 Good afternoon. My name's Catherine White, and I'm a member of the University of Michigan Board of Regents, and first I would like to recognize our president of the University of Michigan, Mary Sue Coleman, who's here with us, and we also have two Regent Emeriti, Phil Power and Neil Nielsen here with us today. So thank you. And so on behalf of the University of Michigan, I would like to welcome you all here this afternoon. It is a tremendous honor to have Federal Reserve Chairman, Dr. Ben Bernanke, as our featured speaker. Chairman Bernanke will be introduced more thoroughly in a moment by today's host, Dean Susan Collins, from the Gerald R. Ford School of Public Policy. The first portion of our program will consist of a conversation between the Dean and the Chairman, and as such, let me take a moment to introduce Dean Collins to you. Dr. Collins is the Joan and Sanford Weill Dean of Public Policy and a professor of Public Policy and Economics. The Ford School is one of the top public policy programs in the nation. The Ford School is known for its excellence, from its faculty that is outstanding to its firm grounding in degree programs in social science research, and additionally, the Ford School has remarkably strong connections and affiliations with scholars, programs and opportunities from all over the nation and the world. Dr. Collins' area of expertise is international economics, including issues in both macroeconomics and trade. She is currently a non-resident senior fellow at Brookings and vice president of the Association for Professional Schools of International Affairs. Just last month, Dr. Collins was appointed to the board of directors of the Federal Reserve Bank of Chicago's Detroit Branch, and she joins a group of private sector leaders, scholars and analysts, whose responsibilities range from general supervision of the bank to making recommendations on monetary policy. And very importantly, Dean Collins and her colleagues continually share their understanding of our region's economic conditions to advise monetary policy. Her work on the board and indeed today's event itself are clear examples of the University of Michigan's strong commitment to helping our state and our region grapple with its urgent policy challenges. And now, to begin our program, let's welcome Dean Susan Collins to the stage to formally introduce Chairman Bernanke. Thank you very much, Regent White. It is also my great pleasure to welcome all of you here today and on behalf of the Gerald R. Ford School of Public Policy, the University of Michigan is extremely honored to welcome the honorable Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve System. Today's conversation is the latest in our series of distinguished lectures, policy talks at the Ford School. We're so pleased that Regent White could introduce today's event, and we're also very pleased to have President Mary Sue Coleman with us today, as well as Regent Emeritus Nielsen and Power, who were already mentioned to you. We also have several of the University's executive officers and deans, and I would like to welcome all of them and thank them for joining us today. Well, it's an honor and truly a personal pleasure for me to introduce our special guest. As the central bank of the United States, the Fed's charge is to promote a healthy economy and a stable financial system. This is a complex and critically important mission, and that makes the person at its helm one of, if not the most important, economic policy makers worldwide. Chairman Ben Bernanke was first appointed Fed Chair in 2006, and he has served in that role during the most challenging period for monetary and financial policy since the Great Depression. The financial crisis, the Great Recession, very slow recovery with persistently high unemployment, evolving global challenges, and the very contentious situation between Congress and administration, which continues to stymie fiscal policy. Chairman Bernanke was uniquely prepared for this extremely complicated role. As a highly respected economist, he taught at Harvard, MIT, and Stanford before joining Princeton's faculty. He had already served as a Fed Governor and chaired the President's Council of Economic Advisors. He's an expert on the role of central banks, and he's renowned for his research on policy during the Great Depression, specifically how the Fed could have handled things better. In fact, in 2000, he wrote a paper entitled, A Crash Course for Central Bankers, which was published in Foreign Policy. He has a deep and long-standing commitment as well to education, and I know he recently took time out to do a town hall meeting for K through 12 teachers. And so I'm particularly pleased today that joining us in the audience is an advanced placement economics class from Chelsea High School, a special welcome to you. We're delighted to have you with us. A word about our format. For the first portion of our time, Dr. Bernanke will join me here on the stage in a conversation about a number of economic issues. For the rest of the time, he has graciously agreed to take questions from the audience, and so at around 4.30, our staff will be coming through the aisles to collect question cards from you. Those of you who are watching online or even those of you in the audience are welcome to tweet your questions to us as well using as a hashtag Ford School Bernanke. Professors Catherine Dominguez and Justin Walfers will select questions along with two of our graduate students, Hayden Allen and Kirby Smith. And now it is my great pleasure and honor to welcome to the stage Chairman Ben Bernanke. Susan, before we get started, I wanted just to take a minute to remember Ned Gramlich, who taught here at University of Michigan more than 20 years and was one of the first deans, if not the first dean of the Public Policy School here. I knew Ned as a member of the Board of Governors of the Federal Reserve in Washington. He was a terrific colleague. He was one of the first people to figure out the subprime issue, as you probably know. And it was a great loss when he passed a few years ago. So I just wanted to say that and to thank you for inviting me here to Michigan. Well, thank you very much. Both, we are delighted to have you here, but also for your special words about Ned Gramlich, who has played such an important role in the Ford School development. And we're delighted to have you recognize that. Perhaps a good place for us to start our conversation is with something that I'm sure many in our audience have been paying close attention to in recent weeks, and that is the fiscal cliff. I actually believe that that's a term that you're credited with popularizing last February. You've stressed that uncertainty about fiscal policy is one of the real concerns that is slowing economic growth. Well, a deal was struck recently. What are your views of the outcome? Well, when you think about fiscal policy, there are a whole lot of issues, but I think the two big issues right now that we need to think about first is the long-run sustainability of our debt. As the Congressional Budget Office and a lot of other experts have shown, if there's no change over the next couple of decades, deficits will rise, debt to GDP ratios will rise, and our debt will become unsustainable. So a very, very important objective for policy is to find a plan to bring the federal budget under control over the next few decades. The second issue, though, which in some way seems contradictory to the first, is that, as you know, we're still in a relatively fragile recovery, and we want to avoid taking fiscal actions that will push the economy back into recession. And that was one of the risks that the fiscal cliff posed, that if tax increases and spending cuts of that size were all to occur in the short run, the CBO and others estimated that unemployment would rise, and we very well might go back into a recession. So the challenge is to achieve long-run sustainability without unduly hampering the recovery which we have. Now the deal that was struck together with the previous work in 2011 that involves some spending cuts made some progress in both of these goals. On long-run sustainability, at least over the next decade or so, we have seen some movement towards stability in terms of the debt-GDP ratio, for example. More work to be done for sure, a lot more work to be done over the longer period, but some progress there. And then on the short run, the fiscal cliff deal on New Year's eliminated a good bit of the restrictive components of the fiscal policy that would have had such adverse effects. Again, not completely, but at least a good start. So there was a bit of progress on both of these two goals, very importantly. But I should hasten to say that we are not out of the woods because we are approaching a number of other fiscal critical watersheds coming up. We've got the funding of the government. We've got the so-called sequester, which is a set of automatic spending cuts that were delayed by two months as part of the fiscal cliff arrangement. And we have the infamous debt ceiling, which will come into play. So we will be seeing a lot of activity in the next few months, debates about the appropriate size of the government, about the size of the deficit, and a lot of back and forth over these three issues. I think I just want to, without going into all the different ramifications, I want to say one word about the debt ceiling, which is that not everybody understands what the debt ceiling is about. The debt ceiling, raising the debt ceiling, which Congress has to do periodically, gives the government the ability to pay its existing bills. It doesn't create new deficits. It doesn't create new spending. So not raising the debt ceiling is sort of like a family which is trying to improve its credit rating saying, oh, I know how we can save money. We won't pay our credit card bills. Not the most effective way to improve your credit rating. And it was the very slow solution to the debt ceiling in August 2011 that got the US downgraded last time. So it's very, very important. All these issues are important, but it's very, very important that Congress take necessary action to raise the debt ceiling to avoid a situation where our government doesn't pay its bills. Well, a number of people have expressed concern about how much of the challenges actually were addressed in the deal. As you've mentioned, it certainly went part way, but it leaves a number of issues still on the table, and the additional negotiations are looming. Would you characterize that as an additional cliff that is facing us, or do you think that it's not as concerning as it was when you raised that term initially? Well, as I said, the fiscal cliff, if it allowed to take place, would have probably created a recession this year. A good bit of that has been addressed. But nevertheless, we still have first a fairly restrictive set of fiscal policies now. It's estimated that federal fiscal policy will subtract from real GDP growth, something on the order of 1 to 1.5% this year, quite significant drag on the economy. And at the same time, we have quite a bit to do to address our long-term sustainability issues. So there's a lot more work to do. Let me be very clear about that. But it's going to be a long haul. It's not going to happen overnight. Basically, because the government budget represents the values and priorities of the public, and decisions being made about what to spend on, what to tax, and so on, are very difficult and contentious decisions that are going to take some time to address. Well, those issues, of course, are not the specific purview of the Fed, and so why don't we shift gears and talk more explicitly about some of the things that the Fed is doing and things that the Fed might do. Perhaps a way to introduce that is to say that the Fed, of course, has been keeping interest rates at close to zero since roughly 2008, and it's dug pretty deep into its arsenal of very unconventional policies more recently, in terms of, in particular, the very massive asset purchases recently launched its third round, which are intended to bring long-term interest rates. Can you tell us how well you think that is working? So to go back just one step, as you said, we've brought the short-term interest rate down almost to zero, and for many, many years, monetary policy just involved moving the short-term, basically overnight interest rate up and down and hoping that the rest of the interest rates would move in sympathy. Then we hit a situation in 2008 where we had brought the short-term rate down about as far as it could go, almost entirely to zero, and so the question is what more could the Fed do? And there were many people a decade ago, there were a lot of articles about how the Fed would be out of ammunition if it got the short-term rate down to zero, but a lot of work by academics and others, researchers at Central Banks, suggested there was more that could be done once you got the short-term rate down to zero, and in particular what you could do is try to address the longer-term interest rate, bring longer-term rates down, and there are two basic ways to do that. One way is through talk, communication, sometimes called open-mouth operations, the idea being that if you tell the public that you're going to keep rates low in the long term that that will have the effect of pushing down longer-term interest rates, but the question, the one you're asking about is what we call at the Fed large-scale asset purchases, or otherwise known as QE, the idea there is that by buying large quantities of longer-term Treasury securities or mortgage-backed securities that we can drive down the interest rates on those key securities, and that in turn affects spending investment in the economy. The latest episode, so far we think we are getting some effect, it's kind of early, but overall it's clear that through the three iterations that you refer to that we have succeeded in bringing longer-term rates down pretty significantly, and clear evidence of that would be mortgage rates, as you know the 30-year mortgage rate is something like 3.4% now and incredibly low, and that in turn makes housing very affordable, and that in turn is helping the housing sector recover, creating construction jobs, raising house prices, increasing activity in that sector, real estate activity, and so on. So I think broadly speaking that we have found this to be an effective tool, but we're going to continue to assess how effective, because it's possible that as you move through time and a situation changes that the impact of these tools could vary, but I think what we have decisively shown is that the short-term interest rate getting down to zero, what economists call the zero lower bound problem, does not mean the Fed is out of ammunition. There's still things we can do, things we have done, and I would add that other central banks around the world have done similar things and have also had some success in creating more monetary policy support for the economy. So you had mentioned that of course there's been evidence that the longer-term interest rates, mortgage rates, had come down through the initial rounds. A concern is that the unemployment rate remains very high, and to further increase activity to try to bring that down, one would hope to see some additional movement from the most recent round. Are you suggesting that one would need to be patient, or can you say a little bit more about how you would assess whether this most recent round is having the kind of effect that you would expect or anticipate? As I said, we'll be doing that on a regular basis. We'll be looking first at the impact on financial markets, and we do see some impact there. We'll be looking to see whether or not the labor market situation is improving. There has been some modest improvement. When we first began talking about the latest round, the unemployment rate was about 8.1, now it's about 7.8. There's been some movement, but we would obviously like to see a stronger labor market. A labor market with nearly 8% unemployment, with 40% of the unemployed having been out of work for six months or more, that's not an acceptable situation. That's a situation where there's too many people whose skills and talents are being wasted, who are suffering significant hardships. We're looking to see improvement in the labor market and in the economy more broadly. We'll continue to evaluate. I can't give you specific criteria except to say that we'll be assessing the impact of our actions on financial market conditions, and looking to see how those link up to developments in labor markets and in the broader economy. As always, you have to make assumptions. You have to think, ask yourself what would have happened if we hadn't taken these actions. Again, the evidence seems to be, and I would cite not only evidence on the US, but also on the UK and elsewhere that these types of policies do have some impact on the economy. At this point, of course, having reduced the short-term interest rate close to zero, we're looking for the tools that we can get to get better outcomes. Certainly, hopefully there will be more of an impact going forward to continue to bring the unemployment rate down more quickly. You mentioned that you were looking at the kinds of tools that are available. Is there more in the Fed's toolkit that might have the kind of power to have additional effects? Well, first, on the pace of improvement, that's an interesting question because the pace of growth, of economic growth over the last few years since the beginning of the recovery, has not been as strong as you normally would think would be needed to get really big improvements in the labor market. Nevertheless, we have seen a decline in unemployment from 10 to 7.8, which is fairly significant, and we hope to see an ongoing improvement there. So it's a little bit hard to judge exactly how much more improvement we'll see, but certainly we want things to keep things going in the right direction. In terms of additional tools, as I mentioned earlier, once you get the short-term interest rate down to zero, there's basically two principle approaches, either securities purchases or communication. There are a few other things of smaller magnitude, like the interest rate we pay on the excess reserves, for example. But I think those are the two basic approaches that we have. Of course, we can continue to try to improve our communication, look for ways to be more effective, but as far as I'm aware, there's no completely new method that we haven't yet tapped. We have just had a meeting of the Detroit Board of Directors of the Chicago Fed, as you know, which provides some information about the conditions more explicitly in this region, and certainly the conditions across the country are quite varied. And I wonder if you could share how you factor in the differences across different parts of the economy when making decisions that, of course, are more aggregate. Well, first, thank you, Dean Collins, for joining the Detroit branch. People probably don't know, unless you have been studying this, but every Federal Reserve Bank around the country, the 12 Reserve Banks, and a good number of additional branches, each one has a board of directors drawn from the private sector. It could be academics, it could be business people, it could be community leaders, nonprofit organizers, and so on. And we draw these people in primarily to get their input and their insight. This is a very large and complex economy. There are many different sectors, and it's very helpful to us to have people from leaders from different parts of the economy, from different parts of the country, providing this input and giving us somebody to bounce ideas off of to help us make a better decision to understand what's going on. So that's very useful. And I attended at least part of the meeting this morning with the Detroit branch, and I heard from a number of people about the auto industry, health care, academics, industry, a variety of things. So that's actually very useful. Now, in terms of the local economy, you know, Michigan is still notwithstanding that it's become much more diversified, it still has a pretty significant reliance on auto production. And because auto sales drop so sharply during the Great Recession, the unemployment rate here rose, I think, like to 15% or something like that, compared to a 10% national peak. It's now come back quite a bit as the auto industry has improved. And so we are seeing, I think, some strengthening, although conditions here are still not where we'd like them to be. Housing market also, I think, has come back some in Michigan. But like many other industrial parts of the country, like Pittsburgh steel plants and other places, Michigan also is diversifying and is bringing in high tech, various kinds of services, health care, education, and so on. And places like University of Michigan and Arbor are a tremendous resource for entrepreneurs, people trying to develop new high tech businesses. So it is a good sign to see that America still has a powerful industrial base, but it is diversifying into a wide range of new types of industries. So it is a large and complex economy. I don't know if you want me to talk about the broader economy or not, but we can come back to it if you like. But we have been seeing some improvement in the labor market is still not where we'd like it to be. Growth has been moderate. There are some positive signs to look at. And I think one of the key positives I already made reference to is housing. As you know, house prices in the U.S. fell about 30%. And the manner of construction fell extraordinarily over this recession. And now for the first time, really since 2007, 2006, we're starting to see increases in production, high rising house prices. That's going to affect household wealth. So that's one positive factor that's going to help us have, I hope, a better year in 2013 and then in 2014. A few other things that are positive just to point out. One is that state and local governments, which have been in very contractionary mode because of the loss of tax revenue during the recession and laying off people have been postponing spending, they're in much better shape now than they were a few years ago, including in Michigan, I think. And as a result, they're not going to be the drag on the economy that they've been for the last few years. Energy, the energy industry in the U.S. is looking much stronger. Consumers are more optimistic. University of Michigan publishes the index of consumer sentiment, which is one of the very best guides to how consumers are feeling. And as long as the fiscal policy thing isn't getting too messed up, the consumers seem to be a little bit more upbeat. So there are some positives, but I want to be clear that while we've made some progress that it's still quite a ways to go before we're where we'd be satisfied. Well, let me shift gears a little bit. Certainly, as you well know, there are some very vocal critics of that policy. And I wonder what you might say to those who argue that, for example, the policy that has maintained interest rates at such low levels has actually taken some of the pressure off of Congress to try to address these fiscal challenges. And that the massive asset purchases have created extremely high risks, perhaps underappreciated risks for future inflation. Well, they're critics on both sides, you know. You should give the other guys a chance. I'll get there. You'll get to that later. I'll get there later. Well, let me first say that as we think about the costs and risks of any policy, we should also think about what we're trying to accomplish. And I made reference already, but the Federal Reserve has a dual mandate from the Congress to achieve or at least to try to achieve price stability and maximum employment. Price stability means low inflation. We have basically taken that to mean 2% inflation. Inflation has been very low. It's been below 2%. And appears to be on track to stay below 2%. So our price stability record is very good. Unemployment, though, as we've already discussed, is still quite high. It's been coming down, but very slowly. And the cost of that is enormous in terms of lost resources, hardship, talents, and skills being wasted. So our effort to try to create more strength in the economy to try to put more people back to work, I think that's an extraordinarily important thing for us to be doing. And I think it motivates and justifies what has been, I agree, an aggressive monetary policy. So that's what we're doing. And that's why we're doing it. Now, are there downsides, are there potential costs and risks? There are some. You mentioned inflation. We have obviously used a very expansionary monetary policy. We've increased the monetary base, which is the amount of reserves that banks hold with the Fed. There are some people who think that's going to be inflationary. Personally, I don't see much evidence of that. Inflation, as I mentioned, has been quite low. Inflation expectations remain quite well-anchored. Private sector forecasters do not see any inflation coming up. And in particular, we have, I believe, we have all the tools we need to undo our monetary policy stimulus and to take that away before inflation becomes a problem. So I don't believe that significant inflation is going to be a result of any of this. That being said, price stability is one part of our dual mandate. And we will be paying very close attention to make sure that inflation stays well-contained as it is today. The second issue I think would probably worth mentioning is financial stability. This is a difficult issue. The concern has been raised that by keeping interest rates very low, that we induce, the Federal Reserve induces people to take greater risks in their financial investments. And that in turn could lead to instability later on. Again, a difficult question. I probably could take the rest of the hour talking about it, so I don't think I'll do that. But what I will say is that we are, first of all, very engaged in monitoring the economy and the financial system. The Fed has increased enormously the amount of resources we put into monitoring financial conditions and trying to understand what's happening in different sectors of the financial markets. We have also, of course, been part of the very extended effort to strengthen our financial system by increasing capital in banks, by making derivatives transactions more transparent, by toughening supervision, and so on. So we are taking measures to try both to prevent financial stability and to identify potential risks that we would then address through regulatory supervisory methods. So we're very, very much attuned to those, to these issues. But once again, I think this is something that we need to pay careful attention to. And as we discussed in our statement and have for a while, as we evaluate these policies, we're going to be looking at the benefits, which I believe involve some help to economic growth, to reduction in unemployment. But we're also going to be looking at cost and risk. We have a cost-benefit type of approach here. We want to make sure that the actions we're taking are fully justified in a cost-benefit type of framework. Now you mentioned, I didn't talk about the congressional issue. You know, I think that, you know, it's not really up to the Fed to try to be playing games, to try to induce Congress to do what it's supposed to be doing. Congress needs to be addressing these fiscal issues. And interest rates will eventually rise. We hope they'll rise because that means the economy will be strengthening. So, you know, we're not going to be playing games with that. We are going to follow our mandate, which means do what's necessary to help the economy be strong. Congress should take care of their job, which is to address the fiscal issues, which I talked about earlier. And I don't think that small changes in interest rates are really going to make that much difference. Indeed, I think the worst thing we could do would be if we raised interest rates prematurely and caused a recession, that would greatly increase budget deficits and would just make the solution to the problem all that much more difficult. So, I don't see that raising interest rates in order to force Congress to take action on the fiscal policy is a very sensible way to go. Well, as I mentioned in my introduction, you came to your position with a real expertise as one of the world's experts on the Great Depression and how policymakers should react in the midst of a crisis. Now that you have actually lived through a major global crisis, I wonder if you could tell us what surprised you most? The crisis. I was very engaged, very interested in financial crises. As an academic, I worked on the Great Depression. I did theoretical work on the role of financial crises in the macroeconomy. And I was very interested when I came to the Fed in addressing issues related to potential crises. But obviously, you know, this was a very large and complex crisis that was more severe than I anticipated, certainly. And I think we fear to say that most people anticipated. But we did learn some things from history. And I think there's a lot of value to studying history, particularly from our perspective economic history, because it helps you see what your predecessors did wrong and did right. Two things we learned from the Great Depression, one was not to let monetary policy get too tight. In the 30s, the Federal Reserve did not actively try to expand monetary policy accommodation. And as a result, there was a deflation, about 10% of your deflation falling prices, very damaging. The Fed also did not do very much in the 30s to try to stabilize the banking system, which, you know, about a third of all the banks in the country failed. So those were two lessons that we really tried to learn from. We, of course, have been, as we've been discussing, very aggressive on the monetary policy side. And we took strong actions to try to stabilize our financial system, because we understood that if the financial system collapses, then the economy is likely to collapse as well. So we took those actions learning from what had happened in the 30s. A couple of other things I think that were useful. During the 30s, in part because, obviously, the world was still recovering from World War I, there was a lot of international enmity. Cooperation among central banks, among governments, was not very good. In fact, you may know about, your audience may know about the Smoot-Hawley tariff and the tariff wars and all the other things that happened during the 30s. It's very important, if you can, in a global crisis like this one, to cooperate, to coordinate as much as possible with policymakers around the world. And that was something that we did quite actively, both in terms of banking and financial regulation stabilization, and even to some extent in monetary policy, when at one date, five or six of the world's largest, most important, central banks coordinated an interest rate cut. We've also worked with other central banks in making sure, for example, that they have enough dollars to lend for banks that need to use dollars in their transactions. So cooperation has been very helpful in the latest episode. That was another thing that we learned from the 30s. One last thing that occurs to me. One reason that the Fed and other policymakers didn't take more aggressive fundamental action to try to end the Great Depression was they were afraid to do anything that was unorthodox. There was the gold standard. There was a whole variety of standard practices, and given the great uncertainties that they face, and I'm not being critical because it was an incredibly difficult period, they often maintained a very orthodox approach. The person who changed that in the United States was President Roosevelt, who did a lot of different things, some of which didn't work, some of which didn't work. But sometimes when you're in a very severe situation, you need to consider unorthodox approaches. The Fed and other central banks did undertake some unorthodox policies, which not all of them worked, but a lot of them did. And we did help to stabilize the global financial system and begin a process still underway of bringing our economy back to where we'd like to see it. Well, you raised the issue of what's going on globally and the cooperation that has emerged, which certainly is a very positive thing. But of course, those global linkages are very important in terms of prospects for U.S. growth. If you look over the medium term, where would you see a plausible scenario to generate the demand for the growth that we hope the U.S. is able to achieve? We aren't eager, I think, you would agree, to go back to the very high household consumption levels that were arguably unsustainable. Given the challenges in Europe and slowing growth in China, it's not so clear where that growth might come from. And I wonder what your thoughts are about that set of concerns. Well, it's true that global growth has been somewhat slower for a variety of reasons, different reasons. One is the European situation, which you alluded to. Europe, much of Europe, is in recession at this point following the very difficult financial problems that they've had. Some emerging market economies have slowed for, again, for a variety of reasons. The slowdown in China was at least partly a policy goal to try to create a more sustainable and stable growth path and to try to shift the sources of demand in China from foreign buyers' exports to domestic demand. So a variety of things have happened to slow overall growth. And we saw in the U.S., just the last reading, we saw pretty weak export numbers. And that's, for us, that's a loss of, again, potential growth from our perspective. So there are a couple of challenges. One globally, the different parts of the world that are facing slowdowns, each has to address its own set of issues. In Europe, there's some progress that's been made in addressing their sovereign debt and banking issues that they have. The European Central Bank has taken some important steps to try to stabilize the financial markets there, have been helpful. They're working on improving their fiscal arrangements, both to create longer-term sustainability in individual countries, but also to put up a set of agreements under which countries will be willing to work with each other on fiscal matters. They are working to develop a banking union where bank regulation would take be done throughout the Eurozone by the ECB or some other agency. And that would strengthen the European banking system and make it less dependent on individual countries. So steps are being taken in Europe, which I hope will help stabilize that situation over time. In the emerging markets, again, you have a variety of different stories, but I think the fundamentals there in the emerging markets are pretty good, as you know. And even if there is some moderation of growth in some countries, we are seeing overall a rather remarkable transformation of places like China and India, which has been the biggest anti-poverty program in history. The growth in those countries has lifted many millions of people out of poverty. So I think the growth will proceed in those areas as well, with each country, each region, Latin America, Asia, dealing with different sets of issues. Well, I know that our audience has many questions to pose to you. Perhaps let me ask one final one before I turn over to our students to read questions from the audience. And that has given all of the range of things that we have already discussed. Are there one or two particular things that keep you up at night? Well, we have a dog that's this big that sleeps with us. I tried to get as much sleep as possible. I think that's probably good. It didn't work out this today because the airline canceled and it's a long story. But no, I want to see our economy recover. I'd like to see this. I'd like to see stronger labor market. I'd like to see fiscal policy address the issues that I mentioned. There are a lot of obviously difficult issues out there. But I do think things are moving not as fast as we would like, but in the right direction. And I'm therefore cautiously optimistic about the next couple of years. Thank you. Well, as I mentioned, I'm sure that there are a great many questions that have already been shared with our presenters. So let me turn the floor to them. Thank you for your comments, Chairman Bernanke, and for your questions, Dean Collins. My name is Kirby Smith, and I'm a master's student at the Ford School of Public Policy and the Ross School of Business. And the first audience question is that if Treasury had printed or minted a trillion dollar platinum coin, would the Fed have accepted it and credited Treasury's accounts? If not, why not? And what does this mean for the independence of the Fed moving forward? Well, I'm not going to give that any oxygen. As you probably know, the Treasury and the Federal Reserve over the weekend, the Treasury issued a statement which the Federal Reserve approved, stating that we didn't think this was the right way to deal with this problem. I mean, there are legal issues or policy issues. I think the right way to deal with this problem, as I said earlier, is for Congress to do what it's supposed to do and needs to do and authorize an increase in the debt ceiling so that we can pay our debts, we can pay our bills. And that's the right way to do it. And, you know, I think that's what will eventually happen, but I don't think that going off in that other direction would really be all that helpful. Hello, Chairman Beneke. My name is Haven Allen. I am a second-year MPP at the Ford School and also studying for a graduate certificate in science and technology. Second question for the audience, does the debt ceiling still have a practical purpose and could it be eliminated without much consequence? Does what have? The debt ceiling. Oh. No, it doesn't really have. You know, it's got symbolic value, I guess, but what, no other country, I believe, and maybe the one or two other countries, but I think, essentially, no other countries in the world have this particular institution, just so everybody understands what it is. The Congress appropriates a hundred dollars, tells the government to spend $100 on whatever, and then it raises $80 in revenue through its tax code. Now, the arithmetic here, so it says, you know, you've got to borrow $20, right? No, the Congress has to give a third rule, which says that 100 minus 80 equals 20. There really is, I mean, if the Congress is approving spending and it's approving taxing and those two things are not equal, then it's kind of logically that there's got to be something to make up the difference and that difference is borrowing. Now, I'm not saying that deficits and debts are a good thing, I'm not saying that at all, but the way to address it is by having a sensible plan for spending and a sensible plan for revenue and make decisions about how big the government should be or how small it should be. But, again, as I was saying before, this is sort of like a family saying, well, we're spending too much, let's stop paying our credit card bill. That's not the way to get yourself into good financial condition. So, yes, I think it would be a good thing if we didn't have it. I don't think that's going to happen, and I think it's going to be around. But I do hope that Congress will allow the government to pay its bills, not raise the possibility of default, which would be very, very costly to our economy, and then address very seriously these fiscal issues. I'm not saying we shouldn't do that, absolutely. There are a lot of important issues and very basic fundamental values involved. So, let's do that, but we don't need to do it in the context of the debt ceiling. So, do you believe that the Fed should actively prevent future asset bubbles, and if so, what tools do you have to do that? Well, asset bubbles are very, very difficult to anticipate, obviously. But we can do some things. First of all, we can try to strengthen our financial system, say by increasing, as I mentioned earlier, by increasing the amount of capital and liquidity that banks hold, by improving the supervision of those banks, by making sure that every important financial institution is supervised by somebody. There were some very important ones during the crisis that essentially had no effective supervision. So, if you make the system stronger than if a bubble or some other financial problem emerges, the system will be better able to be more resilient, will be better able to survive the problem. Now, you can try to identify bubbles, and I think there's been a lot of research on that, a lot of thinking about that. We have created a council called the Financial Stability Oversight Council, the FSOC, which is made up of 10 regulators and chaired by the Secretary of the Treasury. One of whose responsibilities is to monitor the financial system, as the Fed also does, and try to identify problems that emerge. So, you're not going to identify every possible problem, for sure, but you can do your best, and you can try to make sure the system is strong. And when you identify problems, you can use, I think the first line of defense needs to be regulatory and supervisory authorities that not only the Fed, but other organizations like the OCC and the FDIC and so on have as well. So, you can address these problems using regulatory and supervisory authorities. Now, having said all that, as I was saying earlier, there's a lot of disagreement about what role monetary policy plays in creating asset bubbles. It is not a settled issue. There are some people who think that it's an important source of asset bubbles, others who think it's not. Our attitude is that we need to be open minded about it and to pay close attention to what's happening, and to the extent that we can identify problems, we need to address that. The Federal Reserve was created in about 100 years ago now, 1913 was the law, not to do monetary policy, but rather to address financial panics. And that's what we did, of course, in 2008 and 2009. And it's a difficult task, but I think going forward, the Fed needs to think about financial stability and monetary economic stability as being, in some sense, the two key pillars of what the central bank tries to do. And so we will obviously be working very hard on financial stability. We'll be using our regulatory and supervisory powers. We'll be trying to strengthen the financial system. And if necessary, we will adjust monetary policy as well. But I don't think that's the first line of defense. Okay. This question comes from Twitter. Since the Fed declared it was targeting, targeting a 2% inflation rate in January of 2012, the FOMC has released its projections five times. In each one of these projections, the inflation rate has come in below this target. Why then has the policy been set to consistently undershoot the target? Was that 140 characters? I suspect many in our audience had related questions. That's a very good question. And when we've tried to address, as I said earlier, when Dean Collins was asking me about the risks of some of our policies, I was pointing out that inflation is very low. Indeed, it's below the 2% target. And unemployment is above where it should be. And therefore, there seems to be a pretty strong presumption that we should be aggressive in monetary policy. So I think that does make the case for being aggressive, which we are trying to do. Now, the additional point that I made, though, was that the short-term interest rate is close to zero. And therefore, we are now in the world of non-standard monetary policies, weird asset purchases and communications and so on. And as we were discussing earlier, we have to pay very close attention to the costs and the risks and the efficacy of these non-standard policies, as well as the potential economic benefits. And to the extent that there are costs or risks associated with non-standard policies, which do not appear, or at least not to the same degree, for standard policies, then you would, you know, economics tells you when something is more costly, you do a little bit less of it. We are being quite accommodative. We are working very hard to try to strengthen the economy. Inflation is very close to the target. It's not radically far from the target. But in trying to think about what the right policy is, we have to think not only about the macroeconomic outlook, which is obviously very critical, but also the costs and risks associated with the individual policies that we might apply. So I'd actually like to follow up on that question a little bit. One of the things that you mentioned earlier, which is in the toolkit and which you have been trying to use in a variety of ways, is the way that the Fed explains its policy to the public First, there was a number of announcements that set dates for how long interest rates would remain low. More recently, the move to making it conditional on performance. And a variety of changes such as more information in the minutes about the kind of information or the kind of discussion that has happened at the Fed. And I wonder whether that increased information about what the Fed's thinking you see as helping to be more effective or perhaps being complicating the message to some degree. Well, of course, that's up to some extent in the up to the auditors, the beholders, to determine whether they think it's helpful or not. But I think that to address your specific point, that switching from the date, when we started out by trying to convey to the markets when we thought short-term interest rates might start to rise, initially we gave a date, which was just our best guess. And as conditions changed, we changed that date a couple of times. A better way to do it, in my view, is instead of talking about a date, which is a very non-transparent way to explain what you're doing, people say, well, how did they get that date? What does it mean? Instead, what we've tried to do in our more recent evolution is to try to explain what we will be looking for in terms of unemployment and inflation, our two main mandate objectives, before we would begin the process of raising interest rates. So that is, first of all, much more transparent. It helps people understand what our thinking is and what we're looking at. But also, if the outlook changes, suppose for example that some really good news comes in, I hope it does, some really good news comes in about unemployment. If we were using the date, people wouldn't know how to adjust that. I mean, how do we change that? Is the date still valid or not? But if we're using these guideposts in terms of inflation and unemployment, then the investors in the market can say, well, the date where we get to 6.5% unemployment seems to be a little closer now than we thought, and that would allow us to change our estimate of when the Fed is going to respond. So that should allow a greater clarity about how policy will evolve over time, and that's our goal. I mean, we have worked as a committee. It's not easy to work with 19 people, all who have very strong opinions, but over time we have tried to increase our clarity and tried to communicate more clearly. Each individual change can be debated, but I think if you look at the broad sweep of what we've accomplished in the last 15 years or so at the Federal Reserve in terms of communication, there's just been an enormous change. And we are just much, much more transparent and easy to understand, I think, than would have been the case 15, 20 years ago. So the shift from Fed speak to talking about fiscal clips is really quite striking. This question is from an audience member. What's one aspect of financial policy that you think requires reform but which isn't currently being discussed in the media? Well, I think the main area that has been put aside for the time being is the government sponsored enterprises, Fannie Mae and Freddie Mac, which were taken into receivership at the very beginning of the crisis because of the losses that they suffered on mortgages and because of their low levels of capital. I think there's a pretty wide spread agreement in Washington that reform is needed for those institutions. And the Treasury has put out some alternative suggestions. Other suggestions have been made by members of Congress, but so far not too much progress has been made in that area. And I think that's one pretty obvious area that needs to be addressed. But I would say that the bill, Dodd-Frank bill, of course, is very broad and has covered a lot of the major parts of the financial system. This question comes from an audience member. How do you respond to the people who question the constitutionality of the Federal Reserve and would like to severely weaken it? And furthermore, how do you respond to members of Congress who wish to audit the Fed? Well, I'm not a lawyer, so I do know Article 1, never mind. I'm not a lawyer, but the Fed has been around now for a century and nobody so far has had a Supreme Court case, so I'm not going to get into that issue. I think the Fed performs the critical role of managing the monetary system, which is, of course, a power that Congress has to delegate, which it has done. Let me talk to the other issue, which is, I think, more substantive. As you know, there are bills in Congress that would, quote, audit the Fed. And it sounds like something, how could anybody object to auditing the Fed? I mean, don't you have to look at people's books and see what's on their books? Well, the trouble with audit the Fed is that that's not what it's about. That's a misnomer. The Fed's books are thoroughly and completely audited. We are audited first by an outside private sector accounting firm, which gives us a clean bill of health. Secondly, all of our books, all of our financials, everything is open to the GAO, the Government Accountability Office, which works for Congress and for the government and can look at anything it wants to look at. And third, we also have an independent inspector general that is able to evaluate any aspect of the Fed's financials or activities that it would like. If you'd like to see more about this, the Fed's website, FederalReserve.gov, has a detailed discussion of all the various audits that the FederalReserve goes to. So all our financials, all of our activities are thoroughly audited with one exception. And that exception is that in the law which created the Government Accountability Office, the GAO, there is an exception made for monetary policy. In other words, GAO can do anything it wants at the FederalReserve, but what it can't do is go in and audit a monetary policy decision. Now, what the Audit to Fed Bill would do is very simple. It would strike that clause. So if the Audit to Fed Bill passed, then a congressman who didn't like the Fed's latest interest rate move could say, GAO, go audit that. And what that would mean would be, it would be the Government Accountability Office would send its staff into the FederalReserve to look and see, you know, why did you guys raise interest rates and begin to investigate that decision. And it seems to me that's the first step toward basically the FederalReserve no longer being an independent central bank. Now, there's a very strong agreement around the world that if you want monetary policy made based on long-term considerations and not based on short-term political considerations into central bank needs to have some independence in making monetary policy, what this bill would do is strike at the very heart of that independence. So it's my opinion that many people who support the bill just think it means what it sounds like, which is something about the financials. It has nothing to do with the financials. It has to do with whether or not Congress can ask the GAO to investigate a decision by the Fed that it doesn't like. And again, I think if you want a healthy economy, you want to have a strong and independent central bank and that is not consistent with that bill. This is the last question and it comes from Twitter. So there's a vibrant discussion of macroeconomic issues on social media. Do you get any information from these discussions and if so, how? Well, you know, I read blogs. I have to say the 140 characters kind of limits the discussion on the Twitter. So those, I mean, I think blogs have become a pretty important source of intellectual exchange. The same way, there was a very important step, Dean Collins will remember this, used to be that years ago, way long time ago, if you were an academic and you wrote a paper, then you had to submit it to a journal and took two years and it got published and it was like three years after you wrote the paper before anybody knew what you were working on. And then came the internet and working papers and so on and pretty soon papers were available almost immediately for professional evaluation. But even that, of course, involved the long delay involved in doing the research and writing the paper and so on. What if you had a shorter perspective, a shorter idea that you wanted to put out there? Well, again, the internet has provided useful ways for people to communicate, to discuss interesting ideas and monetary policy or anything else. I follow a lot of baseball blogs myself actually. So that's just the next natural step to creating a conversation among people and I think that's been very constructive. So there are a few Federal Reserve blogs. The Atlanta Fed has one, the New York Fed has one and we have Twitter, we have Facebook, we're really moving along here. So we're still a little bit old fashioned, but I think the social media do provide a really convenient way to communicate quickly to a group of people, to exchange ideas and to keep track of what's going on in a particular area. So I think there's some positive developments there. Well, perhaps we should encourage you to follow the Tigers while you're... Unfortunately, we are out of time. I'd like to thank our questioners for posing the questions. I'd like to thank all of you in the room and online for joining us in today's conversation. You can find information on future policy talks at the Ford School on our website and through our Twitter site and I hope you'll follow us. We certainly will be following the Fed. Chairman, thank you very much for joining us today. We are...