and i am very hopeful that it will effectively deal with it. we will monitor as we go forward on what needs to be done. >> the time of the gentleman has expired. the chair now declares a five-minute recess. >> we will have more that hearing with janet yellen in just a moment. first, a look at the u.s. economy with former u.s. white house economic adviser and he was on cnn this morning and he was asked about raising the minimum wage. >> is minimum wage an economic issue or is it a political issue in washington? certainly in washington it's a political issue. but everything in washington is a political issue. in the state of the union, he was calling for minimum wage, raising the earning income tax credit, earlyx

education, community college -- he has identified the issue of incomes americans' being tied to an economic space where we want to get growth. and just marking on anyone policy saying, no, no, let's not do this one and let's not do that one, the overall issue is the fundamental issue. people don't get rich if they don't have customers. and if customers don't have income, they can't spend. and if we don't invest in the skill base of our workforce, we will fall behind as a country. together kind of address those issues because there's nothing more important than that. thene of the headlines from associated press is moaning said "house democrats trying to force wage and immigration." according to the associated

in order to put a spotlight on the republican spin since democrats are in the minority, they would have to use get aharge position to vote. they would bypass the speaker. they still need half the members in the house, 217, to vote for the position, -- for the petition, including 17 republicans. the house is out this week. they will be back in session on monday the 24th. and on the other side of the capitol, the u.s. senate, john mccain is pressing for action on immigration legislation. he helped draft a measure that passed in the senate. he was also on scene and in this morning where he talked about the possibility of immigration being brought up in the house. we have the broadest coalition of support of any legislation i've ever been involved in. big business. small business. evangelical. the catholic church.

the list goes on and on. it is time for people to weigh in and bring pressure to bear and say, look, we need to act. i have not given up hope that we will act and we must act. i would again urge my house colleagues to consider whatever way they want to pursue to try to address this issue because it will have to be addressed. and to wait to 2015 when we are now involved in republican primaries, obviously, would not be a viable scenario. >> the sunday morning brock shows -- the sunday morning talk shows broadcast on c-span right now. now back to the second of two portions of the house hearing of the fed chairman of the federal reserve. tothe committee will come order. the chair now recognizes the gentleman from georgia. >> thank you, mr. chairman.

thank you, madam chair, for being here. we heard from the other side of the aisle that the president's policies are not having any ill effect on the economy. yet, chair yellen, we have just recently all seen the report from the cbo that the obamacare affordable care act is estimated to cost 2.5 million jobs over the next decade. do you believe that regulation or overregulation has an impact on our economic growth and in the job creations? yellen, i don't think your microphone is on. could you see if it is on. >> i apologize. certainly regulation has an impact on the economy, on economic growth.

there are many economic studies that have tried to document what it is. i think in the case of the affordable care act, cbo has done important analysis and probably will continue to look at it. i think they have recognized that the impact of the act is likely to be complex. are stilley attempting to figure out what all the different channels are by which it will affect the and we will look at that and tried to, you know, look at their assessments going forward. >> you know, we had to pass it to find out what with his -- to find out what was in it and now we are finding out together. has the fed done any estimates implementations thehe dodd-frank and

culminate of the effect of the obama administration's regulatory policies are expected to cost the economy or is it the fed is not interested in that because we feel dodd-frank will have as much impact on the job market as what the affordable care act did? we lived through a significant financial crisis that has taken a huge toll on including creating a period with very high and employment. studies that have been done, for example, the bobble committee and the united states participated in these assessments, this is only one piece of dodd-frank. but in deciding to raise capital

standards on financial , tried to assess to what would be the effect on the economy. and while there may be some impact in terms of raising the cost of capital, the overall found that these studies is that reducing the odds of a financial crisis would be the most important benefit. and when we see what a negative effect that has on jobs for such a long period of time, to my mind, they regulatory agenda of trying to strengthen the financial system, which we are trying to put into place to make it more resilient and reduce systemic risk, will bring important long-term benefits to the economy. >> when you say long, what are we talking about? we always hear long-term. what is long-term?

and when does long-term start? because we have been supposedly in a recovery now for a period of time and we keep hearing that dodd-frank and some of these other things that have gone in will have long-term pluses. when does long-term start? is four years not long-term? when are we planning on this kicking in? five years? 20 years? >> i think it is kicking in in that we are building a more resilient financial system and substantially mitigating the odds of another financial crisis that will take this kind of toll on households in the economy. >> ok. just one of the question. quickly. the you think there is enough separation between the federal reserve and this administration in the fact that i know you meet with the secretary of the

treasury about once a week, once a month. it's been the tradition to meet almost once a week. areasare many overlapping of interest between the federal reserve and the treasury that i think makes it desirable to have ongoing communication. the time of the gentleman has expired. >> is completely independent of conducting monetary policy. >> the chair recognizes the gentleman from new york for five minutes. >> it is with great pleasure that i welcome you as morning, madam chair. the historic ascension to position speaks volumes for our nation and the continued progress our nation is making any inclusion of women and minorities in positions of leadership and will be another source of inspiration to our young women like my three daughters and especially those who are looking for careers in the finance and banking industry.

let me just say that i am pleased, not just because you're a woman, but because you are a right person of the job. and you did it the old-fashioned way. you earned it could >> thank you. i appreciate that. >> i think the ranking member touched on this. gap,thing about the wealth 95% ofu look at what the the income gains have gone to the top 1%, there has always been a big question between the relationship main street and wall street. for me, it has been difficult, especially sitting on this committee, to explain wall street to main street when you have this kind of inequality. average,r example, on the average african-american the whiteis 20% of household.

largely because most people's wealth was in their homes. when he had the crisis, most people were steered in minority communities and lost part of that growth when it was closing. matt has gone to tremendous levels. given that we know that there were no dark loans that were going into these communities that are causing disparity in wealth, is there anything that the fed can do or is doing that will help the middle class, but more specifically these individuals who were impacted at a great extent because of the inequality of what was going on in the system? is there something we can do to help them get back on their feet? the think, congressman, most important thing to do, which has been absolutely our focus, is to promote a stronger recovery.

that wereouseholds hit so hard by what happened in the housing sector by the subprime debacle, we want to see those households get jobs so that they can rebuild wealth and have the income that they need to support their families. >> the problem they are having is that many have referred to this recovery as a jobless recovery. when you look at technology today and you see that technology is -- a lot of business folks have a co-efficiency etc., thereby a lot of jobs that would have gone to people are losing some of the -- i look at new york city. bank, are a teller at a atms have replaced you. all of these jobs that used to be manual labor now are replaced it has of technology.

-- replaced because of technology. can we identify the jobs that will be created so that we can then pinpoint where we should be training individuals so that they can get the jobs that will be created and not just randomly creating jobs? thethen we can go back in communities and train people specifically for the job we feel current a result of the economy. >> a stronger economy will create jobs in virtually every sector of the economy. trend thatr-term ties in with the concerns that you have expressed is a growing skills gap, a growing wage inequality between more and less educated workers, technological trends that reduce what used to good important class of

high-paying wage jobs. those jobs are being competed away because of technological change and to some extent ships in global competition. shifts in global competition. we need to address that skill gap in order to make sure that we reduce inequality. >> is there anything the fed can do specifically to help? >> we can try to promote smarter -- promote stronger demand, a strong job market generally. we have seen low income individuals have been disproportionally harmed by the downturn. as the economy recovers, by no means saying that this is a panacea not by any stretch of the imagination for inequality, but i think we will see it

broadly shared throughout the economy. >> the time of the gentleman has been expired. the gentleman from north carolina. >> chair yellen, congratulations on your appointment and being an important mark in the history books as well. appointment and being an important mark in the history books as well. >> thank you. >> i have a question. in 2010 you spoke that banks may be required in their debt stack, in their capital to use a convertible instrument that in good times has a debt nature and in bad times converts to equity. you said that they may be required to do this. is this your intention to use this instrument? >> so i think when i gave the speech at that time, i was broadly considering possible

regulations or shifts in the focus of supervision that might be helpful. i think there still is focus on something like that. i think to improve the resolvability of a large banking organization, something that the federal reserve and other regulators are contemplating, is a requirement that bank holding companies hold a sufficient amount of long-term debt. it would play a role similar to the contingent capital instruments you've described. >> you mentioned that in your opening statement, about this requirement on long-term debt. would it be your intention to have this contingent convertible capital as a part of that long-term debt requirement? >> well, i think it bears this type of -- this type of debt would bear some similarities. it's not exactly the same, but it bears some similarities to

contingent debt in that it is a source of gone concern of value that would b there if an organization got in trouble that would serve to recapitalize it. in the existence of such a class of debt, i think would give proper incentives to monitor risk taking in these organizations. >> so are you still broadly favorable towards these contingent convertible? >> i mean, there are a number of issues associated with that kind of debt, what would trigger it and so forth. but i think it remains an interesting possibility in this proposal >> an interesting possibility. well, that's a fair admission from a chair of the federal reserve. so i'll take that as somewhat favorable, if i may. and i was reading yesterday in "the financial times." we have this discussion about the volcker rule and the

exception the volcker rule provides for sovereign debt, vis-a-vis corporate debt in the united states. i read in "the financial times" yesterday that danielle nuey, who's the head of the bank supervisory agency in the european union, she said that they're really going in a different direction in the eu. and in light of, you know, their recent crises with sovereign debt, she said, one of the biggest lessons of the current crisis is there is no risk-free assets. sovereigns are not risk-free assets. that has been demonstrated. so we now have to react. in essence, the eu is going a different direction when it comes to sovereign debt than we are in the united states. how would you react to that? >> i believe the exemption for u.s. debt markets was built into

dodd-frank. that was explicit in dodd-frank. >> okay. so what is your reaction to that? we're policymakers. we could remedy that if you think that is a flaw. >> you know, we have tried to write a rule that is consistent with dodd-frank as it was legislated. >> so if we -- would you look favorably upon us saying that sovereign debt should not be exempt or should comparable to corporate debt? >> that's something i would have to look at more carefully. >> but did you not look more carefully at this subject matter when you wrote the volcker rule? >> well, we put into effect the allowance that congress included in dodd-frank to exempt treasury securities. >> well, no, that's treasury

securities. i'm asking about sovereign debt, which was excluded from the volcker rule. written into the language of dodd-frank is exclusion of u.s. sovereign debt, not the exclusion of other sovereign debt. i would call this a lack of enthusiasm from you. >> time of the gentleman has expired. the chair now recognizes the gentleman from massachusetts, mr. capuano, for five minutes. >> thank you, chair. thank you for being with us today. i have a couple different areas i'd like to pursue. in your confirmation hearing, you made a comment, at least it's reported you made a comment, addressing too big to fail is among the most important goals of the post-crisis period, which on some levels i would agree. though i happen to think we did address a fair amount of it. i also accept chairman bernanke once said, which is reality is in perception. the perception is we haven't done enough. therefore we have to do more. i'm just wondering if you have any thoughts on how to do that.

particularly with relation to either reinstituting some form of glass stooeg l or instituting some sort of market-driven attempt to reduce the size of some of these too big to fail programs. >> so i think we have a broad agenda that is intended to address too big to fail, and we are putting it into effect and i think have made meaningful progress. we have -- >> do you think it would be worth us considering reinstituting some form of glass stooeg l? >> i think if we continue on the path we're on of completing the dodd-frank rule makings beyond that of putting in place a rule that would enable a resolution by -- through orderly liquidation by requiring -- >> so you think we won't need it when you're all done?

>> i think we have to keep watching whether or not we've succeeded in addressing this, but i believe we've -- >> fair enough. i would ask you also take a look at hr-2266, which is a market-driven attempt to reduce the size of some of these institutions. i also want to talk about an editorial i read in "american banker" last week that basically n my opinion, coined a new phrase but one that's accurate. too big to jail. and it was about the concern that not enough of these people that have foisted their inappropriate activities on us in '08 have paid a penalty on a personal basis. some of these biggest corporations simply write a check to stay out of jail free. because it's not even their money. it's corporate money. and when i read it in "american banker" it kind of puts a big underscore to me. i'm just wondering, do you have any concerns about the lack of personal accountability in some of the largest institutions in this world when it comes to some of the activities they participated in, not just before

2008 but after 2008 as well. >> well, i do have concerns about those activities, and the federal reserve cooperates with the department of justice as appropriate when they take actions that are criminal in nature. the federal reserve's focus is on safety and soundness. we're -- >> but isn't the safety and soundness of the entire economy based on trust and good activity? and my concern, to be perfectly honest, if people are not held personally accountable when they're allowed to write corporate checks, not personal checks, to just push away their ill-gotten gains and they get to keep that money and continue on and actually get raises and bonuses from those institutions, the moral hazard says to the next guy coming down the street, the people you have to regulate, it's okay. don't worry about it.

do anything you want, and all we have to do is the corporation, not you, will pay a few hundred million dollars of shareholder money, by the way, not your money. you don't have a concern with that, with the federal reserve by not having -- not you, but by not having other entities holding the personal account that it will make your job tougher going forward? >> well, i a gree with you there certainly should be accountability within these organizations. >> thank you. i appreciate that. and the last point, i want to talk about fannie and freddie. i have always wanted to amend and reform them. however, i've also thought it's wrong. fannie and freddie has now pretty much paid back the money they've borrowed from the taxpayer. i don't know if they're exactly there, but they're close to it and on their way. yet, at the moment, they have been allowed by our own laws to pay one penny towards the payment of that principal. there are lawsuits going on, as i'm sure you're aware. i'm just curious.

do you think that it is fair or wise or equitable to keep any entity in a de facto bankruptcy state once they've paid back their debt? >> i think -- you know, with respect to gse's -- i think it is really very important for congress to put in place a new system to address gse reform. i think we still have a system that has systemic risk, that government funding remains critical to the mortgage sector. and i think to really get housing back on its feet, it's important for congress to put in place a new system and to explicitly decide what the role of the government should be in helping the housing sector. >> time of the gentleman has expired. the chair now recognizes the gentleman from new jersey, mr. garrett, chairman of our capital

markets subcommittee. >> i thank the chair, and i thank chair yellen. congratulations on your position. welcome to the committee. thank you also. i understand the rules here that you are waiving a little bit and staying a little longer, since there are a whole host of members on congress on both sides who would like to dig in. we do very much appreciate that. i'm going to step aside from some of the monetary discussions some people have made and otherwise get into, to start off with, your prudential supervision role, which of course under dodd-frank and others have been expanded greatly. i'm not going to run through the list of all the expansions. you know well what they are. let me just begin to go back, reference a letter you may -- a report back in november 2011. president gao came up with a report on dodd-frank regulation and implementation of cost benefit and analysis. and in that report, just to

brief you, fed reserve general council responded to it with a letter. that was scott alvarez and james lyon responding to that. what they said, what the fed response was, that the federal reserve will consider appropriate ways to incorporate these recommendations into rule making procedure. i have the letter. they even go further. to seek, to follow the spirit of benefit-cost requirements. cost-benefit analysis, basically. my first question to you is, you know, what progress are you all making? this is two years ago this letter was written. what progress are you making on completing and complying with more than the spirit of cost-benefit analysis and rule making? >> well, the federal reserve strongly supports analyzing the cost and benefits of rules that it puts into effect, and we've done a great deal of that. an example i could give you is in connection with our basal rule making where we

participated in extensive cost-benefit analysis, with other regulators. >> would you say you're satisfied with how it wake out with volcker? we had no indication that a cost-benefit analysis was done. i asked the governor where it is. we have not seen it. so two years later, it seems like on something that's important as that, it was not done. do you believe it was done in that situation? >> i think what's important in the case of volcker is that dodd-frank required the federal reserve in essence the decision about the cost and benefits of putting those restrictions in place were decided by congress, taking account of what the likely cost and benefits would be. and our job has been to implement it. we have certainly taken into account, issued a proposed rule, received a wide range --

thousand z and thousands of comments. >> i appreciate that. my time is very limited. i would encourage a true cost-benefit analysis, one where could say please submit to for the record, that it be submitted to congress, which i think in anyone's estimation was not done fully in volcker. speaking of governor, the president has not appointed anyone to fill the position of supervisory division vice chair. would you say that governor is effectively holding that position until that is completed? until the appointment is made. >> well, we operate the board through a committee system. >> yeah. >> i usually have three governors and a chair. and governor ter rue low heads the board's banking supervision committee. so in that sense, he certainly takes the lead. >> takes that role. >> but all of us are involved and all of us are responsible.

>> but would you commit, then, to have goff te rue low come and testify on federal rule making before this committee, since he seems to be filling that role? >> he has done a great deal of testifying on these topics. >> just on that topic, we can ask him? >> on all topics. >> i understand. i guess i'm asking for a commitment we can have him come back in that role and testify before the committee on rule making. >> well, you know, i don't want to commit as to what he's going to do, but he has certainly taken the lead role in testifying on these topics. >> sure. with regard to international agreements that you negotiate, you probably see some ideas floating out there that market participants should have a better ability to chime in, comment on them. prior to and in the process of making those agreements. would you commit today to making -- allowing for market participants to engage in that

process while you're making those international agreements? >> well, when we turn to putting rules into effect for the united states, which is what affects those firms, we always have consultation and take comments in a rigorous process of evaluating comments. >> thank you. >> time of the gentleman is expired. care now recognizes the gentleman from texas, mr. hinojosa for five minutes. >> thank you. thank you, chair yellen, for sharing your testimony and for your time with us today. since the height of the 2008 financial crisis and the deep recession that followed it, the economy has made significant progress, as you and i know. the unemployment rate declined from a high of 10% in 2009 to the current rate of 6.6%. in the most recent quarter, gdp grew at an annual rate of 3.2%. and further more, despite some

recent volatility, equity markets have substantial, have seen substantial gains with the s&p index increasing by 30% last year, 2013. many economists and policymakers fear that the nature of the recent recovery may indicate that the u.s. economy could be a major infliction point where the ability of the private sector to create wealth is now outstripping its ability to create jobs. i've seen that in the region that i represent in deep south texas. for most of the post-war period, u.s. policymakers assumed that growth and employment went hand in hand, and the u.s. economy's performance had largely confirmed that assumption. but the structural evolution of the global economy and its effects on the u.s. economy today could mean that growth and employment in the u.s. are

starting to diverge. chair yellen, can you discuss with us why we appear to be undergoing what many have referred to as a jobless recovery? what explains the disparity between fairly weak employment growth in recent months and the fact that equities and corporate earnings are at an all-time high? >> well, congressman, it certainly has been a slow recovery by the standards of u.s. history from downturns, but 7.8 million jobs have been created since the trough in employment, i believe in the beginning of 2010. and while we still have a ways to go in the job market, is not by any means back to full strength, we're not back to

maximum employment. there has been substantial job creation so that i think we have made -- we have made progress. clearly, we have further to go. we're trying to promote a faster recovery and a fuller recovery, but i do see, and not only in terms of the number of jobs, but across a broad range of labor market indicators, i do think there's progress even though certainly there's a significant way to go. >> in past speeches, you have indicated a concern about rising inequality. many members on this committee are concerned due to moral beliefs. additionally, many economists have expressed worry that it will impact the recovery. do you believe that rising inequality might affect the stability of the economy? >> well, i am very concerned. i share your concern about rising inequality.

i think it's one of the most important issues and one of the most disturbing trends facing the nation at the present time. there has been some discussion about the possibility that inequality is holding back the recovery because the gains have been so unequally distributed. i think we don't have certainty about that. but certainly rising inequality is not -- is partly a matter of a weak job market that we're trying to address. but there are deep and disturbing longer term structural trends, rising disparity between the wages earned by more and less skilled workers, shifts in global competition that have diminished

jobs for less educated people. >> i'm very concerned about the percentages of unemployment in our 18 to 29-year-olds. not only in our country but in other countries in europe, as examples. what can we do so that we can bring those jobs, those rates down to a single digit? >> so we are working hard. the purpose of our monetary policy is to promote a stronger recovery that will see young people who are in school come out into stronger job market that can affect their entire future career. it's a key goal of the federal reserve, and i think congress could also consider ways of helping as well. >> time of the gentleman has expired. chair now recognizes the gentleman from california, mr. miller, for five minutes. >> thank you, mr. chairman.

chair yellen, glad to have you here today. i've enjoyed your testimony. there's been a considerable amount of discussion. i was pleased you indicated your agreement that insurance has unique features that make it different from banks and that a tailored regulatory approach for insurances would be inappropriate. i think it would be devastating to apply the same standards to an insurance company that we did it a bank. so what are you going to do to make sure that insurance companies are not subject to inappropriate bank-centric rules? >> we explicitly decided when we put in effect our capital rules to defer their application to savings and loan holding companies with substantial insurance activities and to the other nonbanks that were designated. we wanted to have a chance to

study what an appropriate regime would be, recognizing there are important differences between the insurance business and banking. we understand that the risk profiles of insurance companies really are materially different, and we are trying our best to craft a set of capital and liquidity standards that will be tailored to -- to the risk profiles of insurance companies. i would say that we do face constraints in our ability to do that because the collins amendment requires us to establish consolidated minimum risk based leverage and capital requirements for these entities that are no lower than those that apply to depository institutions. within that constraint, we're working as best we can to tailor and appropriate regime.

>> i'm concerned on the asset designation and how the feds look at assets of banks versus assets of insurance companies. governor te rue low said, quote, the liability structure of financial institution affect the amount of capital it needs. it doesn't affect how risky a particular asset is. it doesn't matter who holds it. an asset is an asset. i guess my concern i'd like you to take into consideration is banks hold assets different than insurance companies do. insurance companies generally buy asset for the long term. banks will buy asset for short term. so to me, there's a difference in the way institutions hold assets and the difference in the reasons institutions buy assets. so i hope at some point in time you will take that into consideration when you're reviewing the asset held by a bank versus an insurance company. last fall treasury offices of financial research published a report on asset management, financial stability at the

direction of fsoc. asset managers, as opposed to financial institutions, act as an agent on behalf of their clients where investment gains and losses are solely the clients do not flow through to the asset manager. i'm concerned the asset management firms might be designated and put under bank-centric regulations. i think it would be harmful to financial sector if that happened. do you agree that with the study that asset management and banks are different? >> i think, of course, they are different. designation is something that's very important to any company and deserves very thorough review if fsoc considers these entitie entities. i think it will be appropriate to do very careful analysis of whether they do pose systemic risk. >> and as it applies, the regulations imposed on asset managers should be tailored and taken into account the fundamental difference between the business of the asset and the management and banking. do you agree with that also? >> i definitely believe that our

supervision in regulation should be tailored to the unique features of any entity we regulate. >> okay. i would hope that the fed in the future can try to make it -- to create more of a comfortable environment for insurance companies. there's been considerable unease in the industry, as you know, in the past year over what their future might be. some have sold off assets such as they might have held a small bank for a courtesy to their clients because they thought they were going to be drug into the regulation of the banks. i hope that we can be more clear. i know in your position it's very difficult to be clear sometimes because the market misreads that clarity. but there needs to be some clarity, i believe, for insurance companies so they're not concerned in the future what their future might be. i yield back. thank you, mr. chairman. >> chair now recognizes gentleman from massachusetts, mr. lynch, for five minutes. >> thank you, mr. chairman.

madam chair, i want to just start off by welcoming you and congratulating you. i wish for your every success in your, for us, a new position. i do have a couple of questions. recently there's a fair amount of attention that's been paid to the commodities activities of some of our bank holding companies. for many years, american law and our regulatory framework recognized there should be a healthy separation between banking and commerce to ensure that we have the safety and soundness of banks, to ensure fair, inequitable credit flows to economically beneficial activity and also to prevent excessive concentration of power and wealth in the financial sector. however, over the last 15 years, this wall between banking and commerce has begun to crumble

with serious negative consequences. in july of last year, the global risk manager for miller coors testified before the senate banking committee that the commodity activities of banks cost that company tens of millions of dollars and more than $10 billion for all aluminum buyers globally in 2012. similarly, jpmorgan chase, deutsch bank, and barclays recently paid fines to the federal energy regulatory commission, which has won more than $8 million in civil penalties from banks since 2005 for manipulating electricity and natural gas markets. and then recently, "the new york times" documented aluminum warehouses owned by goldman sachs that used obscure exchange rules to drum up hefty fees while contributing very little tangible benefit to the economy. so what all of this shows is

that there's a move away from the traditional business of banking by banks and into more risky and, you know, potentially more lucrative but certainly more dangerous activities that seem to produce very little economic benefit while these banks are chasing profits and exposing themselves to steep fines and swings in commodity prices. so the bottom line for me is, do you support pulling back and getting the banks back into traditional banking business? do you support restricting or prohibiting altogether these expanded commodities activities by banks? and what does the federal reserve plan to do to curb these abuses? >> we're thoroughly reviewing our supervision in these areas. we have recently put out an

advance notice of proposed rule making in this area, highlighting a number of different issues that we want to consider. we will carefully look at the comments. i expect that we will be reviewing and likely making changes in these areas to address some of these concerns. i would say, though, that the federal reserve's main focus in our supervision of these areas is to make sure that banks operate in the commodities activities in a safe and sound manner. you referred in your remarks to allegations of market manipulation. and i would point out that it's the responsibility of market regulators, the cfts, the s.e.c., in some cases the firk, to pursue actions with respect

to market manipulation. we would, of course, cooperate in any investigation, but they do have primary responsibility. but yes, we're thoroughly reviewing our policies in this area. >> all right. that's great to hear. one other quick question. section 956 of the dodd-frank wall street reform and consumer protection act requires that the federal financial regulators issue a rule requiring big banks to disclose the incentive-based compensation agreements for employees who can expose the banks to excessive losses. in other words, an article, i believe, by gretchen morganson in "the times" a couple weeks ago. where are we on that? i know you're in the rule making process. do you agree with that approach? and where are we on that -- on the rule making process? >> well, we did put into effect supervisory guidance with respect to compensation in the

banking organizations that we supervise. we have engaged in horizontal reviews and are -- i believe there have been improvements in the compensation, incentive compensation practices of the organizations that we supervise, and we intend to be active in that area. >> time of the gentleman has expired. the chair now recognizes the gentleman from california, mr. royce, chairman of the house foreign affairs committee. >> chair yellen, it's good to have you here. congratulations. >> thank you. >> on your appointment. i was going to ask you about a speech you gave as president of the san francisco fed some years ago. as chairman of the federal reserve there, you made some observations as sort of a warning, a wake-up call to the situation as it relates to the federal budget deficits not

being sustainable. and your words were, we begin to look at numbers that are truly staggering, frightening. and you were talking about entitlements. you said, i'm concerned that the people take it as a given, that they have social security and medicare and support from medicaid to pay for nursing home care. and you explained then it was 8% of gdp. i think it was in about 2006 you gave that speech. 2005 maybe. you said that looking forward, the numbers showed that it would double that. it would be 16% of our entire gdp that would go to pay for entitlements. now i guess we're at 12 today, they tell me. and i was going to ask you about this because it's a very similar thing that we've heard after the federal reserve chairman ben bernanke retired. he made some comments about this. and also allen greenspan. your thoughts today on this? >> well, i agree with my

predecessors that when you look at these long-run trends -- at that time, i think we were looking over the next 30 to 40 years with unchanged programs, an ageing population, and at that time health care costs that were rising more rapidly than the general price level. you would see a very, very substantial -- i believe i said roughly doubling of the share of gdp that would go to those three programs without revenues rising in tandem. of course, that is the key dynamic that underlies cbo's long-term budget projections that show the united states to be on an unsustainable budget path. and this is something we have known about for decades. and we need to -- >> but this is a question i

have. i'm not sure everybody's gotten the message. i heard the leader in the senate say we have got a generation before we have to deal with this. and i guess my question to you is, if we don't deal with it now in order to bend this curve, what will be the result for young americans coming into the work force a generation from now? what will they face? >> well, we'll face a situation in which rising budget deficits begin to crowd out private investment and begin to lead to an environment of higher interest rates, slower growth, crowd out productive private investment. >> and economists agree with this. regardless whether economists are left, right, or center, they're all warning us of the same consequence. so the question i have is, is there a way for you basically to

sell the american public -- because i don't berealieve thate public really understands the magnitude of it -- in order to bring the pressure to bear to get an agreement that will address entitlement reform? how could you do that? how could you take your job as chair of the federal reserve and go out and explain the consequences of inaction in order to get washington moving and doing the right thing? >> you know, my predecessors, chairman greenspan and chairman bernanke, have consistently testified that these long-run budget trends -- >> but i'm sharing with you -- >> are highly problematic. >> i know. we've heard the testimony here. what i'm sharing with you is that it's not doing the trick. somehow we have to figure out a way to get you, as chairwoman, out among the public to build support and maybe with the support of former fed chairmen

who are saying today what you're saying today in order to galvanize the political, you know, action necessary because describing the consequences of inaction here isn't doing it. >> i believe that this is something that's essential for congress to address, and i anticipate consistently sending this message that this is a critical issue. >> anything you can do to figure out a way to turn up the heat and get the facts out to the public on the consequences -- i mean, people used to live to be 65. it's going to be 85, and they're having two children instead of four. this has to be addressed in terms of reforms. >> time of the gentleman has expired. chair now recognizes the gentleman from georgia, mr. scott, for five minutes. >> chair yellen, welcome. i'm over here. let me just ask you, because i need to ask you if you will be bold. we need bold leadership here.

you got to do a mission, fighting price instability, inflation. but employment, that part of the mission has always been like a stepchild for the fed. it's been like a second-class citizen. and we have a national crisis on unemployment. this is riveting. the 6.6 figure is misleading. i mean, college graduates right now getting out of college is 22%. young veterans, it's 24%. not to count young males at 30%. one-third of all the working-age women have already slid into poverty. we need you to be bold. we need you to take us not around the docks with the little boats. we need you to take us out with the big ships on this issue. i need to ask you, will you do that? will you lift this up and make the employment part of your mandate on an equal plateau with

fighting inflation? >> congressman, i strongly support both parts of the federal reserve's dual mandate. price stability and maximum employment. i have led the committee to produce a statement concerning its longer term policy strategies and goals that puts both of these on an equal footing. and in terms of bold policy, with the economy seemingly stuck -- >> my time is short. i want a yes or no answer. >> yes, i will -- >> will you lift employment up? i mean, this nation's in trouble. we have 50-year-old men who are being laid off in desperate situations. we have jobs being shipped overseas. in other words, what i'm saying is, we need more than just

zero-rate interest rates. your agency is the only one that has the mandate of dealing with unemployment. that is a dual mandate. and it has never been dealt with, with the level of importance that it should be. and let me ask you this, just to give you an idea. right now, did you know that legislation has been introduced in this congress to eliminate your employment mandate away from that? are you aware of that? >> yes, i am. i strongly support the federal reserve's dual mandate. both parts of it, both price stability and the employment mandate matter enormously to american households. i think it serves this country well. and there's no conflict between

most of the time, and especially now, between pursuing both pieces of this. we have acted boldly in order to promote a stronger recovery. >> what do you say to congress? why would congress, at this most critical time, when the future of this country is at stake -- this is a national crisis. the depth of unemployment, when you look at it structurally. and here in this congress, they're trying to take away a part of your dual mandate to eliminate your employment mandate at this critical time. what do you have to say to congress about that? >> i feel very strongly that the fed's dual mandate to focus on both employment and price stability has served this country well. we're committed to pursuing both

parts of that mandate, and we are doing so. >> chair, would you make it a part of the fed's policy and objectives to fight this legislation, to speak out against this legislation? all i'm saying here is that you have a great opportunity here. this country needs leadership on fighting this unemployment, this structured unemployment. in every factor, it is a shame that our young people have this rate of unemployment. many are giving up. they don't even calculate that in the work force, where they've given up. and ms. yellen, i am so proud of you, but i am going to be even more prouder if you become that chairman of fed to right the

wrong and take us -- >> time of the gentleman has expired. the chair now recognizes the gentle lady from minnesota, ms. bachman. >> thank you, chairman. we're extremely grateful for you being here. also, good luck on your service as the head of the federal reserve. we want you to be successful. >> thank you. >> we asked our constituents what their number one question would be today. this is a historic opportunity to have a new federal reserve chair, and we had a plethora of responses from constituents with questions. but it was interesting that there was a commonality of the questions that came forth. one was really from our financial institutions and businesses. and the first was from individual constituents. so i would like to give you, first of all, the question that we received most from our individual constituents, and it was this. it was, you and other opponents of the audit the fed legislation have said that it threatens the

independence of the federal reserve. could you please point to a specific section of the bill that allows congress to interfere with the ability of the federal reserve to determine monetary policy? my constituents absolutely can't understand why the federal reserve would push back against having the federal reserve audited. >> so i strongly believe that the federal reserve should be audited. it should be open. it should be transparent. we are audited. we're audited by the gao in almost every aspect of our financial affairs and the programs that we run. we have outside independent accounting firms that audit the fed. we publish our balance sheet weekly. all of this is completely appropriate. what i don't agree with and would strongly oppose is interfering with the

independence of monetary policy by bringing political pressures to bear on the committee's judgment about what is the appropriate way to implement monetary policy. we're given objectives by congress that's completely appropriate. we report to congress. you should hold us accountable and ask us to explain how our policies advance the goals that you have assigned to us, but if you pass a bill that wouldn't have the gao come and take documents, second guess every decision that we make or permit them to do that within a short time of our making those decisions and bring political pressures to bear, congress wisely made the fed independent in the implementation of policy

because it was understood that we sometimes have to make difficult decisions that would be hard for the congress to make in the best long-run interest of the country and enabling us to make those decisions free of short-term political pressure is critical to maintaining our independence. >> thank you. and i hear what your response is. our former colleague, ron paul, who had introduced the legislation to audit the fed, contained within the language of that bill, this is no section that deals with giving congress the right to determine monetary policy. if the house and the senate were to pass the audit the fed legislation, if the president of the united states would pass that legislation, this is very strong bipartisan legislation. if that happened, would we hear from all of you at the federal reserve opposition to that bill

that enjoys very strong support from the american public? >> you would hear opposition to that bill because congress has for many, many years, for decades, exempted from gao audits our monetary policy decisions. and it's really critical that our monetary policy decision makings, not other aspects of federal reserve operations, remain free of gao audits. >> and i think that's part of the reason why we're here in this hearing today. because the american people are feeling less and less empowered to be able to hold the federal reserve responsible and accountable. because they're seeing the federal reserve's balance sheet escalate to a level never before seen in american history. and the people know that eventually they will be the ones called upon to meet the bills and payments that are accumulated by the federal

reserve. what means do the american people have to hold the federal reserve accountable? >> in hearings like this, it's entirely appropriate for you to demand accountability from me and from my colleagues. >> and that's -- >> time of the gentle lady has expired. chair now recognizes the gentleman from texas, mr. green, for five minutes. >> thank you, mr. chairman. i thank the ranking member as well, ms. yellen. if you'll look over this way. yes, we're over here. thank you. and welcome to the committee. >> thank you. >> you have acquitted yourself well today. i'm sure this will be one of many visits that you'll have with us, and i look forward to continuing this relationship. we're in our genesis today, but there's much we can do together. i want to ask just two -- go into two areas. the first has to do with how much of the '08 crisis was cyclical as opposed to structural. because if you apply structural,

cyclical remedies to a structural problem, you don't get the desired results. so have you been able to quantify the amount of it that was cyclical as opposed to structural? >> well, when you say that we had serious problems in the financial sector of the economy, we are certainly trying to put in place changes that will make the financial system structurally sounder. but the crisis that was resulted from those weaknesses produced a marked downturn in spending in the economy and raised unemployment, lowered employment. much of that shortfall is cyclical in the sense that it represents a shortfall of our

economy producing well below what it's capable of. and we've been trying through our own policies to boost spending in the economy to create jobs and get the economy back to operating closer at its potential, at its capacity. >> the theory of expansionary physical contraction is one that many of my colleagues have bought into, and it is the notion that if you cut government spending, that will stimulate the private sector and create more jobs, more businesses will come into being. where do you stand on this theory of expansionary physical contraction? >> so i think government, the stance of government in the economy and its role in the

economy in the long term influences growth. it influences capital formation. dealing with budget deficits can have a favorable effect on economic growth in the long run. but in the short run, particularly in a weak economy, when government cuts spending or raises taxes, it almost invariably has the impact of lowering growth and raising unemployment. i believe that's what's been going on. >> do you think we have reached a point where cutting a loan is not going to give us the desired results? >> well, my predecessor, chairman bernanke, routinely advised congress to address long-term budget deficit issues, thought it was critical, as i do, to the long-run well being

and functioning of this economy. but to avoid cuts in spending or increases in taxation that would diminish the ability of the economy to recover. so there are ways of addressing long-term budget deficits that wouldn't weaken the recovery, and i share his view. >> thank you very much, mr. chairman. i yield back. >> gentleman yields back. the chair now recognizes the gentleman from new mexico, mr. pierce, for five minutes. >> thank you, mr. chairman. thank you, chair yellen, for being here and congratulations, not only your nomination but the confirmation. >> thank you. >> the -- one of the articles refers to you as the champion of main street. i think it's the senator brown of ohio says she'll be a fed chair that gets out and sees the real economy more and talks to people. i had submitted a request for mr. bernanke to come to the district and we'd host a town

hall together. i am still waiting on pins and needles for him to answer. maybe i'm giving up that eternal hope now, but i would reissue that invitation to you. >> thank you. much appreciated. i'll try to do that. >> well, i'll start waiting on pins and needles for you. okay. and the reason that i would make that offer is that in this hearing room, there have been references by people sitting a the that desk as seniors being collateral damage. that the low interest rate is acceptable collateral damage. and i'd like someone that sits on that side of the table to come out and explain that to the seniors that show up at my town hall meetings who say that we lived our life correctly. we saved. we paid for our homes. and now we're caught in policies that reduce our ability to live

on our savings, and they're eating on their principal, just trying to get by. that does not seem acceptable, because many don't have the capability to go back to work. in a previous testimony somewhere, you have said that there are other instruments available. but those instruments bring a higher risk. and the last thing an 85-year-old wants is more risk. they're just looking for that 2% or 3% coupon that does not exist anymore. that explanation to them of why they should understand that this is for the greater good sort of runs a little bit thin as they try to pay for increasing cost of food and gasoline, which don't show up in our inflation rates because we don't include them anymore, but the price of both are squeezing both the poor and seniors more than anything else, giving us a de facto war on the poor coming from washington right now. and that's probably the

recurring theme that i see there. now, i'd like to discuss just a little bit the logic. you said at one point that interest rates are lower because of too much savings. yet, you have a policy -- the feds have a policy of paying interest on excess reserves, which would be a de facto way of encouraging more savings. so any discussion ever come up why we're doing this, why are we paying this if we think there's too much savings? >> well, the fed is paying an extremely low rate on interest on reserves -- >> it's higher than zero, though, because zero is what -- one quarter of 1% is what seniors are getting right now so banks can make more than seniors. again, they see the advantage going to the rich, not to the poor. again, i just rep