report to the congress. ben s. bernanke ( 2012 ), “ semiannual monetary policy report to the congress, ” statement before the committee on financial services, u. s. house of representatives, february 29. bis central bankers ’ speeches ( including, potentially, the flexibility to recapitalize banks directly rather than through loans to sovereigns ), and movement toward unified supervision of euro - area banks. even with these announcements, however, europe ’ s financial markets and economy remain under significant stress, with spillover effects on financial and economic conditions in the rest of the world, including the united states. moreover, the possibility that the situation in europe will worsen further remains a significant risk to the outlook. the federal reserve remains in close communication with our european counterparts. although the politics are complex, we believe that the european authorities have both strong incentives and sufficient resources to resolve the crisis. at the same time, we have been focusing on improving the resilience of our financial system to severe shocks, including those that might emanate from europe. the capital and liquidity positions of u. s. banking institutions have improved substantially in recent years, and we have been working with u. s. financial firms to ensure they are taking steps to manage the risks associated with their exposures to europe. that said, european developments that resulted in a significant disruption in global financial markets would inevitably pose significant challenges for our financial system and our economy. the second important risk to our recovery, as i mentioned, is the domestic fiscal situation. as is well known, u. s. fiscal policies are on an unsustainable path, and the development of a credible medium - term plan for controlling deficits should be a high priority. at the same time, fiscal decisions should take into account the fragility of the recovery. that recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken. the congressional budget office has estimated that, if the full range of tax increases and spending cuts were allowed to take effect – a scenario widely referred to as the fiscal cliff – a shallow recession would occur early next year and about 1 – 1 / 4 million fewer jobs would be created in 2013. 3 these estimates do not incorporate the additional negative effects likely to result from public uncertainty about how these matters will be resolved. as you recall, market volatility spiked and confidence fell last summer, in part as a result

housing and mortgage markets. the federal reserve supported placing fannie mae and freddie mac into conservatorship to help stabilize an important source of housing finance. more recently, the federal reserve has announced that it will purchase $ 600billion in debt issued by the housing - related government - sponsored enterprises and in mortgage - backed securities backed by fannie mae, freddie mac, and ginnie mae, which could reduce funding costs for mortgages. it also is supporting foreclosure prevention and neighborhood stabilization efforts, which help reduce unnecessary foreclosures and their costs on communities. limiting foreclosures will also help reduce the risk that house prices will sink significantly below the level justified by fundamentals. the events of the past year and a half have highlighted the need for changes in our financial system. presumably, such changes may include a different balance between bank - based and market - based financial intermediation. as regulators of banks and thrifts, our job is not to determine what this balance should be. rather, our job is, and has been, to create an environment in which, in the short run, banks can step up to fill as much of the gap as possible that has been left by still - dysfunctional markets, consistent with a strong, stable banking system. over time, of course, we will need to work with the congress and the new administration to construct a system of oversight over both markets and institutions that better protects the stability of the financial system and the u. s. economy. see board of governors of the federal reserve system, federal deposit insurance corporation, office of the comptroller of the currency, and office of thrift supervision ( 2008 ), " interagency statement on meeting the needs of creditworthy borrowers ", joint press release, november 12.