[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]




 
                  FEDERAL RESERVE AID TO THE EUROZONE:
                 ITS IMPACT ON THE U.S. AND THE DOLLAR

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                        DOMESTIC MONETARY POLICY

                             AND TECHNOLOGY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 27, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-111



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO R. CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

           James H. Clinger, Staff Director and Chief Counsel
        Subcommittee on Domestic Monetary Policy and Technology

                       RON PAUL, Texas, Chairman

WALTER B. JONES, North Carolina,     WM. LACY CLAY, Missouri, Ranking 
    Vice Chairman                        Member
FRANK D. LUCAS, Oklahoma             CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   GREGORY W. MEEKS, New York
BLAINE LUETKEMEYER, Missouri         AL GREEN, Texas
BILL HUIZENGA, Michigan              EMANUEL CLEAVER, Missouri
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
DAVID SCHWEIKERT, Arizona


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 27, 2012...............................................     1
Appendix:
    March 27, 2012...............................................    33

                               WITNESSES
                        Tuesday, March 27, 2012

Dudley, William C., President, Federal Reserve Bank of New York..     5
Kamin, Steven B., Director, Division of International Finance, 
  Board of Governors of the Federal Reserve System...............     8

                                APPENDIX

Prepared statements:
    Paul, Hon. Ron...............................................    34
    Dudley, William C............................................    36
    Kamin, Steven B..............................................    43

              Additional Material Submitted for the Record

Paul, Hon. Ron:
    Written responses to questions submitted to William C. Dudley    50
    Written responses to questions submitted to Steven B. Kamin..    55
Luetkemeyer, Hon. Blaine:
    MarketWatch article by Andrea Thomas, dated March 8, 2012....    57


                       FEDERAL RESERVE AID TO THE
                      EUROZONE: ITS IMPACT ON THE
                          U.S. AND THE DOLLAR

                              ----------                              


                        Tuesday, March 27, 2012

             U.S. House of Representatives,
                  Subcommittee on Domestic Monetary
                             Policy and Technology,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Ron Paul 
[chairman of the subcommittee] presiding.
    Members present: Representatives Paul, McHenry, 
Luetkemeyer, Huizenga, Schweikert; Clay, Maloney, and Green.
    Chairman Paul. This hearing will now come to order.
    Without objection, all Members' opening statements will be 
made a part of the record.
    I will now recognize myself for 5 minutes to make an 
opening statement.
    First, I would like to thank Dr. Kamin and Dr. Dudley for 
appearing today to discuss a very important subject that the 
world is looking at constantly: a major debt crisis that exists 
around the world.
    It has a great deal of significance not only for world 
finance, but also for the American taxpayer and the value of 
the U.S. dollar, and indirectly, the deficits that are run up 
because they are all interconnected.
    The crisis we face right now is a crisis in debt and how we 
handle this debt. Who gets stuck with the debt? Who gets the 
bailout? How does the debt get defaulted on? How do you 
liquidate the debt?
    And there are different ways of liquidating debt. When you 
can't pay the bills and you write them off the books, that is 
liquidating debt and that helps to solve the problem.
    Other times, governments and central banks participate in 
liquidating debt by diminishing real debt, and that is by 
purposely devaluing the currency and, of course, that has been 
used historically many, many times and is one of the most 
common ways of liquidating debt.
    So if you can devalue a currency by 50 percent, you can get 
rid of real debt by half if your prices go up. And there 
certainly seems to be a concerted effort around the world, and 
even within our own country, to handle debt in that fashion.
    But in the process, the question really is: Who gets stuck 
with it? Who gets the most penalties? And if you happen to be 
on the receiving end of being too-big-to-fail and you get some 
benefits from the system, but the debt is not liquidated, it is 
passed on, it is transferred from one group of individuals to 
another. Nevertheless, it is still a pain. But it is just a 
matter of picking and choosing who will receive the most harm.
    The problem I see right now in dealing with this debt 
crisis is can the U.S. dollar and the U.S. economy and the U.S. 
taxpayer bear the burden? And this is the way it seems because 
now, the European Central Bank (ECB) is asking us to continue 
to do what we have done over these last few years, to use the 
dollar to actually bail them out.
    On paper, it looks like the balance sheet is better with 
the Europeans. Their assets-to-capital ratio is better than our 
bank. And yet, the dependency is for the United States to bail 
them out and it seems like it is working.
    Of course, we have the advantage of issuing the reserve 
currency of the world which has given us, in a deceptive way, 
some advantages over many, many decades. But the big question 
is: How long can that happen? Will we always have the benefits? 
Will other countries finally get together, as they talk about 
constantly, and replace the dollar? And certainly, the dollar 
isn't getting to be a stronger reserve currency; if anything, 
it is getting slightly weaker. And someday, there may be some 
real challenges to the dollar, so there has to be a limit to 
this.
    We talk about the Greek crisis, which is major and 
significant, and we are dealing with it on a daily basis. This 
might just be the beginning of a much bigger crisis when you 
look at the different countries, whether it is Portugal or 
Spain or Italy. And this thing could--it is much bigger than we 
are willing to admit. In many, many ways, I think we are in 
denial of how serious this problem is.
    So we have to face up to the fact that there is a cost. I 
see it is going to be a cost against the value of the dollar. 
Some people say, ``This is good. We want a weaker dollar 
because it is going to help our trade; it is going to help our 
exports.''
    And now, there are currency wars going on. All we do is 
complain about the Chinese having too weak a currency. At the 
same time, we triple our balance sheet and triple the monetary 
base.
    Now, that is deliberately trying to weaken a currency too. 
So there will be limits on that. I think we are facing that. We 
are up against the wall on this. And very soon, I think we are 
going to have to admit that you can't solve the problem of debt 
with more debt.
    You can't solve the problem of a weak currency by making 
the currency even weaker. You can't solve the problem by having 
the moral hazard of a guaranteed bailout that people--there is 
always going to be a lender of last resort, and if you are too-
big-to-fail, you are going to be taken care of. Some people may 
suffer, but others will be taken care of.
    I think there are limits. I think we are facing that. I 
think we are in denial. We won't admit how serious it is; but I 
believe that we will be forced to, not because of the politics 
of it as much as because of the economics.
    I complain about the power of governments and central 
banks, but ultimately, there are economic rules and laws--
economic laws probably much stronger than all of us. And you 
can't dictate and mandate forever. You can kid people for a 
long time. But right now, it is an illusion that we can trust 
the dollar to bail out the world. And soon, we are going to see 
the end of that and that is why many of us believe that the 
crisis is far from over and that we have to face up to those 
facts.
    Now, I would like to recognize Mr. Clay for his opening 
statement.
    Mr. Clay. Thank you, Chairman Paul, and thank you for 
holding this hearing to examine the Federal Reserve's 
assistance to the Eurozone and the effect of that assistance on 
the U.S. economy, monetary system, and the dollar.
    The focus of this hearing is to examine the Federal 
Reserve's Central Bank's currency swap-line arrangements with 
central banks of Europe, England, Switzerland, Japan, and 
Canada.
    Also, I want to thank the witnesses for appearing before us 
today.
    When the new Greek government came into power in late 2009, 
they revealed that the previous Greek government had not been 
reporting the budget deficit accurately. This has led to major 
economic challenges and concerns to other parts of Europe and 
the United States.
    The first concern is the high levels of public debt in some 
Eurozone countries. Three Eurozone major governments--Greece, 
Ireland and Portugal--have had to borrow money from the 
European Central Bank and the International Monetary Fund in 
order to avoid defaulting on their debt.
    Currently, the Greek government is negotiating losses on 
bonds held by private creditors. Investors have started to 
demand higher interest rates for buying and holding Italian and 
Spanish bonds. The Italian government debt is forecast to be 
$2.8 billion in 2012, which is greater than Spain, Portugal, 
Greece, and Ireland combined.
    The second concern is the lack of growth and the high 
unemployment in the Eurozone. In January of this year, the IMF 
downgraded its growth forecast for the Eurozone from growing by 
1.1 percent in 2012 to contracting by 0.5 percent.
    The third concern is the weakness of the Eurozone's banking 
system, which holds high levels of public debt. In December of 
last year, the European Banking Authority estimated that 
European banks need about $152 billion of additional capital in 
order to withstand a range of shocks and still maintain 
adequate capital.
    The fourth concern is persistent trade imbalances within 
the Eurozone. The Eurozone core countries tend to run trade 
surpluses with the Eurozone periphery countries. And the 
periphery countries tend to run trade deficits with the core 
countries.
    To help ease the financial crisis in the Eurozone, the 
Federal Reserve opened the currency swap line. Under a swap 
line with the European Central Bank, the ECB temporarily 
receives U.S. dollars and the Federal Reserve temporarily 
receives euros.
    After a fixed period of time, the transaction is reversed. 
Interest on swaps is paid to the Federal Reserve at the rate 
that the foreign central bank charges to its dollar borrower. 
The temporary swaps are repaid at the exchange rate prevailing 
at the time of the original swap, meaning that there is no 
downside risk for the Federal Reserve if the dollar appreciates 
in the meantime.
    All of these concerns have raised questions about the 
economic stability of the Eurozone countries. I look forward to 
the witnesses' comments regarding these concerns and actions 
taken by the Federal Reserve Bank to address these concerns.
    And again, thank you for conducting this hearing. I yield 
back.
    Chairman Paul. I thank the gentleman.
    Now, I will recognize Mr. Luetkemeyer for his opening 
statement.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. Over the past 
several years, many of my colleagues and I have expressed 
serious concerns regarding U.S. exposure to the Eurozone.
    Like many of my colleagues, my concerns have been met at 
times with cynicism and assurance of an efficient recovery with 
little or no contagion. Yet here we sit today, continuing to 
talk about the Eurozone crisis, and hearing once again that our 
Nation won't be dramatically impacted.
    Certain scholars and fellow officials said that the crisis 
wouldn't spread. It has now impacted several European nations 
with effects ranging from default and upheaval in Greece to 
bank failures and increased risk in the perceived financial 
stalwart of France. This hasn't badly taken a toll on U.S. 
markets. I believe it has a potential to take a toll on our 
Nation's economy as a whole.
    Chairman Bernanke testified recently in this committee that 
the two greatest threats to our economy are rising gas prices 
and the Eurozone problems. Secretary Geithner testified in this 
committee just last week, and seemed concerned as well about 
the possibility of a eurozone contagion, although he was 
optimistic things would work themselves out.
    Regardless of what we hear today, we are in fact exposed. 
Our financial institutions, industries, and government are all 
exposed, and as a result, so are the taxpayers. Our economies 
are and always will be deeply connected. It is our 
responsibility to ensure that this exposure is managed 
thoughtfully and to ensure that the U.S. taxpayers are not 
again on the hook for the failure of the financial institutions 
not only domestic but foreign as well.
    Mr. Chairman, I look forward to an enlightened discussion 
with our panel. This is an important topic and one that merits 
great transparency and attention. I thank you, and I yield 
back.
    Chairman Paul. I thank the gentleman.
    Now, I would like to introduce our witnesses for today. Dr. 
William Dudley is the President of the Federal Reserve Bank of 
New York. Before taking over as President of the New York Fed 
in 2009, Dr. Dudley had been Executive Vice President of the 
Markets Group at the New York Fed, where he managed the 
System's open market account for the Federal Open Market 
Committee.
    Prior to joining the New York Fed in 2007, Dr. Dudley was a 
partner and managing director at Goldman Sachs and company, and 
was Goldman's chief U.S. economist for a decade. Dr. Dudley 
also serves as chairman of the Committee on Payments and 
Settlement Systems of the Bank for International Settlements 
and as a member of the Board of Directors of the Bank for 
International Settlements. Dr. Dudley received his bachelor's 
degree from New College of Florida and received his Ph.D. in 
economics from the University of California, Berkeley.
    Dr. Steven Kamin is the Director of the Division of 
International Finance for the Board of Governors of the Federal 
Reserve System. He joined the Federal Reserve System Board in 
1987, and was appointed to the official staff in 1999.
    Prior to taking over the Division of International Finance 
in December of 2011, Dr. Kamin was Deputy Director of the 
Division. He has also served as a visiting economist at the 
Bank for International Settlements, a senior economist for 
international financial affairs at the Council of Economic 
Advisors, and as a consultant for the World Bank.
    Dr. Kamin received his bachelor's degree from the 
University of California, Berkeley and received his Ph.D. in 
economics from the Massachusetts Institute of Technology.
    Without objection, your full written statements will be 
made a part of the record. You will now each be recognized for 
a 5-minute summary of your testimony.
    Dr. Dudley?

STATEMENT OF WILLIAM C. DUDLEY, PRESIDENT, FEDERAL RESERVE BANK 
                          OF NEW YORK

    Mr. Dudley. Thank you. Chairman Paul, Ranking Member Clay, 
and members of the subcommittee, my name is Bill Dudley and I 
am the President of the Federal Reserve Bank of New York. It is 
an honor to testify today about the economic and fiscal 
challenges facing Europe and the Federal Reserve's effort to 
support financial stability in the United States.
    Let me preface these remarks by stating that the views 
expressed in my written and oral testimony are solely my own 
and do not represent the official views of the Federal Reserve 
Board, the Federal Open Market Committee or any other part of 
the Federal Reserve System.
    Additionally, because I am precluded by law from discussing 
confidential supervisory information, I will not be able to 
speak about the financial condition or regulatory treatment or 
rating of any individual financial institution.
    The economic situation in Europe has been unsettled for the 
better part of 2 years with pressure on sovereign debt markets 
and local banking systems. The strains in European markets have 
affected the U.S. economy.
    The euro area has the capacity, including the fiscal 
capacity, to overcome its challenges. However, the politics are 
very difficult, both because the problem has many dimensions 
and because many different countries and institutions in the 
euro area have to coordinate their actions in order to achieve 
a coherent and effective policy response.
    Europe's leadership has affirmed its commitment to the 
European Union and a single-currency union on numerous 
occasions. And the leadership is working harder than ever to 
achieve greater policy coordination in areas such as fiscal 
policy. A more robust and resilient European Union would be a 
welcome development for the United States. Three recent 
developments are especially encouraging in that regard.
    First, liquidity concerns have eased significantly 
following the European Central Bank's long-term financing 
operations in December and February. Through this program, the 
ECB provides 3-year loans to European banks at low rates, 
accepting a wider range of collateral in return.
    Second, earlier this month the Greek government worked with 
European leaders and its largest creditors to restructure the 
bulk of its 206 billion euros of outstanding privately held 
bonds. This not only helped reduce Greeks' total indebtedness, 
it also helped calm persistent worries that a disorderly Greek 
default could become the trigger for a global economic crisis.
    Third, leaders in most euro-area countries have approved a 
new treaty designed to increase fiscal coordination. The new 
rules already appear to be making a difference. While difficult 
work still lies ahead, countries in the euro area have made 
meaningful progress towards achieving long-term fiscal 
sustainability.
    Looking to the future, the difficult work that remains also 
presents special risks, both for Europe and for the United 
States. If Europe fails to chart an effective course forward, 
this could have a number of negative implications here. In 
particular, there are three areas of potential risk that I 
would like to highlight for the subcommittee today.
    First, if economic conditions in Europe were to weaken 
significantly, the demand for U.S. exports would decrease. This 
would hurt domestic growth and have a negative impact on U.S. 
jobs. It is important to recognize that the euro area is the 
world's second largest economy after the United States, and it 
is an important trading partner for us. Also, Europe is a 
significant investor in the U.S. economy and vice versa.
    Second, deterioration in the European economy could put 
pressure on U.S. banking systems. As the recent round of stress 
tests reveals, U.S. banks are much more robust and resilient 
than they were a few years ago. They have bolstered their 
capital significantly, built up their loan loss reserves, and 
have significantly higher liquidity bumpers.
    The good news in the United States means that we are better 
able to handle bad news from Europe. With that said, the 
exposures of U.S. banks climb sharply when one also considers 
their exposures to the core European countries and to the 
overall European banking system.
    Third, severe stresses in European financial markets would 
disrupt financial markets here, which could harm the real 
economy. Stress in the financial markets causes banks to more 
carefully husband their balance sheets. When that phenomenon 
occurs, the availability of credit to U.S. households and 
businesses becomes constrained.
    Such conditions could also cause equity prices to fall, 
impairing the value of American pension and 401(k) holdings. 
This would damage the U.S. recovery and result in slower output 
growth and less job creation. At a time when the U.S. 
employment rate is very high, this is a particularly 
unacceptable outcome.
    In the extreme, U.S. financial markets could become so 
impaired that the flow of credit to households and businesses 
could dry up. In today's globally integrated economy, banks 
headquartered abroad play an important role in providing credit 
and other financial services in the United States. About $1 
trillion in worldwide dollar financing comes from foreign 
banks; $700 billion in the form of loans within the United 
States.
    For these banks to provide U.S. dollar loans, they have to 
maintain access to U.S. dollar funding. At a time when it is 
already hard enough for American families and businesses to get 
the credit they need, they have a strong interest in making 
sure these banks continue to be active in the U.S. dollar 
markets.
    It is in our national interest to make sure that non-U.S. 
banks remain able to access the U.S. dollar funding that they 
need to be able to continue to finance their U.S. dollar 
assets. If access to dollar funding were to become severely 
impaired, this could necessitate the abrupt forward sales of 
dollar assets by these banks, which could seriously disrupt 
U.S. markets and adversely affect American businesses, 
consumers, and jobs.
    One way we can help to support the availability of dollar 
funding and ensure that credit continues to flow to American 
households and businesses is by engaging in currency swaps with 
other central banks. Such swaps are a policy tool that the 
Federal Reserve has used to support dollar liquidity for nearly 
50 years.
    More recently, the Federal Reserve established dollar-swap 
lines with major central banks during the global financial 
crisis of 2008, and reactivated them in May 2010. The swaps are 
intended to create a credible backstop to support but not 
supplant private markets. Banks with surplus dollars are more 
likely to lend to banks in need of dollars if they know that 
the borrowing bank will be able to obtain the dollars it needs 
to repay the loan if necessary from its central bank.
    Our principal aim is to protect U.S. banks, businesses, and 
consumers from adverse economic trends abroad. I am pleased 
that the swaps seem to be working. In conjunction with ECB's 
long-term refinancing operations, the swaps have helped 
European banks avoid the significant liquidity pressures we 
feared a few months ago. And they have reduced the risks that 
they would need to sell off their U.S. dollar assets abruptly.
    In conclusion, I am hopeful that Europe can effectively 
address its current fiscal challenges. The Federal Reserve is 
actively and carefully assessing the situation and the 
potential impact on the U.S. economy.
    At this time, although I do not anticipate further efforts 
by the Federal Reserve to address the potential spillover 
effect of Europe on the United States, we will continue to 
monitor the situation closely.
    Thank you for your invitation to testify today and I look 
forward to answering your questions.
    [The prepared statement of Dr. Dudley can be found on page 
36 of the appendix.]
    Chairman Paul. Thank you, Dr. Dudley.
    Dr. Kamin?

      STATEMENT OF STEVEN B. KAMIN, DIRECTOR, DIVISION OF 
   INTERNATIONAL FINANCE, BOARD OF GOVERNORS OF THE FEDERAL 
                         RESERVE SYSTEM

    Mr. Kamin. Thank you, Chairman Paul, and members of the 
subcommittee, for inviting me to talk about the economic 
situation in Europe and actions taken by the Federal Reserve in 
response to this situation.
    In the past several months, European authorities have 
provided additional liquidity to banks, bolstered bank capital 
requirements, developed rules to strengthen fiscal discipline, 
and explored means of enlarging the euro-area financial 
backstop.
    Stresses in financial markets have eased, but these markets 
remain under strain. The fiscal and financial strains in Europe 
have spilled over to the United States by restraining our 
exports, depressing confidence, and adding to the pressure on 
U.S. financial markets.
    Of note, foreign financial institutions, especially those 
in Europe, have found it more difficult to borrow dollars. 
These institutions make loans to U.S. households and firms as 
well as to borrowers in other countries who use those loans to 
purchase U.S. goods and services.
    While strains have eased somewhat of late, difficulties 
borrowing dollars by European institutions may make it harder 
for U.S. households and firms to get loans and for U.S. 
businesses to sell their products abroad. Moreover, these 
disruptions could spill over into U.S. money markets, raising 
the cost of funding for U.S. financial institutions.
    To address these risks to the United States, on November 
30th, the Federal Reserve announced, jointly with the European 
Central Bank or ECB, and the central banks of Canada, Japan, 
Switzerland, and the United Kingdom that it would revise, 
extend, and expand its swap lines with these institutions.
    The measures were motivated by the need to ease strains in 
global financial markets which, if left unchecked, could impair 
the supply of credit to households and businesses in the United 
States and impede our economic recovery.
    Three steps were described in the announcement.
    First, we reduced the pricing of the dollar swap lines from 
a spread of 100 basis points over the overnight index swap rate 
to 50 basis points over that rate. This has enabled foreign 
central banks to reduce the cost of the dollar loans they 
provide to financial institutions in their jurisdictions. This, 
in turn, has helped alleviate global financial strains and put 
foreign institutions in a better position to maintain their 
supply of credit, including to U.S. residents.
    Second, we extended the closing date for these lines from 
August 1, 2012, to February 1, 2013, demonstrating that central 
banks are prepared to work together for a sustained period to 
support global liquidity conditions.
    Third, we agreed to establish swap lines in the currencies 
of other participating central banks. These lines would allow 
the Federal Reserve to draw foreign currencies and provide them 
to U.S. financial institutions on a secured basis. U.S. 
financial institutions are not experiencing any foreign 
currency liquidity pressures at present, but we judged it 
prudent to make such arrangements should the need arise in the 
future.
    Information on the swap lines is fully disclosed on the Web 
sites of the Federal Reserve Board and the Federal Reserve Bank 
of New York. I also want to underscore that the swap 
transactions are safe and secure.
    First, the swap transactions present no exchange rate or 
interest rate risk because the terms of each drawing and 
repayment are set at the time the draw is initiated.
    Second, each drawing on the swap lines must be approved by 
the Fed, providing us with control over the use of the 
facility.
    Third, the foreign currency held by the Fed during the term 
of the swap provides an important safeguard.
    Fourth, our counterparties are the foreign central banks, 
not the private institutions to which the central banks lend. 
The Fed's history of close interaction with these central banks 
provides a track record justifying a high degree of trust and 
cooperation.
    Finally, the short tenor of the swaps means that positions 
could be wound down relatively quickly were it judged 
appropriate to do so. Notable, the Fed has not lost a penny on 
these swap lines since they were established in 2007. In fact, 
fees on these swaps have added to the earnings that the Fed 
remits to taxpayers.
    To conclude, following the changes that we made to our swap 
line arrangements last November, the amount of dollar funding 
for the swap lines increased substantially. Subsequently, as 
measures of dollar funding costs declined, usage of the swap 
lines has fallen back.
    Ultimately, however, a sustained further easing of 
financial strains here and abroad will require European 
authorities to follow through on their policy commitments in 
the months ahead. We are closely monitoring events in Europe 
and their spillovers to the U.S. economy and financial system.
    Thank you, again, for inviting me to appear before you 
today. I would be happy to answer any questions you may have.
    [The prepared statement of Dr. Kamin can be found on page 
43 of the appendix.]
    Chairman Paul. Thank you, Dr. Kamin.
    I will start off with the questioning.
    For Dr. Dudley, I wanted to see if we could start off by 
seeing if we could agree with what the problem is--in my 
opening statement, I emphasize that the debt is the problem; 
that we are in a worldwide debt crisis.
    Do you generally agree with that and how serious to you 
think it is?
    Mr. Dudley. I think you are certainly correct that there is 
a question of debt sustainability in Europe in terms of the 
fiscal budget deficit path for some countries--not all 
countries, some countries--and there is also--and that is also 
implicated some of the European banks to have large exposures 
to that sovereign debt.
    And so what is important is that these countries have an 
opportunity to undertake the fiscal consolidations that they 
need to demonstrate to the market that they can actually be on 
a sustainable path.
    ECB's long-term refinancing operations and, I think, the 
dollar swaps have helped create some time for this to take 
place, but for this to work out well, these countries still 
have to take the appropriate steps.
    Chairman Paul. So far, if we date the crisis back to 2008 
and 2009, and if it was a debt crisis that was a problem, if 
you look at everybody's debt, it is exploding, including ours. 
How do you solve the problem of debt with exponentially 
increasing the debt? It seems like our problems are just 
compounded.
    How do you get around to either stop accumulating more debt 
or do you believe you have to liquidate debt? Some people 
believe you have to get rid of the debt in order to get growth 
again because the debt will consume us and interest rates are 
bumping up already.
    And as I said in my opening statement, the Fed will have 
some ability to manipulate interest rates in the economy, but 
ultimately, the economic laws are pretty powerful, so interest 
rates are liable to go up.
    So how can we solve the problem of debt with more debt, and 
what is your opinion of liquidating that? Is that important?
    Mr. Dudley. I think that you are right, obviously, more 
debt does not solve the problem of too much debt. I think the 
good news in the United States, and I will speak about the 
United States, is that there has actually been a significant 
amount of deleveraging that has taken place among U.S. 
households over the last few years.
    Debt-to-income ratios have come down. Debt service relative 
to income has come down. So U.S. households, I think, are in 
significantly better shape than they were a few years ago.
    The second area where we see a pretty big change in terms 
of deleveraging of the United States is in the state of health 
of the U.S. banking system. U.S. banks, compared to 5 or 6 
years ago, have much more capital and much bigger liquidity 
buffers.
    So while I think it is too soon to say that the 
deleveraging process in the United States is over, we have made 
a considerable amount of progress in working our way out of the 
problems that we faced in 2007 and 2008.
    Chairman Paul. But isn't it true that mortgage debt is 
still on the books? It has been transferred; maybe the Fed owns 
that debt. We don't even know what the real value is of most of 
it.
    And banks still hold some mortgage debt and it might be at 
a nominal value so in that sense of that debt being liquidated, 
maybe some individuals have straightened out their bank 
accounts, but there are still millions of people--if they 
really were improving, they could make their payments again, 
but debt is still the problem.
    You say that some are deleveraged, but has there been any 
real liquidation of debt when it comes to mortgage and the 
derivatives because governments are involved in that--either 
the Central Bank or some of our programs are involved. It seems 
like none of that has been deleveraged. If anything, that looks 
like it is getting worse.
    Mr. Dudley. On the mortgage front, there has been some 
deleveraging, because banks have taken mortgage losses. Also, 
in certain cases, especially among private holders of mortgage 
debt, there has been some principal forgiveness, principal 
reductions.
    So you have actually seen, for example, last year, total 
household debt outstanding, according to the flow of funds, 
which is the broadest measure of household credit, was roughly 
flat last year; so nominal GDP was growing. Debt that was held 
by households was flat. So you are actually seeing the debt 
burden become less overwhelming.
    Chairman Paul. Yes. The promises that we made and the 
involvement we have with Europe that our finances are so good 
with our debt and our dollar that we have been standing and 
saying, ``Yes, we will be there.''
    The Chairman of the Fed has said, ``We are not ignoring 
this. If necessary, we have been there before, we will be back 
again.''
    What is the limit to this? What is the limit to us making 
these promises that we can always be available? Isn't there a 
limit to what the dollar will sustain?
    Won't it eventually have to stop or do you think we can do 
this--if another crisis hits and there is a big downturn, and 
you have to inject trillions of dollars again, what is the 
limiting factor to the dollar and the United States economy 
bailing out the world?
    Mr. Dudley. I think that, from my perspective, we want to 
make the decisions based on what is in our self-interest, what 
is best for U.S. households and businesses.
    And, in that calculation, if we decide that intervention 
can help U.S. household and businesses, at higher benefits than 
cost, then we want to proceed. If we don't reach that 
calculation, if we think that there is too much risk involved 
in the program or that the program is going to lead to moral 
hazard and is going to be counterproductive, then we don't want 
to undertake it.
    So I don't think that the Federal Reserve has made any 
decisions about what future interventions we would or would not 
do, except that we will do interventions that are consistent 
with our dual mandate, as set by Congress, to achieve maximum 
employment and price stability, sustain financial stability in 
the United States, and do what is best for households and 
businesses here.
    That is why we are doing this program; not for Europe, but 
for ourselves.
    Chairman Paul. Dr. Kamin, did you want to make a comment?
    Mr. Kamin. Yes, do you mind? Could I add a few words, 
Chairman Paul?
    Just to add to the comments that President Dudley made--our 
purpose in the swap lines, in particular, is not to, in some 
sense, fully back or to make whole all the debts that have 
accumulated around the world. That is very far from our 
purpose.
    Our key strategy and our key intent in this regard is to 
make sure that foreign financial institutions could maintain 
the flow of credit, both to U.S. households and firms, and to 
firms and households around the world that in turn buy U.S. 
goods and services.
    So the intent was mainly to help alleviate the liquidity 
pressures that could lead these foreign institutions to wind 
down their assets too quickly, and thus injure the U.S. 
recovery.
    Thank you.
    Chairman Paul. Thank you.
    Mr. Clay?
    Mr. Clay. Thank you, Chairman Paul.
    Let me follow Chairman Paul's line of questioning.
    Dr. Dudley, in your opening statement you mention that 
severe stress in European markets will create stress in the 
U.S. economy. Are we that tied to the European economy and that 
married to that system that it would have that kind of 
reaction, a chain reaction?
    Mr. Dudley. I think we live in a global economy, and what 
happens in the other big economies of the world definitely 
affects us. As I noted in my testimony, there are sort of three 
channels by which Europe could affect us in a negative fashion. 
One, if the European economy is in recession or very weak, that 
is going to reduce the demand for our exports. So that has 
effects on U.S. production and employment here in the United 
States.
    Two, if Europe were to be in a difficult position, and the 
European banking system were to worsen, that would have 
consequences for U.S. banks that have exposure to the European 
banks.
    And three, if Europe were to perform badly, that would have 
negative effects on financial markets around the world. And 
that would have implications for our financial markets, and 
therefore, investment and growth here in the United States.
    So there are definitely significant channels by how Europe 
can affect the United States.
    Mr. Clay. Dr. Dudley, have actions taken by the Federal 
Reserve regarding the currency swap line arrangements been 
beneficial or detrimental to the U.S. economy?
    Mr. Dudley. We think that the swap lines have had their 
desired effects, because they have basically given a source of 
a backstop to other sources of funding to European banks. So as 
a consequence of them having this backstop available, if they 
were to need it, they don't have to be as fearful about their 
ability to obtain funding. And therefore, they can manage their 
dollar loans to U.S. businesses and households in a more 
orderly fashion.
    We follow the activities of European banks in the United 
States through their U.S. branches and subsidiaries, and they 
are definitely reducing their exposure in the United States. 
But I think because of the dollar swaps, this is happening in 
an orderly way, rather than a disorderly way.
    And so, we don't see that their reduction in the business 
that they are doing in the United States is having any damaging 
effects on the U.S. economy, which is really what our goal is; 
to prevent any damaging effects on the U.S. economy.
    Mr. Clay. Okay.
    Dr. Kamin, would you like to add something?
    Mr. Kamin. Yes, thank you, if I could just add to those 
remarks.
    Over the past couple of years, as the crisis in Europe has 
progressed, we have seen several periods when the financial 
situation in Europe deteriorated fairly dramatically. And 
during those periods, we could see some very obvious spillovers 
to financial markets, both in the United States and around the 
world.
    During those periods of deterioration, investors became 
worried, and around the world they retreated from assets they 
perceived to be more risky. And what that led to, both in 
Europe and the United States and elsewhere, was sharp declines 
in stock prices, increases in interest rates line of credits, 
and other developments that were associated with retreats from 
risk and flights to quality. So, we have seen those episodes 
very clearly.
    Now, more recently, since we changed the pricing of our 
swap lines, since the ECD introduced many measures to add 
liquidity to banks, and since European leaders have taken other 
actions, we have seen financial conditions in Europe--this is 
more or less since December--improve quite markedly. And that 
has been an important contributing factor to the improvement to 
the tone in financial markets in the United States. So those 
connections are definitely there.
    Mr. Clay. Dr. Kamin, share with us the effects that the 
rise in gasoline prices around the world and in the United 
States--what effects will this rise in gas prices have on the 
economies of Europe and the United States?
    Mr. Kamin. The effects that higher oil prices will have on 
both the United States and on Europe are, in broad qualitative 
terms, relatively similar. Both broad economies import oil. 
There is a greater dependence on imported oil in Europe than in 
the United States, but both do.
    So, when oil prices rise, that acts as a tax on consumers 
of oil in both countries. And as a result, that diminishes the 
purchasing power that consumers in those counties have to 
basically spend on other goods. So, it basically acts as a 
brake on economic recovery and all else being equal, may make 
it more difficult to create jobs.
    In addition to the effects on unemployment and economic 
activity, increases in oil prices have the effect of raising at 
least some portion of the consumer basket of prices. As long as 
oil prices will continue to rise, that should lead to a 
temporary increase in inflation. But that also poses concerns.
    So obviously, recent increases in oil and gasoline prices 
are something that we monitor very carefully.
    Mr. Clay. Thank you.
    And my time is up.
    Chairman Paul. I thank the gentleman.
    Now, I recognize Mr. Luetkemeyer from Missouri.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Gentlemen, correct me if I am wrong, but I believe that the 
swap dollars that are--I guess euros--that are on the other end 
with the European Central Bank, they secure those, do they not, 
whenever they loan them back out on their other end?
    And would you agree that there is a problem from the 
standpoint that what we have been told and what we find 
recently is they are taking a little more exposure, a little 
more risk, with some of the investments that they are taking as 
collateral for those? Would that be a fair statement?
    Mr. Dudley. They have broadened out the collateral 
eligibility, but they also have significant haircuts for that 
collateral. So, they take more collateral than the value of the 
money that they are actually lending out.
    Mr. Luetkemeyer. Instead of one-to-one, it may be two-to-
one, as they take additional collateral?
    Mr. Dudley. They adjust for what they perceive to be the 
quality of the collateral.
    Mr. Luetkemeyer. Because I know that former executive board 
member Juergen Stark recently said that the balance sheet of 
the ECB is not only gigantic in dimension, but also alarming in 
its quality. Would you agree with that statement?
    Mr. Dudley. I don't have enough information to assess the 
quality of the ECB balance sheet. But my dealings with the ECB 
suggest that they are quite prudent in terms of how they run 
their operations.
    Mr. Luetkemeyer. Yes, but aren't you one of the leading 
experts on swaps between the United States and Europe?
    Mr. Dudley. But I do not conduct the daily operations of 
the ECB in lending money to their banks, versus collateral that 
they take.
    Mr. Luetkemeyer. Okay.
    One of the concerns that I have is with regard to the 
quality of the economies over there. We keep talking saying, 
``They have dodged the bullet. They are getting better. They 
are improving.''
    And yet, we see, and we had Secretary Geithner here just 
last week, and he acknowledged that the European continent as a 
whole is still struggling. I think the comment was made in 
testimony today that it is a negative position as far as the 
growth of the economy yet. Greece is probably 4/10ths or 4 
percent negative growth.
    It is fine to sit here and go through a workout and 
restructure your debt, but if you don't have the ability to 
repay it, because you don't have an economy that grows fast 
enough to repay it, what do you have? I think we have to look 
at the revenue side.
    We may be able to restructure the debt so that it can work. 
But if you don't have enough cash flow, enough revenue coming 
in, we are still in trouble. Where do you see that going?
    Mr. Dudley. I certainly accept your observation that the 
European economy is very weak, and that weakness is going to 
persist for a while as these governments engage in further 
fiscal actions to get their budget deficits on a sustainable 
course.
    But that fact I think in no way creates risk for us in 
terms of our swap agreements with the European Central Bank. We 
think we are very well secured in those transactions. We fully 
anticipate being fully repaid.
    During the depths of the financial crisis in 2008 and 2009, 
a far worse economic environment than the one in which we are 
today, with far greater amounts of swaps outstanding, we were 
fully repaid. We didn't lose a penny. In fact, the total profit 
to the U.S. taxpayers for the swaps that were engaged in during 
that period was about $4 billion of profit to the U.S. 
taxpayer.
    Mr. Luetkemeyer. The point I am getting to, though, is if 
you have weak collateral for the European Central Bank swap 
lines and their economy is not going anywhere, that even gets--
to me, that makes the debt that is--or the collateral that is 
securing that line--even weaker.
    And so therefore, whether we may have two-to-one or three-
to-one, if you have nothing supplying--you have 2 or 3 times 
nothing securing the debt, that is pretty concerning to me.
    Quick question for you--do you think that the swap lines 
enhance the dollar as the world reserve currency, or do you 
think it hurts it?
    Mr. Dudley. I think--
    Mr. Luetkemeyer. I would like a comment from both of you, 
please.
    Mr. Dudley. I don't think it is a major factor, but I think 
at the margin it probably enhances the dollar as a reserve 
currency. In other words, the fact that the Federal Reserve is 
willing to engage in dollar swaps probably makes people more 
comfortable to use the dollars to finance international 
transactions around the world.
    I don't think this is a major factor though in terms of why 
we are engaging in swaps, or should be a major factor in terms 
of why we are engaging in swaps. I think the main reason why we 
are engaging in swaps is we don't want European banks to 
quickly exit their dollar lending business here in the United 
States, with that exit causing harm to U.S. households and 
businesses.
    Mr. Luetkemeyer. Dr. Kamin?
    Mr. Kamin. If I could add to that, clearly, key factors 
that are underpinning the dollar's status as a global reserve 
currency are the breadth and depth of U.S. financial markets. 
And in particular, including but not limited to the status of 
U.S. Treasuries. All that is underpinned by the vitality of the 
U.S. economy and its consistent record of being able to 
innovate and grow.
    The purpose of the swap lines is ultimately focused on 
continuing to preserve the vitality of the American economy and 
by making sure that foreign financial institutions have the 
funding they need to continue the flow of credit to American 
households and firms.
    Insofar, then, as the swap lines can contribute to the 
continued vitality, the continued recovery of the U.S. economy, 
it undoubtedly is a plus as far as the dollar's reserve status. 
Although, as President Dudley has pointed out, it is probably 
one of many factors and not necessarily the most important.
    Mr. Luetkemeyer. Okay. Thank you very much. I see my time 
has expired.
    Thank you, Mr. Chairman.
    Chairman Paul. Thank you.
    I now recognize the gentlelady from New York, Mrs. Maloney.
    Mrs. Maloney. Thank you.
    I want to welcome both of the panelists, particularly Dr. 
William Dudley, who is the President of the Federal Reserve 
Banks of New York. So welcome, Dr. Dudley.
    And I would like to begin questioning by asking you, 
regarding the Federal Reserve's foreign exchange swap lines, 
can you tell me what your track record has been with these 
programs? Have they been successful? Have there been any losses 
to the taxpayers? Have there been any gains for the taxpayers; 
and if so, how much? And welcome.
    Mr. Dudley. Thank you.
    Mrs. Maloney. Thank you for your service, both of you. 
Thank you.
    Mr. Dudley. Thank you, Congressman Maloney. The track 
record is excellent, in two dimensions. One, the swap lines 
that we have engaged with have accomplished the goal that we 
set for them, which is basically to support U.S. financial 
markets and ensure the flow of credit to U.S. households and 
businesses.
    And two, we have managed to do so in a way that has been 
extraordinarily safe. As I noted earlier, there have been no 
losses on any swap programs that we have ever engaged in, going 
back to 1962; and in terms of the swaps that we enacted during 
the financial crisis in 2008 and 2009 and ongoing, total 
profits for the taxpayers of about $4 billion.
    So no losses, profit for the taxpayers; has had the 
beneficial effect that we wanted in terms of supporting the 
financial system and supporting the flow of credit to U.S. 
households and businesses. So I think that they have worked 
very well. Thank you.
    Mrs. Maloney. Thank you very much.
    And I would like to ask Dr. Kamin about a statement that 
Treasury Undersecretary Brainard has stated; that the 
Administration's position in Europe is not to seek additional 
funding for the IMF. And to quote her directly, she said, ``The 
challenge Europe faces is within the capacity of the Europeans 
to manage.''
    Europe accounts for roughly 16 percent of our exports; in 
my opinion, and correct me if I am wrong, accounting for the 
stabilization of many jobs here in the United States, probably 
thousands of jobs. What occurs abroad is going to have a direct 
effect on the recovery here at home in the United States.
    Do you believe the stabilization of European markets is 
critical to our economic recovery here at home, making systems 
like the Federal Reserve foreign exchange swap lines crucial?
    Mr. Kamin. Thank you, Congresswoman Maloney.
    In response to your questions, first of all, I absolutely 
agree that it is critical that the Europe financial and 
economic situation be stabilized. As you have pointed out, 
Europe is a major trading partner of the United States. And as 
we discussed earlier, its financial conditions in Europe are 
highly intertwined with those in the United States.
    So a stabilization of the European situation really is very 
important, both for the United States financial conditions as 
well as the continued growth of exports and the real economy, 
and thus jobs. Now, as regards the issue of IMF policy, the 
Treasury Department is our liege on that, on the issue of IMF 
policy, so I can't speak directly to their statements.
    But I will note, as Treasury officials have noted as well, 
as well as Federal Reserve officials, that Europe is a very--
the euro area is a very large and comparatively wealthy economy 
relative to many others in the world. And they do have very 
many substantial resources that could be brought to bear on 
their situation. And so it is critical for them to do so. Thank 
you.
    Mrs. Maloney. Thank you.
    And Dr. Dudley, I would like to ask you, as countries and 
international markets form individual firewalls to stave off 
residual financial distress, are we always and likewise 
creating firewalls through various other areas in policies 
involving capital and liquidity requirements that could have an 
effect on our economy here in the United States?
    Mr. Dudley. We think it is very important to have a 
financial system that is resilient and robust. And towards that 
end, Congress, the Administration, and the regulatory community 
in the United States have been working hard to bolster the 
capital and liquidity among U.S. financial firms.
    I have to say that we are in much better shape than we were 
a few years ago in both those regards. And I think that is good 
news because it means that if there are shocks emanating from 
abroad or emanating in the United States, that U.S. banks are 
in much better shape to absorb those shocks and to continue to 
function and supply credit to U.S. households and businesses.
    Mrs. Maloney. Could I ask for an additional 10 seconds?
    Do you believe that we should do everything we can to 
contain the European crisis, to ensure that there is no 
spillover here in the United States, and to stabilize that 
region and our own economy? Yes or no?
    Mr. Dudley. I think we should do everything that is prudent 
to stabilize the European economy. Obviously, we should do what 
is in our self-interest in terms of what is best for the United 
States; and all our policies are enacted through that prism.
    Mrs. Maloney. Okay.
    Dr. Kamin?
    Mr. Kamin. Yes. That was exactly my thought. Definitely 
everything that is prudent and appropriate.
    Mrs. Maloney. Okay. Thank you.
    I yield back. Thank you, Mr. Chairman.
    Chairman Paul. Thank you.
    Did Mr. Luetkemeyer have a unanimous consent request?
    Mr. Luetkemeyer. Yes, Mr. Chairman. I would like to ask 
unanimous consent to place in the record the article which I 
referred to this morning. It is a MarketWatch article by Andrea 
Thomas with regards to the comment of executive board member 
Juergen Stark.
    Chairman Paul. Without objection, it is so ordered.
    Mr. Luetkemeyer. Thank you, sir.
    Chairman Paul. I now recognize Mr. Schweikert from Arizona.
    Mr. Schweikert. Thank you, Mr. Chairman. Congressman 
Luetkemeyer stole one of the number-one questions I was 
interested in pursuing, and that was the credit quality of what 
is being pledged.
    Can I get into something that is a little more conceptual? 
But this one actually really does bother me.
    I am trying to get my head around the interconnectivity of 
euro-yen, euro's relationship to Singapore. And ultimately, as 
we are providing interlocking swap facilities, what happens 
when the debt cascade happens somewhere else in the world? Does 
that cascade end up tagging Europe, which tags us?
    And how much ultimately is there in true net reserves in 
central banks around the world when you start looking at the 
net borrowing compared to the net savings countries? Dr. Kamin, 
I would love it if you would start with that one.
    Mr. Kamin. Thank you. I will be happy to.
    So to start with, as we have come to recognize only too 
well, we have a very globalized financial system. And 
disturbances that occur in one part of the world are 
transmitted around the world through numerous channels and 
through numerous markets.
    That was quite evident during the global financial crisis 
of 2008 and 2009. And we have seen it more recently with the 
European fiscal and financial crisis as deteriorations there--
    Mr. Schweikert. Can I beg of you to pull the microphone a 
little closer to you?
    Mr. Kamin. Thank you. We have seen it more recently during 
the European financial crisis in the last couple of years. So--
    Mr. Schweikert. And almost to the--what I am somewhat 
hunting is I have been tracking some data coming out of Japan, 
and there are some very worrisome signs in the net debt. How 
does that play into this interconnectivity?
    Mr. Kamin. What we have seen, then, is that in situations 
that occur like this, some dollar-funding problems, which is to 
say problems with banks getting funding in dollars in order to 
continue their flow of financing, they tend not to basically 
stay in one part of the world. There is a very easy capacity 
for those problems to spill out all over the world.
    And it was in large part for that reason that we didn't 
just establish the swap lines with the ECB. We also established 
them with central banks around the world so that problems as 
they arose in different parts of the world could be addressed.
    And as is evident from the data on the swap lines that we 
publish on our Web site, the take-up of these swap lines, in 
other words the distribution of funds to institutions in 
different regions, has not been limited exclusively to the euro 
area, although that is where most of the money has gone.
    Mr. Schweikert. Dr. Dudley?
    Mr. Dudley. I certainly agree with Dr. Kamin's answer to 
that. The world is very interconnected, and problems in one 
part of the world can definitely have ripple effects through 
the other parts of the world.
    That is why we did set up these swap lines with five 
central banks rather than just the European Central Bank. And 
there are some draws on those swap lines from some of these 
other central banks.
    Mr. Schweikert. Dr. Dudley, as to that concept, help me get 
my head around it.
    Considering the nature of our balance sheets today after 
the 2008 crisis, both Europe and the United States, some of our 
partners in Japan, around other places in the world, if today 
Europe--this became a very hard recession and we had something 
like the Tequila Crisis from 15 years ago or some sort of 
cascade out there, do we have enough capacity, particularly if 
we also had different regions of the world competing for access 
to those swap lines? Do you believe our balance sheets are 
capable of stabilizing?
    Mr. Dudley. It is hard to know what would happen in a given 
scenario, so it is hard to speculate.
    One thing that I think is important though is that the 
foreign countries around the world are a bit better protected 
themselves in terms of sharp changes in capital inflows to 
capital outflows in the sense that they have very large foreign 
exchange reserves compared to what they had 20 or 30 years ago.
    So, the ability of countries to bear a reversal from 
capital inflows to capital outflows is much better generally 
around the world than it was 20 or 30 years ago.
    And part of that is my concern over the interest-rate 
spike, particularly with our net debt coverage; the interest 
rate spike and where our WAM is on our U.S. sovereign debt. A 
couple of years of higher interest rates would be devastating 
budget-wise. So, I am fearful of a cascade somewhere else truly 
affecting us.
    Mr. Schweikert. I talked in a recent speech about debt 
service problems for the United States that are not really 
visible yet because U.S. interest rates are so low.
    And if the United States does not get its fiscal house in 
order over the medium term, there is a chance that U.S. 
interest rates will rise. And that debt interest burden on the 
U.S. fiscal position will become quite significant. So, this is 
just another reason why the United States does need to get its 
fiscal house in order over the medium to longer term.
    Thank you for your tolerance, Mr. Chairman. Thank you.
    Chairman Paul. I thank the gentleman.
    Now, I recognize the gentleman from North Carolina, Mr. 
McHenry.
    Mr. McHenry. Thank you, Mr. Chairman.
    And thank you both for being here. We had a similar hearing 
in my subcommittee of the Committee on Oversight and Government 
Reform. And the times have changed slightly in the last couple 
of months, so I do want to touch on some of the things that I 
raised then, just to see if things have changed.
    Dr. Dudley, can you explain under what circumstances the 
Fed would consider purchasing European sovereigns directly?
    Mr. Dudley. The Federal Reserve has a small foreign 
exchange reserve portfolio that we manage for ourselves and for 
Treasury. And so we do actually own a very small amount of 
European sovereign debt as part of that foreign exchange 
reserve portfolio.
    With the exception of that portfolio, which we periodically 
roll over maturing securities, I think the bar, as I said in 
our hearing a few months ago, was extraordinarily high for the 
Federal Reserve to actually go out and buy foreign sovereign 
debt for its own portfolio apart from these very small foreign 
exchange reserves holdings that we have.
    Mr. McHenry. So, roughly what dollar amount do we have?
    Mr. Dudley. I think it is on the order of $20 billion, $25 
billion total. It consists of cash, sovereign debt of a couple 
countries, and then there are some reversed repurchase 
agreements where we basically have executed against dealers and 
taken--
    Mr. McHenry. So, for context--
    Mr. Dudley. It is a tiny--and it is based--
    Mr. McHenry. $25 billion to what of your total holdings, 
just so we have--
    Mr. Dudley. The total portfolio is about almost $3 
trillion, not quite $3 trillion.
    Mr. McHenry. Okay. So, it is de minimis--
    Mr. Dudley. It is de minimis and it hasn't changed in size 
or composition over--
    Mr. McHenry. Do you have statutory authority to expand 
that? Could you ramp it up to $500 billion?
    Mr. Dudley. We have legal authority under the Federal 
Reserve Act to buy foreign sovereign debt. I don't see the 
circumstances under which we would ever be willing to do that, 
except with the exception of managing this foreign exchange 
reserve portfolio.
    Mr. McHenry. Okay. Now, in terms of the long-term 
refinancing operation the European Central Bank has undertaken 
with the 3-year notes, in essence it looks similar in concept 
to TARP, doesn't it?
    Mr. Dudley. It is a little different in the sense that TARP 
was money that Congress appropriated and then was used by the 
Treasury as capital to put into banks or put into other 
entities to recapitalize them.
    The long-term refinancing operation is a loan from the 
European Central Bank to its banks against collateral that they 
pledged. So, it is a lending operation, not a capital 
investment.
    Mr. McHenry. So, the TARP really wasn't a lending operation 
so you had to pay it back with fines and penalties and 
interest? It seems to me--
    Mr. Dudley. TARP could be used for many purposes. It could 
be lent out and it could be used as capital. But if you look at 
how the TARP money was used and the bulk of it, the bulk of it 
was used for capital investments.
    Mr. McHenry. I think we are battling semantics here because 
in essence they are similar in dollar amounts, similar in terms 
of their intent.
    Now, really at the root, what is the European problem? Is 
it a problem of indebted countries? Is that the root of what we 
are contending with right now?
    Mr. Dudley. I think that is part of it. Part of it is you 
have some countries in Europe that have budget deficits that 
are unsustainably high and debt burdens that are continuing to 
climb. So, that is problem number one.
    But problem number two is they are doing so in a system of 
17 countries with a common currency where the individual 
countries don't have control over their own monetary policy. 
They don't have their own currency and there is a lack of 
fiscal transfers within Europe to support countries that are in 
a weaker position relative to those that are in a stronger 
position.
    So, there are some things that are very special about 
Europe's that are part of the European Union, the system of how 
the system is arranged that are very different than anything 
that applies to the United States.
    Mr. McHenry. So, what happened with much of this long-term 
refinancing operation, that capital; it flowed into sovereign 
debt of a few countries and in large part that is where much of 
this flowed.
    But Dr. Kamin, in terms of what that actually did--we have 
actually bought some time and space for a few highly indebted 
countries. Is that basically what has happened?
    Mr. Kamin. I think that it is possible that the sect of the 
Long-Term Refinancing Operations (LTRO), in combination with 
the other measures that have been taken, basically might have 
some somewhat longer-term benefits.
    To be specific about that, it is true, as you say, that 
probably some of the LTRO money did flow to the purchase of 
sovereign bonds. But perhaps the more important thing that the 
LTRO funds did was alleviate many concerns by the market about 
the liquidity position and the financial position more 
generally of European banks.
    And so the way in which that may have led to reductions in 
the sovereign yields of some embattled European governments was 
not just directly--they had the funds and they could use them; 
but indirectly because European banks felt more solid in their 
financial position and more comfortable being able to buy these 
bonds.
    In turn, that improved situation in terms of European banks 
in the eyes of the markets may have led investors to believe 
that, therefore, European governments would not in turn be 
called upon to support banks. So, there was sort of a virtuous 
circle in process here, which has so far been very beneficial 
in terms of improving the tenor of markets.
    Now, all that said, you are absolutely right that the LTRO 
is the provision of liquidity by itself cannot be the only 
thing that will solve the European crisis. It is very important 
that European leaders work on a number of more lasting 
fundamental issues.
    One of them is they need to actually make the financial 
backstops for European governments higher and stronger, and 
that is a discussion they are having. They also need, quite 
obviously, and this is very challenging, to actually follow 
through on their many commitments to improve their fiscal 
situation.
    And finally, as we have discussed here today, improved 
fiscal performance must be buttressed by improved growth 
performance, and that is particularly challenging for the 
peripheral European economies. And so, they are going to have 
to follow through on a lot of fairly rigorous structural 
reforms.
    Thank you.
    Mr. McHenry. Thank you.
    It sounds like psychology and economics are getting closer 
and closer in these current crisis times.
    Mr. Kamin. I think they always have been.
    Chairman Paul. I thank the gentleman.
    I want to follow up on this issue about how it is going to 
help our consumers here at home when we make these loans 
overseas. And I think, Dr. Dudley, you indicated that you 
already have some evidence that it has been helpful? Or are you 
just saying that if we do it, it could be helpful?
    Mr. Dudley. The evidence is--it is soft evidence rather 
than hard evidence. But we have been monitoring the performance 
of the European banks who do business in the United States 
quite closely because they were having trouble getting dollar 
funding.
    Money market mutual funds which were providing dollar 
funding to the European banks during the summer and fall were 
pulling back. Other lenders, large asset managers, were also 
pulling back from the European banks. And this was causing 
those banks to start to get out of their dollar book of 
business. They were trying to sell off loans and pull back in 
terms of their willingness to provide credit.
    This was going on at a pretty feverish pitch through the 
late fall and in through the early winter. And I wouldn't say 
that it stopped, but the sense we get is it is happening now in 
a much more orderly way and not leading to the fire sale of 
assets at low prices; not leading to downward pressure on 
financial markets; not leading to a constraint in credit 
availability of U.S. households and businesses.
    So, from what I can tell, we are seeing that the leveraging 
of the European banks is continuing. But it is happening in an 
orderly way rather than a disorderly way, which is what our 
objective is.
    Chairman Paul. You don't actually have a quantity, a number 
that you can--
    Mr. Dudley. No, we don't have--
    Chairman Paul. --to say that they did such and such to the 
consumers back here at home?
    Mr. Dudley. We don't have the details or data on that. But 
we do have discussions with those banks.
    Chairman Paul. It seems like there is a conflict, at least 
in my mind, of the need to send more currency swaps over there 
when the banks--I think the top eight banks in Europe actually 
had a tremendous increase in their reserves, a 50 percent 
increase in 1 year. So, why do they need more money? Why do 
they need more? It is already there.
    What about our banks? Our banks have $1.5 trillion. If it 
is a good deal and it needs these bailouts or these purchases 
that you want them to do by having these currency swaps to help 
the banks--give the central banks to help buy some of this 
debt. If it is a good deal for anybody, why wouldn't some of 
our banks--they have $1.5 trillion?
    It seems like you are doing something that the market 
doesn't want you to do. And there is a reason. Maybe it is way 
too risky. And if we are sending money over to the European 
banks with the hope, but no evidence, actually, of some of this 
money coming back and actually stimulating our economy, why is 
it that just more credit and more money in the system is going 
to work if our banks are holding $1.5 trillion?
    There is something more to it than the lack of the ability 
or the lack of the willingness of the Fed to just endlessly 
create more and more credit. Why is it going to work better by 
just pumping more into, say, a European bank if the goal--see, 
you emphasized the help it is going to--you do it out of the 
interest of the American consumer.
    You diminish the possibility that it might be done to just 
prop up the banks because they are in over their heads--that 
they may have credit default swaps. And the banks over there 
are--it is global. They have branches over there. It is just to 
prop up a system that is not viable.
    So why is there a disconnect? There seems to be a lot of 
money there. Why do you feel compelled that we have to keep 
sending more in order that hopefully it will help our consumers 
here at home?
    Mr. Dudley. I think that the U.S. banking system is a very 
different place than the European banking system. The U.S. 
banks have plenty of dollar assets that they can--monies that 
they can lend. They gather deposits through their retail branch 
networks here. So they don't have any shortage of dollar funds 
which they can lend.
    The European banks were in a different position because 
they were dependent on the wholesale funding market providing 
them with dollars. And as the European situation deteriorated 
last summer and fall, U.S. investors that had been providing 
dollars to these European banks were pulling back.
    And it was that pulling back and that difficulty for 
European banks to gain access to the wholesale dollar funding 
markets which was forcing them to pull back in terms of their 
willingness to lend to U.S. households and businesses. U.S. 
banks don't need dollar liquidity right now, so there is no--
and they are not deleveraging.
    The issue is the European banks, their dollar book of 
business. They were having trouble funding that book of 
business, and that is why they were pulling back.
    Chairman Paul. But they are holding all the reserves. If it 
were any advantage at all, they would do it. Obviously, there 
is no advantage to even helping out Europe. There is no law 
against them loaning the money, is there? Why do you feel 
compelled that you have to do something that the banks that are 
holding all this money won't do?
    Mr. Dudley. I think that the European situation was 
creating a lot of anxiety about the health of the European 
banking system because the health of the European banking 
system was tied up with the health of the individual national 
economies in terms of their fiscal positions. And the ECB 
basically has been trying to find a way to cut that tie.
    I think that long-term refinancing operations and the 
dollar swaps have sort of calmed down the anxiety in the 
market. And what we have actually seen now since the long-term 
refinancing operations have been put in place by the ECB and 
the dollar swaps have been put in place by us, is we have 
actually seen financing pressures in Europe subside.
    So the rates that the European banks have to borrow from 
other European banks or to borrow from U.S. banks in dollars, 
those rates have actually been coming down. So that is actually 
a beneficial consequence of the long-term refinancing 
operations and the dollar-swap programs. The pressure on the 
markets is abating, which I think is a good thing.
    Chairman Paul. I will recognize Mr. Luetkemeyer from 
Missouri.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    I am kind of curious. Who determines the rate for the swap 
lines, the interest rate?
    Mr. Dudley. The interest rate is established by the Federal 
Open Market Committee in discussions with the foreign central 
banks. Obviously, they have to agree to the rate that we are 
willing to--
    Mr. Luetkemeyer. How often is it reviewed to go up or down? 
How often do you review that: quarterly; semi-annually; once a 
year?
    Mr. Dudley. The swap lines are outstanding. For example, 
the current set of swap lines are outstanding until February 1, 
2013. But we certainly could review them at any--
    Mr. Luetkemeyer. The rate doesn't float?
    Mr. Dudley. --at any point in time. The rate is set 
essentially at the Federal funds rate plus 50 basis points. So 
right now, it is about 0.6 percent of the interest rate.
    Mr. Luetkemeyer. Okay, but the amount above the Fed funds 
rate--that stays constant for the entire length of the swap? Or 
do you float that or adjust that as well?
    Mr. Dudley. It had been at 100 basis points over the 
Federal funds rate up until last fall. And then, we lowered 
that spread from 100 basis points to 50 basis points. And the 
reason why we lowered that rate is that European banks were 
reluctant to use the swaps because they felt that using the 
swaps at that rate would be a sign of weakness.
    The swaps were actually not being very effective in 
containing pressure in financial markets. So a decision was 
made by us and the foreign central banks in which we have 
engaged with the swaps to lower the rate from 100 basis points 
over the Federal funds rate to 50 basis points over the Federal 
funds rate.
    Mr. Luetkemeyer. If the European banks felt it was in their 
own best interests not to borrow money, not to swap because the 
rate was too high, why would you want to entice them into this 
with a lower rate?
    Mr. Dudley. They were reluctant to use the swap because 
they felt that if they used it, it would be a sign that they 
were particularly weak institutions.
    Mr. Luetkemeyer. Why are they not viewed as weak now 
because they are using it now?
    Mr. Dudley. Because when the swap rate was lowered from 100 
basis points over the Federal funds rate to 50 basis points 
over the Federal funds rate, it became broadly attractive to 
the rates that were then in place in markets.
    Mr. Luetkemeyer. It made them look like better investors?
    Mr. Dudley. Pardon?
    Mr. Luetkemeyer. It made them look like better investors, 
better money managers?
    Mr. Dudley. There was an economic rationale for borrowing 
from the swap lines at the lower rate, so lots of banks 
participated. And since lots of banks participated, there was 
very little stigma from participating in that program.
    Mr. Luetkemeyer. This whole thing is held together by 
confidence and the perception that everybody is doing okay, 
isn't it?
    Mr. Dudley. I think we have seen both in the case of the 
swaps and in the case of our own discount window in the United 
States, that there are times that banks don't want to use 
liquidity facilities, backstop facilities, because they are 
afraid that it is going to show that they are weak relative to 
other institutions. And that is just a problem in terms of 
these type of liquidity facilities.
    Mr. Luetkemeyer. I am just kind of curious. I will follow 
up on Chairman Paul's line of questioning with regards to the 
ECB loaning it to the banks, and the banks turning around and 
loaning it to our American, I guess, companies and investors 
here.
    Why would they do that? Why are they not borrowing the 
money from us directly, our banks here?
    Mr. Dudley. The European banks have big books of business 
in the United States, especially in areas like trade finance, 
project finance, and reserve energy. They lend against oil-and-
gas drilling, energy reserves. And they have specialized 
expertise in these areas. And so, that is why they undertake 
this business around the world.
    And in the United States, when they partake in this 
business, they do it in terms of lending dollars because 
obviously that is what the currency that we do business here in 
the United States. And so, they have a need for dollars to be 
able to sustain that business.
    Mr. Luetkemeyer. So what you are saying is that there are 
banks in Europe that are better experts at lending in certain 
areas, certain fields, than we have lending institutions in 
this country. Is that what you just said?
    Mr. Dudley. I am saying that there are European banks that 
are specialized in certain areas. Now whether they are better 
or worse than U.S. banks that participate in the same areas, 
there is some overlap in the areas of competition.
    But there are certain areas where European banks 
historically have concentrated their lending. Project finance, 
trade finance, and energy reserve lending are probably three of 
the most predominant examples.
    Mr. Luetkemeyer. Do the American corporations or entities 
that borrow from them, are they buying goods and services from 
Europe then, or are they buying goods and services from 
someplace else in the world, or the United States? Or is it 
kind of--does it kind of work like our export-import bank here, 
or how does that work?
    Mr. Dudley. I would presume that if you are borrowing in 
dollars, you are using those dollars to buy U.S. goods and 
services. Otherwise, you wouldn't need the dollars. You would 
need some other form of currency.
    Mr. Kamin. Congressman, if I could add--this is a very 
global financial system, and we are in the middle of a very 
global economic system.
    So, large banks operate all around the world and compete 
with each other. And that actually ends up being beneficial to 
non-financial--
    Mr. Luetkemeyer. I understand that, Dr. Kamin, but I am 
trying to get at--I am kind of concerned here because we have 
foreign banks that are apparently competing against American 
banks, which is what you just said, yet we are loaning money to 
the ECB, to those banks, to be able to loan back and compete 
against our banks. Is that what you just said?
    Mr. Kamin. What I said was just that both financial 
institutions and non-financial institutions compete with each 
other all around the world.
    Mr. Luetkemeyer. Yes, but my concern is that if we, through 
these swap lines, are funding these international banks, and 
they are in turn competing against our banks, I don't think we 
need to be doing that. Do you?
    Mr. Kamin. The primary concern of the Federal Reserve in 
setting up the swap lines was to maintain the flow of credit to 
American households and firms. That was key because that is 
what is needed in order to maintain the economic recovery and 
to move toward achieving our dual mandate of both price 
stability and maximum sustainable employment.
    So, that was the critical factor that motivated.
    Mr. Dudley. I think the U.S. banks also are interested in 
having a healthy U.S. economy, just like the European banks 
are. And I think that they probably broadly recognize that a 
forced liquidation of assets by Europeans banks would have 
negative consequences for the U.S. economy and for their banks.
    Mr. Luetkemeyer. I see my time is up. Thank you, Mr. 
Chairman.
    Chairman Paul. I now recognize Mr. McHenry for 5 minutes.
    Mr. McHenry. Thank you, Mr. Chairman. To follow up on the 
earlier question I had about the long-term refinancing 
operation, it is interesting to me, Dr. Kamin--you did walk 
through the whole thought process. And I do appreciate that, 
the willingness of a witness from an independent institution 
the Congress oversees to walk through in sort of a very broad 
form; your thinking on this is rather impressive, and, dare I 
say, revolutionary.
    But it was very much appreciated because this is really 
just about trying to make sure policymakers on the Hill have an 
awareness of what the Fed is doing. And I don't have to explain 
to the Fed the chairman of this subcommittee's vigorous 
intention of oversight of the Federal Reserve. That may be the 
understatement of the day.
    So with this injection of funds, of low-interest-rate loans 
for an extended period of time, much of this capital--a large 
portion of this capital, I should say--of all the categories 
has gone to sovereign debt.
    Mr. Kamin. This is the LTROs?
    Mr. McHenry. Yes.
    Mr. Kamin. Thank you.
    Mr. McHenry. Yes. I am sorry.
    So in that operation, money is flowed to sovereign debt. So 
it has had one of the intended effects from the ECB, it 
appears. The question is, of course, ``What is our exposure to 
Europe?'' Right? In terms of a quantifiable dollar amount, by 
our private sector; that is one question.
    But really the bigger question here for policymakers is 
what is our exposure as a government, and the Federal Reserve's 
exposure to Europe?
    Mr. Kamin. Thank you, Congressman McHenry, for your kind 
remarks earlier, and for these questions.
    The Federal Reserve exposure to Europe would be basically 
encompassed by the value of our swap lines, which is around $50 
billion or so, to the ECB, and then a very small amount to the 
Swiss National Bank.
    As we have discussed earlier, we think that those exposures 
are very secure. We have provided them with dollars. In 
exchange, they have provided us with their currency. And we 
appreciate the prudent management and the strong financial 
position of the ECB.
    The exposure of our private financial institutions to 
Europe is obviously much, much larger, both our banks and our 
money market funds. Those exposures to the most embattled so-
called countries in Europe, particularly like Greece and 
Portugal and Ireland, are really very small; the exposures to 
Spain and Italy--somewhat larger. But we have had many 
discussions with the banks that we supervise, and those are 
viewed to be quite manageable. Obviously, the exposures to core 
European banks which are, in turn, exposed to peripheral Europe 
are much larger.
    But we are, in terms of thinking about the channels of 
spillover and how this exposure really works--what is probably 
more of concern is not so much these direct financial exposures 
to European institutions, but rather the fact that if the 
situation in Europe took a turn for the worse, there will be 
these ancillary channels that we have talked about before; the 
disruptions of financial markets; the retreat from risk-taking 
that could disrupt financial markets around the world.
    And that is really the matter of greater concern, and that 
is where we focus a lot of our efforts in working with the 
banks that we supervise, and other regulatory institutions 
taking the same standpoint that the banks--
    Mr. McHenry. Sir, explain to me how the swap lines benefit 
the American economy. Just in layman's terms.
    Mr. Kamin. Sure. To begin with, many European financial 
institutions, as we have discussed, are engaged in direct 
extensions of credit to U.S. households and firms. Any 
situation where these European banks were unable to get the 
dollar funding they needed, they would be forced to pull back 
on lending from U.S. households and firms. They might be forced 
to sell assets, which would then depress asset values in the 
U.S. economy more generally. And both of those effects would 
directly affect the ability of the U.S. households and firms to 
grow and prosper.
    On top of that, funding difficulties by these European 
banks would lead to their cutback on credit, in terms of dollar 
lending, to other firms around the world; firms which buy a lot 
of the U.S. exports. And so, that would be an additional 
channel through which a funding shortage could hurt the U.S. 
economy. And that is what we hope to alleviate through the 
provision of these funds.
    Finally, in the event that the dollar funding was not 
available--say in the absence of our swaps lines--and European 
banks ran into more severe difficulties, this could be a 
contributing factor to a further and renewed deterioration of 
European financial conditions, that not only could severely 
impact the European economy and prolong the recession, but lead 
to distressed conditions around the world.
    So there might be larger, more ancillary effects from 
dollar funding problems then, again, the dollar swap lines are 
intended to alleviate.
    Mr. McHenry. Thank you, Mr. Chairman.
    Chairman Paul. Thank you.
    I recognize the gentleman from Michigan, Mr. Huizenga.
    Mr. Huizenga. Thank you, Mr. Chairman.
    I appreciate the opportunity, and I thank the witnesses for 
coming in. I want to maybe touch on a couple of quick things 
and continue on the currency swaps.
    How far are we going to bring this along, I guess would be 
part of my question? How long are we going to stick into this 
game and be part of it? If Europe remains dependent on currency 
swaps, these same swaps become increasingly risky. Are you 
prepared to allow these currency swaps to wind down? Or what is 
going to happen there?
    And then, the short-term dollar funding in Europe seemed to 
be the discussion point; right? How would you define short term 
versus medium term and long term?
    Mr. Kamin. I will start. Or, why don't you go ahead?
    Mr. Dudley. Okay.
    What we would hope is that the European countries do the 
right thing in terms of getting their fiscal houses in order 
and improving their competitiveness, so that investors start to 
have more confidence in the sustainability of the European 
Union and how all these countries are going to persist.
    If that happens, and at the same time, the European banks 
are shown to have good earnings, liquidity, and capital, then I 
think that the willingness of private lenders to provide dollar 
liquidity to the European banks will emerge very much intact.
    And in that situation, our swaps will be at rates that are 
actually higher than the market, and the swap programs will 
just sort of wind down automatically.
    This is what we saw during 2007, 2008, 2009, during the 
first big wave of swaps; that as market conditions normalized, 
the swap usage came down pretty automatically.
    Mr. Huizenga. I am kind of curious about that, because I am 
looking at some information in front of me here that says 
interest rates on dollar loans from the ECB are around 0.6 
percent; interest rate on ECB charges for its euro loans is 1 
percent. I don't have my Ph.D. in economics, however, I can see 
the incentive there. Why by making dollar financing cheaper 
than euro financing, how are they ever going to get out of that 
cycle?
    Mr. Dudley. I am not sure that I would agree with that, if 
that is the right comparison. The 1 percent is to borrow euros. 
The 0.6 percent is to borrow dollars. And the alternative is to 
borrow dollars from a U.S. bank when the Federal Reserve is 
paying 25 basis points on the interest rate that we pay on 
excess reserves.
    There is quite a bit of room between the 25 basis points we 
pay on the reserves here in the United States, and the 0.6 
percent on the dollar swaps. So we would expect that if the 
conditions in Europe were to continue to improve, that the rate 
at which European banks could borrow dollars would be somewhat 
north of 25 basis points perhaps, but below that 0.6 percent. 
So we would think that there is plenty of room in that 
difference for the European banks to obtain credit from private 
entities.
    And, in fact, we have actually seen private suppliers of 
dollars to the European banks return subsequently to the large, 
long-term refinancing operations and the dollar swap programs. 
So it looks like--
    Mr. Huizenga. But doesn't that--
    Mr. Dudley. --the market is already starting to normalize 
the dollar swaps.
    Mr. Huizenga. But doesn't that weaken the value of the 
euro, what they are doing?
    Mr. Dudley. I think the euro has really basically been 
trading in line with how the situation in Europe looks. As the 
European situation worsens, the euro depreciates. As the 
European situation improves, the euro appreciates. So it is 
really based on the outlook for Europe, of course relative to 
the outlook in the United States.
    Mr. Huizenga. Help me to understand how if it is a weaker 
euro, doesn't that mean a typically a weaker Eurozone, since we 
have sort of flagged this off as a European issue, and trying 
not to get dragged into it here from the U.S. side?
    Mr. Dudley. You are certainly right that if the European 
outlook were to deteriorate, the euro would probably weaken as 
a consequence. The good news is that over the last 4 or 5 
months, the euro has actually strengthened a bit, because 
Europe has actually made some progress in terms of addressing 
some of their issues.
    Mr. Huizenga. Okay.
    And then, my time is almost up, and I will--Dr. Kamin, do 
you want to say something as well?
    But I am just curious: What keeps you up at night? What 
other countries? You specifically--I think in Dr. Kamin's 
testimony, he talked briefly about Greece.
    And then, you just were touching on Spain and Portugal. But 
where are we at with Italy and Ireland? Are we on solid 
footing--are they on solid footing in France and Germany and 
some of those other countries that have been leading this?
    Mr. Kamin. Certainly, the euro crisis in general is what 
keeps me up at night, and what occupies much of my thinking 
time during the day as well.
    Obviously, the situation in Greece has been very difficult. 
And we have been following that very closely. We also, 
obviously, are very focused on, basically, Ireland and 
Portugal, which are the recipients of IMF funds. And we think 
it is critically important that these problems not move further 
into Spain and Italy, which have also been the focus of market 
attention.
    And we think it is absolutely critical to make sure that 
you don't have further contagion beyond that. So far, things 
have been looking on the brighter side. There have been 
improvement in markets. But we have continued to monitor the 
situation as closely as ever.
    And then, while most of my thinking lately is focused on 
Europe, obviously I am thinking about oil prices as well, 
because that is another area that poses a potential threat at 
least down the road.
    Mr. Huizenga. Thank you.
    Chairman Paul. Thank you.
    I have a couple of additional questions I would like to 
ask.
    I am interested in one line on the Federal Reserve sheet at 
each week on other assets, other Federal Reserve assets. And it 
has been growing a bit. It used to be a small number, but even 
in recent years, it has gone up. I think it is about $160 
billion now.
    What does that include? Does that include anything foreign? 
Is there any type of a foreign asset or a swap or anything 
involved in there that would help me understand this 
international financial crisis that we are in?
    Mr. Kamin. Chairman Paul, we definitely put on our balance 
sheet--we list our holdings of foreign assets. I don't recall 
offhand if that is where the ``other assets'' are. I don't 
think so. The ``other assets'' have, as you point out, risen 
over time. And there is one main contributing factor to that, 
which is when we buy securities in the markets, sometimes we 
buy them at a value that is above their par or face value, 
because interest rates had declined since they were first 
issued. That raises the value of those securities.
    So then, we place the par value of the securities in one 
line on our balance sheet, and then that additional part that 
is over the par value, the premium, that is placed in our 
``other assets'' line. So as we have continued to purchase 
securities in the market, the amount of the premium part of our 
purchases, which has gone into the ``other assets'' line, has 
continued to rise.
    Chairman Paul. So you say you are buying securities. Would 
this be like mortgage securities?
    Mr. Dudley. This would be predominantly the maturity 
extension program, in which we are selling short-dated Treasury 
securities and buying long-dated Treasury securities. We are 
also buying mortgage-backed securities, but with emphasis to 
rolling over existing maturing mortgage-backed securities, so 
the size of the mortgage-backed securities portfolio is pretty 
constant.
    Chairman Paul. So, the significant increase of $160 billion 
of just saying they are ``other,'' it is definitely related to 
the international financial crisis that we are involved in 
right now?
    Mr. Dudley. As Steve related, it is related to the 
expansion of the Fed's balance sheet and the types of assets 
that we are buying in the market. The maturity extension 
program--we are selling short-dated Treasuries; we are buying 
long-dated Treasuries. To the extent that we are buying 
Treasuries that are selling above par because interest rates 
has declined, that is different than what Steve was saying is 
booked in the other assets category.
    Chairman Paul. What does this mean, if this were to 
continue to grow at the rate it is growing now?
    Mr. Dudley. No. I would expect that once the maturity 
extension program or other asset purchase programs are ended, 
then I would expect the other assets category actually to 
probably come down over time as that premium was amortized over 
time. So, I would view this as a temporary phenomenon.
    Chairman Paul. But there is no one place in the Federal 
Reserve reports that would give me a full explanation of 
exactly what the $160 billion is? You don't send out a report 
each month and say exactly what that is made up of?
    Mr. Kamin. There is an interactive portion of our Web site 
that offers more analysis of the different lines. That is the 
first thing.
    The second thing I want to follow up on is having checked, 
the ``other assets''--I just think the ``other assets'' 
category does indeed, as you suggest, also include foreign 
currency denominative assets, but not the swap lines. It is the 
other European and the undenominated securities that we hold.
    Chairman Paul. Okay.
    The other thing I have noticed since 2008 is if you look at 
a long-term chart of currency in circulation, it is a steady 
increase and very predictable. But since 2008, it has been 
going up much more rapidly. This is cash as currency. Where is 
the demand for more cash? Do you know exactly where that goes? 
Does that end up overseas? Is that in circulation here? Or is 
it in a shoebox someplace?
    Mr. Dudley. Probably in both places. With interest rates 
this low, the opportunity costs of holding more currency 
obviously is very low. If you hold the currency, you get a 0 
percent return. But if you have gone to your bank these days, 
you don't get much more than that.
    So, people probably are carrying around more currency in 
their pockets because there is less cost of holding the 
currency versus holding it in a bank. This may also be true 
internationally, although I am not familiar with how much 
currency is held here versus abroad. I know historically, it 
has been about one third here, and two thirds abroad. But I 
don't know how that has been changing recently.
    Chairman Paul. I have one quick question for both of you. 
You can probably answer this rather easily.
    You are very much involved in dealing with the value of our 
money, the value of our dollar and our financial system. But I 
have trouble finding the legal definition for the unit of 
account that we have as a dollar. Can you tell me your 
definition of--what is a dollar?
    Mr. Dudley. I view the dollar as the legal tender in the 
United States, so that if someone pays a dollar as payment, the 
shopkeeper has to accept that dollar for that transaction.
    Mr. Kamin. Also the classic definition of money, I think of 
it as three things. It is store value, which it is a medium of 
transaction.
    Mr. Dudley. And usually has portability.
    Mr. Kamin. Yes. And then it is a medium of accounts. In 
other words, you measure value by using a dollar.
    Chairman Paul. But you do realize there was a more precise 
definition of a dollar most of our history where you could 
actually know what it meant. But it seems like there is no 
definition at all. You say it is just a unit of account. And 
that is probably the reason why we have lost about 98 percent 
of the value of that dollar since 1913, since it has been the 
responsibility of the Federal Reserve to protect the value of 
our currency.
    So, I have trouble believing that we will be able to solve 
any of our problems financially or even fiscally if we can 
create money endlessly and out of thin air and accommodate the 
politicians who spend money, who spend money overseas, who 
spend money on foreign policy that indirectly you have to deal 
with. Look how the sanctions and the threat of war in Iran 
affects the finances of the world, not only perception-wise in 
trade and pushing up oil prices, but also the need to keep 
monetizing this debt.
    Federal Reserve Chairmen endlessly, for all the years I 
have been here, have said, ``If the Congress would quit 
spending so much money and didn't have so much debt, we 
wouldn't have such a tough problem managing the currency.'' At 
the same time, the debt wouldn't be there if the Federal 
Reserve wasn't there willing to monetize the debt, because you 
are the lender of last resort.
    You guarantee the moral hazard that politicians are going 
to spend money. And it seems like to coordinate the two and 
have a sound economic system instead of a financial bubble that 
is based on debt and a monetary standard based on debt with the 
world awash in an exploding amount of debt. I don't know how we 
will ever get out of this unless we finally come up with a 
definition, once again, of what the unit of account is and what 
a dollar means.
    This hearing is now adjourned.
    The Chair notes that some Members may have additional 
questions for the panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    [Whereupon, at 11:42 a.m., the hearing was adjourned.]


                            A P P E N D I X



                             March 27, 2012


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