way toward the ability of displacing other kinds of electrical power sources. as natural gas use with kohl has driven down u.s. carbon emissions, there is still some debate over the level in different parts of the state with gas development. and certainly technology is enabling huge growth in natural- gas development and that has enabled u.s. oil production to reach a 20 year high. you can see many analysis from outside groups on this idea that the north american continent as a whole could be something close to self sufficient and largely used for transportation fuels. that is certainly out there. natural gas, everyone is going to be grappling with this sense of abundance, if you will. for a long time there was this debate about how we replace

resources that are thought to be on the downswing. the whole question of climate change, the environmental effects and trappings, they are all swarming around this leveraging consensus or close to it where instead we have more stuff lying around than we thought. >> if it is close, with the environment lists be happy about fracking, but not having all of it created equal? >> some would be happier than others in the community. someone a more vigorous role from the federal government. they want the interior government to regulate across the country. it probably goes a little bit further. i see the chairman trying to find middle ground on that. middle ground is elusive at the moment. oversight hearings are what the energy committee is doing right now.

i definitely think that there is a big factor from the environmental community that wants to get back to renewable energy in general. that is why i think natural gas is important for renewable energy and sustained renewable energy. shining when the sun as the shining, when the wind is not blowing. i think that natural gas plays an important role in that but i think that time will tell in instances like that. >> thank you to both of you for being here this week with your questions. >> thanks a lot. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2013] >> the house and senate are back on monday. the house legislators will be looking to keep the federal government funded to the last six months of the budget year. current funding runs out on the 27 and the continuing resolution is expected to come up for

debate later in the week. live coverage of the u.s. house, here on c-span. in the senate there will be voting on new york court nominations. on tuesday they plan to debate a measure authorizing expenditures by committee. coming up as early as tuesday, the intelligence committee -- committee votes on the nomination of john brennan. you can watch the senate live on our companion network. >> you have to understand that all of the founders, their primary concern, number one was with national security. o would they think, for example, about a company like lockheed? i am of the opinion that based on how they acted in other instances they would have grudgingly bit -- grudgingly favored a bailout of lockheed

because it supplied the united states at the time with its top reconnaissance jets and fighter planes. you can make an argument that they would have supported the bailout of chrysler in the 1980's but not the bailout of chrysler today. the difference? back then chrysler made tanks. in fact they were our only tank manufacturer. it is interesting, when chrysler comes out of debt and repays the government loan and comes back to health, the main way they did that was by selling off the tank division and putting that money back into the company. >> larry schweitzer will take your calls coming e-mails, facebook posts, and tweak on the founding fathers, live today on book tv, c-span 2. >> next, ben bernanke testifies

before the senate banking committee about the health and progress of the u.s. economy and the potential effects of automatic spending cuts. this is just under two hours. ontoday's hearing is monetary policy for congress. progress has been slow but positive, thanks in part to the fed's monetary actions. the economy has added private

sector jobs for 35 straight months. during that time over 6 million new jobs have been created. we should not sacrifice those gains by slamming the brakes now. moderate cuts will take effect in just a few days and could send our economy into rivers at a time when we should continue moving forward earning jobs. projections suggest that the sequester will cost us 750,000 jobs this year. in addition to layoffs for cops, firefighters, and teachers that could devastate our communities, these cuts will impact our lowest level citizens, including kids, seniors, and the disabled.

as they issued an array of cuts, it will affect military readiness. it is unacceptable that we are launching from one manufactured crisis to the next. americans have had enough. these flights of bad for the economy and our making it harder for families to make ends meet. this steep drop in consumer confidence during the fight over the debt limit after the lehman brothers figure, this has consequences. consumers did not spend, businesses did not prosper and did not hire more workers. our academy will lie grow, it is that simple. we must do all the weekend to restore confidence in our

financial system, but also our ability as a country to tackle long term challenges in a responsible bipartisan manner. we need a plan that is balanced. there are things this committee can do to help achieve these goals. from rigorous oversight to confirming well-qualified nominees, we need to reach consensus. our steps this committee can take to reassure consumer confidence and move forward with long-term plans and strengthen our economic recovery. chairman bernanke, i look forward to your views as both the fed and the congress pursue supporting our nation has to be asked economic recovery. >> thank you, mr. chairman.

we will hear from our federal reserve chairman, ben bernanke. he will testify on the monetary policy and the state of the economy. mr. bernanke, thank you at the offset for your efforts to improve the transparency of the federal open market committee. so much is at stake for the u.s. economy. the fed has the responsibility to make as much information available to the american people as possible on its actions. i also thank you to your steadfast reminder to us that most of the important issues is the fiscal situation. i agree. fiscal reform and economic growth should top the list of our priorities in congress. you need to adjust the federal spending problem and reform our broken tech system and promote a sustainable and economic

recovery that will result in increased jobs. unfortunately, some officials are looking for an easy way out, by claiming our fiscal problems are nearly solved. nothing could be further from the truth. our economy contracted in the last quarter. our unemployment rate remains too high. medicare will be insolvent in 12 years. social security will be insolvent after that. unless we take steps to reform entitlements and make them solvent for generations to come, our fiscal problems are far from solved. in addition to our own fiscal situation, the ongoing banking

crisis in europe also presents substantial risk to our economy. in response to unsustainable fiscal policies here and abroad, such thinkers throughout the world have turned to unconventional monetary policies over the past few years. near zero interest rates and large-scale purchases and record size central bank balance sheets have become the norm. however, some authorities have become increasingly concerned that the cost of prolonged easing policy outweighs the benefits. in an annual report released last june, the bank of international settlements laid out the risk entailed with the worldwide expansion of the central bank balance sheets and their extended low interest rate policies. not only did their report concluded that such actions might delay the return to a self-sustaining recovery, but the great longer-term risk to central banks credibility and operational independence. more recently, the minutes of the january meeting showed that several members expressed

concern that the fed easing policy could threaten the financial stability of the united states. these concerns warrant serious consideration given the scale, scope, and duration of unconventional monetary policies. the fed has kept the target range from zero to one quarter of a percent for more than four years. they have engage in multiple rounds of asset purchases commonly referred to as quantitative easing. they are currently buying agency backed mortgages for months and $45 billion of budget securities per month. it is a total monthly pace of $85 billion. annually, that is more than $1 trillion. as a result of this large-scale asset purchase, the fed has ballooned its balance sheet to more than $3 trillion and growing. i look forward to hearing from chairman bernanke about the concerns raised about the risk of prolonged easing monetary policy and why they cannot overcome this policy. i also look forward to hearing

from chairman bernanke on this uncertainties around the dodd frank. what specific legislation can be achieved to remove this uncertainty? at our last hearing, chairman bernanke confirmed that regardless of congressional intent, thinking regulators are required to have some margin requirement under of it is unless congress changes the statute. chairman bernanke also confirmed that the fed is comfortable with an explicit statutory exemption. i look forward to hearing his suggestions for other legislative issues around dodd frank that could garner support. these issues are critical to us. i appreciate your attendance at this hearing. >> thank you, senator. this morning's opening statements will be limited to the chairman to allow more time for questions from committee

members. i want to remind my colleagues that the record will be open for the next seven days for opening statements and questions for the record and any other material that you would like to submit. now, we like to introduce our witness, ben bernanke, and chairman of the board of governors of the federal reserve system. it is a position he has held since february 2006. thank you for being here today to testify on the monetary policy report. your written statement will be included and on the record. you may begin your testimony. >> thank you, mr. chairman, ranking member, chair members. i'm here to get my monetary policy report. i will begin with a summary on

economic positions. since i last reported to this committee in the middle of 2012, economic committee in the u.s. has continued to expand at a moderate and somewhat on even pace. in particular, gdp is estimated to have risen at an annualgdp ie first quarter, but has been relatively flat in the fourth quarter. it does not reflect a stalling out of the recovery. economic activity was temporarily restrained by weather conditions and declines in a few volatile categories of spending, even as demand from us households and businesses continue to expand. available information suggests that economic road has picked up this year. consistent with a moderate pace of economic growth, conditions in the labor market have been improving gradually. since july, nonfarm payroll has

increased by 75,000 jobs per month and the employment rate claim three tenths of a percentage point over the same time. hewlett -- cumulatively, private sector or jobs have grown since the low point in 2010. the unemployment rate has fallen a bit more than two percentage points since its cyclical peak in late 2009. despite these gains, the job market remains generally week with the unemployment rate well above normal levels. about 4.7 million of the unemployed have been without a job for six months or more and millions can only find part- time work. high unemployment has substantial costs, including not only the hardship by the unemployed and their families, but also the harm done to the vitality and the productive potential of our economy as a whole. lengthy periods of unemployment can erode worker skills and

attachment to the labor force or prevent young people from gaining skills in the first place. develop an sector significantly and he and jake significant -- significantly reduced. the output of warnings -- the out put of earnings -- the recent increase in the gasoline crisis is hitting family budgets. however, overall inflation remains low. over the second half of 2012, the price index for personal consumption expenditures grew by 1.5 %, similar to the rate of increase in the first half of the year. measures of longer-term inflation expectations have remained in a narrow range is seen in the last several years. it is anticipated that the inflation will be likely at or below its two % object to.

magic its two percent objective. progress toward the federal reserve's mandated objectives of maximum employment and price stability has required a highly accommodative monetary policy. under normal circumstances, policy accommodation would be provided to reductions through the federal funds rate, the interest rates for overnight lows between banks. the federal reserve has had to use alternative all as he tools. these alternative tools have fallen into two categories. the first is forwarded guidance regarding the f1c. since longer-term interest rates reflect market rents -- rocket expectations, it supports a stronger recovery. the formulation of this guidance has devolved over time.

between august 2011 and december 2012, the committee used calendar dates to indicate how long it expected economic conditions to warrant exceptionally low levels to the federal funds rate. the fomc agreed to shift to provide more specific guidance and how it expects policy rates to respond to economic development. the current exceptionally low rate will "be appropriate at least as long as the unemployment rate remains of of 6.5%, inflation between one and two years ahead is no more than a percentage point over two percent, and longer-term inflation expectations continue to be well anchored article -- well anchored."

the new guidance also serves to underscore the city's intent rigid -- the committee's intention as long it is needed for a stronger economy with stable prices. the second time -- the second type is large-scale purchases of longer-term securities during -- securities. they are intended to put downward pressure on longer-term interest rates. the fed is engaged in several rounds. the fomc announced it would purchase securities. in december, the committee stated that come in addition, beginning in january to mate would purchase treasury securities at an initial pace of 45 million dollars per month. these additional purchases of long-term treasury security's replace the purchases we were conducting under are now completed a treaty extension program for my which lengthened the maturity portfolio without increasing its size.

the fomc has indicated it will continue purchases until it observes a substantial improvement in the outlook of the labor market. the committee also stated that, in determining the size, case, and condition of its asset purchases, it would take appropriate account of its efficacy and costs. in other words, with all of these policy decisions, the committee continues to assess its program of asset purchases within a cost-benefit framework. the benefits of asset purchases at a policy accommodation more generally are clear. monetary policies providing important support to the recovery well keeping inflation close to the fomc's 2% objective. it has helped spark recovery in the housing market and to increase sales in the production of automobiles and other durable goods.

it is raising employment and higher home wealth through home purchasing. there are several costs and risks that the committee is monitoring closely. the further expansion of the federal reserve's balance sheet. inflation expectations could rise. footing the fomc's price stability objective at risk. but the committee remains confident that it has the tools necessary to tighten money terry policy when the time comes to do so. as i noted, inflation is currently subdued and inflation expectations of tiered -- expectations appear well anchored. another potential costs that the committee take seriously the possibility that very low interest rates, if maintained for a considerable time, could impair financial stability.

for example, portfolio managers dissatisfied with lower returns may take more credit risk, durations, or leverage. on the other hand, some risk taking, such as what happens when an entrepreneur takes out a loan, he is a necessary element of the health economic recovery. moreover, although accommodative maturing policies may increase certain types of risk taking, in the present situation, it also helps to reduce the risk in the system, most of all bio rigid -- most of all by strengthening the housing market. the federal reserve is responding actively to financial stability concerns through substantially expansive on entering of a risks in the financial system. the ongoing implementation of

reforms to make the financial system more transparent and resilient. a long time of low rates could create risk-taking. we don't see potential costs to the increased risk taking in some financial markets as outweighing the benefits of a stronger economic recovery and more rapid job creation. another aspect of the federal reserve's policies is their implications for the federal budget. the federal reserve earns substantial interest in the assets it holds in his portfolio and any other amount in funding operations is committed back to the treasury. yearly remittances have roughly tripled in recent years. if the economy continues to strengthen, as we anticipate, policy accommodation is

accordingly reduced, these remittances will likely decline in coming years. further analysis shows that remittances to the treasury could be quite low for a time in some scenarios, particularly if interest rates were to rise quickly. however, even in such scenarios, it is highly likely that such remittances will remain higher than the pre-crisis norm, perhaps significantly so. the resulting deficit in a federal rigid -- although monetary policy is working to a in a more robust economic recovery, it will depends importantly on the course of fiscal policy. the jones for the congress in the administration is to put the

federal budget on a sustainable and long term path that promotes economic growth and stability without unnecessarily impeding the current recovery. significant progress has been made recently toward reducing the federal budget deficit over the next few years. projections released earlier this month by the cbo indicate that, under current law, the federal deficit will narrow from seven percent of gdp last year to two and a half percent in 2015. the federal head by the public, including that held by the federal reserve, is projected to remain roughly 75% of gdp through much of the current decade. however, a substantial portion of the recent progress in lowering the deficit has been concentrated in the near-term budget she says -- budget changes. the cbo estimates that a deficit reduction policy will slow the pace of real gdp growth by about 1.5 or signage points this year. -- 1.5 percentage points this

year. the sequestration will and she viewed two 6/10 of a percentage point on the economic drag this year. this additional near-term burden on the recovery is significant. moreover, besides having adverse effects on jobs and income skies lower recovery would lead less actual deficit reduction in the short run. at the same time, despite progress in reducing near-term budget deficits, the difficult process of determining longer problems has only begun. the cbo projects that the federal deficit and debt as a possessive adjective -- as a percentage of gdp will begin rising again in the latter part of this decade, reflecting in large part the aging of the population and fast rising healthcare costs europe to promote economic growth for the longer-term and to preserve economic and financial

stability, fiscal policy makers will have to put the federal budget on a sustainable long- term path that for stabilizes the ratio of federal debt to gdp and given the current elevated level of debt that eventually places that ratio on a downward trajectory. between 1960 and the onset of the financial crisis, federal debt averaged less than 40% of gdp. this relatively low level of debt provided the nation much needed flexibility to meet economic challenges of the past few years. replenishing this capacity will give future, suzanne administrations a greater score to deal with unforeseen events. to address both the near and long-term issues, the, send administration should consider replacing the sharp from spending is required by the sequestration with policies that reduce the federal deficit more gradually in the near-term, but more substantially in the longer run. such an approach could lessen the fiscal headwinds facing the

recovery for more effectively addressing the longer-term imbalances in the federal budget. finally, the size of deficits and debt matter, of course, but not all programs are created equal with respect to their effects on the economy. to the greatest extent possible , in their efforts to achieve sound public finances, fiscal policy makers should not lose sight of the need for federal tax and spending policies that increase incentives, work and save coming. investments and workforce skills, advanced private capital formation, remote research and moment, and provide necessary and productive public infrastructure. although economic growth alone cannot eliminate federal budget imbalances, a more rapidly expanding economic high will ease the difficult choices that we face eerie thank you, mr. chairman. -- that we face. thank you, mr. chairman. >> thank you for your testimony.

i will ask the clerk to put five minutes on the clock for each member. chairman bernanke, what is your assessment of thecongress did nt would the impact be if there is another crisis with a fight over the cr? >> as i mentioned in my remarks, with respect to the sequester, cbo estimates that it would cost about six tens of a percentage of growth this year and the equivalent of about 750,000 jobs. it would be a drag on near-term economic recovery. all of the actions taken this year would be a drag of about one point five percentage points. that is quite significant. in that respect, an appropriate balance would be to introduce these cuts more gradually and competent with larger and more

sustained cuts in the longer run to address our fiscal issues. as you noted, there are a couple of other issues this year, including the continuing resolution and the debt ceiling. i hope that congress can work together to address these issues to minimize uncertainty. the uncertainty itself is costly in terms of the private sector to land to take risk and to help grow the economy. >> that is important to our economic growth. it will have a major impact on housing. chairman bernanke, do you agree with a governor [indiscernible] what would you do to ensure to not hinder mortgage lending?

>> mr. chairman, the qrm -- we have had to wait for it to be done before we could attack the process. the qm is intended to help consumers. it is meant to strengthen the security. responding to your question, the six agencies which are currently discussing the qrm consider the idea of making qrm identical to the qm. >> thank you for your answer. the ranking member and i sent you a letter on the attentional impacts of rules on insurance companies in community banks. i look forward to your response. chairman bernanke, there is an

increased focus on security and the united states, including the financial system. that has noted the issue in panel reports. what is the fed doing in your own networks to strengthen financial data protection and enhance the cybersecurity in the financial sector? >> mr. chairman, your point is right. cybersecurity insurgence in the financial system has become more acute lately. there have been a number of so- called server attacks on banks, which essentially fled the websites and prevent the public from accessing their accounts. these are quite disruptive them problematic. the leadership on cyber security for the financial system is being taken on one hand by the treasury and on the

other hand by the various intelligence agencies. we are engaged in cooperating with these agencies and sharing information and working with banks to make sure they have the appropriate procedures and oversight in place to deal with such problems. we do not have to press them hard. they recognize it is in their own interest to do whatever they can to rent these attacks from being affect. >> some urge the fed to focus on inflation, which has been a bigger threat since 2007. chairman bernanke, what steps has the fed taken to -- >> we have a new mandate.

congress will set our objectives and the reserve will figure out how to meet them. we have been accommodating. in doing so, we have provided support for the economy and job growth through strengthening housing and demand for automobiles and wealth effects and the like. i would note with inflation at below the two percent policy, at the moment it does not seem like much of a concern, but as it gets closer to zero at

critical levels, that risk increases. keeping inflation from going too low, it is hard to explain to people why it's a problem. it is a barrier to economic growth and stability. our policy has not traded off one of these against the other. it has supported both real growth and employment and to close to our target. monetary policy is the tool that the fed has to try to address that mandate. >> thank you, mr. chairman. mr. bernanke, the fed is monetary its near zero interest rate policy and how it could result in risk-taking and threaten the financial

stability of the united states. what specific metrics have you used to evaluate whether these are increasing? >> we have greatly expanded our resources that we use in the monitoring process. we have created an office for financial stability. we are working with an oversight council. in the amount of effort we have into this has greatly increased. our internal monitors report regularly to the board. our discussion on the monetary policy includes discussions of financial stability issues. the kind of metrics that are used on things like leverage our people who are invested in leverage. interest rate risk or other kinds of risks that are concentrated. the fed is anxious. we have spent a lot of effort

looking to banks and other financial institutions trying to ensure that they have appropriate capital or liquidity and are managing their risks. there is a wide range of which we look at this. we have been watching this carefully. this is a view shared by others on the committee. they are not concerned that they outweigh the benefits of trying to support the recovery. >> thank you. i would probably disagree with those conclusions. i know my colleagues will get into this. theyif we are able to achieve se bipartisan consensus on steps

to improve dodd frank, what are some provisions that you think need location or improvements for reconsideration? >>. frank is a complicated piece of legislation that addresses many issues. reduce costs without losing the purpose of the regulation. something along those lines would be doable. but fed is willing to work with you closely. in terms of specific, we want to do the work, but you mentioned in your opening remarksif we are able to achiev. there is an area which is the pushout initiative for derivatives. the burden falls heavily on

small community banks, which do not have the resources to manage those regulations very effectively. i would say that we ought to work together to find ways to lower that burden for smaller institutions. >> thank you. i appreciate your advice and your willingness to work with us on this to try to improve. last issue -- i want to talk about the crisis in europe. elastic the european union released its 2013 forecast for the year on the euro zone economy. it was predicted that the eurozone will shrink for the third year in a row. what specific risk is a prolonged recession in europe exposed the u.s. economy to?

>> given the risk on and off the waiver we have seen from the markets, the european central bank has taken a number of important steps, including the monetary transactions that help to bring down the sovereign debt yields for the more fiscally challenged countries. that has been helpful. there are a number of steps that have reduced the financial stresses in europe. that remains a concern. the financial stresses are certainly less today than they were over the last two years. at the same time on even if the financial stresses have -- the eurozone is in recession and

unemployment is rising, that effects us in a number of ways, partly the financial sector, but also on trade. our economy prospers when we can export. the european market is important. we have noticed our decline in our ability to export to europe. that is a risk as well. >> thank you. >> senator reed. >> thank you for your testimony. over the last several years, the fed has been providing stimulus through qe and other programs. it seems that our fiscal policy is not complementary to your policy. it seems contradictory.

if we could add jobs rather than subtract them and add growth and close the deficit and provide an opportunity in the long run to solve some of these challenging problems -- if we continue to sort of use austerity as a major approach, that would complicate your ability as you suggest in a measured way to move away from quantitative easing at the right time. can you comment? >> monetary policy is no panacea. it is no clear all. we do not have the ability -- we can all agree on how powerful these measures are.

they are effective. i do not think they can set off 1.5 percentage went up discover string we are seeing this year. in terms of the nearer term recovery, there is a sense in which there is cross purposes. i want to be clear -- to some extent, the fiscal policy decisions being made are mismatched with the timing of the problem. the problem is a longer-term problem. it should get just over a longer timeframe and in a way that does no harm. that is the kind of balance i hope this congress will consider. >> so do i. i might be repeating myself. if our policies were

complimentary, there would be cross purposes. is that your sense, too? >> on one hand, you would have fewer cuts and greater growth. it is true that to get less bang for the buck because of the short-term on growth, you would get in longer and larger long-run deficit impact and do less damage to growth process by looking at this over a longer timeframe. >> thank you. let me turn to another issue. there are rules allowing the use of mortgage-backed securities and liquid assets, etc. do you intend to follow that approach?

risk taking and adding leverage to the financial market? >> i think that will be our starting point. we need to start with international agreements and act to what extent we need to strengthen and customize it for the u.s. there has been a significant amount of discussion on what was reasonable and what might be the side affects and the like. but was a bit of reiteration in terms of what the international agreement was. we will meet with international agreement. we will look to see whether additional steps is necessary. >> very quickly, a senator touched on the european

situation. from afar, it seems that there policy of austerity has not helped them grow at all. it complicated their economic situation. is that a fair assumption? >> they have high interest rates and a variety of other factors affecting their economies. again, i would say that it is possible to achieve both objectives, short-term growth and longer the fiscal sustainability. >> thank you. >> senator shelby. >> thank you. the portfolio balance sheet of the fed you said it was $3 trillion? >> yes. that is about right.

>> it was about $3 trillion? objectives, short-term>> yes, s. >> has there ever been that type of balance sheet close to that? >> i do not think so. >> ok. does it concern you not how to add to the balance sheet, but how to deleverage the balance sheet? will that be a challenge to the fed? >> senator, i should comment that the fed has not had a balance sheet this size, the japanese for example have. >> they paid for it too, haven't they? >> the current prime minister thinks they haven't done enough. >> what do you think? >> i think they should try to get rid of deflation. i support their attempts to get

rid of deflation. we have put out a couple years ago, we put out a plan. we have a set of tools, i think we have belts, two pares of suspenders, we have two ways to do it. so i'm not -- i think we have the technical means to unwind at the appropriate time. of course, picking the right time to do it is always difficult. you want to withdraw the support at the right time, not too early or too late. that is a judgment call. in terms of the ability to get out, we have, again, a set of tools, that i would be happy to go into if you would like. it allows us to normize policy by retaining assets by doing other things like what we pay on reserves. >> do you think you will grow to a $4 trillion balance sheet?

>> we did not announce a number. we're tying our asset purchases to the state of the economy. we want to continue purchases until we see a substantial improvement in the labor market, can on inflation remaining stable. we're looking a the costs and benefits, including the financial stability issues that the senator eluded to. so we haven't given a specific number. but we're certainly paying close attention to all of these issues. it was mentioned the transparency of the fed. we're having this debate in public. you may have noticed that many members of the committee talk in public. we want everyone to understand that we're looking at the issue, we're taking them into account, and we're trying to to do the right balancing of our objectives. >> is your portfolio public?

>> yes, sir. >> it is public? in other words the $3 trillion of value, it is public on what securities you have and what they are doing performing or nonperforming? >> they are all performing, every single one. >> just about all of them are treasury or treasury related securities? >> by law, we can only by treasuries and agencies. >> and they are all performing right now? >> 100%. >> ok. i want to get on basal iii where is that in terms of implementation in europe and u.s. thing is very important regulatory challenge for everybody. >> as you know we put out a proposed rule on basal iii. we see lots of comments, we worked through the comments, we continue to talk to our

international partners. we are planning to have a final rule out on basal iii -- i can't give you an exact date but somewhere in the middle of this year. begin the implementation of basal iii during 2013. i would point out also, as far as we can tell through our stress tests eastern measures, all of our banks are well on track to meet the basal iii requirements. it is not a question of them being adequately capitalized. they are at or about to reach the basal iii levels. >> what about europe and their banks? >> europe is in the process of implementing basal iii. their banking system is weaker, i think. it has strengthened some in recent quarters. we are discussing with them some of the details on their plans,some whether differ from

the international agreement in our view. they are in the process of implementing this agreement. >> thank you. >> first i want to welcome senator crappo as your new ranking member and i look forward to working with you on the committee. and to the other new committees, welcome. this is great committee and a great group. i hope we'll have a good, productive time under the chairman's leadership. my first questions are about sequestration. i want to talk a little bit about italy. estimates suggest that letting sequester take effect could reduce the g.d.p. by as much as half a point over the remainder of the year. i want to know -- i'm going to

ask you a series. is that a fair estimate? instead of stopping sequestration some have suggested let the full amount of cuts take effect but rearranging the cuts. in your opinion would this reshuffling mitigate the negative affect on g.d.p. growth this year or next? or would the net effect on the short-term on g.d.p. be the same as the amount of cuts will be the same. my second question is this, sequestration goes into effect on friday. there is some debate on how quickly the cuts will take place. c.b.o. says that sequestration will cost 750,000 jobs. when do you think we'll see the impact on the job markets. those are my questions on sequestration. >> that is a c.b.o. number and

we get similar results to that. i think that is a reasonable estimate. in terms of whether or not rearranging the cuts would be beneficial. they could be beneficial in the point of view more efficient allocation of the cuts or cuts that are more consistent with congress. but that, of course, is a congressional decision. i have no input there. other than to say the near term on effect on growth would be not be substantially different if you did it that way. in terms of the effects on jobs and employment, the spending takes place over a period of time -- >> you didn't answer the second one. regardless of what the congress might have, would the rearrangement affect economic growth in any real way if the cut level is the same? >> not significantly, it would be about the same, i think. >> good. spending>> in terms of the impe

sequestration takes place over time. furloughs take place over time, spending cuts take place over time, so i would not expect to see a big impact immediately. i think it would build over a period of months. >> right. one of my colleagues, i don't want to steal his thunder but he described it as like the frog jumps into a pot and the water boils and you don't feel it at first but if you stay there it you be burned. >> it will take place over a period of time and it is in conjunction with the other measures that will today's place. >> thank you. next questions are on italy. so the markets reacted quite nervously shall we say to the elections in italy and the idea

they might not be able to form>, a government or form a government that is less likely to go along with the present economic policies. my question is, a, what do you think of that, but b more importantly, what is the expo church of the financial institutions to italy's debt. let's take the worst case scenario. they can't form a government and they go through what greece or spain has. what affect does it have on the stability of our american institutions? >> the market reacts to uncertainty. it does not know which way the italian government is going to go and how the policies will be affected. i'm not an exert in italian politics, but i don't think any of the candidates have outright

rejected either staying in the euro or maintaining the policies that are required of italy to continue to be in the eurozone. but again, there is a lot of uncertainty there. you see what happens. italy is unusual in that its current deficits are not large but it has a very large outstanding debt. there is a lot of italian debt held throughout the world. our assessments going back, say our banking exposure to spanish and italian debt is that it is moderate. it is would be meaningful but it would not, within itself a write down -- knife not forecasting -- i'm not forecasting any any way. it would not inflict significant damages on our financial institutions. funds that lend a lot of funds to

european banks, including italian banks. those are connected, the fate of those institutions are connected to the fate of the fiscal situation. but, again, i think the main effects would be more indistrict. -- indirect. serious concerns about, say the ability for italy to remain in the euro would have broader effects on stock market, bond yields around the world, bank stock, etc., and those effects would be more unpredictable and concerning than the direct losses and exposures in terms of italian debt holdings. >> thank you. >> thank you, mr. chairman. >> when the fed decided they were going stimulate a global

currency war as it did, did you embark on that thinking, our country is in trouble and let's sort of the heck with everybody else. or did you think it would level range the wealth effect, if you will. if everybody had a race to the bottom. i know the fed has been trying to create this faux wealth effect. did you think it would multiply you're efforts? i know you do calculations all the time. can you tell us what sort of, the wealth effect is, the part of it that is not real? if you stop doing what you're doing as relation to monetary supply today, how much would the national wealth take place? >> on the first question, we're not engaged in a currency war. we're not targeting our currency.

the g7 put out a statement that it is clear that it a appropriate for countries to use monetary policies to address objectives, in our case employment and stability. our position is that our mon tear policies, which are being replicated in other countries, are increasing demand globally and helping, not only our businesses but also the business in other countries that export to us. so this is not a beat our neighbors this is a benefit. >> but the wealths is something you try to stimulate here. how much wealth diminishment would take place if you move away from the punch bowl? >> there would be some. i would point out, if you look at the stock market for example, the so-called risk premium associated with stock prices is quite wide.

in other words, stock prices don't appear to be overvalued given earnings and interest rates. if interest rates went up that would have only effect on stock prices. the point is not to create a faux wealth effect. the point is to stimulate the economy and create momentum in growth and employment and that shows up in earnings and creates a genuine wealth same as house prices. >> i don't think there is any question that would be the biggest dub since world war ii. we have a federal government that is spending more relative to g.d.p. than any time since world war ii. those are working well together and that the fed is purchasing large portion of the new debt as we live beyond our means. so it is very -- it is working very well together in that

regard. just wondering if you talk at all in your meetings about the degrading effect that is having on our society. how it is punishing people who have done the right things and throug seniors under the bus and others who have saved money. do you talk about the longer term degrading effect of these policies as we try to, you know, live for today? >> i think one concern we have is about the effect of long- term unemployment and people who will don't have jobs for years. that means they are never going to acquire skill, they are not going to be a productive part of our work force. the jobs part is important. you called me a dove, in some respects i am but my inflation is better than any chairman. we have worked on both sides of the mandate. we're trying to achieve a

stronger economy for everybody. i don't think there is any degrading going on. you mention in particular saverers and i think that is an important issue. i would point out, if we try to raise interest rates from current 10-yield is 2%, while the economy is weak. it could not be sustained. our economy is not strong enough. if we try to do that we will throw the economy back into recession and we'll have low interest rates like the japanese do. the only way to get a strong recovery is provide adequate support to the recovery. of so i don't agree with that. >> we watch regulatory -- the regulators work for the people they regulate. we have tarp which most people

who voted felt like it was a needed thing. we have this easy money policy, which allowed the big institutions to reap tremendous benefits in material stages without doing anything. then you're getting ready in a few years when interest rates rise to basically, have to print money to sell securities at losses then pay interest on reserves, which people have pointed out, i think you have talked about it, it is going to be billions of billions of dollars going to these institutions. do you concern yourself at all with the fed being viewed at, you know, not as independent as it used to be? working so closely with many of these institutions that you regulate? >> well, we're concerned about perceptions that's true but none of the thing you said are accurate. for example -- >> yes, they are. >> to take the case on paying

interest on reserves. that is number one that is beneficial for the taxpayer because on the left-hand side of the balance sheet are reserves but on the right-hand side is r the securities that we hold which may a higher interest rate, which we make a profit. not helping the bank. >> when you exit and you draw the money supply in, very, very beneficial to the institutions. >> why? >> they are going to be yielding huge returns on their reserves as you pay -- >> we'll pay market rates. there is no subsidy involved. >> thank you, mr. chairman. thank you for your testimony. you mentioned the housing market. that being important has always been one of the drivers of the economic recovery.

in that respect, senator boxer and i have reintroduced the homeowner, which would remove barriers for people who have a history of paying their mortgage on time. too many families who have never missed a payment are being told no. can you discuss the benefit to individuals and the national economy of enabling moretoo mane never missed a payment are being told no. can you discuss the benefit to individuals and the national economy of enabling more families to refinance mortgages in today's historically low interest rates. >> well, on the side of the borrower's if they are able to refinance they will have lower payments, lower debt burdens, and more income to spend. i guess the offset, the other side is whether there are needed subsidies and other costs and how large those would be.

that would be the tradeoff i would look at. but it is true from the borrowers point of view, being able to refinance at a lower rate increases the chance that you can stay in your house and increase your income. >> wouldn't we be solidifying a universe of so far responsible borrowers to ensure they will continue to be a responsible bower. and create an economic stimulus. roofve been patching the on my house, because i don't have the money to fully repair it and now i'm paying $300 or $400 least month. i will be able to spend the money in an economy that would have a ripple effect. is that a fair statement? >> as you know, i don't like to

endorse specific proposals. >> forget about the proposal. just the question about the possibility of refinancing at lower rates? >> from the borrower's view that is better. the question the, what implications would that have on the lender's side or the fiscal side? would there be money coming in on the government's side to off jet it. it would help borrowers, it would. >> you said in your testimony, i don't know if you verbalized it but you said that deficit and debt matters but not all programs are created equal with their effects on the economy. fiscal policymakers should not lose sight of the need for policies that increase incentives to work and save.

with that view being your statement, isn't sequester, which is something i did not vote for, because i saw where we would be headed. isn't the way that sequester takes place is contrary to that view? >> so i'm asking congress -- i think there's a tendency, senator, when you're thinking about the budget and the deficit to talk about total spending and total taxes. i'm saying and i think it is consistent with your point, it is also very important, whether the tax policy is a good tax policy. whether the spending is a productive spend that increases the productivity of the economy. i hope it is not too controversial to say that i think congress should think carefully about how it taxes and spends and try to achieve the best outcome it can.

>> in sequester you have across the boards cuts. if you're in the private sector or if you have to make cuts in your business, would make them if coordy nance with what might cause you growth again. across the board cuts don't have the balance that you suggest is necessary. would that be a fair statement? >> that's fair. the question is, will the senate and the congress be able to agree on how to replace the sequester with a different set of programs. if they can, obviously, if they can find a better combination that would be better for our economy. >> certainly for desirable assuming that agreement could be achieved. that a meat ax approach regardless of understanding the issues that you raised. how do you create policies that can encourage work force skills

and whatnot. >> i agree. >> thank you. >> thank you, mr. chairman. thank you ben bernanke for joining us. i want to follow up on the point that the senator from new jersey was making. i think, if i understood what he was saying, we might have a lot of agreement on this. that is whether we like it or not, it certainly, certainly possible and it looks quite likely that the sequester will at least begin. as it is currently codified, it is without regard to any sense of what our higher and lower priorities in the various agencies would be affected. that is hard to imagine that is the way to go about cutting spending. it is hard for me to believe that all spending is equal. and every agency has equal merit and equal priority.

so it seems to me, that the most sensible way to go about this would be to give some flexibility to the people who are closest to these spending decisions, the agency heads, so they can make the cuts that are left disruptive. some cuts are more disruptive than others. it could less disruptive to our economy if they can do this with a thoughtful process and this across the board. does that make some sense? >> yes, sir. >> another point i have to make, i have to strongly disagree with the notion that we have some kind of severe us aer the zri program that we're about to -- austerity program that is about to kick in. the sequestration contemplates 2.5% budget authority reduction, which as you know,

about half of that would be spent in this fiscal year. so we're talking less than 1.3% in federal spending that would be curved. the fact is if sequestration goes into effect in fiscal year 2013, the federal government will spend more money than it did in 2012. it is hard for me to understand that. by the way, by my math the outlay is a reduction that is equal to .25 of reduction of g.d.p. how that has a dangerous impact on g.d.p. escapes me. if we would postpone it and promise that we'll make cuts in the future, i think the credibility of those promises would be worth zero. our economy would respond to that in an adverse way. it would see we have no willingness, no political ability to begin the slightest

impoe zigs of fiscal discipline. my specific questions for you on monday tearry policy, mr. chairman. you talked about the fact that inflation has not been a problem by conventional measures at this point. to what extent are you concerned about asset bubbles. there are people who think we have bubbles in right now in real estate, agriculture, some in the equity markets. how do you know when there is a bubble? how concerned are you that this unprecedented monetary policy could manifest its way into appreciation? >> it is a concern. we're approaching it two ways. first, we're putting a lot of effort into measuring, monitoring, asset prices and

financial activities. secondly, we are trying to make sure to the extent there might be some frothiness that the holders of those assets are prepared to deal with losses. for example, banks have twice as much capital today than they did a few years ago. and we test them according to -- we stress them according to different scenarios and ask would they still be able to lend and be stable. >> i have little time. i acknowledge that but i think you would agree that i it count difficult when a bubble is really forming. as opposed to being driven by fundamentals. the other concern i have, you mentioned earlier in conversation with other senators that you're confident that you have the ability to

unwind the very large balance sheet that you have. no question, you can unwind. but what worries me is the impossibility of knowing the impact of the unwind. just the suggestion of a lig more decent than people previous i will thought existed. what would the impact be having to liquidate on the bond markets? towe don't anticipate having do that. >> not every? >> we could exit without ever selling by letting it run off and we could tighten policy by raising interest rates that we pay on reserves. that is one strategy for example. we said we would sell slowly be w lots of notice and we will be offering our forward guidance about rates, so there wo won't be a shift in rates on the part

of the market. tove given a lot of thought these issues. if i can make one quick point. there is no risk-free poach. the risk of not doing anything is risky as well. we're trying to balance this as best as we can. >> thank you, chairman. thank you for your work and your efforts, as we all have concerns to take extraordinary actions, oftentimes because it seems that we have failed to keep up our end of the bargain to put in place the kind of balanced, comprehensive, phased- in deficit reduction plan that you have called for and many of us have worked on for years. i would add as well, every one of those plans from simpson bowles on had a revenue comb poe innocent that was higher than the revenue secured on the

new year's eve deal. i would acknowledge all of those had a component that was not part of the agreements to date. i do want to come back on one level on the sequestration because i heard some of my colleagues say the hit to the economy of sequestration, which was set up to be the stupidest option possible. such an you rageous option that people would not allow to come to pass. we look at the top line number and the affect on the economy and one of the things, i know you have great folks that do analysis. whether you can dig in at all level beyond just the top-line cut, the failure to have it phased in, the fail to have it

balanced but to actually get to the level of grand you lairty where in many cases, the acrossl the board cuts where in my m cases we will cost the taxpayer more money by these cuts. we will be breaking volume contract purchases not just on the d.o.d. side but other sides. this was a case i had a president here with me today, n.i.h. grants that had three or four years worth of research and now the last year of research can't continue and all of the previous work goes down the drain. or retalk about the m economic costs of furloughing individuals. what the drown stream might mean. not as much food gets into the grocery store and it will impact everybody.

has your analysis taken on the extra added stupidity value built into this legislation? >> i agree with a couple of speakers a thoughtful approach would be better than just across the board approach. we don't get into line items and specific programs. >> i agree. top line the numbers are going to have a debt tremental effect. there is a less stupid way. i think only digging into some of the some of the absurdcies that the taxpayers would occur under the guys that are cutting is remarkable. i want to come back to a host of questions and my time is

going away as well. two other items. one, a lot of confidence for those of us who are wrestling with the fiscal issues. clearly we're at a historic spending levels we're also at historically low revenue levels. one of the things that is sometimes cited is, our goal ought to be a 50-year running average of what our revenue spoub compared to g.d.p. i wonder, with the demographic bulge that we have, the aging population, even those of us who have been very strong opponents of major entitlement reform. do you think a backwards looking revenue target is appropriate as an commitment when you look at both our aging population bulge that we have, the and thec bulge of the baby boom coming in, even which w meaningful

entitlement reform? >> as i mentioned in my remarkses, we had a national asset of debt to g.d.p. ratio before the crisis. and we lost that. given what is going to happen 20 years out we need to build up capacity to deal with it. can you say what that goal should be going forward? you have made that comment various times. >> i don't think there is a magic number but historically we haven't been at 75% at any time just after world war ii. to if we can bring it down from here it would be helpful, i think. >> thank you, mr. chairman for being here. i appreciate your work. the revenue that was passed was less than what simpson bowl

bouse agreed to but i would remind my colleagues that was used to stimulate the economy not to raise taxes and not stimulate the economy. what is outrageous that we haven't done anything to address the long-term problems. i know my colleague from virginia has been working to accomplish that. my question has to do with q.e. is there a diminishing return on quantitive easy? in terms of it's effect? >> it's a good question. on the one hand, the first round in 2009, had substantial benefits. markets were in turmoil. our purchasings helped to calm markets and set the stage for recovering markets. we don't have that situation today. on the other hand, there are things working with in the other direction. credit markets are more open

today. so interest rates can pass through easier than they could a few years ago. we don't know exactly which way it goes. but there is good evidence that 3.5% mortgage rates is one reason why housing looks like it is turning around. low auto rates, one reason why car sales are up. it does have some positive benefits in terms of growth. >> now that we have japan pretty well duplicated some of our efforts in q.e. to fight deflation, which i agree is a proper goal for them. they have struggled with that for 20 years. do you worry at all, now that the european countries have done a quantity tive easing, we have done it, china has done it,

that the comprehensive -- competitive might vert away in terms of the international markets? >> you make a good point. the fed is not extraordinary. in terms of balance sheets, long-term interest rates we're similar to other countries. policyt view monetary aimed at domestic goals being a currency war. it is not like putting terrorist on your imports so ugg better thy neighbor. that is not what we're doing. all the major economies we have supported provide stimulus that is muchly beneficial. china depends on the u.s. as their export market and we too,

depend on other countries for the market for our good. this is a positive-sum game not a zero-sum game. >> there were some concerns in the target of the yen being at 110 instead of 78 like it was 90 days ago or maybe longer. there is some concern that currencies can get out of balance and that can have a significant impact on trade. would you agree with that? there was some discussion in the press. >> there was discussion of the issue. the emerging market economies, which are at full employment in many cases, are unhappy because low interest rates in the advanced economies give them a choice they don't like. they have to accept low interest rates, which they feel causes inflation or alternatively they have to raise -- let their

exchange rate and appreciate which hurt theirs export markets. they have concerns with monetary policies in general. but i don't think japan raises a special case, notwithstanding the rhetoric, of course, we haven't seen what they're going to do. they haven't officially appointed the new governor. but presumably they will do the monetary policy aimed at object jives and not specifically at the exchange rate. >> one final, you don't have to answer this but if you would give me your thoughts. a recent paper, would you mind at some point giving me your thoughts on that. i think you've seen that. >> i will. i think the main thing i would say is, i want to be clear that the c.b.o. agrees that the federal reserves balance sheet

policies are with high probability, going to be significant boom in terms of the taxpayer in terms of returns to the treasury. >> thank you for your testimony. i want to start with too big to jail. we had the situation with singapore where they decided not to investigate any individual and not to investigate the bank as a hole relating to money laundering and drug organizations. it is no small thing. no small thing in northern mexico responsible forthe too bt we still have barnings too so lank that we're afraid to cause any ripples.

this sends a message as well. if curve behavior has fines associated with it but not criminal prosecutions of too big to jail for money laundering. doesn't this kind of undermine our structure for financial institutions? >> i agree that no individual and no institution should be exempt from paying for crimes that they commit. on this particular case, we worked closely with the department of justice, we cooperated to give them every kind of information. in the end, the company paid a $2 billion fine. if it relates to the bigger issue of too big to fail, we agree that is something that needs to be addressed and many of the parts of dodd-frank are intended to address that.

we're pushing those as hard as we can. >> thank you. i think it does certainly, say to us we're a long ways to getting there if we're concerned about any form of shakiness in these large banks. but there's another aspect too and it continues to tell folks it is safer to invest, if you will, in large banks that say community banks. a community bank would been

shut down or investigated thoroughly. what i see in the economy in oregon, the community banks are willing to lend into the local economies because they understand it better, they are more comfortable with it. they may have relationships to know the competency and so forth. it is this kind of bias counterproductive to the overall health of our economy? >> absolutely. it means that the playing field is not level. there is too much risk taking. so getting rid of too big to fail is an incredibly important objective and we're working in that direction. >> thank you. i want to turn to the fiscal cliff. we had a drop in g.d.p. in the fourth quarter of last year. do you share the views somehow that was in part attributeable to the fiscal cliff? >> one of the factors that happened to contribute to the fourth quarter was a drop in defense spending and it is possible that in anticipation of the sequester, for example, there might have been changes in the spending patterns. but as i said in my remarkses,

i think the quart -- remark, i think it didn't signal any change in the pace of the growth of the economy. on the other hand, the growth of the economy remains around 2%, which is positive but not as strong as we would like. >> now we're look at the different i items that you mentioned. the debt ceiling and the sequester, which does convey a feeling of lurching from crisis to crisis. we heard many companies put money aside that they have not reinvested. does this style that we seem to adopted and unable to get our act together, really kind of shooting ourselves in the foot? >> i think so, senator. we have not been able to identify with accuracy of the quan today active impact but we hear many antidotes about their reluctantcy to expand or hire

given they don't know what the fiscal situation will be. >> switching gears. the firewall between hedge fund-style activities and banks that take deposits and make loans. we're well passed the mark does this need to get done to since constitutions know what the appropriate boundaries are and also here we can demonstrate that we have the ability to pass laws and the rules that go with them and operate as a competent society? >> we would like to get it done and we've made a lot of progress on it. the issue at this point is the rule is really three or four different rules. the banking agency each have a different rule which applies to the institutions they supervise. there's a strong sense that we have -- that we would be better

served if those rules were closely coordinated and closely identical as possible. the issues are finding agreement and closure among the different agencies that who are working on the rule. >> thank you. >> senator heller. >> thank you, mr. chairman. it is good to have you in front of me and thank you for taking the time. we ask a lot of questions a lot of different ways and isle probably not going to be any different but let's give it a

shot. we haven't passed a budget around here in four years. are you optimism that sometimes if your lifetime that we may pass another budget around here in washington, d.c.? for that matter, let me ask you another question. do you think we will balance a budget, have a balanced budget in your lifetime? >> well, i would settle for stabilization of debt to g.d.p. ratio, which is a slightly tough level. >> it sounds like a no. >> i have -- it is easy to criticize but politics is difficult. i understand that there is a lot of different views and strongly held views. it is not easy to come to an agreement. i don't think congress is not trying to, i know you are trying to. i hope you can find the

agreement to achieve these important objectives. >> the reason i raise the question, i think the sequestration issue we have in front of us on friday, is a result of our lack of budgeting and effort to budget. i'm from nevada. if i put money down i'm putting $100 that sequestration comes and goes on friday. then as soon that is occur, we get into the budget academy markups that is supposed to happen on march 11-15. i'm putting down another $100 that doesn't happen. then march 27, government funding expires. because we don't budget and i'm arguing that day comes and goes and we have a big argument. i'm talking about the instability that we have and how difficult does that make your job? >> it make miss job difficult but it makes the economy's job difficult.

again, as the senator mentioned, the uncertainty associated with not knowing of what the policy is going to be dwolved and what tax rates will be -- dwolved -- developed and what the tax rates will be. >> i know your concerns are based on monday tearry policy and also -- monetary policy. i have to believe that our inability to get things done is causing a lot of problems. you made a comment and you have repeated this in this hearing. i want to go to quantitive easing, will you explain to me what that means. >> sure. we're going to be looking at a variety of variables. we'll be looking at payroll employment, is it strengthening? is the unemployment rate coming down? so those are indications -- >> do you have a target? >> we don't have a specific target. we've given thresholds but we not extended those and the reason -- a couple of reasons. there's a lost other things happening in our economy like the fiscal issues but in addition, we're paying close attention as a number of you have mentioned, to the costs of these policies. that makes it difficult to say this is the number we're going to achieve. so we're doing our best to communicate the criteria for

action but we've not been able to come to a specific number, which combines the number for the labor market and the assessment. that is another part of the decision process. >> do you believe your asset purchases is causing an equity bubble? >> i don't see much evidence of an equity bubble. earnings are very high. the premium is above normal, in other words, equity holders are being somewhat risk adverse in

their behavior. but again, we have a two-part plan. first, is to monitor these different asset markets. the second is to try to understand what would be the implications if we're wrong. what would happen -- who would be hurt? would there being broad effects, if, in fact, some asset turns out to be in a bubble? we're trying to to do both of those things. we do not rule out that if these problems become worrysome that they would be taken into account in our monetary policy. >> thank you. >> thank you, mr. chairman. i want to thank you mr. chairman. this is my first chance to say in public how grateful i am for your help in setting up the consumer agency

and all the people at the fed during the transition. thank you very much. i want to go to the question about too big to fail. we haven't gotten rid of it yet and now we have a double problem. that is the big banks, big at the time they were bailed out the first time have gotten bigger. and at the same time, investors believe with too big to fail out there, it is is safer to put your money in the big banks and not the little banks, in turn create an insurance policy for the big banks, not there for the small banks. now economists are documenting what those subsidies are worth. bloomberg did the research on it and came up with $83 billion that the big banks get, they borrow cheaper than the small banks do. i understand that we're trying to get to the end of too big to fail. but my question mr. chairman

is, until we do, should those biggest financial institutions be repaying the american taxpayer that $83 billion subsidy that they are getting? >> the subsidy is coming because of market expectations that the government would bail out these firms if they failed. those expectations are incorrect. we have -- even in the crisis we have, in the cases of a.i.g. for example, we wiped out the shareholder. >> excuse me -- you did not wipe out the shareholders of the big bank? >> we did not have the tools. now we have the tools. >> but the $83 billion says that whatever you're saying mr. chairman, $83 billion says there will be a bailout for the

largest institutions if they fail. >> that is the expectations of market, that doesn't mean we have to do it. what we have to do is solve the problem and i think we're in agreement of this. too big to fail is not absolute. there are spreads that say they can fail. moody's and others have taken down their support of these. we're in agreement that we need to stop too big to fail. >> i don't understand. it is working like an insurance policy. folks pay for car insurance and home insurance and these big financial institutions are getting cheaper borrowing in the tune of $83 billion in a single year, simply because people believe that government will step in and bail them out. if they getting it why are they not paying for it?

>> i think we should get rid of it. >> ok, you were here in july and you commended dodd-frank for providing a blueprint for getting rid of too big too fail. we've understood this problem for nearly five years. when are we going to get rid of too big to fail? >> some of these rules take time to develop. we have the living wills. i think we're moving in the right direction. if additional steps are needed congress can discuss those. >> any idea about when we're going to arrive in the right direction? >> it is not a zero-one kind of thing.

over time you will see increasing market expectations that these institutions can fail. i will make another prediction and this is always dangerous, the businesses that are being large that will decline over time so some banks will reduce their time. because they are not getting the benefit on -- this -- >> i read your predictions on this but they are getting $83 billion for staying big. >> that is one study. you don't know if that is accurate number. >> we'll look at it again if you think there is one problem. does this worry you? >> of course. i think this is very important. we're putting a lot of effort into this. it's a problem we have had for a long time. i assure you that -- as somebody who spends a lot of late nights trying to deal with these problems i would like to have the confidence that we

could close down a large institution without causing damage to the rest of the economy. >> fair enough. i know we're going in the same direction. i'm pointing out that all that space between is the big banks are getting a terrific break and the little banks are getting smashed on this. that has a long-term impact for the whole financial system. >> i agree with you 100%. >> thank you. >> thank you mr. chairman for being here. my top concern is actually the same as mrs. warrens and i think that is a statement in of itself. there is growing bipartisan concern across the whole political spectrum about the fact, i believe it is a fact, that too big to fail is alive and well. first of all, in terms of the

study, mrs. warren cited the bloomberg calculations but that is clearly not the only thing out there. there is a study released in september that concludes "the largest banks, do in fast, pay less for deposits. further more, we show the differences of the costs of funding cannot be attributed to differences or balance sheets or any nonrisk factors. the premium gap is on the order of 45 basis points and that is consistent with the significant of too big to fail paid to the largest banks." a paper has tried to quantity fie this subsidy and it says the subsidy "was already sizable, 60 basis points at the end of 2007. it increased to 80 basis points by the end of 2009. " then we have the bloomberg study that was working off the

i.m.f. work that was mentioned and a board member who says "to the extent of a growing footprint increases perceptions of too big to fail in such a firm notwithstanding the measures in dodd-frank and our regulation allegations there may be funding advantage for the firm, which reinforces the impulse to grow." so my first point is it is not just one study. given all of that, what specifically is in process of terms of -- or should be put in process to counter act that?

my concern is even if this problem is solved two years from now the entire landscape of american banking will be different by then, including a lot of solid, smaller firms gone. i think that is a real loss to our financial system. >> there's a three-part plan under dodd-frank. we're working closely but the fdic and foreign counterparts to figure out how we would take down the elected institution about the system. part three is the rapid measure to strengthen the overall system to be more credible to take down the system. that is the three part plan. it is working, to some extent.

even the u.s. fencer stronger, financially, the european banks, frequently they have wider credit default swap spreads because the actual differences in government support, that is the process, that is the plan. in addition there are ideas like going through glass-stiegel again. separate and commercial banking activities. again with the volcker rule, i do not think that glass-stiegel by itself would be very helpful. some of the firms that failed were straight investment banks, some of the first ones in trouble were straight commercial banks. i am open to discussing additional measures, but the plan to cut costs on the largest banks and develop a liquidation

authority on the overall system over time that ought to improve the situation, if it does not we need to consider alternative additional steps. >> in closing i would continue to encourage you all doing that now. again, i think that this is a bipartisan concern and i have expressed it on several ideas with several brown on the committee. with three of the components you described, they are understood by the market. in my opinion they have been digested and validated by the market and the markets still says that are too big to fail. in particular i would continue to encourage you to read the higher capital requirements beyond the marginally higher requirements that you have instituted so far for banks. i would continue to urge you all

to think of alternatives for basel iii as well in the same spirit. >> senator? >> chairman, thank you for being here. two and a half years ago i was in the armed services committee. admiral mullen asked what the greatest threat was and he did not even hesitate by saying that the debt of this nation is our greatest threat. i do not know if you share that same thought. >> it is certainly an important economic risk. i think it is very important over the long term to developing sustainable fiscal plan, no question about it. >> he said it was the greatest threat to be face. >> i do not know.

there are many possible candidates for that. >> they were talking about sequestering today. we were talking back and forth about the consequences if we do or do not. the cause for the summer of 2011, we brought the super committee together. if we did not reach the goal there was a minimum of $1.20 chellean. >> we voted on that as a body. we are now looking for a way to get out of that. we were saying that if we did not do it at all and negated that responsibility, what affect would that have on the market? ii have heard everything about the effects that it would have if we did it, but what about if we did not do it? >> my recommendation to you, obviously the congressional decision on how to proceed is to

parts. look at the short run and the long run. it is true. canceling the sequester would be -- would not solve the overall problem, this is a long term fiscal issue. if you cut the sequester, delay its, however you modify it, you should compensate, in my recommendation, by looking at matters that address the longer term fiscal concerns, which is cbo shows to be the point at which debt begins to explode. that is the trade-off. >> it would be irresponsible for us not to do something. we should fix these financial problems in the longer-term or do something in which we price ourselves, basically because as a body we have been unable to

come together. if we are going to do sequestering, should not be done in a smarter way? >> as you point out, it was done to be sort of like "dr. strange love." like the bomb that goes off. obviously, if you can find a bipartisan way to make it more effective and better prioritize, that would be a good thing. people disagree on the second point, but what i suggested today was the facts on the near- term recovery. -- was an affect on the near- term recovery. the timing -- the timing of progress in the near term, where it still remains not addressed, it does not quite match to be doing tough policies today when the real problem is a longer- term problem. that is what i suggest.

>> there are a lot of us concerned about how we keep kicking the can down the road. my final question, sir, would be -- how big is our national debt? >> there are many measures of it. >> yours? >> the basic measure, held by the fed is $11 trillion. that does not include, though, for example, unfunded liabilities, such as the process for future medicare recipients. >> they understand paying that i am good faith. what is our total national debt responsible in this country? >> currently it is $11 trillion. >> but if you get everything?

>> owed by parts of the government to other parts? >> fannie and freddie? >> that is another element, that is guarantees, that is not direct debt. like a said in the beginning, it is hard. >> if you look at all of those in this country, would you say to me? >> i saw the article that you are referring to. it includes the possibility that the government would have to pay off every deposit in the united states to the fdic, which is not a realistic possibility. there are some alternative measures that are certainly bigger the $11 chilean. >> could you say $30 trillion? >> could you include? >> it is definitely higher. >> yes, it is.

>> thank you. >> it is an old painting of the senator from tennessee. >> just one very quick question. i went back to the office and did not expect a comeback. but listening to the exchange reminded me of the questioning when it was passed to you serve with on the fed board. he had mentioned -- i asked him about systemic risk. he mentioned the goal has been to identify systemic risk and deal with that. much like the answer you gave to senator warner minutes ago, is there any entity in our country that if it fails would create systemic risk?

and if so, why is that still the case after the creation -- why have we not move more quickly? why are we taking so long that this journey? if there is an institution where it fails it would pose a threat to our country? >> the only answer i can give you is that dog frank is a complicated bill. >> but that piece of it is not very complicated. it is only about eight words. it is not complicated, it is a directive to you, you are a big part of this and you came out a big winner in that. why would you not go ahead and identify that? if there is an entity that fails something in the nation, you would know that. why would we not make a plan to deal with that? >> they have the authority to

designate non-banks firms and do come under the oversight of the fed. >> those firms, though, is it your fault that under this power that you have been given, is it your fault that we would continue to have firms operating in our country that if they failed they would pose systemic risk? or do we try some other way? >> the goal of the powers that you gave to the fed and other agencies was to as much as possible eliminate the problem over time. it required congressional action over what we had implemented. >> i do not think so. i do not think that is the case. i appreciate your testimony. >> thank you for being here with us today. this hearing is adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2013]

>> house speaker john boehner and the national economic director, james sperling, were on "meet the press" this morning. they both talked about sequestration. [video clip] >> 174 of your members in the house voted to support it. >> you both voted. >> the president demanded it at the 11th-hour. because he did not want to be inconvenienced by having another vote on the debt limit before his reelection. as a result the agreement that we have really did not have the

sequester, they did not accept it. hime looking for a way for to avoid a second debt load before the reelection. >> everyone knows that the president wanted another mechanism that included the most well-off. the speaker and republicans insisted that this be an enforcement mechanism of spending cuts. because we were forced to do that, it is true that we suggested going back to the other mechanism. i think it is most accurate that they proposed the all spending cut mechanism on this path with defense and education and research. the idea -- this is the critical part, that people would good faith comeback and compromise.

republicans are not getting a win by letting the sequester going to affect. they want to win -- they want more money for border security. the speaker says he wants more on entitlement reform. this gets them nothing. >> you can hear more during the c-span real air of the sunday morning talk shows on c-span radio. later we will show the president's remarks of sequestration and speaker boehner's remarks after he met with the president. house lawmakers will begin a stopgap bill to keep the house funded. the current funding runs out on march 27 and the continuing resolution is expected to come up for debate and a vote later in the week. you can watch live coverage of the house. c-span. the senate will be in at 2:00. voting on two district court

nominations. as early as tuesday you could see a senate intelligence committee vote on the nomination of john brennan to head the cia. moreover on c-span 2. >> at one point steinbeck had to write a small paragraph that said basically -- people are asking what happened to charlie. it is elaine and john, not charlie and john. someone must of said to him -- where is charlie? he wrote about ap -- a page in the half. he said -- well, when my lady fair joined me, he took his third position but it never appeared in the book. editors went in and just expunged entirely from the west

coast. almost 30 days of the presence with john on the west coast. there were basically on vacation. >> john steinbeck took so many liberties with the truth that it cannot be classified as nonfiction. more with the author, tonight at 8:00 on "q&a." >> next hearing and using drones overseas to kill american citizens who are terror suspects. themore on the due process of w in the battlefield. the obama administration said he was a senior leader of al qaeda in yemen. this hearing is just over two hours.

the due process of>> good morn. the judiciary committee will come to order.

without objection the chair is authorized to declare a recess at any time. welcome to everyone in today's hearing on drums and the war on terror. -- drones and the war on terror. i will recognize myself first for an opening statement. october 4, an outline of the white paper justifying killing u.s. citizens overseas was leaked to nbc news. this brought new attention to an issue largely ignored during president obama's tenure. is the targeted killing of a legend american terrorists appropriate? under what circumstances? the white paper accounts for a double shift in terror policy by this president. the then junior senator from illinois laid out his position on the war on terror, saying

that we must first behave in ways that reflect the decency and aspirations of the american people, ending the practices of shipping away prisoners in the dead of night to be tortured in far off countries. maintaining a network of secret prisons to jail people beyond the reach of the law." the same president who opposes the detention of foreign president before and terrorists attempted to bring those foreign terrorists to trial in new york city. now reporting the killing of americans? ironically the detention facility remains open and they are being tried before a military commission. reviewing the memos for the white paper coming it is denied.

one of the first acts as president was to enhance the justice department and he now refuses to reply to the targeted orling memos or couldn't -- congressional overseers. we invited them to testify today, but that was the night as well. according to one estimate, drawn strikes against suspected terrorists have increased sixfold on the obama administration. more, this administration is not just targeting foreign fighters, but american citizens as well. the american-born al qaeda cleric was killed in september of last year, u.s. forces killed him and his son in a drone strike in yemen. americans now have the criteria to use for targeted killings.

the white paper sets forth a legal framework for when the u.s. government can use lethal force, with a senior operational leader about qaeda or associated force, located outside the area of active hostilities. this would be lawful where the conditions are met and the u.s. government has determined that the targeted individual poses an imminent threat to the united states, captures not feasible and the united states continues to monitor whether capture becomes feasible, three -- the operation will be conducted in a manner consistent with the principles of the laws of war. examining the justice department white paper and constitutional issues around the targeted program -- targeted hearing -- target killings of americans overseas.

we are helping the committee to analyze these important issues. we have asked members of the staff to allow us to conduct the hearing without the pain of drilling. the targeted killing of americans overseas has ignited a debate about the commander-in- chief authority and standards that should apply. is the white paper a fair reading of the wall? under what circumstances and the president decide to kill american citizens? is there a lot? does the administration approach fourth the law? should the president be able to decide this unilaterally? the american people deserve to know the legal basis under which the obama administration believes they can kill u.s.

citizens and under what circumstances. if the justice department were here to testify today, members of the committee could have a fuller understanding of the rationale, but today's hearing will provide an additional public debate on the issue. it is my pleasure to recognize the ranking member of the committee, the gentleman from michigan for his opening statements. >> thank you, chairman. members of the committee, distinguished witnesses, the press, we are here examining a pressing matter a rally use of unmanned aerial vehicle drones to strike at suspected terrorists on the ground. first, let's make clear the

house judiciary jurisdiction over the matter. these are serious constitutional considerations involved. that is what this committee has been created for. as well as civil rights questions, which are also involved in this operation. our committee has direct oversight over the department of justice, which has issued legal opinions that are classified and report to establish a legal basis for the use of lead -- the full force against terror suspects. now in the course of this issue that has been raised, numerous letters have been sent. i want to point out that our

latest one was joined in by myself, the former chairman, jerry nadler, and [indiscernible] , who wrote again to the president to renew our request for all legal opinions related to drone programs. i am pleased that we have reached a clear bipartisan consensus on this issue. this committee requires those documents to fill its oversight responsibility. this is not a witch hunt. this is an inquiry. we are all cleared for top- secret.

we will work together to convince the administration to satisfy our requests. a couple of issues here. targeted strikes against the united states citizens, targeted strikes generally, and the odious so-called signature strikes. now, the need for oversight is clear. i am not convinced that the title of the hearing before us suggests the administration's legal rationale for the targeted

killing of any united states citizen overseas. the white paper describes a balancing test for the fourth amendment, unlawful seizure of a person or a life. due process tells of the potential target having little chance that meaningful due process when he is nominated without his considered question on the kill list. i also remain unconvinced about the targeted killing of terror suspects who are non-citizens. although the administration

appears to rest its claim of authority on the authorization of the use of military force, passed by the congress in 2001, it is not clear that congress had intended to sanction legal force against a loosely defined enemy in an indefinite conflict with no borders or discernible end date. and i am considered the troubled by the widely reported use of so-called signature strikes. where suspects need only display suspicious activity, but their identities are unknown prior to the government's use of force against them. that may be a cia activity that

should be sent over to the defense department, by the way. today, and i rushed to a conclusion, we want to accomplish the following. we need to know more. i hope that the way that we conduct this hearing individually, among our members of the committee will convince the administration that this is not a personal nor political and that all we are seeking is information to which we are duly entitled.

we have one committee on intelligence and have gotten to reports out of a dozen or more? that is not acceptable. with all due respect to administration that i support, we are creating a resistance of a visceral level that general stanley mcchrystal has echoed, on a level that we cannot even begin to imagine. the counter insurgency in afghanistan, the resentment created by the american use of unmanned the strikes is much greater than the average american appreciates.

i think it we appreciate it and that we want to have this become the first of a number of hearings. i conclude by saying that i do not think that the attorney general of the united states can decline to come before this committee on a subject that is so clearly within our jurisdiction. >> i yield back my time. >> thank you for that expression of concern. i share it and will work with members on this side and the other side of the aisle to see what we can do to bring about better cooperation. we are seeking the information that this committee is entitled to. we have a very distinguished panel and, without objection, all the opening statements will be made it part of the record.

we have a very distinguished panel joining us today. our first witness is mr. john dillinger, a partner at a law firm here in washington, d.c., where he advises sovereign governments on a variety of international and security la usages. an adjunct senior fellow in national and international security loll where he directs the program on international justice. he served as the legal advisor for the u.s. department state under condoleezza rice from 2005 to 2009, earning the secretary of state distinguished service award. he received his degree from the woodrow wilson school public affairs and harvard law, most recently foreign affairs from the university of virginia. we are fortunate to have him and his expertise with us today.

robert jazz knee, the professor in law and associate dean for academic affairs is with us. the professor specializes in a broad range of issues regarding military detention, the role the judiciary in national security affairs, and terrorism related prosecutions. he is a non-resident senior fellow of the brookings institution as well as a team member on the council of foreign relations. degreeed his bachelor's in political science and psychology from texas christian university and said it -- and graduated magna clout they -- magnum from loudoun -- magna cum laude. from the brookings project on law and security, we have the

author of law and the long war, the future of justice in the age of terror." he is the editor of the 2009 brookings book, "legislating the war on terror." he is the editor-in-chief of the law affair blog, a non- ideological discussion of heart national security choices. between 1987 and 2006 he was the editorial writer for "the washington post." he is also an alumnus of oberlin college. we thank him for serving as a witness today and look forward to his insights into this complex topic. finally, mr. stephen vladick, a law professor from the college of law at american university. he is a fellow at the center for national security at the ford

university of lot in new york city and is the co-author of multiple legal textbooks and has served as an appellate judge in florida and california. he earned his bachelor's from amherst college and his jd from yale. are pleased to have him with us today. each witness has written statements that will be made a part of the record in their entirety. i ask that each witness summarize their testimony in five minutes or less. to help you stay within that time there is a timing light on your table. when it goes from green to yellow you will have one minute. when it turns red, the five minutes have expired. minutes have expired.