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tv   Key Capitol Hill Hearings  CSPAN  January 6, 2014 10:30am-12:31pm EST

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offered qualitative guidance regarding the future path of interest rates. with short-term rates near zero, expanded guidance about intentions for future 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 rates supplements the broader policy framework that i described earlier by providing information about how the committee expects to achieve its stated policy objectives despite the complications 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 anticipated future policy has evolved through several stages. in december 2012 the committee introduced state con tip gent guidance announcing for the first time that no increase in
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the federal funds rate target should be anticipated so long as the unemployment rate remained above 6.5%, inflation between one and two years ahead was projected to be no more than half a percentage point above the committee's longer-run goal and expectations continued to be well anchored. my colleagues and i have certain sized that the statements in that guy dance were thresholds, not triggers. crossing one of the thresholds would not automatically give rise to an increase in the federal funds rate target. instead, it was signaled only that it would be appropriate for the committee to begin considering based on a wider range of indicators whether and when an increase in the target might be warranted. large scale asset purchases also provide monetary accommodation by lowering long-term interest rates. working through the portfolio balance channel, asset purchases reduced the supply of loan duration assets in the hands of the public, thus reducing longer
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term yields. at times the decision to begin with or extend an asset purchase program may also have a signaling effect to the extent that market participants see that decision as indicative of policymakers' commitment to an accommodative policy stance. however, it's important to recognize that the potential signaling aspect of asset purchases depends on the broader economic and policy context. in particular, the fomc's decision to modestly reduce the pace of asset purchases at its december meeting did not indicate any diminution of its commitment to maintain a highly accommodative monetary policy for as long as needed. rather, it reflected the progress we have made toward our goal of substantial improvement in the labor market outlook that we set out when we began the current purchase program in 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
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unemployment rate threshold of 6.5% is crossed, especially if projected inflation continues to run below the committee's 2% longer-run goal. have these unconventional tools been effective? skeptics have pointed out that the pace of recovery has been disappointingly slow with inflation adjusted gdp growth averaging only slightly higher than 2% over the past few years and inflation still below the committee's 2 percent longer-term target. however, as i will discuss, the recovery has faced powerful headwinds suggesting that economic growth might well have been considerably 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 appear to shift interest rate expectations, and the prepond answer of studies show that asset purchases push down longer-term interest rates and
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boost asset prices. these changes in financial conditions in turn appear to have provided material support to the economy. once the economy improvers sufficiently so that -- improves sufficiently so that unconventional tools are no longer needed, the committee will face implementation and ultimately the design of the policy framework. large scale asset 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 fomc's ability to raise short-term nominal interest rates when appropriate. however, the federal reserve now has effective tools to normalize the stance of policy when conditions warrant without reliance on asset sales. the interest rate on excess reserves can be raised which will put upward pressure on short-term rates. in addition, the federal reserve will be able to employ other tools such as fixed rate, overnight reverse repurchase
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agreements, term deposits or term repurchase agreements, to the drain bank reserves and to tighten control over money market rates if that proves necessary. as a result, at the appropriate time the fomc will be able to return to conducting monetary policy primarily through adjustments to the short-term policy rate. it is possible, however, that some specific aspects of the federal reserve's operating framework will change. the committee will be considering this question in the future, taking into account what it has learned from this experience with an expanded balance sheet and the new tools for managing interest rates. in the remainder of my remarks, i will reflect on the state of the u.s. recovery and its prospects. the economy has made considerable progress since the recovery officially began some four and a half years ago. payroll employment has risen by seven and a half 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
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was 5.5% above its pre-recession peak. the unemployment rate has fallen from 10% in the fall of 2009 to 7% recently. industrial production and equipment investment have matched or exceeded pre-recession peak as. the banking system has been recapitalized, and the financial system is safer. when the economy was if 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 this progress, the recovery clearly remains incomplete. at 7%, 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 who are working part time for economic reasons have improved less than the unemployment rate. labor force participation has continued to decline, and
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although some of this decline reflects longer-term trends that were in place prior to the crisis, some of it likely reflect potential workers' discouragement about job prospects. in retrospect at least, many of the factors that held back the recovery can be identified. some of these factors were difficult or impossible to anticipate such as the resurgence of financial volatility associated with the european southern debt crisis -- sovereign debt crisis and the economic effects of natural disasters in japan and elsewhere. other factors were more predictable. in particular, we appreciated early on -- although perhaps to a lesser extent than we might have -- that the boom and bust left of severe imbalances that would take time to work off. as carmen rhine half and ken rogoff has mentioned, economic activity tends to be anemic especially when the preceding economic expansion was accompanied by rapid growth in credit and real estate prices. weak recoveries from financial crises reflect in part the
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process of deleveraging and balance sheet repair. households pull back on spending to recoup lost wealth and reduce debt burdens while financial institutions restrict credit to restore capital ratios and reduce the riskness with their portfolios. in addition to these financial factors, the weakness of the recovery reflects the overbuilding of housing and to some ec tent commercial real estate prior to the crisis together with tight mortgage credit. indeed, recent activity in these is in comparison to the rapid recovery typically seen. although the federal reserve like other forecasters have tended to be optimistic in its forecast of real gdp during this recovery, we have also at times been too pessimistic in our forecasts of the unemployment rate. for example, over the past year unemployment has declined more quickly than we and other forecasters expected even as gdp growth was moderately lower than
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a year ago. this represents a number of factors including declines in preparation, but an important reason is slow growth of productivity curl this recovery. when productivity gains are limited, firms need more workers even if demand is growing slowly. according toly, it must be added to the list of reasons that economic growth has been slow or than moped. incidentally, the slow pace early in the recovery was not evident until well after the fact because of large day revisions, an illustration of the frustrations of realtime policy making. the reasons for weak productivity growth not entirely clear. it may be a result of the severity of the financial crisis. for example, if tight credits have inhibited the formation of new firms or simply reflect slow growth in sales which have led firms to use capital and labor less intensively. notably, productivity growth has
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also flagged a number of foreign economies that were hard hit by the financial crisis. yet another possibility is weak productivity growth reflects longer-term trends largely unrelated to the recession. obviously, the resolution of the productivity puzzle will be important in shaping our expectations for long-term growth. to the list of reasons for the slow recovery, the effects of the financial crisis, problems in housing and mortgage markets, weaker than expected productivity growth and events in europe and elsewhere, i would add one more significant factor; namely, fiscal policy. federal fiscal policy was expansionary in 2009 and 2010. since that time, however, federal fiscal policy has turned quite restrictive according to the congressional budget office, tax increases and spending cuts likely lowered output growth in 2013 by as much as one and a half percentage points. in addition, throughout much of the recovery state and local government budgets have been highly contractionary reflecting their adjustment to sharply
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declining tax revenues. to illustrate the extent of fiscal tightness, at the current point in the recovery from the 2001 recession, employment at all levels of government had increased by nearly 600,000 workers. in contrast in the current recovery, government employment has declined by more than 700,000 jobs, a net difference of more than 3.3 million jobs -- 1.3 million jobs. there have been corresponding cuts in government investment and infrastructure, for example, as well as increases in taxes and reductions in transfers. although long-term fiscal sustainability is a critical objective, excessively tight, near-term fiscal policies have likely been counterproductive. most importantly, with fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be. but the current policy mix is particularly problematic when interest rates are very low, as is the case today. monetary policy has less room to maneuver while expansionary
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fiscal policy is more effective and less costly in terms of increased debt burden when interest rates are pinned at low levels. the more balance policy mix might also avoid costs of low rates without sacrificing jobs and growth. i discussed the factors that have held back the recovery not only to better understand the recent past, but also to think about the economy's prospects. the encouraging news is that the headwinds identify mentioned may now be abating. near term fiscal policy at the federal level remains restrictive, but the degree of restraint seems likely to lessen somewhat in 2014 and even more so in 2015. meanwhile, the budget tear situations of state and local governments have improved reducing the need for further sharp cuts. the after effects of the housing bust also appear to have waned. for example, notwithstanding the effects of somewhat higher mortgage rates, house prices have rebounded with one
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consequence with being that the number of homeowners with underwater mortgages has dropped significantly as have foreclosures and mortgage delinquencies. household balance sheets are strengthened considerably with the household debt service burden at its lowest level in decades. partly as a result of households' improved finances, lending standards to households are showing signs of easing, though potential mortgage borrowers still face impediments. businesses, especially larger ones, are also in good financial shape. the combination of financial healing, greater balance in the housing market, less fiscal restraint and, of course, continued monetary policy accommodation bodes well for u.s. economic growth in coming quarters. but, of course, if the experience of the last few years teaches us anything, it's that we should be cautious in our forecast. what about the rest of the world? the u.s. recovery appears to be somewhat ahead of that of other advanced industrial economies. for example, real gdp is still slightly below its pre-recession
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peak in japan and remains 2% and 3% below pre-recession peaks in the u.k. and euro area respectively. nevertheless, i see some grounds for cautious optimism abroad as well. as in the united states, central banks and other advanced economies have taken significant steps to strengthen financial systems and to provide policy accommodation. financial sector reform is proceeding, and can the contractionary effects are waning. although difficult reforms such as banking and fiscal reform in europe and structural reform in japan are still in early stages, we've also seen indications of better growth in the advanced economies which should have positive implications for the united states. emerging market economies have also grown somewhat more quickly after a slowing in the first half of 2013. although growth prospects for the emerging markets continue to be good, here, too, the extent and effectiveness of structural reforms like those currently underway if china and mexico --
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in china and mexico will be critical factors. last month we had a ceremony at the board to create the signing of the federal reserve act by president woodrow wilson. over its 100 years of existence, the fed has faced numerous financial and economic 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 head to important changes at our institution including new monetary policy tools, enhanced policy communication, a substantial increase in the institutional focus on financial stability and macroprudential policy and increased transparency. we up speak of the principal reserve and other institutions as if they were -- federal reserve and other institutions as if they were autonomous actors. of course, they are not. the fed is made up of people working with an institutional culture and set of values. i'm very proud of my colleagues at the fed for the hard work and
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creativity that they have brought to bear in addressing the financial and economic crisis, and i think we and they have been well served by a culture that emphasizes objective, expert analysis, professionalism, dedication and independence from political influence. whatever the fed may have achieved in recent years reflects the everetts of many people -- efforts of many people who are committed to pursuing the public interest. although the fed undoubtedly will face some difficult challenges in the years ahead, our people and our values make me confident that our institution will meet those channelings successfully. thank you. [applause] >> thank you very much.
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that was, it's just really awesome many, i mean, in the literal sense, not the undergraduate sense. [laughter] it's truly awesome to hear those set of remarks and to reflect upon an extraordinary institution that a the federal reserve is. so we have two, i've asked two established 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 lessons are for perhaps future chairman or chairwoman. and also for scholars, young
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scholars who are thinking about where they're going to devote their scholarly lives. so the first is ken rogoff. ken is the thomas cabot professor of public policy and professor of economics at harvard university. hehe has a most distinguished career in areas, both in public service and in academic life, particularly in open economy macroeconomics and finance. ben referred to his recent book with carmen reinhart called this time is different. this is a wonderful -- well, that's not the right word. this is a very, very interesting book about financial crises over the centuries. and i would just say read it and weep. but before you weep, let's hear ken rogoff. [applause] >> thank you very much, bill. thank you to the american
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economic association for inviting me here. i certainly would not presume to comment in this context on the chairman of the federal reserve's speech which was a tour de force be, awesome i guess sums it up, as bill said. [laughter] certainly, you know, 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 older people here as well. there are many things to say about ben's tenure, but i think, you know, the one which just, you know, seizes me is the extraordinary creativity that they exercised during the financial crisis, trying out things which just seemed surreal like declaring that the investment banks are banks so
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that the federal reserve could give them money. there are many people who have, think they have 20/20 hindsight and see clearly things the fed could have done better. i certainly can think of a lot of people and things that could have been done worse, and i found their originality blinding, thinking of 20/20 hindsight. sometimes people in the press or, you know, friends say, well, what problems has this raised? have we figured this out? i think you have to put in context. we're in a research meeting here. we still don't have the great depression figured out. we know that we're way ahead of where we were when ben wrote his 1983 article more than 50 years after it happened about the
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importance of credit in the great depression, how that made it last. jeff sachs and others talked about how the gold standard transmitted the great depression after that, and i'm sure there'll be a similar trajectory on our understanding of this crisis. where people are continually reevaluating, look at thing, looking at things from a fresh perspective. i would like to see someday -- i assume, ben, you're going to sit down and write a book at some point after this, you don't have to say -- but i would like to see a chapter on thebackiest ideas you -- whackiest ideas you didn't do that came up. [laughter] and i think this, by the way, when you appear on letterman would make a good ten list for him. [laughter] and you could, i expect, probably make a couple of appearances and not go over the same list twice. there certainly were many ideas
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that were floating out there that were not tried and babe they're good and maybe their bad, but i'm just going to list a few of them. ben rightly said that fiscal policy was inadequate, i think, largely declaring victory prepa curely. but -- prematurely, but i think there were many other problems. but i would just mention a few ideas. e think one -- i think one would be that i think authorities around the world were somewhat reluctant to write down debt, for example, there were plans to write down subprime mortgage debt in the united states. marty feldstein, many others, have proposed things. certainly carmen reinhart and i long advocated significant debt restructurings in the prif try of europe. another idea which is very current is to think about whether the federal reserve should allow temporarily higher inflation. there are different renditions of this.
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mike whitford has a very precise one, and potentially use unlimited policy tools, for example, unlimited qe to try to achieve that. a smaller idea but i think an important one is the idea of starting public infrastructure bank while 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 proposed that. the idea would be to restructure it and quickly privatize it. and i think when you look back on these ideas, you have to remember that there's a huge overhang of uncertainty over the economy. so, yes, one of the fed's jobs is to be very creative. one of the government's jobs is to be very creative. but there's a balance, and it's
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very, very hard to get that right. it's perhaps easy with 20/20 hindsight, but it's very hard to know precisely what works, what doesn't. and ben referred again and again to maintaining public confidence, how far could you push things and maintain public confidence. and the same could be said for some of the problems that they've dealt with in europe. and speaking of europe, certainly for a couple years it looked like the other shoe might drop, that the eurozone could fall apart. we didn't know where the bottom was. and in terms of calibrating ideas, for example, if you're just in the middle of restructuring your banks and then that happens, it could be very difficult. so you're acting under enormous up certainty. one element -- uncertainty. one element where i think academic research can inform policy and maybe we need to think about in the future is rethinking the business cycles
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after financial crises. we haven't really had a real financial crisis that was worldwide like this and only a handful in advanced countries 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 haven't reached their level of gdp of when they started, but frankly, i think when you have these long periods when you're talking about five years in the case of some of the periphery countries, it may be ten years before they're completely out of this, you need to think about per capita gdp. there's a lot of population growth that goes on then, and it's a pretty ugly picture. if you look at the ten, twelve countries that had systemic financial crises in 2007, 2008,
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only the united states and germany really reached the per capita gdp level where they've started. i should mention that my frequent co-author, carmen reinhart, is giving a paper on this right now. thank goodness her plane 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. where we look at evidence from a hundred different systemic financial crisis from 857 to -- 1857 to 1913. and this trajectory that we have experienced is very common among them where you have to think in terms of six to eight years as the typical amount of time that it takes to recover your previous level of per capita gdp. that's not getting back to potential. that's just to get back to where you started. and it may be more than that for some of the periphery countries if imf world economic outlook
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forecasts are correct. in other words, the cumulative loss here is something that is just staggering. there are many factors, i think, which have made it so protracted in europe. i would particularly identify the nation building that's going on that creates many problems, but certainly the lack of deleveraging in guaranteeing the financial sector and preventing the crisis from morph offing faster in the short run, it has -- morphing faster in the start short run, it 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, um, capital controls, financial repression and other ideas that advanced countries have used in the past to try to deal with debt problems that perhaps we need to look to. i wallet to give a few -- i want
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to give a few comments about research that might come out of the financial crisis, and, you know, sometimes graduate students say to me, oh, somebody's already working on that. just trust me. no one will have figured it out by the time you graduate. it's not a threat. i think one lesson we've certainly learned is the importance of looking at economic history. that, i think, across many fields simply because long time periods can take in these rare events that you might not otherwise see, and i would also say the importance of looking at many countries. another area is looking at financial frictions. that sounds, you know, obtuse maybe to some of you who aren't professional economists. when keynes came along in the '30s, i think the big insight was that product markets and labor markets might not clear right away. there could be nominal rigidities that prevent that, and that really started modern macroeconomics. do we understand those frictions
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yet? no, not really. those of you who follow these meetings will realize that rather than necessarily agreeing the freshwater and saltwater approaches to these things, there's just more of a truce with certain techniques used. but nobody's really gotten to the root of it. with financial frictions, one can anticipate a similar trajectory where as soon as you depart from complete markets -- and let's understand what we mean by that, supply equals demand, that's what we understand -- as soon as you're putting frirks friction in the way of supply equals demand, you create all kinds 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 these problems. i've worked on sovereign debt my whole life. it is fundamentally a political economy problem. ability to pay is not really the issue so much as willingness to pay or fairness as you have it.
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but i think these are very important things. be let me pick a more mundane area where perhaps the financial crisis ought to make us think more, which is measurement. .. >> there are conceptual issues you'll hear about them at these meetings like intangible investments where you reorganize offices, you reorganize firms. perhaps train people in ways
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that don't show up in gdp but they are a lot like investments. we don't measure them. another issue where measurement is a big problem, it's very, very hard to properly measure. the fed targets that but the truth is we don't really know at a deep economic level what it is, especially when we're making long comparisons over long periods. the problem, there are many problems. a wonderful job in the late 90s exploit this so i would say the central problem is they are constantly new goods. i think you gave an example of maybe what was used in the world's fair at 99, 10% were still been used for something like that, if i'm still remembering. there are things like the internet, cell phones, which we just don't properly integrate into the cpi. they try to make adjustments. it's very hard. and when you try to make these
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comparisons, what was the real wage 20 years ago, what is it today? is very, very sensitive to how you're measuring inflation. similarly what is the real interest rate? we kind of suspect that we overstate inflation, that's part of the reason i think for the 2% as opposed to zero. some people think it should be 4%, but we don't really have necessarily have a precise idea. so let me just close with thoughts for the next fed chairman. i think the big question on the front burner is whether in the near term this should be a more eclectic policy towards inflation, perhaps raising the trigger point in the feds rule for how much inflation they will tolerate. for europe, i think they need to have more the clock tick policies towards dealing with debt rather than just hoping to
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grow their way out of it. for economic researchers, i have the happy message that the crisis will provide fertile ground for academic research for a long time to come. a.q. [applause] >> it's always a great pleasure to hear ken reflect and push all my buttons. i was just talking to someone who came into the meeting from the bureau of economic analysis about how are we doing on measuring the conjugation of the internet to economic welfare and to output? and there was a long silence, not very well. and then one other thing, i do think this issue is a puzzle about why is it that business
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cycles caused i financial crises are different? bears persuasive evidence they are different, but you just look at your standard model, it's not at all clear why this should be different so this is another one that will outlive the career of the current graduate students. so our second comment will be by anil kashyap, the edward equal brown professor of finance at the booth school, business at the university of chicago. is research -- banking, business cycles, corporate finance, price setting and monetary policy. but among his outstanding contributions is a recent one where he organized a panel of economic experts to determine what economists think about key economic issues.
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and check it out. it's really interesting. you know what you think and you know what your friends think, but this is a sample of people from freshwater, no water, and salt water, underwater, you name it. and it's really surprising. now, when ken mentioned some of the bad ideas, he didn't mention going back to the gold standard as one of -- but if you want to know what economists think about the gold standard, about the u.s. going back to the gold standard, you might be really surprised. so i would check it out. but before we do that, professor kashyap. [applause]
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>> all right. thank you, bill, for the kind words for our panel, and for including me in this session. it's a privilege and an honor to speak with chairman bernanke your i'm going to be more forward looking in my comments. the transparency of the federal reserve means i was able to predict quite a bit of what the chairman was going to talk about, so i'm going to give some open questions i think on several other things he discussed. and have it and i'm going to have a little tribute, it may give me the trouble, maybe it will go viral, we'll see. but the web address up here for those of you want to see this video that i'm going to play at the end, so you can note that. the same web address will allow you to sign-up for the experts panel. i'm going to talk about for questions, three of which were directly in the chairman's remarks, one about leverage, and
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the role that leverage plays in financial stability. a second one about forward guidance and how forward guidance operates. third one about key word, tapering. and the events of the past summer, and then finally, only really thoughtful thing i guess i have to say about this last point which i think is a great open topic that is someday going to get someone in nobel prize. i'll try to play what they mean by that but in terms of deep questions that the crisis has raised, trying to figure what the social value of liquidity creation is a great thing. you missed jeremy stein's speech at the launch, you can go download his remarks on this, closer related to some of the south jeremy was talking about.
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so, this first vote could have almost been a quote from his speech. it's almost boilerplate language and most federal reserve discussions about the post crisis world. they say something like, we are looking for builders in leverage. we understand how leverage amplifies -- amplifies. we look across the financial system and we see some markets that look unusual but we don't see a big buildup of leverage and, therefore, we are somewhat confident that we are not headed down a replay. that's a little bit of fighting the last war. i think we now understand much, much better that leverage and amplify shocks at start up small, but i think it's not yet established that if you don't have leverage, that means you can't have financial instability. there was a nice keynote address to the san francisco fed asia
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conference last november, two months ago now, where he laid out a framework where asset managers, interacting just in asset markets can create kind of a feedback loop again be destabilizing. i listed the mechanisms that's here. i don't want to get tied exactly to that mechanism, but i do think we need to be on guard for mechanisms that can bring and stability that don't require leverage. so fire sales can come before selling and one reason for force selling is because of some sort of debt and leverage, but that's not the only reason that you can get it. i think trying to decide whether all we have to do is to essentially keep our eyes out for leverage is something that's a great open question and i think this will be an area where there's a lot more work. another mechanism where asset managers are chasing returns
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that gives the same kind of labor where there can be kind of a positive feedback, piling into certain traits, pushing up prices, reinforcing themselves and then you get a moment of truth and then it unwinds quite rapidly. so that's something i think is a great open question and one that we should study. it leads me directly then to my second question which is, can we go by this so-called separation principle? if any of you, i don't know if you spent time at the meeting but lars has talked at length about this. he has a great quote there that monetary policy should be the last line of defense for financial stability, not the first line. there is this notion you often hear that says, we've got all these regulatory tools that we can use to constrain risk-taking in the financial system.
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we should apply those to worry about financial instability. we shouldn't burden the short-term interest rate with more work. it's already got inflation and employment, now you're going to need financial stability. how are you going to do all this? i think one issue is what happens if the kind of example i just gave you is the way the world actually works? you have asset managers interacting in asset markets where there is no intermediary, no intermediation and you still get the cycles. in that world, if what you're going to try to do is something with bank capital requirements or liquidity requirements or anything like that, those tools are also very second best for confronting those types of problems. whereas the short-term interest rate in some sense is a direct input. and effect forward guidance is a particularly effective, may be
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dangerous input in the sense that if you think about the incentives of asset managers, if you tell them you can find this asset by rolling over short-term funding without much risk of rates rising, you are going to fool people into e*trade and then the question is, where -- will there be a moment of reckoning when that has to unwind and everything reverses? if you think that you can get this instability coming out of asset management behavior are just other mechanisms that involve fire sales, don't directly involve immediate reach -- intermediaries. there's a real question of whether not will have the tools we want to use them. i think it's instructive to remember that it took a long time for the fed to actually have the intellectual framework and then the public trust to be allowed to take the punch bowl away from the party with respect to inflation. i tend to think that even if we had known where we were headed with respect to the housing
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markets, it would've had to be a very brief chairman to try to do something like raise down payment requirements in 2005-2006. there would've been all kinds of people saying you're hating on the poor, this is discrimination. you're not letting people live the american dream. it's not clear to me wit where s we understand and we will be willing and able to use and maintain political independence, if we use those in the wake of this crisis. we have all these ideas and we've got many examples, wha we really don't have much experience doing it. it is this advantage of the short-term interest rate at its direct and it also, in this case i think, could be part of a mechanism that could generate instability. that's the second question. third question is, want to make of the events of last summer. this is a chart that one of my colleagues created that shows you the remarkable events around
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the potential talk of paper and head fake in september. and i think it's difficult to square why all these markets, and many other markets, that's an intermediate bond fund and home builders. you can see spectacular returns ride around the day when it looked like the fed was maybe going to taper and then maybe the world. why do i say this was the interesting question for research? the conventional view, i guess the term was going to say something about this. actually you did say something about this. you said we have the tools and if we start easing back our asset purchases, it doesn't take anything necessarily about the direction of the short-term rate. so that is one interpretation of what was happening, that people just couldn't believe that it was possible to lift your foot off the gas on the taper tool
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and you wouldn't do something in the short-term interest rate. but there are other interpretations that are less benign, and i think those involved views that may be markets are fundamentally about this agreement and that we have very different worldviews that many in the financial markets had the part of what is going on every day is that you're mediating this agreement. if that's true, the way i prefer to interpret what happened in june was, for a couple years now even you have been putting people into these aggressive position saying, risk on, take your gamble. and then all of a sudden you raised the possibility that perhaps the accommodation is going to slow. and that's the point the people who have been most confident and most optimistic about the prospects of continued easing policies are going to be the ones that probably have the most aggressive positions that will
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suffer the most immediate losses. so if you're familiar with -- that triggers a rebalancing where people take losses, and the people that replace the optimists probably step in and are less willing to use leverage itself. being a little schizophrenic. i'm telling you a leverage story. there perhaps with some of the. if that's true, if there's anything like this, it means that when you're setting communication policy, you can't -- you can if there's a representative agent. you have to be cognizant of the possibility you're going to say one thing and the guys just want to hear go, go, go, are going to take that and kind of push into certain types of risk-taking. that's a much more tricky communications game. i think it's also safe to say part of what we've learned over the last couple of years is because of the increased
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transparency, we know a lot more about what many policymakers think. and i think it's safe to say that there is not a representative foc member. there are different camps. we are reminded right now that in any given year you can lose three or four people who are governors that can just leave. so when you're trying to forecast what the fed is going to be doing in 2016, he may not even know who's going to be making those decisions. and i think this means we should rethink some of these models that involve an institution like the fed, committing to do something in two and half years when you don't even know who the people will be. i'm just not sure what the fed can do that is institutional feasible. i think that's another area. then i'll close with this. this is a little play on ed prescott's famous theory ahead of measurement.
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i'm struck by how little attention the public has paid to what's actually going on with the balls are rules. -- the basel rules. is an attempt to be made potentially monumental in the way that we approach banking regulations that are going to violate attention to whether not the banks have enough assets in hand and a funding structure in hand to avoid fire sales. so there are two potential tools, one of them has to do with the amount of short-term fun you can get. the other has to do with the amount of assets you can have that you can sell and hopefully not push prices around. so this is under way. it is being phased in, taking a long time. there's been thousands of comments on it. when you think about it, we have no framework for thinking about liquidity at the highest level. we are greatly assisted in most aspects of corporate finance by the miller propositions that
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tell you resize conditions under which the structure of an organization's funding is irrelevant. we don't have anything like that for liquidity. we have no idea what the optimal amount of liquidity creation and society should be. we don't know if we have too much or too little of it. we don't have an idea about what frictions lead banks to be organized in the way that they are organized, shadow banks be organized in a way shadow banks organized. so we can't talk, for instance, about whether the private incentives are different from social incentives to create liquidity. i think this is just a huge challenge because if you're going to do this regulation you can't even tell directionally if you are moving towards or away from the first best. it's hard to decide how to calibrate your tools. so i think this is probably -- if i could solve one problem in
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all of economics i would try to solve this one. i'm not talented enough to figure out exactly how to do this, but i think the returns to trying these are very, very high. so now i'm probably going to get electrocuted but i'm going to try this. i made a tribute to you. so let's hope it works. ♪ ♪ you know greenspan and poker and martin and miller and ♪ ♪ and fisher and raskin and yelling ♪ ♪ but do you recall ♪ the most famous banker of all? ♪ ben bernanke, the central bank are ♪ ♪ had a very shiny dome ♪ and if you over saw it
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♪ you might even say it glowed ♪ ron paul and all the other bold above is ♪ ♪ used to laugh and call him names they note they never let the chairman ♪ ♪ play in any policy james ♪ but then -- is your dome is so bright, won't you save the world tonight? ♪ then all the economists loved him ♪ ♪ and they shouted out with billy ♪ ♪ ben bernanke, the central banker and ♪ ♪ you'll go down in history in ♪ yo go down in history ♪ [applause]
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>> chairman bernanke is a very humble guy. it's common when you get an economist together or people to say i can't believe that kind of lack of gratitude that the politicians have often shown for what they did in the crisis. i think we are very close to the great depression to .0. if it hadn't been for the chairman's leadership things could been very, very different. it's unfortunate, i think economists recognize this, i'm sure history will treat you really, really well. it's too bad that there hasn't been more fun as it's been going on. [laughter] >> can't even give you a gift because of the giving limit. but after your out i will offer you some tickets and. [applause]
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>> i have to admit that when you organized this session, your nightmare is some fellow who thinks he's a comic. [laughter] and is going to produce something. for the last week we've been talking about, well, thi this ts really a good idea? [laughter] like, if it goes over well, you will be famous. but if it goes over badly you will be the butt of jokes on "saturday night live." well, that went really well. so, we have some time four questions. so there are two mics over there. we don't have a lot of time, but
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the chairman very graciously offered to follow-up and allow you to follow-up with questions. the ground rules are the standard ground rules, which are questions and no speeches. when it crosses the line and i will intervene. so let's start over there. >> thank you for your speech, chairman bernanke. in 2008, the fed acted aggressively to protect money market mutual funds investors from small negative returns. yet equity mutual funds investors took negative returns almost every other day. and, in fact, they lost about 50% between the crisis in early 2009. so if investment should all be profits and no losses, shouldn't of the fed have acted equally aggressively to buy up stocks? or was it a big mistake to support the money market mutual
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funds? >> before answer the question i had to very distant colleagues who are also happy i'm sure to take -- any questions that might come up, particularly about production values. the actions which by the way were led by the treasury department to protect the money market funds were not about protecting the investment of any particular individual or group. it was about avoiding precisely this issue of -- one of the key ideas in a financial crisis are what's called firesale externality. the idea that when large numbers of people are forced to sell assets at a given moment, it will drive down prices well below sort of the sustainable price level because not enough buyers in a very short run and that will feedback, reduce the net wealth of other asset holders who in turn will be forced to sell and get into a
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vicious cycle. the money market funds that were in a run fo were pulling cash ot of, first, the repo markets which finances a lot of assets held by broker-dealers and others, and also the commercial paper market which funds both financial and nonfinancial firms in the short term. so it wasn't at all an issue of protecting the wealth of any given group, in the same sense that intervening with various companies was not an attempt to protect the wealth of any given group but it was rather an attempt to try to avoid a cascade of falling asset values and fire sales, which the run on the money market funds was already creating spin by the equity funds had to sell assets. a cascade of 50%. >> but they were not runnable. that's the point. >> neither are money market mutual funds. you get 50% more if you put
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money in. >> next question. >> my question is a mechanism that -- >> can't hear you. is that on? >> my question is, the mechanism by which quantitative easing is seen to work. your original statement back in what is called qe1 suggested that what you were doing was targeting higher inflation and that -- or avoiding deflation, and the impression that that generated was that higher inflation would generate more stimulus. in your more recent statement suggests that quantitative easing works through reducing interest rates, buying securities which reduce interest rates. which is the more important mechanism which you are attempting to use?
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rising inflation or lowering interest rates? >> no, i think you're mixing together goals and mechanisms. the goal was to avoid deflation. whenever concerns besides the weak recovery, at the time of qe2, was that inflation was very soft and moving down. we were concerned about deflation risk. and, of course, deflation is not a 01 thing. even low inflation can create problems. so we adopted the quantitative easing policy which the objective of raising the inflation rate to meet our target. and at the same time by doing so, of course we would lower real interest rates and help the real economy. so that was the objective. the mechanism, and, of course, there's a lot of debate about how exactly this works and so on, but the mechanism that we have focused on is based on sort of a tobin friedman kind of
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world in which there are imperfect substitute those between different assets. buying has an effect. that's the mechanism which i discussed today which i talked about in jacksonville right before qe2 as well. that's the basic mechanism that we have argued. >> thank you. i just want to ask if you could share with us a little bit more on sort of how you balance transparency and accountability at the central bank? and what challenges other central bankers might face in trying to follow your example. >> why is it a question of balancing? so, well, okay. let me -- let me try a specific example. i think i understand where you're coming from here. so the very specific example, i have a long footnote in my
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speech if you'd like to take a look at it. it's on the fed website, which talks about the so-called audit the fed legislation. that legislation is misnamed but it's not about auditing in any common sense at all. as i tried to emphasize in my spoken remarks, the fed is thoroughly audited. all its financial operations, transactions are thoroughly audited, controls everything. and as i said we've always had a very good record there. moreover, the gao, the government accountability office which is an arm of congress has access to virtually everything that the fed does and can comment, criticize, report, et cetera. the one exception and here's what i think you're talking about, the one exception is that there is an exemption in the law for gao auditing individual monetary policy decisions.
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so the gao under current law is not allowed to come in to give me the records of your last meeting. we want to see that and having anything review of whether or not you should have raised or lowered interest rates the last meeting. and so that exemption in gao of law which was put in the '70s by the congress, we view that as an appropriate balance on the one hand, the fed is very transparent, very open. gao has brought access to all of our activities. of course, monetary policy is very transpired also. the minute the transcripts, five years later, et cetera, et cetera. the congress took the view in the '70s that exempting monetary policy decisions was needed in order to prevent congress from using gao audits as a tool for influencing short-term decisions made by the fed. so there's a balance as you point out between dependence and
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transparency. what the so-called audit the fed legislation in various forms would do is remove that extension. that's a good thing it would do. doesn't do anything else. and removing that again would mean for gao could come in, the day after an fomc meeting and second-guess the decision which would be pretty inconsistent with any common view of central bank independence. so i think the palace where it is not as appropriate. i think i would resist giving congress day after authority to second-guess our policy decisions. i think it would be bad for the economy if the public and market makers, market participants, thought that essentially whatever the fed did was subject to immediate reversal, or substantial pressure either congress. >> so i asked my students if
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they had a question for the chairman. and there were a number of them. one which i would ask is, what about bitcoin? [laughter] which i know he knows about. but i thought a real interesting ones was this. if you knew in 2006 what you know now, what step or steps would you have taken them to prevent or ameliorate the financial crisis and subsequent zero downturn? >> that's a really unfair question. [laughter] i mean, the reality is that everybody, every policymaker has to make -- this is the niche of policy but it has to be made in very, very foggy conditions, very imperfect information. a lot of uncertainty. in order to do anything i think
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i would not have to know everything in advance, everybody else would have to know that i knew everything in advance. in other words, if i went out and started saying, all of a sudden i'm arbitrarily raising capital requirements by five percentage points, the banks would say, what? will be difficult to get congress and the of the regulators and so on to agree. i think the crisis was a very complex, involving many, many issues. one of the concerns, i want to respond a little bit indirectly because of a point that anil raised, which macroprudential type measure to one of the practical questions is even if you think you've got macroprudential measures that were, can you put in place quickly enough and responsibly enough, preemptively enough? i think that's one of the things, the bank of england is working to try to find mechanisms for more rapid response. i think that's one of the real challenges. for example, before the crisis the fed put in a new guidance on
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commercial real estate for banks which meant strengthened the criteria for risk management, and said you shouldn't have too much ciardi on your balance sheet, et cetera, et cetera. that process finished the it took more than two years negotiations and discussions and sending it out to the banks and the banks have time to implement it. in order to make this work, macroprudential think star, you're going to have to have a more nimble system. i think that's a big part of this. the answer to the question that bill raised is that, i'm sure there are some things that could've been done, but unless everybody collectively knew what was going to happen and was willing to work together cooperatively to take those necessary steps, it's not obvious that you could have avoided it. >> maybe one more question.
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>> you rightly expressed concern about the premature phaseout of this ghosting was at the end of 2010. do you think in a future session it might be helpful if the federal reserve were able and willing to give it ashtrays for to the treasury so congress could sustain this ghosting was further without additional borrowing? >> -- fiscal stimulus spent i don't think i'm going there. [laughter] first of all, that's not going to work because -- presumably the dead has an inflation target. even if, let me besides everybody. this is entirely hypothetical, okay? [laughter] even if that were to happen and i think -- no doubt illegal anyway, but even if it were to happen at some point in the future the fed would have to undo that. in order to get the money supply consistent with its inflation target and, therefore, it actually would not affect the
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long run debt held by the government. so i'm not at all sure that would even work in theory. it's early sounds like a bad idea in any case. i think fiscal policy ought to be made by the congress and thinking come principally about spending taxes and debt issues. thank you all very much. [applause] >> well, the time has come to bring this session, wonderful session to a close. i want to thank our two commentators for their many insights, but i have a few final words for ben bernanke. you received many honors and awards for your service over the last eight years, and i'm sure there are many more to come. but we at the american economic association have her own unique
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award. paul simpson once remarked that for the true scholar, the only coin worth having is the applause of one's peers. so could we offer you some applause? [applause] >> [inaudible conversations]
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>> [inaudible conversations] >> coming up on c-span2, the senate banking committee's confirmation hearing for janet yellen. and later we'll be live at 2 p.m. eastern as the senate returns from its holiday break. on the agenda, a bill to extend unemployment insurance benefits, and a confirmation vote on the nomination of janet yellen to be the next reserve chair. >> we focus on issues you would expect. we are focused laserlike on innovation but we want to make sure that innovation is a national strategy and american companies keep introducing the greatest come these products in the world. we dominate in so many areas. we have a lot of foreign
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multinationals but it's a global phenomenon but u.s. is the leader world and we want to keep it that way which requires great immigration policies, the best enterprise, requires additional spectrum but it requires a rational patent policy so you could invent things but you're not being said by people in all the time. >> the head of the consumer electronics association gary schapiro tonight on "the communicators" at 8 p.m. eastern on c-span2. >> last november federal reserve chair nominating janet yellen appear before the senate banking committee. during the nearly two and half hour confirmation hearing, she defended the fed monetary policies to sting like the economy including its bond buying program known as quantitative easing. later today the full senate is expected to confirm her to succeed ben bernanke this term expires on january 31. janet yellen has been the federal reserve's vice chair since 2010 and will become the first woman to head the u.s. central bank.
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bank.. [inaudible conversations] [inaudible conversations]
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[inaudible conversations] >> i call this hearing to order. today we consider the nomination of the honorable janet yellen to be chair of the board of governors of the federal reserve system for a term of four years. dr. yellen is an extraordinary candidate to lead the federal reserve. she currently serves as a member
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and vice chair of the board of governors. she previously served as a member of the board of governors in the 1990s. a she was the chair of president clinton's council of economic advisors, and she served six years as the president of the san francisco fed. in addition, dr. yellen has an impressive academic record. she is a professor at berkeley's haas school of business and was previously a professor at harvard university, as well as a faculty member at the london school of economics. dr. yellen graduated summa cum laude from brown university, and received her ph.d. in economics from yale. dr. yellen's nomination is especially timely as our nation
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struggles with high unemployment in the wake of the great recession. she has devoted a large portion of her professional and academic career to studying the labor market, unemployment, monetary policy, and the economy. dr. yellen also has a strong track record in evaluating trends in the economy, her economic analysis has been spot-on. "the new york times" recently noted that she was the first fed official, in 2005, to describe the rise in housing prices as a bubble that might damage the economy. she was also the first, in 2008, to say that the economy had fallen into a recession. these forecasts were not an anomaly. "the wall street journal"
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recently analyzed 700 predictions made between 2009 and 2012 in speeches and congressional testimony by 14 federal reserve policymakers, and found dr. yellen was the most accurate. such accurate economic judgment would be a tremendous quality of a fed chair. dr. yellen has proven through her extensive and impressive record in public service and academia that she is most qualified to be the next chair of the federal reserve. we need her expertise at the helm of the fed as our nation continues to recover from the great recession, completes wall street reform rulemakings, and continues to enhance the stability of our financial sector. i am excited to cast my vote to
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confirm her as the first woman to serve as chair of the federal reserve, and when we vote on the nomination, i urge my colleagues to do the same. now turn to ranking member for his opening statement. >> thank you, mr. chairman for holding today's hearing on the nomination of dr. gellin to be the next chair of the federal reserve board. today's hearing is an opportunity not only to examine governor yellin's qualifications but also her views on the role and direction of the federal reserve. in recent years the fed has engaged in unprecedented politics come including purchasing trillions of dollars in treasuries and mortgage-backed securities. current fed purchases total up to $85 billion a month. as a result, the next fed chair will inherit a balance sheet that currently stands at approximately $3.8 trillion, four times higher than before the financial crisis. as a native windows i've been a
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longtime critic of this quantitative easing purchases your now that a reduction and asset purchases finally seems to be on the horizon, i'm concerned markets have become overly reliant on them. that's why it's essential to know how dr. yellen, if confirmed, would manage the process of normalizing our monetary policy. the fed has indicated that it will hold short-term interest rates low for an extended period. in a speech in april, governor john state the policy rates should under present conditions be held lower for longer. but how long is too long? the extended period of low rates is hurting individuals living on fixed income investments and defined-benefit engine fund. the international monetary fund cautioned that the actions taken by central banks are associate with financial risks that are likely to increase the longer the policies are maintained. how would the fed ensure that these risks are avoided under dr. yellen's chairmanship? in addition to unprecedented
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monetary policy, the next century will finalize several key financial records what reform rules. these rules must balance the financial stability with the inherent need for markets to take on and accurately price risk. they must be done without putting the u.s. markets added unto competitive disadvantage or harming consumers with unintended consequences. the chair of the federal reserve must understand how different rules interact with each other, what impact they have on the affected entities, and the economy at large. just as some worry that we did not have enough regulations on the books to prevent the economic crisis, some of us were not that the post crisis response will result in a regulatory regime that stifles growth and job creation. the chair of the federal reserve must know and understand the need for that balance and how to carefully manage competing demands without harming the economy. vios banking system and capital markets must remain the preferred destination for investors throughout the world.
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during previous hearings i've asked chairman bernanke what parts of dodd-frank could be revisited on a bipartisan basis. the chairman identified the end-user and swaps push a provision of was the need for regular relief on small banks. chairman bernanke also commented in july the legislation is needed to allow the fed flexibility to do with the collins and emmett and taylor of private capital requirements for insurance companies. i look for during dr. yellen's views on what dodd-frank's, dodd-frank fixes, congress ought to consider common how she -- and economic growth, if confirmed. in addition to the previously mentioned issues, the makeup of the board itself will change in the near future. governor sarah bloom raskin has been nominated to a position at treasury and governor elizabeth duke resigned in august. if governor yellen is confirmed as chair the fed will need a new vice chair. moreover, dodd-frank create a
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vice chair of supervision which has not yet been officially filled. these appointments will shape the direction of the federal reserve policymaking for years to come. i look forward to working with the chairman to see these positions are filled and in a way that provides the proper balance and expertise at the fed. thank you, mr. chairman spent thank you, senator crapo. senator crapo and i have agreed that to allow for sufficient questions we are eliminating -- limiting opening statements to the chair and ranking member. all members are welcome to submit an opening statement for the record. we will -- we will now swear in dr. yellen. please rise and raise your right hand. do you swear or affirm that the testimony that you're about to give is the truth, the whole truth and nothing but the truth, so help you god? >> do you agree to appear and testify before any duly
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constituted committee of the senate? >> i do. >> please proceed. please be assured that your written statement will be part of the record, and invite you to introduce your family and friends in attendance before beginning your statement. dr. gellin, please proceed with your testimony. >> thank you. i would like to introduce my husband, george, and my sister-in-law alison brooks, and my friend and former san francisco fed director carla chambers, who are with me here today. >> chairman johnson, senator crapo, and members of the committee, thank you for this opportunity to appear before you today. it has been a privilege for me to serve the federal reserve at different times and in different roles over the past 36 years, and an honor to be nominated by the president to lead the fed as
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chair of the board of governors. i approach this task with a clear understanding that the congress has entrusted the federal reserve with great responsibilities. its decisions affect the well-being of every american and the strength and prosperity of our nation. that prosperity depends most, of course, on the productiveness and enterprise of the american people, but the federal reserve plays a role too, promoting conditions that foster maximum employment, low and stable inflation, and a safe and sound financial system. the past six years have been challenging for our nation and difficult for many americans. we endured the worst financial crisis and deepest recession since the great depression. the effects were severe, but
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they could have been far worse. working together, government leaders confronted these challenges and successfully contained the crisis. under the wise and skillful leadership of chairman bernanke, the fed helped stabilize the financial system, arrest the steep fall in the economy, and restart growth. today the economy is significantly stronger and continues to improve. the private sector has created 7.8 million jobs since the post-crisis low for employment in 2010. housing, which was at the center of the crisis, seems to have turned a corner, construction, home prices, and sales are up significantly. the auto industry has made an impressive comeback, with domestic production and sales
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back to near their pre-crisis levels. we have made good progress, but we have farther to go to regain the ground lost in the crisis and the recession. unemployment is down from a peak of 10%, but at 7.3% in october, it is still too high, reflecting a labor market and economy performing far short of their potential. at the same time, inflation has been running below the federal reserve's goal of 2% and is expected to continue to do so for some time. for these reasons, the federal reserve is using its monetary policy tools to promote a more robust recovery. a strong recovery will ultimately enable the fed to reduce its monetary accommodation and reliance on unconventional policy tools such
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as asset purchases. i believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy. in the past two decades, and especially under chairman bernanke, the federal reserve has provided more and clearer information about its goals. like the chairman, i strongly believe that monetary policy is most effective when the public understands what the fed is trying to do and how it plans to do it. at the request of chairman bernanke, i led the effort to adopt a statement of the federal open market committee's longer-run objectives, including a 2% goal for inflation. i believe this statement has sent a clear and powerful message about the fomc's
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commitment to its goals and has helped anchor the public's expectations that inflation will remain low and stable in the future. in this and many other ways, the federal reserve has become a more open and transparent institution. i have strongly supported this commitment to openness and transparency, and will continue to do so if i am confirmed and serve as chair. the crisis revealed weaknesses in our financial system. i believe that financial institutions, the federal reserve, and our fellow regulators have made considerable progress in addressing those weaknesses. banks are stronger today, i regulatory gaps are being closed, and the financial system is more stable and more resilient.
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safeguarding the united states in a global financial system requires higher standards both here and abroad, so the federal reserve and other regulators have worked with our counterparts around the globe to secure improved capital requirements and other reforms internationally. today, banks hold more and higher-quality capital and liquid assets that leave them much better prepared to withstand financial turmoil. large banks are now subject to annual stress tests designed to ensure that they will have enough capital to continue the vital role they play in the economy, even under highly adverse circumstances. we have made progress in promoting a strong and stable financial system, but here, too, important work lies ahead.
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i am committed to using the fed's supervisory and regulatory role to reduce the threat of another financial crisis. i believe that capital and liquidity rules and strong supervision are important tools for addressing the problem of financial institutions that are regarded as too big to fail. in writing new rules, however, the fed should continue to limit the regulatory burden for community banks and smaller institutions, taking into account their distinct role and contributions. overall, the federal reserve has sharpened its focus on financial stability and is taking that goal into consideration when carrying out its responsibilities for monetary policy. i support these developments and pledge, if confirmed, to continue them.
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our country has come a long way since the dark days of the financial crisis, but we have farther to go. i believe the federal reserve has made significant progress toward its goals but has more work to do. thank you for the opportunity to appear before you today. i would be happy to respond to your questions. >> thank you for your testimony. what the court please put five minutes on the clock for each member. dr. gellin, you know as i do that unemployment is not just numbers. we are real men and women. we are ready to work if given a chance. so as chair, how would you lead the fed to continue to reduce unemployment aggressively and improve the prospects of young americans and others who are
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unemployed? >> thank you, senator. i would be strongly committed to working with the fomc to continue promoting a robust economic recovery. as you noted, and unemployment remains high. ..
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and their families, so i consider it imperative that we do what we can't to promote a very strong recovery. we are doing that by continuing our asset purchase program, which we intend we put in place with the goals of assuring a substantial the improvement in the outlook at the labor market. we are taking account of the cost and efficacy of that program as we go along at this point i believe the costs exceed -- the benefits exceed the cost. as that program gradually winds down, we've indicated that we expect to maintain a high and be
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accommodated policy for some time to come thereafter, and the message that we want to send is that we will do what is in our power to ensure a robust recovery in the context of price stability. >> what are the dangers of purchasing too early? if confirmed, how should the fomc move forward in the exit strategy? >> so, cementer i think there are dangers frankly on both sides of ending the program or ending the accommodation to early. there are also dangers that we have to keep in mind with continuing the program for too long or keeping monetary policy accommodation in place for too
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long. so the objective is to ensure a strong and robust recovery so that we get back to full employment and that we do so why all keeping inflation under control. it's important not to have removed support especially when the recovery is fragile and the tools available to the monetary policy should the economy falter or given the interest rates are at zero, i believe it could be costly to withdraw the accommodation or to fail to provide adequate accommodation. on the other hand, it will be important for us also as the recovery proceeds to make sure that we do withdraw accommodation of when the time has come. my colleagues and i are
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committed to our longer run inflation goal of 2 percent and we will need to ensure that as the recovery takes hold and progresses that we will also accept the pre-monetary policy back to normal in a timely fashion. i believe we have the tools to do so. we have been very careful to make sure that we have the tools available at our disposal and we also have the will and the commitment, and i look forward to leaving when the time is appropriate to the normalization of the monetary policy. >> thank you. senator crapo. >> thank you. i would like to follow-up on that question with you ms. yellen with regard to the
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easing. you've indicated that you feel as long as the economy remains, i don't want to put words in your mouth, but as it remains, we need to continue the accommodation from the federal research. according to the july quarterly survey, the primary by the new york fed to the balance sheet will reach almost 24% of gdp in the first quarter of 2014. and i am concerns about the size of the balance sheet and its impact on the economy and the unintended consequences. there's a disconnect between what the intended to accomplish and the results. the executive stated it may have contributed as little as one quarter of 1% to the gdp growth. they add that only about .13% to the real gdp growth in 2010 and another expert has indicated
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that the federal policies contribute to the market's to rate how do you respond that it's limited impact on the economic growth and is in fact creating very serious risks in our financial markets? >> so, and number of different studies have been done attempting to assess what the contribution of our asset purchases have been. and of course, this is something we can only estimate and can't know with certainty. but my personal assessment would be based on all of that work that these purchases have made meaningful contribution to economic growth and to improving the outlook. certainly long-term interest rates, the purpose of the purchases was to push down long-term interest rates.
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we have seen interest rates fall very substantially. a lower interest rates and mortgage rates particularly have been instrumental. it's not the only factor but it's been a positive factor in generating the recovery that the housing sector and that prices after having fallen very substantially are moving at and i think that is helping substantially many households including the large fraction of the american households that found themselves under water on their mortgages. it's improving their household demand a and i think that we are seeing a very meaningful recovery with the attractors played but also by the lower interest rates. >> how long can we operate the
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monetary policy with such extreme levels to the commitee that easing? >> when we initiated this program, the common plant rate was 8.1% and the committee was somewhat pessimistic about its expectations for what we would see in the labour market over the year. in fact, the committee expected little meaningful progress in bringing down unemployment and when we began this program, we indicated that the goal was to see a substantial improvement in the outlook for the labor market. so the process of this program is not on a set course but we've seen improvement in the labour market. >> can you continue indefinitely if the labor market doesn't improve to the point you reach your target how long can this continue and do you agree that
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there has to be some kind of which we return to the normal monetary policy. >> i would agree that this program cannot continue forever. but there are costs and risks associated with the program and we are monitoring this very carefully. and it very seriously the committees' focus on a variety of risks and recognizes the wonder that this program continues, the more that we will lead to worry about those risks. and at the beginning? >> well, at each meeting we are attempting to assess whether or not we are seeing -- we have seen meaningful progress in the labour market and with the committee is looking for is song
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means that we have closed it strong enough to the continued progress. the indicated in the most recent statement we are expecting to continue progress moving forward, so while there is no set time to decide the purchases at each meeting where you are attempting to that is meeting the criteria that we have set out in the purchases. >> cementer hernandez -- senator hernandez? >> as the federal reserve has engaged in measures to strengthen the economy, some critics have argued that any
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growth that would somehow be artificial i know that we have heard that here. or that low interest rates and cheap credit might lead to financial instability as the make risky investments in order to reach for the yield. in the current environment the question isn't weak demand but the greater concern and i looked at the consumers that on the spending because of the high debt burdens and underwater mortgages in the financial crisis, business is holding off on investing because weak consumer demand. it doesn't that change the relative cost and risks of different monetary policy actions? >> well, senator, i completely agree that we demand for the goods and services that this economy is capable of producing
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is holding back the economy. and of course the purpose of the policies are to bring down interest rates in order to spur the spending in the interest sectors and if we are capable of doing that, that will help to stimulate a favorable dynamic in which drops are created and more spending takes place and that creates more jobs throughout the economy. so i agree with your diagnosis that the programs are intended to remedy the situation. on the other hand it's very important for us to monitor financial risks that could be developing as a consequence of the program or of low-interest rates more generally and more
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broadly of developing the financial risks in the economy. no one wants to live through another financial crisis and the reserve is devoting substantial resources and time and effort. in monitoring those risks. at this stage i don't see the risks of financial stability or limited evidence of reach for yield. we don't see a build up in leverage with the development of risks that i think at this stage poses a risk to the financial stability. >> i appreciate that. some commentators have suggested that in addition to managing inflation and promoting full employment, the fed shut also monitor the asset bubble. if you think it is a feasible job expecting that they should be doing and if so how would you go about it? >> senator, i think it is important for the fed to attempt
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to detect the asset bubbles when they are forming. we devote a good deal of time and attention to monitoring the asset prices in different sectors whether it is house prices or equity prices for farm land prices to try to see if there is evidence of the price misalignment developing. by and large i would say if i do not see evidence at this point in the major sectors of the price misalignments at the level of what threatened the financial stability. but if we were to detect other threats to the financial stability, in mauney view i would like as a first line of defense we have a variety of
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supervisory tools we can use to attempt to limit to the behavior that is giving rise to those misalignments. i wouldn't rule out using the monetary policy as a tool to address the price misalignments but because it is a blunt tool and because congress has asked us to use the tools to achieve the goals of maximum of nine-point and price stability is which are important in their own right, i would like to see monetary policy first and foremost directed towards achieving those goals the congress has given us and are there other tools in the first instance to try to address the potential financial stability threats but an environment where we can induce risky behavior and
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i wouldn't rule out monetary policy conceivably having to play the role >> and the portfolio of the federal reserve as unprecedented you are an economist and you were also the chairman of the economic advisors of president clinton. looking back in recent history for the last 30, 40, 50 years have you noticed any portfolio approaching what it is today? >> not at the federal reserve. other central banks -- >> i'm asking about the federal reserve and the united states of america. would you describe what you're
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doing here you call it quantitative easing in a term that has been made up i guess we all make that, but is that a stimulus you use the term monetary tool is that what you would call it to halt to stimulate the economy? >> it is a tool that is intended to push down the longer term interest rates to stimulate the demand and spending. >> is this in the area of economics something that others have espoused over the years at times when you have got high unemployment? gandy you use a monetary tool to stimulate the economy?
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>> well, friedman and others -- i don't know if they actually thought about this, but a number of economists have written about something called the portfolio balance the fact that basically is about supply and demand that by the upper class of assets it may be possible to push up their prices and push down their yields and thereby affect the financial conditions in the economy. >> was set several years ago that china was totally -- we were totally dependent on china to finance our deficits and so forth it is basically the bonds
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and paper. >> we are purchasing a quantity of treasure and mortgage back securities, but we are certainly not doing so for the sake of holding the government finance the deficit. we are doing so to achieve the goals that the converse has assigned to the federal reserve in circumstances where we have run out of scope for conducting additional normal monetary policy once or overnight interest rate market has hit zero we have to really rely on alternative techniques, and we are certainly not the only central bank that is recognized this in undertaking similar programs. >> you have diluted to other central banks that you look around the world and i don't
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know of any central bank that i think that we should follow myself and a lot of economies think that we should set an example here in the united states and the fed has historical triet on employment, you mentioned unemployment, stated unemployment is worth 7.2 or 7.3? what is the real unemployment, that is people that have given up looking for jobs or working part-time or who are frustrated by the whole system. is it around 13 or 14%? >> you are absolutely right that the measures of on an plan and are much higher. part-time employment among people who would prefer full-time jobs or more work or at unprecedented levels and we have seen a significant decline
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in the labor force participation part of it is voluntary and reflects in the aging work force, but some of it may be a reflection of the very weak labor market condition where people who've been on in plight for a long time feel frustrated about their job prospects to the >> could you quickly mention your views on how important it is for our banks to meet the standards of capital and liquidity and also the other banks in europe, how important is that? >> it is important for the banks to have more capital, high-quality capital basel iii and there are other important steps that we will be taking
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with other regulators down the line to make sure that the most systemically important institutions, those whose failure could create financial distress would be asked to hold more capital and meet higher standards of liquidity and prudential supervision to make sure that they are more resilient. >> what have you learned since you were the president of the san francisco bank? you were there in the housing. as a regulator i hope that you and others have learned a lot in not just the federal reserve but others that you cannot let a bubble continue to grow. >> senator, i think in the aftermath of the crisis, all of us have spent a great deal of time attempting to draw the
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appropriate lessons. there have been many of them. the federal reserve is very focused on the broad financial stability mandates, both in terms of our monitoring of the economy, attempting to understand that threats that exist broadly in the financial system, and to improve our supervision especially of the largest institutions to make sure that we are identifying those threats that can be risked in the economy. >> senator roane barone? >> when he came before the committee three years ago he noted that the two sectors that pullout of the recession of housing and manufacturing. the defense monetary policy through the large scale purchases of the mortgage-backed
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securities are clearly aimed at stimulating and promoting housing. you had spoken about their real economy, and i hope that that means an emphasis on manufacturing, particularly because of its impact rippling through the entire economy. but one of my concerns is that the fed monetary policy doesn't serve and americans. last year a journalist described the policy as a sort of trickle-down economics and it boosts the price of assets and bonds and in the homes it can enrich the wealthy and wall street, but it isn't clear to me, and more importantly it isn't clear to the many americans who have not seen a raise in a number of years that this policy increases the wages and incomes for the workers on main street. during your time as the chair, tell us how you are sure monetary policy directly benefits to families on main street and in places like
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cleveland and mansfield a high of. >> senator, the objective of the policy is too broadly benefit all americans, especially those who were seeing harm come to them and their families from high unemployment in the recovery that's taken a long time and has been frankly disappointing. it's true that in the policies of the fed conducted when we implemented the monetary policy of the interest rates and affecting the asset prices and you use the term of trickle-down we tend to affect the spending on the automobile housing, but the ripple effect goes through the economy and brings benefits
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to i would say all americans both those who are unemployed and who find it easy to get jobs as the recovery is stronger and also to those that have jobs coming you mentioned that growth has been nonexistent in real terms over the last several years. as the economy recovers, my hope and expectation is that that would change and if we can generate a more robust recovery in the context of price stability but for all americans could see more meaningful increases in their well-being. >> just as my role in this committee spending time talking to the community bankers and to the regionals like the bankers at pennington it is the third and some of the six or seven largest banks, which i have here
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a concern from so many of these bankers across the board that too big to fail still has not been solved. chairman bernanke said it too big to fail isn't solved. it's still here. last friday i'm sure you saw the comments not exactly of a populist firebrand. he said that there were a deep-seeded cultural and ethnic failures that many of the institutions and they have an apparent lack of respect for regulation and public trust and said the current regulatory efforts may not solve these problems. if it is reinforced by the fact that the doj currently has eight separate investigations open against the largest u.s. banks. do you agree with what i assume you are hearing from the bankers and others and from the chairman, do you agree with chairman bernanke that a system
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where too big to fail institutions have it as an apparent lack of respect for the regulation of the public trust, do you agree we have not solved the problem, and what do you do as the chair to address too big to fail? >> i would agree that address into big to fail has to be among the most important goals of the post crisis period that we try to achieve too big to fail is damaging and it creates morrill hazards. it corrodes market discipline and creates a threat to the financial stability and other fairly in my view advantage large banking firms over small ones. my assessment would be that we are making progress. dodd-frank put into place and
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agenda that as we completed should making very meaningful difference in too big to fail. we have raised capital standards and we will raise it further for the largest institutions that pose the greatest risks by proposing the so-called capital surcharges and we have the possibility of requiring that the largest banking organizations hold additional unsecured debt at the company lawful to make sure they are capable of the resolution. right now, the fdic has the capacity and the legal authority to results using the early liquidation authority in the systemically important firm that finds itself in trouble.
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.. how will you assess the regs put out, the higher capital standards by the fed and occ, and fdic? how will you assess as they go into eec


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