able to generate more water that exists in the water table but is not available right now or desalinization project. >> right here at. >> i am a fellow at the university of virginia center for national security law. i was doing to of research on al qaeda's relationship with indigenous tribal structures. i think your assessment of the regime is correct. i have seen a lot of progress and i think the administration should be commended. i also think there are significant improvements in the security situation in the south. i have some concerns about implementation on an indigenous basis in terms of security on the one hand and development on the other. it was clear to me from the leaders that i interviewed that economic desperation is the primary driver of al qaeda recruiting in the country.

some of these regions are so desperate that it is hard for the government let alone our security apparatus to get out to some of these places. the concern i have is how do we do this diligence and who will be doing a going forward? thank you. >> we have a lot of challenges ahead in terms of addressing the multiple needs of the yemeni people in different parts of the country cannot many of which are remote and distant -- of the country, many of which are remote or removed from the government. i think what the president is trying to do -- he is a southerner from the area, so he knows the people in that area.

there is going to have to be a period of time with you are going to have to develop trust in individuals so the mechanisms are in place. as money flows down, it will float down to the right places. corruption has been rampant for years in yemen. the president is trying to address that. we are talking about a short period of time. there have been complaints in the south that as a result of military forces, you do not have the police coming in or the regeneration of the communities or the shops have not been repaired. that is difficult to do even in the united states. in a place like yemen which is seriously challenged, the instruments of interaction with local communities have been interrupted as a result of what aqap has done. what we need to do is make sure

what is pumped in at the top flows through the people and the mechanisms that are going to give you confidence to derive benefits. this is going to take a while. we are counting on the president to do as much as he can. two years from now, we're still going to be facing some enormous hurdles. yemen is one of the most backwards parts of the world. it is beautiful. but trying to have a country- wide system where you can connect the government to the people in a sustained way is really tough. >> yes, someone in the middle here. the lady in the middle. if i may ask to keep your questions short because we do

not have a lot of time. >> thanks. i very much appreciated what got the most attention putting in a broad context. the reason i think the drone program gets so much attention is because of the use of legal force which tends to get people's attention. i would like to understand more about the framework in which we are operating. this is one of the concerns a lot of americans have about that program. you described this in turn a conflict that we are trying to assist the yemeni with in driving out aqap. the u.s. has a strong interest in making sure it is granted in the rules of law. are we granting that in the

concept of being a party in yemen? if not, what is the legal basis for the use of lethal force? >> i would draw the distinction between what you said and what the reality is. first of all in terms of the basis for the use of lethal force, the operation of the use of lethal force provided the basis for the u.s. government and military to take action against al qaeda because it presents a threat to us. aqap clearly is one of the most active al qaeda franchises worldwide and has been determined to carry out attacks against us. while we have aided the government in building the capacity to deal with the insurgency that exists on the ground, we are not involved in working with the yemeni

government as a part of that insurgency. what needs to be made clear is there are individuals in al qaeda that are determined to kill americans whether in the homeland or other parts of the world. we go to a great extent to thwart those attacks. when we do not have those opportunities to prevent these individuals from carrying out the attacks, if our only recourse to take legal action to provide our partners with assistance or to do things with them to mitigate the threat, we will do it. so, there is uncertainty -- aqap is a very interesting organization.

you look at al qaeda. there are some pakistanis up there in al qaeda, but mainly they are arabs. the arabian peninsula is mostly made up of yemenis. they are not determined only to carry out attacks against americans. and a lot of them are trying to gain ground. that actually put up their flags. controlling the territory. they are trying to unseat the government. we are trying to help the yemenis thwart that insurgency and push it back. it is counter to our interests and the arabian peninsula as a whole. where we get involved is to mitigate those terrorist threats.

al qaeda in the arabian peninsula has some very creative and determined murderers that have gone to great lengths to try to find ways to put ied's on aircraft and carry out attacks on a daily basis. we are not going to sit by and let our fellow americans the killed. if the only way we can prevent this deaths is to take direct action against them, we will do so. >> this gentleman right here. then the lady right there. >> thank you so much. what is your assessment of the claim from five members of congress that the muslim brotherhood has deeply penetrated the u.s. government? [laughter]

>> i would refer you to the five members of congress who made that remark. i have no idea what it is they are making reference to. [laughter] i really cannot address that statement. >> i wanted to give you a chance to give us a report card on al qaeda at large. how they are doing in the arabian peninsula. you mentioned that you disrupted their recording operations. can you give us more specifics? >> i will start with yemen. there is a lot of attention paid to when there is an ordinance dropped by somebody against a terrorist organization. that is what gets the focus them back on a daily basis, -- gets the focused. on a daily basis, there are operations under way thwarting these plans.

you know there are different phases and in operation, from fund-raising to identifying operatives and materials or whatever else. there is a continuum there. regularly, we and the yemenis are disrupting things taking place on the continuing. on a regular basis, we are doing that. in yemen, two things are in very positive directions. one is since the president has assumed the presidency, there is a new consistency in what the government is doing on the terrorism front. our ability to work with them and the intelligence, military, and the intelligence, military, security -- that has