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






  EUROPE'S SOVEREIGN DEBT CRISIS: CAUSES, CONSEQUENCES FOR THE UNITED 
                       STATES AND LESSONS LEARNED

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

                                HEARING

                               before the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 21, 2012

                               __________

                           Serial No. 112-158

                               __________

Printed for the use of the Committee on Oversight and Government Reform








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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 DARRELL E. ISSA, California, Chairman
DAN BURTON, Indiana                  ELIJAH E. CUMMINGS, Maryland, 
JOHN L. MICA, Florida                    Ranking Minority Member
TODD RUSSELL PLATTS, Pennsylvania    EDOLPHUS TOWNS, New York
MICHAEL R. TURNER, Ohio              CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   ELEANOR HOLMES NORTON, District of 
JIM JORDAN, Ohio                         Columbia
JASON CHAFFETZ, Utah                 DENNIS J. KUCINICH, Ohio
CONNIE MACK, Florida                 JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan                WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma             STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
ANN MARIE BUERKLE, New York          GERALD E. CONNOLLY, Virginia
PAUL A. GOSAR, Arizona               MIKE QUIGLEY, Illinois
RAUL R. LABRADOR, Idaho              DANNY K. DAVIS, Illinois
PATRICK MEEHAN, Pennsylvania         BRUCE L. BRALEY, Iowa
SCOTT DesJARLAIS, Tennessee          PETER WELCH, Vermont
JOE WALSH, Illinois                  JOHN A. YARMUTH, Kentucky
TREY GOWDY, South Carolina           CHRISTOPHER S. MURPHY, Connecticut
DENNIS A. ROSS, Florida              JACKIE SPEIER, California
FRANK C. GUINTA, New Hampshire
BLAKE FARENTHOLD, Texas
MIKE KELLY, Pennsylvania

                   Lawrence J. Brady, Staff Director
                John D. Cuaderes, Deputy Staff Director
                     Robert Borden, General Counsel
                       Linda A. Good, Chief Clerk
                 David Rapallo, Minority Staff Director













                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 21, 2012...................................     1

                               WITNESSES

The Honorable Timothy F. Geithner, Secretary of The Treasury
    Oral Statement...............................................     7
    Written Statement............................................    10
The Honorable Ben S. Bernanke, Chairman Board of Governors of The 
  Federal Reserve System
    Oral Statement...............................................    15
    Written Statement............................................    18

                                APPENDIX

The Honorable Darrell Issa, A Member of Congress from the State 
  of California, Hearing Preview Statement.......................    63
The Honorable Elijah E. Cummings, A Member of Congress from the 
  State of Maryland, Opening Statement...........................    64
The Honorable Dan Burton, A Member of Congress from the State of 
  Indiana, Opening Statement.....................................    66
The Honorable Gerald E. Connolly, A Member of Congress from the 
  State Virginia, Opening Statement..............................    68
Responses to the Questions submitted for the record..............    70

 
  EUROPE'S SOVEREIGN DEBT CRISIS: CAUSES, CONSEQUENCES FOR THE UNITED 
                       STATES AND LESSONS LEARNED

                              ----------                              


                       Wednesday, March 21, 2012,

                          House of Representatives,
              Committee on Oversight and Government Reform,
                                                   Washington, D.C.
    The committee met, pursuant to call, at 9:30 a.m. in room 
2154, Rayburn House Office Building, Hon. Darrell E. Issa 
[chairman of the Committee] presiding.
    Present: Representatives Issa, Burton, Turner, McHenry, 
Jordan, Lankford, DesJarlais, Gowdy, Farenthold, Kelly, 
Cummings, Maloney, Norton, Kucinich, Connolly, Quigley and 
Welch.
    Staff Present: Kurt Bardella, Majority Senior Policy 
Advisor; Brian Blase, Majority Professional Staff Member; 
Robert Borden, Majority General Counsel; Molly Boyl, Majority 
Parliamentarian; Lawrence J. Brady, Majority Staff Director; 
John Cuaderes, Majority Deputy Staff Director; Gwen D'Luzansky, 
Majority Assistant Clerk; Linda Good, Majority Chief Clerk; 
Tyler Grimm, Majority Professional Staff Member; Peter Haller, 
Majority Senior Counsel; Ryan M. Hambleton, Majority 
Professional Staff Member; Christopher Hixon, Majority Deputy 
Chief Counsel; Mark D. Marin, Majority Director of Oversight; 
Rafael Maryahin, Majority Counsel; Kristin L. Nelson, Majority 
Professional Staff Member; Laura L. Rush, Majority Deputy Chief 
Clerk; Jeff Solsby, Majority Senior Communications Advisor; 
Noelle Turbitt, Majority Staff Assistant; Rebecca Watkins, 
Majority Press Secretary; Jaron Bourke, Minority Director of 
Administration; Kevin Corbin, Minority Deputy Clerk; Carla 
Hultberg, Minority Chief Clerk; Adam Koshkin, Minority Staff 
Assistant; Lucinda Lessley, Minority Policy Director; Leah 
Perry, Minority Chief Oversight Counsel; Jason Powell, Minority 
Senior Counsel; Steven Rangel, Minority Senior Counsel; Dave 
Rapallo, Minority Staff Director; and Mark Stephenson, Minority 
Director of Legislation.
    The Chairman. The Committee will come to order.
    The Oversight Committee mission statement is that we exist 
to secure two fundamental principles. First, Americans have the 
right to know the money Washington takes from them is well 
spent. Second, Americans deserve an efficient, effective 
government that works for them. Our duty on the Oversight and 
Government Reform Committee is to protect these rights. Our 
solemn responsibility is to hold Government, I repeat, 
Government, accountable to taxpayers because they have a right 
to know what they get from their Government. Our job is to work 
tirelessly in partnership with citizen watchdogs to deliver the 
facts to the American people and genuine reform to the Federal 
bureaucracy.
    Today's hearing is most important because, in fact, since 
2009 Europe has been struggling to emerge from a severe 
sovereign debt crisis brought about by massive government 
spending and a weak economy. America could say the same: that 
we, in fact, have been struggling since 2009 to emerge from a 
severe sovereign debt crisis brought about by massive 
Government debt and, in fact, a weak economy.
    But that is not the issue today. The issue is not America's 
economy or sovereign debt; the issue is if the European Union 
in international monetary funds spends hundreds of billions of 
Euros to aid Greek, Ireland, Portugal, the E.U. and, with IMF 
assistance, if, in fact, America will be drawn into this 
problem. Can America afford one sovereign debt crisis such as 
Greece?
    I believe, after over a year of watching the Greece on-
again, off-again crisis, there is a certain assumption that 
eventually it will be solved, a certain assumption that we know 
what we are doing, a certain assumption that, in fact, it will, 
in time, be solved.
    Clearly, this hearing, which builds on the good work of 
Chairman Patrick McHenry, is, in fact, to ask a greater 
question. The greater question is: what if we could go beyond 
Greece. Assumptions are that, between hedging and, in fact, 
other means, that the problem is manageable. Our obligation is 
to say what if it is not.
    Our witnesses today are the two most important individuals 
at the center of this. Our Federal chairman certainly has a 
good understanding of our economy, what the Federal's 
capabilities are, and ultimately what he can do if, in fact, 
things go wrong.
    Secretary Geithner, who has been a loyal servant of the 
American people both at the Federal Reserve in New York and now 
in his current position, also has been intimately involved in 
both the U.S. crisis and in matters of Europe.
    So today our primary question will be, in fact, on what 
U.S. exposure truly is, what the impact to taxpayers could be. 
We will try not to look to the past; we will try to look to the 
future. But let us understand that, while we have a budget 
deficit of more than a trillion dollars, while our debt in the 
United States is 100 percent of GDP, while, in fact, we are 
still remembering the good and the very bad of TARP, we are 
still remembering both of the individuals before us today came 
and were involved in saying what TARP would be spent for, none 
of which came to pass. Ultimately, as Secretary Geithner has 
recently said, he does not plan on needing a bailout. He does 
not anticipate it.
    Our obligation on this Committee is to anticipate and to 
plan; therefore, the questions today for our two esteemed 
witnesses will be: what is plan B? I repeat, what is plan B if 
what you are managing is not manageable?
    With that I would like to recognize the Ranking Member for 
his opening statement.
    Mr. Cummings. Thank you very much, Mr. Chairman, for 
calling this hearing.
    I want to say to you, Secretary Geithner and Chairman 
Bernanke, I thank you for your service to our Country, and I 
thank you on behalf of a grateful Congress and a grateful 
Nation.
    Mr. Chairman, this is a very important issue, addressing 
the financial crisis in Europe and the lessons that can be 
learned here at home from it.
    Since the last hearing we held on this topic in December, 
the European officials have taken decisive action to 
reestablish financial stability in the Eurozone. American 
officials have helped diplomatically through consultation, 
through our participation in the IMF, and through the Central 
Bank support. No one is declaring mission accomplished, but the 
signs of improvement are impossible to miss.
    Unfortunately, it appears that some in the majority see the 
Euro crisis as a justification for imposing extreme austerity 
measures here at home. Yesterday the House Republicans released 
a budget proposal to cut $5.3 trillion over the next ten years 
to end Medicare as we know it and shift costs to seniors and 
give further tax rates to corporations.
    Today the majority will seek to draw parallels between 
Greece's financial troubles and those of the United States. In 
our last meeting, a majority witness called Greece a ``wake-up 
call'', arguing that the United States should shred our 
Nation's safety net and cut taxes to avoid Greece's fate.
    Don't believe it. While strong medicine is needed, it is 
the banks that caused the financial crisis who should be taking 
the hit.
    What we have learned from Greece is that austerity measures 
imposed during an economic downturn have very real negative 
consequences for working people, hard-working people, while 
they leave economic elite unscathed. Nevertheless, some 
Republicans believe we should implement similar extreme 
austerity measures here at home in the form of deep across-the-
board spending cuts.
    Secretary Geithner, on past occasions you warned against 
such actions. For example, you said this, ``We need to stay 
intensely focused on straightening our economy in the short 
term. We can't cut our way to growth. Severe austerity now 
would be very damaging.''
    But how Republicans have ignored this key point. Different 
problems require different solutions. In the case of the United 
States, economists largely agree that the housing bubble and 
risky investment products created by Wall Street were the key 
causes of our economic collapse. As Mark Zandi, chief economist 
of the Moody's Analytics Link, stated: Housing is ground zero 
for the economy's problems, high unemployment, and lost jobs.
    Although the recent $25 billion settlement with five of 
these banks is commendable, the sad truth is that millions of 
borrowers will not receive the relief they so desperately need 
because one important entity refuses to cooperate. The Federal 
Housing Finance Agency, the FHFA, Fannie Mae's and Freddie 
Mac's regulator, will not allow them to participate in the 
settlement, reportedly because much of the relief would be in 
the form of principal reduction.
    If we want to ensure that our economy at home is strong 
enough to weather the Euro crisis, turbulence from slowdowns in 
other foreign economies, we must end the housing crisis here at 
home. We must have principal reduction as one tool for 
borrowers who are underwater and who owe more than their homes 
are worth--in many cases through no fault of their own, by the 
way. FHFA's own data shows that principal reduction would save 
taxpayers billions of dollars. But Edward DeMarco, the agency's 
acting director, maintains what happens to be an ideological 
opposition. It is my hope, as we examine the Euro crisis, we 
keep in mind what should be our ultimate goal: rebuilding and 
protecting a strong economy for the millions of middle class 
Americans here in the United States.
    Mr. Chairman, with that I ask unanimous consent to enter 
the March 20th Washington Post article entitled: The Man 
Blocking America's Recovery into the record.
    The Chairman. How is this germane to today's hearing?
    Mr. Cummings. It addresses this issue.
    The Chairman. We can include it as extraneous material, but 
it was really germane to the hearing we had in New York and 
would also suggest it be placed in the record for that hearing.
    Mr. Cummings Thank you very much.
    The Chairman. You are welcome.
    We now go to the chairman of the Subcommittee, Mr. Patrick 
McHenry, for his opening statement.
    Mr. McHenry. Thank you, Mr. Chairman, and thank you for 
calling this hearing today.
    Nearly four years ago Americans witnessed domestic and 
global markets deteriorate, resulting in millions of job losses 
and unprecedented measures by Government and central banks to 
prop up financial institutions. As the United States economy 
remains vulnerable in the midst of a very shaky recovery, just 
across the Atlantic our European friends fight to fend off a 
second wave of economic and financial turmoil. Their lesson is 
one for the world, as well as the United States.
    In December my Subcommittee invited officials from the 
Federal Reserve and the United States Treasury to explain the 
economic unrest facing Europe and what actions they would 
consider in reaction to it and what measures remain at their 
disposal as events change day by day.
    At the time the Federal Reserve had just authorized foreign 
currency liquidity swap lines with five central banks to bide 
time for a political solution in Europe and for 
recapitalization purposes, as well. Daily headlines read of 
liquidity injections to the tune of billions and trillions of 
Euros swaying stock markets wildly.
    In December the ECB had a second auction known as a long-
term refinancing operation to provide European banks with over 
500 million Euros in cheap loans and a credit event was 
declared in Greece. The credit event in Greece is one of 
particular concern to markets around the world.
    As we look ahead, the European story is far from over. 
European leaders continue to strengthen the weak framework of 
the E.U. to substantiate their rescue efforts, and financial 
markets become more dependent on the continued willingness of 
the central banks to use their balance sheets to rescue the 
global economy.
    My understanding is that the economic storm facing Europe 
influences U.S. markets. I commend Chairman Issa for inviting 
Chairman Bernanke and Treasury Secretary Geithner here to 
Congress to address this critical issue.
    I am interested to hear how our Nation's foremost economic 
experts and authorities view the Euro's own crisis, the impact 
it can have on the United States' economy, and our pension 
funds and market participants, as well.
    With that, I would like to yield the balance of my time to 
the former Chair, Mr. Burton.
    Mr. Burton. I thank the gentleman for yielding.
    The Chairman said in his opening remarks that he wanted to 
find out if the United States possibly could be drawn into the 
Euro crisis. I have been to Europe. I have been all over the 
place over there, including Brussels. I am convinced that we 
are already drawn in. So I would like to find out today how 
deeply we are drawn in and how severe the problem could be, 
especially if the Euro is devalued. And I want to find out if 
we are underwriting or bailing out the Europeans, and to what 
extent.
    When I was in Brussels I found out that the invitation to 
us printing money with QE1 and QE2, the European central banks 
are doing that over there, as well, so they are inflating their 
money supply.
    Let me first say, according to the Congressional Research 
Office, our exposure to Greece, Ireland, Italy, Portugal, 
Spain, and France and Germany is $641 billion for those, and 
for France and Germany it is $1.2 trillion, so there is that 
exposure already.
    Regarding the currency swaps with the European central 
banks, including Canada, Switzerland, Japan, and the United 
Kingdom, we have as of February 15 $109 billion is outstanding 
on those lines. As I said before, if there is a devaluation of 
the Euro, what does that do to our exposure and how much is 
that going to cost the United States?
    In addition to that, Treasury Secretary Geithner has 
dismissed reports that we might participate in a special IMF 
European aid fund, and I would like to know if that is accurate 
and if that is going to be true in the future. And the Obama 
Administration increased our contribution to the IMF, which is 
currently 17 percent of the IMF's overall budget, and the IMF 
has indicated it is going to need another $500 billion.
    So what I want to find out is: how much exposure are we 
facing right now? And how much exposure are we likely to have 
added on to us? And are we going to be underwriting the 
European financial crisis, and what impact that is going to 
have on the United States of America?
    Thanks, Mr. Chairman.
    The Chairman. I thank the gentleman. I thank both the 
Subcommittee chairman on TARP and Financial Services and our 
former full Committee chairman.
    With that, we go to the Ranking Member of the Financial 
Services and TARP Subcommittee, Mr. Quigley, for five minutes.
    Mr. Quigley. Thank you, Mr. Chairman.
    Today's hearing, as we know, builds on the two previous 
hearings we held before the TARP Subcommittee, of which I am 
honored to be the Ranking Member.
    As in December, today's hearing will examine the European 
debt crisis and what it means to U.S. taxpayers in our economy.
    As Mr. Douglas Elliott of the Brookings Institute testified 
in December, in 2010 our exports to the E.U. totaled $400 
billion. We have over $1 trillion of foreign direct investments 
in the E.U. The global market is not what it was ten years ago, 
or, for that matter, five years ago. The complexity of the 
market is such that there can be no question a healthy European 
economy is in the best interest of the United States and the 
American taxpayer.
    The plain truth is: when the earthquake of a financial 
crisis hits, every nation feels its aftershocks, including here 
at home. That is why I am encouraged by the work Secretary 
Geithner and Chairman Bernanke have done to engage the E.U. I 
am also cautiously optimistic by the steps taken by Europe's 
political and financial leaders since our Subcommittee hearing 
in an effort to add stability to the European financial system. 
European leaders created a fiscal compact under which 25 nation 
states agreed to new rules aimed at controlling deficits. And 
Greece recently restructured its debt. The European Central 
Bank has also worked to contain a crisis by purchasing bonds 
and providing loans.
    These recent actions have lessened the pressure on our 
financial market here at home; however, it is important to 
recognize that the Eurozone has a long and challenging road 
ahead. Countries like Greece, Italy, and others need to 
implement a balanced approach to their short-term and long-term 
financial challenges.
    Some have likened our economy to Greece's, but I believe 
that the U.S., unlike Greece, controls its own destiny. We need 
a balanced approach to get our own fiscal house in order. We 
have to put everything on the table, but we also have to ensure 
that in reducing the deficit we don't torpedo our recovery.
    The truth is that the mission of government matters, but 
reckless decisions have made it harder to fulfill that mission. 
We cannot allow politics to get in the way of what is right. We 
need to take a balanced approach both in spending and revenue-
generating measures.
    Reality is that now is not the time to pull the rug from 
those who need the help most, but a long-term deficit reduction 
plan is not incompatible with economic growth.
    We also must not forget politics, not economics, nearly saw 
the U.S. Government default on its debt in early August. We 
cannot allow politics to stand in the way of addressing the 
home foreclosure crisis, ensuring our Nation's seniors have 
health care, and low-income children have food to eat.
    As Ranking Member Cummings addressed in his statement, 
strengthening our economy must be our number one priority, but 
we cannot forget about the essential links between our economic 
and Europe's.
    I look forward to hearing the testimony of the Secretary 
and the Chairman on this important issue.
    Thank you. I yield back.
    The Chairman. I thank the gentleman.
    Before I introduce the witnesses, I want to caution the 
Committee. It is our policy when we invite guests, I joked with 
them both beforehand, to tell them what the Committee hearing 
is about, to expect that they will have answers for our 
questions, not just answers irrelevant of our questions. But, 
at the same time, we have an expectation that today's hearing 
is primarily and technically exclusively about the European 
debt crisis and how it might affect America.
    So although by definition there is a ripple effect and you 
may want to ask broader questions, if you ask questions that 
are not germane to the subject for which we have invited our 
guests, it will be their option whether to say they were 
prepared or not prepared to answer them. We want our witnesses 
to be fully prepared. We only asked them here under that fairly 
narrow set of circumstances.
    Now, Mr. Secretary and Mr. Chairman, you are very good 
beyond that, so I won't be surprised if you may choose to 
answer questions, but I am cautioning all of our people that 
you are our guests. We do not intend to have you asked 
questions and expected to answer them if they are well outside 
the scope of today's hearing.
    With that, pursuant to our Committee rules, all witnesses 
must be sworn. Would you please rise and take the oath.
    Please raise your right hands. Do you solemnly swear or 
affirm that the testimony you are about to give will be the 
truth, the whole truth, and nothing but the truth.
    Secretary Geithner. I do.
    Mr. Bernanke. I do.
    The Chairman. Let the record reflect all witnesses answered 
in the affirmative.
    Please take your seats.
    A little bit like yesterday, with Secretary Chu, we would 
like you to stay as close to five minutes as possible. We would 
like you to know that your opening statements, of course, are 
placed in the record in their entirety, along with extraneous 
material you may choose to enter after the hearing.
    With that, I am not sure we did a coin toss, but I will go 
from left to right.
    Mr. Secretary, you are recognized for five minutes.

                      WITNESSES STATEMENTS

                STATEMENT OF TIMOTHY F. GEITHNER

    Secretary Geithner. Thank you, Mr. Chairman and Ranking 
Member Cummings and members of the Committee. Thanks for giving 
me a chance to come talk to you today about the crisis in 
Europe and its risks and implications for the United States. 
This has been going on for more than two years, of course, and 
we welcome the attention you are bringing to this important 
question.
    Europe is a key strategic and economic partner of this 
Country, and we have an enormous stake in the success of 
Europe's efforts to avert a catastrophic financial crisis.
    Our economy is gradually getting stronger, but, of course, 
we still face a lot of tough challenges here in the United 
States. Among those challenges, of course, unemployment is 
still very high, the housing market is still very weak. We 
still have a long way to go to repair the damage caused by our 
crisis, but we also face a challenging and uncertain global 
economic environment with the risks around Iran adding to the 
pressure on oil prices and Europe facing a long and difficult 
crisis.
    Europe accounts for about 18 percent of global GDP. It is 
the major source of financing for many emerging economies and 
accounts for about 15 percent of U.S. exports of goods and 
services, with a larger portion of the exports of many of our 
trading partners. When growth slows in Europe, it affects 
growth around the world. And when the fears of a broader 
European crisis have been most acute, as they were in the 
summer and fall of 2011, and earlier in the spring and summer 
of 2010, then financial markets fell around the world, damaging 
confidence and slowing the momentum of recovery here in the 
United States and around the world.
    Now, over the past few months, with our active 
encouragement and support, Europe's leaders have put in place a 
more comprehensive strategy to address the crisis. This 
strategy has the following key elements:
    First, it involves economic reforms, very tough reforms in 
the member states to restore fiscal sustainability to 
restructure recapitalized banking systems to improve the 
competitiveness and growth prospects of their economies.
    Second, it includes broader reforms to the institutions of 
Europe, including the Fiscal Compact that establishes stronger 
disciplines on the fiscal policies of the member states to 
limit future deficits and debt as a share of GDP. It involves a 
coordinated strategy to recapitalize, as I said, the European 
financial system with government backstop for funding. And it 
involves a firewall, a financial firewall of funds to provide 
financial support to governments that are undertaking reforms 
so they can help retain access to financing on sustainable 
terms.
    These reforms have been aided by a number of actions by the 
European Central Bank, and together these efforts have helped 
calm financial tensions somewhat, but Europe is still at the 
initial stages of what will be a long and difficult path of 
reforms. And for these reforms to work, policy makers in the 
Euro area are going to have to carefully calibrate the mix of 
financial support and the pace of consolidation, fiscal 
consolidation, ahead.
    These reforms, these tough economic reforms, are not going 
to work without financial support that enables governments to 
borrow at affordable rates. And if every time economic growth 
comes in a little weaker than expected governments are forced 
to cut spending or raise taxes to compensate for the impact on 
deficits, this would risk a self-reinforcing negative spiral of 
growth-killing austerity.
    The most important unfinished business of this broader 
financial strategy in Europe is to build a stronger financial 
firewall. European leaders are now reviewing options for how to 
expand the combined financial capacity of their two funds so 
they can make it clear to markets that they have the resources 
available on a scale that is commensurate with the needs they 
might face were the crisis to intensify in the future.
    As you know, the IMF has played an important role in 
Europe. IMF has provided advice on the design and reforms, a 
framework for public monitoring of progress, and financial 
support for programs in Greece, Ireland, and Portugal. The 
financial support has come alongside a much larger amount of 
financial support from the European nations, themselves, as is 
appropriate.
    It is in the interest of the United States that the IMF 
continue its efforts in Europe, but the IMF resources cannot 
substitute for a strong and credible European firewall. The IMF 
has played a major role in every major post-war financial 
crisis, while consistently returning to the United States any 
resources with interest that it has temporarily drawn upon. Our 
premise for the IMF are backed by very strong financial 
safeguards, and in more than 60 years of experience dealing 
with financial crises we have never lost a penny.
    Over the past 18 months the crisis in Europe has taken some 
of the wind out of our recovery. We are encouraged by the 
progress that our European colleagues have been making. We hope 
they are able to build on these efforts in the coming weeks to 
put in place a more durable foundation for economic growth and 
a stronger financial firewall. We do not want to see Europe 
weakened by a protracted crisis, so we are going to continue to 
work very closely with them and with the IMF to encourage 
further progress.
    Thank you.
    [Prepared statement of Secretary Geithner follows:]



    
    The Chairman. Thank you, Mr. Secretary.
    Chairman Bernanke?

                  STATEMENT OF BEN S. BERNANKE

    Mr. Bernanke. Thank you, Chairman Issa and Ranking Member 
Cummings, for inviting me. As you know, for about two years 
developments in Europe have had an important influence on 
global financial markets and the global economy. High debt, 
large deficits, and poor growth prospects have led to big 
increases in sovereign borrowing costs, concerns about fiscal 
sustainability, first for Greece but subsequently for other 
countries, as well.
    Pessimism about countries' fiscal and economic situations 
has, in turn, undermined confidence in the strength of European 
financial institutions.
    This has had an impact on the U.S. economic. The European 
Union accounts for about one-fifth of U.S. exports of goods and 
services, and we have seen those exports under-perform. Of 
course, Europe also affects the rest of the world.
    Financial strains have been evident. During times when 
financial conditions in Europe were the most turbulent, we saw 
a global retreat from riskier assets. In the United States 
those pullbacks from risks decreased stock prices, increased 
the cost of issuing corporate debt, and affected consumer 
business confidence. We have also seen our own financial 
institutions thought to have substantial exposures to Europe 
see their stock prices fall and their credit spreads widen.
    We have seen some improvement. Financial stresses in Europe 
have lessened in recent months, which has helped improve the 
tone of financial markets around the world, including the 
United States. Several actions by European policy makers have 
contributed.
    First, the actions by the European Central Bank to 
undertake two longer-term refinancing operations that have 
helped European banks lock in their funding. The European 
banks, in turn, have increased their holdings of sovereign 
debt, which has lowered borrowing costs for some countries.
    Secondly, Euro area leaders, including the Greek government 
and private sector holders of Greek debt, have been taking 
steps to put Greece on a more sustainable fiscal path. With its 
sovereign debt significantly reduced, the Greek authorities are 
intensifying their efforts to implement fiscal and structural 
reforms and the E.U. and IMF have pledged a considerable amount 
of new funds as part of a second assistance package. However, 
the Greek economy remains in a deep recession.
    The third positive step has been the approval of a new 
fiscal compact treaty among the members of the E.U. This treaty 
is an important step toward resolving the fundamental tension 
inherent in having a monetary union without a fiscal union, and 
that should help bolster the viability of the Euro area economy 
in the longer run.
    Although progress has been made, more needs to be done. 
Secretary Geithner discussed some of these issues: further 
strengthening of the European banking system, an expansion of 
financial backstops or firewalls to guard against contagion in 
sovereign debt markets, and critically we need to continue 
efforts to increase economic growth and competitiveness and to 
reduce external imbalances in troubled European countries.
    The Federal Reserve has been following these developments 
closely. We have been in frequent contact with key European 
policy makers. Our focus, of course, is to protect U.S. 
financial institutions, businesses, and consumers from any 
adverse developments occurring in Europe.
    To help calm dollar funding markets and to support the flow 
of credit to U.S. households and businesses, the Federal 
Reserve acted in concert with major foreign central banks to 
enhance the U.S. dollar swap facilities, as has been testified 
to before this Committee. Use of our reestablished lines was 
limited until late last year; however, in late November we 
agreed with the ECB and the Central Banks of Canada, Japan, 
Switzerland, and the U.K. to extend the swap lines to February 
2013 and to reduce their pricing.
    The lower cost to the ECB and other foreign central banks 
has, in turn, allowed them to reduce the cost of short-term 
dollar loans they provide to financial institutions in their 
jurisdictions. As was noted, the swap line increased 
considerably and peaked at $109 billion in mid-February. This 
has had a very beneficial effect on easing dollar funding 
pressures in European and other foreign banks, which has, in 
turn, lowered tension in U.S. money markets, alleviated 
pressures on foreign banks to reduce their lending in the 
United States, and has boosted confidence at a time of 
considerable strain in international financial markets.
    As market conditions have improved notably, usage of the 
swap lines has fallen back to currently about $65 billion.
    I would add that the swaps are very safe from the 
perspective of the Federal Reserve and the U.S. taxpayer. They 
present no exchange rate or interest rate risk. Each drawing 
has a short maturity and must be approved individually by the 
Federal Reserve. They are collateralized by the foreign 
currencies for which the dollars are swapped and our 
counterparties are the foreign central banks, not the 
commercial banks who are receiving the dollar loans.
    Fed has also worked with the FSOC and other agencies who 
monitor our financial institutions. Notably, U.S. financial 
institutions have very limited direct credit exposure to the 
most vulnerable Euro area countries, and U.S. money market 
funds have almost no exposure to those countries.
    There are some exposures arising from the sale of credit 
default swaps and sovereign debt, but our assessment is that 
those are broadly edged with the CDS in the other direction, 
and that the counterparties to those CDS are broadly dispersed 
and are strong banks in Europe.
    Although U.S. banks have limited exposure to peripheral 
European countries, their exposures to European banks and to 
the larger core countries is much more material. Moreover, 
European holdings represent 35 percent of the assets of prime 
U.S. money market funds in February, and those funds remain 
structurally vulnerable despite some constructive steps taken 
since the recent financial crisis.
    So the risk of contagion does remain a concern for both 
those institutions and their supervisors and regulators. In 
particular, were the situation in Europe to take a severe turn 
for the worse, the U.S. financial sector likely would have to 
contend not only with problems stemming from its direct 
European exposures, but also with an array of broader market 
movements, including declines in global equity prices, 
increased credit costs, and reduced availability of funding.
    Most recently, the Fed released on March 13th the results 
from our Comprehensive Capital Analysis and Review, or CCAR, 
which is essentially a stress test of the largest banks or bank 
holding companies. We imposed a hypothetical stress scenario on 
the banks that involved a deep recession in the United States, 
with unemployment reaching 13 percent, a decline in activity 
abroad, combined with sharp decreases in both domestic and 
global asset prices.
    This exercise was designed to capture both direct and 
indirect exposures and vulnerabilities of U.S. financial 
institutions to the economic and financial stresses that might 
arise from a severe crisis in Europe. The results show that a 
significant majority of the largest U.S. banks would continue 
to meet supervisory expectations for capital adequacy, despite 
large projected losses in an extremely adverse hypothetical 
scenario.
    So, in conclusion, the recent reduction in financial stress 
in Europe is welcome, given our important trade and financial 
linkages. The situation, however, remains difficult and it is 
critical that European leaders follow through on their policy 
commitments to ensure a lasting stabilization.
    I believe that our European counterparts understand the 
challenges and risks they face, and they are committed to take 
the necessary steps to address those issues.
    For our part, the Fed will continue to monitor the 
situation, work with our financial institutions and foreign 
counterparts to strengthen our financial system, and be ready 
to use the tools at our disposal to help stabilize U.S. markets 
should the situation require such action.
    Thank you.
    [Prepared statement of Mr. Bernanke follows:]



    The Chairman. Thank you.
    I will now recognize myself for five minutes.
    Chairman Bernanke, in that stress test you, I presume, 
assume that the Fed systems, including the credit default swaps 
that are back nation to nation, would work; is that correct? 
You weren't assuming a collapse of all of the $1.4 trillion 
exposure?
    Mr. Bernanke. We didn't assume they would work. We checked 
to make sure we were comfortable with the counterparties.
    The Chairman. But that means you graded yourself as that 
part working, correct?
    Mr. Bernanke. I am not quite sure what you are asking. We 
looked at the CDS positions of the banks and we verified first 
that they are largely hedged against sovereign default in 
Europe first. And then secondly we looked at the counterparties 
of those credit default swaps and assured ourselves that they 
are widely dispersed and represent the strongest financial 
institutions.
    The Chairman. Like AIG did a couple years ago?
    Mr. Bernanke. AIG is an example of what we don't see now. 
AIG was not appropriately regulated. It was not appropriately 
hedged. It didn't have sufficient capital behind those CDS. We 
know there is nothing like that----
    The Chairman. So you are comfortable today that there are 
no AIGs hiding in the woods, no FP sitting in some small 
company in London that essentially is at the bank without us 
knowing it?
    Mr. Bernanke. Well, our stress test has covered all the 
largest bankholding companies in the U.S. We have looked also 
at other large banks, with a somewhat less stressful but 
somewhat different approach, but within that whole range of 
U.S. bank institutions we don't see any similar problems.
    The Chairman. Thank you. One of the most important parts of 
today is to ask the questions that weren't asked in earlier 
times before what couldn't happened occurred.
    The Eurozone has an economy we will call nominally our 
size. It has a depth, if I am roughly right in the Euro 
conversion, of about $14 trillion of sovereign debt. Some 
countries actually have positive, but we will just look at 
their sovereign debt across the board.
    So it is fair for the American people, not being talented 
economists, but for the American people to say same size 
entity, similar debt to ours, not exact but similar. If that is 
the case, why is it that they are not being treated, and this 
is a question for the American taxpayer, if you will, being 
treated much more like we treat our States? California doesn't 
look to Greece or Germany for a bailout. They could look to the 
United States Federal Government. In other words, we are 
internal.
    What is the justification for the American people to 
understand of a zone similar size to ours, similar wealth to 
ours, similar debt to ours, looking around at the rest of the 
world and saying, what part will the United States put into a 
European Union member such as Greece's problem?
    Mr. Bernanke. Your question highlights the difference 
between Europe and the United States which is we have a fiscal 
union as well as a monetary union, and, as you point out 
correctly, the reason that we don't see the same kind of 
stresses at the State level is because implicitly there is 
support from the Federal Government for the rest of the 
Country.
    The Chairman. But for the taxpayer, and I want to get to 
Secretary Geithner, too, for the taxpayer, if they are very 
similar to us in the positive side, human beings move freely 
within the Eurozone. Money moves freely. Most of the Eurozone 
is a single currency and, in fact, they basically act, from a 
winning standpoint, as a protective trade partner. They treat 
each other in a way they do not treat us. Period. We simply do 
not enjoy the advantages of selling into the Eurozone, that the 
Eurozone enjoys throughout the European Union.
    So the question is, for the American people, and by the 
way, this is not a question of why are we doing it in our own 
self-interest. I understand we are doing it in our own self-
interest, too. But the question is, why is it that the Eurozone 
isn't being asked by our Government to step up much more and 
take more responsibility? Why is it that it comes to the 
American people at all?
    Not why is it in our best interest, but why does it come to 
the American people when, in fact, they have the same 
wherewithal, and when they are trading with each other they 
trade like States, but when they have a problem with a rogue 
nation or two or three or four they turn to the IMF and other 
external forces in which we participate?
    Mr. Bernanke. It is a good question. Our position, and 
perhaps the Secretary can speak to this from the 
Administration's point of view, the position of the United 
States has generally been that Europe needs to really step up 
and do a lot more. We have been encouraging them to strengthen 
their firewalls, strengthen their fiscal compacts, and 
essentially to move in the same direction as the United States 
is currently structured.
    The Chairman. And Mr. Secretary, as I go to you I want to 
say this because, as you said in your statement, we have never 
lost a penny to the IMF. We have been fully repaid. Some might 
say that the interest has not always been what we would hope it 
to be, but, in fact, it has been a good bet overall for the 
world economy. But the American people are wondering what I 
asked, and I hope you can give it to us in a way.
    The follow-up question I will give you in advance, which 
is, doesn't it strengthen Europe's hand when we make it clear 
that the American people are essentially saying no, and you are 
going to have to convince us if you need large amounts of 
money. You are going to have to convince us to go against what 
is, in fact, a populist feeling within Mr. Cummings' community 
and mine, as well.
    Secretary Geithner. We have a very similar view to the view 
you expressed. Europe is a very rich continent. Absolutely has 
the means to solve this on their own. And you are right to 
point out that because they are a monetary union without a 
fiscal union they don't have the mechanisms we have in the 
United States, not just the discipline, the borrowing behavior 
of our States which we have, but we have a set of fiscal 
transfers that are very powerful in the United States to soften 
the downturns that individual States might face.
    The IMF is an institution where its members have a right to 
request assistance, and if they are prepared to meet the 
conditions that the IMF establishes, then they have the right 
to request that assistance. And our judgment has been that it 
has been in the interest of the United States, and fully 
consistent with its institution, and certainly better for us as 
a Country for the IMF to play a modest supplemental role 
alongside the much more dominant financial role of the European 
authorities going forward, and where they have asked us the IMF 
to take more of the burden we have said no, we don't think that 
is appropriate.
    So we are taking very much, I think, the course you would 
take and most Americans would say which is they are a rich 
country, and, in fact, nations around the world are taking a 
similar view, which is let's make sure people understand for 
their strategy to work the world needs to see Europe, that very 
rich continent of Europe, demonstrate that they are prepared to 
do what it takes to make this work. And we can help with advice 
and some support in the margin. We are not going to do that in 
a way that puts the American taxpayer at risk, and we are not 
going to do it in a way that shifts the burden of solving their 
crisis to the American taxpayer.
    The Chairman. Thank you.
    Mr. Cummings?
    Mr. Cummings. Thank you very much, Mr. Chairman.
    Secretary Geithner, Europe has a housing crisis, does it 
not?
    Secretary Geithner. Parts of Europe do.
    Mr. Cummings. And so to restore our economy you would agree 
that housing has to be addressed. Do you believe that, the 
foreclosure situation that we are going through right now?
    Secretary Geithner. I do think that obviously our economy, 
as I said, is still suffering from a lot of damage, collateral 
damage fallout from our crisis. You see that in housing, not 
just in high unemployment. And our judgment is that we should 
do everything we can to help repair that damage, and that would 
make the economy stronger over time. That is what we are trying 
to do.
    Mr. Cummings. Now, the House Republicans released a budget 
proposal this week that would lay a course that would cut more 
than $5 trillion in Medicare as we know it, shift the cost of 
health care to seniors, slash education, research, and 
infrastructure funding. Chairman Bernanke, you and I have 
talked about this a number of times. You gave a speech back in 
2008 in which you said principal reductions that restore some 
equity for the homeowner may be a relatively more effective 
means of avoiding delinquency and foreclosure; is that right?
    Mr. Bernanke. Our research shows that sometimes it can be 
effective. Yes.
    Mr. Cummings. And Secretary Geithner, you also agree that 
principal reduction can be a critical tool if it is well 
designed; is that right?
    Secretary Geithner. Yes, in some cases. That is why you see 
private investors and private banks on their own, in many 
cases, offering principal reduction to their borrowers.
    Mr. Cummings. How does Europe deal with this foreclosure 
situation?
    Secretary Geithner. There is actually a very limited number 
of countries in Europe with quite that same mix. They are 
taking somewhat different approaches, but where they are 
different it is different because the nature of the problem is 
different in those cases. You can't see a common approach 
across the continent on the housing front yet. And I think it 
is fair to say they have not been as aggressive as we were in 
trying to move early to try to repair the damage in the housing 
market.
    Mr. Cummings. Mortgage banks across the Country already are 
doing principal reduction because they count their bottom line. 
They want to keep people in their homes paying lower mortgages 
instead of foreclosing and getting nothing at all. This helps 
the homeowners and shareholders.
    The only official who does not share this view appears to 
be Ed DeMarco, the acting director of FHFA. Chairman Bernanke, 
his opposition is strange because his own data which he 
provided to us earlier this year shows that principal 
reductions would save the United States taxpayers billions of 
dollars compared to foreclosures. His data also shows that 
principal reductions would help the homeowners.
    So based on his own data and based on the law Congress 
passed to create FHFA, Mr. DeMarco should be doing principal 
reductions now but he has refused.
    Now, Secretary Geithner, I know that you are in 
negotiations with Mr. DeMarco and the Treasury has now offered 
triple incentives for principal reductions. Can you tell us why 
Treasury is doing that and why are these incentives important?
    Secretary Geithner. I should point out that under the law 
the Treasury did not have any authority to compel the FHFA to 
undertake the activities. Under the conservatorship mandate 
they have to make sure they meet a very tough test, 
appropriately so, to make sure the things that they are doing 
are in the interest of reducing losses to the taxpayer, 
maximizing overall returns to the taxpayer.
    But there are certain cases where we think there is a 
pretty strong economic case for principal reduction as part of 
a strategy to limit the future losses to the GSE. So we have 
been having some discussions with him about how to narrow the 
differences between us. But he will have to make these choices, 
and I think maybe on this question it would be better for me to 
come back and talk to you in more detail about it separately. 
Maybe in a couple of weeks we could give you a better sense of 
where he is going to come out.
    Mr. Cummings. Very well. In his letter to us he has said, 
so that you will have this when you talk to him, he said 
administrative costs would be too high to address his IT 
systems. Then he went on to say, and he has made that argument 
to you, I assume, has he not?
    Secretary Geithner. He has, but again, I think he is in the 
process of looking again at those questions, as are we.
    Mr. Cummings. Yes. And so your response was look further?
    Secretary Geithner. Yes. Again, we both have the same basic 
interest, which is we want to make sure that those institutions 
are doing things to not just help repair the damage in the 
housing market, but are doing so consist with their obligation 
established by Congress to make sure they are doing things that 
would limit the risk of future losses to the taxpayer.
    Mr. Cummings. Finally, Secretary Geithner, let me ask about 
the stakes here. Mr. DeMarco controls all of the loans 
guaranteed by Fannie Mae and Freddie Mac. How many families 
would be affected by his decision? Hundreds of thousands, I 
would think, or millions potentially.
    Secretary Geithner. No, not millions. It is hard to tell. I 
know it is not part of the popular wisdom, but the GSEs were 
actually more conservative and more careful in their 
underwriting standards in the loans they took, and so the 
broader quality of their loans is actually better than the 
broader market in this context. But again, our job is to try to 
make sure that we are doing everything that we can to reach as 
many people as we can, where we think there is a good, strong 
case for the Country on the merits, not just for the taxpayer.
    The Chairman. I thank the gentleman. The gentleman's time 
has expired.
    Mr. Secretary, we will also send you a copy of the field 
hearing information from Brooklyn, which actually has Fed and 
other representatives' testimony to that point so that you are 
briefed before you come back to the Ranking Member.
    With that we go to the chairman of the full Committee, 
emeritus, Mr. Burton, for five minutes.
    Mr. Burton. Is that what you call me?
    The Chairman. Emeritus is a forever term, as is chairman 
around here.
    Mr. Burton. I got it.
    The Chairman. Please, Mr. Chairman.
    Mr. Burton. According to CRS, the exposure that the United 
States has in Portugal as of September of last year was $54 
billion, Ireland was $111 billion, Italy $310 billion, Greece 
$48 billion, Spain $244 billion, Germany $635 billion, and 
France $685 billion, for a total of $2.08 trillion.
    I am concerned about what happens if the Euro starts to 
devalue and how it is going to affect the United States' 
ability to collect on the indebtedness that we are having with 
Europe.
    My first question is, and I will combine some of these 
questions so you have more time to answer, we are printing 
money, have been printing money with QE1 and QE2 and I presume 
this may be continuing. Is there a mid-or long-term cost to 
loaning money that we have printed to Europe? And how much will 
that be?
    The Federal Reserve has created this foreign currency swap 
mechanism and it has outstanding loans, as I said earlier, as 
high as 1.2 trillion. I understand you say now it is only 65 
billion. But nevertheless, that is a considerable amount of 
money.
    I would still like to ask what happens if you do have some 
defaulting over there and they can't repay those loans. I know 
the European Central Bank is printing money right now. That 
will cause some kind of inflationary pressures, as well. What 
will that do to the indebtedness that we have?
    The foreign currency swaps takes our money and exchanges it 
for Euros. I presume we are getting the money from the money we 
are printing. I would like to have the answer to that.
    And it appears as though we are providing dollars that are 
loaned to or swapped with Europe, and then it is used to buy 
European Central Bank bonds that are then lent to commercial 
banks. I believe that is correct. If that is the process, it 
sounds like we are cooking the books to make this all look 
legitimate.
    Finally, I have been to a number of these countries, and 
the unrest is very apparent. Some of our European neighbors 
have not passed austerity measures, and even when they had 
passed some of these reforms you still have an awful lot of 
dissention in the countries. They have had changes in those 
governments. I think there is still a big question whether or 
not Greece can survive and maybe Italy, Spain, Portugal and so 
forth.
    So to what extent are we exposed if this so-called European 
recovery does not take place? And can you give us the figures 
or at least roughly the figures, both directly and indirectly, 
as far as the exposure is concerned? And do your numbers 
include foreign currency swaps or other assistance from the 
Federal Reserve or the Treasury?
    I know that is a lot, but if you could kind of run through 
that I would appreciate it.
    Mr. Bernanke. May I respond?
    Mr. Burton. Sure.
    Mr. Bernanke. On the swaps, as you said, the maximum was 
$109 billion. It is down to $65 because it has been very 
constructive and it has helped improve the market. It has been 
beneficial to the United States, as well as to Europe.
    If the Euro devalues or depreciates, it has no affect 
whatsoever in our value of our liability because we get paid 
back in dollars, so the European Central Bank takes any foreign 
exchange risk. If the banks that they lend the money to don't 
repay, we still get paid back in full because the ECB also 
takes all the credit risk. So we are not taking any credit 
risk, we are not taking any foreign exchange risk. The chances 
of losing any money is very, very low and the benefits are 
quite significant.
    On exposure, you mentioned some numbers. I wasn't clear 
whose exposure you were talking about, but let me just say 
briefly that obviously our banking system is exposed to Europe. 
They are a major trading partner and we have many investments 
there. But it was exactly what we tried to do in our stress 
test scenario that we just released the results last week. We 
considered a very severe scenario that included a sharp new 
recession in the United States, a sharp decline in activity in 
Europe, major financial stress, including 50 percent drop in 
stock prices, so all of this is sort of an attempt, at least in 
part, to measure the impact in our banking system of a new 
crisis in Europe.
    Of course, there would be significant losses, but what we 
found was that all the banks essentially were able to meet a 
reasonable level of capital, even following the losses 
associated with such an event. The losses would be large, of 
course.
    Mr. Burton. Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman.
    The gentleman from Illinois, Mr. Quigley.
    Mr. Quigley. Thank you, Mr. Chairman.
    Gentlemen, I guess the academic question is that balance 
that I talked about in my opening statement about austerity 
measures and how they impact recovery. Your view in general on 
that issue, and how the European plan seems to strike that 
balance, or how effectively it might do that? Either or both of 
you, please.
    Mr. Bernanke. Well, I think the answer to your question 
depends on which country you are talking about. I mean, there 
are countries like Greece, Ireland, and Portugal which are 
currently under European Union, Eurozone, and IMF support, 
which have essentially no alternative but to do whatever they 
can to reduce their fiscal deficits, and they have been trying 
to do that, although the slowing in growth has made it more 
difficult.
    More broadly, there are some countries that have some 
fiscal space, as it is called, and there they might consider a 
balanced approach which leaves some flexibility in the short-
term to deal with the fact that Europe is slowing, their 
economy is slowing, at the same time addressing longer-term 
fiscal issues in a comprehensive, long-term plan which, for 
example, they are trying to do through their fiscal compact. So 
that is analogous to an approach the United States might take, 
which is a comprehensive plan that has both a short-term and a 
long-term component to it.
    Mr. Quigley. Okay.
    Secretary Geithner. I think the chairman said it exactly 
right. You have to distinguish the countries that lost the 
ability to borrow on their own without support from those that 
still have that capacity. In general, for the countries not 
still in the acute stage of crisis, you want there to be a 
medium-term plan to gradually phase in the reductions and 
deficits that have to come, and you want that to be balanced 
and complemented by reforms that are focused on trying to 
improve the growth performance of the economy, make it easier 
to start a business, things like that. It is very important to 
get that balance right.
    As I said, it is going to take a bunch of financial support 
to make sure those reforms have time to work, and you want to 
make sure they are phased on gradually over tim, and you want 
to avoid the risk that, again, every time growth disappoints 
and therefore the short-term effects in the deficit or increase 
the deficit, you want to avoid the risk that that has to be 
matched by immediate cuts in spending or tax cuts or tax 
increases, because if you do that the risk is you add to the 
challenge on growth and harder to dig you out of this problem. 
So that is the balance I think you want to have.
    Mr. Quigley. And how did they do? I mean, how are they 
doing? If you want to talk about the countries that are more 
acute, like Greece and Italy and others, how did they do 
striking this balance? How optimistic are you? The concern is 
if we are so dependent on their recovery, and perhaps we can 
learn some lessons there, did they go too far with these 
countries that are really hurting and stymie the opportunity 
for recovery?
    Secretary Geithner. I don't believe you can say that in 
Greece and Ireland and Portugal because, again, once you get to 
that point there is really no choice, no alternative available 
to them except to do this mix of very tough reforms across the 
board.
    The other countries in Europe are in a different position. 
They have a bit more time and space to bring a bit more care 
and balance to the path.
    Of course, Greece and Ireland and Portugal are very small 
economies, even aggregate, in that context. What hurts the 
United States is the risk of a longer period of weak economic 
growth in the major economies in Europe, and that is why it is 
so important that, as they calm the financial tensions across 
Europe, that they are able to shift some of the attention, some 
of the focus in Europe to broader strategies that would make 
growth stronger across the continent.
    Mr. Quigley. And your overall assessment, their chances for 
recovery, why are they perhaps less optimistic, or you are less 
optimistic or more optimistic about what Europe faces versus 
the U.S.?
    Secretary Geithner. I think the fundamental reality of 
Europe is that this is going to take a very long time for them 
to work through, and I think just realistically looking at the 
prospects ahead, even if Europe is able to be successful in 
avoiding a catastrophic financial crisis and they have the 
means to do that, even if they are successful in avoiding that, 
then the risks are that Europe is still growing, on average, at 
very weak levels, and that will mean that growth in the United 
States is weaker than it otherwise would be.
    Again, this process has a lot of risk in it, very fragile, 
lot of political challenges in this, as your colleagues have 
said. That is why it is so important that they are doing 
everything they can, not just to restore some financial 
stability, but help lay a foundation for stronger growth, and 
it is why we have such a compelling economic interest in trying 
to work with them to help make that happen.
    Mr. Quigley. Thank you. My time has expired.
    The Chairman. Thank you, Mr. Quigley. A very good line of 
questioning.
    With that, we go from the chairman of the Subcommittee to 
the Ranking Member of the Subcommittee, Mr. McHenry, for five 
minutes.
    Mr. McHenry. Thank you, Mr. Chairman.
    Thank you both, Secretary Geithner and Chairman Bernanke, 
for your service to our Government. You certainly have both 
served in some challenging times, not just in the last three 
years but over the longer run, as well.
    Chairman Bernanke, I just want to ask about your legal 
authority, the Fed's legal authority. So the Fed can purchase 
sovereign debt of the United States, and has. Does the Fed have 
legal authority to purchase other countries' sovereign debt?
    Mr. Bernanke. It does for the purposes of reserve holdings, 
and we currently hold a relatively small amount of debt of very 
high quality. I think it is France, Germany, and Japan. But we 
are not engaging in purchasing debt of troubled countries.
    Mr. McHenry. But that could be considered?
    Mr. Bernanke. We are not considering it.
    Mr. McHenry. Okay.
    Mr. Bernanke. Congress made clear in earlier discussions 
some decades ago when this issue came up that the purpose of 
this authority was to maintain foreign exchange reserves. I 
don't think that it was the intent of Congress that we get 
involved in sovereign debt issues. It is not our intent to do 
so.
    Mr. McHenry. But beyond that, does the Fed accept as 
collateral for foreign debt sovereign debt of foreign 
countries?
    Mr. Bernanke. Well, some of the debt we simply own as part 
of our foreign exchange reserves. In other cases we have 
various kinds of short-term repurchase agreements and other 
kinds of arrangements where we do take collateral for a short 
period. Again, we are making sure that we have sufficient hair 
cuts and so on to make sure that we are comfortable with the 
safety of those short-term arrangements.
    Mr. McHenry. Okay. Thank you.
    Secretary Geithner, I have a few questions about the 
International Monetary Fund. Within Treasury you have a 
designee who serves on the 24-member executive committee of the 
IMF. In terms of the actions taken with the recent IMF loan to 
Greece, were you involved in that process? Was that a 
discussion you were engaged in?
    Secretary Geithner. Absolutely. We are the largest 
shareholder in the IMF, and so we pay a lot of attention to any 
decision, any meaningful decision the IMF makes in that 
context.
    Mr. McHenry. Okay. Now, looking at that, is the Treasury, I 
know you have mentioned this before, but I just want to raise 
the issue again. Are you considering additional contributions 
to the special IMF European bailout fund?
    Secretary Geithner. No, we are not. Our judgment is that 
the IMF already has $400 billion of available resources it can 
use if necessary to help support the needs of its members. 
Europe, of course, has very substantial financial capacity to 
put behind their strategy to resolve this crisis, and therefore 
we do not see the case for coming to Congress and asking for 
more authority in this context.
    Mr. McHenry. Okay. Now, is the Treasury considering being 
involved in the IMF's NAB, the new arrangement to borrow 
facility?
    Secretary Geithner. We are in that already. Congress has 
authorized us to participate in that, so yes, when the IMF 
draws on the new arrangements to borrow, which is like a 
supplemental pool of resources, then yes, like when the IMF 
draws on its quota resources, we do participate in those 
drawings. As I said, we have 60 years of experience with how 
the IMF acquits itself in that context, and the record supports 
our judgment that there is very substantial strong financial 
safeguards that protect the interests of the U.S. taxpayers in 
that context.
    Mr. McHenry. Under Dodd Frank, and I know you have been 
support of this, a number of provisions in there, one in 
particular dealing with the IMF. When our designee, your 
designee and our Country's designee to the IMF, engages in a 
decision to the IMF to loan money to a country that has greater 
than 100 percent debt-to-GDP ratio, they have to present 
Congress with the understanding of why they made this decision 
and what the credit risk is. Is that being done?
    Secretary Geithner. Absolutely. Of course, there is a rich 
history, a long history of Congressional mandates on the votes 
we can cast in the institution. That is one of the more recent 
ones, and we will meet the test to that provision.
    Mr. McHenry. And it is a 30-day provision, so we would 
expect that within the next three or four weeks in front of 
Congress, the decision-making there.
    Secretary Geithner. And the way that provision is 
structured, as you said, in some circumstances where the 
existing level of debt in the country is high, there is a 
higher burden on all of us to make sure that the reforms that 
come with this assistance give us a reasonable prospect that it 
is going to be improving the path to sustainability.
    Mr. McHenry. Well, we look forward to that report. Thank 
you.
    The Chairman. I thank the gentleman.
    Just to clarify for the record, if I heard correctly, the 
IMF doesn't maintain a whole pile of money. They maintain the 
ability to draw by the members, based on an allocation. So for 
the American people to understand, you are not coming to us for 
new money, but there will be distributions at times within the 
current limit that just occur as a result, a trigger so that 
they don't sit there with all our money, but the fact is they 
will be taking our money; is that correct?
    Secretary Geithner. You are exactly right. The way the law 
of the land is structured, we can't lend money to the IMF 
without the authorization of the Congress of the United States. 
Congress authorizes the scale of the financial commitments we 
can make. What happens is, as members ask the IMF for 
resources, they meet the IMF's conditions and can draw on those 
resources, then we provide a part of those resources. But 
again, the exposure we take is backed by not just a substantial 
amount of IMF gold, but a set of other financial safeguards so 
our interests are protected.
    The Chairman. I thank the gentleman.
    The gentleman from Virginia, Mr. Connolly.
    Mr. Connolly. Thank you, Mr. Chairman.
    Welcome to both of our guests this morning.
    Mr. Geithner, you noted in your testimony that Ireland and 
Spain actually ran large fiscal surpluses, yet they were 
victims of financial crisis contagion. You also noted that 
Spain reduced its structural deficit through austerity measures 
since the onset of the crisis.
    Do you believe that there is some lesson in that? I would 
have guessed that, in order to have this kind of crisis, both 
Ireland and Spain would actually be deeply in the hole of debt. 
How did that work?
    Secretary Geithner. Well, you are right. I think the 
popular perception is that the crisis in Europe is 
overwhelmingly the result of decades of fiscal profligacy, and 
that is not really quite right. It was certainly true in Greece 
where, following the advent of European Monetary Union, Greece 
did substantially expand how much it borrowed, and the 
government grew as the size of the economy to unsustainable 
levels.
    Mr. Connolly. I am going to come back to Greece.
    Secretary Geithner. In those other countries what you saw 
was a very large rise in private borrowing in the banking 
system and by the private sector, huge rise in private debt as 
a share of the economy, and a damaging loss in the relative 
competitiveness of their businesses relative to Germany in that 
context. And when the crisis hit and confidence eroded, their 
fiscal positions did deteriorate dramatically, as always 
happens in that context. But the fundamental cause of the 
crisis was not a long period of extreme fiscal profligacy.
    Mr. Connolly. Mr. Bernanke, one of the medicines 
recommended here obviously is draconian fiscal austerity 
measures. We have a new budget out yesterday that certainly 
subscribes to that philosophy. Many European countries actually 
adopted that policy in terms of austerity measures. Did those 
economies grow faster or slower than the United States since 
2009?
    Secretary Geithner. Well, the economies of Europe, with the 
exception of Germany, to some extent, have grown significantly 
slower than the United States over this period of time, partly 
for the reasons you said. Their crisis was more acute than 
ours. They are in the earlier stage of adjusting to it. They 
reacted more tentatively and with less overall force than we 
did in the United States. And for those reasons and the scale 
of the challenges they faced beforehand, growth has been weaker 
in that context.
    I think the basic lesson in this context is yes, you want 
to be very careful to try to balance the imperatives of 
restoring fiscal sustainability with the recognition that 
ultimately both long-term fiscal sustainability, not just the 
immediate health of your economy, depends on your ability to 
get the economy growing again.
    Mr. Connolly. One of the comparisons that often is cited by 
some even here in this body is that the United States, if it is 
not careful, given its debt posture and its lack of fiscal 
discipline, is going to look alarmingly like Greece. I 
personally find the comparison invidious, and upon any 
examination lacking in any serious comparison, given the fact, 
I refer, for example, to Michael Lewis' book on the European 
crisis, it is shocking what went on in Greece. They did not 
have macro economic data that was reliable. They actually 
engaged in outright deception when E.U. officials came to 
examine the books. They didn't know how much debt they had. 
They didn't have any kind of central control over their own 
economy at all, unlike the United States.
    But I would like each of you, if you would care, to comment 
on that comparison. Is the United States headed toward going 
down the road of Greece?
    Mr. Bernanke. Congressman, it is certainly true that 
situations are not directly comparable. First, Greece's debt 
trajectory looks a lot worse than ours or that of other 
industrial countries. Secondly, the economy is a small, less-
diversified, less-strong economy in general, less competitive. 
And their short-term issues cannot be ameliorated by an 
independent monetary policy since they are part of the 
Eurozone. So there are some very important differences.
    That being said, I think we all understand that there are 
long-term fiscal sustainability issues in the United States, 
and what we need to do is find a strategy that will credibly 
and convincingly put us on a path towards long-term 
sustainability without doing undo damage to the recovery.
    Mr. Connolly. Thank you, Mr. Bernanke.
    Secretary Geithner?
    Secretary Geithner. Yes. No basis for comparisons with 
Greece. It is important for people to recognize that our fiscal 
position, long-term fiscal position, is actually we are in a 
much stronger position than the continent as a whole, and it is 
partly because our economy will grow faster than Europe's over 
time. It is partly because we are a younger country. It is 
partly because the commitments we have made to health care and 
retirement security, even if unsustainable, are much less 
generous than is true in Europe, as a whole. And those factors 
and the ones that the chairman mentioned mean that we are in a 
fundamentally different position, a more comfortable position.
    But of course, in the United States, as well, we have made 
unsustainable commitments. Our deficits are unsustainable over 
the long run. We have a little bit more time and substantially 
more room for maneuver in how we address those. And very 
important as we address them, and we need to address them. We 
can't put them off indefinitely, we do so in a way that 
achieves the necessary balance between helping the economy 
repair the damage from a terrible crisis, making sure we can 
invest in things we need to grow, but still restoring us some 
gravity to our long-term fiscal positions.
    Mr. McHenry. [Presiding] The gentleman's time has expired.
    Mr. Connolly. Thank you.
    Mr. McHenry. Mr. Gowdy from South Carolina is recognized 
for five minutes.
    Mr. Gowdy. I thank the gentleman, Mr. Chairman, from North 
Carolina.
    Mr. Chairman, is there an interconnectivity between cost of 
energy and economic recovery?
    Mr. Bernanke. Yes, there is, particularly when there is a 
supply side element, which there appears to be, given some 
reductions in available supply and tensions in Iran and so on. 
Higher energy prices create at least short-term inflation 
pressures. Moreover, they act as a tax on household purchasing 
power and reduce consumption spending, and that also is a drag 
on the economy. So yes, higher oil prices, higher energy 
prices, are a concern.
    Mr. Gowdy. And I think the price per gallon in Europe is 
about double, if not more, than what it is in the United 
States.
    Mr. Bernanke. Yes, because of much higher taxes.
    Mr. Gowdy. So can you imagine any scenario under which 
someone would advocate for boosting our price per gallon to 
European levels?
    Mr. Bernanke. There are a lot of policy issues relating to 
that.
    Mr. Gowdy. I mean an economic reason, not environmental, 
economic.
    Mr. Bernanke. Well, the question is whether or not there 
are other goals that are served: environmental goals, 
congestion goals, and the like.
    Mr. Gowdy. I am just asking from an economic standpoint.
    Mr. Bernanke. From a purely GDP growth perspective, I think 
higher energy prices would probably slow growth, at least in 
the short run.
    Mr. Gowdy. Well, what word would you use to describe it if 
our price per gallon talismatically doubled?
    Mr. Bernanke. That would have a----
    Mr. Gowdy. Catastrophic?
    Mr. Bernanke. I wouldn't say catastrophic, but it would 
have obviously a very negative effect on consumers, consumer 
confidence, consumer real incomes, at the same time that it 
would push up inflation.
    Mr. Gowdy. Thank you.
    Mr. Secretary, what is our debt as a percentage of GDP 
currently?
    Secretary Geithner. I can give you the precise numbers in 
writing, but as we measure it, which is----
    Mr. Gowdy. I am not going to hold you to a precise number. 
Just something round that a lawyer can understand.
    Secretary Geithner. As we measure it, which is debt held by 
the public, and we try to measure it net of financial assets, 
which is the appropriate way to do it financially, our debt-to-
GDP ratio is somewhere between 60 and 70 percent of GDP today.
    Mr. Gowdy. All right. Since I have been here there has been 
one request for an increase in the debt ceiling. I understand 
there is another one coming. I don't know whether it will come 
before the first Tuesday in November or after the first Tuesday 
in November. I want you to assume, and, again, I am not going 
to hold you to the number. You don't need to go research it. 
You are smart enough. I have seen you testify before enough to 
know that you probably will be able to answer this question off 
the top of your head.
    If this were the last debt ceiling increase you could ask 
for, the final one, and you had to make it large enough for all 
current and future obligations, what would the request need to 
be?
    Secretary Geithner. I don't know how to answer that 
question. Let me answer it slightly differently. It makes no 
sense for the Country, since Congress controls how much we can 
borrow every year, we have no independent authority to spend 
beyond what Congress authorizes, for Congress to put itself and 
its Members in the position every six months or every year to 
hold a separate vote, politically difficult vote, on whether 
they should continue to authorize us to do things they have 
already authorized us to do. But I don't know how to answer 
that question, because you are talking about the future. The 
best way to----
    Mr. Gowdy. Well, the last debt ceiling increase was for how 
long and for how much?
    Secretary Geithner. Well, under the deal we reached last 
August, we set up a mechanism, I believe, where Congress 
imposed on itself three votes over a 15-month period.
    Mr. Gowdy. What will be the amount of the increase in 
November or December?
    Secretary Geithner. Well, it depends. Congress makes this 
choice, and Congress has to make the choice based on how much 
time they want to give themselves.
    Mr. Gowdy. Right. But you have seen the numbers. In fact, I 
made a note. You used the exact same word that Chairman Ryan 
uses. And I hope they don't run any ad showing you pushing a 
senior citizen off a cliff in a wheelchair for using that word, 
but you just used the word unsustainable.
    Secretary Geithner. Right.
    Mr. Gowdy. So my question to you is: if we had one more 
chance to borrow all the money that we need, assuming current 
variables, how big would that number have to be?
    Secretary Geithner. I don't know how to answer that. I 
think that if you--let me try this a little differently. You 
will have to decide, as a Member of Congress, how much time you 
want to give Congress before you have to vote on it again, and 
you can choose that amount of time. The larger the number you 
create, but again, the debt limit doesn't decide how much we 
can borrow. You decide how much we can borrow, because every 
year you decide what you can authorize.
    Mr. Gowdy. How much debt would we need to meet current and 
future obligations, assuming the status quo indefinitely?
    Secretary Geithner. I would be happy to give you that in 
writing. I can't do it in my head.
    Mr. Gowdy. How about a round number?
    Secretary Geithner. No idea. But if your question is if 
Congress authorized no additional increase in spending or 
revenues----
    Mr. Gowdy. Right.
    Secretary Geithner.--forever, how much we would have to 
borrow? I can do that question in math, but I have to----
    Mr. Gowdy. Twenty trillion?
    Secretary Geithner. I just can't do it in my head.
    Mr. Gowdy. Fifty trillion?
    Secretary Geithner. I don't know.
    Mr. Gowdy. I have seen you work before. You are smart. You 
are quick.
    Secretary Geithner. I am not smart enough to answer that 
question.
    Mr. Gowdy. A lot? Can we agree it would be a lot?
    Secretary Geithner. It would be a lot. It would make you 
uncomfortable.
    Mr. Gowdy. Right. Thanks.
    Thank you, Mr. Chairman.
    The Chairman. It would make you uncomfortable. Interesting 
transition.
    Ms. Holmes Norton is recognized for five minutes.
    Ms. Norton. Thank you, Mr. Chairman.
    And thank you, Secretary Geithner and Chairman Bernanke, 
for being here.
    Every country and every culture, of course, is very 
different, and it is very risky to go looking at cultures, 
whether it is Greece or some culture or country that you 
perhaps admire. I do want to ask you about Germany. There are 
some in the Congress who believe that the way out of our 
present recession and dilemma is to impose draconian cuts 
repeatedly, even forsaking the budget deal that was very 
difficult to reach, was reached at a huge sacrifice, the loss 
of our triple-A rating.
    I look to Europe, this was a worldwide recession, and look 
at the difference among the various countries. The British seem 
to have adopted something of that approach, approach to 
emphasize retrenchment over growth. I am intrigued by Germany, 
everybody's favorite example of the strongest economy in 
Europe, perhaps the strongest in the world today, and do not 
understand and believe we need to come to grips with the theory 
that they have embraced during this recession. They are one of 
the few countries in Europe not to cut the budget deficit. I 
take it it wasn't terribly out of control but I don't know. I 
am going to ask you. In fact, they have added to their deficit, 
certainly in 2009 and 2010, one of the few countries in Europe 
to do so.
    I am truly intrigued by a country that did not abandon its 
working class, did not abandon its social net, has a national 
policy that is maintained of keeping unemployment low. I know 
they have some things that are culturally oriented toward them, 
like work sharing and the rest. They also, of course, subsidize 
employers to keep people on the job. We do that in a scattered 
fashion.
    But I believe we have to come to grips with why this 
country continues. It is a country that we identify we so 
closely. We need to come to grips with their model and how they 
do it, so I have to ask you, how has Germany maintained its 
strength, continued to grow, without cutting its budget 
deficit?
    Mr. Bernanke. Let me take a first stab at that. Germany has 
achieved quite a bit. When they had reunification a couple of 
decades ago, there were significant problems with the 
competitiveness and efficiency of their industries, trying to 
integrate the two parts of Germany together, and so on. And 
they made a very sustained and successful effort to increase 
the competitiveness and efficiency and productivity of their 
industry, which is all to their credit.
    In addition, though, as part of the Eurozone, they have 
benefitted quite a bit from that arrangement. First, because 
they have sort of an export market that they have easy access 
to, and, secondly, because the Euro, which reflects an average 
of the economic strength of the different parts of the 
Eurozone, is probably weaker than a Deutschemark would be, 
which means that they have something of a currency advantage to 
some extent in their ability to export.
    Ms. Norton. Just like we have a currency advantage.
    Mr. Bernanke. I don't know about that.
    Ms. Norton. Not today, all right.
    Mr. Bernanke. This is more or less permanent, I think.
    Ms. Norton. Go ahead.
    Mr. Bernanke. As you point out, they also had work sharing 
policies, which in this particular case it is a question 
whether that is a good strategy in general, because sometimes 
it could promote inefficiency because there is not movement of 
workers between different industries and so on, but----
    Ms. Norton. Of course, nobody claims that the Germans are 
inefficient. Go ahead.
    Mr. Bernanke. In this particular case, they avoided some of 
the sharp layoffs we saw in the United States, and their 
unemployment rate remained lower. In fact, it is lower today 
than it was before the crisis. That in turn meant that their 
fiscal stresses haven't been as great as some in the United 
States or some other countries.
    So they have had a number of things supporting their 
economy, and certainly they deserve credit for their improved 
competitiveness. But it is the case that not every country in 
the world can be a major exporter. Somebody has to buy. So that 
model is not necessarily exportable in itself to every country 
in Europe.
    Mr. McHenry. The gentlelady's time has expired. Mr. Turner 
from Ohio.
    Ms. Norton. Could I ask for a second----
    Mr. McHenry. The gentlelady's time has expired.
    Ms. Norton. I have wanted to hear from----
    Mr. McHenry. The gentleman from Ohio, Mr. Turner, is 
recognized for five minutes.
    Mr. Turner. Thank you, Mr. Chairman.
    Secretary Geithner, the title of this hearing is Europe's 
Sovereign Debt Crisis, Causes, Consequences for the United 
States, and Lessons Learned. Focusing on that portion of 
lessons learned, I have a concern as we look to the issue of 
Europe that stems from my concern from the bailout process that 
has gone through in the United States. Largely, as we look to 
what occurred in the U.S. with bailouts, I think many people 
like me have a significant concern of conflicts of interest, 
issues of lack of transparency, and a lack of openness.
    Mr. Secretary, as we look to the auto bailouts you served 
in three different roles. You served as the Secretary of the 
Treasury, looking at issues of the taxpayers' dollars, and 
exercising the ownership interest of the United States to the 
extent the United States became an owner frequently in the auto 
bailouts. You served as co-chair of the auto task force and a 
board member of the Pension Benefit Guaranty Corporation. You 
were not merely involved in the GM bailout, but you were 
simultaneously leading all of the agencies on every side of the 
deal in one role or another.
    Throughout these processes, you have refused and Treasury 
has refused to answer questions. You have provided unredacted 
documents or disclosed relative information that people have 
asked to try to hold accountable the Treasury to find out what 
has occurred, where the tax dollars have gone.
    One of those issues obviously affects Delphi salaried 
retirees, where 20,000 people across this Country lost a 
significant portion of their profits as the three roles of the 
Treasury, the co-chair of the auto task force, and the Pension 
Benefit Guaranty Corporation picked winners and losers, and 
they were ones that, with our tax dollars, were picked as 
losers.
    If you looked at that hardship that was imposed on tens of 
thousands of Delphi salaried retirees left in the wake of the 
GM bailout and then you have concern as to how we look to the 
European crisis and whether or not similar conflicts of 
interest, taxpayers' dollars, and a lack of openness or 
transparency, as you know, as the Delphi salaried retirees have 
tried to get the information as to what happened, how they lost 
their pensions, the three roles of yourself, both in Treasury, 
PBGC, and the auto task force, have been closed. Documents have 
not been provided. Redacted documents have been provided, if at 
all. And most recently we have the PBGC acknowledging your role 
as the ultimate authority in the decision to terminate Delphi 
pensions. With the GM bailout you were involved in many of the 
decisions to terminate these.
    But yet there is this sense of how do we have a system 
through bailouts where a person like yourself would have the 
three roles that conflicts exist, and yet Congress have no 
ability for oversight. Individuals who lost their pensions, who 
don't have an ability to hold you or Treasury accountable in 
seeking additional information.
    As you know, this comes at a significant price. We have the 
$1.3 billion loss on the Chrysler deal, the $25 or so billion 
that is at risk in the GM bailout. If we look to the European 
issue, how can we be assured, looking at the performance of 
what occurred in the prior bailouts, that we are not going to 
have this issue of conflicts of interest, of lack of 
transparency, that there will be some openness, that Congress, 
that people who are impacted by this, will have access to 
information?
    I sit here as a Member of Congress knowing that Treasury is 
not answering the basic questions about the decision-making 
that occurred with the Delphi salaried retirees losing their 
pensions and wondering how then can we look to perhaps a 
European issue and not know whether or not our own Government 
is going to be willing to tell us the decisions that are being 
made and the basic financial underpinnings of the decisions 
that occur? Mr. Secretary?
    Secretary Geithner. Good questions. Let me try to be 
responsive.
    Our financial crisis caused enormous damage across the 
Country, not just in the case of Delphi, but that is a good 
example of how much damage caused by the causes that led to 
this crisis.
    We have, of course, cooperated very closely with this 
Committee and every other Congressional Committee in making 
sure we are as responsive as possible for all your requests for 
information, and will continue to do that.
    Mr. Turner. But Mr. Secretary, does that mean that you 
would be willing to release unredacted versions of the 
documents? You say you have tried. If you send us documents 
that are redacted or you, in litigation that is pending, send 
redacted documents, you are not being forthcoming. That is not: 
here is what your Government did.
    Secretary Geithner. Of course I disagree with you on that, 
but we will try to be as forthcoming as we can. But let me just 
point out every action that we took in this crisis has been 
subject to not just the oversight of four separate independent 
bodies established by the Congress to oversee our actions, but 
by all the Congressional committees involved. All the actions 
we took in the auto context were reviewed and validated by the 
courts. There is a good set of checks and balances in our 
Country.
    Mr. Turner. Wait a minute, sir. The one with the Delphi 
retirees is still pending, and you have not been 
participating----
    Mr. McHenry. The gentleman's time has expired. The 
Secretary can summarize his answer.
    Secretary Geithner. I just want to point out that we have 
provided an incredible level of transparency over every 
decision we made with the taxpayers' money in that context. The 
roles you described to me are roles Congress gave me and my 
predecessors. There is no conflict in those roles. Again, we 
have a very strong, robust set of checks and balances in this 
Country, appropriately so, that gives you the ability and the 
authority and the right to oversee everything we have done in 
this context, which I know you will continue to do, and I 
respect and honor that process.
    Mr. McHenry. The gentleman's time has expired.
    Mrs. Maloney from New York is recognized for five minutes.
    Mrs. Maloney. Thank you.
    I would like to join my colleagues in welcoming Chairman 
Bernanke and Secretary Geithner. Secretary Geithner is a former 
resident of New York, and I think I speak for all New Yorkers 
when we say we are so proud of you and your service, and thank 
you, Chairman Bernanke.
    I would like to follow up on my good friend's questioning. 
There is a consensus in this Country that if we had not 
invested, he uses the term bailout, but if we had not invested 
in the American auto industry we would have totally lost it. 
Lost it. I don't know about my colleagues on the other side of 
the aisle, but it is hard for me to imagine an America that 
doesn't make its own cars.
    I would prefer to see more things made in America with 
American jobs. It was at a hearing at this Committee where GM 
testified they are now the leading car producer in the world, 
that they are employing 1.3 million Americans, and that they 
are now exporting the Volt. I would call that an American 
success story. I would call that American dream.
    If it is true that you are the architect of this program--I 
am not so sure that you are. Many people, I am sure, worked on 
it. But if it is true that you were the architect of it, we 
should be carrying him around on our shoulders and thanking him 
for saving American jobs, building American exports, building 
up the economy of our Country.
    So I would like to say thank you, Secretary Geithner.
    Now, I would also like to continue on Mr. Turner's 
questioning that I think was a really valid one in that we need 
to learn. We need to learn from the crises that we just went 
through. I would like to ask both of you what lessons we have 
learned as a Country and how we are going to be better prepared 
in the future.
    Very specifically, how would you compare the actions that 
were taken by the American Government in the face of the crisis 
that we faced in 2008 and 2009 and the actions we took with the 
actions that have been taken by Europe. And I would like to 
begin with Chairman Bernanke and then Secretary Geithner on 
what was the difference in the response? What are the lessons 
that we have learned to make us stronger in preventing it?
    And I would just like to close by saying that Christina 
Romer testified before Congress that the economic shocks of 
this particular downturn in our economy was three times greater 
than the Great Depression. So because of the lessons and 
reforms that we put in after the Great Depression we were 
better able to combat it. Hopefully, the lessons we have 
learned now will help us not only to combat it but to prevent 
it in the future.
    Chairman Bernanke? And thank you for your service.
    Mr. Bernanke. Thank you, Congresswoman.
    We did make a very strong effort to arrest the crisis. It 
was a global crisis. We worked with the Europeans in order to 
do that. I think, relative to the history of financial crises 
and given the size of this one, I think we were pretty 
successful in stopping it.
    Since then, I think the United States has been somewhat 
more aggressive in trying to restrengthen our financial system. 
I would cite, for example, our 2009 stress tests, which were 
highly credible and led to substantial capital races by our 
banking system. Our capital in our largest banks has increased 
in the last two years by about 75 percent, something in the 
order of $300 billion.
    So we have, I think, taken a lot of positive steps to 
strengthening our system. There are many aspects of dot frank, 
including orderly liquidation and macro prudential oversight, 
which have been, I think, very constructive.
    That being said, I think we also have to learn lessons from 
how we got into the mess in the first place, and there clearly 
were gaps and weaknesses in our regulatory system, mistakes by 
supervisors and regulators, including the Federal Reserve. 
Obviously, lots of problems in business practices, which we are 
still seeing. I think we will not have really learned the 
lesson unless we can correct those issues, as well.
    Mrs. Maloney. Thank you.
    Mr. Geithner?
    Secretary Geithner. I think the best way to look at what we 
did is to judge us on the results, and if you look at the path 
of the American economy since the beginning of 2009, you 
compare that record against the record in Europe and the record 
in the United States or other countries in past financial 
crises----
    Mrs. Maloney. Thank you, Mr. Geithner. My time is almost 
over. I just would like to put in the record I have been 
researching you and getting all your quotes that are very 
positive about this crisis, that Europe has the ability to 
avoid the debt crisis, Geithner. And a direct quote was, ``And 
he said that the European Union has the ability to avoid a 
worsening crisis and urged E.U. members to speak with one voice 
about plans to solve their debt problems.''
    I have no time left, but a yes or no. Chairman Bernanke, do 
you agree with that statement that Europe has the ability to 
solve this debt problem?
    Mr. Bernanke. They certainly have the economic and 
financial resources. As was pointed out, their economy is about 
the same size as that of the United States. They face very 
difficult political problems getting agreement among 17 
countries on a path forward, so it is not going to be easy, but 
yes, I do think they have the capacity.
    Mrs. Maloney. Thank you.
    Mr. McHenry. Thank you.
    Mr. Meehan from Pennsylvania is recognized for five 
minutes.
    Mr. Meehan. Thank you, Mr. Chairman.
    Let me express my appreciation to both of you as public 
servants for making this commitment that you have at a 
tremendously challenging time not just for our Nation but for 
our world. I am grateful for your efforts. Obviously, there are 
many complexing questions that are part of this overall 
equation, but, Chairman Bernanke, as I was listening to your 
testimony, one of the things that struck me was in your review 
of the totality of the circumstances in Europe.
    One of the places where, in my estimation, you seemed to 
identify a little bit of the hesitancy was with respect to this 
issue of the currency swaps in which we take American dollars, 
make them available to the European banks, as I understand it, 
and then they are going to be paid back again in American 
dollars by the central bank.
    Now, what is the real purpose behind that? Is that any 
distinction from the other kinds of IMF funding and other 
things? It is a liquidity issue, primarily?
    Mr. Bernanke. It is a liquidity issue, not a long-term 
loan. The longest of these loans ever made is three months. We 
have our counterparty is not the country; the counterparty is 
not the bank. Our counterparty is the central bank, the 
European Central Bank, which we have every confidence will 
repay. As I said, we have the collateral of the currency.
    So we have a lot of confidence in the financial integrity 
of those swaps. They have very substantial benefits to the 
United States. European banks do a lot of their business in 
dollars for two main reasons. One is that they lend in the 
United States, and so it directly affects their ability to make 
loans to American businesses and households. Secondly, they do 
a lot of lending support trade globally, a lot of which takes 
place in dollars, and that activity strengthens the role of the 
dollar as the principal trade currency and as the leading 
reserve currency.
    So our interests are very much involved, and at no 
financial cost. We have achieved a significant improvement in 
funding conditions in Europe and, as I mentioned earlier, 
because of that improvement the demand for those swaps is 
actually going down, and so we think that has been a successful 
step.
    President Draghi of the ECB has made a point of saying how 
important the contribution of the swaps was to the 
stabilization we are seeing.
    Mr. Meehan. You mentioned a three-month period. Is this 
more or less a rolling line of credit, so to speak, that over 
the course of the three-month period you get repayments and 
then you make new available credit, as well, or access to the--
--
    Mr. Bernanke. Yes, but we approve not just the program but 
every single draw, so we can, there is never a point where we 
couldn't end the program with----
    Mr. Meehan. Well, what is our exposure currently? What is 
the totality of our exposure?
    Mr. Bernanke. The totality of our exposure currently is $69 
billion, of which $54 billion is to the ECB and the rest is 
mostly to the Bank of Japan.
    Mr. Meehan. Just $64 billion. What is our total exposure in 
terms of other things by the United States to the European 
sovereign debt and other forms?
    Mr. Bernanke. As our stress test analyzed, the exposure of 
our banking system to the debt of the weaker countries is, on 
net, about zero, because even though they hold some such debt 
and they have written some insurance on that debt. They have 
hedges in the other direction that protect them from loss, and 
we are comfortable in the security of those hedges.
    Mr. Meehan. What is the credibility of the hedges? Where 
does the strength of the hedges come?
    Mr. Bernanke. The hedges are written by a variety of 
stronger European institutions, and we are quite comfortable 
that we can't imagine a scenario when essentially every major 
European institution----
    Mr. Meehan. Well, explain to me the qualification, because, 
if I am not incorrect, in your testimony you did express some 
reservation. One area of exposures was currency swaps. I 
thought I heard that in your testimony.
    Mr. Bernanke. No. No, we are quite comfortable with the 
security of the currency swaps.
    Mr. Meehan. Okay. Let me ask just one closing question from 
either of you. We are also living in a very dangerous world. I 
know you run these with respect to models. The instability that 
is currently existing in our relationship with Iran and what 
may happen, to what extent may these models be impacted by what 
may be a very problematic future with regard to global unrest? 
Can this whole system be subject to a complete reordering if we 
have significant instability in the middle east?
    Mr. Bernanke. You mean our banking system?
    Mr. Meehan. Yes.
    Mr. Bernanke. So we haven't done directly a stress test 
based on a shock to oil prices, but we have done a stress test 
based on a much more severe U.S. recession, 13 percent 
unemployment and a 50 percent drop in stock prices. So I think 
a geopolitical event that caused oil prices to double, as I 
think Mr. Gowdy perhaps was suggesting, would have effects of 
that sort. We believe our banking system has sufficient capital 
to deal with that.
    Of course, it would be very costly to the American economy 
and to the banks and to the financial system more generally.
    Mr. Meehan. Okay. Thank you.
    Mr. Chairman, my time has expired.
    The Chairman. [Presiding] The gentleman yields back.
    The gentleman from Pennsylvania, Mr. Kelly.
    Mr. Kelly. Thank you, Mr. Chairman.
    I would like to yield my time back to the Chair.
    The Chairman. Thank you. I will use it briefly.
    This has been very instructive. Before we go to a second 
round, originally we said we would get you out of here before 
1:00. If we get you out of here before 12:00 are you willing to 
stay for a second round?
    Mr. Bernanke. Of course.
    Secretary Geithner. Yes, sir.
    The Chairman. Good. But before we go to that, a couple of 
quick questions.
    I just want to clarify. The European Central Bank can print 
an unlimited amount of Euros, is that correct, the same as we 
can print, theoretically, an unlimited amount of dollars?
    Mr. Bernanke. Yes, but it has an inflation objective, which 
it is very scrupulous about.
    The Chairman. And we know they have only cheated on that a 
few hundred times; is that right, Mr. Chairman?
    Mr. Bernanke. They have had a good record of keeping 
inflation around 2 percent.
    The Chairman. But they have cheated on a lot of other 
monetary things? The fact is that Greece is where it is because 
nobody was watching what Greece was doing while Greece was 
pumping up its debt; is that pretty much true?
    Mr. Bernanke. Well, I would argue that was basically both 
Greece and some of the other authorities rather than the ECB 
that was responsible for that.
    The Chairman. But isn't the European Central Bank somewhat 
the fair arbiter of whether or not they are obeying it? Who is 
responsible to prevent, within the Eurozone, violations by the 
Eurozone, because ultimately the debt affects the value because 
on a common currency they are agreeing to live within certain 
guidelines which clearly nobody was watching, when many 
countries just ignored the guidelines, at least as to debt.
    Mr. Bernanke. Right. There was a stability in growth pact, 
which in principle was supposed to limit debt and deficit, and 
it was violated, and for political reasons there wasn't 
sufficient enforcement of that. They have tried to strengthen 
that now with the fiscal compact that they have agreed to more 
recently.
    The Chairman. Well, going back to my original question, 
then, within the obligation we have for currency swaps, are 
they obligated, notwithstanding political pressure, to make us 
whole? In other words, if, hypothetically, the Euro were to 
drop in half, they would have to give us back twice as many 
Euros to get dollars. Is that within their jurisdiction, or 
would they have to go back to that kind of interesting vote of 
so many members?
    Mr. Bernanke. No. That is entirely within the jurisdiction 
of the ECB, and I have no doubt whatsoever they would honor 
their obligation.
    The Chairman. Okay. So that is the underpinning of your 
confidence that the swaps are, in fact, extremely safe?
    Mr. Bernanke. Yes, sir.
    The Chairman. And I appreciate that, because I think the 
American people have to understand that the swaps that we are 
talking with today are not the swaps we were talking about in 
the AIG era.
    One more question that I know the answer to but I want to 
make sure the American people hear. Secretary Geithner, I think 
the Ranking Member addressed it toward you. He talked about the 
huge amount of debt built up in this Country in mortgages, and 
you may have noticed that the word principal reduction comes 
out of the Ranking Member in every question. He is very good at 
it. He is very disciplined.
    Isn't it true that in Europe, in fact, their loans are 
recourse, and in the U.S., almost uniquely within the world, 
ours are non-recourse, meaning in Europe they can't walk away 
from their loan until they have exhausted all of their 
resources. In the U.S., you could have a pile of money of 
millions and you could walk away from your mortgage if it is 
upside down and you don't want to deal with it.
    Is that essentially your understanding?
    Secretary Geithner. I am sure you are right in some 
countries, but I can't speak to the broader pattern across 
Europe.
    The Chairman. Okay. We found no countries in Europe that 
were non-recourse. And that doesn't mean that you can't have a 
loan chosen to be non-recourse, but the ordinary default in 
Europe apparently is you sign like you would for any personal 
loan. They take the house and then they come at you for the 
deficit.
    Secretary Geithner. You did see very, very substantial 
increases in borrowing by households, not just against 
mortgages, not just for mortgages, but generally in many of 
those countries in Europe anyway. So even with that slightly 
different system, you saw in some countries in Europe, very, 
very large rises in debt by individuals.
    The Chairman. Now, I went to the debt clock. That may not 
be the best one but, Mr. Chairman, it is the one we all tend to 
use because it is on the Internet. I looked and, in round 
numbers, at the time of the crisis we were at, like, $14 
trillion, about a trillion more in mortgage debt than we have 
today. That shows me that overall debt of mortgages has fallen, 
if you will, a relatively small amount, certainly less than 10 
percent.
    What does that really say to you from a standpoint of debt 
to equity of debt is down by that relatively small amount but 
housing values are down less? And how does that make you feel 
relative to the security of home mortgages?
    I realize that is outside the original scope of this 
hearing. You don't have to respond if you are not prepared.
    Mr. Bernanke. Well, there has been about $7 trillion of 
homeowner equity lost by declining house prices, and so 
obviously leverage in the housing sector is up. But things are 
moving in a de-leveraging direction as home purchases have gone 
down and home ownership has gone down and as there have been 
write-downs and as people have paid down their debts.
    The Chairman. Okay. I will now take advantage of this 
opportunity to call on one last first-round member, the 
gentleman from Texas, Mr. Farenthold.
    Mr. Farenthold. Actually, Mr. Chairman, I would like to 
yield my time to Mr. McHenry.
    The Chairman. The gentleman is recognized.
    Mr. McHenry. I thank my colleague for yielding.
    Chairman Bernanke, is the current fiscal trajectory 
sustainable?
    Mr. Bernanke. In the United States?
    Mr. McHenry. In the United States.
    Mr. Bernanke. No, it is not.
    Mr. McHenry. What is a sustainable debt load for a country 
such as ours?
    Mr. Bernanke. Well, there is no exact number. I think that 
the current levels would be sustainable if they were kept more 
or less constant relative to the GDP. I think that is an 
important criterion. If we could, over a period of years, get 
the debt-to-GDP ratio to some level like 75 percent and then 
over time even begin to improve that, I think that would be a 
much better situation. But as it stands, the CBO projections 
show that under current law the debt-to-GDP ratio begins to 
explode in the next couple of decades.
    Mr. McHenry. So explain what happens. You have mentioned 
this before, and just to clarify, what happens at the end of 
this year in terms of our fiscal situation?
    Mr. Bernanke. Well, for a number of reasons, under current 
law if no further action is taken there will be what I have 
termed a fiscal cliff on January 1 of 2013 as a number of tax 
and other provisions expire, including the Bush tax cuts, the 
payroll tax, UI benefits, and at the same time on the spending 
side is the sequestration arising from the failure of the Super 
Committee to agree kicks in. And if all those things happen, I 
think there would be a very sharp and rapid fiscal contraction 
that would be a serious negative for the recovery.
    I hope that Congress will take the opportunity to think 
through where they want fiscal policy to go, and this will be 
in some sense a forcing event.
    Mr. McHenry. So austerity too fast and spending cuts too 
soon and tax increases that would have a negative impact in 
economic growth, that is the fiscal cliff that you are speaking 
of?
    Mr. Bernanke. A very sharp change in fiscal stance in a 
short period of time would have a negative affect on growth, 
yes. Again, it is important to achieve sustainability over a 
longer period, but one day is kind of a short period to have 
such a big change in the position.
    Mr. McHenry. Secretary Geithner, I know you have spoken of 
this. You are obviously the economic spokesman for the 
Administration, and you have taken that role on in a vigorous 
fashion. I have heard you speak about the tax increases, the 
component of the President's budget, and raises a number of 
folks' taxes at the end of this year, but can you speak to this 
cliff, because under that scenario of sustainability the 
President's budget that he submitted to Congress falls short of 
that, and there is only one fiscal plan that actually puts us 
on that sustainable path over the long term, over the next 
decade, over the next 20 years, over the next 30 years, and 
that is the budget that we passed out of the House last year. 
The President's budget that he submitted this year puts us in a 
very harsh spiral based on the debt-to-GDP ratio, based on the 
tax increases, and for not addressing the cost drivers of our 
budget.
    I will give you an opportunity to respond, obviously.
    Secretary Geithner. Obviously, I have a different view, but 
let's look at it this way: CBO just did an assessment of the 
implications of the President's budget on the long-term fiscal 
path, and they concluded, as did we, that if Congress were to 
adopt those policies then we would reduce our deficits over the 
next three to five years to a level that makes them sustainable 
over time.
    What that means is they would bring the deficits down as a 
share of GDP to the level where our debt burden would stop 
growing as a share of the economy and would start to fall. That 
is for the next ten years.
    Mr. McHenry. And that is done through a number of increases 
in the revenue to Government as a percentage of the economy 
above the historical norm?
    Secretary Geithner. I will explain the mix. If you go back 
to where we were last summer, before the agreement last summer, 
we needed to find savings of roughly $4 trillion over ten years 
to achieve that objective, meaning getting the deficits down 
low enough so the debt stops growing as a share of the economy 
and starts to decline, so we had to hit a $4 trillion target.
    The Congress agreed on about $1 trillion of cuts last 
summer, which we are obligated to hold to. That leaves us with 
about $3 trillion left to do.
    What we propose to do is about half of that through an 
increase in the effective tax rates of the top 2 percent of 
Americans, very few number of Americans affected by that, and 
to find a balance of other savings across the Government.
    Mr. McHenry. Unspecified or specified?
    Secretary Geithner. Very specified. We have a very detailed 
set of savings in Medicare, in Medicaid, and other mandatory, 
like farm subsidies and civil service retirement, things like 
that, that would provide an additional $1.5 trillion of 
savings. And so the overall balance we propose is roughly $2.5 
of spending cuts for every dollar in revenue increases. And the 
reason why we propose that is not because, we know no one likes 
to raise revenues or raise taxes, is because if we don't find 
that additional tax revenues out of our current system, then we 
have to find a trillion-and-a-half dollars in spending cuts in 
Medicare or low-income programs or education or infrastructure 
or defense, which we don't think we can justify, or we have to 
ask somebody else to pay higher taxes, and we don't think that 
is a fair thing to do for the American people.
    So that is the proposal we made. We have got some other 
differences between us, of course, and those mostly relate to, 
over the longer term, how we bring our commitments in health 
care to a more sustainable level. As you know, we have 
fundamental disagreements on what it is going to take to do 
that. We have laid out an approach designed to reduce the rate 
of growth in cost but still preserve that basic commitment to 
Medicare, to retirees, and we have millions and millions and 
millions of more Americans retiring in the coming decades. And 
that is an approach which is very different from the approach 
you guys embrace in that budget.
    The Chairman. I thank the gentleman. I would also mention 
we will ask that the record indicate the CBO scoring for 
Obamacare be put in at the same time to sort of complement the 
two CBO claims.
    Secretary Geithner. That helps us though.
    The Chairman. Not so much.
    Mr. Burton, would you like to lead off the second round as 
chairman emeritus? The gentleman is recognized.
    Mr. Burton. Sure.
    My colleague, My colleague, I think Mr. Meehan, asked a 
while ago about the exposure of the United States and our 
financial institutions. According to CRS, in U.S. dollars in 
2011, September 2011, our total exposure is $2.08 trillion. Can 
you quantify that? You said you didn't know what I was talking 
about.
    Mr. Bernanke. I am not clear whose exposure you are talking 
about, the banks or the U.S. economy? I am not quite sure what 
it refers to.
    Mr. Burton. Well, since you don't understand it, if I 
submit this to you will you check it out and let me know?
    Mr. Bernanke. Certainly.
    Mr. Burton. Could you answer that for me? I would really 
appreciate it.
    Mr. Bernanke. Certainly.
    Mr. Burton. The second thing I would like to ask is one 
more time. I am not a banker. I am not a financier or a 
financial expert, but I would like to ask this question one 
more time, and that is, If there is a default in Europe by 
Greece, Italy, Spain, Portugal, some of these other countries, 
and the European Central Bank has to start printing more Euros, 
which would cause an inflationary problem and devalue their 
currency, you said a while ago that we were not in any trouble 
because they would pay us back in dollars they are holding. But 
what if they can't?
    Now, they are going to have to pay for the dollars that 
they are going to repay us with currency that has been devalued 
substantially. How are we going to get our money, number one, 
and, number two, would we refinance that debt?
    Mr. Bernanke. Well, Congressman, first of all, the ECB has 
been very clear that they are not going to be financing 
sovereign debtors, and they have not, and their primary 
commitment is to the low inflation rate, the 2 percent 
inflation rate in the Euro. So I don't see any necessity or 
even likelihood that the ECB would print inflationary amounts 
of money in order to address sovereign default.
    Mr. Burton. I know, but it seems like to me Europe is 
absolutely committed to keeping Greece in the European Union 
and make sure that nobody is leaving, and if these expenses 
continue in Greece and they have these civil disorders, and 
possibly in Italy and these other countries, the European 
Central Bank and Germany and other countries are going to have 
to pay the freight to keep these countries afloat.
    Now, if they do that it seems to me that the European 
Central Bank, and I talked to some of the leaders over there, 
they said that they would, of course, do like we did we 
quantitative easing and they would print whatever currency they 
needed.
    Now, if they did that there would be an inflationary spike, 
it seems to me, at some point, and if we had to recover our 
debt how would they repay us?
    Mr. Bernanke. Well, first, the European Central Bank, 
itself, has capital.
    Mr. Burton. You mean they have U.S. dollars?
    Mr. Bernanke. Well, I guess their capital is in Euros. That 
is correct.
    Mr. Burton. Well, how would they repay us then?
    Mr. Bernanke. Well, I guess they get repaid from the banks 
they lend to in dollars. That would give them dollars to repay.
    Mr. Burton. Well, many of those banks could go belly-up, as 
well, so they are going to have trouble recovering that, so the 
inflationary problem is a real problem, so how would we get our 
money back?
    Mr. Bernanke. Well, again, the European Central Bank is a 
highly solvent institution. It is committed to low inflation. 
It is, in turn, supported by a whole network of central banks 
of the 17 countries which have their own----
    Mr. Burton. I understand, but that is not really answering 
my question.
    Mr. Bernanke. The kind of scenario you are envisioning 
where they couldn't pay us back would be absolutely 
apocalyptic. It would mean a collapse of major governments in 
Europe. It would mean a collapse of----
    Mr. Burton. Let me follow up with this question then.
    Mr. Bernanke. Yes.
    Mr. Burton. Let's say that Greece defaults and they leave--
--
    Mr. Bernanke. It has already defaulted.
    Mr. Burton. I understand, but let's say they are forced to 
leave the European Union because they don't comply with the new 
demands. And we have a cascading effect into Italy and maybe 
Portugal and Spain and some of those other countries. In a 
worst-case scenario, the European Central Bank and the other 
countries say, okay, we are going to try to keep this from 
becoming a catastrophe, and they start printing Euros. We are 
obligated and we are involved, to a large degree, according to 
the figures I have. How would we fare in the United States and 
how would we get repaid and what kind of impact would that have 
on our Country?
    I know you used the term apocalyptic. I would like for you 
just to explain a little bit more thoroughly.
    Mr. Bernanke. Well, again, the money we have lent, first of 
all, the swap that we have made, the collateral, we have taken 
collateral for it, which is coming down, is backed, first of 
all, by the European Central Bank, which, in turn, has behind 
it 17 national central banks which have gold, they have other 
kinds of assets. Those central banks, in turn, are backed by 
the governments of the Eurozone. So it is an extraordinarily 
unlikely situation that we would lose any money.
    Again, it is a three-month obligation. You are talking 
about a situation where national governments are defaulting 
across the Eurozone.
    Mr. Burton. If I might follow up?
    The Chairman. Thirty seconds for a brief follow-up.
    Mr. Burton. Thirty seconds. I know some of those 
governments over there are having political problems and they 
are not anxious to pour more of their money and their resources 
into saving other countries. Germany in particular has had some 
political problems, and maybe more severe. So when you say 
these 17 other central banks are going to come across and help 
keep everything afloat, there is a political problem that is 
involved in that, too. That is why I asked about a worst-case 
scenario.
    Mr. Bernanke. I didn't say they were----
    Mr. Burton. I think it is important that we understand all 
the problems that we might be facing.
    Mr. Bernanke. I didn't say they were going to support the 
individual countries; I said that they would pay the United 
States back the swap money.
    The Chairman. Thank you.
    We now go to the Ranking Member, Mr. Cummings, for a second 
round.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    The Chairman had mentioned a little bit earlier that I am 
very disciplined with regard to this foreclosure issue, and I 
am, because so many of my neighbors and people across this 
Country are suffering tremendously. I think it was you, 
Secretary Geithner, who mentioned the $7 trillion in wealth 
that has been lost. That is why I do that. And I also do it 
because I realize it is going to be kind of difficult to 
address this recessionary problem that we all want to deal with 
unless we do that.
    Several Republicans have likened the fiscal situation of 
the United States to that of Greece. Chairman Issa likened it, 
the U.S. financial situation, to the sovereign debt crisis. 
They argue that the social safety net in this Country as we 
know it, which provides critical support to the Nation's 99 
percent, should be tossed aside. Those Republicans have used 
the European crisis to justify arguments for draconian 
austerity in the United States, just as it is now being imposed 
in Greece.
    Chairman Bernanke and Secretary Geithner, can the financial 
situation of the United States be reasonably compared to that 
in Greece? Just curious.
    Mr. Bernanke. As I responded earlier on this, I think a 
direct comparison is not appropriate. Greece has a much higher 
debt-to-GDP ratio. They have a much weaker and less diversified 
economy. They are a very small economy. And they don't have an 
individual central bank, a separate monetary policy, so there 
are lots of differences.
    With that being said, I think everyone needs to 
acknowledge, and I am sure you do, that in the long run every 
country, including the United States, has to have a sustainable 
fiscal path, and we do need to pay attention to that.
    Mr. Cummings. I agree. And so would you agree with that, 
Secretary Geithner?
    Secretary Geithner. Of course. I think it is very important 
to point out the contrast. The additional policies we have to 
agree to in the United States to bring our deficits to a more 
sustainable level over the medium term are very modest as a 
share of our economy, completely within our capacity to do, 
without asking the economy to suffer some undo burden or 
without dismantling our safety net, or without abandoning 
commitments to retirees in Medicare and Social Security.
    The gap between where we are today and where we are 
expected to be and what is sustainable in economic terms is 
roughly 2, 2.5 percent of GDP, which is a very small challenge 
relative to what many countries around the world are starting 
to face. And the existing level of benefits we give our 
retirees are very, very modest. No one could call them 
excessively generous. We ask Americans to bear a much, much 
larger portion of the risks in retiring or in paying for health 
care than is true in really most of the other economies in 
Europe in that context.
    So I see really no comparison in our situations. We are a 
much stronger Country, much stronger position, both fiscally 
and financially, probably because we were much more aggressive 
in responding to our crisis. And even with all our challenges--
and we have many challenges, and fiscal sustainability is one 
of them--we are in a very strong position as a Country to 
address those challenges.
    Mr. Cummings. Now, Greece failed to have a firm 
understanding of what its deficit actually was. In 2009 Greece 
reported a deficit of about 7 percent. Months later this figure 
was revised to 12 percent, and again later to 15 percent. When 
Greece's sovereign debt was reported, it had no explanation as 
to how such a monumental error had taken place.
    Chairman Bernanke and Secretary Geithner, I cannot imagine 
the U.S. failing to have a firm grasp of what our debt actually 
is; would you agree with that?
    Mr. Bernanke. Well, our debt obligation is complicated. We 
have unfunded liabilities with respect to our entitlement 
programs and so on, but yes, I think I have confidence in our 
Government's accounting system. In Greece there were obviously 
questions about whether or not the numbers were being 
accurately reported, and that clearly made things much worse.
    Mr. Cummings. Now, in Greece any monetary stimulus aimed at 
mitigating financial stress must be channeled through a third 
party, the European Central Bank, and it must be agreed to by 
several other nations in the Eurozone; is that right?
    Mr. Bernanke. I am sorry? Repeat the question?
    Mr. Cummings. In other words, in Greece any monetary 
stimulus aimed at mitigating financial stress must be channeled 
through a third party, the European Central Bank, and be agreed 
to by several nations within the Eurozone; is that correct?
    Mr. Bernanke. That is correct. There is one central bank 
for the whole Eurozone, and it makes decisions based on the 
whole Eurozone, not on the situation in one given country.
    Mr. Cummings. I guess that makes their situation a little 
bit more complicated than ours.
    Mr. Bernanke. It does.
    Mr. Cummings. To remedy anything to do with the deficit and 
spending and whatever.
    Mr. Bernanke. The main difference is that both the United 
States and Europe have a single monetary policy, but in the 
United States we have a Federal Government and a national 
fiscal policy; in Europe they have 17 different national fiscal 
policies.
    Mr. Cummings. Thank you very much, Chairman.
    The Chairman. You are very welcome.
    The gentleman from Pennsylvania, Mr. Kelly.
    Mr. Kelly. I thank the Chairman.
    Mr. Secretary, Mr. Bernanke, thank you so much for being 
here today. I know you are in a difficult position. I have been 
in that same spot myself very many times. I am an automobile 
dealer and have really gone through some times that were very 
difficult.
    My question deals more with prime rate and where prime rate 
goes. I think if you go back to 47 until present it averages 
somewhere around 9.5 to about 9.8. Right now we are at 3.25. 
But I remember, and with not really pleasant memories, in the 
early 1980s where it went to 21.5 percent for prime rate. Now, 
people tell me, Are you out of your mind? That couldn't 
possibly happen. The reason I remember is because we paid 1 
percent over prime for our floor plant so borrowing money to 
buy cars at 22 percent made it a little bit crazy, because that 
meant that we were paying 2 percent per month on every car that 
sat in the lot, so the idea then was not to have too many cars 
on the lot.
    What I worry about is our dollar starts to drop in value. 
If we start to pump more money into the equation to raise the 
levels, what do you see happening in the future. I know that 
right now at 3.25 it looks awfully attractive. In fact, we just 
negotiated a loan to build a new building, but it was the 
certainty, Mr. Bernanke, thank you, by the way, that the banks 
came to us. We had about five bidding for our business, and we 
came up with what we thought was a real attractive package.
    But again, the driver for all of us in small business is 
the certainty of what the markets are going to be, or, as we 
look into the future, how we plan our purchases, our equipment 
buys, our employee hires, and everything like that.
    What do you see happening right now dollar-wise, our value 
of the dollar, because it does drive what lenders are going to 
ask for us to give back. I know for me it became very difficult 
because the covenants changed every quarter, the fact that we 
had a single-purpose building they say, you know what? Your 
collateral is not worth what it was before, so you become a 
difficult risk for us.
    So risk is the key that drives everybody throughout the 
whole world. We are looking at great risk in Europe, because I 
really look at us as mountain climbers all attached to the same 
rope, and so as they start coming off the side of the mountain 
it is going to pull all of us down.
    Tell me about prime rate. What do you see happening with 
prime rate? I know we have some certainty, at least in the very 
near future. Where is it going to go?
    Mr. Bernanke. Well, first, of course, the Federal Reserve's 
policy has been to try to keep interest rates low to stimulate 
our economy, and in that respect auto dealers and auto 
purchasers have obviously benefitted from low cost in funding. 
In fact, what we are seeing now is that auto purchases are 
going back close to where they were before the crisis, so that 
is a very significant improvement.
    So that is part of the plan is to try to get the economy 
growing and get people back to work, and that can only be good 
for auto sales, as well as for the economy, in general.
    With respect to the dollar, there are two definitions. One 
is the value of the dollar in terms of other currencies, which 
may matter for international competition in autos and so on, 
but there the dollar has been pretty stable. There has not been 
any real trend in the dollar over the last few years.
    The other measure of the value of the dollar is the 
inflation rate, and there also, with some exception relating to 
gas prices, inflation has been low and stable. In particular, 
we haven't had the problem of high inflation that we saw in the 
1970s, which led to the 21 percent interest rates that you were 
referring to earlier. So I think our policies are achieving 
support for the economy without damaging the value of the 
dollar.
    Going forward, as the economy strengthens over a period of 
time, I don't know exactly how long, obviously interest rates 
will go up to some extent. The dollar will react to the change 
in interest rates, it will react to expectations about growth 
in the United States, but we think that meeting our mandate of 
maximum employment and price stability is the best way to get a 
strong dollar in the medium term, and that is what we are 
trying to do.
    Mr. Kelly. And I would agree with you when it comes to auto 
sales, but again the SAR in 2009 at 16.5 million units a year 
dropping to 9.5 million units a year, just through attrition, 
right now we are seeing people whose cars are no longer 
operable so they are coming back into the market. But still, I 
have got to tell you, when I am on the lot or when I am in the 
showroom, when I look across the desk at people it is the 
uncertainty of where they are going to be three, four, and five 
years down the road drives their decision to make a purchase or 
not to make a purchase. So I have got to tell you, the 
stability of our economic recovery is so critical.
    I look at energy prices right now and I am watching the 
value of used cars drop almost daily, especially cars that are 
deemed to be gas guzzlers. If they start to drop off you can 
lose 35 or 40 percent very quickly as the price point goes up, 
and that is the one thing I fear. I watched it happen before, 
and we are very quickly reaching that tipping point again at 
about $4 where all the sudden the whole world stops and we 
start to go in a rapid decline.
    But I do appreciate your being here today and I appreciate 
what you are trying to do.
    Mr. Chairman, I yield back.
    The Chairman. I thank the gentleman. We now go to the 
gentlelady from New York for five minutes.
    Mrs. Maloney. I thank the gentleman.
    I would like to ask unanimous consent to place in the 
record quotes, an article from Secretary Geithner, the 
President of the United States, Simon Johnson, a former IMF 
chief economist, all that say that Europe is working hard to 
address the problem and has the ability to handle the problem. 
I think it is an important statement.
    The Chairman. Without objection.
    Mrs. Maloney. Thank you very much.
    I would like to come back to the stress test that came out 
last week, Chairman Bernanke. Fifteen of our largest banks 
examined have sufficient capital to withstand a crisis, 
according to this test. By my calculation, that is roughly 78 
percent of all the banks tested. I would call this overall 
positive news, although our banks do need to do more. Would you 
agree?
    Mr. Bernanke. Yes, there has been a very substantial 
increase in capital and ability to withstand stress.
    Mrs. Maloney. I have a specific question that pertains to 
the European situation. What should we be doing here at home in 
order to ensure that American banks stay well positioned to 
manage their exposure to Europe and the European financial 
situation?
    Mr. Bernanke. Well, as supervisors, the first thing that we 
look at is capital, and the capital situation is much improved. 
And, as I said, the stress tests mimic, to some extent, the 
effects of intensification of the European crisis on the United 
States. Beyond that, though, we are looking more specifically 
at the exposures they have and how they are managing those 
exposures. We talked about the credit default swaps and other 
kinds of insurance.
    We are also looking at liquidity and other types of aspects 
of bank safety. So again, we have come a very long way in the 
last couple of years, and although a blow-up in Europe, let me 
be clear, would be very costly and create a lot of problems for 
our banks and for our economy, I think we are much better 
prepared to meet such a challenge today than we would have been 
a couple years ago.
    Mrs. Maloney. Thank you very much.
    You have testified before the Financial Services Committee. 
Specifically, on February 29th you testified and expressed 
concern about sharp spending cuts that would take place next 
year due to the inability of the Super Committee to reach an 
agreement on a plan. I would like to place in the record some 
of your statements, because there is a debate now before 
Congress on the stimulus versus austerity.
    May we place in the record the chairman's statement before 
the Financial Services Committee?
    The Chairman. I am assuming this is his opening statement?
    Mrs. Maloney. No, no. It was in response to questions. No, 
it was in his opening statement.
    The Chairman. Of course, without objection.
    Mrs. Maloney. Secretary Geithner, I would like to ask you 
basically do you think the U.S. Government would have been 
worse off if, instead of passing the stimulus package in 2009, 
it passed an austerity plan? Would you consider, since we now 
have before us a blueprint of how we are going to go forward 
with the budget, proposed budget that Congressman Ryan put out 
yesterday, and it is the equivalent of a severe, would you call 
this a severe and damaging austerity plan? His proposed plan 
cuts even more than the final agreement with the Super 
Committee.
    I want to know if you agree with this statement that was in 
the New York Times by Paul Krugman when he stated, ``The truth 
is that if you want to know who is really trying to turn 
America into Greece, it is not those urging more stimulus for 
our still-depressed economy; it is the people demanding that we 
emulate Greek style austerity, even though we don't face Greek-
style borrowing constraints, and thereby plunge ourselves into 
a depression.''
    Would you agree with this statement by Mr. Krugman? And 
what is your response to those who demand that our Nation take 
austerity measures that have not particularly worked well in 
other countries?
    Secretary Geithner. If the United States had not, in the 
early part of 2009, put in place $800 billion of tax cuts and 
emergency spending increases, then our economy would have been 
dramatically weaker than it has been and we would be in much 
worse shape today. The estimates, of course you know, and maybe 
it is worth recalling that in the last quarter of 2008 the 
economy was shrinking at an annual rate of 9 percent, and it 
was only the actions in the Recovery Act, combined with those 
of the Fed and our plans to stabilize the financial system that 
we had, that we had growth resume really, really quite quickly.
    As you know, we have some very fundamental disagreement 
with the President's opponents on the fiscal side. The Ryan 
plan, as I understand it, would not just cut spending too 
deeply and prematurely in the short term, but it would 
dramatically erode our capacity not just to meet our 
commitments to retiring seniors and Medicare, but would 
dramatically erode what is already a very weak safety net and 
leave us without the ability to fund critical investments in 
education or innovation which we think are essential to our 
ability to grow in the future.
    So we would not support those policies, do not believe they 
are in the interest of the United States, and do not believe 
they would be responsible to adopt at a time where the economy 
is still healing from a devastating crisis.
    The Chairman. Thank you.
    The gentleman from Vermont, Mr. Welch.
    Mr. Welch. Thank you very much, Mr. Chairman.
    Thank you, Secretary Geithner and Chairman Bernanke, for 
your incredible service in a pretty tumultuous time.
    I want to go back to this question. It really is a central 
issue for Congress. I will start with you, Mr. Bernanke. We are 
having a debate, as you know, in Congress about, with the 
levels of debt, is austerity the policy that we should be 
pursuing, or should it be investment, putting it in broad 
terms, and on the investment side have it be something where, 
in the short term, we try to maintain low interest rates and 
rebuild our economy, but have a long-term plan to make for a 
sustainable fiscal future?
    On this question of austerity, the budget that has recently 
been introduced I think has implicit in it two assumptions. One 
is austerity will be beneficial to growth, and the budget that 
has been proposed in the House for our consideration would cut 
spending across the board in many of the domestic discretionary 
areas: infrastructure, housing, medical research, education. It 
would fence off the Pentagon. In fact, the sequester cuts would 
be avoided.
    So, number one, the implicit assumption is that austerity 
is the path in this budget, the path to progress and growth.
    The second assumption in this budget appears to be that if 
we reduce taxes on folks who have substantial incomes, that 
likewise will lead to growth.
    My question to you is: is there any evidence that either 
the assumption about cutting taxes on high incomes in these 
economic circumstances does lead to growth, number one. Number 
two, is cutting some expenditures in these items I mentioned, 
medical, research, education, is there evidence to indicate 
that that will also lead to growth and a lower debt?
    Mr. Bernanke. I think the general approach, without talking 
too much about specific policies, again is a balanced approach 
which works to achieve financial stability and fiscal 
sustainability in the longer term, while being respectful of 
the need to maintain the recovery at the current stage. I think 
that is a balanced approach that could be managed.
    On the other issues, I think it is also important not just 
to look at the size of the debt or the debt-to-GDP ratio, but 
ask ourselves what is the quality of the fiscal programs being 
undertaken. On the spending side, if we are making investments, 
are they a bridge to nowhere or are they a type of 
infrastructure investment that will pay a return and improve 
economic activity and be worth the investment that is being 
made.
    On the tax side, is it smart tax policy? Is it broadening 
the base and lowering rates and achieving a fair and more 
efficient tax code?
    So on both of those things I think a balanced approach to 
fiscal sustainability, but also looking at the specific 
programs with the eye of trying to achieve healthier, long-term 
growth is very important.
    Mr. Welch. Thank you.
    Secretary Geithner, do you have anything to add on that? 
This is the central debate in the House, certainly.
    Secretary Geithner. The fundamental debate we have to face 
and the things that happened at the end of this year require 
Congress to confront these things, provide a huge incentive to 
deal with them now, and the choices are: how fast should we cut 
our deficit? Be careful not to do it in a way that would 
undermine the economy in the short run and the long run.
    What mix of cuts and tax increases is most appropriate for 
the long run? What should be the role of Government in helping 
support investments in infrastructure, education, high returns 
over time? And what commitments should we leave in place to our 
retiring seniors in health care and Social Security? Those are 
the things which separate us fundamentally.
    You know our approach, which is a balanced approach which 
phases in savings over time as we recover and preserves room to 
make investments in education and infrastructure so that we are 
growing over the long run, and maintains a commitment made by 
Republicans and Democrats for decades in this Country to 
guarantee our seniors a retirement security and health care 
security in their retirements. Those are things we can afford 
to do.
    Now, we can't put off these fiscal challenges indefinitely. 
Our fiscal position is unsustainable over the long run. But 
that is not an argument to go and dramatically erode the 
capacity of this Country to make the economy stronger, provide 
more opportunity over the longer run.
    Mr. Welch. Thank you.
    The Chairman. Thank you. I will now recognize myself for a 
second round. I will try to be brief and keep our promise to 
get you out of here before 12:00.
    Chairman Bernanke, you alluded to how much of our debt is 
not really on budget. If you take our on-budget debt, our 
inter-government debt, and our off-budget liabilities, 
contingent liabilities, as a percentage of GDP, roughly what is 
our debt?
    Mr. Bernanke. I would have to get back to you. I think the 
biggest component of off balance sheet is the unfunded Medicare 
liabilities, 75 years, which is a tremendous number, and more 
than $30 trillion, something like that, according to the 
Medicare trustees. That assumes essentially continuation of the 
increased costs we see in health care delivery out into the 
indefinite future.
    The Chairman. So at about 100 percent of GDP on budget we 
could be at 300 or 400 percent of GDP including what is off 
budget?
    Mr. Bernanke. As I said, if we don't make any changes to 
our current fiscal trajectory, it is definitely not 
sustainable.
    The Chairman. Well, Secretary Geithner, and I am only 
entering this subject because he brought it up, talked about 
these costs being small, but isn't it true that America already 
spends a bigger percentage of GDP than our European allies do 
on health care? In other words, we already are more generous in 
health care in the sense of what we spend. Maybe not what we 
get for our money.
    The Secretary is absolutely right, more than half of all 
health care is paid for outside of Government, but it doesn't 
mean that what is paid for in Government isn't already larger 
than what Canada pays in Government for total health care. 
Isn't that right?
    Mr. Bernanke. I am not sure about the government 
comparison, but it is true that the United States spends more 
total on health care as a share of GDP than other industrial 
countries.
    The Chairman. Well, I would like to go on looking at that 
for a couple of reasons. There has been a lot of discussion 
about austerity and this brings it back home a little bit. I am 
an Art Laffer economic model guy. I am not a Keynesian, 
clearly. But I think we can all understand, I knew that was 
good for a laugh, Peter, that all economists tend to believe 
that there is probably a sweet spot, in other words, a right 
balance of public and private spending, a right balance, and so 
on.
    As we talk about austerity in Greece or in Portugal or in 
any country and we talk about austerity here, and particularly, 
Mr. Secretary, aren't we agreeing that we are trying to get to 
the same position, whatever that sweet spot is, of promoting 
growth through not taking it all to the Government, and that we 
are only debating, when you talk about the rate of austerity, 
we are not debating where we need to get to.
    Where we need to get to so that the private sector can 
flourish is probably very similar to where we are telling the 
countries of Europe to get to, so that the difference of the 
austerity we ask for others and the austerity we need to get to 
may be about how much time we have to get there more than it is 
about what we need to achieve; isn't that true?
    Secretary Geithner. That is probably right. The fundamental 
reality, the fundamental constraint we all have to live with, 
whether you are European or American or Japanese, is you have 
to get the deficit down to a point where the debt stops growing 
as a share of the economy and starts decline, and you have to 
stabilize at a level that is acceptable.
    The Chairman. Right. And I want to follow up on that, just 
for the record.
    Secretary Geithner. But the difference, just on your first 
question, is it is partly a debate about how fast and what is 
appropriate.
    The Chairman. Right.
    Secretary Geithner. But it is also a debate about the 
composition, and the composition, if you look at what divides 
the Country----
    The Chairman. The left and the right will never agree on 
where Government should spend/invest, so we will assume that 
that part is probably very much ours.
    Chairman Bernanke, you had already, I think, provided a 
little bit of a mea culpa, and I am not going to ask for it 
again, but you put out a white paper related to the housing and 
what banks and so on should do. If you don't mind, I would like 
to follow up to a great extent in support of the Ranking 
Member. In your white paper, and, again, your representative 
from Richmond, Virginia and others may have chastised you over 
this, but since it is out there in the record, one of the 
things that was in the white paper had to do with the 
possibility that banks should essentially flip their properties 
into rentals, that that was an element.
    And the Ranking Member, very disciplined, talked about 
principal reduction. When we are looking at what is best for 
people who find themselves in homes that they could not 
originally afford, I mean, principal reduction in these low-
interest times assumes that they can no longer or could not 
when they bought the home afford what they bought.
    When we look at the potpourri of options both for Freddie 
and Fannie and FHA and for the banks in their roles, would you 
comment further for this Committee on the record to try to 
understand why these alternatives of perhaps you can't afford 
the rent for this home for a period of time, perhaps that is 
the best transition, perhaps it is best for the community, I 
think that is an element that has not been discussed, if you 
will, by the left or the right, and you did put it in your 
paper, and to the extent that it exists I would like to have it 
fully vetted.
    Mr. Bernanke. The theme was that we need to attack the 
housing issue at different points. Obviously, if we can avoid 
unnecessary and uneconomic foreclosures we should do that, and 
there are multiple ways of doing that. We didn't come down in 
favor of any specific approach. I think it depends on the 
situation.
    But what we noted was that, no matter how hard we work, and 
the Country has been working pretty hard on this issue, that 
there are going to be still a number of foreclosures that 
occur, people who lose their homes or leave their homes, 
investors who abandon their properties, and it is bad for the 
housing market, it is bad for neighborhoods, for empty houses 
to stand in a row on a street.
    So we still think that we should be looking at ways to 
avoid unnecessary and uneconomic foreclosures, but another part 
of the problem is the fact that we have got so many empty 
houses overhanging supply in the housing market, which pushes 
down prices and reduces construction.
    So there are various possible approaches to that. One of 
them is REO to rental, which we described and talked about in 
our paper. There are other things. For houses that are in bad 
condition, land banks can purchase them and perhaps bulldoze 
them if necessary.
    So our point is only that loan modifications have a role to 
play, but there is a whole number of different things that can 
be helpful in the housing market.
    The Chairman. And I will give the Ranking Member some 
additional time if he would like it, but I want to follow up 
with one more, and this is much more broadly in your purview, 
both of you.
    A number of cities, even States, have found ways to extend 
dramatically the amount of time it takes to foreclose on 
somebody that isn't paying. In Brooklyn where we were they 
basically got it out to three years, if your papers are all in 
order, between the time someone stops paying and perhaps stops 
maintaining the home and the time that the institution can take 
possession. In the case of Illinois, I am sorry the gentleman 
is not here right now, they have tried to have Freddie and 
Fannie, during the foreclosure process, which is being 
elongated, maintain the home on behalf of the homeowner who is 
not maintaining it on behalf of the community.
    I don't want to presume your answer, but would you say that 
these are probably not helpful to either the long-term credit 
market because of certainty, or to the process that we are 
trying to get beyond and get to where we have a positive market 
and positive neighborhoods? And feel free to answer as you 
think is appropriate.
    Mr. Bernanke. Well, I think delay for the sake of delay is 
not constructive. The homes deteriorate. The process drags on 
and the healing of the housing market drags on.
    That being said, obviously we have seen a lot of cases 
where servicers have not performed their due diligence where 
they have foreclosed in appropriately, et cetera, and when 
there are situations where there are questions about the 
integrity of the process then we have to take the time 
necessary to make sure that things are being done correctly.
    The Chairman. Yes. Mr. Secretary?
    Secretary Geithner. I think the chairman said it right. 
There are, of course, huge numbers of innocent victims in this 
crisis, and there are lots of people who can afford to stay in 
their homes, and you want to make sure you give them a chance 
to do it. And there are some people that have already left 
their homes or need to pursue a more affordable option, and we 
should help make that easy for them to do it.
    You want to make sure that when you foreclose that process 
has complete integrity, and so you want to have some checks and 
balances on that, but I agree with you that the process is 
taking too long in many parts of the Country, and if that could 
be sped up without compromising those other fundamental 
objectives, that would probably be better for those 
communities.
    The Chairman. Thank you.
    Mr. Cummings, a couple minutes.
    Mr. Cummings. Thank you very much.
    I want to just go back to a matter that the Chairman 
brought up on Monday in Brooklyn at our hearing and just get 
your opinion on this. We had major banks there, and we asked a 
question about how, when interest rates are lower, and let's 
say somebody has a mortgage at 6 percent now, and dare I say 
underwater, we were asking or he was asking the banks what is 
the negative side, and you can correct me if I am wrong, Mr. 
Chairman, of trying to make sure that those people are able to 
take advantage of lower interest rates?
    Do you all see that as one of the, we talked about a number 
of remedies. In other words, do you understand my question? I 
mean, I just wanted your opinion on that. It seems like a lot 
of people would fall into that category.
    Secretary Geithner. No, exactly right. That is why it is so 
important that you give people the opportunity to refinance and 
take advantage of the lower rates, and one of the most 
important things that we have done and what the head of the 
FHFA has done over the last six months is to put in place a 
much better-designed program to help people who are 
significantly underwater take advantage of lower interest 
rates, but we want that to happen on a much larger scale.
    That program is actually getting quite a lot of traction 
now. You are seeing, as you may have heard in New York, a very 
substantial increase in refinancing by people who are 
significantly underwater, and we think we are at the early 
stage of that increase, expect much more to happen.
    Now, those programs now only apply to the loans that have 
been guaranteed by Fannie and Freddie, and so we have also 
suggested that Congress consider authorizing the FHA to provide 
an additional program in that context too, just to be fair. You 
know, most people are not sure who guaranteed their loan, and 
we want to make sure those opportunities are available to 
everybody who owns a house.
    Mr. Cummings. Just one last question. One of the things 
that I looked at is this whole idea of when the banks did their 
settlement, FHFA did not bring them under those provisions for 
writing, as a matter of fact, they said we don't want to be a 
part of that. I know that you are talking to Mr. DeMarco. Was 
that a concern of yours, particularly when we have tripled the 
incentives for those kinds of things? I am just curious.
    Secretary Geithner. As I said, there is a very strong 
economic case in some circumstances, and that is why you are 
seeing private investors do it, to reduce principal for people 
who are deeply underwater but can afford to stay in their own 
and meet a reasonable payment. And that case will be equally 
compelling in parts of the people whose loans were guaranteed 
by Fannie and Freddie, and so what we are trying to do is 
encourage Mr. DeMarco, who is fully independent and has----
    Mr. Cummings. I understand that.
    Secretary Geithner.--to take another look at the evidence 
because we think there is a place for doing more in a way that 
is completely consistent with the mandate that Congress gave 
him appropriately to make sure he is protecting the interest of 
the taxpayer as he helps the housing market. So we are working 
through those numbers with him and I expect to hear some more 
in the next couple of weeks.
    Mr. Cummings. On the behalf of the many millions of 
Americans who are dealing with this issue, I would ask you to 
use your most convincing voice to try to get him to move off 
the dime.
    Thank you very much, Mr. Chairman.
    The Chairman. I thank you.
    I want to thank our witnesses. We did get you out pretty 
close to the 12:00 o'clock. You extended your willingness to 
answer far beyond the initial scope. I would only ask one more 
item. Please, the next time we invite you back, remember that 
this was a Committee that has worked a lot in areas that 
overlap, and accept our invitation, as you so graciously did 
this time.
    With that, we are adjourned.
    [Whereupon, at 12:05 p.m., the committee was adjourned.]



                                 
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