there was a broken piece of iron, we want to protect the public. we want to make sure there is ample construction barriers there to preclude anything from happening. not that we're expecting it to happen, we just want to ensure doesn't. everything, the brackets, the columns and the super structure -- plates skin placed was created in a foundry in poole and hunt. once poole and hunt finished balcony,k up to the from that point forward, all of the work was done by james kirkland out of new york. >> what are the wires? a the wires are part of defunct bird proofing system. we'll remove those and install a passive netting system to keep

birds from nesting in capitals. when we started this project, there was a major water event in of 1990 that deposited a large amount of water on the floor of the rotunda and it was through our investigations that we discovered bird nesting materials and debris from eating dome was what clogged the gutter system, caused the water the interstitial space and cascade into the rotunda so we've taken on a series of projects since that time to ensure that the drainage system is never compromised again by debris and it led to the development of the master plan and the study of the iron work and to the project that we're now going to get completed years.next two [captions performed by national captioning institute] [captions copyright national cable satellite corp. 2014] >> on the next "washington

brandus looks at president obama's relationship with the press and his administration's goals for 2014. then jonathan bialosky discusses apprehended from the border will be removed from the country. that, richard dieter on capital punishment. "washington journal" live at 7 on c-span.n deadline's approaching for c-span's student cam video competition open to middle and high school students, answering the question, what's the most important issue congress should address this year with a five to seven-minute documentary that programming.an there's $100,000 in total prizes. by january 20. studentcam.org.

>> the supreme court heard oral airlineson whether need any reason to drop their frequent flyer programs. arthwest airlines stripped rabbi from its world perks membership because according to airline, he abused the program. at issue is whether rabbi to bringhas a right his case or whether it's preempted by the airline act which prohibits parties from bringing claims the airline because of price, service or route of the carrier. this is an hour. >> we hear argument first this 12462, northwest rabbiorated versus ginsberg. mr. clement? itmr. chief justice, may please the court. under this court's decision there are only two relevant questions and the ninth circuit

of them wrong. first question is whether a claim for additional benefits a frequent flyer program price upgrades relate to price and routes and services. answered that question and agreed that it was close.ticularly to reach the same conclusion in howsame context underscores far they've strayed from this court's precedence. the second question is whether party's claim seeks to enforce state law to enlarge undertakings and enlarge the party's bargain and as to we thinktion respondent's own claims make the case quite clear. bring a claim to enforce the party's voluntary undertakings, a breach of contract claim. preemption seeks to impose a duty of fair dealing in and superimpose

on the bargaining even when the parties to the contract have given one party absolute discretion. >> the argument was made that if airline has an unreviewable terminate this reason or forany no reason, if that is so, then illusory contract. what is your answer to that if get outy can willy-nilly, what kind of bargain is it? >> there are a couple of answers to that. although the focus on whether a contract is illusory is as part of the analysis under the implied covenant for a bilateral contract. think that same analysis would apply to a frequent flyer which would be understood as a unilateral contract. the second thing you have to

understand -- make sure i understand that point? distinction if you go back to the horn books on contract law between a unilateral contract and bilateral contract. a unilateral contract is a outstanding promise that doesn't require an exchange of consideration and the party who makes the promise has the to withdraw the promise until there's performance essentially relying on the why i thinkthat's it's actually a little bit of a mistake to apply that doctrine a frequentg like flyer program. >> i don't understand that wayuse i always thought the these agreements worked were they were agreements that if i number of miles on your plan i was going to get a free ticket and it wasn't a gift that i was getting a free ticket, it was because i did certaing, i flew a number of miles so there was an exchange with value on both sides. i suppose you could conceive a it that way and also as

premium offered by the company to reward your loyalty but fulle already gotten performance. >> i think you have to perceive of it that way but it still unilateral contract. it's not a promise in exchange for another promise. it's a promise in exchange for an act.ormance of that is, flying the airline, you know, a certain number of miles. you're correct, it is a unilateral contract. means that is there illusoryhing as an unilateral contract? >> i don't think there really is. foroked at the treatises that and i don't think that concept applies in the unilateral contract. >> i don't see why that would make sense because if i knew it me really up to you to give the free ticket, maybe i was going to get it, maybe i wasn't, spendinghink i'd be all this time in the air on your plans. thatind another company actually gave me the free ticket. >> that really, i think, gets to whatub of this because

you're suggesting is that there would be a market solution to this problem and that's what the act is allegulation about, letting the market decide these issues so some airline crazy enough to systematically turn on its most lucrative and loyal customers, the market would solve that and if a bunch of airlines of it, department transportation stands ready to police that. >> what we say when a contract consideration, we don't say, oh, we're going to hold you to it anyway because the market will solve it. we say the contract has no consideration, it's illusory in that justice ginsberg pointed out and the question is, if there's really no obligation on the part of the airline here to give that free ticket, if they can do it when like it and not do it when they don't feel like it, consideration,y why isn't the contract illusory? consideration because this is not something where the airlines look we can do anything we want.

say, look, if you present us with miles while you're still in good standing in the program, upgrades, we'll let you into a lounge but if pursuant to the contract you program in our sole discretion, then you lose your membership status and that's what's happened here. you're not trying to enforce the contract anyway. you want to get out of the betract, so you want to happy to have it pronounced an illusory contract, right? what do you care? that is true but i suppose the argument might be that you could as a matter of breach of contract law use this principle to interpret the contract and if that were an argument, it's an argument for count one. >> you're making an assumption. the claim here is not whether he abused or didn't abuse the program. is that the only reason you terminated the contract was because you wanted to get rid of these high flyers in your merger negotiations with other airline. that's the same as saying, they didn't terminate me because i

program, they terminated me because i was of a or i was woman or i or some otherd improper consideration so are you suggesting that this thatact permits you to use kind of self -- that kind of ground, not grounded in the contract but grounded in your whim and caprice? points, justice sotomayor. i think it's really important to the claim about this pretax and all being about the merger is not made in the breach of contract count or breach of implied covenant count. that's pled in the misrepresentations counts, counts three and four of the everybodythat recognizes are pre-emptive. under the contract, somehow, we have the ability to terminate somebody without just cause and that's the argument

the district court rejected on the merits. the implied covenant count two is different. it says that under state law there is a duty of good faith dutyair dealing and that is superimposed on the contract even if the contract gives one the parties absolute discretion and those aren't my words, those are the words of complaint,f the appendix. >> even if you have absolute discretion, isn't there a limit to that? isn't there a limit of that absolute to discretion? that's the whole question, otherwise you have a contract with no substance. >> the way i would think about sotomayor, is absolute might not mean absolute and the place to make that breach ofs under the contract rubric but when you get contract'sven if the absolute, state law still superimposes a reasonableness in the contract,e that's the point in which preemption kicks in.

contract said in its absolute discretion and to no obligation of good faith, suppose it said that, law still impose an obligation of good faith? >> it might well, justice scalia? it might well or it would? in the state. >> the state we're talking about. >> minnesota, as i read the minnesota isle in that the covenant of good faith and fair dealing is not waivable a case we found called new amsterdam casualty, the indemnity context and it says a covenant of good faith fair dealing is not waivable so i don't think you could do that which i think underscores the parties agreeing to this, this is having this them.ion superimposed on >> there's a choice we have here noy between state law and relief, or is there some theory under which either federal

common law or appeal to the flyer, thed give the customer, some relief? and we can all think of crazy hypotheticals, suppose the phone rings and said i'm john doe, i you about myto airline, you miscalculated, mr. doe, we've heard from you 15 times, you're out of the program. mistaken identity. can the innocent good faith john doe do anything at all? yes, the good faith john doe can do two things. one, as your question suggested, can go to the d.o.t. the d.o.t. has the authority to investigate complaints about programs andr exercises that authority. it's discussed in pages 20 and 21 of the brief. they heard something like 289 of these complaints last year. that's one place you can go. the other place you can go in a case of mistaken identity, if followed up and certainly if you went so far as to bring a breach of contract

claim, i assume that would get addressed in that forum because not in thee interest -- do not have an interest in getting rid of their and loyaltive customers mistakenly. >> in part of that suit wouldn't what's the underlying substance and you say well there's a duty of good minnesotaing under law and you're right back where you started unless you make some common law or something like that? there's don't think federal common law, this court essentially rejected that. in the case of mistaken identity, i think that would get so are they out in the process where ay at the point breach of contract action was brought. if there's a john doe -- i don't understand the substantive basis for the breach say weract suit if you can't prefer -- refer to state law. >> you can't add the covenant of breach of good faith.

suppose this complaint only had one count and suppose they said, look, we have this and it gives substantial discretion, gives -- it givesrds alone absolute discretion to northwest rightat can't really be because contracts have this implied covenant of good faith, an implied duty to perform in good faith and that means that this discretion is narrowed in certain kinds of ways so they can't terminate my membership for certain kinds of and that's all the complaint said, there was just this one count. think that would be preempted? >> i think the reliance on the that contextant in should be preempted. i think that's the better rule. if this court wanted to adopt a narrower rule and say it's really at the point you try to bring a separate implied covenant claim, that's pre-emptive, i suppose you could do that. might make some sense. you have to take a practical look at this. wake of woolens, if you

plead a routine breach of claim, you have preemption. you run the risk of -- >> the implied covenant here is an interpretive pool. it says there are certain kinds of provisions that are written very vaguely and an implied covenant comes in to ofp us interpret those kinds provision. and viewed in that way it's just contractual divide that in light of rollins ought to be permitted. my thought on that. even the respondents admit that in some states the implied is much more than simply a rule of instruction for the explicit terms of the and i suppose if this court wants to say that the only way the implied covenant is not is when it's just a rule of construction for the explicit terms of the contract, live withwe could that rule and i think we would win in this case. the reason i would suggest that courttter rule for this

to adopt is that the implied preemptedhould be even in that circumstance is because in that circumstance it doesn't add anything. really is a rule of construction for the express terms of the contract, you could get in the same place with a citation to cordozo and lady beth gordon. >> can you tell me where you they concede that some states -- their position would lead to a different result in some states? not -- it's in the red brief and i think it's quite clear. they say -- i'll try to find the point where i find this but i don't think they do this. they basically say that some states do apply this rule. that our claim is different and i'll get you the exact -- sayingought they were that in some states it's not an implied term of the contract but sort of provision. >> i may have misspoke. both parties agree as they would have to that in some states the implied covenant

doctrine is used to directly impose public policy so in alaska that seems to be the case, in montana that seems to be the case. >> how about minnesota? minnesota is the rule of construction of the contract? so, your't believe honor. i'm not going to try to tell you that minnesota law is clear on this but the minnesota supreme case case, the hennepin that recognizes the implied covenant cites the restatement. clearlyatement quite embraces a view of the implied covenant that goes beyond merely constructing the express terms of the contract. >> i still have this problem. you say -- now don't worry, you can always bring in express contract action, i said, well, what law do you apply? well, you have no state law and there's no federal common law. cann't understand how you bring an action with no substantive law to inform it. misspoke, justice kennedy. the breach of contract claim

bring, the routine breach of contract claim you so weis a state law claim don't have a quarrel with count usesf this claim which minnesota contract law to interpret the express terms of the contract. count two says even if the contract gives the parties absolute discretion we are going superimpose a duty of good faith and fair dealing and to complete the answer, since minnesota has adopted the restatement, the restatement suggests that the way you find you exclude the possibility of bad faith based on community standards of fairness and decency and at the point you're applying community standards of fairness and to me quiteeems clear that you are not applying the party's self imposed undertakings but something else. >> you could say it is assumed contracties to a comport with community standards of fairness and decency. you know, you can wiggle to there if you want. >> you could try to wiggle there

my point would be, the way to wiggle there is interpreting the express terms of the contract. an implied covenant is different. if you step back and think about when an airline reserves to itself the sole discretion to make judgment by aking an unruly passenger off plane, do you really want state courts to apply community decency? of if i could reserve the remainder of my time. >> thank you, counsel. >> thank you, mr. chief justice it please the court. in wilkins, this court enacteded that congress the a.d.a. to leave the decisions of prices, routes and businessto the judgment of air carriers subject to market forces and limited the department of transportation. in light of that statutory purpose, rollins held that

claims based on the state common law of contract are not preempted by the a.d.a. to the extent they seek to enforce the voluntary undertakings of the party. >> what if you had decision by the minnesota supreme court on common law contract principles said when the parties use the word "sole" in a contract, to meanpret that subject to reasonableness constraint. the wordere use "sole," would the application of that principle violate, would that be preempted or not? >> in that context i think not. courtends on what the meant by the term reasonable. if the term reasonable incorporates external standards such as -- reasonable means, i mean, you know, the airline says sole means sole. explain why weo did it and the minnesota court said no. ben you say sole, it has to reasonable. it can't be for no reason. it has to be for some articulated reason. >> i understand, chief justice, thank you. but i think reasonable could

different focuses. it could be reasonable in light of the expectations of the parties at the time they formed it could be or reasonable in light of community standards of decency which are -- forward,say going going forward, the parties know that this decision is out there and they say, sole. so it means they're using the term subject to the gloss that's put on it by the minnesota supreme court so what about in that case? subsequent, if there is a gloss and the -- i think that would be a question of what the parties intended with the contract and i think there may thatbe an argument under scenario that the airline understood that the gloss was going to be given although -- they would assume then that knew whether or whenever they used the word sole it would mean to reasonableness as interpreted by the minnesota supreme court. >> that may well be right but i to caution that an argument like that can prove too much, an argument like that could suggest

as respondent argued in the lower court that any time a party enters into a contract, the party endorses or at least accepts all normative principles that would law include things like doctrines of unconsciousability and other that impose extra contractual limitations on the party's choices. you're not going to give me reasonable for interesting? >> i absolutely am going to give you reasonable. meif you're going to give reasonable, in other words, the party's express terms do not say reasonable. the most natural reading is that it's not reasonable but they contractual, the interpretation that the minnesota supreme court has adopted, i don't know why the rule wouldn't apply when the minnesota supreme court says there is an implied condition of reasonableness, across the board and that the parties contract that background just like they do when there's a specific interpretation of the sole. >> i think the problem, chief notion ofs that the

doctrine of the implied covenant extraordinarily broad and encompasses a number of concepts. it encompasses notions of reasonableness and implying discretionary grants of authority reserved in contract. it also encompasses in some concepts such as notions of fairness which extend beyond parties.t of the >> let me change the hypothetical slightly. suppose the contract says that the parties reserves sole discretion to do something and the contract goes on to say, and in exercising this discretion, we don't promise to act in a the state manner, but court says that nevertheless tot has to be interpreted mean that the party can only perform in a reasonable manner. the situation -- >> i think the a.d.a. would preempt exactly that sort of on that a claim based sort of an argument. -- a.d.a. ishe dat is

to leave to the judgment of air carriers subject to market decisions concerning rates, routes or services and i'd like to underscore this out that theting interpretation that this court gives to the a.d.a. is not only control frequent flyer programs, it's also going to control contracts of carriage. the question i have, which is, i think, for anyone who it, particularly the government, i absolutely agree with you that a free the heart price is at of the deregulation act given. think frequent flyer programs are simply price discounts given. if you don'tthat have contracts, you can't have free markets, given. but i also think that the state cannot, under the guys of theract law would, regulate prices of airlines. if you allow that, we'll have worse than we ever had. be 50 different systems. if i think those four things, tot standard do i use

separate when a state is and using its not contract law to regulate prices. justice breyer, i heartily endorse -- is the i'm missing standard. >> the standard that this court could adopt and make very clear contract doctrine which seeks to interpret the intent of the parties at the the contract formation is a valid standard to be is not in any suit and preempted by the a.d.a. likeny contract doctrine unconsciousability and like, in some states, some instances of of the implied covenant which seeks to impose terms likeactual community standards, like -- >> you said in some states. where thatthe states doesn't -- >> no. >> are you saying that in some the implied covenant is assumed to be what the parties

states it'sand some not? >> justice ginsburg, i think there's a continuum. notion of the implied scaliat as justice explained for the d.c. circuit ad the time share decision is label that encompasses many meanings. illinois andike connecticut use the doctrine interpretive device the intent of the parties. other states at the other end of the spectrum, arizona is one, use the same concept to encompass extra contractual principles. by state. regimes to me the proposed by the petitioner is more manageable. if it goes beyond the words of readingract, and you're into something it doesn't say, policy.matter of state

i can work with that. but you're asking me to go through each of the 50 states, by one, to decide, oh, which of these are really trying to intent of the parties and which ones aren't. especially since you're the intent of the parties by simply saying parties communityapply standards and there's different community standards in every state, presumably. states are more honest than others, right? >> justice scalia i have two to that observation. first is, i don't think the state-by-state analysis is unusual or difficult. there has to be a state-by-state analysis any time you have a applying state law. there are variances among states in their contract law. second part of the same response is, i don't think the is aard we're articulating particularly difficult -- >> there are variances but not an ineffablesuch

question as to whether this is to discern thet real intent of the parties or rather, whether it's an intent standards,ommunity especially since, as i say, parties intend to adopt community standards usually. >> with respect, justice scalia, athink it's not at all difficult question. i think it's unlikely that a or anyt flyer contract airline contract that reserves discretion is likely to have incorporated implicitly community standards. i think the point would be that to decide towere inivable standards such as that it would be clear. >> easy for you representing the government but suppose you were representing the airline, would you come up here and say the it to be well known we don't have to be reasonable. toind that very difficult understand. >> i have one principal

kennedy, whichce is this. if the court were to adopt a along theic rule lines petitioner is suggesting, we think it would be better than alternative prophylactic rule in the other direction off the useould cut of the implied covenant doctrine that would impose extra -- it seems consistent with the normal presumption of apply out ofhat we respect for the state legal regimes to adopt a broad prophylactic rule. this is why we propose the court adopt a standard -- go back to a simpler standard. >> go ahead. >> my simpler standard comes from coding hennepin. covenant claimd extend to actions beyond the scope of the underlying can it override the express terms of an agreement? no, it's not is

pre-emptive. is that an ok statement? ok statement. >> so if that's what minnesota law says, it's ok and it's not pre-emptive. with the following caveat, somece sotomayor, in states that have adopted the haveed covenant, they hybrid approaches where they look to the intent of the parties and impose external standards. >> thank you, counsel. ms. rosenbaum? >> mr. chief justice and may it please the court. claims that the contract allowed to terminate i ginsberg may be and take away the miles he accrued in flyerce of the frequent program contract, that is allowed it for come reason or him of all the benefits of the frequent flyer

contract bargains. our position is that northwest actions breached its obligations specificallytract, the contractual obligation to perform in good faith. ofause this is a question rabbict interpretation, ginsberg's claim is not -- >> what are you saying was the bad faith? what action? the action was terminating him from the program and taking away his miles. >> it can't be that. >> without having cause for doing that. was theare you saying bad cause here? assume their answer, that he was abusing the program. >> we do not think he was program.he the complaint -- >> so you're doing exactly what he's saying. saying that their judgment of abuse is not enough. we think that there are some not be he could terminated from the program for and there are allegations in the

are incorporated into the covenant of good faith, claim in the complaint, that he was terminated because of the merger between delta and northwest. understand your argument, correct me if i'm be terminatedd reasonable cause if he happened to be from a state or was brought under the governing law of a state inposed this obligation of good faith as a matter of law. says, regardless of what the contract says, even if sole discretion without any obligation of good faith, even if it says that, as a matter of law, there is an good faith.f as i understand your case, you that state,that in luck.ld simply be out of >> i don't think so, that he

of luck --t >> that he would have no cause of action because this is obviously not an interpretation contract. it is an imposition of a state requirement. agree that it is not construing the contract, that if a state were instead claiming the contract violated the law, instead of that northwest -- somebody's been given a raw that's still going to be punishable even if we rule for you here. state he'son what from, right? >> well, states tend, in applying the covenant of good apply it as a contract interpretation tool as a way of the benefits of the -- >> some do, some don't. some do, some don't. >> the vast majority of states and there's an appendix to the this issue,f on talks about the covenant of good faith as a way of interpreting the contract. >> let me ask you this, unless or onee, in minnesota,

of the states, where you say the covenant is simply a way of intent of thehe parties, you have a contract between two very tough and nasty and they write right in their contract, you know, we're going to comply with thisiteral terms of contract but we do not promise each other that we're going to or thatin good faith we're going to deal with each other fairly. we're going to take every thentage we can under literal terms of the contract. now, would that get rid of the law?ant under minnesota >> generally the covenant of good faith cannot be waived. of whether question the principle that the covenant an't be waived is itself external principle of law is a much harder question than the of whether the covenant itself -- >> it can't be waived. it'sre seems as though operating independently of the party's reasonable expectations. to separateou need out the principle that it can't be waived from the underlying

principle of what the covenant is doing which is giving effect partiesargain the entered into based on looking at the reasonable expectations of parties. onin the case that you rely and that allowed room for expressionaims, the was "self imposed undertaking." the airline says, we didn't thise, we didn't take on we didion but the law, in every contract whether we want it or not. how is it self imposed if the no say and applies anyway. >> the terms of the contract are undertaking and this is the tool being used to understand and interpret the

and thenthe contract to enforce them and this is a widely used tool to interpret contracts particularly when there are discretionary contract.in a that's something that's done in the statesjority of and in fact the discretionary -- there arewhere discretionary terms within a quintessential application of the covenant of good faith. of the early covenant of good faith claims involved outputs or requirement contracts the specific amount of the contract was not set and the covenant was applied to that scholars?tuation and talking about the covenants, often specifically note that it applies to discretionary terms. how do you account for the fact that in many states the covenant of good faith and fair is read into most contracts but is not read into employment contracts? a situationhat's that states struggle with given

at-well employment doctrine and they view the covenant and at-will employment doctrine as being in conflict with each other. though, the covenant and the contract and any other principle are not in contract with each other. covenant isn't being used to override any terms in the contract. it's being used to help give the terms in the contract and to identify what the impplicit restrictions are. discrepancy show simply that the state has different policies with respect types of contracts? >> i don't think that it's applying different types of policy. i think it's interpreting the contract and what the contract means differently in different situations. >> it might be, because people different expectations in those two different situations employmente at-will is so pervasive and so customary sweeping that the policy -- the rule of an implied faith doesn'tod

apply there because we think everybody expects it not to apply there. i do think courts will sometimes say the covenant when what they mean is that if the covenant did apply and the court were looking the reasonable expectations of the parties based on the contract, there would be no reasonable expectation. contractntract is a that gives the employer sole discretion as to whether to employee and here we have a contract that says that discretion has sole to determine whether to terminate somebody from the frequent flyer program so what difference? >> it's a difference in the context and what the term, sole in differenteans contracts is going to vary based whate context and based on someone entering into that contract reasonably would have expected that contract to mean based on the terms of the contract so in the employment employee, given the wide acknowledgment of the

employment doctrine, might not expect that they could only be terminated for a cause. agree, same question i asked the government, i'd like your answer, i imagine you would agree that a state readthe following, we into, like common law, courts aed to do all the time, for transportation company, we believe the price must be fair reasonable and a contract in our state for transportation prices has to set a fair and price and i personally think many fares are not reasonable. they're too high. right, and therefore we have substituted the judges and the states for setting prices instead of the parties. be agree that would pre-emptive. >> we agree. >> now, what is your standard what is andishing is not preempted where the state imply a contract law to fair and reasonable term? >> i think our standard is very

familiar to the one that the united states said. the covenantether is going -- whether the claim is the partieshether breached the contract or whether it's looking at whether the contract itself violated the law so it's a question of whether the claim is actually the contract and trying to get at what the parties -- what their agreement is or whether the claim really that the contract, as the to it, violated the law. court of theupreme state have an opinion, if we're this,to be candid about the prevalent of fair dealing, thisfaith, it's not in but we will read it into every contract, that is, if the state's supreme court said imposed, this is

a rule that we will read into because of the policy in our states that people should deal with each other fairly. that was controlling decision of the minnesota court, then you're out, is that right? a state says it's imposing external notions of policy that would fall on the side of the line drawn in rollins which looked at enforcing terms of the agreement versus imposing external state .olicies >> in such a state there might be a contract where the parties expect thisid limitst term that something, a very broad conferral of discretion to just becauseet this state supreme court has framed its argument in a particular kind of way, they don't get the benefit of that. >> i think it would depend on how the claim was framed and how

the court interpreted that claim and whether in interpreting that claim the court was looking at reasonable expectations of the parties based on the terms of the contract and based on anir desire to be bound by enforceable contract or whether it thought it was imposing, parties' contract and imposing external notions of fairness. >> that's no clearer than the government's view and it seems to be a particular problem when talking about the objectives of the a.d.a. to say that the rule varies from state to state, we're dealingince with airlines that go to a lot of different states. that looseste state from the point of view of setpreemption is going to the standard. >> i don't think that the rule varying from state to state. i think the rule would be the same across states. rule butit's a general it depends upon the particular circumstances. same rule but in application it varies from state to state. >> i don't think it necessarily

because in all the states a claim seeking to get at the expectations and intents of the preempteduld not be whereas one imposing external notions of fairness -- what yourn't complaint, but i think the paragraph 56, which i think is the key paragraph, says, that the-- under the law is contract law that you want to enforce is even where a party to given absolute discretion, it must exercise that discretion in good faith in thenner consistent with reasonable expectations of the parties.ty, or that's, i think, what they're objecting to because there is -- sounds to me like if i get a ticket, my reasonable expectation is mey're not going to charge what they're going to charge, it's unbelievable. that's my reasonable expectation party and sother you clause sounds as if could -- under state contract

the price according to my reasonable expectation, namely, the consumer. a great idea but i don't think that's the idea behind this act. what -- that's what i just read you. that?o you say about >> there's a difference between subjective expectations and expectations and the concept of reasonable expectations in the complaint is standard of what based on this contract and based on the context, what -- how the contract should be interpreted and what implicit terms there need tohe contract that be interpreted and then enforced and that can, in fact, be party.d by the other >> ms. rosenbaum, in our decision in this case, do you we should apply the presumption against preemption of state law? should apply the preemption against

of state law. >> the whole purpose of the law.. was to preempt state i can understand applying that other statutes. the whole purpose of the a.d.a. airlines, wasate to say there will be no federal reulation, let the free market and there will be no state regulation and you want us to apply a presumption against to that statue? >> i do think the presumption applies, i don't think it's necessary to any outcome in this case. court tellsthis that claims are about holding airlines to the terms of their agreement are not preempted and the covenant of good faith -- >> the terms in the agreement, to say, it'sthing an underlying premise, good fair dealing will control. are you taking issue with the

and fair dealing amorphous, being susceptible to different interpretations, different different juries? >> i think there is a fair thent of uniformity across states in how they actually apply the covenant of good faith it as terms of applying an interpretation of the contract and then especially in cases where one party is claiming that all of their the contractnder is in their sole discretion and that they're free not to perform at all, yountract know, essentially the contract illusory in applying the covenant specifically under those circumstances to ensure is meaningful performance that's required under the contract. is an employment at-will contract illusory? ani don't believe that's illusory contract but i think rather than it being in print,

there are specifically -- whether specifically this contract is illusory, i think the fact that one party is claiming that it under they to perform contractshows that the had reasonable implicit thetations in it, that parties reasonably expected they beingontracted to there some sort of performance under the contract and in fact the principles at issue here are remarkably similar to the principles at issue in rollins itself and this court there recognized that those were contract construction issues. because the contract was silent. here it isn't. contract says "sole discretion." rollins, the question was retro activity and the contract nothing one way or the other about it. >> in rollins, the question was

reservation of rights and the contract didn't say appliedor not it retroactively so the question was whether there were applied the expresson reservation. >> would this contract produce a different result if it did not contain the words "in its sole discretion in." the interpretation of the contract might be different but -- apply the very same doctrine of reasonableness, right? words, "in its sole discretion" become super nucleus. >> there may be a larger amount of deference given to the airline and a party would reasonably expect would be given because of the sole discretion language and that's obviously a question for exactly is thet meaning of the sole discretion. >> i guess different states will treat that differently, as well, right? >> i think the question is less state by state and really more

context bye and context of what does sole discretion language means when used -- >> i find it hard to believe that you're doing nothing but a contract when you outcome whether it says "in its sole discretion" "in its soleay discretion," i find it hard to grasp how what you're doing in is simply interpreting the contract. wouldon't think there necessarily be the same outcome in every single situation, the contractt said, "sole discretion" or not, be more deference given to the airline because of in discretionary term but both situations, the question what does this contract mean and contracts include both implied termsand and the covenant of good faith is going to interpreting those

to identifying them within the contract and enforcing them within the contract. airline were able to just insert "sole discretion" or within itsent" contract, it would be able to entirely circumvent the rule the court set forth in rollins by adding "sole discretion" to its be held, it would never to any contractual duties or requirements. a question about something slightly different. an amicus brief submitted in of your position by california and other states points out at some length that are now a lot of frequent flyer programs in which a lot of makingre earned by purchases other than for flights and in which miles can also be spent for things other than flights. do we have to worry about that case?s >> we think that's another noton why this claim is preempted, is because it has to do with membership in a frequent than program rather

being -- rather than like in rollins having to do tocifically with access flights or -- >> what are the facts relating to this particular plan? can you earn miles by doing things other than flying? can you spend miles on things flying?an >> there are not very many facts in the record about the plan but does refer to sorry -- tos -- airline partners, from whom one could earn miles and spend miles, also. thehe plaintiffs used frequent flyer program, whatever it else it might be used for, lower prices on flights, right? >> he did, yes, and that is something in the record but -- prices?oes it relate to even if you get credit for miles, from staying at certain hotels, it still has the effect for yourng the price

airline ticket and likewise if use your frequent flyer miles to get cheaper hotel that effectively lowers the price of your airline ticket, doesn't it? makeesn't seem to me to any difference whether the only thing you get from the frequent mileage is, you know, airfares or other goodies. they're all price. >> this is a claim just about in the program overall and that's a membership have the sameho claim as him could be earning miles on their credit card, spending miles on hotel rooms and once there's a claim where has no can bring it who relationship with air travel whatsoever where they can bring the exact same claim, it's hard to see how that claim is related to prices and services of air travel and there's certainly showing here. >> you're talking about a situation where you can assign your mileage to somebody else

the hotel room? >> no, i was saying that -- >> the question, who gets the discount for the hotel room is person who bought the airline ticket, right? >> or the person who used their to receive frequent flyer miles. canour point is that you get frequent flyer miles by purchasing other than airplane transportation. yes and then also use them for purposes other than airline transportation. reportedly more miles are earned now on the ground than on flight through means other than travel, than actually through -- >> didn't see anything in the complaint about anything other than airline. >> he, himself -- in yourere anything complaint that talks about anything other than airlines? isn't.there rabbi ginsberg himself earned and used his miles -- well, i know, but what we're talking about is what count two of the complaint says, i think their objection as far as count two of the complaint says it's about airline miles.

i take it, and airline miles are et cetera.lines and >> his claim -- >> if there is something else in this complaint, tell me, and to figure out whether we go beyond the complaint. hisis claim is about membership in the program itself and the program itself can be used, including the accrued miles earned and the program, can be used for purposes besides airline flight. >> does it say that in the complaint? >> it does not specifically say to the contract does refer the airline partners and this was decided -- >> airline partner, i take it, is another airline? >> no, i think airline partners can be the people with whom they with to -- to whom they sell their miles. find outi want to where that is in the record, where do i look? >> this was decided on a motion dismiss so all there is the complaint but -- complaintre is the and it doesn't talk about it in the complaint. what i'm thinking about it obviously is we might reserve

question for another day. >> the complaint does include the contract that does refer to but does not, i don't think, define exactly who the partners are. court doesn't have to reach the question of whether or not the claim relates to prices, ittes and services because can decide this case based on the lines on in rollins on whether or not this claim the terms of the contract which under minnesota covenant of good faith does. cases in minnesota have referred to this as the breach of contract claim and i want to respond to justice -- you say would apply to contractual obligations of the airline, right? have toirline says you get off the plane, if the flight you to do so,s there's going to be a good faith obligation attached to that so

can challenge those decisions in court? there are separate regulations that apply to safety so -- anda.d.a. separate preemption doctrines that apply to safety under the besides that, this would apply to matters besides-- to matters frequent flyer miles and other sole discretion -- issues in the contract leaves an issue to the sole discretion of the airline. respond to justice kennedy's question about whether someone can go to the department of transportation. the department of transportation does have authority over unfair deceptive practices by airlines but that's very claim thathan the we're pursuing here. airline --aim by an sorry, by the government, that then't give remedies to specific consumer who was hurt and that also looks at whether

or practice is unfair deceptive and our claim here isn't that this was an unfair practice. claim here is that this is a practice or these were actions the contract and was being applied here are contract law principles about interpreting the covenant of good faith and the same thing rollins.also in at the time of rollins, the department of transportation had ability to pursue claims for unfair and deceptive the courtbut recognized that that did not override the need for there to a contract dispute resolution regime by the state courts and same -- the same is true here whether or not the contract term at issue is express or implied and overall, like in rollins, this is a claim where, if these sorts of claims were preempted, it would undercut the efficiency of and the competitive marketplace that overall the a.d.a. meant to pursue.

people need to be able to rely on their contracts. they need to be able to rely on fact that the other party to their contract will interpret good faithct in according to the reasonable expectations of the parties, will give them the performance they reasonably thought they were securing when contract.ed into the under northwest's position here, though that, it has the to perform at all, people won't be able to rely on the security of their contracts and it's hard to imagine that when congress airline deregulation act it meant to undercut the of contracts in that way. >> i don't think it helps your argument to say in a your position promotes the purposes because the whole purpose of the preemption that's for theat federal government to determine, not state laws, what promotes the purpose of the a.d.a. thing the court said in rollins is for people to be able to trust their contract was

something that promoted the purpose of the a.d.a. and we think that's true whether the terms that are being relied on express terms of contracts or like here, the implicit, understood terms of the >> unless a court has any other questions, thank you. >> thank you, counsel. two minutes. >> thank you mr. chief justice. first a few loose ends. also, this argument that somehow frequent flyer miles have changed and are different because their partners. the same arguments were made by the plaintiffs. i think this court has artie caused -- >> i don't want to take up your rebuttal time.

earned by miles were purchasing things other than than flying. 90% of the miles were spent on things other than flying. wouldn't that be very different? >> i'm not sure how that would be different in a claim brought against the airlines. the ada has nothing to do with that area if you're suing an airline, if the court was to reserve that, i suppose it could. i do want to underscore that the implied covenant doctrine is very different. it is non-way for both. where you are trying to determine the difference between self-imposed undertaking and things imposed by law, nonwaiver ability is a huge strike against it being voluntary. an can bring separate implied covenant claims. i have never heard of a contra preference term claim. courts make policy decisions about whether to have it.

states have a valid public policy. they have different views about employment contracts. it is just statutory and policy oriented in a way. justice breyer, i certainly agree with your premises. if i had to state a standard, i would say the standard is that the implied covenant is only not 3m did what it does no more than provide a rule of construction for the express terms of the contract. of course if that is all it does then there is nothing to be gained by saying those claims are not preempted. you can still get to the same place. there's lot to be gained by adopting a more prophylactic rule. the claims brought in the real world are claims that -- i get a refund, even though the ticket is nonrefundable. i get a thousand dollars even though the loss of it was 500.

the last question i ask you to think about is why is it the airlines don't put these covenants in as express covenants? why does it say sole discretion? the reason is, you can't run a national, let alone an international airline if everyone of your judgments by taking unruly passenger off or taking out an abusive customer is going to be second-guessed by a jury applying reasonable standards of ordinary decency and morality. for that reason we think the judgment below should be reversed. we would urge you to apply a more prophylactic rule. thank you. >> thank you, counsel. the case is submitted.

>> on the next "washington brandis discusses president's 2014 agenda. after that, richard teacher of the death penalty information center on the use of capital punishment in 2013. plus your e-mails, phone calls and tweets. washington journal, live at 7 a.m. eastern on c-span. >> i think it is really interesting to sit here and talk about how the republican party is less unified antidemocratic artie when we think about this historically i think it is a really interesting time to be studying this because for the first time in recent years we are seeing a republican party that is facing many of the struggles of the democratic faced 2030 years ago when they were tinkering with the reform process every four years.

>> the interplay of what happened, how candidates deal , all reallyppened matter. especially if you're running in a context in which you can present yourself as an abused him a part of an abused group, abused by the system, you can really play that quite well. jeffer it is the case that talked about or whether it is roy moore in alabama who used the 10 commandments controversy very effectively in terms of an attack on christian conservatives, i think that is very much the case. >> this weekend on c-span, the state of the national parties and a look at the political scandals and the politics of recovery. saturday morning at 10 eastern. live sunday on c-span two, your calls and comments for talk radio host mark levin, best selling author of five

nonfiction books, including liberty and tyranny and his latest, the liberty amendments. that is at noon on book tv's in depth. on c-span three, american history tv looks back 15 years at the impeachment of president william jefferson clinton. saturday and sunday at noon eastern. >> outgoing chair of the federal reserve and bernanke delivered a speech today in philadelphia. the fed recently announced it will begin slowing its bond purchasing program known as quantitative easing. the senate is scheduled to hold a confirmation vote monday on chairman bernanke successor. he is joined by economist neil katcher and ken rogoff. they spoke for about an hour and good afternoon, i'm william

lord house, i am president-elect of the american economic association. there are many people who know about the association but for those of you are watching on feed let me say a word about it. these are the annual meetings of our association. this is an association of economists. it is attended by 11 or 12,000 card-carrying economist around the country and indeed around the world. , not here, but in these meetings, annually. he, we debate debate-year he, we debate policy.

theory. then earned his phd from m.i.t. in 1979, and since then has been a distinguished scholar and .ublic servant i'm not going to give a long introduction because most of you know him. i will give some personal .eflections on his career his scholarly writings have eliminated a wide variety of areas. helpful in hisry later career, including the credit channel in the great , the potential role on aflation targeting

favorite article of my students which is a global savings glut, which for all of you who are teachers is a wonderful way to teach open economy macroeconomics. addition to his other activities, has written about the essence of economics. you might be interested, you might take notes on this to explain to your students also, actually,or he said, in his talk to princeton graduates i think last year, it economics is a highly sophisticated field of thought. it is superb at explaining to policymakers exactly why the choices they made in the past were wrong. [laughter] about the future it is not so helpful. [laughter] most people outside this room know been from his eight years as captain of the fed.

during that. the country and indeed the global economy suffered from a rare confluence of terrible financial and economic shocks, what you might call a category five financial hurricane that we are suffering here. this is a category one snowstorm. , the captain of the fed had historical and , thetical knowledge creativity and the courage to introduce policies that kept the ship afloat and steered it through the storm. that i findhings most impressive is that i go back and look at what we thought or 2007,n 2005 4 2006 is what we might do if we got hit by this kind of storm. of there just a whole list things in the closet, on the shelves to pull off, pullout in

case of crisis? i think the answer is no. i think all of these were very creative and talented steps that the fed took that were not on the shelf ready to go. from similar wreckage around the world and storms of this kind in other countries and other times how damaging they can be and we understand how fortunately were to have been at the helm. so this is a program. german bernanke will talk, give his presentation. he will be followed by commentators ken rogoff and neil cash up. depending on where we are we plan to have some questions from the floor. there are two mics, but i'm afraid if we took all the questions we would still be here tomorrow morning and that is not possible. so we will have a very few

questions but i would like to present ben bernanke. [applause] >> thank you, thank you, bill. in less than a month, my term as fed chairman will and. needless to say, my tenure has been eventful. for the federal reserve, the country and for me personally. i thought it would be appropriate to reflect on some accomplishments of the past eight years as some uncompleted tasks. i will briefly cover three areas in my remarks. the federal reserve's commitment to transparency and accountability, financial stability and financial reform, and monetary policy. i will close by discussing the prospects for the u.s. and global economies. fostering transparency and accountability in the federal reserve was one of my principal objectives in front were 2006. i had long advocated increased

transparency and in particularly a more explicit policy framework to make policy more predictable and effective. my efforts have made it more effective, but i will discuss the steps are approved important in other spheres as well. as a beginning expected to build on the framework that i inherited from paul volcker and alan greenspan. my predecessors had solidified the commitment to low and stable inflation as foundations of broader economic stability and they gradually increased the of monetary policy, deliberations and plans. volcker introduced a framework to help guide the fed's attack on high inflation in the early 1980s and the practice of issuing a statement after each meeting as cf one c again under chairman greenspan. i believed that a still more transparent approach would make policy even more effective and

further strengthen the fed's credibility. in particular as an academic i to the targeting approach used by the bank of england and other central banks. by making public considerable information about policy goals and strategies with their forecasts, these banks provided a clear framework to help the ntslic and market participat understand policy actions. the plans also help make these banks more accountable for achieving their stated objectives. i was confident that we could adapt this type of framework to the reserves to a mandate to promote maximum employment and price stability. indeed, central banks using this framework were already in practice, often pursuing economic objectives in addition to stable inflation. hence the term flexible inflation targeting. because the crisis and its

aftermath occupied so much attention, progress toward a more explicit framework was slower than i had hoped. nevertheless, progress was made. in the minutes of the october 2007 meeting, we introduced an sep which included f1 seat adjustments projections of key variables such as inflation, gdp growth and unemployment rate. projections added of inflation growth and unemployment as well as projections of the path of the federal funds rate consistent with each individual's views of policy. these additions have better inform the public about participants use on objectives of policy and the path most consistent with achieving those objectives. we took another important step in january 2012 when the f1 seat issue the statement laying out its longer run goals and policy

strategy. the statement established for the first time an explicit goal for inflation of two percent and appointed to the sep to provide information about committee participants assessments of the longer run unemployment rate currently between 5.2 and six percent. the statement also indicated that the committee would take a balanced approach to its price stability and employment objectives. atadopted measures aimed clarifying the rationale for decisions including my quarterly postmeeting press conference. the increases in policy transparency that were achieved prove valuable turning a difficult. for monetary policy. as it happened, during the crisis and its aftermath the feds transparency proved critical in a different sphere, namely in supporting the institutions democratic legitimacy. the fed like other central banks wields powerful tools.

democratic accountability requires that the public be able to see how and for what purposes those tools are being used. transparency is important in it. like the recent one in which the reserve has been compelled to take unusual and dramatic actions, including the provision of liquidity to a wide range of financial institutions and markets that did not normally have access to the fed's discount window to help stabilize the financial system and the economy. transparency are needed to preserve public confidence? the most basic level, the central bank must be clear and open about its actions and operations, particularly when they involve the deployment of public funds. the fed routinely makes public information on all aspects of its activities and since the crisis it has greatly increased the detail of its reports to the congress and the public. contrary to what is asserted, all of the fed's transactions and operations are

subject to regular intensive audits by the government accountability office, the gao, an independent inspector general and a private accounting firm as well as by our own internal auditors. it is a testament to the dedication of the feds management team that these thorough audits have consistently produced assessments of the fed's accounting and financial controls that most public companies would envy. transparency and accountability are about more than just opening up the books, however. they require thoughtful explanations of what we're doing and why. our firstgard, responsibility is to the congress, which established the federal reserve almost exactly a century ago and determined its structure, jet is and powers. federal reserve board members including the chairman as well as senior staff testify frequently before congressional committees on a wide range of topics. but i became chairman i anticipated the obligation to appear regularly before the congress.

anticipatedtirely that i would spend so much time meeting with legislators outside of hearings, individually and in groups. realized the importance of keeping these channels open. as part of the fed's interaction with the congress we have routinely provided staff briefings and conducted programs for the benefit of congressional staff interested in federal reserve issues. likewise maintains regular contact with both the bush and obama administrations, principally through meetings with the secretary of the treasury and other economic officials. the crisis and its aftermath raised the need for communication annexed the nation by the fed to a new level. we took extraordinary measures to meet extraordinary challenges and we had to explain them to earn the public support and confidence. anding only to the congress market participants was no longer enough.

the effort to inform the public engaged the whole institution including ward members and staff. as chairman, i did my part by appearing on television programs holding town halls, taking student questions at universities and visiting a military base to talk to soldiers and their families. keyfed banks also played roles in providing public information in their districts to programs, publications, speeches and other media. crisis has passed, but i think the feds need to educate and explain will only grow. when paul volcker for set in the chairman's office in 1979, there were no financial news channels on cable tv, no bloomberg screens, no blogs, no twitter. news, ideas and rumors circulate almost instantaneously. the fed must continue to find ways to navigate this changing environment while providing clear, objective and reliable information to the public.

for the u.s. and global economies, the most important event of the past eight years was of course the global financial crisis and a deep recession that it triggered. as i have observed on other occasions, the crisis for a strong family resemblance to a classic financial panic, except that it took place in the competent environment of the 21st-century global financial system. likewise, the tools used to fight the panic were adapted to the modern context were analogous to those which would've been used a century ago including liquidity provision by the central bank, liability guarantees, recapitalization and the provision of assurances and thermation to the public. immediate trigger was a change in house prices. policy at the time including myself appreciated that prices

might decline, although we disagreed about how much decline was likely. indeed, prices were moving down when i took office in two thousand six. however to a significant extent our expectations about the possible effects of house price decline were shaped by the apparent analogy to the bursting of the.com bubble a few years earlier. bust also involved a large reduction to pay for wealth that was followed by only a mild recession. in the event of the bursting of the housing bubble it triggered the most severe financial crisis since the great depression. it did so because unlike the prices,decline in negri it interacted with critical vulnerabilities in the financial system and and government regulation that allowed what were initially moderate losses to subprime mortgage holders to cascade through the financial system. in the private sector, key vulnerabilities included high levels of leverage, excessive dependence on unstable short- term funding, deficiencies and

risk measurement and management and the use of exotic financial instruments that redistributed risk in nontransparent ways. public sector, vulnerabilities included caps on the regulatory structure that allowed some systemically important firms and markets to escape comprehensive supervision . failures of supervisors to effectively use their existing powers and insufficient attention to threats to the stability of the system as a whole. the federal reserve responded forcefully to the liquidity pressures during the crisis in a manner consistent with the lessons the central banks have learned from the financial panics over more than 150 years and summarized in the writings of 19th-century british journalist alter pageant. early and freely to solve and institutions. the context had changed substantially since padgett panics typically

involve runs on commercial banks and other depository institutions. prior to the recent crisis in contrast credit extension had aggressively migrated outside traditional banking to so-called shadow banking entities which relied heavily on short-term wholesale funding that proved vulnerable to runs. accordingly to help calm the panic, the fed provided liquidity not only to commercial banks but also to other types of financial institutions such as investment banks and money keyet funds as well as to financial markets such as those for commercial paper and asset- backed securities. because funding markets are global in scope and u.s. borrowers depend importantly on alsogn lenders, the fed approved currency swap agreements with 14 foreign central banks. providing liquidity represented only the first step in stabilizing the financial system. subsequent efforts focused on rebuilding the public's confidence, notably including public guarantees of bank debt

by the fdic and of money market funds by the treasury department as well as the injection of public capital into the banking system. the bank stress test of the federal reserve lead in the spring of 2000 nine which included detailed public disclosure of information regarding the solvency of our largest banks further buttressed confidence in the banking system. the success of the stress test disclosures by the way was yet another example of the benefits of transparency. the subsequent efforts to reform focusedework had been on limiting the reemergence of the vulnerabilities that precipitated an exasperated the crisis. the federal reserve conference of capital analysis and review requires that large

financial institutions maintain sufficient capital to weather extreme financial shocks and demonstrate that their internal processes are effective. in addition, public disclosure of the results facilitates market discipline. the basel three framework includes liquidity requirements designed to mitigate excessive reliance by global banks on short-term wholesale funding and to otherwise constraining risk. further steps on their way to toughen the oversight of large institutions and to strengthen the financial infrastructure am a for example by requiring central clearing with greater transparency for the trading of most standardized riveters. -- standardized derivatives. the new oversight council has dedicated some firms as systemically important financial institutions subject to the subdivision are the fed.

addition, measures are being undertaken to address the potential instability of short- term wholesale funding markets, including reforms to money market funds and the tri-party repo market. in a highly integrated global financial system, no country can effectively implement a financial reform that i have described in isolation. the good news is that similar reforms are being pursued throughout the world with the full support of united states and with international bodies such as the basel committee and the financial stability board providing coordination. more broadly, the approach to regulation and supervision of the fed has evolved to include a macro prudential or systemic orientation in addition to the traditional focus on individual institutions. createdple, the fed has the office of financial stability policy and research which coordinates efforts to

monitor the interactions of financial institutions, markets and economic developments to identify emerging vulnerabilities and systemic risks. enhanced monitoring of this type is especially important as the changes in regulatory structure of financial position may leave risks to manifest in new ways or to migrate outside of the perimeter of the current regulatory structure. but progress has been made more remains to be done. in addition to completing the efforts i have mentioned, including the implementation of new rules and responsibilities, the agenda still includes further cooperation to ensure the effectiveness of mechanisms to allow the resolution of insolvent institutions and increase market discipline for those institutions. of macroation prudential tools that might be used to address financial imbalances is another high priority. for example, the new basel three apital framework includes

countercyclical capital buffer which may help build resilience within the sector during periods of point credit creation. investigatingare the potential of this and other tools such as sick quickly sensitive requirements for mortgages to improve stability. includingf countries advanced and emerging economies have deployed such measures and their experiences should be instructive. although in principle monetary policy can be used to address imbalances, the presumption remains that macro prudential tools with traditional regulation and supervision should serve as a first-line of defense against emerging threats to stability. be done more remains to to understand how to design and implement macro prudential tools and how they interact with monetary policy.

while liquidity provision and other steps were critical to stemming the panic, a rapid shift in the stance of monetary policy was necessary to counteract the economic blow delivered by the crisis. the f-1 c reduce the federal funds rate from five went to five percent in the summer of 2007 to a range of 0-1.4% by the end of 2008, a very rapid easing. the rate has been at its lower bound ever since. to provide policy accommodation despite the constraint imposed on interest rates, the fed turned to to tools, enhanced guidance and large-scale purchases of longer-term securities for the fed's portfolio. other major banks have responded to the development since 2008 in roughly similar ways. the bank of england and the bank

of japan have employed detailed guidance and conducted large- scale purchases. the european central bank has moved to reduce the perceived risk of sovereign debt, provide banks with liquidity and offer qualitative guidance regarding future path of interest rates. with short-term rates near zero, expanded guidance of policy has helped to shape market expectations which in turn has eased financial conditions by putting downward pressure on longer-term interest rates and helping to support economic activity. forward guidance about the short-term interest rate supplements the broader policy framework that i described earlier by providing information about how the committee expects to achieve its stated house he object this, despite the competitions created by the zero lower bound on the policy interest rate and uncertainties about the cost and efficacies of the available policy tools. beginning with qualitative guidance, the committee's

communication about its future policy has evolved through several stages. in december 2012 the committee introduced state contingent guidance, announcing for the first time that no increase in the funds rate target should be anticipated so long as the unemployment rate remains above 6.5%, inflation between one -- two years ahead was to be no more than half a percentage point above the committee's long-run goal. patientsrm x pick continued to be well anchored. my colleagues and i have emphasized that these were thresholds not triggers. crossing one of the thresholds but not automatically give rise to changes in the fed rate started. large-scale purchases also provide monetary accommodation by lowering long-term rates. working through the port folio

balance channel, as it urges is reduced the supply of long duration assets in the hand of the public, depressing term premiums and reducing longer- term yields. at times the decision to begin or extend an asset purchase program may also have a signaling effect to the extent that market participants see that decision as indicative of policy makers commitment to an accommodative policy stance. it is important to recognize that the aspect of asset purchases depends on the economic and policy context. in particular, the f-1 c's decision to reduce the pace of asset purchases at its december meeting did not indicate diminution of its commitment to maintain a highly accommodative policy for as long as needed. rather, it reflected the progress we have made to our goal of substantial improvement in the labor market outlook that was set out when we began the current purchase program of september 2012.

at its most recent meeting, the committee reaffirmed and clarified its guidance on rates stating that it expects to maintain the current target range for the federal funds rate well past the time that the unemployment rate threshold of 6.5% is crossed, especially if projected inflation continues to run below the committees two percent longer run cold. skeptics have pointed out that the improvement has been slow. below theis still committee's two percent target. however, the recovery has faced powerful headwinds suggesting that growth might well have been weaker or even negative without substantial monetary policy support. for the most part, research supports the conclusion that the combination of forward guidance and large-scale asset purchases

has helped to promote the recovery. for example, changes in guidance appeared to shift expectations and studies show that asset purchases pushed down longer- term interest rates and boost asset prices. these changes in financial conditions in turn appeared to have provided material support to the economy. once the economy improves sufficiently so that unconventional tools are no longer needed, the committee will face issues of policy implementation and ultimately the design of the policy framework. large-scale purchases have increased the size of our balance sheet and created substantial excess reserves in the banking system. under the operating procedures used prior to the crisis, the presence of large quantities of excess reserves likely would have impeded the f-1 c's ability to raise short-term interest rates when appropriate. fed now has effective tools to normalize the stance of policy when conditions warrant without reliance on asset sales.

the interest rate on reserves can be raised each will put pressure on short-term rates, in addition the reserve will be able to employ other tools such as fixed rate overnight reverse repurchase agreements, terms deposits or term repurchase agreements to drain bank reserves and tighten control over money market rates if that proves necessary. as a result, at the appropriate time, the f-1 c will be able to return to conducting policy primarily through adjustments to the short-term policy rate. it is possible that some specific aspects of the feds are burning framework of change. the committee will consider this question in the future, taking into account what it has learned from this experience with an extended balance sheet and the new tools for managing interest rates. in the remainder of my remark several reflect on the state of the u.s. recovery and its prospects. the economy has made considerable progress since the recovery officially began some 4.5 years ago.

payroll employment has risen by seven .5 million jobs from its trough. real gdp has grown in 16 of 17 quarters and the level of real gdp in the third quarter of 2013 was 5.5% above its prerecession peak. the unemployment rate has fallen from 10% in the fall of 2009 27% recently. industrial production and equipment investment is matched or exceeded pre-recession peaks. the banking system has been recapitalized and the financial system is safer. when the economy was in freefall in late 2008 and early 2009, such improvement was far from certain as indicated at the time by stock prices that were nearly 60% below current levels and very wide credit spreads. despite the progress, the recovery clearly remains incomplete. at seven percent the unemployment rate is still elevated. the number of long-term unemployed remains unusually high and other measures of labor

underutilization such as the number of people working part- time for economic reasons have improved less than the an labor forcerate. participation has continued to decline and although some of its decline reflects num longer-term trends, some of it reflects workers discouragement about job prospects. , many of the factors that held back the recovery can be identified. some of these factors were difficult or impossible to anticipate thomas such as the resurgence of financial volatility associated with the european sovereign debt crisis and in economic effects of natural disasters in japan and elsewhere. other factors are more predictable. that theiated early on boom and bust left severe imbalances that would take time to work off. as carmen reinhart and kenneth rogue us indicated, economic

activity following a crisis tends to be anemic. weak recoveries from financial crises reflect in part the andess of deleveraging balance sheet repair. households pullback in on spending to recoup lost wealth and reduced debt burdens. financial institutions restrict credit to restore capital ratios and reduce the riskiness of their portfolios. in addition to these financial factors, the weakness of the recovery reflects the overbuilding of housing and to some extent commercial real estate prior to the crisis, together with tight mortgage credit. indeed, recent activity in these areas is especially tepid in comparison to the rapid gains in construction more typically seen in recoveries. although the fed like other forecasters tended to be overoptimistic and it's forecast to real gdp during this recovery, we have at times been too pessimistic in our forecast of the unemployment rate.

for example, over the past year, unemployment has declined notably more quickly than we or .ther forecasters expected, this discrepancy reflects a number of factors including declines in participation. an important reason is the slow growth of productivity during this recovery. he intuitively when productivity gains were limited, firms need more workers, even if demand is growing slowly. disappointing growth accordingly must be added to the list of reasons that economic growth has been slower than hoped. incidentally, the slope pace of gains early in the recovery was not evident until well after the fact because of large data revisions, an illustration of the frustrations of real-time policymaking. are noton for we growth entirely clear. it may be the result of a severity of the financial crisis .

or it may simply reflect slow growth in sales which has led firms to use capital and labor less intensively or even maybe ms. measurement. alsoly, growth has affected a number of economies that were hard hit by the crisis. another possibility is weak productivity growth reflects longer trends unrelated to the recession. obviously the resolution of the puzzle will be important in shaping our expectations for a long-term growth. to this list of reasons for the slow recovery, the effects of the crisis, weaker than expected , i would addwth one more factor, namely fiscal policy. the fed policy was expansionary in 2009 in 2010. since that time, federal policy has turned restrictive according to the congressional budget office.

in addition, throughout much of the recovery, state and local budgets have been highly contractionary, reflecting their adjustment to sharply declining tax revenues. to illustrate the extent of fiscal tightness, at the current point of recovery from the 2001 recession, employment at all levels of government had increased by nearly 600 thousand workers. he contrast, in the current recovery, government employment has declined by more than 700,000 jobs, a net difference of more than 1.3 million jobs. there've been corresponding cuts in government investment in infrastructure for example as well as increases in taxes and a reduction in transfers. term stability is an objective, policies have likely been counterproductive. most importantly fiscal policy and monetary policy working in opposite your actions, the government is weaker than it

would be. the current mix is problematic when interest rates are very low as is the case today. monetary policy has less room to maneuver when interest rates are close to zero, while expansionary policy is likely more effect if and less costly in terms of priest debt burden when interest rates are pinned at low levels. balanced policy mix might avoid some of the cost of her low interest rates such as potential risk to financial stability without sacrificing jobs and growth. factors of hell back there covering not only to understand the recent past and also to think about the economy's. that theraging news is situation might be abating. the degree of restraint on economic growth seems likely to lessen somewhat in 2014 and even more so in 2015. meanwhile, the budgetary situation of state and local governments have improved

reducing the need for further sharp cuts. the aftereffects of the housing bust also appear to have waned. for example, notwithstanding the effects of higher mortgage rates, house prices have rebounded with one consequence being that the number of homeowners with underwater mortgages has dropped significantly as have foreclosures and mortgage latencies. household balance sheets of strengthened considerably with wealth and income rising and debt burden at its lowest level in decades. partly as a result of households improved finances, standards to households showed signs of easing though potential mortgage borrowers face impediments. businesses, especially larger ones are in good financial shape. a combination of financial healing, greater balance in the housing market, less fiscal restraint and continued monetary policy accommodation bodes well for u.s. economic growth in coming quarters. ofcourse if the experience the last two years teaches us anything, it is that we should be cautious in our forecast.

the about the rest of world? the u.s. recovery appears to be somewhat ahead of that of other advanced industrial economies, real gdp is above its peak in japan and remains two percent and three percent below recession peaks in the u.k. and euro area, respectively. i see some grounds for cautious optimism abroad as well. banksthe u.s., central and other advanced economies have taken significant steps to strengthen financial systems and provide policy accommodation. financial sector reform is proceeding in the contractionary effects of tight fiscal policies are waning. although difficult reform such as banking and fiscal reform in europe and structural reform in japan are still in early stages, wincing indications of better growth in the advanced economies which should have positive implications for the u.s.. emerging market economies have grown quickly after slowing in

the first half of 2013. although growth prospects for emerging markets continue to be -- last month we had a ceremony at the board to commemorate the centennial of the signing of the federal reserve act by woodrow wilson. over its 100 years of existence, the fed has faced numerous challenges. certainly the past few years will rank among some of the more difficult times for the u.s. economy and for the fed. the experience has led to important changes that are institution, including new tools , enhanced policy communication, a substantial increase in the institutional focus on step -- focus on policy and transparency. the fed andak of other institutions as if they were autonomous actors. of course they are not.

the fed is made up of people working within a structure and an institutional culture and set of values. i am proud of my colleagues at the fed for the hard work and creativity they have brought to bear addressing the financial and economic crisis. i think we have been well served by culture that emphasizes object of expert analysis, professionalism, dedication and independence from political influence. whenever the fed may have achieved in recent years reflects the efforts of many people who are committed individually and collectively to pursuing the public interest. although the fed undoubtedly will face some difficult challenges in the years ahead, our people and values make me confident that are institutional meet those challenges successfully, thank you. [applause]

thank you, very much. awesome in the literal sense not the undergraduate sense -- [applause] hear really awesome to such remarks and reflect upon an extraordinary institution that the federal reserve is. wo distinguished scholars to reflect not so much on what the chairman has said but on the state of monetary policy and finance, both looking backwards to think of what we have been through, but also looking forward to what the

future chairman and also forn young scholars who are thinking about where they are going to devote their scholarly lives. , he thet is ken rogoff thomas cabot professor of public dollars seat and professor of economics at harvard university. he has a most distinguished career in many areas, both in public service and in academic life. particularly in open economy macroeconomics and finance. been referred to his recent book with carmen reinhart called this time is different. bookis a very interesting about financial crises over the centuries. i would say read it and weep,

but before you weep, let's hear ken rogoff. [applause] >> thank you, very much bill. thank you to the economic association for inviting me here. i would certainly not presume to comment in this context on the chairman of the federal reserve's speech, which was a tour de force. awesome sums it up, as bill said. , this is a privilege for us to have ben bernanke here , who is one of ours and has had an exemplary career that i think undoubtedly inspires many young people and many older people here as well. there are many things to say about dan's tenure, but the one which just seizes me is the extraordinary creativity that

they exercised during the financial crisis, trying out things which just seemed surreal , like declaring that the are -- so theks federal reserve could give the money. there are many people who think they have 2020 hindsight and see clearly things the fed could have done better. i certainly can't think of a lot of people and things occur been done worse. i found their originality blinding more than thinking of 2020 hindsight. sometimes people say were problems as is raised? have we figured this out? we are in a research meeting here. we still don't have the great depression figured out. we know that we are way ahead of

where we were when ben wrote his 1983 article more than 50 years after it happened him about the importance of credit in the great depression, how that made it last. , talkedhs, and others about how the gold standard transmitted the great depression after that. i'm sure there will be a similar trajectory in our understanding of this crisis where people are continually reevaluating and looking at things from a fresh perspective. i would like to say someday day, i assume, ben, you're going to sit down and write a book after this. you don't have to say, but i would like to see a chapter on the wackiest ideas you didn't do that came up. i think when you appear on

letterman this would make a good top 10 list for him. you could make a couple appearances and not go over the same list twice. there certainly were many ideas that are floating out there that were not tried and maybe they are good and maybe they are bad but i will just list a few of them. then rightly said that fiscal policy was inadequate, largely declaring victory cream and surely, but i think there were many other problems. i will just mention a few ideas. thatnk one would be authorities around the world were somewhat reluctant to write down debt, for example there were plans to write down some try mortgage debt in the united states. marty feldstein and others proposed things, certainly carmen reinhart and i long advocated significant debt restructurings in the periphery of europe.

another idea, which is very current is to think about whether the federal reserve should allow temporarily higher inflation. they're different renditions of this. of unlimited policy tools, for example unlimited qe2 try to achieve that. a smaller idea, but i think an important one, is the idea of starting public infrastructure bank will credit markets were so weak, to see public-private partnerships. president obama suggested that. there were a lot of ideas about how to write down debt more dramatically during the crisis, for example nationalizing a major bank. many people pose to the idea would be to restructure it and quickly privatize it. i think when you look back on these ideas, you have to remember that there's a huge

overhang of uncertainty over the economy. jobses, one of the fed's is to be very creative. one of the government jobs is to be creative, but there is a balance and it is very hard to get that right. it is perhaps easy with 2020 , but is very hard to know precisely what works and what doesn't. been referred again and again to maintaining public confidence. how far can you push things and maintain public confidence. the same could be said for some of the problems they have dealt with in europe. speaking of europe, certainly for a couple of years it looked like the others you might drop, that the eurozone might fall apart. we do not know the bottom was. in terms of calibrating ideas, if you're just in the middle of restructuring your bank and then that happens, it could be very difficult. you're acting under enormous uncertainty. thinkement where i

academic research can inform and something we need to think about in the future is rethinking the business cycles after financial crises. we haven't really had a real financial crisis that was worldwide like this. only a handful in advance country since world war ii, but they are a very different animal and the length of time it takes to recover the per capita gdp where you started can be a very long time. the chairman gave some examples of countries who have not when theylevel of gdp started, but frankly when you have these long periods and you're talking about five years in the case of similar of periphery countries and maybe 10 years, before they are completely out of this, you need to think about per capita gdp. there's a lot of growth that

goes on and it is a pretty ugly 10 ore if you look at the 12 countries that have systemic 2007 and crises in 2008. only the united states and germany have reached the per capita gdp level where they have started. i should mention that my frequent co-author carmen reinhart giving a paper on this right now. thank goodness her plans had been canceled. she made it five minutes in advance of the session so i don't have to be in two places at once. 100ook at evidence from different systemic financial 1857-1913. this trajectory that we have experiences were common among them where you have to think in terms of 6-8 years as a typical amount of time that it takes to recover your previous level of per capita gdp.

that is not getting back to potential that is just getting back to where you started. it may be more than that for some of the periphery countries if world out look forecasts are correct. that is staggering. there are many factors which have made it so protracted. in europe i would identify the thatnbuilding is going on creates many problems, but certainly the lack of deleveraging and guaranteeing the financial or and preventing the crisis from working faster in the short run has left problems lingering in the long run. i will leave it to you to look at our paper about ideas about more eclectic approaches to debt restructuring, using elevated inflation, capital controls, financial repression and other

ideas that advance countries have used in the past to try to deal with debt problems. perhaps we need to look. i want to give a few comments about research that might come out of the financial crisis. sometimes graduate students say to me somebody is working on that very trust me, no one will have figured it out by the time you graduate. it is not a threat. one lesson we have certainly learned is the importance of looking at economic history. simply because long time periods can take in these rare events that you might not otherwise see and i also say the importance of looking at many countries. another area is looking at financial frictions. that sounds up to us may be to those of you who are not professional economists. when keynes came along in the

30s, do we understand those frictions yet? no, not really. those of you who follow those meetings realize that rather than necessarily agreeing with the freshwater and saltwater approaches, there is just more truth with certain techniques used. no one has really gotten to the root of it. the financial frictions anticipate a similar trajectory where as soon as you depart from complete markets -- let us understand what we mean by what we mean by supply equals demand. you create all sorts of ad hoc issues that we have to try to better understand how to approach. i think political economy is very important in thinking about