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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 

( 

Available via the World Wide Web: http://www.fdsys.gov 

http://www.house.gov/reform 

(II) 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM 

DARRELL E. ISSA, California, Chairman 

DAN BURTON, Indiana 

JOHN L. MICA, Florida 

TODD RUSSELL PLATTS, Pennsylvania 

MICHAEL R. TURNER, Ohio 

PATRICK T. MCHENRY, North Carolina 

JIM JORDAN, Ohio 

JASON CHAFFETZ, Utah 

CONNIE MACK, Florida 

TIM WALBERG, Michigan 

JAMES LANKFORD, Oklahoma 

JUSTIN AMASH, Michigan 

ANN MARIE BUERKLE, New York 

PAUL A. GOSAR, Arizona 

RAU ́ L R. LABRADOR, Idaho 

PATRICK MEEHAN, Pennsylvania 

SCOTT DESJARLAIS, Tennessee 

JOE WALSH, Illinois 

TREY GOWDY, South Carolina 

DENNIS A. ROSS, Florida 

FRANK C. GUINTA, New Hampshire 

BLAKE FARENTHOLD, Texas 

MIKE KELLY, Pennsylvania 

ELIJAH E. CUMMINGS, Maryland, Ranking 

Minority Member 

EDOLPHUS TOWNS, New York 

CAROLYN B. MALONEY, New York 

ELEANOR HOLMES NORTON, District of 

Columbia 

DENNIS J. KUCINICH, Ohio 

JOHN F. TIERNEY, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

JIM COOPER, Tennessee 

GERALD E. CONNOLLY, Virginia 

MIKE QUIGLEY, Illinois 

DANNY K. DAVIS, Illinois 

BRUCE L. BRALEY, Iowa 

PETER WELCH, Vermont 

JOHN A. YARMUTH, Kentucky 

CHRISTOPHER S. MURPHY, Connecticut 

JACKIE SPEIER, California 

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 

(III) 

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 

(1) 

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 

2 

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, offagain 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. 

3 

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 

4 

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 longterm 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. 

5 

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. 

6 

As Mr. Douglas Elliott of the Brookings Institute testified in De- cember, 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 

7 

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. 

8 

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. 

9 

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:] 

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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 ecoVerDate Aug 31 2005 11:07 Aug 06, 2012 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 C:\DOCS\75303.TXT APRIL
16 

nomic 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 

17 

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:] 

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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 

26 

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 

27 

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 

28 

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. 

29 

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 EuroVerDate Aug 31 2005 11:07 Aug 06, 2012 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 C:\DOCS\75303.TXT APRIL
30 

pean 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, 

31 

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. 

32 

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. 

33 

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 shortterm 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 debtto-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. 

34 

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 

35 

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 longterm 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, longVerDate Aug 31 2005 11:07 Aug 06, 2012 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 C:\DOCS\75303.TXT APRIL
36 

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? 

37 

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. 

38 

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 

39 

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. 

40 

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 

41 

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. 

42 

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 

43 

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 

44 

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 

45 

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 

46 

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 

47 

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 deleveraging 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 beneVerDate Aug 31 2005 11:07 Aug 06, 2012 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 C:\DOCS\75303.TXT APRIL
48 

fits, 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. 

49 

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, 

50 

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. 

51 

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. 

52 

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-toGDP 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. 

53 

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, 

54 

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 singlepurpose 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 

55 

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 

56 

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. 

57 

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. 

58 

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? 

59 

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 

60 

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. 

61 

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 

62 

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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