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THE ROLE OF THE INTERNATIONAL 

MONETARY FUND AND THE FEDERAL 

RESERVE IN STABILIZING EUROPE 

JOINT HEARING 

BEFORE THE

SUBCOMMITTEE ON 

DOMESTIC MONETARY POLICY 

AND TECHNOLOGY 

AND THE

SUBCOMMITTEE ON 

INTERNATIONAL MONETARY POLICY 

AND TRADE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

MAY 20, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–138 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

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 

DENNIS MOORE, Kansas 

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 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON DOMESTIC MONETARY POLICY AND TECHNOLOGY

MELVIN L. WATT, North Carolina, Chairman 

CAROLYN B. MALONEY, New York 

GREGORY W. MEEKS, New York 

WM. LACY CLAY, Missouri 

BRAD SHERMAN, California 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

KEITH ELLISON, Minnesota 

JOHN ADLER, New Jersey 

SUZANNE KOSMAS, Florida 

RON PAUL, Texas 

MICHAEL N. CASTLE, Delaware 

FRANK D. LUCAS, Oklahoma 

JIM GERLACH, Pennsylvania 

TOM PRICE, Georgia 

BILL POSEY, Florida 

LEONARD LANCE, New Jersey 

(IV) 

SUBCOMMITTEE ON INTERNATIONAL MONETARY POLICY AND TRADE

GREGORY W. MEEKS, New York, Chairman 

LUIS V. GUTIERREZ, Illinois 

MAXINE WATERS, California 

MELVIN L. WATT, North Carolina 

GWEN MOORE, Wisconsin 

ANDRE ́ CARSON, Indiana 

STEVE DRIEHAUS, Ohio 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

GARY G. MILLER, California 

EDWARD R. ROYCE, California 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

MICHELE BACHMANN, Minnesota 

ERIK PAULSEN, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

May 20, 2010 ..................................................................................................... 1 

Appendix: 

May 20, 2010 ..................................................................................................... 35 

WITNESSES 

THURSDAY, MAY 20, 2010 

Morici, Peter, Professor, Robert H. Smith School of Business, University 

of Maryland .......................................................................................................... 24 

Reinhart, Carmen M., Professor of Economics and Director of the Center 

for International Economics, University of Maryland ...................................... 21 

Tarullo, Hon. Daniel K., Governor, Board of Governors of the Federal Reserve 

System ................................................................................................................... 6 

Truman, Edwin M., Senior Fellow, the Peterson Institute for International 

Economics ............................................................................................................. 22 

APPENDIX 

Prepared statements: 

Paul, Hon. Ron .................................................................................................. 36 

Morici, Peter ..................................................................................................... 37 

Reinhart, Carmen M. ....................................................................................... 42 

Tarullo, Hon. Daniel K. .................................................................................... 46 

Truman, Edwin M. ........................................................................................... 56 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Meeks, Hon. Gregory: 

Written statement of Amar Bhattacharya, G24 Secretariat ......................... 72 

Written statement of Martin A. Weiss, Specialist in International Trade 

and Finance, Congressional Research Service ............................................ 75 

(1) 

THE ROLE OF THE INTERNATIONAL 

MONETARY FUND AND THE FEDERAL 

RESERVE IN STABILIZING EUROPE 

Thursday, May 20, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON DOMESTIC MONETARY

POLICY AND TECHNOLOGY, AND

SUBCOMMITTEE ON INTERNATIONAL

MONETARY POLICY AND TRADE, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittees met, pursuant to notice, at 2 p.m., in room 

2128, Rayburn House Office Building, Hon. Melvin L. Watt [chairman of the Subcommittee on Domestic Monetary Policy and Technology] presiding. 

Members present: Representatives Watt, Meeks, Sherman, 

Green; Paul, Royce, Manzullo, Bachmann, Paulsen, and Lance. 

Chairman WATT. This joint hearing of the Subcommittee on 

International Monetary Policy and Trade and the Subcommittee on 

Domestic Monetary Policy and Technology of the Financial Services 

Committee will come to order. 

Without objection, all members’ opening statements will be made 

a part of the record, and we will recognize some members for opening statements 

And I will now recognize myself for an opening statement. 

Today’s hearing is a part of our ongoing effort to examine and 

understand what things can cause a global economic crisis and 

threaten our economic well-being. 

Today, we will look at the sovereign debt crisis in many nations, 

particularly in Europe. We will explore the root causes and potential solutions to the European debt crisis with particular focus on 

the policy responses made by the Federal Reserve and the International Monetary Fund (IMF) to help stabilize European financial 

markets. 

In recent weeks, the European Union and the IMF agreed to a financial stabilization package of nearly $1 trillion, which will be 

available to all 27 Eurozone countries in the form of loan guarantees and direct bilateral loans if they agree to take strict debt reduction measures. 

As the chairman of the Domestic Monetary Policy and Technology Subcommittee of the Financial Services Committee, however, I want to focus the bulk of my attention on the actions of our 

own Federal Reserve. The Fed has agreed to reopen temporary curVerDate Nov 24 2008 17:37 Oct 07, 2010 Jkt 058048 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\58048.TXT TERRIE
2 

rency swap facilities with foreign central banks, including the European Central Bank, the Bank of England, the Swiss National 

Bank, the Bank of Japan, and the Bank of Canada. These currency 

swap lines, authorized through January 2011, will provide foreign 

central banks with access to U.S. dollars in their local markets at 

fixed local rates in exchange for Euros or local currencies. 

We need to understand and shine the light of transparency on 

why this was necessary, whether it could extend beyond January 

of 2011, and exactly what exposure, if any, U.S. taxpayers could 

have as a result of the Fed’s action. 

As I understand it, these swap facilities are designed to improve 

liquidity positions in global currency markets and minimize the 

risk that strains abroad could spread to U.S. markets. Some observers believe that the European debt crisis, if left unaddressed, 

could threaten the nascent U.S. economic recovery by shattering 

confidence and disrupting credit flows to businesses and consumers, and that it could put upward pressure on interest rates. 

The Fed has emphasized that these currency swaps are not a 

bailout, that they involve no direct expenditure of U.S. taxpayer 

funds to European financial institutions, and that under the contracts between the Fed and foreign central banks to swap currencies, the foreign central banks will bear any risk of defaults by 

European financial institutions. 

In addition, it appears that the Fed actually made money, over 

$5 billion, from the currency swaps of 2008 and 2009, because foreign central banks pay interest to the Fed when they draw on swap 

lines. We need to hear more from the Fed about the mechanics of 

these currency swap facilities and about the potential risk and rewards to U.S. taxpayers from many of the Fed’s policy responses 

to the European debt crisis. 

As chairman of the International Monetary Policy and Trade 

Subcommittee, Chairman Meeks will be presiding over the second 

panel. While he will take the lead, I also look forward to questioning these witnesses about the IMF’s role in stabilizing Europe. 

It is no accident that Chairman Meeks and I scheduled a joint 

hearing of our two subcommittees to examine the sovereign debt 

crisis in Europe because the global financial system is interconnected, and what happens in Europe or anywhere else in the 

world, for that matter, affects the United States and vice versa. 

Our two subcommittees will continue to monitor the situation in 

Europe and elsewhere and will conduct follow-up hearings as necessary. 

I will now recognize the ranking member of the Domestic Monetary Policy and Technology Subcommittee, Mr. Paul, for 5 minutes. 

Dr. PAUL. Thank you, Mr. Chairman. 

Mr. Chairman, I’m disappointed that yet again American taxpayers find themselves forced to pay billions of dollars in bailouts, 

only this time we are not bailing out profligate American companies but foreign governments. 

Billions of dollars of IMF funding, much of it coming from U.S. 

taxpayers, will be sent to Europe to bail out Greece and other European countries who might find themselves in financial crisis. Evidently, the lesson of the U.S. Government bailouts has not been 

3 

learned. Bailouts do not, in fact cannot, make things better; they 

can only make things worse. 

Governments can pay for bailouts by increasing taxes, which 

takes money out of the pockets of hardworking poor and middleclass Americans and siphons it off into the bank accounts of failed 

bankers, or governments can pay for bailouts through inflation, increasing the supply of money out of thin air and devaluing the currency, in this case, the bailout firms who have used this new 

money to reap all the benefits while the poor and the middle class 

see increased prices and the purchasing power of their savings reduced. Finally, governments can pay for bailouts through increased 

issuance of debt, increasing the tax burden of future generations in 

the hope of finding investors who will purchase bonds, which are 

increasingly unlikely ever to be paid off. 

None of these options lead to long-term stability. They merely attempt to patch up a fragile financial system and put off financial 

reckoning until the next crisis. Bailouts provide a short-term illusion of continuing prosperity, while underneath the same rotten 

fundamentals ensure that bailout money is merely throwing good 

money after bad. 

Bailing out foreign governments is just as bad. Why should 

American taxpayers be on the hook because a foreign government 

cannot cover its debts? 

What makes this situation even worse is that the bailout is being 

undertaken in a manner which is nearly impossible to stop. Bailout 

funds coming from the IMF, which receives nearly 20 percent of its 

funding from the United States, require the approval of IMF members, including the United States, with its de facto veto power. 

Only the President can prevail upon the U.S. representative at the 

IMF to vote against this bailout. The people and their constitutionally elected Representatives in Congress are shut out. 

Compounding this is the reemergence of dollar swap lines from 

the Federal Reserve to foreign central banks, which will likely result in the creation of tens of hundreds of billions of dollars of new 

money. Bailouts never work. They never have and they never will. 

They only thing they do is burden the taxpayer and delay the inevitable collapse of the bailed-out entity. 

Fiscal and monetary responsibility is a tough pill to swallow, but 

it is essential for the sound functioning of the economy. We need 

to end the cycle of bailouts and ensure that American taxpayers 

will not continue to subsidize foreign governments. 

I yield back the balance of my time. 

Chairman WATT. I thank the gentleman for his opening statement. The gentleman from New York, the chairman of the International Monetary Policy and Trade Subcommittee, is recognized 

for 5 minutes. 

Chairman MEEKS. Thank you, Mr. Chairman. 

Before I begin, let me first thank you for—as subcommittee 

chairman of the Domestic Monetary Policy and Technology Subcommittee— working and putting this hearing together in a timely 

fashion. This hearing I think is happening at the most appropriate 

time, and as you correctly indicated, both of our subcommittees 

continue to monitor the situation as we move forward from both 

the domestic and international policy sides. 

4 

And the reason why this hearing will be helpful to all of us is 

because it will help us to better understand the extraordinary 

events occurring in Europe this past month and the associated implication of the international monetary system. Specifically, we look 

forward to, and this hearing will be focusing on, actions as they 

pertain to the Fed and swaps, as indicated by Chairman Watt. But 

also, it will be focused on the actions taken by the IMF as well as 

the Federal Reserve to help Europe staunch the burgeoning sovereign debt crisis, which began in Greece and threatens financial 

markets worldwide. 

Europe represents a quarter of global GDP and is a major source 

of demand for U.S. exports. More than 20 percent of the total U.S. 

goods exports and more than 35 percent of total U.S. services exports go through Europe. The total value of these exports to the EU 

is more than 5 times the value of U.S. exports to China. 

Furthermore, European-owned firms in 2007 employed roughly 

two thirds of the 5.5 million U.S. workers on the payrolls of all foreign firms operating in the United States. Therefore, strong growth 

in Europe supports production and jobs in the United States. A 

prolonged and deep recession in Europe could or would undermine 

Americans’ own economic recovery. 

The United States also has very strong financial linkages to Europe. The intensifying European debt crisis has adversely affected 

U.S. corporate bond and stock issuance. The week prior to the announcement of the stabilizing actions taken by the EU and IMF on 

May 9th had the lowest number of investment grade corporate 

bond sales since the week of September 15, 2008, when Lehman 

Brothers fell. 

Additionally, during that timeframe, a large number of initial 

public offerings of stock were canceled or postponed in the equity 

markets. Thus, it is not in the interest of the United States, or any 

other countries, to allow the significant uncertainty in the markets 

to continue or worsen. 

Given these important economic linkages between the United 

States and Europe, it is critical that the United States provide support to Europe in its efforts to quickly stabilize the financial markets, prevent contagion, and promptly address sovereign debt 

issues. In particular, supporting the IMF in its assistance to Greece 

and, as necessary, to other affected European countries, appears to 

be the best and most preferable means to effectuate United States 

support. 

I look forward to the testimony from today’s witnesses. In particular, I look forward to learning about the EU’s financial stabilization fund and the support provided by the IMF. I also seek 

to better understand how Greece and other European countries 

ended up in this situation and whether the proposed plans are appropriate. 

Lastly, and of particular importance to me, I hope to learn what 

impact this focus on Europe by the IMF will mean to its efforts in 

helping developing countries around the world. 

I yield back the balance of my time. 

Chairman WATT. I thank the gentleman. The gentleman from 

California, Mr. Royce, is recognized for up to 7 minutes. 

5 

Mr. ROYCE. Mr. Chairman, last year, during a pretty fierce budget debate that we had in this committee, the Obama Administration quietly requested an additional $100 billion loan from us to 

the IMF, and while I and other Republicans raised concerns about 

this, opposed this measure, over our objections, that provision 

passed and our exposure to the IMF grew. 

I took issue with this very provision then, and I do today, for several reasons. First, we have near-trillion dollar deficits as far as 

the eye can see, and things continue to get worse. The government 

has lent, spent or guaranteed about $8.2 trillion to prop up our 

economy in the last 2 years. While we were overleveraged pre-crisis, this drastic spike in taxpayer liabilities is a Trojan horse that 

has put us on a Greek-like course. 

Just last month, the Federal budget deficit, at $82.7 billion, hit 

an all-time high for April. It was $53 billion higher than economists had predicted. As Chairman Bernanke has repeatedly said to 

us, this path is unsustainable. 

Second, the IMF has a poor track record when it comes to dealing with sovereign debt crises. Over the years, the IMF has developed into a dependence-inducing crutch used by weaker countries 

to avoid making the tough decisions necessary to get their fiscal 

houses in order. More than 70 nations have already depended on 

IMF aid for 20 or more years. They just keep rolling over and increasing the debt. Twenty-four countries have received IMF credit 

for 30 or more years. In many ways, the IMF has been as much 

part of the problem as part of the solution. 

Lastly, the possibility of contagion puts potential U.S. liabilities 

through the roof. Just within the IMF–EU proposal, U.S. exposure 

is roughly $54 billion. Looking at the global debt issues, things 

could get much worse. According to recent CDS spreads, 8 of the 

10 riskiest sovereign debts in the world reside outside of the EU. 

Where will the IMF be when those countries move to the brink of 

default? 

Given these factors, the United States needs to look at reducing 

its exposure to the IMF. No loan, however large, will solve Europe’s 

problems. It will simply delay and weaken the appetite for necessary change. 

The promise of a never-ending European welfare state is at the 

heart of the crisis. For decades, governments overcommitted and 

failed to pay for these entitlement programs, which led to a sea of 

debt. The irony that an institution of which we are the greatest 

contributor is going to rescue countries drowning in debt is apparent. 

Now is the time for us to address our own budgetary crisis and 

put our economy back on a path toward prosperity. The longer we 

delay, the closer we will get to being the ‘‘United States of Europe.’’ 

I yield back the balance of my time. Thank you, Mr. Chairman. 

Chairman WATT. I thank the gentleman for his statement, and 

we’re pleased to welcome as our first and only witness on panel 

one, Governor Daniel K. Tarullo of the Board of Governors of the 

Federal Reserve, who will be recognized for 5 minutes. We generally don’t enforce that for Fed witnesses as rigorously as we do 

against some other folks, but there will be a lighting system there 

6 

to prompt you: green for 4 minutes; yellow for 1 minute, and red 

after the 5 minutes is over; but we’ll be generous. 

Without objection, your entire written statement will be made a 

part of the record, and we would encourage you to summarize your 

testimony in as close to 5 minutes as you can. 

So Governor, you are recognized. 

STATEMENT OF THE HONORABLE DANIEL K. TARULLO, GOVERNOR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE 

SYSTEM 

Mr. TARULLO. Thank you, Mr. Chairman, Mr. Meeks, Mr. Paul, 

and Mr. Royce. 

Let me, in my oral remarks, make points on three topics: first, 

the nature of the European sovereign debt problems and the European response; second, the kinds of risks that their problems pose 

for the United States; and third, as you requested in your letter inviting us to testify today, the actions that the Federal Reserve took 

last week. 

First, with respect to the European sovereign debt problems, 

these have evolved over some number of years as aggregate debt 

levels have increased. Once the European Monetary Union was created in 1999, many investors appeared to assume that there was 

an implicit guarantee protecting the debt of Euro area members, 

probably resulting in an underpricing of risk associated with some 

sovereign issuers. 

When it became clear last fall that the Greek fiscal deficit was 

several times larger than previously thought, investors began to 

focus on the sustainability of these levels of debt. Spreads on Greek 

debt widened, and it became increasingly clear that Greece was losing access to market funding. 

Despite a fiscal consolidation plan announced by the Greek gov- ernment and, at the beginning of the month, a $110 billion Euro 

EU–IMF program, market pressures were not contained. By then, 

concerns of investors had also arisen about the sovereign debt provisions of other so-called peripheral European countries. 

Pressures were felt in dollar funding markets, with some signs 

of dollar shortages in the interbank market bringing back unpleasant memories of the recent global financial crisis. In response to 

these growing problems, European leaders announced, on May 

10th, the package of stabilization measures with which you are familiar. 

My second topic is the potential risk posed for the U.S. economy. 

In assessing these risks, I think it’s useful to analyze in terms of 

two kinds of transmission channels, through financial markets and 

through the so-called real economy. The two are obviously connected, and sufficiently serious problems in one will exacerbate 

problems in the other. But as I say, it’s a good analytic starting 

point for thinking about risks to our own economy. 

An important component of the real economy transmission channel is trade. If European growth slows down, U.S. exports will suffer, with potential effects on output and employment here at home. 

Similarly, if the Euro depreciates significantly, U.S. exports that 

compete with European products around the world will be adversely affected. 

7 

If we look, though, at the likely effects of a moderate slowdown 

in European growth, the impact on U.S. growth would likely be discernible but relatively modest. Larger effects are likely to be felt 

only if there are significant problems in financial markets, which 

would amplify the real economy effects with much greater impact 

on wealth, lending, and production in the United States. 

The large U.S. institutions that do significant business in Europe 

appear to have manageable levels of exposure to the peripheral European sovereigns. However, if sovereign problems in peripheral 

Europe were to spill over and cause financial difficulties more 

broadly, U.S. banks would face larger losses on their considerably 

larger overall credit exposures. 

Increases in uncertainty and risk aversion could lead to higher 

funding costs, resulting in forced asset sales and reductions in collateral value that might lead U.S. financial institutions to pull back 

abruptly on their lending. This would obviously come at a particularly bad time, as we are just beginning to see signs that lending 

standards for smaller companies and households could soon be relaxed in our own economy. 

In the worst case, which I add we do not expect, broad uncertainty could result in a generalized unwillingness to extend funding. Forced asset sales could lead to further declines in collateral 

with further funding pressures, resulting in the freezing up of financial markets such as was seen following the bankruptcy of Lehman Brothers in the fall of 2008. 

My third and final topic, what actions did the Federal Reserve 

take last week? Well, the Federal Reserve has a limited but important role here, one that addresses directly the potentially serious 

liquidity problems I mentioned a moment ago. 

Last week, as you noted, Mr. Chairman, we re-established dollar 

liquidity swap lines with the European Central Bank and a number of other central banks. These lines are similar to those which 

the Federal Reserve put in place during the recent financial crisis. 

Swaps are a well established tool of international monetary relations among central banks. In the current situation, the dollar liquidity swaps provide a backstop to counter significant dollar funding pressures in foreign markets. The swap is a temporary arrangement whereby a foreign central bank exchanges its currency for 

dollars at the prevailing exchange rate. There is an agreement to 

reverse this transaction within a short period of time, in no case 

more than 3 months. 

Under the terms of the swap agreements, all of which are posted 

on the Federal Reserve site, our dealings are only with the central 

bank, not banks, financial institutions in the other country to 

which the central bank may lend the dollars. 

Also, in accordance with the terms of the agreement, we do not 

bear the risk that the foreign currency may depreciate during the 

term of the swap, since the foreign central bank is committed to 

repay us with the same number of dollars that they originally took 

in the swap for the same number of euros or yen or whatever their 

foreign currency may be. We charge an interest rate well above 

what a normal market-level interest rate would be, and this indeed 

is intended to ensure that our swap facility is a backstop to foreVerDate Nov 24 2008 17:37 Oct 07, 2010 Jkt 058048 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\58048.TXT TERRIE
8 

stall serious liquidity problems, not to be a normal source of dollar 

funding. 

To date, there has been fairly modest use of the swap lines estab- lished on May 10th. Last week, there was an 8-day, $9 billion swap 

drawn by the European Central Bank. Because it was 8 days, that 

will be repaid today, the 20th. There have since been 2 smaller 

swap drawings, both 84-day drawings, one of a little over $1 billion 

with the European Central Bank, and one a little over $200 million 

with the Bank of Japan. So, as of the end of the business day 

today, we’ll have outstanding about $1.2 billion in the swap arrangements. 

Each Thursday at four o’clock, the Federal Reserve will post on 

its Web site a list of all outstanding swap arrangements. 

The policies announced last week in Europe, with the supporting 

role played by the swap lines, have stopped deterioration in dollar 

funding markets in Europe, but dollar funding markets remain 

strained as investors await further clarification of the stabilization, 

regulatory, and fiscal measures to be adopted within Europe. 

In closing, Mr. Chairman, I would say that the United States is 

in a very different position from that of the European countries 

whose debt instruments have been under such pressure, but their 

experience is another reminder, if one were needed, that every 

country with sustained budget deficits and rising debt, including 

the United States, needs to act in a timely manner to put in place 

a credible program for sustainable fiscal policies. 

Thank you very much, and I would be pleased to answer any 

questions you may have. 

[The prepared statement of Governor Tarullo can be found on 

page 46 of the appendix.] 

Chairman WATT. Thank you, Governor, for your very comprehensive statement. I will now recognize the members of the committee 

for 5 minutes of questioning each, and I will recognize myself initially for 5 minutes. 

In your testimony, Governor, you indicated at pages six and 

seven that the Fed’s role here is ‘‘limited though important’’ and I 

wonder if you could kind of expand on that, the importance of it 

in particular. I understand the limited nature of it; you explained 

what you have outstanding and what you could potentially have 

outstanding, what about the importance of it? 

Mr. TARULLO. The importance, Mr. Chairman, I think is best understood by thinking about the experience we went through a couple of years ago, where dollar funding became constrained not because of the underlying credit situation of a particular financial institution but just because there is such widespread uncertainty in 

markets that those who provide funding become reluctant to provide funding for anything more than the shortest terms to almost 

anyone who might have exposures, in this case, to sovereign debt. 

A couple of years ago, it was to subprime or other kind of mortgage 

securities. 

From our point of view, that kind of freezing up of dollar funding 

markets is what produces these kind of amplified negative effects 

on our real economy, stopping lending at home because everybody 

begins to husband their liquidity sources at that moment. What I 

describe as our limited role is limited to providing expensive dolVerDate Nov 24 2008 17:37 Oct 07, 2010 Jkt 058048 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\58048.TXT TERRIE
9 

lars—that’s why we charge a higher rate on them, to make sure 

that they’re only used to stop a really serious liquidity situation 

from developing. But, it is important precisely because there is assurance given that through the mechanisms of the European Central Bank and other central banks, in such circumstances, dollar 

funding will be available so that we don’t have that kind of freezing 

up by institutions in search of dollars that are unavailable. 

Chairman WATT. Let me see if I can squeeze in two other questions quickly. First of all, we tried to address—well, in the regulatory reform bill there is some language that says, if the House 

bill were passed as the final bill, that this kind of swap arrangement would require some heavier vote in the Fed, a higher level. 

What was the vote by which—or was there a vote by which this 

was done at the Fed and did it exceed that level, even though it’s 

not applicable at this current moment? 

Mr. TARULLO. Mr. Chairman, we had a meeting of the Federal 

Open Market Committee (FOMC) on Sunday, May 9th. At that 

meeting, the situation in Europe was discussed, as was the possible 

reactivation of the swap lines, and by unanimous vote, the FOMC 

granted the Chairman the authority to reactivate the lines. 

Chairman WATT. So I assume we didn’t require anything in the 

statute more than a unanimous vote. 

[laughter] 

Chairman WATT. So that answers my question. Okay. 

You talked about the swap agreements freezing your risk of currencies’ values going down. Obviously they—and that protects you 

against that, and then you’ll get interest. But I assume these 

agreements also freeze you from the prospect of currencies going up 

for that period of time too. Is the risk—is that interest commensurate with, say—or would you ever be doing this to try to see if you 

could make money on it anyway, other than the interest? 

Mr. TARULLO. We’re not speculating in foreign exchange here, 

Mr. Chairman. Our purpose is, as I said, to provide a backup 

source of expensive but nonetheless available liquidity if needed. 

The interest rate that we set on the swap line is meant, as I said, 

to discourage its use as a normal source of dollar funding. 

We arranged to have, in essence, the same number of dollars and 

euros or dollars and yen exchanged at the end of the swap, and we 

are getting the interest on the use of those dollars during that period. One would anticipate, although there’s no guarantee of this, 

that in a situation in which one polity is borrowing the currency 

of another that its own currency is probably depreciating, as we 

have seen some euro depreciation. There is, in theory though, the 

possibility that the currencies could go in the other direction. 

Chairman WATT. My time has expired, and I recognize the gentleman from California for 5 minutes for his questions. 

Mr. ROYCE. Thank you very much, Mr. Chairman. 

You mentioned the liquidity of euro debt markets. Do you think 

this is a liquidity problem rather than a solvency problem right 

now? 

Mr. TARULLO. I would say a couple of things about that, sir. One, 

the problem that we, the Federal Reserve, are addressing is the potential emergence of serious liquidity problems within the EuroVerDate Nov 24 2008 17:37 Oct 07, 2010 Jkt 058048 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\58048.TXT TERRIE
10 

pean financial system, which could in turn have an impact on our 

own financial system. 

There are obviously questions within Europe about the sustainability of the debt situations of some of the sovereigns, beginning 

with Greece. 

Mr. ROYCE. Yes, that’s what I wanted to ask you. Adding additional liquidity into the European market, does that make it more 

likely or less likely that these excessive debt issues are going to be 

addressed? 

Mr. TARULLO. I wouldn’t say, Mr. Royce, that drawing on a swap 

line makes it any more or less likely that the fiscal problems as 

such are going to be addressed. Remember, these are temporary 

lines that unwind. 

Mr. ROYCE. Yes. 

Mr. TARULLO. They’re only meant to stop the very bad kinds of 

things from happening and so— 

Mr. ROYCE. But at times I wonder, if you remove the urgency, 

can you create moral hazard? And let me go down this line of argument with you for a minute, Daniel. 

The more leeway we give EU governments in making the necessary changes to reign in their excessive debt, the more likely 

other countries around the world will take our actions to mean that 

they can delay those necessary changes. That’s the worry I have. 

In many ways I think—some people argue, some economists 

argue we saw this during the financial crisis. The Fed took extraordinary steps to bail out Bear Stearns, but lo and behold, according 

to some, that sent the message to Lehman Brothers and to other, 

much larger institutions, that the Federal Government would not 

let a major bank fail. And what we saw was that in negotiations 

then for additional capital or for merger, there was a delay, arguably, as people looked for the same deal that JPMorgan got with 

respect to the prior bailout at Bear Stearns. 

So it sends the message, and I wonder if we run the risk of repeating that hypothetical moral hazard problem that some economists argue was created there with this IMF-financed backstop. Do 

we delay that sense of crisis that the legislature has to act now, 

that the left government in Greece has to produce this solution because there is no backstop, or instead do we create this false sense 

of security? 

Mr. TARULLO. Let me try to distinguish our actions from, I think, 

the broader questions which you are raising. Our actions are addressed to forestalling a serious liquidity crisis in the short term, 

which has the potential for very negative effects in our own economy. I don’t think that— 

Mr. ROYCE. I understand your argument there. 

Mr. TARULLO. With respect to your broader question, I think 

there is always going to be a question about the degree to which 

the availability of a stabilization package or some form of assistance in a particular circumstance might create a more— 

Mr. ROYCE. I’m running out of time, so I—in your opening statement, you mentioned the Fed’s plan to reopen dollar swap lines 

with the Banks of Canada, England, and Japan, the ECB bank, 

and the Swiss National Bank, but as I said earlier, many of the 

world’s riskiest sovereign debt resides outside of the reach of these 

11 

central banks, and I worry about the extent of the Fed’s willingness 

then to assist these countries because I wonder where this will end. 

Venezuela, Argentina, Pakistan, the Ukraine, you look at the 

probability of default according to CME—the Chicago Mercantile 

Exchange did a little study on this: 48 percent for Venezuela; 46 

percent for Argentina, this is during the next 5 years; Pakistan, 42; 

Ukraine, 35; and Iraq, 28. As we put this off, the debt problem 

grows and the overleveraging grows. If the pressure comes home to 

bear sooner rather than later, perhaps it’s better in the international economy to have these things faced before they compound 

as they’re now compounding. 

Mr. TARULLO. I would say, Mr. Royce, as I said in my prepared 

statement, quite apart from our swaps, which are for the very limited purpose I indicated, there is a recognition that the broader stabilization package in the European Union is not itself a solution, 

and there is a need to address the fiscal consolidation issues within 

the European Union. 

Some of the urgency that you feel is being reflected in the way 

in which markets are looking at the elaboration of the program 

right now. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Chairman MEEKS. [presiding] The gentleman’s time has expired. 

And I will now recognize myself for 5 minutes. 

Let me first thank you, Governor, for your testimony today, and 

for the great work that I think that you and the Federal Reserve 

are doing in these most challenging of times in which we now live. 

Let me ask this question first of all: I think you mentioned in 

your opening statement that the Fed has posted on its Web site the 

contracts that detail the swap arrangements with foreign and central banks, including the European Central Bank, and that is, I 

think, great for the transparency that presents itself around these 

agreements. My question to you is, I’m wondering if you might explain the process around how the decisions are made with which 

foreign central banks to sign agreements and what the selecting 

criteria are and what is utilized, how are you doing that? 

Mr. TARULLO. With respect, Mr. Meeks, to the swap arrangements which have just gone into effect, I think the criteria essentially arose around the question of where might there be these 

kinds of serious liquidity problems, in what set of financial institutions might they conceivably arise. And, as you’ll note, what we did 

was to put in place swap arrangements with the G7 plus Switzerland, covering basically a broad part of the global financial system 

and the interconnected financial institutions within that system. 

With respect to some of those countries, it really is a matter of 

a backstop being available if needed. It may well not be needed. 

Some of the swap arrangements that were in place during the financial crisis of the last couple of years weren’t drawn on. So to 

some degree, their very presence provides markets with the assurance that in more serious circumstances, the liquidity will be available. 

I would just say that in general, our criteria are obviously going 

to include the understanding of the situation, the potential 

vulnerabilities, and, of course, the kinds of dealings that are going 

on at that moment which lead to the need for it. 

12 

Chairman MEEKS. The currency swap facility, which was established in 2007 to address dollar liquidity pressures resulting from 

the global financial crises, peaked the number of swaps outstanding in December 2008 with a total notional value surpassing 

$580 billion. And we were told that some economists believe that 

the new swap program could peak with total values as much as 

$100 billion, large but still, I guess, relatively, I think, modest 

sums compared to the Fed’s total balance sheet. Do you have your 

own estimates of peak notional values of total swaps outstanding 

for the new program? And do your estimates support the statement 

that even at the peak, the total value of outstanding swaps will 

represent only a relatively modest sum compared to the Federal 

Reserve’s total balance sheet? 

Mr. TARULLO. Mr. Chairman, let me say a few things. First, as 

you noted, the peak drawings during the financial crisis were about 

$580 billion, all of which has been unwound, an indication, I think, 

of the capacity of these arrangements to function and to function 

smoothly and effectively. 

Second, we don’t have a specific estimate as to what may be 

needed. One’s hope, of course, is that the institution of the arrangements, their availability, means that they won’t have to be drawn 

on to a considerable extent. But they might, and we have confidence in the arrangement that would lead to swaps being put in 

place and then being unwound. 

Third, on the general question of how much, we are always in a 

position to make our own decisions about whether to go through 

with a particular swap drawing, even within the confines of a particular agreement. We do retain the discretion to shape it as necessary. So from our point of view, this is, as I say, a prudent measure that is well established in central bank practice, has been used 

recently, and that we have the ability to control going forward. 

Chairman MEEKS. My last question that I’m going to try to get 

in, it’s a short question, because some of the economists worry that 

putting more U.S. money into circulation at a time when the Federal Reserve is looking at ways to eventually shrink its balance 

sheet would only add to inflationary pressures down the road. Do 

you agree with that statement? What mitigating actions is the Federal Reserve taking to prevent detrimental inflationary pressures 

from swap lines in the future? 

Mr. TARULLO. With respect to the swap lines, Mr. Chairman, 

they unwind within that relatively short term, so the reserves are 

not sitting on the balance sheet for a prolonged length of time. And 

of course at the present time, inflation is extremely subdued. 

Chairman MEEKS. Thank you. The gentleman from Illinois, Mr. 

Manzullo is recognized. 

Mr. MANZULLO. Thank you. 

Mr. Tarullo, when the Maastricht convergence criteria was 

struck, the annual deficit could not exceed 3 percent of GDP, and 

total national debt could not exceed 60 percent of GDP. Were there 

exceptions made to that criteria so as to enable countries to use the 

Euro? 

Mr. TARULLO. We’ll go back in time, Congressman, because I 

think you’re basically raising the question of what has gone wrong 

13 

here with the EU and the requirements for state member participation. 

Mr. MANZULLO. That’s a good—that’s a better question than 

mine. 

Mr. TARULLO. I think, if you recall, there were two kinds of problems back in the late 1990’s, which many economists observed, 

about the beginning of European Monetary Union. 

I think a lot of people acknowledged the benefits that could be 

gained, but there were two kinds of questions. One was whether 

this was an optimal currency union, meaning whether it actually 

covered the kind of area with the kinds of economic diversity that 

made for a workable currency union. There are questions about 

whether there are enough fiscal stabilization transfer payments 

and the like to allow for the fact that there would be variance in 

economic performance across the euro zone. 

The second question was exactly the one that I think we are all 

addressing today, which is whether in a monetary union with a single currency, there would be the potential for some member states 

of that currency union to be borrowing in ways that resulted in the 

underpricing of risk because there was some sort of implicit guarantee in the common currency. And as you indicated, there were 

requirements. 

Mr. MANZULLO. Were there exceptions made to those requirements? 

Mr. TARULLO. Yes. There was an exception— 

Mr. MANZULLO. Did Greece meet the requirement when it came 

in, do you recall? 

Mr. TARULLO. When it came in, 2001, I believe they did. 

Mr. MANZULLO. They did meet the requirement. Okay. 

Mr. TARULLO. But I think there’s widespread acknowledgement 

in Europe that the mechanisms for ensuring fiscal sustainability 

and fiscal responsibility have not been adequate, and that’s why 

you see the debate right now in Europe with proposals being offered by member states and by the Europe— 

Mr. MANZULLO. Do you see the United States going the same 

way, with the increase that we have in our annual deficit and government debt? 

Mr. TARULLO. Right now, I think we need to be clear, we’re in 

a very different situation, that the proportion of GDP accounted for 

by the interest payments we pay on our debt is substantially lower 

than those of the countries we’re talking about today. 

Mr. MANZULLO. What is it now? 

Mr. TARULLO. It’s a couple of percent, and of course, it is the case 

that in fact the response of markets has been to go to U.S. Treasuries. The flight to quality has been toward United States Government obligations, indicating that we still are a safe haven for finances in periods of stress. 

Mr. MANZULLO. But— 

Mr. TARULLO. Having said that, Congressman, and I think you 

were going to supplement if I didn’t. There is no question, as 

Chairman Bernanke has said, and as I would repeat today, that for 

the United States going forward, a very important economic policy 

aim needs to be to put ourselves on a more fiscally sustainable 

path, which is and I think ought to be an imperative for us all. But 

14 

it is not as if we are today in the same situation as Greece or some 

of the other countries we’re talking about. 

Mr. MANZULLO. I see many statistics that talk about the possibility that we could really exceed Greece’s debt ratios because of 

the excessive spending that’s going on in this country, and my concern is, who will bail out the United States as we push ourselves 

more towards the European economy or the European style of government? 

Mr. TARULLO. Congressman, I think that it is well within our capacity as a country to fix our own fiscal problems, and I think that 

Members of Congress, the Administration, and some of us on the 

Federal Reserve, have made essentially the same points. 

We are the world’s largest and most important economy. We are 

in a position to deal with our own problems. And, as I said, I think 

it’s imperative that we do so. 

Mr. MANZULLO. Thank you. 

Chairman MEEKS. The gentlewoman from Minnesota, Ms. Bachmann. 

Mrs. BACHMANN. Thank you very much, Mr. Chairman, and 

thank you so much, Governor Tarullo, for coming here today to 

speak with us. I just wanted to tag on to the Congressman from 

Illinois and ask, you talked about the fiscally sustainable path for 

the United States, and I’m just curious to know, from the Federal 

Reserve’s perspective, what would that fiscally sustainable path be? 

What would it look like? 

Clearly, Greece has gone out of a safe harbor zone and they’re 

not on a fiscally sustainable path. What does a fiscally sustainable 

path look like in the United States? 

Mr. TARULLO. I think conventionally, the understanding of a fiscally sustainable path would be one in which you don’t have your 

total outstanding debt continuing to rise. That is, you have a deficit, which when taking into account growth and the servicing costs 

associated with it, has gotten your debt leveled off so that you’re 

not in a continuing period of increase, which then suggests to markets that you’re not going to continue to increase your debt burden 

over time, and that has the consequent effects upon interest rates. 

So I think that, in the broadest terms, is how to understand fiscal sustainability over the medium to long term. 

Mrs. BACHMANN. Paul Volcker had just made the statement at 

Stanford, I’m sure that you’re aware of, where he said we have to 

turn this thing now, we can’t wait any longer. With America’s current fiscal situation, we can’t keep the spending levels up; we can’t 

keep the debt levels up; we have to do something and we have to 

turn this quickly because the time clock is turning. 

And I think that’s something a lot of us sense, just kind of like 

an hourglass when you turn it up. We’re seeing that the sands are 

coming toward their end here on America’s opportunities to be able 

to turn around the fiscal situation. How long do you think that we 

have to turn this around? 

Mr. TARULLO. I wouldn’t put a timeline on it. What I would say 

is that it is important sooner rather than later to begin developing 

a credible plan for achieving a fiscally sustainable budget. And by 

that, I mean it’s important that we have presented to investors, 

those who buy Treasuries, those who invest in other arenas as well, 

15 

the credible steps that will be taken in order to address these problems over the medium term. While I don’t think it’s appropriate for 

me to inject myself into the actual process of coming up with that, 

as a central banker, I would say that it behooves us to do something sooner rather than later. 

Mrs. BACHMANN. The Federal Reserve is in the currency swaps 

now, and I don’t know if you commented on this earlier, if you 

looked at any other additional policy steps, but what I really want 

to know is, is the Federal Reserve likely to take future actions regarding Greece or any other European nations that might get into 

trouble? Is the Federal Reserve looking at doing any future actions 

or is this it? Are we drawing the line? 

Mr. TARULLO. We don’t have any other actions under consideration. 

Mrs. BACHMANN. I guess what I’m concerned about is the moral 

hazard that we’re creating, because if we’re coming out and—I 

guess the only analogy I can look at is Fannie Mae and Freddie 

Mac. There was an implicit guarantee of the government-sponsored 

entity, and everyone had the idea that if Fannie and Freddie ever 

got into trouble that the United States will bail them out from 

that. That’s, as a matter of fact, what we did. 

Now we’re doing that with Greece. What would lead any other 

European nation to think otherwise, that the United States 

wouldn’t be there to bail them out if, God forbid, Spain’s economy 

would be such that it would require a bailout, or Portugal or Italy 

or Ireland or the United Kingdom? Why would be bail out Greece 

and not any of those other European nations? 

Mr. TARULLO. The Federal Reserve swap actions are not a bailout for anyone, and certainly not a bailout for Greece. This is a 

matter of providing short-term liquidity, and by short term, we are 

talking no more than 3 months of swapped lines and frequently 

less, just in order to stop dollar funding markets from freezing. 

This is not a matter of a bailout, this is a matter of— 

Mrs. BACHMANN. I think the way that my constituents back 

home view this is that if the American taxpayer is on the hook for 

up to $50 billion, they feel that is a bailout, because from their perspective, the money is coming out of their pocket; $50 billion dollars is still—in today’s parlance, that may not seem like a lot of 

money, but people back home look at $50 billion and they see that 

this only may be the beginning of a riptide of the United States 

bailing out country after country after country essentially with borrowed money, and they’re worried about the direction that we’re 

going because they see that the United States is at a tipping point 

financially. 

And now we’re in the situation where we’re—whether it’s the 

currency swaps or whatever it is, it’s still coming out of their pocket. 

Mr. TARULLO. With respect to the IMF program, that’s not something I can address, because it’s not something we have any real 

authority over. 

With respect to the swaps arrangements, I think that one can be 

assured, based on long-established practice, the kinds of safeguards 

we have on market risk, the dealing only with central banks, that 

this is something that is intended to and I hope will keep problems 

16 

from spreading more into our own country and not putting our own 

taxpayers at risk. 

Mrs. BACHMANN. But is this— 

Chairman MEEKS. The gentlelady’s time has expired. 

Mrs. BACHMANN. Thank you, Mr. Chairman. And thank you so 

much for answering the questions, Governor Tarullo. Thank you. 

Chairman MEEKS. The gentleman from Texas, Mr. Green, is recognized for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. I thank the witness for 

appearing today, and I thank the ranking member and you for 

making this hearing possible. 

Mr. Governor, I would like to talk to you about the status of investments in America. We have Treasury notes, the stock market 

is an investment, the dollar is an investment. Do we find that foreign entities and foreign personalities are investing in America? 

Mr. TARULLO. Certainly, Congressman, we have a substantial 

amount of inward investment, both direct investment and portfolio 

investment, including over time a significant amount of investment 

in U.S. Treasuries, yes. 

Mr. GREEN. In my readings, and this is from the newspaper, you 

probably have empirical evidence, but my readings indicate that 

people are still buying America, that America is still a good investment, that this is a place where people are still bringing their assets, they want their assets in America. Is this an accurate assessment? 

Mr. TARULLO. It has certainly been true over time, and in the 

very short term, which is to say recent weeks, I think what we 

have seen is a substantial sense that U.S. Treasuries continue to 

represent the safest kind of investment to make because we have 

seen a significant inflow into U.S. Treasuries even as the European 

problems have evolved. 

Mr. GREEN. And the U.S. dollar compared to the euro, my understanding is that the euro is currently not as strong as it was a year 

ago and that the dollar has gained strength. Without knowing the 

exact amounts, is that a fair statement? 

Mr. TARULLO. That is absolutely true, Congressman. As you 

know, the dollar depreciated against the euro over the course of 

several years earlier in this decade, but in recent months, there 

has been a significant appreciation of the dollar vis-a-vis the euro. 

Mr. GREEN. The reason I ask is because I want to give an accurate assessment of our country, and I don’t want to paint a picture 

of the country simply falling apart, if we don’t just cut in a Draconian way, the country is just going to fall off the edge, go over the 

precipice. I do believe that we have to be fiscally responsible, and 

I do believe that is something that requires our attention and that 

we must do it, but I don’t want to paint a picture that is unfair 

as it relates to the strength of our country and the view that our 

country has, the way it’s viewed in the world. 

America is still viewed as a great investment by other countries 

around the world. They still buy our Treasuries, they still invest 

in our dollar. It’s still the place to have your capital if you have 

capital that you can place someplace; is that a fair statement? 

Mr. TARULLO. I think that is a fair statement. Yes, Congressman. 

17 

Mr. GREEN. Okay. Now let’s talk for a moment about the circumstance with Greece. It is so true, as Dr. King made known to 

us, that life is an inescapable network of mutuality tied to a single 

garment of destiny. What impacts one directly impacts all indirectly, but we have found in this latest crisis, economic crisis, that 

the connectivity is a lot stronger than many of us realized. 

AIG had connections that were important to the world’s economic 

stability. A country like Greece is important to economic stability 

in the world. So, if you would—and you may have visited this issue 

prior to my coming in, and my apologies, I have been trying to 

monitor from my office and do a number of other things, but just 

briefly if you would, give us or me an indication as to how important the Greece scenario, the worst-case scenario would be to us if 

there is something that goes awry and we have to deal with the 

worst-case scenario, meaning a bankruptcy circumstance or a collapse. 

Mr. TARULLO. Congressman, I would say that the most serious 

kind of case is not one that involves Greece as such. What has happened over the last few months is that concerns about fiscal sustainability in Greece have extended to some other so-called peripheral European countries, which has in turn called into question the 

positions of financial institutions and others who may be investors 

in those peripheral countries. This is what happens when markets 

begin to inquire further into whether a position that they thought 

was a sustainable position might actually have some added exposure. 

I think from our point of view, we can’t pretend that we can insulate ourselves, much less the Europeans, from the consequences of 

the aftermath of some of the problems that they’re enduring right 

now. That is not something that is either appropriate or possible 

for us to do. What we can do and what we tried to do with our 

swap arrangements was to foreclose the situation in which generalized uncertainty led to a generalized unwillingness on the part of 

banks and money market funds and others to provide funding to 

all the transactions that go on every day— 

Mr. GREEN. I’m going to intercede. My time is up, and the chairman has been generous. Maybe you can get to it at a later time. 

I yield back, Mr. Chairman. My apologies. 

Chairman MEEKS. Thank you. The gentleman from Texas, Mr. 

Paul, is recognized for 5 minutes. 

Dr. PAUL. I thank the chairman. I want to follow up on the discussion about whether or not this is a bailout because, as we stated 

earlier, most Americans see this as a bailout. 

We obviously are committing funds. I estimate it must be close 

to $60 billion that we have committed in one way or the other, and 

if it wasn’t a bailout, they wouldn’t need us. What is the purpose? 

If they didn’t need help, if they didn’t need to be bailed out, they 

could just go in the market and borrow money. But they lost all 

their credit rating and nobody wants to loan money to Greece, so 

they have to be bailed out. And I think that is a proper term. 

But you say, no, well, we’re going to get them on their feet again, 

and they’re going to pay us back and we’re going to make a profit 

at it. But it’s the other side of this—what about the people who 

don’t get bailed out and get help? 

18 

Think about all the small companies in this country. Think of the 

people who were just about under with their mortgages, if they just 

had had help for 6 months to get back on their feet again. But no, 

they don’t get the help. The big banks and the countries get this. 

And this is why the people see this as so unfair. 

I see it as a very unfair system as well, but one that is not constitutionally oriented, because if we commit monies, especially on 

these swap funds, swap arrangements, currency swaps—these are 

monies, I know it’s traditional, I know it’s accepted, but Congress 

doesn’t appropriate this money. They don’t authorize this money, 

and it’s big money. It’s really big money, so I don’t see how we can 

avoid calling this a bailout. 

There was a time in 1979 and 1980, when our dollar was in trouble, and other countries came and the IMF bailed out our dollar 

and made these arrangements, but it’s always because it’s too big. 

If we don’t bail out the big guys, if we don’t bail out these sovereign nations, if we don’t bail out these banks because we’re really 

bailing out banks here; they’re the ones who have made these 

loans. 

So I would like to have you further defend this idea that it isn’t 

a bailout, and I would like to know, also, what kind of collateral 

we’re going to get on these swap arrangements. They say we have 

collateral. Well, what kind is it going to be? We have collateral 

with all this money we gave our banks. It was these illiquid assets, 

these derivatives, these housing markets that nobody else wanted. 

We have these assets and they’re all on the books at the Fed, but 

this is so unfair because it’s done with increasing the money supply 

and it’s a burden on the taxpayer. 

So, once again, see if you can convince me that this is not a bailout. Convince the American people. Try to talk to somebody who 

didn’t get help on their mortgage or a small businessman who was 

out of business and didn’t get treated as well as we treated these 

foreign nations and these foreign banks who have made loans to 

these governments. 

Mr. TARULLO. Congressman, let me say first that the Federal Reserve is not providing any money to Greece. We’re not providing 

any liquidity. We’re not providing any other assistance. What we 

have done is to say that we will in short tern swap arrangements 

provide dollars to the European Central Bank. 

Dr. PAUL. And you get what? 

Mr. TARULLO. And we get euros at the prevailing exchange rate 

for those dollars. And then the arrangement gets unwound at the 

end of it. If it’s an 8-day arrangement, as one maturing today— 

Dr. PAUL. Why is that necessary? Why don’t they just use the 

euros if it’s equal, if it’s an equal trade? 

Mr. TARULLO. It’s necessary, Congressman, because you have institutions in Europe which have lent dollars, for example, and 

which are in need of funding in dollars. It may be, and often is, 

a perfectly good transaction to have entered into. But as conditions 

become very tight because there’s a lot of uncertainty about the 

availability of dollars, then, as we saw a couple of years ago, even 

an institution which has been well run and has been careful in taking on exposures may not be able to get that dollar funding in the 

19 

short term. But that is why we offer this liquidity swap only at a 

penalty rate. 

Dr. PAUL. And where do we get the dollars to give them for their 

euros? 

Mr. TARULLO. It is created as a reserve and then unwound when 

it comes back, as they did during the financial crisis. But I just 

want to say one other thing, Congressman, which is that the reason we’re doing this is precisely so that we forestall the potential 

for the generalized freezing up in credit markets, which will constrain or would constrain our own large institutions, which in turn 

would constrain their ability to lend to American businesses and 

American households. 

And I would say that at this moment, when after a period of 

watching lending standards tighten for quite some time and then 

simply not relax at all, particularly for small businesses, we’re finally seeing some indications that those standards may be relaxing, that we may be able to start increasing lending to small businesses again. And I think this is the moment where we really do 

not want a substantial external shock to our financial system to 

undo the progress that we’re making in that direction. 

Dr. PAUL. If I may ask one quick question, what happens if the 

euro loses 50 percent of the value? Are the taxpayers, is the dollar 

at risk there? Do we lose something then? 

Mr. TARULLO. The European Central Bank is still obliged to pay 

us back the number of dollars that they drew originally. Market 

risk rests with them, not us. 

Dr. PAUL. We’re holding the euros. 

Chairman MEEKS. The gentleman’s time has expired. And before 

we close this panel, I will go to the chairman of the Domestic Monetary Policy Subcommittee, if he has anything. 

Chairman WATT. Mr. Chairman, I have used my 5 minutes, and 

I apologize to the Governor for having to run out. I had another 

commitment that I had to attend to, but I thank him for being 

here. 

And there’s, I think, a series of votes coming that might intervene between—in fact, they’re getting ready to start right now, 

that might intervene between this panel and the second panel. 

We should note that some members of the subcommittees may 

have additional questions to submit in writing. And without objection, the hearing record will remain open for 30 days for members 

to submit written questions to this witness and to place his responses in the record. 

So we thank the Governor for being here, and this part of the 

hearing is over. We’ll go into recess until we can have the series 

of votes, and then we’ll go to the second panel. 

Mr. TARULLO. Thank you, Mr. Chairman. And thank all of you 

for your interest. 

[recess] 

Chairman MEEKS. [presiding] The hearing will come to order and 

we will resume the testimony. 

First order of business, what I would like to do is, without objection, enter into the record the testimony of Mr. Martin A. Weiss, 

who is a specialist in international trade and finance from the Congressional Research Service; and the testimony of Mr. Amar 

20 

Bhattacharya, who is the G24 Secretariat. So without objection, 

their testimony will be made a part of the record. 

We have for our second panel some very knowledgeable and astute individuals. First, Ms. Carmen Reinhart, who is a professor of 

economics at the University of Maryland. She is the director of the 

Center for International Economics, and she received her Ph.D. 

from Columbia University. Professor Reinhart held positions as 

chief economist and vice president of the investment bank of Bear 

Stearns in the 1980’s where she became interested in financial crises, international contagion, and commodity price cycles. Subsequently, she spent several years at the International Monetary 

Fund. She was a research associate at the National Bureau of Economic Research, a research fellow at the Center for Economic Policy Research, and a member of the Council on Foreign Relations. 

Her papers have been published in leading scholarly journals and 

her work is frequently featured in the financial press around the 

world. Her latest book, entitled, ‘‘This Time is Different: Eight Centuries of Financial Folly,’’ documents the striking similarities of the 

recurring booms and busts that have characterized financial history. 

Welcome, Ms. Reinhart. 

And we also have with us Mr. Edwin Truman, who has been the 

senior fellow at the Peterson Institute for International Economics 

since 2001, served as Assistant Secretary of the U.S. Treasury for 

International Affairs from December 1998 to January 2001, and returned to the U.S. Treasury as Counselor to the Secretary in May 

2009. He directed the Division of International Finance of the 

Board of Governors of the Federal Reserve System from 1977 to 

1998. 

Mr. Truman has been a member of numerous international 

groups working on economic and financial issues and he has published on international monetary economics, international debt 

problems, economic development, and European economic integration. He is the author and coauthor or editor of several books, including, ‘‘Reform the IMF for the 21st Century: A Strategy for the 

IMF Reform’’, ‘‘Chasing Dirty Money: The Fight Against Money 

Laundering’’, and ‘‘Inflation Targeting in the World Economy.’’ He 

has a B.A. from Amherst College and a Ph.D. from Yale, both in 

economics. 

And finally, we have Mr. Peter Morici, who is a professor at the 

Robert H. Smith School of Business at the University of Maryland. 

The professor is recognized as an expert on economic policy and 

international economics at the University of Maryland. And prior 

to joining the University, he served as Director of the Office of Economics of the U.S. International Trade Commission. 

He is the author of 18 books and monographs and has published 

widely in leading public policy and business journals, including the 

Harvard Business Review and Foreign Policy. He has lectured and 

offered executive programs at more than 100 institutions, including 

Columbia University, the Harvard Business School, and Oxford 

University, and his views are frequently featured on several networks—CNN, CBS, BBC, FOX, you just name them, and he’s on 

all of them. He’s on national broadcast networks not only here in 

21 

the United States, but indeed in this small place that we call the 

Earth, he is everywhere. 

Thank you for being with us. 

And we will hear now from Ms. Reinhart. Your entire written 

testimony, as indicated earlier, will be submitted into the record, 

so please summarize. You will have 5 minutes to give testimony. 

You will see after 4 minutes, a yellow light will come on letting you 

know that you have 1 minute to go. We will be a little liberal on 

time if you need it, but let’s try to stick to the time. 

Welcome, Ms. Reinhart. 

STATEMENT OF CARMEN M. REINHART, PROFESSOR OF ECONOMICS AND DIRECTOR OF THE CENTER FOR INTERNATIONAL ECONOMICS, UNIVERSITY OF MARYLAND 

Ms. REINHART. Thank you, Chairmen Meeks and Watt, and other 

members of the subcommittees for the opportunity to comment on 

the IMF’s role in helping Europe deal with its economic crisis. 

I was also asked to remark on whether the external support for 

Greece and other EU member nations exacerbates moral hazard 

and on the adequacy of the proposed fiscal austerity measures. 

It’s not surprising that questions have arisen about the legitimacy of IMF involvement in a program aimed at aborting a sovereign default in Greece and possibly other high-income countries. 

The last of the peacetime sovereign defaults among high-income 

countries took place during the Great Depression of the 1930’s, well 

before the founding of the IMF in 1944. 

Item five of the purposes of the IMF in its articles of agreement 

reads, ‘‘to give confidence to members by making general resources 

of the Fund temporarily available to them under adequate safeguards, those funds providing them with the opportunity to correct 

maladjustments in their balance of payments without resorting to 

measures destructive of national or international prosperity.’’ 

Whatever the concerns about the solvency of Greece and other 

EU nations may be, these countries also face a classic maladjustment in their balance of payments that arise from a substantial 

loss of international competitiveness. They are IMF member countries, and as such a part of the IMF’s original mandate. 

As my recent work documents, the wealthy economies are no 

strangers to IMF programs. The United States had two IMF programs in the 1960’s, and the U.K. holds the record with 11 IMF 

programs. Portugal had a program as late as 1986. These programs, however, did not attempt to deal with solvency issues and 

were modest in size, as was customary in the pre-1995 Mexican 

peso crisis bailout model. 

The need for Greece on fiscal austerity and other European 

economies to slash government spending is not some artificial imposition by the IMF or the European Union. Once investors decide 

that a country is living beyond its means, it will have a hard time 

meeting its debt obligations. Spending cuts become a reality of 

arithmetic, but fiscal austerity doesn’t pay off quickly. 

A large and sudden contraction in government spending is almost sure to shrink economic activity as well. This means tax collections fall and unemployment and welfare benefits rise, undermining efforts to reduce the deficit. Even if new borrowing is reVerDate Nov 24 2008 17:37 Oct 07, 2010 Jkt 058048 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\58048.TXT TERRIE
22 

duced or eliminated, it takes time to whittle down large debt, and 

international investors are notoriously impatient. 

A restructuring of Greek sovereign debt may not be inevitable, 

but it certainly seems probable. A country such as Greece could 

seek to negotiate with its creditors to reduce its debt, but that 

path, essentially a partial default, is also no panacea. Argentina’s 

economy contracted by about 15 percent after its default in 2001 

and was shut out of international capital markets for a while. 

On moral hazard, as in other situations, questions now arise 

about the tradeoff between exacerbating moral hazard and limiting 

contagion. I think it is safe to conclude that the combination of 

bailouts and forbearance are well entrenched in the expectations 

that financial market participants have for the foreseeable future. 

However, on contagion, it is relevant to recall that Thailand has an 

even smaller gross domestic product than Greece, but in 1997, Thai 

financial problems ignited the Asian crisis. 

There are three main mechanisms for this contagion. First, many 

governments have common lenders, including international banks 

and hedge funds. If these institutions suffer large losses in one national market, they will pull back lending to the others. Second, 

trouble in one country acts as a wakeup call to investors who scour 

their global holdings for similar risks elsewhere. When they look 

hard enough, they will find something to worry about, triggering 

even more funding withdrawals. Third, Greece, casts a long shadow 

on the European continent because 15 other countries share a common currency. Greece debt problems called into question whether 

the euro will survive. 

The large EU–IMF package was intended to send a strong signal 

that the EU is committed to go to great lengths to avoid a breakdown of the euro. It is intended to provide a broad-based coverage 

beyond Greece in the spirit of the TARP legislation in the fall of 

2009. 

Like the U.S. bailout package, an important feature of the plan 

was to continue that—Greek bonds as rating agency downgrades 

had never taken place. This kind of forbearance, shown to toxic assets in the United States over the last 2 years—moral hazard is an 

issue that cannot be understated. 

At best the EU–IMF initiative can buy some time for policymakers in other countries that have come under duress to implement difficult austerity measures and to move to restructure private debts. It does not change Greece’s or anyone else’s levels of 

outstanding debts, and their even more worrisome profile in the period ahead. 

[The prepared statement of Professor Reinhart can be found on 

page 42 of the appendix.] 

Chairman MEEKS. Thank you. 

Mr. Truman. 

STATEMENT OF EDWIN M. TRUMAN, SENIOR FELLOW, THE 

PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS 

Mr. TRUMAN. Thank you, Chairmen Meeks and Watt, and members of the subcommittees. I appreciate the opportunity to appear 

before you to discuss the role of the Federal Reserve and the InterVerDate Nov 24 2008 17:37 Oct 07, 2010 Jkt 058048 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\58048.TXT TERRIE
23 

national Monetary Fund in stabilizing Europe. I will concentrate 

primarily on the International Monetary Fund aspect. 

The Greek tragedy, which is now on center stage, was largely of 

the Greek authorities’ own crafting. However, it also emerged as an 

aftershock of the global economic and financial crisis of 2007–2009 

and has set off a European crisis. 

The challenge is to manage the European crisis so as to minimize 

the negative fallout on the fragile global economy and financial system and to reduce the severity of other aftershocks, which inevitably will occur over the next several years. How successfully the 

Europeans, the United States, and other systemically important 

economies deal with that challenge will determine the strength of 

our own and the global economic recovery now underway. 

The major policy instrument available to the United States to 

contain the European crisis and its aftermath is the International 

Monetary Fund. The United States should continue to provide maximum constructive support for the Fund in carrying out its responsibilities for the promotion of global growth and financial stability. 

I will summarize the rest of my testimony this afternoon with 

eight points: 

First, the program of Greek economic and financial stabilization 

and reform, approved by the IMF executive board on Sunday, May 

10th, is ambitious and demanding. It may fail, but it is in the collective interest of the United States and the international community to give the people of Greece and the authorities of Greece time 

to implement at least the first phase of their program. 

Second, the European Union authorities delayed too long in providing a framework to support economic reform and to provide the 

necessary financial support for Greece. Consequently, the financial 

contagion has spread to other countries in the euro area and perhaps beyond. 

For possible future use, the EU authorities are now putting in 

place a European Stabilization Mechanism and have taken other 

steps to contain the crisis, including unconventional action by the 

European Central Bank. 

The IMF may be called upon to cooperate with the ESM using 

the Greek program as a template. A positive response by the 

United States to such a request, on appropriate terms, is fully consistent with the Fund’s core mission. Meanwhile, the Federal Reserve has reactivated some of the swap arrangements that were deployed to contain the recent financial crisis and its impacts on financial markets, in my view, appropriately. 

Third, the IMF is not and should not be viewed as an institution 

that lends only to emerging market and developing countries. The 

mission of the Fund is to provide prompt and persuasive policy advice and to help design and finance economic reform programs for 

all its members. 

Fourth, beyond its traditional role with respect to macroeconomic 

policies, which is much needed to restore and maintain economic 

growth in Europe, a key area of IMF policy advice for Europe is 

on strengthening their banks that now face the high probability of 

another round of substantially impaired assets and the risk of sovereign defaults. 

24 

Fifth, all IMF-supported programs involve a balance between 

painful policy adjustments that adversely affect economic growth in 

the short run and necessary, temporary financial support. The correct balance between adjustment and financing is a matter of intense disagreement, but both are required. 

Sixth, the contribution of IMF lending to the perpetuation of 

moral hazard is greatly exaggerated under current, and most, circumstances. 

Seventh, I am not greatly concerned that the IMF will be called 

upon to lend more to European countries, will run out of resources 

to lend, or will leave non-European members of the IMF in the financial lurch. 

And last, citizens of the United States have a great deal to gain 

from successfully containing the European crisis. However, if the 

United States and the global economy are to recover decisively and 

enter a period of sustained expansion, more needs to be done beyond simply containment. U.S. policies should be oriented towards 

further substantive and financial support for the Fund in order to 

provide more confidence in the global economic outlook and in the 

restoration of financial stability. 

Thank you very much. I look forward to your questions. 

[The prepared statement of Mr. Truman can be found on page 56 

of the appendix.] 

Chairman MEEKS. Thank you. 

Mr. Morici. 

STATEMENT OF PETER MORICI, PROFESSOR, ROBERT H. 

SMITH SCHOOL OF BUSINESS, UNIVERSITY OF MARYLAND 

Mr. MORICI. Thank you for having me. 

I think, as the flash crash and events of the last week have demonstrated, Greece’s financial circumstances have the potential for a 

dramatic impact on Europe and in turn on the United States, not 

merely through our banks but our equity markets as well. 

The problems in Greece really emerge from several interrelated 

problems in Europe, and they are not really of Greece’s making 

alone. With economic integration, folks in Greece, Spain, Portugal, 

and elsewhere came to expect social benefits comparable to those 

in places like Denmark, Holland, and Germany, but they simply 

don’t have the economies to pay for it. 

In the United States, social benefits are not the same in Mississippi as in New York, but they’re not that different. We essentially tax Manhattan to subsidize Mississippi. In Europe, the Germans enjoy gold-plated benefits as they lecture the Greeks about 

Teutonic austerity and the Greeks simply are trying to provide 

benefits consistent with the expectations of their populations that 

they simply can’t afford. 

What this means is essentially the Europe Currency Union, the 

common euro, requires a fiscal union where they share the costs of 

the safety net, but it also doesn’t mean higher taxes necessarily, 

because probably the Europeans have taxed themselves to the 

point that is detrimental. But rather it means that not only must 

the Greeks have less, the Germans must have less too. 

The Europeans have taxed themselves and provided benefits to 

the point that they have virtually zero population growth in several 

25 

countries, and their economic growth has been woefully slow for 

the last several years, actually, the last several decades. The bottom line is fiscal unity must be matched by—currency unity must 

be matched by fiscal unity, and these bailouts aren’t going to do 

much good unless we do that. And it’s also going to require wholesale public sector reform to bring the social safety net in line with 

that necessary to encourage individual risk-taking and entrepreneurship. 

Right now, the way things stand is the Germans are confronted 

with the choice of either subsidizing the Greeks, either directly by 

taxing themselves and transferring money, or subsidizing them indirectly by having the European Central Bank print euros, buy 

Greek debt and pretend that they will someday be repaid. 

Make no mistake about it. These austerity programs are far beyond what can succeed. Greek debt is essentially in default. So the 

Europeans are basically faced with, in the north, taxing themselves 

to subsidize the south, but also in the process, reducing their own 

social benefits or enduring inflation, which will do the same. 

The lesson for the United States has been largely misunderstood, 

I believe. The U.S. budget doesn’t make a whole lot of sense. The 

drama we had in Sacramento recently looks a lot like what we had 

in Athens last week. The problem here isn’t so much the scope of 

the safety net, it’s that our public sector is so inefficient. It really 

is. 

Consider healthcare, for example. We spend almost 20 percent of 

GDP on healthcare. The Germans spend 12 percent. Arguably, 

their healthcare system is as good as ours. Half of that is paid for 

by the federal government or the federal and state governments. 

That should tell us something. 

Universities are comical institutions of inefficiency. Municipalities have become the same in recent years as they took advantage 

of the taxes they gained in the property boom to basically multiply 

bureaucrats. Ask yourself, are your municipal services any better 

or different they were 20 years ago? Go count noses at city hall. 

I don’t mean to cast this in terms of a liberal versus conservative, more versus less government. But in the United States, we 

are probably facing the same financial catastrophe, but for the fact 

that we print the world’s money simply because our public sector 

is not functioning properly. 

That, I believe, is part of why we’re seeing the kinds of elections 

we’re seeing right now. It’s not a Republican or a Democratic issue; 

it’s a citizen issue. 

Now in the United States, we can’t fail, because we print the 

world’s money. For now, the world accepts the dollar as the coin 

of the realm. However, we’re not that far away from the day when 

we’ll have printed so darn much of it that we will suffer inflation 

instead of outright default, and we may not be that far away from 

an alternative to the dollar emerging. And I would be happy to address how that could happen during the question period, as I am 

out of time. 

[The prepared statement of Professor Morici can be found on 

page 37 of the appendix.] 

26 

Chairman MEEKS. I thank all of you for your testimony, and 

now, I will recognize members for 5 minutes of questioning. I will 

yield myself the first 5 minutes for questions. 

And I will start out, I guess, with Ms. Reinhart. In 2010, March 

2010, the prime minister of Greece vocally criticized unprincipled 

speculators for making billions of dollars every day by betting on 

a Greek default. My question is, what are your opinions about the 

role of speculators in this current European debt crisis and what 

related recommendations do you have for our financial regulatory 

efforts? What implications do you think that these speculator actions have for international finance reforms efforts and the necessity of having some universal coordination? 

Ms. REINHART. Mr. Chairman, I have in the past commented 

that speculators are like vultures. They begin to circle when something is dying, but they don’t create the problem. They play upon 

an existing problem, and the existing problem here was the surge 

in Greek debt. 

The speculator issue aside, I do think that regulatory reform of 

one kind or another will be more attuned to taking into account 

hidden debts, which also is an important lesson from Greece. That 

is, not only the debts that we see but off-balance-sheet items that 

we don’t see. And I think that was an issue, especially with the 

Goldman Sachs debacle. 

So I don’t think that the speculator issue is a new one to this 

crisis. It crops up every time there is a crisis. But I do think that 

the issue of tackling or paying more attention to leverage in general and opaqueness of balance sheets, hidden debts are things that 

are very much on the agenda. 

Chairman MEEKS. Let me just follow that up with, it seems as 

though there were early warnings that—and this is for anyone; 

anyone can answer this. There were early warnings about the past 

Greek sovereign debt levels. The IMF saw that, but yet we still 

have the crisis. The crisis was still created even though it was seen 

earlier. 

Now some are talking about, therefore we have to improve, the 

IMF has to improve its surveillance process. And there have been 

several ideas that have been put out there. 

I think the last G–20 launch of the mutual assessment process, 

that’s one of them. And there have been other suggestions, which 

include an enhanced, multilateral approach involving the IMF and 

the enrichment of the systemic content of the bilateral or countrylevel surveillance by introducing thematic country reports. 

So my question to all of you would be, do you agree with any of 

those recommendations or do you have other recommendations? 

How could we improve IMF surveillance procedures so that we may 

be able to prevent a crisis before it happens? 

Mr. MORICI. You can’t improve IMF surveillance procedures so 

this won’t happen. Angela Merkel is running around trashing 

naked shorts. I am not a big fan of naked shorts, if you have 

watched me on TV, but they’re not what’s causing this problem. 

What’s causing the problem is that Greece spent too much money 

and no one has faith in this $1 trillion patch. 

27 

The IMF has told this government repeatedly its deficits are too 

large and must be fixed. We have been surveillanced beyond limit, 

but we don’t act. 

At the end of the day, the members of the IMF are sovereign governments, and they cannot be compelled by an international body 

to act any differently than they choose, except if they need cash at 

the moment. So the IMF’s leverage at any point in time is strictly 

limited to the leverage provided by short-term finance. Once that 

goes away, they’ll go back to what they’re doing. 

How many times has the IMF made reference to China’s undervalued currency? Does China move? No. It’s a sovereign government. It does as it pleases. I’m sorry—I don’t mean to point. Does 

this body balance the Federal budget? No. This is a sovereign body; 

the IMF is not. 

Mr. TRUMAN. I think I agree with Peter to the extent that you’re 

not going to do away with crises, but you can reduce their incidence and variance, and I think there is a role for better IMF surveillance. 

I think in the European case, maybe as in ours, there is a tendency, was a tendency in Europe, to say the IMF doesn’t know what 

it is doing and it should stay out of our business. And one of the 

issues in this crisis was precisely that because Europe delayed in 

bringing the Fund in even though the Fund has a much better 

record at imposing policy conditionality than does the European 

Union, Europe tended not to look at IMF advice. 

So I think the lesson from this is that the Fund can do more, 

should do more, and should be more pointed in its criticisms. Certainly, Peter is right; the Fund doesn’t have much leverage, but the 

bully pulpit actually provides quite a lot of leverage. That’s what 

we have seen in this crisis. And I think there are mechanisms to 

improve the process. 

Chairman MEEKS. My time has expired, but I’ll allow—if you 

want to quickly respond, Ms. Reinhart. 

Ms. REINHART. I would just quickly add that I share the view of 

the former speakers. I would say that we can do better in terms 

of surveillance, particularly monitoring debts, but I am skeptical 

about the ability to enforce, especially during the boom period 

when no one is willing to listen to the IMF or others that warn of 

dangers. That should apply to us now too. 

Chairman MEEKS. I may have a follow-up question to that, if we 

get to a second round. My time has expired. 

I now recognize the gentleman from New Jersey, Mr. Lance, for 

5 minutes. 

Mr. LANCE. Thank you very much, Mr. Chairman. 

As I understand it in the testimony, if we distill it to its essence, 

the IMF is bailing out Greece based largely upon the fact that 

Greece provides social services to its citizens that it cannot afford, 

given the level of productivity in Greece. Professor, would that be 

a distillation with which you would agree? 

Mr. MORICI. That is one essential element. The other essential 

element is that you’re generally—providing social services it cannot 

afford. So the point that it shrinks its pie, look at the level of unemployment benefits and employment support the German government provided during the recession. Think of what Manhattan 

28 

could provide for itself if it wasn’t taxed, the financial sector wasn’t 

taxed to provide to the rest of the country. 

My view is that it’s very easy to blame the Greeks, the Portuguese, the Spaniards, and so forth, but it’s more of a continental 

problem. 

Mr. LANCE. So be it. Let us assume that it is a continental problem. Why should we here in this country participate in helping bail 

that situation out? Is it not at least primarily the responsibility of 

the European continent? 

Mr. MORICI. Yes, however, I think you would find that the balance sheets of our banks would be very threatened, much as their 

balance sheets were threatened when we had our mortgage crisis, 

that if there is a sovereign debt crisis in Europe, it would find its 

way back to our major banks. 

Mr. LANCE. To our major banks, not to community banks across 

America. This is— 

Mr. MORICI. Community banks are already in pretty tough shape 

because the TARP wasn’t used to assist them. We didn’t have a 

resolution trust as we did during the savings-and-loan crisis. Instead, this Administration chose to prop up General Motors and do 

other things, and it was not inclined—which I advised in the Senate that they not do. And it was disinclined to set up a resolution 

trust type of mechanism because the major Wall Street banks 

didn’t want it. They’re busy having a good time restructuring those 

loans on their own and making cash of them, so the community 

banks are already in very tough shape. 

Mr. LANCE. Thank you. Mr. Truman, do you wish to comment? 

Mr. TRUMAN. Well, I would like to add a nuance to your phrase 

of ‘‘bailout’’ so we can understand what we are talking about. A 

bailout would be when you have a bill due, or I have a bill, let’s 

put it my way and say, I have a bill to pay and you say, ‘‘Ted Truman, I’ll pay it for you, and you don’t have to pay it anymore.’’ In 

the case of an IMF loan, what we’re saying is, we will lend you the 

money, you, Greece the money, to pay that debt. And you will pay 

us back, which has happened in every IMF program that has ever 

been written. 

So the financial transaction is only one of buying time for the 

debtor so that it can raise the money both to pay back the IMF and 

to pay their other debts. 

Mr. LANCE. Are you confident that we will be paid back—not we, 

the IMF will be paid back from Greece in this situation? 

Mr. TRUMAN. Yes, I am confident because ‘‘we,’’ meaning the 

American taxpayers, have been paid back every time. There are a 

few, three, countries which have debts that haven’t been paid, and 

there has been a write-down of other types of debt that have nothing to do with this type of— 

Mr. LANCE. Well, thank you. You’re on the record that you’re 

confident that we will be paid back, that the IMF will be paid back 

from Greece. 

Ms. REINHART. I would like to add— 

Mr. LANCE. Are you confident that we would be paid back? 

Ms. REINHART. Yes. 

Mr. LANCE. Thank you. Are you confident, Mr. Morici? 

29 

Mr. MORICI. I’m confident that the IMF will be paid back because it has, I think—Carmen, correct me if I’m wrong—$150 billion in 

the $1 trillion at play. So they’ll get paid back before the others do. 

The real danger, as Mr. Tarullo said, we’ll get paid back our dollars from the ECB. We may well be in a position where the ECB 

doesn’t get paid back and the euro, they’ll never be—they’re going 

to have to print a lot of euro to pay us back. The real question will 

be whether the swaps will be worth anything if the euro fails. 

Mr. LANCE. Thank you very much. I yield back the balance of my 

time. 

Chairman MEEKS. The gentleman from North Carolina, Mr. 

Watt, is recognized for 5 minutes. 

Chairman WATT. Thank you, Mr. Chairman. 

Professor Morici, I was fascinated by both your question, what 

should it tell us, and your comment that the public sector is not 

functioning properly. I happen to agree with the second part of it, 

but I don’t know what it would tell us. 

I’m accustomed to constituents writing me and telling me that 

the public sector is dysfunctional and so forth and so on. They’re 

usually talking about the U.S. Postal Service, which has been 

privatized, or Fannie and Freddie, which were shareholder entities 

at least at some level. So I’m not sure what any of that tells us. 

It might tell us that Germany’s healthcare is 12 percent and ours 

is 20 percent because theirs is socialized and ours is privatized. 

Ours is in the private sector. 

It might tell us that. I’m not arguing with you. I’m just telling 

you some of the things that might tell us. We can beat up on the 

public sector all we want, but it was, as I recalled, the private sector that really screwed up, that resulted in the financial services 

meltdown. Otherwise, we’re blaming somebody that shouldn’t be 

blamed unless you’re taking the position that they didn’t have any 

blame. 

Yes, the public sector is not functioning properly, but I’m not 

sure that the private sector is doing all that great either. 

Mr. MORICI. You are responsible for what the public sector pays 

for the services it finances. 

Chairman WATT. Say that again, so I make sure I understand. 

Mr. MORICI. I don’t mean to put it in those terms, but— 

Chairman WATT. Go ahead. 

Mr. MORICI. This government is responsible for what it pays for 

the private, for the services it provides citizens, and what I am saying is this government is paying too much for the services it provides, and it is now a large enough share of the economy, for example through healthcare— 

Chairman WATT. I understand that, but I don’t know how that 

answers the question. And again, I actually agree with you. 

Mr. MORICI. We can go down this path. You can ignore this problem. 

Chairman WATT. No, I don’t want to go down this path because 

all that will do is be counterproductive. Let me ask you another 

question. 

Mr. MORICI. I didn’t— 

Chairman WATT. You mentioned the possibility of there being 

some alternative currency that would become the predominant curVerDate Nov 24 2008 17:37 Oct 07, 2010 Jkt 058048 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\58048.TXT TERRIE
30 

rency of the world. As I recall, that currency was going to be the 

euro when the European Union decided that it would get together 

and be the dominant force that we had all thought that it might 

be. It seems to me that it is the euro that is now in trouble. 

What exactly would be that alternative currency that you’re talking about? Would it be the overvalued Chinese currency? Would it 

be the euro, which is now in trouble? What alternative currency 

are you talking about? 

Mr. MORICI. I think the yuan could eventually replace the dollar, 

given the way we’re conducting our affairs. 

Chairman WATT. And given the fact that it’s not trading fairly, 

you say out of one side we shouldn’t be beating up, you think we 

shouldn’t be beating up on the Chinese to make it a fair currency. 

Ms. Reinhart, maybe you can help us. Yes? 

Ms. REINHART. Mr. Chairman, I would like to say that right now, 

I think talking about any other currency is really pie in the sky. 

The renminbi is not a convertible currency, no countries issue their 

debts denominated in renminbi, no countries peg to the renminbi. 

It is not traded. I think, for the sake of realism, we have to assume 

that the reserve currency for the foreseeable future is the dollar. 

One thing in connection with that however, I would like to highlight that we shouldn’t get complacent. That should not— 

Chairman WATT. Oh, yes. Well, I agree with that in that we’re 

becoming less and less a force in the world economy. 

Mr. MORICI. Mr. Watt, if you would permit me, I think it’s— 

Chairman WATT. Yes, sir. Go ahead. I didn’t mean to cut you off. 

I won’t ask another question. 

Mr. MORICI. The dollar did not—I implied, I believe I said that 

we should not presume the dollar will continue to be the reserve 

currency. That’s essentially what I said. 

Chairman WATT. You raised the prospect of an alternative currency. 

Mr. MORICI. Just because of— 

Chairman WATT. I’m just trying to figure out what the alternative currency would be. 

Mr. MORICI. Okay. You keep talking to me and you don’t let me 

answer. If the chairman will give me some forbearance, we should 

not— 

Chairman MEEKS. If you could, answer, and then we’ll move on, 

because the gentleman’s time has expired. You could answer the 

question, but as I said, he won’t get a chance to answer because 

his time has expired. 

Mr. MORICI. I’ll try not to be unnecessarily provocative, Mr. 

Watt. 

At the current moment, at current exchange rates, China’s economy is worth $5 trillion, ours is worth $15 trillion. It is my position 

that if China’s economy was properly valued over a period of 3 to 

5 years, it would be worth $10 trillion. Given how rapidly it’s growing, it wouldn’t be long before it was at least as denominated by 

currencies, as large as ours. 

Just because the renminbi is not convertible today does not mean 

it wouldn’t be convertible 5 years from now. And the fundamental 

value of a currency is a product of what the economy can produce, 

what you can get for it, and how well the fiscal affairs of a country 

31 

is run so that there is adequate confidence that too much of the 

currency won’t be printed. Ergo, China will soon be as large as us 

if China’s currency were fairly valued, and given the way we’re 

printing money around here right now and the potential for inflation right now, it could be that people start to seek other currencies. 

China could make its currency convertible 5, 6, or 7 years from 

now, and people might want to start holding it instead of ours. 

Chairman MEEKS. The gentleman from California, Mr. Sherman, 

is recognized for 5 minutes. 

Mr. SHERMAN. Thank you, Mr. Morici. I would think one possible 

reserve currency is U.S. Treasury inflation-protected securities. 

The idea that you have to hold a currency as opposed to a debt obligation of a sovereign, you— 

Mr. MORICI. Well, the fact of the matter is governments really 

don’t hold dollars, they hold debt securities. 

Mr. SHERMAN. Right, they hold bonds. When you hold a straight 

U.S. bond, you’re investing in the U.S. currency. When you hold a 

Treasury inflation-protected security, you’re holding a not fully dollar-denominated security, a security that is payable by the United 

States but in a certain purchasing power. 

Mr. MORICI. That is true, however— 

Mr. SHERMAN. And that might be, if one were looking for a riskfree reserve currency available in today’s market rather than the 

market you put forward for 5 or 10 years from now, why aren’t 

more countries investing in TIPS? 

Mr. MORICI. I can’t answer why more countries aren’t investing 

in TIPS. 

Mr. SHERMAN. Okay. Now commenting on—the purpose of these 

hearings is—well, first I’m going to comment on China. The fact is, 

China is doing a spectacular job of running their economy. They’re 

doing so because they cheat. And we’re doing a terrible job, in part, 

evidenced by the fact that we let them cheat. And the rich and 

powerful in both countries benefit from them cheating and us letting them cheat. So you may be right that they will succeed. 

But now, shifting to the focus, I think, of today’s hearings, the 

bailout of Greece is not a bailout of Greece, it’s a bailout of the 

banks that lent money to Greece. The total package for Greece and 

others put together by the Europeans is roughly $1 trillion. Am I 

correct in believing that only $39 billion of that is from the IMF, 

that our share of that $39 billion is a little less than 25 percent, 

probably more than the stated 17 percent, and that accordingly our 

share of this bailout package is roughly one percent of the total 

trillion dollars? 

Can anybody comment on that math? Mr. Truman? 

Mr. TRUMAN. Actually, because of the way the Fund is financing 

itself today, our share is more like 10 percent, because the Fund 

is providing a little less than a third of the money. But half the 

third of the money is borrowing from countries other than the 

United States, so that we have— 

Mr. SHERMAN. Now you’re saying the IMF is putting up a third 

of the trillion dollars? 

32 

Mr. TRUMAN. The IMF is putting up 27 percent of the Greek program. The trillion dollars is the European support mechanism, 

which is not in existence yet. 

Mr. SHERMAN. Right. Let me put forward the theory that the entire European support mechanism goes to absolute zero in value, 

it’s lent entirely to countries that then immediately go bankrupt. 

How much does the United States lose? 

Mr. TRUMAN. Well, it hasn’t—it doesn’t exist. I don’t want to split 

hairs. The Greek program does exist. 

Mr. SHERMAN. Right, the trillion dollar program is not a program. It’s an announcement, a press release. 

Mr. TRUMAN. It’s a press announcement. 

Mr. SHERMAN. Your colleague to your left has a good imagination, so I’m asking you to have a good imagination as well. Assuming the whole thing was not a press release, but put out there and 

actually done, and actually lost all, the whole trillion dollars, we 

would lose roughly one percent of that? 

Mr. TRUMAN. If you want to use those numbers, which I think 

is probably exaggerated, but let’s do that. So the Fund’s part of it 

is 1⁄3, right, and we are 20 percent of the third; we’re, if I have my 

arithmetic right, 1⁄15 of the total. 

Mr. SHERMAN. So you would expect that the IMF will be putting up up to $333 billion of this trillion dollar program? 

Mr. TRUMAN. The way that it has been described by the Europeans in the press is that 2⁄3 comes from them and 1⁄3 comes from 

the IMF. 

Mr. SHERMAN. And we have consented to that? 

Mr. TRUMAN. No. No one has consented to anything. 

Mr. SHERMAN. Okay. Shifting to another aspect of the IMF, due 

to the actions taken in 2009, which I voted against, in that package, Iran was given special drawing rights with a value of $1.6 billion. How can Iran use this and put it to use should they have a 

need for funds? 

Does anybody have a comment? What can you do with a special 

drawing right? 

Mr. TRUMAN. Well, as a technical matter, any member of the 

Fund who receives SDRs can, if they have what’s called a balance 

of payments need, transfer those SDRs to another country in return for currency. 

Mr. SHERMAN. So while we say we’re trying to put sanctions on 

Iran, the biggest thing we have done economically is to participate 

in an IMF program that has provided them with another $1.6 billion, and in addition has made the IMF far more bailout-capable 

at a time when Iran is bailout-eligible. Whether the IMF would bail 

out Iran beyond the $1.6 billion remains to be seen. 

Mr. TRUMAN. I don’t think the SDR allocation makes the Fund 

more bailout-capable. 

Mr. SHERMAN. No, no. it’s not the SDR. It’s the $250 billion that 

was put in makes the IMF far more bailout-capable. 

Mr. TRUMAN. Perhaps. 

Mr. SHERMAN. It was a package SDR, plus additional— 

Mr. TRUMAN. $500 billion if you want to talk about the NAB. 

Mr. SHERMAN. Yes. I yield back. Perhaps we could allow Ms. 

Reinhart— 

33 

Chairman MEEKS. Go ahead. I’ll allow her to answer the question. 

Ms. REINHART. I would just like to point out that all this funding 

is fungible, and the IMF track record has been to channel the 

money where the difficulties are and that is what it’s doing now. 

Mr. SHERMAN. Greece money is a lot better than Iran, as far as 

trying to help countries with difficulty. And I yield back. 

Mr. MORICI. And I would like to point out, if I might, Mr. Chairman, that the money you will lose if Greece fails is not—what matters is not what you lose through the IMF, what you will lose going 

back to Wall Street yet again and bailing out the big banks yet 

again. 

Take a hard look at how much European paper is on their books 

and what that will mean relative to the tier one capital. 

Mr. SHERMAN. We’re not bailing them out again. I yield back. 

Chairman MEEKS. Thank you. And we have a bill that says we 

can’t bail them out again. 

And let me just also just say that I want to thank all of the witnesses for being here. It has been my opinion that we’re not really 

just trying to do anything with regards to Greece specifically, but 

it’s the entire European situation, the debt crisis there, and hopefully so that we can prevent the problems coming back here to affect us here in the United States. 

I think through the last colloquy that we had with the Governor 

of the Fed, he clearly indicated that the idea is if we were not 

with—if it wasn’t for the swaps on the Fed side and if it wasn’t for 

the IMF participating and we just allowed things to happen that 

again the lending to small- and medium-sized businesses, etc., and 

to John Q. Public could again freeze. And I would hope that, and 

part of the reason for this hearing is, to see what if anything that 

we need to do, because the last thing that we need to happen is 

direction to reverse itself from the positive direction of getting out 

of this financial crisis back to having what’s taking place in Europe 

reverberate back to us here and cause our economy to again go into 

a tailspin. 

So with that, let me say that the Chair notes that some members 

may have additional questions for this panel, which they may wish 

to submit in writing. Without objection, the hearing record will remain open for 30 days for the members to submit written questions 

to these witnesses and to place their responses in the record. 

This hearing is now adjourned. 

[Whereupon, at 5:15 p.m., the hearing was adjourned.] 

(35) 

A P P E N D I X 

May 20, 2010 

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