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GILES SNYDER: From MPR News in Washington, I'm Giles Snyder. President Obama has unveiled his plan to address one of the root causes of the global financial meltdown. It's an ambitious plan designed to help struggling homeowners avoid foreclosure.

BARACK OBAMA: The plan I'm announcing focuses on rescuing families who've played by the rules and acted responsibly.

GILES SNYDER: Mr. Obama has just wrapped up his speech at a high school in Phoenix, Arizona. The plan pledges up to $75 billion to subsidize struggling homeowners. It also doubles the size of the government lifeline to mortgage giants Fannie Mae and Freddie Mac to reassure financial markets of their viability.

Even as Mr. Obama unveiled his plan, there was more gloomy news today about the housing sector. The Commerce Department says the construction of new homes plunged to record lows last month, with all sections of the country reporting big drops in building activity. MPR's Carol Anne Clark Kelly reports.

CAROL ANNE CLARK KELLY: Work on new homes and apartments dropped nearly 17% in January, well below what economists had been expecting and at the slowest pace in 50 years. In the Northeast, construction plunged 43%. In the Midwest, building was off nearly 30%. And it was down almost 13% in the South. The West posted the smallest loss, about 6.5%, but at the slowest building pace there since October of 1966.

One small bit of good news, the National Association of Home Builders says its housing market index rose a point this month, as foot traffic from prospective buyers gave builders some hope about future sales. Carol Anne Clark Kelly, MPR News, Washington.

GILES SNYDER: There's also word that industrial production dropped last month. The Federal Reserve says that production fell 1.8%, largely reflecting shutdowns at plants making automobiles and related parts.

Israel has decided against lifting its closure of the Gaza Strip's borders until militants there free a captured Israeli soldier. The move is a setback for Egyptian efforts to broker a long-term ceasefire with Gaza's Hamas rulers. MPR's Eric Westervelt reports.

ERIC WESTERVELT: Israel's security cabinet today said any wider opening of Gaza's border crossings is dependent on the safe return of Gilad Shalit, who was taken prisoner by militants in a cross-border raid nearly three years ago. Israel said a list of Palestinian prisoners to exchange for Shalit is being prepared. But it's not clear their list will match Hamas's. And furthermore, Hamas officials have insisted for months that prisoner exchange talks should be separate from talks over border crossings and a ceasefire.

Israel and Hamas declared unilateral truces in January after a month-long war, but both sides have fired on each other almost every day since. Israel continues to allow a limited amount of humanitarian aid to enter Gaza but has not let building materials in, arguing that steel and cement could be used to build military bunkers and rockets instead of homes. Eric Westervelt, MPR News, Jerusalem.

GILES SNYDER: Stocks are rebounding a bit today. The Dow is up 23 points. The NASDAQ has gained eight points. You're listening to MPR News.

SPEAKER 1: Support for news comes from The Pew Charitable Trusts, working to keep the food supply safe for America's families at PewTrusts.org.

STEVEN JOHN: From Minnesota Public Radio News, I'm Steven John. A Northwestern Minnesota Sheriff's deputy was in critical condition and undergoing surgery late this morning at a Fargo hospital after being shot several times. Mahnomen County Sheriff Doug Krier said the incident apparently started around 4:00 AM when authorities got a call about a drunk driver leaving the Shooting Star Casino in Mahnomen. Deputies found the vehicle with no one in it. The shooting occurred a few hours later as the deputy responded to a call of shots being fired nearby. The sheriff says the suspects then ran into a mobile home across the street, where a standoff continues.

The panel overseeing Minnesota's Senate election challenge has denied a request from lawyers for Norm Coleman that the judges reconsider last week's ruling on absentee ballots. The Republican side said the panel's ruling created a system where votes from ballots with the same types of errors were counted in some places and not in others.

Tomorrow is the one-year anniversary of the bus crash that killed four students near Cottonwood in southwestern Minnesota. The Reverend Bob Iverson says a service for healing will be held tonight at Christ Lutheran Church.

BOB IVERSON: Although the accident looms as a large point of ongoing healing for the community, with the economic downturn and losses through the military actions over the last few years and so forth-- I mean, there are numerous reasons for healing. So that was really the motivation in putting this together.

STEVEN JOHN: There are several events planned at the school in Cottonwood tomorrow. Olga Franco was convicted and sentenced to nearly 13 years in prison for causing the accident last February 19. She is appealing the verdict.

Snow should diminish in the North today, and then the skies expected to clear out pretty much statewide, blustery and colder conditions moving in. Highs around 0 to 5 above Northwest to around 30 in the far Southeast. This is Minnesota Public Radio News.

GARY EICHTEN: All right, thanks, Steven. It's 6 minutes past 12:00.

[MUSIC PLAYING]

And good afternoon. Welcome back to Midday on Minnesota Public Radio News. I'm Gary Eichten. President Barack Obama has released his plan to tackle the nation's mortgage crisis. The president, at an appearance outside Phoenix this morning, pledged $75 billion in an effort to prevent 9 million Americans from losing their homes. The same time, the Treasury Department was saying that it would double the size of its lifeline to Fannie Mae and Freddie Mac, absorbing up to $200 billion in losses at each of those companies.

During this hour of Midday, we're going to take a closer look at what the president has proposed to deal with the housing crisis. In general, though, the president's initiative, as you'll hear, is designed to help borrowers who owe more on their mortgages than their homes are currently worth and help those who are on the verge of foreclosure. It would create incentives for lenders to modify subprime loans teetering on default.

Foreclosures, of course, have been at the heart of the nation's economic problems. More than 2.3 million US homeowners faced foreclosure proceedings last year, and analysts say that that number could continue to rise if the recession persists. As we said, President Obama made his announcement in Arizona. That is one of the states hit hardest by the mortgage crisis. He spoke this morning at a Phoenix-area high school.

BARACK OBAMA: I'm here today to talk about a crisis unlike we've ever known but one that you know very well here in Mesa and throughout the Valley. In Phoenix and its surrounding suburbs, the American dream is being tested by a home mortgage crisis that not only threatens the stability of our economy, but also the stability of families and neighborhoods. It's a crisis that strikes at the heart of the middle class-- the homes in which we invest our savings and build our lives, raise our families and plant roots in our communities.

So many Americans have shared with me their personal experiences of this crisis. Many have written letters or emails or shared their stories with me at rallies and along rope lines. Their hardship and heartbreak are a reminder that while this crisis is vast, it begins just one house, and one family, at a time.

It begins with a young family maybe in Mesa or Glendale or Tempe or just as likely in a suburban area of Las Vegas or Cleveland or Miami. They save up. They search. They choose a home that feels like the perfect place to start a life. They secure a fixed-rate mortgage at a reasonable rate, and they make a down payment, and they make their mortgage payments each month. They are as responsible as anyone could ask them to be.

But then they learn that acting responsibly often isn't enough to escape this crisis. Perhaps somebody loses a job in the latest round of layoffs, one of more than 3 and 1/2 million jobs lost since this recession began. Or maybe a child gets sick, or a spouse has his or her hours cut.

In the past, if you found yourself in a situation like this, you could have sold your home and bought a smaller one with more affordable payments, or you could have refinanced your home at a lower rate. But today, home values have fallen so sharply that even if you make a large down payment, the current value of your mortgage may still be higher than the current value of your house. So no bank will return your calls, and no sale will return your investment.

You can't afford to leave. You can't afford to stay. So you start cutting back on luxuries. Then you start cutting back on necessities. You spend down your savings to keep up with your payments. And then you open the retirement fund. Then you use the credit cards. And when you've gone through everything you have and done everything you can, you have no choice but to default on your loan. And so your home joins the nearly 6 million others in foreclosure or at risk of foreclosure across the country, including roughly 150,000 right here in Arizona.

But the foreclosures, which are uprooting families and upending lives across America, are only part of the housing crisis, for while there are millions of families who face foreclosure, there are millions more who are in no danger of losing their homes but who have still seen their dreams endangered. They're the families who see the "For Sale" signs lining the streets, who see neighbors leave and homes standing vacant and lawns slowly turning brown.

They see their own homes, their single largest asset, plummeting in value. One study in Chicago found that a foreclosed home reduces the price of nearby homes by as much as 9%. Home prices in cities across the country have fallen by more than 25% since 2006, and in Phoenix, they've fallen by 43%.

Even if your neighbor hasn't been hit by foreclosures, you're likely feeling the effects of this crisis in other ways. Companies in your community that depend on the housing market-- construction companies and home furnishing stores and painters and landscapers-- they're all cutting back and laying people off. The number of residential construction jobs has fallen by more than a quarter million since mid-2006. As businesses lose revenue and people lose income, the tax base shrinks, which means less money for schools and police and fire departments. And on top of this, the costs to local government associated with a single foreclosure can be as high as $20,000.

So the effects of this crisis have also reverberated across the financial markets. When the housing markets collapsed, so did the availability of credit, on which our economy depends. And as that credit has dried up, it's been harder for families to find affordable loans to purchase a car or pay tuition and harder for businesses to secure the capital they need to expand and create jobs.

In the end, all of us are paying a price for this home mortgage crisis, and all of us will pay an even steeper price if we allow this crisis to continue to deepen, a crisis which is unraveling home ownership, the middle class, and the American dream itself. But if we act boldly and swiftly to arrest this downward spiral, then every American will benefit. And that's what I want to talk about today.

The plan I'm announcing focuses on rescuing families who've played by the rules and acted responsibly by refinancing loans for millions of families in traditional mortgages who are underwater or close to it, by modifying loans for families stuck in subprime mortgages they can't afford as a result of skyrocketing interest rates or personal misfortune, and by taking broader steps to keep mortgage rates low so that families can secure loans with affordable monthly payments.

At the same time, this plan must be viewed in a larger context. A lost home often begins with a lost job. Many businesses have laid off workers for a lack of revenue and available capital. Credit has become scarce, as markets have been overwhelmed by the collapse of securities backed by failing mortgages.

In the end, the home mortgage crisis, the financial crisis, and this broader economic crisis are all interconnected, and we can't successfully address any one of them without addressing them all. So yesterday in Denver, I signed into law the American Recovery and Reinvestment Act, which will create or save--

[APPLAUSE, CHEERS]

The Act will create or save 3 and 1/2 million jobs over the next two years, including 70,000 right here in Arizona, right here--

[CHEERS, APPLAUSE]

--doing the work America needs done. And we're also going to work to stabilize, repair, and reform our financial system to get credit flowing again to families and businesses.

And we will pursue the housing plan I'm outlining today. And through this plan, we will help between 7 and 9 million families restructure or refinance their mortgages so they can avoid foreclosure. And we're not just helping homeowners at risk of falling over the edge. We're preventing their neighbors from being pulled over that edge, too, as defaults and foreclosures contribute to sinking home values and failing local businesses and lost jobs.

But I want to be very clear about what this plan will not do. It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans. It will not help speculators--

[APPLAUSE]

It will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell.

[APPLAUSE]

It will not help dishonest lenders who acted irresponsibly, distorting the facts--

[APPLAUSE, CHEERS]

--distorting the facts and dismissing the fine print at the expense of buyers who didn't know better. And it will not reward folks who bought homes they knew from the beginning they would never be able to afford.

[APPLAUSE]

So I just want to make this clear. This plan will not save every home. But it will give millions of families resigned to financial ruin a chance to rebuild. It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everybody. According to estimates by the Treasury Department, this plan could stop the slide in home prices due to neighboring foreclosures by up to $6,000 per home.

So here's how my plan works. First, we will make it possible for an estimated 4 to 5 million currently ineligible homeowners who received their mortgages through Fannie Mae or Freddie Mac to refinance their mortgages at a lower rate.

[APPLAUSE]

Today, as a result of declining home values, millions of families are what's called underwater, which simply means that they owe more on their mortgages than their homes are currently worth. These families are unable to sell their homes, but they're also unable to refinance them. So in the event of a job loss or another emergency, their options are limited.

Also, right now, Fannie Mae and Freddie Mac, the institutions that guarantee home loans for millions of middle-class families, are generally not permitted to guarantee refinancing for mortgages valued at more than 80% of the home's worth. So families who are underwater or close to being underwater can't turn to these lending institutions for help. My plan changes that by removing this restriction on Fannie and Freddie so they can refinance mortgages they already own or guarantee.

[APPLAUSE, CHEERS]

And what this will do is it'll allow millions of families stuck with loans at a higher rate to refinance. And the estimated cost to taxpayers would be roughly zero. While Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures. So--

[CHEERS, APPLAUSE]

--I also want to point out that millions of other households could benefit from historically low-interest rates if they refinance, though many don't know that this opportunity is available to them-- meaning some of you-- an opportunity that could save your family's hundreds of dollars each month. And the efforts we are taking to stabilize mortgage markets will help you, borrowers, secure more affordable terms, too.

A second thing we're going to do under this plan is we will create new incentives so that lenders work with borrowers to modify the terms of subprime loans at risk of default and foreclosure. Subprime loans, loans with higher rates and complex terms that often conceal their costs, make up only 12% of all mortgages but account for roughly half of all foreclosures. Right now, when families with these mortgages seek to modify a loan to avoid this fate, they often find themselves navigating a maze of rules and regulations, but they rarely find answers. Some subprime lenders are willing to renegotiate, but many aren't. And your ability to restructure your loan depends on where you live, the company that owns or manages your loan, or even the agent who happens to answer the phone on the day that you call.

So here's what my plan does-- establishes clear guidelines for the entire mortgage industry that will encourage lenders to modify mortgages on primary residences. Any institution that wishes to receive financial assistance from the government, from taxpayers, and to modify home mortgages, will have to do so according to these guidelines, which will be in place two weeks from today.

[CHEERS, APPLAUSE]

Here's what this means. If lenders and homebuyers work together, and the lender agrees to offer rates that the borrower can afford, then we'll make up part of the gap between what the old payments were and what the new payments will be. Under this plan, lenders who participate will be required to reduce those payments to no more than 31% of a borrower's income. And this will enable as many as 3 to 4 million homeowners to modify the terms of their mortgages to avoid foreclosure.

So this part of the plan will require both buyers and lenders to step up and do their part, to take on some responsibility. Lenders will need to lower interest rates and share in the costs of reducing monthly payments in order to prevent another wave of foreclosures. Borrowers will be required to make payments on time in return for this opportunity to reduce those payments.

And I also want to be clear that there will be a cost associated with this plan. But by making these investments in foreclosure prevention today, we will save ourselves the costs of foreclosure tomorrow, costs that are borne not just by families with troubled loans but by their neighbors and communities and by our economy as a whole. Given the magnitude of these crises, it is a price well worth paying.

[APPLAUSE]

There's a third part of the plan. We will take major steps to keep mortgage rates low for millions of middle-class families looking to secure new mortgages. Today, most new home loans are backed by Fannie Mae and Freddie Mac, which guarantee loans and set standards to keep mortgage rates low and to keep mortgage financing available and predictable for middle-class families. Now, this function is profoundly important, especially now as we grapple with a crisis that would only worsen if we were to allow further disruptions in our mortgage markets.

Therefore, using the funds already approved by Congress for this purpose, the Treasury Department and the Federal Reserve will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities so that there is stability and liquidity in the marketplace. Through its existing authority, Treasury will provide up to $200 billion in capital to ensure that Fannie Mae and Freddie Mac can continue to stabilize markets and hold mortgage rates down.

And we're also going to work with Fannie and Freddie on other strategies to bolster the mortgage market, like working with state housing finance agencies to increase their liquidity. And as we seek to ensure that these institutions continue to perform what is a vital function on behalf of middle-class families, we also need to maintain transparency and strong oversight so that they do so in responsible and effective ways.

Fourth, we will pursue a wide range of reforms designed to help families stay in their homes and avoid foreclosures. And my administration will continue to support reforming our bankruptcy rules so that we allow judges to reduce home mortgages on primary residences to their fair market value-- as long as borrowers pay their debts under court-ordered plans.

[APPLAUSE]

I just want everybody to understand, that's the rule for investors who own two, three, and four homes. So it should be the rule for folks who just own one home as an alternative to foreclosure.

[CHEERING, APPLAUSE]

In addition, as part of the recovery plan I signed into law yesterday, we are going to award $2 billion in competitive grants to communities that are bringing together stakeholders and testing new and innovative ways to limit the effects of foreclosures. Communities have shown a lot of initiative, taking responsibility for this crisis when many others have not. And supporting these neighborhood efforts is exactly what we should be doing.

So taken together, the provisions of this plan will help us end this crisis and preserve for millions of families their stake in the American dream. But we also have to acknowledge the limits of this plan.

Our housing crisis was born of eroding home values, but it was also an erosion of our common values, and in some case, common sense. It was brought about by big banks that traded in risky mortgages in return for profits that were literally too good to be true, by lenders who knowingly took advantage of homebuyers, by homebuyers who knowingly borrowed too much from lenders, by speculators who gambled on ever-rising prices, and by leaders in our nation's capital who failed to act amidst a deepening crisis. So solving--

[APPLAUSE]

Solving this crisis will require more than resources. It will require all of us to step back and take responsibility. Government has to take responsibility for setting rules of the road that are fair and fairly enforced. Banks and lenders must be held accountable for ending the practices that got us into this crisis in the first place. And each of us, as individuals, have to take responsibility for their own actions. That means all of us have to learn to live within our means again and not assume that--

[APPLAUSE, CHEERS]

--and not assume that housing prices are going to go up 20%, 30%, 40% every year. Those core values of common sense and responsibility, those are the values that have defined this nation. Those are the values that have given substance to our faith in the American dream. Those are the values we have to restore now at this defining moment.

It will not be easy. But if we move forward with purpose and resolve, with a deepened appreciation of how fundamental the American dream is and how fragile it can be when we fail to live up to our collective responsibilities, if we go back to our roots, our core values, I am absolutely confident we will overcome this crisis and once again secure that dream not just for ourselves but for generations to come.

Thank you. God bless you. God bless the United States of America.

[CHEERS, APPLAUSE]

GARY EICHTEN: President Barack Obama outlining his plan to address the nation's mortgage crisis. President spoke this morning at a high school in Mesa, Arizona, Arizona being one of the states hit hardest by the foreclosure crisis.

Well, while the president was outlining his housing plan this morning, Ben Bernanke, chairman of the Federal Reserve, has been speaking this noon about the Fed's response to the economic crisis in this country. Speaking at the National Press Club in Washington, Ben Bernanke has been pledging to do everything in his power to lift the country out of recession. And he has been defending the extraordinary steps that the Federal Reserve has taken to fight what is deemed to be the worst credit and financial crisis since the 1930s. Here is Federal Reserve Board Chairman, Ben Bernanke, speaking this afternoon at the National Press Club in Washington.

BEN BERNANKE: As you know, we live in extraordinarily challenging times for the global economy and for economic policymakers, not least for central banks. As you know, the recent economic statistics have been dismal, with many economies, including ours, having fallen into recession. And behind those statistics, we must never forget, are millions of people struggling with lost jobs, lost homes, and lost confidence in their economic future.

As was already noted in the examples that resonate with me personally, the unemployment rate in the small town in South Carolina where I grew up has risen to 14%. And I learned the other day that what had once been my family home has been recently put through foreclosure.

Traditionally, the most conservative institutions, central banks around the world have responded to this crisis with force and innovation. In the United states, the Federal Reserve has done, and will continue to do, everything possible within the limits of our authority to assist in restoring our nation to financial stability and economic prosperity as quickly as possible. Policy innovation has become necessary because conventional monetary policies, which focus on influencing short-term interest rates, have proven insufficient to overcome the effects of the financial crisis on credit conditions and on the broader economy.

To further ease financial conditions beyond what can be attained by reducing the short-term interest rate, the Federal Reserve has taken additional steps to improve the functioning of credit markets and to increase the supply of credit to households and businesses, a policy strategy that I have called credit easing. In the first portion of my remarks, I will briefly outline the three principal approaches to easing credit that we have undertaken over and above cutting the short-term interest rate, and I'll assess their effectiveness to date.

Each of these policies involves the provision of credit or the purchase of debt securities by the Federal Reserve, which collectively have resulted in a substantial expansion of the Federal Reserve's balance sheet. The second portion of my remarks addresses some issues raised by those changes in the size of the Fed's balance sheet. In particular, I will discuss how the size of the balance sheet affects the ability of the Federal Open Market Committee, the body that sets monetary policy, to foster maximum sustainable employment and price stability, as well as the steps that have been taken to manage our balance sheet appropriately.

Finally, the expansion of the Federal Reserve's balance sheet has raised some concerns and led to some misconceptions about the credit risk being taken by the Fed. I will address the issue of credit risk today. And I will also like to talk about some steps that the Fed is taking to improve the transparency of our programs consistent with our obligations in a democracy.

The Federal Reserve has responded forcefully to the crisis since its emergence in the summer of 2007. The FOMC began to ease monetary policy in September 2007, reducing the target for the federal funds rate, its policy instrument, by 50 basis points or one-half percentage point. As indications of economic weakness proliferated, the Committee continued to respond, bringing down its target for the federal funds rate by a cumulative 325 basis points by the spring of 2008. In historical comparison, this policy stands out as exceptionally rapid and proactive.

Monetary easing helps support employment and incomes during the first year of the crisis. Unfortunately, the intensification of financial turbulence last fall led to further significant deterioration in the economic outlook. The Committee responded by cutting the target for the federal funds rate an additional 100 basis points in October, with half of that reduction coming as part of an unprecedented coordinated interest rate reduction by six major central banks on October 8. In December, the Committee reduced its target further, setting a range of 0 to 25 basis points for the target federal funds rate.

The Fed's monetary easing has been reflected in significant declines in a number of lending rates, especially shorter-term rates, thus offsetting to some degree the effects of the financial turmoil on the cost of credit. However, that offset has been incomplete, as widening credit spreads, more restrictive lending standards, and credit market dysfunction have worked against the monetary easing and led to tighter financial conditions overall. Thus, in addition to easing monetary policy, the Federal Reserve has made use of a range of additional tools to ease credit conditions and support the broader economy.

The additional components in the Fed's tool kit can be divided into three sets. The first set is closely tied to the central bank's traditional role, a provider of short-term liquidity to sound financial institutions. Over the course of the crisis, the Fed has taken a number of extraordinary actions to ensure that financial institutions have adequate access to short-term credit.

In fulfilling its traditional lending function, the Federal Reserve enhances the stability of our financial system, increases the willingness of financial institutions to extend credit, and helps to ease conditions in interbank lending markets, thereby reducing the overall cost of capital to banks. In addition, some interest rates, including the rates on some adjustable rate mortgages, are tied contractually to key interbank rates, such as the London Interbank Offered Rate, often known as LIBOR. To the extent that the provision of ample liquidity to banks reduces LIBOR, other borrowers will also see their payments decline.

Because interbank markets are global in scope, the Federal Reserve has also approved temporary bilateral liquidity agreements with 14 foreign central banks. These so-called currency swap facilities have allowed these central banks to acquire dollars from the Federal Reserve that they may then lend to financial institutions in their own jurisdictions. The purpose of these swaps is to ease conditions in dollar funding markets globally. Improvements in global interbank markets, in turn, promote greater stability in other markets, such as money markets and foreign exchange markets.

Although the provision of ample liquidity by the central bank to financial institutions is a time-tested approach to reducing financial strains, it is no panacea. Today, concerns about capital, asset quality, and credit risk continue to limit the willingness of many intermediaries to extend credit, notwithstanding the access of these banks and other firms to central bank liquidity. Moreover, lending to financial institutions does not directly address instability or declining liquidity in critical nonbank credit markets, such as the commercial paper market or the market for asset-backed securities, which, under normal circumstances, are major sources of credit for US households and businesses.

To address these issues, the Federal Reserve has developed a second set of policy tools, which involve the provision of liquidity directly to borrowers and investors in key credit markets. Notably, we have introduced facilities to purchase highly rated commercial paper at a term of three months and provide backup liquidity for money market mutual funds. The purpose of these facilities is to serve, once again in classic central bank fashion, as backstop liquidity provider, in these cases to institutions and markets that were destabilized by the rapid withdrawal of funds by short-term creditors and investors.

In addition, the Federal Reserve and the Treasury have jointly announced a facility, expected to be operational shortly, that will lend against AAA-rated asset-backed securities collateralized by recently originated student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. Last week, in conjunction with the Treasury, we announced that we were prepared to significantly expand this facility, known as the Term Asset-Backed Securities Loan Facility, or TALF, to encompass other types of newly issued AAA asset-backed securities, such as commercial mortgage-backed securities and private-label mortgage-backed securities as well. If this program works as planned, it should lead to lower rates and greater availability of consumer, business, and mortgage credit.

The Federal Reserve's third set of tools for supporting the functioning of credit markets involves the purchase of longer-term securities for the Fed's portfolio. For example, we are purchasing up to $100 billion in the debt of government-sponsored enterprises and up to $500 billion in mortgage-backed securities guaranteed by federal agencies by midyear.

The Federal Reserve is engaged in continuous assessment of the effectiveness of its credit-related tools, and we have generally been encouraged by the market responses. Our lending to financial institutions has helped to relax the severe liquidity strains experienced by many firms and has been associated with improvements in the interbank lending markets.

For example, we believe that liquidity provision by the Fed and other central banks is a principal reason that liquidity pressures around the end of the year, often a period of heightened liquidity strains, were relatively modest. LIBOR has fallen sharply as well. Our commercial paper facility has helped to stabilize that market, lowering rates significantly and allowing high-quality firms access to financing at longer terms than a few days.

And together with other government programs, our actions to stabilize the money market mutual fund industry have also shown some success, as the sharp withdrawals from funds seen in September have given way to modest inflows. And rates on 30-year conforming fixed-rate mortgages have fallen nearly one percentage point since we announced the program to purchase GSE-related securities.

Thus, taken together, these policies appear to give the Federal Reserve some scope to affect credit conditions and economic performance, notwithstanding the fact that the conventional tool of monetary policy, the federal funds rate, is now about as low as it can go.

The various credit-related policies I've described have implications for the Federal Reserve's balance sheet. In the remainder of my remarks, I will discuss these implications as well as some related issues.

The three sets of policy tools I focused on today-- lending to financial institutions, providing liquidity directly to key credit markets, and buying longer-term securities-- each represents a use of the asset side of the Fed's balance sheet. Specifically, loans that the Fed extends-- either to financial institutions, through the discount window and related facilities, or to other borrowers in programs like our commercial paper facility-- are recorded as assets on our balance sheet, as are securities acquired in the open market, such as GSE securities as the ones we are purchasing.

The Fed's assets also include about $500 billion of Treasury securities, and about 5% of our balance sheet, or a hundred billion dollars, consists of assets we acquired in the government interventions to prevent the failures of Bear Stearns and AIG. I won't say much about those interventions today except to note that the failure of those companies would have posed enormous risks to the stability of our financial system and our economy. Because the United States has no well-specified set of rules for dealing with the potential failure of a systemically critical nondepository financial institution, we believe that the best of the bad options available was to work closely with the Treasury to take the actions that we did to avoid those collapses.

The liability side of the Federal Reserve's balance sheet is relatively simple, consisting primarily of currency issuance, Federal Reserve notes, and reserves held by the banking system on deposit with the Federal Reserve.

The various credit-related policies I've described today all act to increase the size of both the asset and liability sides of the Federal Reserve's balance sheet. For example, the purchase of a billion dollars in GSE securities, paid for by crediting the account of the seller's bank at the Federal Reserve, increases the Fed's balance sheet by $1 billion, with the acquired securities appearing as an asset and the seller's bank deposit at the Fed being the offsetting liability. The quantitative impact of our credit actions on the balance sheet has been large. Its size has nearly doubled over the past year to just under $2 trillion.

Some observers have expressed the concern that by expanding its balance sheet, the Federal Reserve will ultimately stoke inflation. The Fed's lending activities have indeed resulted in a large increase in the reserves held by banks and, thus, in the narrowest definition of the money supply, the monetary base. However, banks are choosing to leave the great bulk of their excess reserves idle, in most cases on deposit with the Fed.

Consequently, the rates of growth of broader monetary aggregates, such as M1 and M2, have been much slower than that of the monetary base. At this point, with global economic activity weak and commodity prices at low levels, we see little risk of unacceptably high inflation in the near term. And indeed, we expect inflation to be quite low for some time.

However, at some point, with credit markets and the economy do begin to recover, the Federal Reserve will have to moderate growth in the money supply and begin to raise the federal funds rate. To reduce policy accommodation, the Fed will have to unwind some of its credit-easing programs and thus allow the balance sheet to shrink. To some extent, this unwinding will happen automatically, as improvements in credit markets should reduce the need to use Fed facilities.

Indeed, where possible, we have tried to set lending rates and other terms at levels that are likely to be increasingly unattractive to borrowers as financial conditions normalize. In addition, some programs-- those authorized under the Federal Reserve's so-called 13(3) authority, which requires a finding that conditions in financial markets are, quote, "unusual and exigent"-- will, by law, have to be phased out once credit market conditions substantially normalize. However, the principal factor determining the timing and pace of the process will be the Federal Reserve's assessment of the condition of credit markets and the prospects for the economy.

A significant shrinking of the balance sheet can be accomplished relatively quickly, as a substantial portion of the assets that the Federal Reserve holds, including loans to financial institutions, temporary central bank liquidity swaps, and purchases of commercial paper, are short-term in nature and can simply be allowed to run off as the various programs and the facilities are shut down or scaled back. As the size of the balance sheet and the quantity of excess reserves in the system declines, the Federal Reserve will be able to return to its traditional means of making monetary policy, namely, by setting a target for the federal funds rate.

Importantly, the management of the Federal Reserve's balance sheet in the conduct of monetary policy in the future will be made easier by the recent congressional action to give the Fed authority to pay interest on bank reserves. Because banks should be unwilling to lend reserves at a rate lower than what they can receive from the Fed, the interest rate the Fed pays on bank reserves should help to set a floor on the overnight interest rate.

Moreover, other tools are available or can be developed to improve control of the federal funds rate during the necessary exit stage. For example, the Treasury could resume its recent practice of issuing supplementary financing bills and placing the funds with the Federal Reserve. The issuance of these bills effectively drains reserves from the banking system, thereby improving monetary control.

As we consider new programs or the expansion of old ones, the Federal Reserve will carefully weigh the implications for our exit strategy. And we will take all necessary actions to ensure that the unwinding of our programs is accomplished in a smooth and timely way and consistent with meeting our obligation to foster maximum employment and price stability and make monetary policy as appropriate for the economy.

Two other frequently asked questions about the Federal Reserve's balance sheet are, first, How much credit risk is the Fed taking in all these lending activities? and second, Is the Fed informing the public adequately about these activities?

To address the first question, for the great bulk of Fed lending, the credit risks are extremely low. The provision of short-term credit to financial institutions, our traditional function, exposes the Federal Reserve to minimal credit risk, as the loans we make to financial institutions are generally short-term, overcollateralized, and made with recourse to the borrowing firm.

In the case of the liquidity swaps, the foreign central banks are responsible for repaying the Federal Reserve, not the financial institutions that ultimately receive the funds, and the Fed receives an equivalent amount of foreign currency in exchange for the dollars it provides to foreign central banks. The Treasury stands behind the debt and securities issued by the GSEs.

Our special lending programs have also been set up to minimize our credit risk. The largest program, the commercial paper funding facility, accepts only the most highly rated paper. It also charges borrowers a premium, which is set aside against possible losses. And the TALF, the facility that I mentioned that will lend against securities backed by consumer and small business loans, is a joint Federal Reserve-Treasury program, and capital provided by the Treasury will help to insulate the Federal Reserve from credit losses.

The transactions we undertook to prevent the systemically destabilizing failures of Bear Stearns and AIG, which, as I noted, make up about 5% of our balance sheet, do carry more risk than our traditional activities. But we intend, over time, to sell the assets acquired in those transactions in a way that maximizes the return to taxpayers, and we expect to recover the credit that we have extended. Moreover, in assessing the financial risks of those transactions, once again, one must consider the very grave risks our nation would have incurred had public policy makers not acted in those instances.

And finally, I should remind you that all the Federal Reserve's assets pay interest, and the expansion of our balance sheet thereby implies increased interest income, income that will accrue to the benefit of the federal budget. From the point of view of the federal government, the Federal Reserve's activities do not imply greater expenditure or indebtedness. To the contrary, the Federal Reserve's interest earnings have always been and will continue to be a significant source of income for the Treasury.

On the second question of transparency, I firmly believe that central banks should provide as much information as possible, both for reasons of democratic accountability and because many of our policies are likely to be more effective if they are well understood by markets and by the public. During my time at the Federal Reserve, the FOMC has taken important steps to increase the transparency of monetary policy, such as moving up the publication of the minutes of the policy meetings and adopting the practice of providing projections of the evolution of the economy at longer horizons and four times per year rather than twice.

Later today, with the release of the minutes of the most recent FOMC meeting, we will be making an additional significant enhancement in Federal Reserve communications. To supplement the current economic projections by governors and Reserve Bank presidents for the next three years, we will also publish their projections of the longer-term values-- at a horizon, for example, of five to six years-- of output growth, unemployment, and inflation under the assumptions of appropriate monetary policy and the absence of new shocks to the economy.

These longer-term projections will inform the public of Committee participants' estimates of the rate of growth of output and the unemployment rate that appear to be sustainable in the long run in the United States, taking into account the important influences, such as the trend growth rates of productivity in the labor force, improvement in worker education and skills, the efficiency of the labor market at matching workers and jobs, government policies affecting technological development or the labor market, and other factors.

The longer-term projections of inflation, which will be disclosed today, may be interpreted, in turn, as the rate of inflation that FOMC participants see as most consistent with the dual mandate given to it by the Congress-- that is, the rate of inflation that promotes maximum sustainable employment while also delivering reasonable price stability. This further extension of the quarterly projections should provide the public a clearer picture of FOMC participants' policy strategy for promoting maximum employment and price stability over time. Also, increased clarity about the FOMC's views regarding longer-term inflation should help to better stabilize the public's inflation expectations, thus contributing to keeping actual inflation from rising too high or falling too low.

Likewise, the Federal Reserve is committed to keeping the Congress and the public informed about its lending programs and its balance sheet. For example, we continue to add to the information shown in the Fed's H.4.1 statistical release, which provides weekly detail on the balance sheet and the amounts outstanding for each of the Federal Reserve's lending facilities. Extensive additional information about each of the Federal Reserve's lending programs is available online. The Fed also provides bimonthly reports to the Congress on each of its programs that rely on the Section 13(3) authorities.

Generally, our disclosure policies are consistent with the current best practices of major central banks around the world. In addition, the Federal Reserve's internal controls and management practices are closely monitored by an independent inspector general, outside private sector auditors, and internal management and operations divisions, and through periodic reviews by the Government Accountability Office.

All that said, recent developments have understandably led to a substantial increase in the public's interest in the Fed's balance sheet and its programs. And so for this reason, we at the Fed have begun a thorough review of our disclosure policies and the effectiveness of our communication. Today, I would like to mention two initiatives.

First, to improve public access to information concerning Fed policies and programs, in coming days, we will unveil a new website that will bring together in a systematic and comprehensive way the full range of information that the Federal Reserve already makes available, supplemented by explanations, discussions, and analysis.

Second, in my request, Board Vice Chairman Donald Kohn, sitting a couple seats to my right, is leading a committee that will review our current publications and disclosure policies relating to the Federal Reserve's balance sheet and lending policies. The presumption of that committee will be that the public has a right to know and that the nondisclosure of information must be affirmatively justified by clearly articulated criteria for confidentiality based on factors such as reasonable claims to privacy, the confidentiality of supervisory information, and the need to ensure the effectiveness of policy.

Extraordinary times call for extraordinary measures. Responding to the very difficult financial and economic challenges that we face, the Federal Reserve has gone beyond traditional monetary policy making to develop new tools to address the dysfunctions in the nation's credit markets. We have done so in a responsible way. The credit risk associated with our nontraditional policies is exceptionally low. And by carefully monitoring our balance sheet and developing tools to drain bank reserves when needed, we will ensure that policy accommodation can be reversed at the appropriate time to avoid any risks of future inflation.

We provide a great deal of information about our lending programs and our balance sheet to Congress and the public. But as I've discussed today, we will do more on this front, both expanding the information we provide and improving how we communicate that information. Increased transparency is the best way to demonstrate that the Federal Reserve's nontraditional policies are well conceived, well managed, and produce substantial public benefit. Thank you very much.

GARY EICHTEN: Federal Reserve Board Chairman, Ben Bernanke, speaking this noon at the National Press Club in Washington. Time for a couple of Press Club questions before we wrap up.

SPEAKER 2: OK, you mentioned that some of the bailouts of the corporations, the financial corporations, were necessary to avoid larger crisis in the future. Was the decision to let Lehman Brothers fail a mistake? And why or why not?

BEN BERNANKE: Well, the word "mistake" implies a choice or an option.

[LAUGHTER]

We were determined to do everything we possibly could to prevent the failure of Lehman Brothers because I have said from the very beginning of this crisis that it is essential not to let large, systemically critical institutions fail. And at the beginning, when we helped Bear Stearns become acquired by JP Morgan, Congress and many others said, oh, let them fail; the market will take care of it; it's good for discipline. And I think we knew better than that.

And when time came to deal with Lehman Brothers-- and that was a critical week. We had Lehman, we had AIG, we had many other firms under tremendous pressure. We made every possible effort. We sent the secretary of the Treasury, the head of the SEC, and the Federal Reserve Bank of New York president in session in New York Fed, together with the heads of all the major financial firms in the city, and they worked through the weekend, trying to find a solution.

Unfortunately, the situation was neither like Bear Stearns nor AIG. In the case of Bear Stearns, we had an acquirer. We had somebody willing to buy the firm. In the case of Lehman, we had some interest, a couple of firms that were looking very carefully, and we had hope that they would consummate the deal. But in the end, no buyer was available. No buyer was willing or able to make the deal.

In the case of AIG, we had a financial products sector that had lost lots of money but was attached to a huge financial firm, specifically the largest insurance company in the world, that had enormous amounts of assets against which we could lend on a collateralized basis to provide the money needed to keep AIG going and to avoid what would have been a calamitous collapse of that firm.

In the case of Lehman Brothers, there was a need for substantial capital. There was a big hole. And this was before the Congress had passed the TARP legislation-- before there was any authority for the Treasury to put capital into the firm. The Federal Reserve is only allowed to lend against well-secured collateral. There was simply no way and no time during the weekend did anyone ever come to me and say, here's a plan; here's something that might work. We had all been quite used to being very aggressive in these situations. There was never anything closely remote, as far as I'm aware, to a proposal or a proposition that would have allowed us to address it.

The only small silver lining from all this, I think, is that it put to bed this notion that people had was that we should let them fail. I think we need to have a commitment to maintaining the security of systemically critical institutions, that we need to address this issue now. And as we go forward, though, we need to also address the question of "too big to fail," which is a major problem, and we need to find ways that we don't get put in the situation in the future. One way we can do that is to have a resolution regime that allows the government to come in and deal with, in a systematic way, a nonbank financial firm that is systemically critical. We did not have that for the nonbanks like Lehman and Bear Stearns and AIG, and we were forced to improvise.

But again, I very much regret the failure of Lehman. We worked very hard to try to avoid it. And the consequences, I think, certainly, while there were many factors that led to the intensification of financial crisis in September and the slowing in the economy, clearly, that was part of the shock.

SPEAKER 2: Is the president's economic stimulus a good idea? What would you have liked to see in the bill?

[LAUGHTER]

BEN BERNANKE: Isn't that a moot point at this juncture?

[LAUGHTER]

Well, last October, I did testify before the Budget Committee, and I did indicate, at that point, I already saw that the economy was slowing significantly, and the Federal Reserve's capacity to continue to cut interest rates was obviously limited. And so at that time, I said that I thought it was appropriate for Congress to consider a fiscal stimulus, and I do think it was appropriate, and I do think some fiscal action is necessary.

I'm not really in a position to talk about individual components or to talk about the size of it. I think those are decisions that are left to the administration in Congress. They've made a lot of trade-offs. They've made a lot of tough decisions.

I will say one thing, though, which is this-- that I view this whole process as being a two-legged approach. There's just two parts to recovery. The first is fiscal or monetary stimulus that will get the economy moving and provide some impetus. But the second is we have to continue these efforts.

And consistent, for example, with Treasury Secretary Geithner's announcements last week, we must continue the efforts to stabilize the banking system and the financial system. If we do not stabilize the financial system, the fiscal policy will not lead to a sustained recovery. Both of these parts are essential. And I just want to stress that we cannot do the fiscal part and not do the financial part and hope to have success.

GARY EICHTEN: That's the Chairman of the Federal Reserve Board, Ben Bernanke, the guest today, the luncheon guest at the National Press Club in Washington. Well, that does it for our Midday program today. Gary Eichten here. Like to thank you for tuning in. Reminder that you will be able to find the chairman's comments on our website and the President Obama's comments that we heard earlier this hour. The president down in Arizona today, talking about his mortgage foreclosure plan. Both of those and all of our Midday programs are archived on our website, MinnesotaPublicRadio.org. It's a good service. Take advantage of it. Go to our website, MinnesotaPublicRadio.org, go to the Programs section, go to Midday, select the program you're interested in.

Well, as we say, that takes care of our Midday program for today. Tomorrow should be a good program. Stephen Smith will be in the studio. From American RadioWorks, he has been working on a number of documentaries under the umbrella of hearing history, the hearing history project. Tomorrow, he comes in, armed with materials from the Depression era-- FDR, Hoover, the New Deal tomorrow on Midday.