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At Forum, Bernanke Defends Fed’s Aggressive Moves

July 27, 2009 at 12:00 AM EDT
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JIM LEHRER: Good evening. I’m Jim Lehrer from the Federal Reserve Bank in Kansas City, Mo., and I welcome you to this special PBS NewsHour forum: “On the Record with Bernanke” — Ben Bernanke, the chairman of the Federal Reserve. His role in matters financial and economic, most particularly in the immediate past and future, is paramount, and that is what he will be talking about tonight with a group of people from and around Kansas City.

The nonpartisan organization Kansas City Consensus helped us identify and select them. Those who will ask questions are sitting there in the center section directly in front of Chairman Bernanke and me. They have been pre-interviewed by NewsHour staff members about what they have on their mind to ask the chairman. I also have a few questions that have been emailed to us at our Online NewsHour site. And we’ll get some perspective-setting help from NewsHour economics correspondent Paul Solman.

Mr. Chairman, welcome, sir.

BEN BERNANKE, chairman, Federal Reserve: Thank you.

JIM LEHRER: Underlying many of the questions that these folks have are questions that are basic about the Federal Reserve itself. For instance, I’d like for Gwen Bailey to stand up.

Ms. Bailey, tell the chairman – get your mike, please. Tell the chairman what you told our producer when she talked to you about your questions for the chairman.

GWEN BAILEY: My name is Gwen Bailey. I’m a social worker with Visiting Nurse Association. And my particular interest is exactly what is the Federal Reserve? I don’t have a clue what they do, how they impact our lives, and that is why I was very interested to be selected to participate in this forum.

BEN BERNANKE: Gwen, you’ve got a good place to start there. The Federal Reserve is an independent government agency also called the central bank. It was founded about 100 years ago. It was founded actually in the beginning to try to address financial crises. There had been a panic in 1907 and that started the process by which Woodrow Wilson created the Federal Reserve.

So throughout our 100-year history, we have been very much involved in dealing with financial crises, trying to address situations just like we have now, when the financial markets are in disarray and they’re affecting the economy.

The Fed has some other important functions as well. The Fed makes monetary policy, and what that means is that we, including President Hoenig here from Kansas City, meet and set short-term interest rates. We set short-term interest rates in order to try to keep the economy on track. We have a mandate from the Congress to move interest rates up and down as needed to try to promote employment and to keep prices stable, keep inflation low. So monetary policy, moving interest rates around is very important.

We have lots of other things we do as well. We work with other supervisors to try to make sure the banking system is stable. We’ve had a lot of work to do on that in the last couple of years. And many people don’t know, we also do consumer protection. So if you look at your credit card bill, you’ll see the periodic statement. The structure, the lines, and the way that’s organized was determined by the Federal Reserve and the Federal Reserve sets a lot of the rules associated with how credit cards can be charged, the kinds of the penalties, fees and so on.

So broadly speaking, financial stability, trying to keep the financial market stable; monetary policy, interest rates to move the economy into a higher pace or a lower pace; banking supervision; and consumer protection. And so a whole range of financial economic issues.

JIM LEHRER: Thank you, Ms. Bailey.

Just to follow up, Mr. Chairman, when you say independent agency, define independent.

BEN BERNANKE: We are an agency of the government, but we’re – within the government we need to have some independence from Congress and the administration, and the most important area is monetary policy. There’s a lot of evidence that when politicians make monetary policy, you don’t get good results. Politicians have a short-term horizon. When they want the central bank to print money to pay for the government deficit, either one of those things is going to create a lot of inflation. What we’ve learned over time, and there is a lot of evidence to support this, is that when the Central Bank is allowed to make monetary policy with the interest – the long-term interests of the economy in mind, without the interference of the administration or the Congress, you get much better results. You get low inflation and you get good growth. This has been seen all around the world. So we’re very, very sensitive to this issue. We want to be very sure that when we make monetary policy that we’re doing it in a non-partisan way, that we’re going it based on what’s good for the economy and that we’re not being told what to do by the president or the Congress.

JIM LEHRER: So when you get up in the morning, who do you go to work for? Who do you feel you’re answerable to?

BEN BERNANKE: I’m answerable to the American people. I was appointed by the president to a 14-year term as a governor but a four-year term as the chairman of the Fed, and I was approved – I was confirmed by the Senate. So I obviously go through a political process to be appointed, but again, the Federal Reserve governors, the Board of Governors, the seven people who are at the head of the Fed in Washington, are generally professionals, technical people, people who are not lifetime politicians, people who wanted to serve the country using their knowledge in one of these areas that I was talking about like banking or monetary policy.

JIM LEHRER: When somebody says, oh, the Fed is the – essentially the fourth branch of government, how do you react to that?

BEN BERNANKE: That’s a tremendous exaggeration. As I said, the Fed needs independence in making monetary policy, and that’s good for everybody because it helps keep inflation low. But we are very accountable. We have to report regularly and frequently to the Congress. I was – just this last week I had to testify – maybe you saw me on television – I had to testify before both the House and the Senate explaining our policies, what we’re doing, and reporting to the Congress and the American people about our ideas, our decisions, and how they affect the economy.

And again, we are subject to the appointment process, and Congress can change the rules as well. So it’s not a constitutional type situation. It’s one where our independence has to be won every day, if you will, in that we have to show that we are producing good results and doing so without intervention or interference from other political bodies.

Understanding the Federal Reserve

JIM LEHRER: OK. Got it. Now, to set the various stages for where we go from here, we a have a report by NewsHour economics correspondent Paul Solman.

PAUL SOLMAN: In Missouri, with more Federal Reserve branches than any state in the country, Kansas City, with more fountains than any city outside Rome. Where better, we thought, to launch an explanation of the Fed's actions to supply liquidity so the economy can remain afloat. Economist Nick Perna.

NICK PERNA: Just like that old metaphor about the Federal Reserve trying to steer a course between inflation and recession. I'm sure you did a segment 20 years ago with a couple of my great old professors from MIT.

PAUL SOLMAN: Indeed, we did. Twenty years ago we went to sea with Nobel laureates Bob Solow and Franco Modigliani, who gave the image of Fed chairman as boat captain a classical twist.

FRANCO MODIGLIANI: He reminds me of a famous passage in the Odyssey that describes Ulysses trying to negotiate a passage between the two rocks.

PAUL SOLMAN: In Homer's epic poem "The Odyssey," one rock harbored six-headed Scylla. To the economic professors, Scylla symbolized the dangers of inflation which makes money worth less. Beneath the Odyssey's other rock, Charybdis, a ship-sucking whirlpool - to the economists, symbolic of the downward spiral of recession and unemployment.

BOB SOLOW: A little bit of recession creates a little pressure for more recession. My business is bad, I buy fewer materials. I lay off workers. They can't spend incomes they don't have.

PAUL SOLMAN: Thus the Fed's job - to steer a steady, sturdy middle course. No wonder the Fed is built to seem so Washington reassuring.

DONALD KOHN, vice chairman, Federal Reserve: This is the boardroom where the Board of Governors meets.

PAUL SOLMAN: Don Kohn is current vice chairman of the Fed.

DONALD KOHN: This is also the room where the Federal Open Market Committee meets to discuss monetary policy.

PAUL SOLMAN: And to make monetary policy, which is how the Fed steers, by deciding to draw money out of the economy if inflation threatens, pump money in, if - as now - recession is the monster.

NICK PERNA: So when the Federal Open Market Committee makes policy decisions, it's the job of the desk at the market groups to actually go out and implement that.

PAUL SOLMAN: The desk is at the stout New York Fed, famous for the five metric tons of gold - more than Fort Knox - tucked underground. 'Die Hard with a Vengeance' had to recreate the vault.

Fourteen floors above the gold, Brian Sack runs the open market desk.

BRIAN SACK, executive vice president, Federal Reserve Bank of New York: In open market operations the way we create money is by buying securities.

PAUL SOLMAN: Amazingly, the Fed's usual job for almost a century is as simple as that. To add money to the economy the Fed buys U.S. government securities, on this date, $3 billion worth, and thereby creates new money - federal reserves. It's supplying, in Fed-speak, liquidity.

BRIAN SACK: Financial firms will be giving us Treasury securities. In return, they'll be getting reserves or liquid assets that they can use for a variety of purposes.

PAUL. SOLMAN: But they're not really anything. I mean they're just electronic entries somewhere on their books?

BRIAN SACK: Right, right. Yeah. We don't send a truck out with $3 billion of bills.

PAUL SOLMAN: But to financial firms, the reserves are like cash in the vault. The more reserves banks have, the more loans they can make, and in competing to make them the lower the interest rates they offer. The usual result, more money flows through the economy.

Returning to the water metaphor, however, these were not usual times. That's because what everyone's been calling a perfect storm hit. The economy appeared to be going under. The Fed responded with what seemed like a radical laundry list. It pumped money into the system short term, lowering overnight interest rates dramatically; it loaned money longer term to financial firms in peril. Finally with Treasury, it gave money to fragile firms directly.

Back in the watery city of fountains, economist Nick Perna.

NICK PERNA: What they did was to provide financial liquidity, not the stuff we're standing in right now. They bought commercial paper, mortgage-backed securities. They bought preferred stock. They made direct loans. They injected hundreds of billions of dollars of funds, of liquidity, into the financial system.

PAUL SOLMAN: So, 20 years after we first shot him explaining the Fed on Martha's Vineyard where he summers, we asked Bob Solow to return to his steering-the-course metaphor. And we're using this boat because we're not going out on the water in this kind of wind. Steering the course between inflation and recession. Fed drives interest rates down almost to zero and yet we're still headed into a whirlpool of recession. What happened?

BOB SOLOW: Well, think of it this way. In normal winds the Fed can steer between inflation and recession by making small adjustments. But then a year or 18 months ago, there weren't normal winds. There was a perfect storm, a really dangerous blow, and a boat like this can't make headway against that. It'll get knocked down. So the Fed had to try something dramatically different, way outside of normal procedures, and it did.

Building a new framework

JIM LEHRER: Mr. Chairman, first, do you agree with the perfect storm analogy?

BEN BERNANKE: A lot of things happened. A lot of things came together. It created I think probably the worst financial crisis certainly since the Great Depression, and possibly even including the Great Depression, so yes, I agree.

JIM LEHRER: What were your worst moments, for you personally?

BEN BERNANKE: Oh, the worst moments were back in September. The financial crisis began with Fannie Mae and Freddie Mac, the large housing companies that were taken over by the government, and subsequent to that a number of very large financial firms came under enormous pressure. One of them, Lehman Brothers, an investment bank, failed. Others came close to failure, needed government support, not just in the United States, but around the world. And those were some very long nights I spent on the sofa in my office as we worked to try to keep the financial system running.

JIM LEHRER: Let's go to a question here from Janelle Sjue about this very thing, the storm and what Chairman Bernanke and others at the Fed were doing.

JANELLE SJUE: Hi, I'm Janelle Sjue, a Kansas City mother. I guess I have a couple short questions. First of all, we've given millions - hundreds of millions of dollars of tax money to these large corporations, these behemoths. Is that going to be enough to correct the situation?

And secondly, you know, I'll use the analogy of nature. When a prairie fire burns through, it takes out all the big overgrowth and allows all the small stuff to pop up. Why don't we just let the behemoths lay down and then make room for the small businesses? Thank you.

BEN BERNANKE: That's a great question. The problem we have is that in a financial crisis if you let the big firms collapse in a disorderly way, they'll bring down the whole system. When Lehman Brothers failed, the financial markets went into anaphylactic shock basically, and it was that shock to the financial system that led the global recession that began last fall, which is probably the worst one since World War II. So it wasn't to help the big firms that we intervened. It was to stabilize the financial system and protect the entire global economy.

Now, you might ask, you know, what's the deal? Why are we doing that? It's a terrible problem. It's a problem called a too-big-to-fail problem. These companies have turned out to be too big to allow to collapse because, again, if they collapse the - when the elephant falls down, all the grass gets crushed as well.

We really need - and this is critically important - we really need a new regulatory framework that will make sure that we do not have this problem in the future. And the present administration has proposed a system that would include - let me just mention two items.

First, that the Federal Reserve would oversee all these major big firms that are, quote, "too big to fail," and would put extra tough requirements on their capital and their activities, what they can do, the risks they can take. That would be the first part.

But the second part is very important. We would modify the bankruptcy code. The problem now is that the bankruptcy code is such that when one of these firms fails, it's a disorderly mess. What we need is a system where the government can say, this firm is about to fail, we can't let it just fail, but we've got to - we don't want - also we don't want to prop it up either. We need an alternative between bailout and bankruptcy, and that alternative is a system where the government can come in and seize the firm and then unwind it in an orderly way, sell off the assets, and do that in a way that does not cause chaos in the financial markets.

We have a system like that already. Right now the Federal Deposit Insurance Corporation, whenever a small bank or medium-sized bank is about to fail, it can come in before it fails, grab it, sell off assets, pay off the depositors, and this all happens without causing a huge problem in the financial market. That's what we need. And I agree with everyone here, too big to fail is a terrible situation. We've got to fix that. And I think that's the top priority for policy going forward.

JIM LEHRER: Bill Black here, staying on the storm question, has a short question on this. Bill Black.

BILL BLACK: Bill Black, professor of economics, law, criminology and former financial regulator, UMKC.

If this is a terrible situation and creates this kind of moral hazard, all theory says we need to remove the officers who put us in the situation. When will the Fed begin to remove those officers?

BEN BERNANKE: Well, when we've gotten into situations where companies were actually failing and had to be supported, first, I should say that this was not a Fed operation. The Fed and the Treasury have worked closely together, so it's been a broader - and the FDIC has participated as well. In those cases where companies were prevented from failing, the shareholders typically lost virtually all their money and we did replace the officers. Take, for example, AIG. The AIG CEO was fired. The shareholders lost all their money. Bear Stearns. Bear Stearns' shareholders lost all their money and the company was taken over by another company. So, you know, in most cases we have replaced the leadership and we have made sure the shareholders have lost the greatest part of the value.

JIM LEHRER: Got an e-mail, Mr. Chairman. This is from is Carl Deninger in Knoxville, Florida. The question is, "Since this crisis began with people unable to pay their bills and continues to be marked by this problem, how does expanding credit solve the problem? Isn't that going to be like giving a drunk a bottle of whiskey and calling him cured"?

BEN BERNANKE: Well, we have a case here of overreaction. It's true to some extent that this crisis was caused by too much credit, credit that was too risky, too easy. That's all true. But the financial crisis has caused a huge reaction in the other direction. And if you're - if you have a small business and you've tried to get a loan, you know that credit is very, very tight right now. We need to have sort of a middle course between credit that is excessively risky, excessively easy, and credit which is so tight that legitimate borrowers can't get credit.

The Federal Reserve has been working hard on this in a lot of ways. First, we've cut interest rates all the way to zero, the short-term interest rate, the one that we control. We've then worked with banks to try to increase their lending. And we have a whole set of programs. Let me just talk about one. We have a program that lends to investors who want to purchase consumer or small business loans from banks, and that puts more money into the system. And what we've found is that this program has brought down auto loan interest rates. We've helped finance 1.6 million auto loans. It's helped a lot in small business loans. We've financed about 600,000 small business loans. And so we have actually intervened in the market to try and get the credit markets working again.

So we had too much credit. It was too risky. It was too excessive. Now we've got to bring things back to sort of a nice middle ground.

JIM LEHRER: Jonathan Kempner, question.

JONATHAN KEMPER: I'm Jonathan Kemper. I'm a fifth generation community banker here in Kansas City. My question is, you reacted to a perfect storm going in, but I think the judge is going to be how you come out of it. As you talk about these new programs, all these special programs, are they going to be part of the normal course of business for the Fed going forward?

BEN BERNANKE: No, they won't. That's a good question. We have some programs we've had for a while, which are - as you would know, are short-term lending programs to banks when they need liquidity for short-term periods. And that's been around since the beginning of the Fed, and that would continue. But all the other programs, the special programs we put together to help in the commercial paper market, to help in the consumer loan market, to help in the mortgage market, all of those will eventually be unwound and be taken away as the normal market processes begin to function again.

We need to do that because we want to make sure, first, that markets go back to normal, that credit is allocated through the market process, and secondly, because at some point when the economy begins to recover we want to make sure that we don't overstimulate the economy into an inflation. And so for both of those reasons we're going to have unwind essentially all of the programs that are being put out.

JIM LEHRER: Dave Huston, you have a question in the same area?

DAVID HUSTON: Hi. Welcome to Kansas City.

JIM LEHRER: Thank you.

DAVID HUSTON: My name is David Huston. I'm a third generation small business owner with offices here in Shawnee, Kansas, a suburb of Kansas City, Des Moines and Omaha. My question is partly a statement but also a question. I said I'm very, very frustrated during the past year when I see billions and billions of dollars sent to large financial institutions, and it's what we were alluding to before. I'm especially upset when I hear the phrase, and you used this, quote, "that company is too big to fail."

As a small business person, that's very hard to swallow. I feel like a more accurate statement of policy would be too big to fail, too small to save. My business and thousands of others fall into that too small to save category. Small businesses employ more people than the Fortune 500 companies combined. Small businesses represent the blood - the lifeblood of small business - small cities, large cities and our American economy. Innovation and creativity is coming from small businesses. But I truly believe small business and the companies that support -

JIM LEHRER: Question. Question.

DAVID HUSTON: - small business are getting shortchanged by the Federal Reserve, the Treasury Department and Congress. Am I wrong on that perception?

BEN BERNANKE: Great question. Tough question, but a great question. Let me go first back to too big to fail, and let me just emphasize that nothing made me more frustrated, more angry, than having to intervene, particularly in a couple of cases where taking wild bets had forced these companies close to bankruptcy. There's nothing that made me angrier than having to do that. Why did we do it? Because if that company had collapsed in the middle of a crisis it could have brought everything down.

In 1929 - people think the Depression was created by the stock market crash. It wasn't. From 1929 to 1931, it was a normal recession. Then in 1931 a huge bank in the middle of central Europe collapsed and that created a global financial crisis which then made the recession into a Great Depression. I was not going to be the Federal Reserve chairman who presided over the second Great Depression, and for that reason, I had to hold my nose and stop those firms from failing. I am as disgusted about it as you are, and I think it's absolutely critical as we go forward that we put in a new system that will make sure that when a firm does not succeed in the marketplace, that it fails. That is absolutely critical and I support that 100 percent.

Now, on small business, I also agree with you. Small business is where the jobs come from, it's where the innovation comes from, it's where the creativity and entrepreneurship in America comes from. Every big company was once a small company, and so we really have to preserve and protect and strengthen small business, and I'm fully aware of those issues. We hear all the time about the credit issues for small business. We're doing what we can. As I mentioned, our program to get small business loans out. We're working with the banks, encouraging them to make loans. I understand your frustration. I absolutely understand your frustration, and we're working really hard to try to make it better.

JIM LEHRER: Mr. Chairman, as I'm sure you know, there were competing pieces in the Sunday New York Times op-ed section on the question of whether you deserve another term as chairman, and the negative part was written by - piece was written by Anna Jacobson Schwartz. She's an economist from the National Bureau of Economic Research. I'm aware that you know her. But let me just read you what she said, which relates to this particular question that we're talking about here as the storm and how the Fed reacted.

Quote, "The Fed delivered plenty of rhetoric about the importance of transparency, yet failed to articulate its own goals. The market was thus bewildered when the Fed rescued certain firms and not others. Mr. Bernanke should have explained the principles behind these decisions. The market could not understand why the Fed rescued Bear Stearns and then permitted Lehman Brothers to die. As a consequence, there was volatility in the credit and equity markets and a general sense of turmoil that demonstrated that participants were at a loss to understand the functioning of the Fed."

Your comment, sir?

BEN BERNANKE: My comment is that we tried to save all these big companies because we knew the implications. We tried to save Lehman Brothers. The problem, as I was discussing before is that we don't have a system, we don't have a structure. All these problems that she was alluding to occurred before even the Congress passed this TARP legislation that created the $700 billion to support failing companies. So we didn't have any tools.

In the case of Bear Stearns and in the case of AIG, by using the Fed's lending authority and other devices we jerry-rigged up a way of preventing the failure of those firms. In the case of Lehman Brothers, there was just a huge $40, $50 billion hole that we had no way to fill and no money, no authorization, no way to do it, so we had to let it fail. We had no choice. So I don't regret - I regret that it happened because it created a huge amount of difficulty. And in fact, it just confirms what I've been saying - that if you allow a big financial firm to collapse in the middle of a financial crisis, the consequences for the average person, for the global economy, are severe.

What Ms. Schwartz wanted us to do was to state in advance what our strategy was for saving firms. We had no idea which firm was going to fail and we didn't have a system, we didn't have a structure. And what I'm saying is going forward we need to have what we now have for banks, but don't have for other kinds of financial firms. We need to have a law, a set of laws, that allows the government to come in and systematically and in a transparent way wind down a failing financial behemoth, to use the word that was used before, so that it doesn't create damage throughout the system.

So her premise is that we made a conscious decision to let Lehman fail. We did not. We made - we spent the entire weekend with - basically 24 hours a day, trying to do everything we could to save that company, not again because we thought it was deserving, but because we knew what the implications were going to be. We didn't have the tools to do it. The other companies that were thinking about buying it decided not to buy it, and so we had no choice.

JIM LEHRER: All right. Let's move on now to the recovery. And the first question to James Thomas. To the recovery itself now. To the present.

JAMES THOMAS: James Thomas, recent economic graduate from UMKC. With the first phase of the stimulus bill in effect now - in my opinion, failed - what do you think worked and didn't work?

BEN BERNANKE: Well, I would say that it might be a little bit early to make that judgment. First of all, let me say one other thing, which is the stimulus package is the administration and Congress. The Federal Reserve's got nothing to do with it. I mean that's - you know, it's a different part of the government. But having said that, I think we have to wait a bit longer. The stimulus package is a big $787 billion package, but something like a quarter of that is getting spent this year and not even all of that is actually going into the system this year. So most of the money that's in that package is in 2010. So it may or may not succeed, but I think we've got to give it a bit more time.

JIM LEHRER: Bob Litan, you have a similar question, a follow-up question on that, I think.

BOB LITAN: Well, I guess I do. I'm Bob Litan from the Kauffman Foundation.

It's widely known among economists that the employment situation lags the general economy, that you really need the economy to grow at something like 2.5 percent a year in order to absorb the new workers and also to absorb productivity. So that means unemployment's going to continue rising even as the economy starts to recover. Can you give us any idea of when unemployment's going to peak out and then at what level?

BEN BERNANKE: Well, nobody really knows for sure, of course. Economic forecasting makes weather forecasting look like physics. But you're absolutely right. It takes about 2.5 percent growth to absorb new workers, keep the unemployment rate about constant. Right now we're seeing growth in the second half of the year, but our best guess, and it's only a guess, is that growth in the second half of the year will be about 1 percent on an annual basis. So that's not enough to bring down the unemployment rate. So our projections - the Federal Reserve - the members of the Federal Open Market Committee, which is the committee that sets monetary policy, puts out forecasts or projections four times a year which are publicly available, and our projections suggest that the unemployment rate will probably keep rising, probably a bit above 10 percent, it'll peak early in 2010, and then begin gradually to come down. We could be wrong. It could be a stronger recovery than that. But you're absolutely right, that even after the economy starts to grow again, and we're hoping to see that in the next third and fourth quarters, it'll be a while before the labor market, the job market, is back to where we want it to be.

JIM LEHRER: Sue Drakeford has a question that's also related to that.

SUE DRAKEFORD: Hello. My name is Sue Drakeford. I'm a banker at Hillcrest Bank and a board member with the Asian American Chamber of Commerce.

When is this going to end? That's my question.

BEN BERNANKE: That's a great question also. Well, there's a healing process that has to take place. We've made a lot of progress. As I said, last September and October we were in the middle of the worst financial crisis at least since the Great Depression. We've seen a good bit of progress in the financial markets. Banks have largely stabilized. The stock market, you know, is up a good bit in the last few months. Credit markets are beginning to open up again. So we're seeing progress in the financial markets, which is very encouraging and suggests that we are going to start seeing some growth in the economy.

We're going to expect to see growth in the economy in the second part of this year, then beginning to pick up in 2010, but as the previous questioner indicated, it probably will be longer than that before unemployment comes down to a level that we find acceptable.

So the Federal Reserve has been - I'll be very clear. The Federal Reserve has been putting the pedal to the metal. We have the interest rate as low as it can go. We are putting everything we can into strengthening credit markets. We are buying up mortgage securities to bring mortgage rates down and get people into houses. So we're doing everything we can to support the economy, and we hope that that's going to, you know, get us going next year sometime.

Now, I want to say one other thing, which is that recessions happen. They typically last one to two years. They're unpleasant. Financial crises can make them worse, and that's what we're seeing today. But I have tremendous confidence in this economy and in the American people.

I think Americans are very hardworking. They're innovated and creative and they're very ambitious. And we have a market system that under normal circumstances rewards those valuable traits. On top of all of that, one of the small silver linings of all this is that people are starting to save more because they've seen what happened to their 401(k)s and to their credit positions. So I have a lot of confidence that within, you know, a few years, that we will be not only back on track, but that we will be growing strongly again. I think this economy cannot be kept down. We will try to get through this process. It's going to take some patience. But I think in the longer term this economy will go back to what it has been, which is the most successful economy in the world.

JIM LEHRER: You have a follow-up to that, to what the chairman just said?

SUE DRAKEFORD: I do. Actually, in specific terms of TARP. A couple of banks, you know, have received TARP. And I want to know from you, how effective do you feel like the TARP program was and is there future plans to bring another similar program like TARP?

BEN BERNANKE: So the TARP stands for the Troubled Asset Relief Program. This was the $700 billion that the Congress approved for financial stabilization last October. It has been used for a whole bunch of different things. It was used initially to help stabilize the system, and that was critical, and it did help there. And it prevented some of the failures that we couldn't prevent before the TARP became available. It's also been used to give capital to healthy banks. And the evidence there I think is that it has helped them make more loans. The inspector general for the TARP has put out a report, which says that 80 percent of the banks who got the TARP money have used it to make more loans in communities around the country. So I hope that's helping, although obviously we still have a very tight credit situation.

But the TARP is now being used for a whole bunch of other things, and these things are really outside the scope of the Federal Reserve. It's been used in the automobile rescue, the GM and Chrysler rescue. It's been used in some foreclosure mitigation programs which are valuable programs that are obviously different from banks. So a lot of the $700 billion is going to other purposes.

And I would finally say that a number of banks have paid back the TARP. And remember, the TARP was supposed to be an investment. And just recently, ten large banks repaid the taxpayer $70 billion with dividends and interest so that, you know, the money came back. And not all the money will come back, but a lot of it will come back and, you know, I think that will be a good thing.

I don't expect to see another TARP program because, again, at this point the money is not being used primarily for financial stabilization but for a variety of other purposes.

JIM LEHRER: Amar Singh, you have a question about inflation, which of course is related to the recovery that's going on now.

AMAR SINGH: Yes. I'm Amar Singh and I'm a small IT company specializing in business intelligence. My question relates to the market policy in terms of the mounting national debt, how you're going to protect the U.S. dollar against other major currencies so that depreciating dollar does not cause the inflation just when you need to keep the interest rate low.

BEN BERNANKE: So the question is about debt and about the dollar, monetary policy?

AMAR SINGH: The national - mounting national debt will probably cause the U.S. dollar to become weaker versus other major currencies. So what are you going to do to protect the dollar so that all of a sudden all the imports we consume don't become too expensive - the inflation?

BEN BERNANKE: So different parts of the government have different responsibilities here. The federal debt, as I'm sure you know, the deficit this year is almost $2 trillion, the largest deficit probably since World War II. Next year it'll still be over a trillion. So these are enormous deficits that are adding to the national debt. Of course this is a responsibility of the administration and Congress, not - the Federal Reserve has nothing to do with the federal debt. But I think that, you know, as we look at that, we see - I think it's important to say that even though I don't think we could have avoided having a big deficit this year or next year given the weakness of the economy, given the financial problems and so on, it is very, very important for the Congress and administration to develop a plan and say here is how we're going to get back to fiscal sanity.

Here is how we're going to bring down the deficit over time so that it gets to a low enough level that debt no longer keeps mushrooming the way it has been. So that part is the responsibility of the Congress and the administration. A very important part of that, by the way, is healthcare because a big part of the government spending is healthcare related. So that's very important.

As far as the Fed and the dollar is concerned, the Fed supports the Treasury's strong dollar policy. We think the dollar should be strong. And the way we think - the best way we think to get a strong dollar is to have a strong economy. When the economy is strong, then there's a lot of good investment opportunities. Foreigners want to invest here, and that causes the dollar to rise.

So our whole strategy right now is to get the economy out of the doldrums and back into a growth path that will attract foreign funds and will get the dollar and keep it strong. So that's our strategy, a strong economy for a strong dollar.

JIM LEHRER: Barbara Stillman, you also have an inflation question.

BARBARA STILLMAN: I'm Barbara Stillman and I've been retired for a number of years.

I wonder what indicators you are considering in determining whether inflation is going to become a concern.

BEN BERNANKE: We look at - the question is how do we tell what inflation's going to do.

Well, first of all, we look at a lot of indicators. We look at commodity prices and - including energy prices, for example. We also look at the amount of slack in the economy. Right now with 9.5 percent unemployment and with markets as weak as they are, that is, the product markets, it's very hard for firms to raise their prices and for workers to raise their - ask for higher wages. And in fact, we're seeing prices and wages being very, very moderate. So our anticipation is that given the softness of the global economy, that except possibly for some fluctuations in energy prices, we expect for the next couple of years that inflation will be quite low.

Now, coming out of this episode, as I've mentioned, the Federal Reserve has brought interest rates down close to zero. We have put a lot of money into the economy through our lending program. So we've had a lot of stimulus, which we're trying to use to make the economy grow. Once the economy starts to grow and begins to move ahead, then it will be very important for the Fed to unwind, raise interest rates, bring that credit back, bring the money back, so that we don't have an inflation problem down the road. We are very confident that we have all the tools we need to take those steps at the appropriate time so that we don't make the mistake of having inflation ultimately. But just like in the film, it's like between Scylla and Charybdis you've got to navigate between inflation, deflation, recession and too rapid expansion. And, you know, we have our tools. We're going to be watching very carefully to try to make sure that inflation stays low.

JIM LEHRER: Now, Jared Campbell, you heard what the chairman said about the stimulus connection. But you have a concern about the stimulus. You have a question for the chairman about that.

JARED CAMPBELL: I do. Good evening. My name is Jared Campbell. I was laid off at the end of last year. I'm happy to report that I've started working full-time last month.

In regards to the stimulus, my question is: Has enough money been released this year for the impact to be what it needs to be to get the economy started again?

BEN BERNANKE: Well, first, I'm glad you found work again. That's good to know.

The Congress and administration, again, who put together the stimulus package, made a number of decisions which had to do with how quickly the money was going to get out versus other criteria. So for example, there's - there were a number of tax-rebate elements in that bill, and that money goes out really quickly and then people spend it over a few quarters, so that was pretty quick. But there were other parts of the stimulus, infrastructure construction, for example, building highways, that kind of thing takes longer and so if you're going to have that in your program it takes longer to get out into the economy.

So Congress and the administration made the decision that they wanted to have a mixture of different kinds of elements in their stimulus program. They wanted to have some things like infrastructure that they knew were going to take some time to get out. And so the outcome and again, this was the decision that Congress made the outcome was a situation where about a quarter of all the stimulus goes out this year and about a half goes out next year. Now, given that the unemployment rate is still likely to be reasonably high next year, unfortunately, I think having that stimulus next year will actually be helpful and will create some more jobs. So those were the decisions that Congress made. We'll have to see how effective that program is.

Consequences of foreclosures

JIM LEHRER: Jack Craft has a question about foreclosures.

JACK CRAFT: Given the significance of how -

JIM LEHRER: Name and -

JACK CRAFT: I'm Jack Craft. I'm a practicing lawyer in Kansas City.

Given the significance of the housing crisis, is there any way for the Fed to involve itself in incentives for either the homeowners or the servicers of mortgage to prevent a deterioration of prices merely because of the foreclosures themselves?

BEN BERNANKE: Foreclosures are a very big issue. We've put a lot of attention on that issue. Foreclosures are bad not only for the borrower, for the homeowner, but they're also bad for the community: When you have a lot of foreclosures in a neighborhood that brings down property values for others. It brings down tax collections for the town. As you pointed out in your question, lots of foreclosures, putting a lot of empty houses on the market, is also bringing down house prices, which is again hurting homeowners across the country. So there are a lot of bad effects of foreclosures over and above the problems that borrowers have.

Now, at this point there are a number of different approaches to dealing with foreclosures and their consequences. The government -- not the Fed specifically -- but the administration and the Congress now have two anti-foreclosure programs. One is called Making Homes Affordable, which gives subsidies to servicers -- reduced interest rates -- to let them help people stay in their homes. The other one's called Help for Homeowners - or Hope for Homeowners, and that - what that does is bring down the principal balance on mortgages so that people aren't underwater having a principal balance that's greater than the value of their house. The Federal Reserve was very involved in developing those programs, and we have -- our economists helped to develop them. And in addition, we are encouraging very strongly the banks that we supervise to ramp up their staffs so they can take advantage of those programs and help reduce foreclosures.

I would say also that the Kansas City Federal Reserve bank and the whole Federal Reserve System is very much involved in community activities, community work. The Federal Reserve Banks are working closely with NeighborWorks, which is a nonprofit, to help preserve communities and neighborhoods and stabilize them even though there may be a lot of foreclosures. So how do you do that, prevent the foreclosures from causing a lot of problems in a neighborhood or in a city. So we address things in a lot of different ways.

Unfortunately, the foreclosure problem is still very large. We expect about 2.8 million Americans to receive foreclosure notices this year. We hope less next year. But it's one of the key things to getting the housing market to stabilize and getting our economy back on track.

JIM LEHRER: Jason Wood has a related question.

JASON WOOD: Thank you, Mr. Chairman. Jason Wood. I work with United Way around our two-in-one system in getting homeowners to access housing counselors.

I guess my question is more in light of the report from the Federal Reserve Bank in Boston in regards to some of the monies that have been released to help homeowners and more importantly, the money that's been given to servicers. The report stated that the money maybe would have been better used if it had been given to the actual homeowners rather than the servicers. I'd like to get your commentary and what your thoughts are in regards to that.

BEN BERNANKE: Yes. First let me say that I'm glad to see you're doing counseling work. We found that having a counselor helps the borrower work with the bank, raises the probability of success quite considerably, so keep up the good work.

The report you're referring to was a research paper done by some Federal Reserve economists. It doesn't represent an official position of the Federal Reserve. It's just a research paper. But it addresses the fact that we don't have much experience with dealing with a foreclosure wave like this, and we don't really know necessarily what the best way is to address it. And their proposal is, instead of trying to restructure the mortgage, instead help the homeowner for the short period of time that he or she needs help: if you've lost your job, if you're sick. Maybe you just need help for a few months and then maybe that you could go back to paying your regular mortgage. So that's the proposal they made.

That's not the approach the government has taken. The government has taken, as I just described, a restructuring approach, bringing down the payment or bringing down the principal. We're just going to have to see which ones of these programs work and what kinds of modifications we have to make going forward.

JIM LEHRER: Speaking of going forward, you've already touched on a lot of this already, some of the things that are in the works or are being debated about how we move from here to there, some reorganization, new legislation, et cetera.

And let's start first with Elma Warrick because it relates exactly to what we've been just talking about in terms of foreclosures and housing.

ELMA WARRICK: Good afternoon, Chairman Bernanke. I'm Elma Warrick. I'm the executive director for Home for USA, which is a housing counseling organization HUD-approved.

You know, I've heard your responses and I think they're wonderfully clear and lucid. But my question has to do with how do we, having been through this in the midst of this perfect storm, how do we protect the consumers going forward? Because frankly, the heart of the mission of the Federal Reserve was to protect the consumer. And we find, unfortunately, in this foreclosure tsunami that the consumer has become the predator rather than the fact that they were preyed on. So what will we do going forward, Chairman, to protect the consumer and make sure the consumer is served as they ought to be?

BEN BERNANKE: Good question. As I mentioned earlier, the Federal Reserve's -- one of the Federal Reserve's functions is consumer protection. And we have addressed a number of issues in mortgage area, credit card areas, a bunch of other areas. As I've said before, we were late in addressing the subprime lending problem. There were a lot of loans made that were done without documentation, for example, that were done without clarity about prepayment penalties, that were done without clarity about escrow accounts.

The Federal Reserve a few years ago addressed those issues and we put together a set of rules which now apply to all lenders, not just banks but all lenders, that will, I hope, solve those problems going forward. But they weren't in place early enough, and that is a -- I think we have to take some heat for that, and I think that's appropriate.

But going forward, we have set some rules. The administration, of course, as you may know, has yet a more ambitious plan. They want to create a separate consumer financial protection agency that will have its only mission protecting consumers. So whether the Federal Reserve does it or another agency does it, I hope that we'll learn some lessons from this episode and make sure the consumers can make good choices but that the choices they have are clear, transparent, so that they can shop and not be fooled or deceived in terms of the kinds of financial products that they use.

ELMA WARRRICK: Thank you.

JIM LEHRER: Erica Shackelford has a related question.

ERICA SHACKELFORD: Good afternoon, Mr. Chairman. Erica Shackelford. I'm affiliated with the Urban League of Greater Kansas City and I'm also a full-time student.

Thinking about the mortgage crisis, predatory lenders allowed people to get themselves into loans that they could not afford. What does the Federal Reserve plan to do to educate the public in the future so that this type of crisis does not reoccur? And also, would you support a mandatory education component as part of the mortgage-lending process?

BEN BERNANKE: Well, you know, first, as I mentioned, we have done the regulations, but we also are very much in favor of financial education, financial literacy. The Federal Reserve, including the Kansas City Federal Reserve, have numerous financial literacy programs. We provide - on our Web sites we provide courses. We work with all kinds of groups that provide financial training. I think it's very, very important that people have that kind of experience now because everybody has to deal with complicated financial products in their everyday life. So I'd like to see more financial-literacy courses in schools. Our experience is -- and we have a number of people here who are counselors -- our experience is that the most effective time to teach people about financial products is when they're thinking about buying. If you're thinking about buying a house, that's the time people listen real carefully when you explain mortgages to them. In high school, we see less-effective results. But financial literacy, economic education, it's a big mission of the Federal Reserve.

You mentioned predatory lending. We've also gotten to public education. We put out, for example, a public service announcement that's playing in movie houses. I don't know if you saw it or not. But there are a lot of scams out there now. There are people who are taking advantage of people who are afraid of losing their homes. And it's very important that if you are afraid of losing your home, if you have gotten a foreclosure notice and you're working with a bank, it's very careful - it's very important to be sure that if you have been approached by some counselor or someone who says they're going to help you to make sure they're legitimate because there are scams out there, and we have been working on those and trying to keep people alert to those.

JIM LEHRER: But you used the word mandatory. You asked the chairman whether it should be mandatory to be counseled in a financial - in a homing - home owning - home buying situation, correct?

ERICA SHACKELFORD: That's correct. The question was, would you support mandatory education - a mandatory education component as a part of the mortgage lending process going forward?

BEN BERNANKE: I'd be open to that. I think a lot of people could use that.

JIM LEHRER: In other words, somebody would sign something that they have to know -

BEN BERNANKE: That they've had some -

JIM LEHRER: - they had to know the rules -

BEN BERNANKE: Yeah.

JIM LEHRER: - before they -

BEN BERNANKE: Yeah. That's not a Federal Reserve-specific issue in the sense of our authority, but I think it's worth looking at.

ERICA SHACKELFORD: Thank you, Mr. Chairman.

JIM LEHRER: Rob Givens, you have a question on the consumer-protection issue that has come into public -

ROB GIVENS: Thank you, Mr. Chairman. Rob Givens, president of Mazuma Credit Union here in - locally.

A lot of financial institutions have been under compliance and regulatory control for a long time. There's some concern that creating a new federal agency separating some of those responsibilities and then adding perhaps some additional responsibilities from the Fed for consumer regulation would in fact put an additional burden on small institutions which would then cause them to fail and leave more too-big-to-fail people out there. What's your sense of how that - that new agency and where it's funded and - I mean there's a lot of issues with that, and how that plays with the Fed's responsibility.

BEN BERNANKE: Right. So this is the proposal by the administration to create a consumer financial-protection agency. And, you know, I can understand the motivation for creating such an agency. It would be an agency that would be focused on consumer issues. But there are some drawbacks, and you mentioned one, which is that if the consumer protection agency has its own examination force, its own going out - examiners going out to banks and then the banks will have to see both the safety and soundness examiners from the Fed or from the office of the comptroller of the currency as well as the consumer-protection agency's examiner. So there would be a duplication of effort to some extent. And some of the knowledge and information that one group gathers would not necessarily go to the other group.

Another possibility which has been discussed would be to leave the examination authorities with the banking agencies themselves where they are now, and just move the rule-writing authority to the consumer-protection agency, which is another possibility. That also has some issues, because then the rule-writers would not be together with the examiners. They wouldn't get the feedback, they wouldn't get the knowledge that the examiners get every day on the ground, in banks. So it's a tough issue, and I know Congress is going to be wrestling this for some time.

JIM LEHRER: But you're opposed to it, right?

BEN BERNANKE: I'm neither opposed to it or in favor of it. I just want to make the point - I think there's an important point to be made, which is I acknowledge that the Fed was late on subprime lending regulations. I acknowledge that. But for the last two-and-a-half, three years, the Fed has been very, very active in mortgage areas, in credit cards, in student loans, in all kinds of areas, and we've been very effective. And so I'm just saying that we've done a good job and we're an alternative if this agency doesn't work out. But again, I understand why people would say you need an agency that's focused on this area.

JIM LEHRER: I've got an online question from Robert Dietrich in Towson, Md. "What do you see is the most significant current or potential threat to the Federal Reserve's independence?"

BEN BERNANKE: Well, again, the independence of the Fed is extraordinarily important. If the Congress or the administration were to begin to interfere with our monetary policy decisions, then the markets would say, "Wait a minute, if there's going to be more inflation because of political reasons, more inflation because the government wants to the Fed to spend money in order to pay for the deficit." So it's incredibly important that the Fed maintain its independence. I think we will. I think we need just to be very vigilant and make sure that there isn't any bill or any other effort made by anyone to take away that independence. And we're going to do our best to maintain it because it is so critical for the stability of our economy.

JIM LEHRER: As you know, there's an effort in Congress now, in the House in particular, to audit what the Federal Reserve does, particularly a monetary policy. How do you feel about that?

BEN BERNANKE: So that bill - people don't fully understand what that bill is about. It sounds like audit the Fed, it sounds like let's look at the books. It's not what it sounds like. The Congress already looks at our books. We have many different layers of auditors. The GAO, the General Accountability Office, which is supposed to be doing this audit, already looks at virtually all of our activities, and the ones it doesn't - our financial books and our financial loans and so on, and the ones it's not looking at and where the taxpayer needs some assurance is we're willing to work with Congress to make sure that the GAO gets the information it needs.

What people don't understand is that this bill would give the GAO the authority to audit monetary policy. And what does that mean? That means that if the Federal Reserve decided a year from now that because of incipient inflation it was time to raise interest rates, that the Congress would say, "Oh, the GAO's going to audit that decision. It's going to subpoena your materials. It's going to demand information from the members of the FOMC. It's going to evaluate your decision and report to Congress." I don't think that's consistent with independence. So we are completely open to providing any information that Congress wants to make sure we're using taxpayer money safely and soundly, that we are meeting all our responsibilities. I don't think the American people want Congress running monetary policy, and I think that's very, very critical for people to understand.

JIM LEHRER: And do you think that's what -- would end up doing?

BEN BERNANKE: Exactly. That's what it would do. There's a provision in that law which currently, current law, which carves out monetary policy, and it doesn't give Congress authority or GAO authority to audit it. That was put in in 1978, at a time when we had a lot of inflation, as you may remember. After that, the Fed became more independent, brought inflation down. But now that's exactly what it would do. If that carve-out is eliminated, the Congress would have the authority anytime to ask the GAO to come in and audit and look at and evaluate the monetary policy decisions made by the Fed. That's not consistent with independence.

Lessons of the Great Depression

JIM LEHRER: Crosby Kemper has a question about regulating.

CROSBY KEMPER: Crosby Kemper, Mr. Chairman. I've also been a banker in Kansas City and now I'm a librarian.

As a banker, I can tell you that the two banks who are represented here, my cousin and I, are two of the solvent banks left in the country. So welcome to Kansas City. You can relax. (Laughter.) And - but I'm also a librarian today. I'm the director of the Kansas City Public Library and an amateur historian. And I've read your book, "Essays on the Great Depression." Wonderful book. And you talk about two causes of the Great Depression. One is the failure to the Federal Reserve to provide an adequate monetary policy. It tightened too much during the days after the stock market crash. And you talked about the non-monetary problems, part of which was the failure, despite great liquidity of the banking system, to respond to the problems of production and unemployment.

And I wonder if there isn't a similar problem going on today in regulation where you're going exactly the other direction, with too much monetary policy; I mean, too much money creation in your monetary policy, in an attempt to intervene to control prices through the mortgage programs and other things, if we aren't getting to the stage on the opposite end of too much regulation, too much government intervention, just at the moment when it looks like the economy may be turning around bottoming out.

BEN BERNANKE: Well, thank you for reading my book. (Laughter.) I'd be glad to autograph it if you have it with you. (Laughter.)

I learned -- I did spend a lot of my career studying the Great Depression and other financial crises. And I didn't expect it would be so helpful, so useful, as it has been. But I learned three lessons from my work on the Great Depression, and you identified two of them. The first one was monetary policy has to be supportive, not restrictive. In the 1930s, the Federal Reserve allowed the money supply to collapse, allowed prices to fall, and that was a major force -- a major factor in the Depression. So this time the Fed was aggressive in cutting interest rates, providing supportive monetary policy, and getting, you know, that part going.

The second thing I learned from looking at the Depression was, as I mentioned before, that allowing the financial system to collapse -- and we had several thousand bank failures here in the United States in the 1930s which the Fed could have stopped, or at least most of them. Letting the financial system collapse is also a very, very bad thing to do, and it contributed very considerably to the collapse in the credit markets and, again, to the Great Depression. And for that reason I have taken the approach that we want to make sure that the financial markets are as stabilized as possible, that we don't have a financial collapse because we know what the consequences of that can be for the broad economy.

But the third thing I learned was this - that the Federal Reserve in the 1930s was completely orthodox. It did things today we think are wrong, but it was doing it based on what at the time were the standard policies, the standard approaches. They didn't use anything unusual. And I think what I learned from that is that when you're in a situation like this, a perfect storm, sometimes you've got to do something a little bit outside the box, a little bit more aggressive. And so when the Federal Reserve got interest rates down to zero, we couldn't cut it anymore and so we had tried to address a lot of the other problems, like fixing the credit markets in the ways that you described.

Now, your point is absolutely right, and someone else mentioned this before. We can't do that forever. Eventually the credit markets have got to go back completely into private hands, the private sector needs to be allocating credit. We are trying to support the markets now, in a period when I think the economy still needs help and when I don't think inflation is a near-term problem. But you're absolutely right that as the economy begins to show strength, then we're going to have to gradually unwind, pull out those special programs, and let the economy do what it's supposed to do, which is allocate credit to the best uses.

JIM LEHRER: And, Manuel Abarca, you have a question?

MANUEL ABARCA: My name is Manny Abarca and I'm a current student in the University of Central Missouri. My question is, as a student and future professional, what would you recommend to my generation to handle this current situation, financial crisis, and prevent future crises from happening?

BEN BERNANKE: Well, I've some kids out of college and we've had some discussions about this. I think this affects you both on a personal basis and on a broad national-policy basis. Personally, I just want to say that we recognize that there are a lot of people graduating from college or graduate school right now and see a very tough job market right now, and we know that, and it's not your fault. And it's part of the reason that we're so aggressive trying to get this economy moving again.

But I would urge you in looking for jobs to not give up, because the way the job market works is -- job markets just don't - jobs just don't disappear. What happens is that some jobs are created and others disappear. So, for example, right here in Kansas City, there've been some pretty significant layoffs, but then also in the last year there's been some pretty big hires as well - not enough to offset the layoffs, but still some hires. So the labor market is always churning. There's new jobs being created, other jobs being destroyed. You need to look. You need to see what you can find. And when you look, you need to be flexible and you need to say, maybe this isn't my ideal, long-term job, but it's a job that I can learn something from, I can get some work experience, and when this economy improves, which it will, then I'll have the background and the experience I need to get the job I really wanted. So let me just give you that bit of encouragement.

On keeping this from happening again, you know, we've had financial crises since the 1300 and 1400s. They happen all the time. This is a particularly bad one. So I don't think we're ever going to completely eliminate financial crises, but there's a lot we can do to make sure that one this severe and this damaging doesn't occur again in the United States. And there I haven't had much chance to talk about it, but the Federal Reserve and the administration have made proposals about how to change our financial-regulatory system. And let me just mention two parts of it.

One part is we need to have a more system-wide approach. Instead of just looking at a silo at each individual institution, each individual market, we need to have a council or a group of regulators that looks at the financial system as a whole and looks for gaps and problems that can cause trouble. So that's one important element.

The other important element -- and let me just reiterate this again -- too big to fail has got to go, and to get rid of too big to fail, we need a way to let big companies fail safely. And to do that, we need a new kind of bankruptcy process that's similar to what the FDIC already has for banks that will allow the government to come in and to take a failing company and to unwind it, sell it off, let it fail, but do it in a way that doesn't bring the whole financial system down.

And so those two things I think would be a tremendous help in both stopping future financial crises, but if one occurs making sure it doesn't have as negative and adverse effect on the economy as this one has.

JIM LEHRER: Peter Cabell has a question about the stock market.

PETER CABELL: Chairman Bernanke, my name is Pete Cabell and, as was mentioned, my question is about investing.

JIM LEHRER: Give us a line about you, sir.

PETER CABELL: A line about me? I'm currently working at a nonprofit. Over the last 10, 11, 12 years, the market has - U.S. market, stock market has not delivered a sustained positive return. As we all get closer to retirement, that's a big problem. Despite the decade-long -- bounce off a decade-long low, the market still has a lot further to go to make portfolios whole. So as we go forward, is there a good engine to invest in as an alternative to the stock market that would be reasonable to look at?

BEN BERNANKE: So I can't practice financial advising without a license over here. (Laughter.) I think the answer to your question, and it would depend very much on your individual circumstances -- you're a young man, you're not about to retire -- is diversification. The stock market is very volatile. It's risky and we've seen how it's gone up and down twice now in the last 10 years, but over long periods of time it tends to do somewhat better than bonds, for example. And so generally speaking unless you're very close to retirement you probably ought to have some stocks and equities in your portfolio, but you can diversify through a whole range of different things, including bonds or CDs, including even perhaps commodities and other types of investments. So I guess I'd give you two pieces of advice. One is to diversify your investments that you have a lot of different things so that if one thing goes up maybe something else, you know, will go down and just balance out.

The other thing I would suggest to you is don't try to time the market. You can't. You know, people - it's very, very difficult to do it and there may be a couple people in the world who can do it, but if they are, they're not telling you. So pick an allocation of assets and stick with it. And over a long period of time, as long as the economy is healthy -- and that's the key thing -- as long as the economy is growing, which I believe it will, I believe we have a very good long term future here in this country - then that asset mix will do OK. So that's about as far as I can go, otherwise I think I would get malpractice suits going on. (Laughter.)

JIM LEHRER: A question for Alicia Falcone - from Alicia Falcone.

ALICIA FALCONE: Mr. Bernanke, I am a marketing consultant here in Kansas City and my question for you is, you've had a chance to oversee the Fed during a historic time in our country's history. What keeps you up at night relative to being the Fed chairman and looking at our economy over the near- and medium-term?

BEN BERNANKE: Well, first, let me say that the Fed Reserve does not equal the chairman. One of the things I wanted to do when I became chairman was to try to sort of depersonalize the Federal Reserve at some extent. The Federal Reserve is an outstanding organization. We have terrific staff, terrific presidents around the country, Reserve banks and governors, so it's not all on my shoulders. I know there's a lot of people there who are watching 24/7. We have people who worked 100 hour a week through the financial crisis, for week after week so it's not just me. You know, there's plenty of people there who are doing good work and I can sleep at night knowing that they're on the job.

More generally, I worry about the same stuff that you would think I worry about. I worry about the economy and the financial markets. I worry about how we're going to deal with these credit issues, but I try to do it during the daytime because if I do it at night, I might not be thinking so straight during the day. So that's kind of where I am.

JIM LEHRER: But there's no overriding concern that you have right now that of all the things you've done, you and your colleagues and the financial - Congress, the administration whatever, there's no overriding concern that you have every day or right now?

BEN BERNANKE: Well, I continue to look at the financial markets. I think they've improved quite noticeably.

JIM LEHRER: Is that a criterion for testing?

BEN BERNANKE: That's a very important one, the financial markets, because after all this has been a financial crisis, it was the financial crisis that caused the global recession. I follow the economy extremely closely.

JIM LEHRER: How do you follow it? What are the measurements?

BEN BERNANKE: I get reports and data and survey materials and everything all through the day. My inbox is always full.

JIM LEHRER: Like on what is - like what? Like on housing, on -

BEN BERNANKE: On housing, on the job market, on industrial production, on what's happening in the financial market. One thing is people sometimes ask me, do you have like a single indicator or a single variable? The answer is no, because it's a big, complicated economy and it's kind of like the elephant in the Indian folktale where everybody sees a different part of it. In order to get -

JIM LEHRER: I'm not sure I heard that. I don't know about it.

BEN BERNANKE: Yes. It was an elephant and you had six blind people feeling the elephant. And one feels the tail and says, an elephant is like a rope. And another feels the trunk and says, it's like a tree, and so on and so on. And the only person who can see the whole elephant, obviously, is somebody who has been all around and looked at all the different parts of the elephant.

So we've got an elephant of an economy. It's got lots of different parts. You've got to look at everything. There's not a single one variable or another that is critical, there are a lot that are very interesting and we pay a lot of attention for example, to unemployment insurance claims, which is a weekly indicator what the legal market is doing. Lot of other variables, but generally speaking, we them all together and try to get sort of a holistic picture out of all the data and information that we get, including information that comes from the Federal Reserve banks, because each of the Federal Reserve banks has got a board and advisory councils and the president of the Federal Reserve banks, when they come to Washington for federal open market committee monetary policy meetings, they bring anecdotes, information about what people are seeing, kind of like this meeting here.

And that's very helpful because the data we get is backward looking. We're going to get data this week on the second quarter GDP. Well, the second quarter is over already. If we want to know what's going to happen in the third quarter and the fourth quarter, it helps to know what business people are saying, what bankers are saying and we get that information from all our Reserve banks around the country and so not just numbers, but also anecdotes, personal information can be very helpful in forecasting the economy.

JIM LEHRER: So to answer Ms. Falcone's question then, once you put all that together on this particular Sunday night, you're going to sleep well?

BEN BERNANKE: I'm pretty tired. (Laughter.)

JIM LEHRER: Thank you very much, Mr. Chairman.

BEN BERNANKE: Thank you.

JIM LEHRER: It was a pleasure.

I want to thank all of you in the audience, all of you who participated with questions and all of you who participated as the audience. I want to thank our online viewers. We didn't get to too many of them, but we got to a few. And I also want to thank our local television host, public station KCPT, and then the Kansas City Consensus organization that helped select the folks who are here. And I also definitely want to thank the folks here at the Federal Reserve Bank of Kansas City. And that ends it. And from Kansas City, Mo., I'm Jim Lehrer. Thank you and good night.