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FEDERAL RESERVE AID TO THE EUROZONE: 

ITS IMPACT ON THE U.S. AND THE DOLLAR 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

DOMESTIC MONETARY POLICY 

AND TECHNOLOGY 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

MARCH 27, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–111 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO R. CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

JAMES H. CLINGER, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON DOMESTIC MONETARY POLICY AND TECHNOLOGY

RON PAUL, Texas, Chairman 

WALTER B. JONES, North Carolina, Vice 

Chairman 

FRANK D. LUCAS, Oklahoma 

PATRICK T. MCHENRY, North Carolina 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

NAN A. S. HAYWORTH, New York 

DAVID SCHWEIKERT, Arizona 

WM. LACY CLAY, Missouri, Ranking 

Member 

CAROLYN B. MALONEY, New York 

GREGORY W. MEEKS, New York 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GARY C. PETERS, Michigan 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

March 27, 2012 ................................................................................................. 1 

Appendix: 

March 27, 2012 ................................................................................................. 33 

WITNESSES 

TUESDAY, MARCH 27, 2012 

Dudley, William C., President, Federal Reserve Bank of New York ................... 5 

Kamin, Steven B., Director, Division of International Finance, Board of Governors of the Federal Reserve System ................................................................ 8 

APPENDIX 

Prepared statements: 

Paul, Hon. Ron .................................................................................................. 34 

Dudley, William C. ........................................................................................... 36 

Kamin, Steven B. .............................................................................................. 43 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Paul, Hon. Ron: 

Written responses to questions submitted to William C. Dudley ................. 50 

Written responses to questions submitted to Steven B. Kamin ................... 55 

Luetkemeyer, Hon. Blaine: 

MarketWatch article by Andrea Thomas, dated March 8, 2012 ................... 57 

(1) 

FEDERAL RESERVE AID TO THE 

EUROZONE: ITS IMPACT ON THE 

U.S. AND THE DOLLAR 

Tuesday, March 27, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON DOMESTIC MONETARY

POLICY AND TECHNOLOGY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:03 a.m., in room 

2128, Rayburn House Office Building, Hon. Ron Paul [chairman of 

the subcommittee] presiding. 

Members present: Representatives Paul, McHenry, Luetkemeyer, 

Huizenga, Schweikert; Clay, Maloney, and Green. 

Chairman PAUL. This hearing will now come to order. 

Without objection, all Members’ opening statements will be made 

a part of the record. 

I will now recognize myself for 5 minutes to make an opening 

statement. 

First, I would like to thank Dr. Kamin and Dr. Dudley for appearing today to discuss a very important subject that the world 

is looking at constantly: a major debt crisis that exists around the 

world. 

It has a great deal of significance not only for world finance, but 

also for the American taxpayer and the value of the U.S. dollar, 

and indirectly, the deficits that are run up because they are all 

interconnected. 

The crisis we face right now is a crisis in debt and how we handle this debt. Who gets stuck with the debt? Who gets the bailout? 

How does the debt get defaulted on? How do you liquidate the 

debt? 

And there are different ways of liquidating debt. When you can’t 

pay the bills and you write them off the books, that is liquidating 

debt and that helps to solve the problem. 

Other times, governments and central banks participate in liquidating debt by diminishing real debt, and that is by purposely devaluing the currency and, of course, that has been used historically 

many, many times and is one of the most common ways of liquidating debt. 

So if you can devalue a currency by 50 percent, you can get rid 

of real debt by half if your prices go up. And there certainly seems 

to be a concerted effort around the world, and even within our own 

country, to handle debt in that fashion. 

2 

But in the process, the question really is: Who gets stuck with 

it? Who gets the most penalties? And if you happen to be on the 

receiving end of being too-big-to-fail and you get some benefits from 

the system, but the debt is not liquidated, it is passed on, it is 

transferred from one group of individuals to another. Nevertheless, 

it is still a pain. But it is just a matter of picking and choosing who 

will receive the most harm. 

The problem I see right now in dealing with this debt crisis is 

can the U.S. dollar and the U.S. economy and the U.S. taxpayer 

bear the burden? And this is the way it seems because now, the 

European Central Bank (ECB) is asking us to continue to do what 

we have done over these last few years, to use the dollar to actually 

bail them out. 

On paper, it looks like the balance sheet is better with the Europeans. Their assets-to-capital ratio is better than our bank. And 

yet, the dependency is for the United States to bail them out and 

it seems like it is working. 

Of course, we have the advantage of issuing the reserve currency 

of the world which has given us, in a deceptive way, some advantages over many, many decades. But the big question is: How long 

can that happen? Will we always have the benefits? Will other 

countries finally get together, as they talk about constantly, and replace the dollar? And certainly, the dollar isn’t getting to be a 

stronger reserve currency; if anything, it is getting slightly weaker. 

And someday, there may be some real challenges to the dollar, so 

there has to be a limit to this. 

We talk about the Greek crisis, which is major and significant, 

and we are dealing with it on a daily basis. This might just be the 

beginning of a much bigger crisis when you look at the different 

countries, whether it is Portugal or Spain or Italy. And this thing 

could—it is much bigger than we are willing to admit. In many, 

many ways, I think we are in denial of how serious this problem 

is. 

So we have to face up to the fact that there is a cost. I see it 

is going to be a cost against the value of the dollar. Some people 

say, ‘‘This is good. We want a weaker dollar because it is going to 

help our trade; it is going to help our exports.’’ 

And now, there are currency wars going on. All we do is complain about the Chinese having too weak a currency. At the same 

time, we triple our balance sheet and triple the monetary base. 

Now, that is deliberately trying to weaken a currency too. So 

there will be limits on that. I think we are facing that. We are up 

against the wall on this. And very soon, I think we are going to 

have to admit that you can’t solve the problem of debt with more 

debt. 

You can’t solve the problem of a weak currency by making the 

currency even weaker. You can’t solve the problem by having the 

moral hazard of a guaranteed bailout that people—there is always 

going to be a lender of last resort, and if you are too-big-to-fail, you 

are going to be taken care of. Some people may suffer, but others 

will be taken care of. 

I think there are limits. I think we are facing that. I think we 

are in denial. We won’t admit how serious it is; but I believe that 

3 

we will be forced to, not because of the politics of it as much as 

because of the economics. 

I complain about the power of governments and central banks, 

but ultimately, there are economic rules and laws—economic laws 

probably much stronger than all of us. And you can’t dictate and 

mandate forever. You can kid people for a long time. But right now, 

it is an illusion that we can trust the dollar to bail out the world. 

And soon, we are going to see the end of that and that is why many 

of us believe that the crisis is far from over and that we have to 

face up to those facts. 

Now, I would like to recognize Mr. Clay for his opening statement. 

Mr. CLAY. Thank you, Chairman Paul, and thank you for holding 

this hearing to examine the Federal Reserve’s assistance to the 

Eurozone and the effect of that assistance on the U.S. economy, 

monetary system, and the dollar. 

The focus of this hearing is to examine the Federal Reserve’s 

Central Bank’s currency swap-line arrangements with central 

banks of Europe, England, Switzerland, Japan, and Canada. 

Also, I want to thank the witnesses for appearing before us 

today. 

When the new Greek government came into power in late 2009, 

they revealed that the previous Greek government had not been reporting the budget deficit accurately. This has led to major economic challenges and concerns to other parts of Europe and the 

United States. 

The first concern is the high levels of public debt in some 

Eurozone countries. Three Eurozone major governments—Greece, 

Ireland and Portugal—have had to borrow money from the European Central Bank and the International Monetary Fund in order 

to avoid defaulting on their debt. 

Currently, the Greek government is negotiating losses on bonds 

held by private creditors. Investors have started to demand higher 

interest rates for buying and holding Italian and Spanish bonds. 

The Italian government debt is forecast to be $2.8 billion in 2012, 

which is greater than Spain, Portugal, Greece, and Ireland combined. 

The second concern is the lack of growth and the high unemployment in the Eurozone. In January of this year, the IMF downgraded its growth forecast for the Eurozone from growing by 1.1 

percent in 2012 to contracting by 0.5 percent. 

The third concern is the weakness of the Eurozone’s banking system, which holds high levels of public debt. In December of last 

year, the European Banking Authority estimated that European 

banks need about $152 billion of additional capital in order to withstand a range of shocks and still maintain adequate capital. 

The fourth concern is persistent trade imbalances within the 

Eurozone. The Eurozone core countries tend to run trade surpluses 

with the Eurozone periphery countries. And the periphery countries tend to run trade deficits with the core countries. 

To help ease the financial crisis in the Eurozone, the Federal Reserve opened the currency swap line. Under a swap line with the 

European Central Bank, the ECB temporarily receives U.S. dollars 

and the Federal Reserve temporarily receives euros. 

4 

After a fixed period of time, the transaction is reversed. Interest 

on swaps is paid to the Federal Reserve at the rate that the foreign 

central bank charges to its dollar borrower. The temporary swaps 

are repaid at the exchange rate prevailing at the time of the original swap, meaning that there is no downside risk for the Federal 

Reserve if the dollar appreciates in the meantime. 

All of these concerns have raised questions about the economic 

stability of the Eurozone countries. I look forward to the witnesses’ 

comments regarding these concerns and actions taken by the Federal Reserve Bank to address these concerns. 

And again, thank you for conducting this hearing. I yield back. 

Chairman PAUL. I thank the gentleman. 

Now, I will recognize Mr. Luetkemeyer for his opening statement. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. Over the past several years, many of my colleagues and I have expressed serious 

concerns regarding U.S. exposure to the Eurozone. 

Like many of my colleagues, my concerns have been met at times 

with cynicism and assurance of an efficient recovery with little or 

no contagion. Yet here we sit today, continuing to talk about the 

Eurozone crisis, and hearing once again that our Nation won’t be 

dramatically impacted. 

Certain scholars and fellow officials said that the crisis wouldn’t 

spread. It has now impacted several European nations with effects 

ranging from default and upheaval in Greece to bank failures and 

increased risk in the perceived financial stalwart of France. This 

hasn’t badly taken a toll on U.S. markets. I believe it has a potential to take a toll on our Nation’s economy as a whole. 

Chairman Bernanke testified recently in this committee that the 

two greatest threats to our economy are rising gas prices and the 

Eurozone problems. Secretary Geithner testified in this committee 

just last week, and seemed concerned as well about the possibility 

of a eurozone contagion, although he was optimistic things would 

work themselves out. 

Regardless of what we hear today, we are in fact exposed. Our 

financial institutions, industries, and government are all exposed, 

and as a result, so are the taxpayers. Our economies are and always will be deeply connected. It is our responsibility to ensure 

that this exposure is managed thoughtfully and to ensure that the 

U.S. taxpayers are not again on the hook for the failure of the financial institutions not only domestic but foreign as well. 

Mr. Chairman, I look forward to an enlightened discussion with 

our panel. This is an important topic and one that merits great 

transparency and attention. I thank you, and I yield back. 

Chairman PAUL. I thank the gentleman. 

Now, I would like to introduce our witnesses for today. Dr. William Dudley is the President of the Federal Reserve Bank of New 

York. Before taking over as President of the New York Fed in 2009, 

Dr. Dudley had been Executive Vice President of the Markets 

Group at the New York Fed, where he managed the System’s open 

market account for the Federal Open Market Committee. 

Prior to joining the New York Fed in 2007, Dr. Dudley was a 

partner and managing director at Goldman Sachs and company, 

and was Goldman’s chief U.S. economist for a decade. Dr. Dudley 

5 

also serves as chairman of the Committee on Payments and Settlement Systems of the Bank for International Settlements and as a 

member of the Board of Directors of the Bank for International Settlements. Dr. Dudley received his bachelor’s degree from New College of Florida and received his Ph.D. in economics from the University of California, Berkeley. 

Dr. Steven Kamin is the Director of the Division of International 

Finance for the Board of Governors of the Federal Reserve System. 

He joined the Federal Reserve System Board in 1987, and was appointed to the official staff in 1999. 

Prior to taking over the Division of International Finance in December of 2011, Dr. Kamin was Deputy Director of the Division. He 

has also served as a visiting economist at the Bank for International Settlements, a senior economist for international financial 

affairs at the Council of Economic Advisors, and as a consultant for 

the World Bank. 

Dr. Kamin received his bachelor’s degree from the University of 

California, Berkeley and received his Ph.D. in economics from the 

Massachusetts Institute of Technology. 

Without objection, your full written statements will be made a 

part of the record. You will now each be recognized for a 5-minute 

summary of your testimony. 

Dr. Dudley? 

STATEMENT OF WILLIAM C. DUDLEY, PRESIDENT, FEDERAL 

RESERVE BANK OF NEW YORK 

Mr. DUDLEY. Thank you. Chairman Paul, Ranking Member Clay, 

and members of the subcommittee, my name is Bill Dudley and I 

am the President of the Federal Reserve Bank of New York. It is 

an honor to testify today about the economic and fiscal challenges 

facing Europe and the Federal Reserve’s effort to support financial 

stability in the United States. 

Let me preface these remarks by stating that the views expressed in my written and oral testimony are solely my own and 

do not represent the official views of the Federal Reserve Board, 

the Federal Open Market Committee or any other part of the Federal Reserve System. 

Additionally, because I am precluded by law from discussing confidential supervisory information, I will not be able to speak about 

the financial condition or regulatory treatment or rating of any individual financial institution. 

The economic situation in Europe has been unsettled for the better part of 2 years with pressure on sovereign debt markets and 

local banking systems. The strains in European markets have affected the U.S. economy. 

The euro area has the capacity, including the fiscal capacity, to 

overcome its challenges. However, the politics are very difficult, 

both because the problem has many dimensions and because many 

different countries and institutions in the euro area have to coordinate their actions in order to achieve a coherent and effective policy 

response. 

Europe’s leadership has affirmed its commitment to the European Union and a single-currency union on numerous occasions. 

And the leadership is working harder than ever to achieve greater 

6 

policy coordination in areas such as fiscal policy. A more robust 

and resilient European Union would be a welcome development for 

the United States. Three recent developments are especially encouraging in that regard. 

First, liquidity concerns have eased significantly following the 

European Central Bank’s long-term financing operations in December and February. Through this program, the ECB provides 3-year 

loans to European banks at low rates, accepting a wider range of 

collateral in return. 

Second, earlier this month the Greek government worked with 

European leaders and its largest creditors to restructure the bulk 

of its 206 billion euros of outstanding privately held bonds. This 

not only helped reduce Greeks’ total indebtedness, it also helped 

calm persistent worries that a disorderly Greek default could become the trigger for a global economic crisis. 

Third, leaders in most euro-area countries have approved a new 

treaty designed to increase fiscal coordination. The new rules already appear to be making a difference. While difficult work still 

lies ahead, countries in the euro area have made meaningful 

progress towards achieving long-term fiscal sustainability. 

Looking to the future, the difficult work that remains also presents special risks, both for Europe and for the United States. If 

Europe fails to chart an effective course forward, this could have 

a number of negative implications here. In particular, there are 

three areas of potential risk that I would like to highlight for the 

subcommittee today. 

First, if economic conditions in Europe were to weaken significantly, the demand for U.S. exports would decrease. This would 

hurt domestic growth and have a negative impact on U.S. jobs. It 

is important to recognize that the euro area is the world’s second 

largest economy after the United States, and it is an important 

trading partner for us. Also, Europe is a significant investor in the 

U.S. economy and vice versa. 

Second, deterioration in the European economy could put pressure on U.S. banking systems. As the recent round of stress tests 

reveals, U.S. banks are much more robust and resilient than they 

were a few years ago. They have bolstered their capital significantly, built up their loan loss reserves, and have significantly 

higher liquidity bumpers. 

The good news in the United States means that we are better 

able to handle bad news from Europe. With that said, the exposures of U.S. banks climb sharply when one also considers their exposures to the core European countries and to the overall European 

banking system. 

Third, severe stresses in European financial markets would disrupt financial markets here, which could harm the real economy. 

Stress in the financial markets causes banks to more carefully husband their balance sheets. When that phenomenon occurs, the 

availability of credit to U.S. households and businesses becomes 

constrained. 

Such conditions could also cause equity prices to fall, impairing 

the value of American pension and 401(k) holdings. This would 

damage the U.S. recovery and result in slower output growth and 

7 

less job creation. At a time when the U.S. employment rate is very 

high, this is a particularly unacceptable outcome. 

In the extreme, U.S. financial markets could become so impaired 

that the flow of credit to households and businesses could dry up. 

In today’s globally integrated economy, banks headquartered 

abroad play an important role in providing credit and other financial services in the United States. About $1 trillion in worldwide 

dollar financing comes from foreign banks; $700 billion in the form 

of loans within the United States. 

For these banks to provide U.S. dollar loans, they have to maintain access to U.S. dollar funding. At a time when it is already 

hard enough for American families and businesses to get the credit 

they need, they have a strong interest in making sure these banks 

continue to be active in the U.S. dollar markets. 

It is in our national interest to make sure that non-U.S. banks 

remain able to access the U.S. dollar funding that they need to be 

able to continue to finance their U.S. dollar assets. If access to dollar funding were to become severely impaired, this could necessitate the abrupt forward sales of dollar assets by these banks, 

which could seriously disrupt U.S. markets and adversely affect 

American businesses, consumers, and jobs. 

One way we can help to support the availability of dollar funding 

and ensure that credit continues to flow to American households 

and businesses is by engaging in currency swaps with other central 

banks. Such swaps are a policy tool that the Federal Reserve has 

used to support dollar liquidity for nearly 50 years. 

More recently, the Federal Reserve established dollar-swap lines 

with major central banks during the global financial crisis of 2008, 

and reactivated them in May 2010. The swaps are intended to create a credible backstop to support but not supplant private markets. Banks with surplus dollars are more likely to lend to banks 

in need of dollars if they know that the borrowing bank will be able 

to obtain the dollars it needs to repay the loan if necessary from 

its central bank. 

Our principal aim is to protect U.S. banks, businesses, and consumers from adverse economic trends abroad. I am pleased that 

the swaps seem to be working. In conjunction with ECB’s long-term 

refinancing operations, the swaps have helped European banks 

avoid the significant liquidity pressures we feared a few months 

ago. And they have reduced the risks that they would need to sell 

off their U.S. dollar assets abruptly. 

In conclusion, I am hopeful that Europe can effectively address 

its current fiscal challenges. The Federal Reserve is actively and 

carefully assessing the situation and the potential impact on the 

U.S. economy. 

At this time, although I do not anticipate further efforts by the 

Federal Reserve to address the potential spillover effect of Europe 

on the United States, we will continue to monitor the situation 

closely. 

Thank you for your invitation to testify today and I look forward 

to answering your questions. 

[The prepared statement of Dr. Dudley can be found on page 36 

of the appendix.] 

Chairman PAUL. Thank you, Dr. Dudley. 

8 

Dr. Kamin? 

STATEMENT OF STEVEN B. KAMIN, DIRECTOR, DIVISION OF 

INTERNATIONAL FINANCE, BOARD OF GOVERNORS OF THE 

FEDERAL RESERVE SYSTEM 

Mr. KAMIN. Thank you, Chairman Paul, and members of the subcommittee, for inviting me to talk about the economic situation in 

Europe and actions taken by the Federal Reserve in response to 

this situation. 

In the past several months, European authorities have provided 

additional liquidity to banks, bolstered bank capital requirements, 

developed rules to strengthen fiscal discipline, and explored means 

of enlarging the euro-area financial backstop. 

Stresses in financial markets have eased, but these markets remain under strain. The fiscal and financial strains in Europe have 

spilled over to the United States by restraining our exports, depressing confidence, and adding to the pressure on U.S. financial 

markets. 

Of note, foreign financial institutions, especially those in Europe, 

have found it more difficult to borrow dollars. These institutions 

make loans to U.S. households and firms as well as to borrowers 

in other countries who use those loans to purchase U.S. goods and 

services. 

While strains have eased somewhat of late, difficulties borrowing 

dollars by European institutions may make it harder for U.S. 

households and firms to get loans and for U.S. businesses to sell 

their products abroad. Moreover, these disruptions could spill over 

into U.S. money markets, raising the cost of funding for U.S. financial institutions. 

To address these risks to the United States, on November 30th, 

the Federal Reserve announced, jointly with the European Central 

Bank or ECB, and the central banks of Canada, Japan, Switzerland, and the United Kingdom that it would revise, extend, and expand its swap lines with these institutions. 

The measures were motivated by the need to ease strains in global financial markets which, if left unchecked, could impair the supply of credit to households and businesses in the United States and 

impede our economic recovery. 

Three steps were described in the announcement. 

First, we reduced the pricing of the dollar swap lines from a 

spread of 100 basis points over the overnight index swap rate to 

50 basis points over that rate. This has enabled foreign central 

banks to reduce the cost of the dollar loans they provide to financial institutions in their jurisdictions. This, in turn, has helped alleviate global financial strains and put foreign institutions in a better position to maintain their supply of credit, including to U.S. 

residents. 

Second, we extended the closing date for these lines from August 

1, 2012, to February 1, 2013, demonstrating that central banks are 

prepared to work together for a sustained period to support global 

liquidity conditions. 

Third, we agreed to establish swap lines in the currencies of 

other participating central banks. These lines would allow the Federal Reserve to draw foreign currencies and provide them to U.S. 

9 

financial institutions on a secured basis. U.S. financial institutions 

are not experiencing any foreign currency liquidity pressures at 

present, but we judged it prudent to make such arrangements 

should the need arise in the future. 

Information on the swap lines is fully disclosed on the Web sites 

of the Federal Reserve Board and the Federal Reserve Bank of 

New York. I also want to underscore that the swap transactions 

are safe and secure. 

First, the swap transactions present no exchange rate or interest 

rate risk because the terms of each drawing and repayment are set 

at the time the draw is initiated. 

Second, each drawing on the swap lines must be approved by the 

Fed, providing us with control over the use of the facility. 

Third, the foreign currency held by the Fed during the term of 

the swap provides an important safeguard. 

Fourth, our counterparties are the foreign central banks, not the 

private institutions to which the central banks lend. The Fed’s history of close interaction with these central banks provides a track 

record justifying a high degree of trust and cooperation. 

Finally, the short tenor of the swaps means that positions could 

be wound down relatively quickly were it judged appropriate to do 

so. Notable, the Fed has not lost a penny on these swap lines since 

they were established in 2007. In fact, fees on these swaps have 

added to the earnings that the Fed remits to taxpayers. 

To conclude, following the changes that we made to our swap line 

arrangements last November, the amount of dollar funding for the 

swap lines increased substantially. Subsequently, as measures of 

dollar funding costs declined, usage of the swap lines has fallen 

back. 

Ultimately, however, a sustained further easing of financial 

strains here and abroad will require European authorities to follow 

through on their policy commitments in the months ahead. We are 

closely monitoring events in Europe and their spillovers to the U.S. 

economy and financial system. 

Thank you, again, for inviting me to appear before you today. I 

would be happy to answer any questions you may have. 

[The prepared statement of Dr. Kamin can be found on page 43 

of the appendix.] 

Chairman PAUL. Thank you, Dr. Kamin. 

I will start off with the questioning. 

For Dr. Dudley, I wanted to see if we could start off by seeing 

if we could agree with what the problem is—in my opening statement, I emphasize that the debt is the problem; that we are in a 

worldwide debt crisis. 

Do you generally agree with that and how serious to you think 

it is? 

Mr. DUDLEY. I think you are certainly correct that there is a 

question of debt sustainability in Europe in terms of the fiscal 

budget deficit path for some countries—not all countries, some 

countries—and there is also—and that is also implicated some of 

the European banks to have large exposures to that sovereign debt. 

And so what is important is that these countries have an opportunity to undertake the fiscal consolidations that they need to demVerDate Nov 24 2008 17:45 Aug 14, 2012 Jkt 075083 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\75083.TXT TERRIE
10 

onstrate to the market that they can actually be on a sustainable 

path. 

ECB’s long-term refinancing operations and, I think, the dollar 

swaps have helped create some time for this to take place, but for 

this to work out well, these countries still have to take the appropriate steps. 

Chairman PAUL. So far, if we date the crisis back to 2008 and 

2009, and if it was a debt crisis that was a problem, if you look 

at everybody’s debt, it is exploding, including ours. How do you 

solve the problem of debt with exponentially increasing the debt? 

It seems like our problems are just compounded. 

How do you get around to either stop accumulating more debt or 

do you believe you have to liquidate debt? Some people believe you 

have to get rid of the debt in order to get growth again because the 

debt will consume us and interest rates are bumping up already. 

And as I said in my opening statement, the Fed will have some 

ability to manipulate interest rates in the economy, but ultimately, 

the economic laws are pretty powerful, so interest rates are liable 

to go up. 

So how can we solve the problem of debt with more debt, and 

what is your opinion of liquidating that? Is that important? 

Mr. DUDLEY. I think that you are right, obviously, more debt 

does not solve the problem of too much debt. I think the good news 

in the United States, and I will speak about the United States, is 

that there has actually been a significant amount of deleveraging 

that has taken place among U.S. households over the last few 

years. 

Debt-to-income ratios have come down. Debt service relative to 

income has come down. So U.S. households, I think, are in significantly better shape than they were a few years ago. 

The second area where we see a pretty big change in terms of 

deleveraging of the United States is in the state of health of the 

U.S. banking system. U.S. banks, compared to 5 or 6 years ago, 

have much more capital and much bigger liquidity buffers. 

So while I think it is too soon to say that the deleveraging process in the United States is over, we have made a considerable 

amount of progress in working our way out of the problems that 

we faced in 2007 and 2008. 

Chairman PAUL. But isn’t it true that mortgage debt is still on 

the books? It has been transferred; maybe the Fed owns that debt. 

We don’t even know what the real value is of most of it. 

And banks still hold some mortgage debt and it might be at a 

nominal value so in that sense of that debt being liquidated, maybe 

some individuals have straightened out their bank accounts, but 

there are still millions of people—if they really were improving, 

they could make their payments again, but debt is still the problem. 

You say that some are deleveraged, but has there been any real 

liquidation of debt when it comes to mortgage and the derivatives 

because governments are involved in that—either the Central Bank 

or some of our programs are involved. It seems like none of that 

has been deleveraged. If anything, that looks like it is getting 

worse. 

11 

Mr. DUDLEY. On the mortgage front, there has been some 

deleveraging, because banks have taken mortgage losses. Also, in 

certain cases, especially among private holders of mortgage debt, 

there has been some principal forgiveness, principal reductions. 

So you have actually seen, for example, last year, total household 

debt outstanding, according to the flow of funds, which is the 

broadest measure of household credit, was roughly flat last year; 

so nominal GDP was growing. Debt that was held by households 

was flat. So you are actually seeing the debt burden become less 

overwhelming. 

Chairman PAUL. Yes. The promises that we made and the involvement we have with Europe that our finances are so good with 

our debt and our dollar that we have been standing and saying, 

‘‘Yes, we will be there.’’ 

The Chairman of the Fed has said, ‘‘We are not ignoring this. If 

necessary, we have been there before, we will be back again.’’ 

What is the limit to this? What is the limit to us making these 

promises that we can always be available? Isn’t there a limit to 

what the dollar will sustain? 

Won’t it eventually have to stop or do you think we can do this— 

if another crisis hits and there is a big downturn, and you have to 

inject trillions of dollars again, what is the limiting factor to the 

dollar and the United States economy bailing out the world? 

Mr. DUDLEY. I think that, from my perspective, we want to make 

the decisions based on what is in our self-interest, what is best for 

U.S. households and businesses. 

And, in that calculation, if we decide that intervention can help 

U.S. household and businesses, at higher benefits than cost, then 

we want to proceed. If we don’t reach that calculation, if we think 

that there is too much risk involved in the program or that the program is going to lead to moral hazard and is going to be counterproductive, then we don’t want to undertake it. 

So I don’t think that the Federal Reserve has made any decisions 

about what future interventions we would or would not do, except 

that we will do interventions that are consistent with our dual 

mandate, as set by Congress, to achieve maximum employment and 

price stability, sustain financial stability in the United States, and 

do what is best for households and businesses here. 

That is why we are doing this program; not for Europe, but for 

ourselves. 

Chairman PAUL. Dr. Kamin, did you want to make a comment? 

Mr. KAMIN. Yes, do you mind? Could I add a few words, Chairman Paul? 

Just to add to the comments that President Dudley made—our 

purpose in the swap lines, in particular, is not to, in some sense, 

fully back or to make whole all the debts that have accumulated 

around the world. That is very far from our purpose. 

Our key strategy and our key intent in this regard is to make 

sure that foreign financial institutions could maintain the flow of 

credit, both to U.S. households and firms, and to firms and households around the world that in turn buy U.S. goods and services. 

So the intent was mainly to help alleviate the liquidity pressures 

that could lead these foreign institutions to wind down their assets 

too quickly, and thus injure the U.S. recovery. 

12 

Thank you. 

Chairman PAUL. Thank you. 

Mr. Clay? 

Mr. CLAY. Thank you, Chairman Paul. 

Let me follow Chairman Paul’s line of questioning. 

Dr. Dudley, in your opening statement you mention that severe 

stress in European markets will create stress in the U.S. economy. 

Are we that tied to the European economy and that married to that 

system that it would have that kind of reaction, a chain reaction? 

Mr. DUDLEY. I think we live in a global economy, and what happens in the other big economies of the world definitely affects us. 

As I noted in my testimony, there are sort of three channels by 

which Europe could affect us in a negative fashion. One, if the European economy is in recession or very weak, that is going to reduce the demand for our exports. So that has effects on U.S. production and employment here in the United States. 

Two, if Europe were to be in a difficult position, and the European banking system were to worsen, that would have consequences for U.S. banks that have exposure to the European 

banks. 

And three, if Europe were to perform badly, that would have negative effects on financial markets around the world. And that 

would have implications for our financial markets, and therefore, 

investment and growth here in the United States. 

So there are definitely significant channels by how Europe can 

affect the United States. 

Mr. CLAY. Dr. Dudley, have actions taken by the Federal Reserve 

regarding the currency swap line arrangements been beneficial or 

detrimental to the U.S. economy? 

Mr. DUDLEY. We think that the swap lines have had their desired effects, because they have basically given a source of a backstop to other sources of funding to European banks. So as a consequence of them having this backstop available, if they were to 

need it, they don’t have to be as fearful about their ability to obtain 

funding. And therefore, they can manage their dollar loans to U.S. 

businesses and households in a more orderly fashion. 

We follow the activities of European banks in the United States 

through their U.S. branches and subsidiaries, and they are definitely reducing their exposure in the United States. But I think because of the dollar swaps, this is happening in an orderly way, 

rather than a disorderly way. 

And so, we don’t see that their reduction in the business that 

they are doing in the United States is having any damaging effects 

on the U.S. economy, which is really what our goal is; to prevent 

any damaging effects on the U.S. economy. 

Mr. CLAY. Okay. 

Dr. Kamin, would you like to add something? 

Mr. KAMIN. Yes, thank you, if I could just add to those remarks. 

Over the past couple of years, as the crisis in Europe has progressed, we have seen several periods when the financial situation 

in Europe deteriorated fairly dramatically. And during those periods, we could see some very obvious spillovers to financial markets, 

both in the United States and around the world. 

13 

During those periods of deterioration, investors became worried, 

and around the world they retreated from assets they perceived to 

be more risky. And what that led to, both in Europe and the 

United States and elsewhere, was sharp declines in stock prices, 

increases in interest rates line of credits, and other developments 

that were associated with retreats from risk and flights to quality. 

So, we have seen those episodes very clearly. 

Now, more recently, since we changed the pricing of our swap 

lines, since the ECD introduced many measures to add liquidity to 

banks, and since European leaders have taken other actions, we 

have seen financial conditions in Europe—this is more or less since 

December—improve quite markedly. And that has been an important contributing factor to the improvement to the tone in financial 

markets in the United States. So those connections are definitely 

there. 

Mr. CLAY. Dr. Kamin, share with us the effects that the rise in 

gasoline prices around the world and in the United States—what 

effects will this rise in gas prices have on the economies of Europe 

and the United States? 

Mr. KAMIN. The effects that higher oil prices will have on both 

the United States and on Europe are, in broad qualitative terms, 

relatively similar. Both broad economies import oil. There is a 

greater dependence on imported oil in Europe than in the United 

States, but both do. 

So, when oil prices rise, that acts as a tax on consumers of oil 

in both countries. And as a result, that diminishes the purchasing 

power that consumers in those counties have to basically spend on 

other goods. So, it basically acts as a brake on economic recovery 

and all else being equal, may make it more difficult to create jobs. 

In addition to the effects on unemployment and economic activity, increases in oil prices have the effect of raising at least some 

portion of the consumer basket of prices. As long as oil prices will 

continue to rise, that should lead to a temporary increase in inflation. But that also poses concerns. 

So obviously, recent increases in oil and gasoline prices are something that we monitor very carefully. 

Mr. CLAY. Thank you. 

And my time is up. 

Chairman PAUL. I thank the gentleman. 

Now, I recognize Mr. Luetkemeyer from Missouri. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Gentlemen, correct me if I am wrong, but I believe that the swap 

dollars that are—I guess euros—that are on the other end with the 

European Central Bank, they secure those, do they not, whenever 

they loan them back out on their other end? 

And would you agree that there is a problem from the standpoint 

that what we have been told and what we find recently is they are 

taking a little more exposure, a little more risk, with some of the 

investments that they are taking as collateral for those? Would 

that be a fair statement? 

Mr. DUDLEY. They have broadened out the collateral eligibility, 

but they also have significant haircuts for that collateral. So, they 

take more collateral than the value of the money that they are actually lending out. 

14 

Mr. LUETKEMEYER. Instead of one-to-one, it may be two-to-one, 

as they take additional collateral? 

Mr. DUDLEY. They adjust for what they perceive to be the quality 

of the collateral. 

Mr. LUETKEMEYER. Because I know that former executive board 

member Juergen Stark recently said that the balance sheet of the 

ECB is not only gigantic in dimension, but also alarming in its 

quality. Would you agree with that statement? 

Mr. DUDLEY. I don’t have enough information to assess the quality of the ECB balance sheet. But my dealings with the ECB suggest that they are quite prudent in terms of how they run their operations. 

Mr. LUETKEMEYER. Yes, but aren’t you one of the leading experts 

on swaps between the United States and Europe? 

Mr. DUDLEY. But I do not conduct the daily operations of the 

ECB in lending money to their banks, versus collateral that they 

take. 

Mr. LUETKEMEYER. Okay. 

One of the concerns that I have is with regard to the quality of 

the economies over there. We keep talking saying, ‘‘They have 

dodged the bullet. They are getting better. They are improving.’’ 

And yet, we see, and we had Secretary Geithner here just last 

week, and he acknowledged that the European continent as a 

whole is still struggling. I think the comment was made in testimony today that it is a negative position as far as the growth of 

the economy yet. Greece is probably 4/10ths or 4 percent negative 

growth. 

It is fine to sit here and go through a workout and restructure 

your debt, but if you don’t have the ability to repay it, because you 

don’t have an economy that grows fast enough to repay it, what do 

you have? I think we have to look at the revenue side. 

We may be able to restructure the debt so that it can work. But 

if you don’t have enough cash flow, enough revenue coming in, we 

are still in trouble. Where do you see that going? 

Mr. DUDLEY. I certainly accept your observation that the European economy is very weak, and that weakness is going to persist 

for a while as these governments engage in further fiscal actions 

to get their budget deficits on a sustainable course. 

But that fact I think in no way creates risk for us in terms of 

our swap agreements with the European Central Bank. We think 

we are very well secured in those transactions. We fully anticipate 

being fully repaid. 

During the depths of the financial crisis in 2008 and 2009, a far 

worse economic environment than the one in which we are today, 

with far greater amounts of swaps outstanding, we were fully repaid. We didn’t lose a penny. In fact, the total profit to the U.S. 

taxpayers for the swaps that were engaged in during that period 

was about $4 billion of profit to the U.S. taxpayer. 

Mr. LUETKEMEYER. The point I am getting to, though, is if you 

have weak collateral for the European Central Bank swap lines 

and their economy is not going anywhere, that even gets—to me, 

that makes the debt that is—or the collateral that is securing that 

line—even weaker. 

15 

And so therefore, whether we may have two-to-one or three-toone, if you have nothing supplying—you have 2 or 3 times nothing 

securing the debt, that is pretty concerning to me. 

Quick question for you—do you think that the swap lines enhance the dollar as the world reserve currency, or do you think it 

hurts it? 

Mr. DUDLEY. I think— 

Mr. LUETKEMEYER. I would like a comment from both of you, 

please. 

Mr. DUDLEY. I don’t think it is a major factor, but I think at the 

margin it probably enhances the dollar as a reserve currency. In 

other words, the fact that the Federal Reserve is willing to engage 

in dollar swaps probably makes people more comfortable to use the 

dollars to finance international transactions around the world. 

I don’t think this is a major factor though in terms of why we 

are engaging in swaps, or should be a major factor in terms of why 

we are engaging in swaps. I think the main reason why we are engaging in swaps is we don’t want European banks to quickly exit 

their dollar lending business here in the United States, with that 

exit causing harm to U.S. households and businesses. 

Mr. LUETKEMEYER. Dr. Kamin? 

Mr. KAMIN. If I could add to that, clearly, key factors that are 

underpinning the dollar’s status as a global reserve currency are 

the breadth and depth of U.S. financial markets. And in particular, 

including but not limited to the status of U.S. Treasuries. All that 

is underpinned by the vitality of the U.S. economy and its consistent record of being able to innovate and grow. 

The purpose of the swap lines is ultimately focused on continuing 

to preserve the vitality of the American economy and by making 

sure that foreign financial institutions have the funding they need 

to continue the flow of credit to American households and firms. 

Insofar, then, as the swap lines can contribute to the continued 

vitality, the continued recovery of the U.S. economy, it undoubtedly 

is a plus as far as the dollar’s reserve status. Although, as President Dudley has pointed out, it is probably one of many factors and 

not necessarily the most important. 

Mr. LUETKEMEYER. Okay. Thank you very much. I see my time 

has expired. 

Thank you, Mr. Chairman. 

Chairman PAUL. Thank you. 

I now recognize the gentlelady from New York, Mrs. Maloney. 

Mrs. MALONEY. Thank you. 

I want to welcome both of the panelists, particularly Dr. William 

Dudley, who is the President of the Federal Reserve Banks of New 

York. So welcome, Dr. Dudley. 

And I would like to begin questioning by asking you, regarding 

the Federal Reserve’s foreign exchange swap lines, can you tell me 

what your track record has been with these programs? Have they 

been successful? Have there been any losses to the taxpayers? 

Have there been any gains for the taxpayers; and if so, how much? 

And welcome. 

Mr. DUDLEY. Thank you. 

Mrs. MALONEY. Thank you for your service, both of you. Thank 

you. 

16 

Mr. DUDLEY. Thank you, Congressman Maloney. The track 

record is excellent, in two dimensions. One, the swap lines that we 

have engaged with have accomplished the goal that we set for 

them, which is basically to support U.S. financial markets and ensure the flow of credit to U.S. households and businesses. 

And two, we have managed to do so in a way that has been extraordinarily safe. As I noted earlier, there have been no losses on 

any swap programs that we have ever engaged in, going back to 

1962; and in terms of the swaps that we enacted during the financial crisis in 2008 and 2009 and ongoing, total profits for the taxpayers of about $4 billion. 

So no losses, profit for the taxpayers; has had the beneficial effect that we wanted in terms of supporting the financial system 

and supporting the flow of credit to U.S. households and businesses. So I think that they have worked very well. Thank you. 

Mrs. MALONEY. Thank you very much. 

And I would like to ask Dr. Kamin about a statement that Treasury Undersecretary Brainard has stated; that the Administration’s 

position in Europe is not to seek additional funding for the IMF. 

And to quote her directly, she said, ‘‘The challenge Europe faces is 

within the capacity of the Europeans to manage.’’ 

Europe accounts for roughly 16 percent of our exports; in my 

opinion, and correct me if I am wrong, accounting for the stabilization of many jobs here in the United States, probably thousands of 

jobs. What occurs abroad is going to have a direct effect on the recovery here at home in the United States. 

Do you believe the stabilization of European markets is critical 

to our economic recovery here at home, making systems like the 

Federal Reserve foreign exchange swap lines crucial? 

Mr. KAMIN. Thank you, Congresswoman Maloney. 

In response to your questions, first of all, I absolutely agree that 

it is critical that the Europe financial and economic situation be 

stabilized. As you have pointed out, Europe is a major trading partner of the United States. And as we discussed earlier, its financial 

conditions in Europe are highly intertwined with those in the 

United States. 

So a stabilization of the European situation really is very important, both for the United States financial conditions as well as the 

continued growth of exports and the real economy, and thus jobs. 

Now, as regards the issue of IMF policy, the Treasury Department 

is our liege on that, on the issue of IMF policy, so I can’t speak directly to their statements. 

But I will note, as Treasury officials have noted as well, as well 

as Federal Reserve officials, that Europe is a very—the euro area 

is a very large and comparatively wealthy economy relative to 

many others in the world. And they do have very many substantial 

resources that could be brought to bear on their situation. And so 

it is critical for them to do so. Thank you. 

Mrs. MALONEY. Thank you. 

And Dr. Dudley, I would like to ask you, as countries and international markets form individual firewalls to stave off residual financial distress, are we always and likewise creating firewalls 

through various other areas in policies involving capital and liquidVerDate Nov 24 2008 17:45 Aug 14, 2012 Jkt 075083 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\75083.TXT TERRIE
17 

ity requirements that could have an effect on our economy here in 

the United States? 

Mr. DUDLEY. We think it is very important to have a financial 

system that is resilient and robust. And towards that end, Congress, the Administration, and the regulatory community in the 

United States have been working hard to bolster the capital and 

liquidity among U.S. financial firms. 

I have to say that we are in much better shape than we were 

a few years ago in both those regards. And I think that is good 

news because it means that if there are shocks emanating from 

abroad or emanating in the United States, that U.S. banks are in 

much better shape to absorb those shocks and to continue to function and supply credit to U.S. households and businesses. 

Mrs. MALONEY. Could I ask for an additional 10 seconds? 

Do you believe that we should do everything we can to contain 

the European crisis, to ensure that there is no spillover here in the 

United States, and to stabilize that region and our own economy? 

Yes or no? 

Mr. DUDLEY. I think we should do everything that is prudent to 

stabilize the European economy. Obviously, we should do what is 

in our self-interest in terms of what is best for the United States; 

and all our policies are enacted through that prism. 

Mrs. MALONEY. Okay. 

Dr. Kamin? 

Mr. KAMIN. Yes. That was exactly my thought. Definitely everything that is prudent and appropriate. 

Mrs. MALONEY. Okay. Thank you. 

I yield back. Thank you, Mr. Chairman. 

Chairman PAUL. Thank you. 

Did Mr. Luetkemeyer have a unanimous consent request? 

Mr. LUETKEMEYER. Yes, Mr. Chairman. I would like to ask unanimous consent to place in the record the article which I referred to 

this morning. It is a MarketWatch article by Andrea Thomas with 

regards to the comment of executive board member Juergen Stark. 

Chairman PAUL. Without objection, it is so ordered. 

Mr. LUETKEMEYER. Thank you, sir. 

Chairman PAUL. I now recognize Mr. Schweikert from Arizona. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. Congressman 

Luetkemeyer stole one of the number-one questions I was interested in pursuing, and that was the credit quality of what is being 

pledged. 

Can I get into something that is a little more conceptual? But 

this one actually really does bother me. 

I am trying to get my head around the interconnectivity of euroyen, euro’s relationship to Singapore. And ultimately, as we are 

providing interlocking swap facilities, what happens when the debt 

cascade happens somewhere else in the world? Does that cascade 

end up tagging Europe, which tags us? 

And how much ultimately is there in true net reserves in central 

banks around the world when you start looking at the net borrowing compared to the net savings countries? Dr. Kamin, I would 

love it if you would start with that one. 

Mr. KAMIN. Thank you. I will be happy to. 

18 

So to start with, as we have come to recognize only too well, we 

have a very globalized financial system. And disturbances that 

occur in one part of the world are transmitted around the world 

through numerous channels and through numerous markets. 

That was quite evident during the global financial crisis of 2008 

and 2009. And we have seen it more recently with the European 

fiscal and financial crisis as deteriorations there— 

Mr. SCHWEIKERT. Can I beg of you to pull the microphone a little 

closer to you? 

Mr. KAMIN. Thank you. We have seen it more recently during the 

European financial crisis in the last couple of years. So— 

Mr. SCHWEIKERT. And almost to the—what I am somewhat hunting is I have been tracking some data coming out of Japan, and 

there are some very worrisome signs in the net debt. How does 

that play into this interconnectivity? 

Mr. KAMIN. What we have seen, then, is that in situations that 

occur like this, some dollar-funding problems, which is to say problems with banks getting funding in dollars in order to continue 

their flow of financing, they tend not to basically stay in one part 

of the world. There is a very easy capacity for those problems to 

spill out all over the world. 

And it was in large part for that reason that we didn’t just establish the swap lines with the ECB. We also established them with 

central banks around the world so that problems as they arose in 

different parts of the world could be addressed. 

And as is evident from the data on the swap lines that we publish on our Web site, the take-up of these swap lines, in other 

words the distribution of funds to institutions in different regions, 

has not been limited exclusively to the euro area, although that is 

where most of the money has gone. 

Mr. SCHWEIKERT. Dr. Dudley? 

Mr. DUDLEY. I certainly agree with Dr. Kamin’s answer to that. 

The world is very interconnected, and problems in one part of the 

world can definitely have ripple effects through the other parts of 

the world. 

That is why we did set up these swap lines with five central 

banks rather than just the European Central Bank. And there are 

some draws on those swap lines from some of these other central 

banks. 

Mr. SCHWEIKERT. Dr. Dudley, as to that concept, help me get my 

head around it. 

Considering the nature of our balance sheets today after the 

2008 crisis, both Europe and the United States, some of our partners in Japan, around other places in the world, if today Europe— 

this became a very hard recession and we had something like the 

Tequila Crisis from 15 years ago or some sort of cascade out there, 

do we have enough capacity, particularly if we also had different 

regions of the world competing for access to those swap lines? Do 

you believe our balance sheets are capable of stabilizing? 

Mr. DUDLEY. It is hard to know what would happen in a given 

scenario, so it is hard to speculate. 

One thing that I think is important though is that the foreign 

countries around the world are a bit better protected themselves in 

terms of sharp changes in capital inflows to capital outflows in the 

19 

sense that they have very large foreign exchange reserves compared to what they had 20 or 30 years ago. 

So, the ability of countries to bear a reversal from capital inflows 

to capital outflows is much better generally around the world than 

it was 20 or 30 years ago. 

And part of that is my concern over the interest-rate spike, particularly with our net debt coverage; the interest rate spike and 

where our WAM is on our U.S. sovereign debt. A couple of years 

of higher interest rates would be devastating budget-wise. So, I am 

fearful of a cascade somewhere else truly affecting us. 

Mr. SCHWEIKERT. I talked in a recent speech about debt service 

problems for the United States that are not really visible yet because U.S. interest rates are so low. 

And if the United States does not get its fiscal house in order 

over the medium term, there is a chance that U.S. interest rates 

will rise. And that debt interest burden on the U.S. fiscal position 

will become quite significant. So, this is just another reason why 

the United States does need to get its fiscal house in order over the 

medium to longer term. 

Thank you for your tolerance, Mr. Chairman. Thank you. 

Chairman PAUL. I thank the gentleman. 

Now, I recognize the gentleman from North Carolina, Mr. 

McHenry. 

Mr. MCHENRY. Thank you, Mr. Chairman. 

And thank you both for being here. We had a similar hearing in 

my subcommittee of the Committee on Oversight and Government 

Reform. And the times have changed slightly in the last couple of 

months, so I do want to touch on some of the things that I raised 

then, just to see if things have changed. 

Dr. Dudley, can you explain under what circumstances the Fed 

would consider purchasing European sovereigns directly? 

Mr. DUDLEY. The Federal Reserve has a small foreign exchange 

reserve portfolio that we manage for ourselves and for Treasury. 

And so we do actually own a very small amount of European sovereign debt as part of that foreign exchange reserve portfolio. 

With the exception of that portfolio, which we periodically roll 

over maturing securities, I think the bar, as I said in our hearing 

a few months ago, was extraordinarily high for the Federal Reserve 

to actually go out and buy foreign sovereign debt for its own portfolio apart from these very small foreign exchange reserves holdings that we have. 

Mr. MCHENRY. So, roughly what dollar amount do we have? 

Mr. DUDLEY. I think it is on the order of $20 billion, $25 billion 

total. It consists of cash, sovereign debt of a couple countries, and 

then there are some reversed repurchase agreements where we basically have executed against dealers and taken— 

Mr. MCHENRY. So, for context— 

Mr. DUDLEY. It is a tiny—and it is based— 

Mr. MCHENRY. $25 billion to what of your total holdings, just so 

we have— 

Mr. DUDLEY. The total portfolio is about almost $3 trillion, not 

quite $3 trillion. 

Mr. MCHENRY. Okay. So, it is de minimis— 

20 

Mr. DUDLEY. It is de minimis and it hasn’t changed in size or 

composition over— 

Mr. MCHENRY. Do you have statutory authority to expand that? Could you ramp it up to $500 billion? 

Mr. DUDLEY. We have legal authority under the Federal Reserve 

Act to buy foreign sovereign debt. I don’t see the circumstances 

under which we would ever be willing to do that, except with the 

exception of managing this foreign exchange reserve portfolio. 

Mr. MCHENRY. Okay. Now, in terms of the long-term refinancing 

operation the European Central Bank has undertaken with the 3- 

year notes, in essence it looks similar in concept to TARP, doesn’t 

it? 

Mr. DUDLEY. It is a little different in the sense that TARP was 

money that Congress appropriated and then was used by the 

Treasury as capital to put into banks or put into other entities to 

recapitalize them. 

The long-term refinancing operation is a loan from the European 

Central Bank to its banks against collateral that they pledged. So, 

it is a lending operation, not a capital investment. 

Mr. MCHENRY. So, the TARP really wasn’t a lending operation 

so you had to pay it back with fines and penalties and interest? It 

seems to me— 

Mr. DUDLEY. TARP could be used for many purposes. It could be 

lent out and it could be used as capital. But if you look at how the 

TARP money was used and the bulk of it, the bulk of it was used 

for capital investments. 

Mr. MCHENRY. I think we are battling semantics here because 

in essence they are similar in dollar amounts, similar in terms of 

their intent. 

Now, really at the root, what is the European problem? Is it a 

problem of indebted countries? Is that the root of what we are contending with right now? 

Mr. DUDLEY. I think that is part of it. Part of it is you have some 

countries in Europe that have budget deficits that are 

unsustainably high and debt burdens that are continuing to climb. 

So, that is problem number one. 

But problem number two is they are doing so in a system of 17 

countries with a common currency where the individual countries 

don’t have control over their own monetary policy. They don’t have 

their own currency and there is a lack of fiscal transfers within Europe to support countries that are in a weaker position relative to 

those that are in a stronger position. 

So, there are some things that are very special about Europe’s 

that are part of the European Union, the system of how the system 

is arranged that are very different than anything that applies to 

the United States. 

Mr. MCHENRY. So, what happened with much of this long-term 

refinancing operation, that capital; it flowed into sovereign debt of 

a few countries and in large part that is where much of this flowed. 

But Dr. Kamin, in terms of what that actually did—we have actually bought some time and space for a few highly indebted countries. Is that basically what has happened? 

Mr. KAMIN. I think that it is possible that the sect of the LongTerm Refinancing Operations (LTRO), in combination with the 

21 

other measures that have been taken, basically might have some 

somewhat longer-term benefits. 

To be specific about that, it is true, as you say, that probably 

some of the LTRO money did flow to the purchase of sovereign 

bonds. But perhaps the more important thing that the LTRO funds 

did was alleviate many concerns by the market about the liquidity 

position and the financial position more generally of European 

banks. 

And so the way in which that may have led to reductions in the 

sovereign yields of some embattled European governments was not 

just directly—they had the funds and they could use them; but indirectly because European banks felt more solid in their financial 

position and more comfortable being able to buy these bonds. 

In turn, that improved situation in terms of European banks in 

the eyes of the markets may have led investors to believe that, 

therefore, European governments would not in turn be called upon 

to support banks. So, there was sort of a virtuous circle in process 

here, which has so far been very beneficial in terms of improving 

the tenor of markets. 

Now, all that said, you are absolutely right that the LTRO is the 

provision of liquidity by itself cannot be the only thing that will 

solve the European crisis. It is very important that European leaders work on a number of more lasting fundamental issues. 

One of them is they need to actually make the financial backstops for European governments higher and stronger, and that is 

a discussion they are having. They also need, quite obviously, and 

this is very challenging, to actually follow through on their many 

commitments to improve their fiscal situation. 

And finally, as we have discussed here today, improved fiscal 

performance must be buttressed by improved growth performance, 

and that is particularly challenging for the peripheral European 

economies. And so, they are going to have to follow through on a 

lot of fairly rigorous structural reforms. 

Thank you. 

Mr. MCHENRY. Thank you. 

It sounds like psychology and economics are getting closer and 

closer in these current crisis times. 

Mr. KAMIN. I think they always have been. 

Chairman PAUL. I thank the gentleman. 

I want to follow up on this issue about how it is going to help 

our consumers here at home when we make these loans overseas. 

And I think, Dr. Dudley, you indicated that you already have some 

evidence that it has been helpful? Or are you just saying that if we 

do it, it could be helpful? 

Mr. DUDLEY. The evidence is—it is soft evidence rather than 

hard evidence. But we have been monitoring the performance of 

the European banks who do business in the United States quite 

closely because they were having trouble getting dollar funding. 

Money market mutual funds which were providing dollar funding 

to the European banks during the summer and fall were pulling 

back. Other lenders, large asset managers, were also pulling back 

from the European banks. And this was causing those banks to 

start to get out of their dollar book of business. They were trying 

22 

to sell off loans and pull back in terms of their willingness to provide credit. 

This was going on at a pretty feverish pitch through the late fall 

and in through the early winter. And I wouldn’t say that it 

stopped, but the sense we get is it is happening now in a much 

more orderly way and not leading to the fire sale of assets at low 

prices; not leading to downward pressure on financial markets; not 

leading to a constraint in credit availability of U.S. households and 

businesses. 

So, from what I can tell, we are seeing that the leveraging of the 

European banks is continuing. But it is happening in an orderly 

way rather than a disorderly way, which is what our objective is. 

Chairman PAUL. You don’t actually have a quantity, a number 

that you can— 

Mr. DUDLEY. No, we don’t have— 

Chairman PAUL. —to say that they did such and such to the consumers back here at home? 

Mr. DUDLEY. We don’t have the details or data on that. But we 

do have discussions with those banks. 

Chairman PAUL. It seems like there is a conflict, at least in my 

mind, of the need to send more currency swaps over there when 

the banks—I think the top eight banks in Europe actually had a 

tremendous increase in their reserves, a 50 percent increase in 1 

year. So, why do they need more money? Why do they need more? 

It is already there. 

What about our banks? Our banks have $1.5 trillion. If it is a 

good deal and it needs these bailouts or these purchases that you 

want them to do by having these currency swaps to help the 

banks—give the central banks to help buy some of this debt. If it 

is a good deal for anybody, why wouldn’t some of our banks—they 

have $1.5 trillion? 

It seems like you are doing something that the market doesn’t 

want you to do. And there is a reason. Maybe it is way too risky. 

And if we are sending money over to the European banks with the 

hope, but no evidence, actually, of some of this money coming back 

and actually stimulating our economy, why is it that just more 

credit and more money in the system is going to work if our banks 

are holding $1.5 trillion? 

There is something more to it than the lack of the ability or the 

lack of the willingness of the Fed to just endlessly create more and 

more credit. Why is it going to work better by just pumping more 

into, say, a European bank if the goal—see, you emphasized the 

help it is going to—you do it out of the interest of the American 

consumer. 

You diminish the possibility that it might be done to just prop 

up the banks because they are in over their heads—that they may 

have credit default swaps. And the banks over there are—it is global. They have branches over there. It is just to prop up a system 

that is not viable. 

So why is there a disconnect? There seems to be a lot of money 

there. Why do you feel compelled that we have to keep sending 

more in order that hopefully it will help our consumers here at 

home? 

23 

Mr. DUDLEY. I think that the U.S. banking system is a very different place than the European banking system. The U.S. banks 

have plenty of dollar assets that they can—monies that they can 

lend. They gather deposits through their retail branch networks 

here. So they don’t have any shortage of dollar funds which they 

can lend. 

The European banks were in a different position because they 

were dependent on the wholesale funding market providing them 

with dollars. And as the European situation deteriorated last summer and fall, U.S. investors that had been providing dollars to 

these European banks were pulling back. 

And it was that pulling back and that difficulty for European 

banks to gain access to the wholesale dollar funding markets which 

was forcing them to pull back in terms of their willingness to lend 

to U.S. households and businesses. U.S. banks don’t need dollar liquidity right now, so there is no—and they are not deleveraging. 

The issue is the European banks, their dollar book of business. 

They were having trouble funding that book of business, and that 

is why they were pulling back. 

Chairman PAUL. But they are holding all the reserves. If it were 

any advantage at all, they would do it. Obviously, there is no advantage to even helping out Europe. There is no law against them 

loaning the money, is there? Why do you feel compelled that you 

have to do something that the banks that are holding all this 

money won’t do? 

Mr. DUDLEY. I think that the European situation was creating a 

lot of anxiety about the health of the European banking system because the health of the European banking system was tied up with 

the health of the individual national economies in terms of their 

fiscal positions. And the ECB basically has been trying to find a 

way to cut that tie. 

I think that long-term refinancing operations and the dollar 

swaps have sort of calmed down the anxiety in the market. And 

what we have actually seen now since the long-term refinancing 

operations have been put in place by the ECB and the dollar swaps 

have been put in place by us, is we have actually seen financing 

pressures in Europe subside. 

So the rates that the European banks have to borrow from other 

European banks or to borrow from U.S. banks in dollars, those 

rates have actually been coming down. So that is actually a beneficial consequence of the long-term refinancing operations and the 

dollar-swap programs. The pressure on the markets is abating, 

which I think is a good thing. 

Chairman PAUL. I will recognize Mr. Luetkemeyer from Missouri. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

I am kind of curious. Who determines the rate for the swap lines, 

the interest rate? 

Mr. DUDLEY. The interest rate is established by the Federal 

Open Market Committee in discussions with the foreign central 

banks. Obviously, they have to agree to the rate that we are willing 

to— 

24 

Mr. LUETKEMEYER. How often is it reviewed to go up or down? 

How often do you review that: quarterly; semi-annually; once a 

year? 

Mr. DUDLEY. The swap lines are outstanding. For example, the 

current set of swap lines are outstanding until February 1, 2013. 

But we certainly could review them at any— 

Mr. LUETKEMEYER. The rate doesn’t float? 

Mr. DUDLEY. —at any point in time. The rate is set essentially 

at the Federal funds rate plus 50 basis points. So right now, it is 

about 0.6 percent of the interest rate. 

Mr. LUETKEMEYER. Okay, but the amount above the Fed funds 

rate—that stays constant for the entire length of the swap? Or do 

you float that or adjust that as well? 

Mr. DUDLEY. It had been at 100 basis points over the Federal 

funds rate up until last fall. And then, we lowered that spread from 

100 basis points to 50 basis points. And the reason why we lowered 

that rate is that European banks were reluctant to use the swaps 

because they felt that using the swaps at that rate would be a sign 

of weakness. 

The swaps were actually not being very effective in containing 

pressure in financial markets. So a decision was made by us and 

the foreign central banks in which we have engaged with the 

swaps to lower the rate from 100 basis points over the Federal 

funds rate to 50 basis points over the Federal funds rate. 

Mr. LUETKEMEYER. If the European banks felt it was in their 

own best interests not to borrow money, not to swap because the 

rate was too high, why would you want to entice them into this 

with a lower rate? 

Mr. DUDLEY. They were reluctant to use the swap because they 

felt that if they used it, it would be a sign that they were particularly weak institutions. 

Mr. LUETKEMEYER. Why are they not viewed as weak now because they are using it now? 

Mr. DUDLEY. Because when the swap rate was lowered from 100 

basis points over the Federal funds rate to 50 basis points over the 

Federal funds rate, it became broadly attractive to the rates that 

were then in place in markets. 

Mr. LUETKEMEYER. It made them look like better investors? 

Mr. DUDLEY. Pardon? 

Mr. LUETKEMEYER. It made them look like better investors, better money managers? 

Mr. DUDLEY. There was an economic rationale for borrowing 

from the swap lines at the lower rate, so lots of banks participated. 

And since lots of banks participated, there was very little stigma 

from participating in that program. 

Mr. LUETKEMEYER. This whole thing is held together by confidence and the perception that everybody is doing okay, isn’t it? 

Mr. DUDLEY. I think we have seen both in the case of the swaps 

and in the case of our own discount window in the United States, 

that there are times that banks don’t want to use liquidity facilities, backstop facilities, because they are afraid that it is going to 

show that they are weak relative to other institutions. And that is 

just a problem in terms of these type of liquidity facilities. 

25 

Mr. LUETKEMEYER. I am just kind of curious. I will follow up on 

Chairman Paul’s line of questioning with regards to the ECB loaning it to the banks, and the banks turning around and loaning it 

to our American, I guess, companies and investors here. 

Why would they do that? Why are they not borrowing the money 

from us directly, our banks here? 

Mr. DUDLEY. The European banks have big books of business in 

the United States, especially in areas like trade finance, project finance, and reserve energy. They lend against oil-and-gas drilling, 

energy reserves. And they have specialized expertise in these 

areas. And so, that is why they undertake this business around the 

world. 

And in the United States, when they partake in this business, 

they do it in terms of lending dollars because obviously that is 

what the currency that we do business here in the United States. 

And so, they have a need for dollars to be able to sustain that business. 

Mr. LUETKEMEYER. So what you are saying is that there are 

banks in Europe that are better experts at lending in certain areas, 

certain fields, than we have lending institutions in this country. Is 

that what you just said? 

Mr. DUDLEY. I am saying that there are European banks that are 

specialized in certain areas. Now whether they are better or worse 

than U.S. banks that participate in the same areas, there is some 

overlap in the areas of competition. 

But there are certain areas where European banks historically 

have concentrated their lending. Project finance, trade finance, and 

energy reserve lending are probably three of the most predominant 

examples. 

Mr. LUETKEMEYER. Do the American corporations or entities that 

borrow from them, are they buying goods and services from Europe 

then, or are they buying goods and services from someplace else in 

the world, or the United States? Or is it kind of—does it kind of 

work like our export-import bank here, or how does that work? 

Mr. DUDLEY. I would presume that if you are borrowing in dollars, you are using those dollars to buy U.S. goods and services. 

Otherwise, you wouldn’t need the dollars. You would need some 

other form of currency. 

Mr. KAMIN. Congressman, if I could add—this is a very global financial system, and we are in the middle of a very global economic 

system. 

So, large banks operate all around the world and compete with 

each other. And that actually ends up being beneficial to non-financial— 

Mr. LUETKEMEYER. I understand that, Dr. Kamin, but I am trying to get at—I am kind of concerned here because we have foreign 

banks that are apparently competing against American banks, 

which is what you just said, yet we are loaning money to the ECB, 

to those banks, to be able to loan back and compete against our 

banks. Is that what you just said? 

Mr. KAMIN. What I said was just that both financial institutions 

and non-financial institutions compete with each other all around 

the world. 

26 

Mr. LUETKEMEYER. Yes, but my concern is that if we, through 

these swap lines, are funding these international banks, and they 

are in turn competing against our banks, I don’t think we need to 

be doing that. Do you? 

Mr. KAMIN. The primary concern of the Federal Reserve in setting up the swap lines was to maintain the flow of credit to American households and firms. That was key because that is what is 

needed in order to maintain the economic recovery and to move toward achieving our dual mandate of both price stability and maximum sustainable employment. 

So, that was the critical factor that motivated. 

Mr. DUDLEY. I think the U.S. banks also are interested in having 

a healthy U.S. economy, just like the European banks are. And I 

think that they probably broadly recognize that a forced liquidation 

of assets by Europeans banks would have negative consequences 

for the U.S. economy and for their banks. 

Mr. LUETKEMEYER. I see my time is up. Thank you, Mr. Chairman. 

Chairman PAUL. I now recognize Mr. McHenry for 5 minutes. 

Mr. MCHENRY. Thank you, Mr. Chairman. To follow up on the 

earlier question I had about the long-term refinancing operation, it 

is interesting to me, Dr. Kamin—you did walk through the whole 

thought process. And I do appreciate that, the willingness of a witness from an independent institution the Congress oversees to walk 

through in sort of a very broad form; your thinking on this is rather impressive, and, dare I say, revolutionary. 

But it was very much appreciated because this is really just 

about trying to make sure policymakers on the Hill have an awareness of what the Fed is doing. And I don’t have to explain to the 

Fed the chairman of this subcommittee’s vigorous intention of oversight of the Federal Reserve. That may be the understatement of 

the day. 

So with this injection of funds, of low-interest-rate loans for an 

extended period of time, much of this capital—a large portion of 

this capital, I should say—of all the categories has gone to sovereign debt. 

Mr. KAMIN. This is the LTROs? 

Mr. MCHENRY. Yes. 

Mr. KAMIN. Thank you. 

Mr. MCHENRY. Yes. I am sorry. 

So in that operation, money is flowed to sovereign debt. So it has 

had one of the intended effects from the ECB, it appears. The question is, of course, ‘‘What is our exposure to Europe?’’ Right? In 

terms of a quantifiable dollar amount, by our private sector; that 

is one question. 

But really the bigger question here for policymakers is what is 

our exposure as a government, and the Federal Reserve’s exposure 

to Europe? 

Mr. KAMIN. Thank you, Congressman McHenry, for your kind remarks earlier, and for these questions. 

The Federal Reserve exposure to Europe would be basically en- compassed by the value of our swap lines, which is around $50 billion or so, to the ECB, and then a very small amount to the Swiss 

National Bank. 

27 

As we have discussed earlier, we think that those exposures are 

very secure. We have provided them with dollars. In exchange, 

they have provided us with their currency. And we appreciate the 

prudent management and the strong financial position of the ECB. 

The exposure of our private financial institutions to Europe is obviously much, much larger, both our banks and our money market 

funds. Those exposures to the most embattled so-called countries in 

Europe, particularly like Greece and Portugal and Ireland, are 

really very small; the exposures to Spain and Italy—somewhat 

larger. But we have had many discussions with the banks that we 

supervise, and those are viewed to be quite manageable. Obviously, 

the exposures to core European banks which are, in turn, exposed 

to peripheral Europe are much larger. 

But we are, in terms of thinking about the channels of spillover 

and how this exposure really works—what is probably more of concern is not so much these direct financial exposures to European 

institutions, but rather the fact that if the situation in Europe took 

a turn for the worse, there will be these ancillary channels that we 

have talked about before; the disruptions of financial markets; the 

retreat from risk-taking that could disrupt financial markets 

around the world. 

And that is really the matter of greater concern, and that is 

where we focus a lot of our efforts in working with the banks that 

we supervise, and other regulatory institutions taking the same 

standpoint that the banks— 

Mr. MCHENRY. Sir, explain to me how the swap lines benefit the 

American economy. Just in layman’s terms. 

Mr. KAMIN. Sure. To begin with, many European financial institutions, as we have discussed, are engaged in direct extensions of 

credit to U.S. households and firms. Any situation where these European banks were unable to get the dollar funding they needed, 

they would be forced to pull back on lending from U.S. households 

and firms. They might be forced to sell assets, which would then 

depress asset values in the U.S. economy more generally. And both 

of those effects would directly affect the ability of the U.S. households and firms to grow and prosper. 

On top of that, funding difficulties by these European banks 

would lead to their cutback on credit, in terms of dollar lending, 

to other firms around the world; firms which buy a lot of the U.S. 

exports. And so, that would be an additional channel through 

which a funding shortage could hurt the U.S. economy. And that 

is what we hope to alleviate through the provision of these funds. 

Finally, in the event that the dollar funding was not available— 

say in the absence of our swaps lines—and European banks ran 

into more severe difficulties, this could be a contributing factor to 

a further and renewed deterioration of European financial conditions, that not only could severely impact the European economy 

and prolong the recession, but lead to distressed conditions around 

the world. 

So there might be larger, more ancillary effects from dollar funding problems then, again, the dollar swap lines are intended to alleviate. 

Mr. MCHENRY. Thank you, Mr. Chairman. 

Chairman PAUL. Thank you. 

28 

I recognize the gentleman from Michigan, Mr. Huizenga. 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

I appreciate the opportunity, and I thank the witnesses for coming in. I want to maybe touch on a couple of quick things and continue on the currency swaps. 

How far are we going to bring this along, I guess would be part 

of my question? How long are we going to stick into this game and 

be part of it? If Europe remains dependent on currency swaps, 

these same swaps become increasingly risky. Are you prepared to 

allow these currency swaps to wind down? Or what is going to happen there? 

And then, the short-term dollar funding in Europe seemed to be 

the discussion point; right? How would you define short term 

versus medium term and long term? 

Mr. KAMIN. I will start. Or, why don’t you go ahead? 

Mr. DUDLEY. Okay. 

What we would hope is that the European countries do the right 

thing in terms of getting their fiscal houses in order and improving 

their competitiveness, so that investors start to have more confidence in the sustainability of the European Union and how all 

these countries are going to persist. 

If that happens, and at the same time, the European banks are 

shown to have good earnings, liquidity, and capital, then I think 

that the willingness of private lenders to provide dollar liquidity to 

the European banks will emerge very much intact. 

And in that situation, our swaps will be at rates that are actually 

higher than the market, and the swap programs will just sort of 

wind down automatically. 

This is what we saw during 2007, 2008, 2009, during the first 

big wave of swaps; that as market conditions normalized, the swap 

usage came down pretty automatically. 

Mr. HUIZENGA. I am kind of curious about that, because I am 

looking at some information in front of me here that says interest 

rates on dollar loans from the ECB are around 0.6 percent; interest 

rate on ECB charges for its euro loans is 1 percent. I don’t have 

my Ph.D. in economics, however, I can see the incentive there. Why 

by making dollar financing cheaper than euro financing, how are 

they ever going to get out of that cycle? 

Mr. DUDLEY. I am not sure that I would agree with that, if that 

is the right comparison. The 1 percent is to borrow euros. The 0.6 

percent is to borrow dollars. And the alternative is to borrow dollars from a U.S. bank when the Federal Reserve is paying 25 basis 

points on the interest rate that we pay on excess reserves. 

There is quite a bit of room between the 25 basis points we pay 

on the reserves here in the United States, and the 0.6 percent on 

the dollar swaps. So we would expect that if the conditions in Europe were to continue to improve, that the rate at which European 

banks could borrow dollars would be somewhat north of 25 basis 

points perhaps, but below that 0.6 percent. So we would think that 

there is plenty of room in that difference for the European banks 

to obtain credit from private entities. 

And, in fact, we have actually seen private suppliers of dollars 

to the European banks return subsequently to the large, long-term 

29 

refinancing operations and the dollar swap programs. So it looks 

like— 

Mr. HUIZENGA. But doesn’t that— 

Mr. DUDLEY. —the market is already starting to normalize the 

dollar swaps. 

Mr. HUIZENGA. But doesn’t that weaken the value of the euro, 

what they are doing? 

Mr. DUDLEY. I think the euro has really basically been trading 

in line with how the situation in Europe looks. As the European 

situation worsens, the euro depreciates. As the European situation 

improves, the euro appreciates. So it is really based on the outlook 

for Europe, of course relative to the outlook in the United States. 

Mr. HUIZENGA. Help me to understand how if it is a weaker euro, 

doesn’t that mean a typically a weaker Eurozone, since we have 

sort of flagged this off as a European issue, and trying not to get 

dragged into it here from the U.S. side? 

Mr. DUDLEY. You are certainly right that if the European outlook 

were to deteriorate, the euro would probably weaken as a consequence. The good news is that over the last 4 or 5 months, the 

euro has actually strengthened a bit, because Europe has actually 

made some progress in terms of addressing some of their issues. 

Mr. HUIZENGA. Okay. 

And then, my time is almost up, and I will—Dr. Kamin, do you 

want to say something as well? 

But I am just curious: What keeps you up at night? What other 

countries? You specifically—I think in Dr. Kamin’s testimony, he 

talked briefly about Greece. 

And then, you just were touching on Spain and Portugal. But 

where are we at with Italy and Ireland? Are we on solid footing— 

are they on solid footing in France and Germany and some of those 

other countries that have been leading this? 

Mr. KAMIN. Certainly, the euro crisis in general is what keeps 

me up at night, and what occupies much of my thinking time during the day as well. 

Obviously, the situation in Greece has been very difficult. And 

we have been following that very closely. We also, obviously, are 

very focused on, basically, Ireland and Portugal, which are the recipients of IMF funds. And we think it is critically important that 

these problems not move further into Spain and Italy, which have 

also been the focus of market attention. 

And we think it is absolutely critical to make sure that you don’t 

have further contagion beyond that. So far, things have been looking on the brighter side. There have been improvement in markets. 

But we have continued to monitor the situation as closely as ever. 

And then, while most of my thinking lately is focused on Europe, 

obviously I am thinking about oil prices as well, because that is another area that poses a potential threat at least down the road. 

Mr. HUIZENGA. Thank you. 

Chairman PAUL. Thank you. 

I have a couple of additional questions I would like to ask. 

I am interested in one line on the Federal Reserve sheet at each 

week on other assets, other Federal Reserve assets. And it has 

been growing a bit. It used to be a small number, but even in recent years, it has gone up. I think it is about $160 billion now. 

30 

What does that include? Does that include anything foreign? Is 

there any type of a foreign asset or a swap or anything involved 

in there that would help me understand this international financial 

crisis that we are in? 

Mr. KAMIN. Chairman Paul, we definitely put on our balance 

sheet—we list our holdings of foreign assets. I don’t recall offhand 

if that is where the ‘‘other assets’’ are. I don’t think so. The ‘‘other 

assets’’ have, as you point out, risen over time. And there is one 

main contributing factor to that, which is when we buy securities 

in the markets, sometimes we buy them at a value that is above 

their par or face value, because interest rates had declined since 

they were first issued. That raises the value of those securities. 

So then, we place the par value of the securities in one line on 

our balance sheet, and then that additional part that is over the 

par value, the premium, that is placed in our ‘‘other assets’’ line. 

So as we have continued to purchase securities in the market, the 

amount of the premium part of our purchases, which has gone into 

the ‘‘other assets’’ line, has continued to rise. 

Chairman PAUL. So you say you are buying securities. Would 

this be like mortgage securities? 

Mr. DUDLEY. This would be predominantly the maturity extension program, in which we are selling short-dated Treasury securities and buying long-dated Treasury securities. We are also buying 

mortgage-backed securities, but with emphasis to rolling over existing maturing mortgage-backed securities, so the size of the mortgage-backed securities portfolio is pretty constant. 

Chairman PAUL. So, the significant increase of $160 billion of 

just saying they are ‘‘other,’’ it is definitely related to the international financial crisis that we are involved in right now? 

Mr. DUDLEY. As Steve related, it is related to the expansion of 

the Fed’s balance sheet and the types of assets that we are buying 

in the market. The maturity extension program—we are selling 

short-dated Treasuries; we are buying long-dated Treasuries. To 

the extent that we are buying Treasuries that are selling above par 

because interest rates has declined, that is different than what 

Steve was saying is booked in the other assets category. 

Chairman PAUL. What does this mean, if this were to continue 

to grow at the rate it is growing now? 

Mr. DUDLEY. No. I would expect that once the maturity extension 

program or other asset purchase programs are ended, then I would 

expect the other assets category actually to probably come down 

over time as that premium was amortized over time. So, I would 

view this as a temporary phenomenon. 

Chairman PAUL. But there is no one place in the Federal Reserve 

reports that would give me a full explanation of exactly what the 

$160 billion is? You don’t send out a report each month and say 

exactly what that is made up of? 

Mr. KAMIN. There is an interactive portion of our Web site that 

offers more analysis of the different lines. That is the first thing. 

The second thing I want to follow up on is having checked, the 

‘‘other assets’’—I just think the ‘‘other assets’’ category does indeed, 

as you suggest, also include foreign currency denominative assets, 

but not the swap lines. It is the other European and the 

undenominated securities that we hold. 

31 

Chairman PAUL. Okay. 

The other thing I have noticed since 2008 is if you look at a longterm chart of currency in circulation, it is a steady increase and 

very predictable. But since 2008, it has been going up much more 

rapidly. This is cash as currency. Where is the demand for more 

cash? Do you know exactly where that goes? Does that end up overseas? Is that in circulation here? Or is it in a shoebox someplace? 

Mr. DUDLEY. Probably in both places. With interest rates this 

low, the opportunity costs of holding more currency obviously is 

very low. If you hold the currency, you get a 0 percent return. But 

if you have gone to your bank these days, you don’t get much more 

than that. 

So, people probably are carrying around more currency in their 

pockets because there is less cost of holding the currency versus 

holding it in a bank. This may also be true internationally, although I am not familiar with how much currency is held here 

versus abroad. I know historically, it has been about one third 

here, and two thirds abroad. But I don’t know how that has been 

changing recently. 

Chairman PAUL. I have one quick question for both of you. You 

can probably answer this rather easily. 

You are very much involved in dealing with the value of our 

money, the value of our dollar and our financial system. But I have 

trouble finding the legal definition for the unit of account that we 

have as a dollar. Can you tell me your definition of—what is a dollar? 

Mr. DUDLEY. I view the dollar as the legal tender in the United 

States, so that if someone pays a dollar as payment, the shopkeeper has to accept that dollar for that transaction. 

Mr. KAMIN. Also the classic definition of money, I think of it as 

three things. It is store value, which it is a medium of transaction. 

Mr. DUDLEY. And usually has portability. 

Mr. KAMIN. Yes. And then it is a medium of accounts. In other 

words, you measure value by using a dollar. 

Chairman PAUL. But you do realize there was a more precise definition of a dollar most of our history where you could actually 

know what it meant. But it seems like there is no definition at all. 

You say it is just a unit of account. And that is probably the reason 

why we have lost about 98 percent of the value of that dollar since 

1913, since it has been the responsibility of the Federal Reserve to 

protect the value of our currency. 

So, I have trouble believing that we will be able to solve any of 

our problems financially or even fiscally if we can create money 

endlessly and out of thin air and accommodate the politicians who 

spend money, who spend money overseas, who spend money on foreign policy that indirectly you have to deal with. Look how the 

sanctions and the threat of war in Iran affects the finances of the 

world, not only perception-wise in trade and pushing up oil prices, 

but also the need to keep monetizing this debt. 

Federal Reserve Chairmen endlessly, for all the years I have 

been here, have said, ‘‘If the Congress would quit spending so much 

money and didn’t have so much debt, we wouldn’t have such a 

tough problem managing the currency.’’ At the same time, the debt 

32 

wouldn’t be there if the Federal Reserve wasn’t there willing to 

monetize the debt, because you are the lender of last resort. 

You guarantee the moral hazard that politicians are going to 

spend money. And it seems like to coordinate the two and have a 

sound economic system instead of a financial bubble that is based 

on debt and a monetary standard based on debt with the world 

awash in an exploding amount of debt. I don’t know how we will 

ever get out of this unless we finally come up with a definition, 

once again, of what the unit of account is and what a dollar means. 

This hearing is now adjourned. 

The Chair notes that some Members may have additional questions for the panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

[Whereupon, at 11:42 a.m., the hearing was adjourned.] 

(33) 

A P P E N D I X 

March 27, 2012 

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