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[no audio] >> up next on c-span2 we take you to recent house hearing looking at the impact of the euro zone crisis on the u.s.. it is two hours and 10 minutes. >> good morning. the service of bailout of public and private programs. hour hearing today is what the euro crisis means for taxpayers and u.s. economy. this is the first of two hearings. we have an additional hearing tomorrow at 9:30 a.m. in this room with the new york fed governor. new york fed president, represented from power central-bank right downtown and represented from the treasury as well.

it is the tradition of this subcommittee to read the mission statement oversight and government reform committee. we exist to secure two fundamental principles. americans have a right to know that the money washington takes from them is well spent and second americans deserve an efficient government that works for them. their duty on the oversight reform committee is to protect these rights. our stalin responsibilities to hold government accountable to taxpayers. taxpayers have a right to know what they get from their government. we worked tirelessly in partnership with citizen watchdogs to deliver facts to american people and bring genuine reforms of federal bureaucracy. this is the mission of the oversight and government reform committee. recognize myself for five minutes for an opening statement. americans witnessed domestic and global markets deteriorated resulting in billions of dollars losses and unprecedented measures by government and central banks prop up financial institutions. as united states economy remains

a vulnerable in the midst of the recovery just across the atlantic the european union, they fight a second wave of economic and financial turmoil. today's hearing examine the economic unrest facing europe, actions undertaken by central bank and international organizations in response, options that remain at our disposal and potential consequences to the u.s. economy and taxpayers. in 2010 what first appeared as a great crisis spread and dictate global headlines. stock markets and the way european nations are categorized. as events worsen this summer, crisis took, of european states and even managed ability of the closest relationships between nicolas sarkozy of france and angela merkel of germany. and their efforts to save the euro.

the e.u. instituted the stability facility and encourage european central bank to take extraordinary measures to address liquidity and solvency in the crisis facing european nations and their banks. so far it seems their actions failed to beat the bazooka markets desired. the greek crisis transformed into a full-fledged euro zone crisis. the contagion to the larger economy of italy and spain with a similar sovereign debt of roughly $4 trillion. today as european leaders worked to strengthen the framework of the e.u. financial markets have become more dependent on continued willingness of central banks to use their balance sheet to rescue the global economy. the central bank's are not shy away from this. last month in an effort to aid european banks that had trouble accessing dollars due to market skepticism about their health six central-bank led by the

federal reserve made it cheaper for banks to borrow dollars for the of sovereign debt crisis. welfare by the market some financial experts warned federal reserve, allowing european central bank to create a limited amount of claims against the fed. since fed currency swaps reached $600 billion during the height of the 2008/2009 crisis it is important recognize the federal reserve that exposure to european central banks. furthermore it is prudent for the fed to review whether this president reduced the incentives of european banks to sell underperforming assets during the intervening calm. for instance with european banks acted to raise capital and sell bad assets sooner if they could not rely on capital injection from the fed. another item worth examination is the role of the euro zone

leaders in determining the conditions of credit default swaps and greek bonds. after leaders declared holders of greek bonds take a voluntary hair cut, billions of dollars of credit default swaps served purpose. by these actions the sanctity of our contract is questioned but the uncertainty may have long-term consequences as market participants must now factor in such a risk to a greater degree in the agreements that they make. if we learned anything from the last crisis it is that an impromptu -- increasing uncertainty and a likelihood of capital injection on behalf of taxpayers. in addition to market uncertainty the reality of european banks spread sheets spreading their assets and reducing lending due to undercapitalization has global markets fearful of another

recession. the implications of european recession recovering the united states economy are significant. a second recession out of europe would reduce u.s. exports and affect the health of the bank and non-bank financials and influence the value of the u.s. dollar. with that said the severity of these effect on the u.s. economy is anyone's guess. consequently the only uncertainty is europe's crisis is now a global crisis. as daily headlines proclaim capital injections in the trillion the year rose reenforcing the interconnectedness of the global economy, to deduct vigorous oversight. and threats to the economy, threats to american jobs, threats to american people's way of life. threats to american people's the value, the currency that they hold. their savings. simple questions still need to

be answered such as are the actions of the federal reserve consistent with this mandate and are the firms that are seeking liquidity liquid or insolvent? i'm interested to hear from our expert witnesses about their views on the euro zone, constitutional rescue efforts and consequences the crisis may have on the united states economy. appreciate it your attendance in the panel and recognize the ranking member, mr. quigley of illinois for five minute. >> they will european -- appear in the european crisis. trillion the bureaus of that remain outstanding for euro zone countries like italy, spain, portugal and others. weak revenues imperil the capacity to repay their debt. and to qualify a major european economy will have consequences for the american taxpayer. as mr. elliott will testify in 2010 our experts in the european

union leaders and $400 million. we have direct investment in the european union. we are exposed to nearly $5 trillion in potential losses and commitment to european government, bank and corporation. the economic power house has become insolvent the ripple effect throughout the global economy would be catastrophic. if europe sinks into a prolonged recession, american small-business will lose out on valuable customers. retirees, retirement plans invest in european assets with a clear risk. the economy would grow more slowly or slide into recession. a healthy economy is vital to the national interest of the united states and the american taxpayer. but we must protect the american taxpayer of the euro crisis not successfully resolve the. i look forward to testimony from the government witness.

ac the proper role of the u.s. government. either way europe must reform its health. benson and others need to address their short-term financial challenges but offer credible long-term debt reduction. of course if it sounds like the pot calling the kettle black he would be right. in the u.s. we routinely fail to look at legislative credible long-term debt reduction. politics, not economic nearly southern u.s. government involved in the audit. europe's challenge is also critical but europe truly has the economic resources to resolve this crisis and repeatedly failed to do so. european leaders have to surmount their political differences and agree that saving the european union will require a shared sacrifice. it would be tragically if the european spirit of cooperation foundered on this crisis and equally tragic if our own leaders were unable to come to agreement on steps to reduce our long term debt.

the truth is the government matters but reckless -- made it harder to fulfill that mission. i join my colleagues, chairman mchenry to take the steps to resolve this crisis and restore the global economy to sustainable growth. thank you and i yield back. >> i thank the ranking member. members may have seven days to submit opening statements for the record. we now recognize our panel before us today. dr desmond laughlin is with the american enterprise institute and hold the phd from cambridge university. dr. anthony sanders is professor of finance in the school of management at george mason university. douglas elliott is a fellow at the brookings institute. joshua roger is with rand fisher and company. mr. birch e. lee --burt ealey

is an adjunct scholar at the cato institute. four of you have testified as before, but it is standard practice of receiving government reform committee that'll witnesses be sworn so please rise and raise your right hand. do you swear or affirm the testimony you are about to give will be the truth, the old truth and nothing but the truth? you may be seated. let the record reflect that all the witnesses answered in the affirmative. seeing as you have testified before if you will summarize your statement you will see red, yellow and green lines before you. when yellow pops up that means just what it means when you are at a stoplight. hurry up.

so obviously green beans go and read means stop. i recognize dr. laughlin for five minutes. >> thank you, chairman mchenry and members of the committee for giving me this honor to testify before you this morning. in my oral statement what i would like to do is three things. the things -- there's going to be significant anticipation of the euro debt crisis in the months immediately ahead that could result in the euro's unraveling within the next 12 months. this is a crisis that does have a sense of urgency. i would then like to draw out serious risks the euro crisis poses to the u.s. economic recovery, should there be an intensification of the euro crisis. last i want to consider the cost to the u.s. taxpayer of various

measures that have been undertaken by the imf and the federal reserve to defuse the crisis. over the past few months there has been a marked anticipation of the european debt crisis. we could get an unraveling as early as 2012. the greek economy appears to be in a virtual free fall and banks are losing deposits. only a matter of time before we can get a hard default of benson. there is a contagion from the greek crisis affecting and italy and spain, third and fourth largest economies that are regarded in the markets as too big to fail but too big to bail. should those problems intensify the question of the euro's existence would be very much in question. the european debt crisis also having a material impact on

european banking system in the throes of a credit crunch that is likely to intensify in the months ahead. we're seeing the german and french economy showing terrorist supplies of slowing moving into recession. european policymakers are hoping the european periphery can correct large public finance and external imbalances by several years of fiscal austerity within the framework of the fixed exchange-rate system that doesn't allow them to boost exports offset to the fiscal economy. i'm very much doubt whether such can work because it is more than likely to throw those into the deepest of recessions and to make the collection of taxes difficult and have a big political backlash. the thing about the european

crisis, could be rail united states recovery. we have already mentioned the idea that could diminish u.s. export process could result in a weakening of the euro that would make it difficult for the u.s. third markets but most important channel through which the european crisis could affect the united states would be through the financial crisis. the money market funds have gone close to $1 trillion through european banks, banks are exposed to germany and france. let me touch on the imf and federal reserve. the imf commitment to benson -- to grease. bill ireland and portugal already total around one hundred billion dollars. considering that the u.s. shares the imf, this puts u.s. taxpayer at risk to the tune of

$20 billion. in assessing how serious is the risk to taxpayers, it is of no that the imf has never lend money on this scale to any country in relation to the signpost countries as it has grease, ireland and portugal. the commitment to these countries are 10% of their gdps and the third of the connections. the recent european summit, european countries are proposing to make loans to the imf to the tune of $260 billion for two hundred billion euros that would be intended to loan to italy and spain. it is important to recognize that if those bilateral loans by european countries give them a claim on the imf as opposed to a claim on italy and spain the u.s. taxpayer would be put at risk for those loans to italy

and spain. if italy and spain go to the imf for exposure of u.s. taxpayers those countries could be enormous. considering that the imf's combined commitment to italy and spain could exceed $1 trillion what we are talking about is u.s. taxpayers could get risk to $200 billion. in assessing potential risk to the u.s. taxpayer from the imf to european periphery one has to consider that the risk of unraveling of the euro is a distinct possibility. word that unraveling to occur in another manner it could have a devastating impact on the european periphery and public finance considering that i am of loans could reach levels that would be an president lee hy relationships to the taxpayer. that those countries would have to repay those loans.

judging by the 2008/2009 experience with currency swaps the federal reserve swap lines could reach -- in the event european crisis were to intensify. how one must propose the risk to the u.s. taxpayer from the federal reserve swap would be circumscribed by the fact that the main counterparty would be the european central bank rather than the countries in the european periphery and one should suppose the european central bank could print the euros to buy the dollars to repay those loans. thank you. >> thank you. dr. sanders. >> members of the subcommittee, thank you for inviting me to testify today. the euro zone is teetering on collapse decades in the making. because the problems are the success of government spending leading to excessive government debt coupled with slow gdp growth. the largest european countries are expected to have real gdp growth of 1.3% for 2012 and

unemployment of 9.9%. the imf produced long-term gdp forecast in which they discovered most of the european zones will have gdp growth by 2016. if you look at the household financial debt, in europe, the uk's debt to gdp ratio including household and finance, over 900%. japan is over 600% legal debt to gdp. the u. s is over 300%. the euro zone, drowning in debt. it shows there is a significant negative effect on growth.

the european union will unify breakup or downsize the option and still spending too much money and taken off too much debt which was slow gdp growth. additional debt is not the answer. it is the problem. obvious solution is austerity, making loans to european central-bank solving the underlying structure problem and only makes the debt to gdp problem even worse. is a short-term solution, how it will help bail out the situation. if germany and france create fiscally integrated europe is difficult to purchase treasury leading treasury rates to rise but given that the fed is the largest purchaser of u.s. treasurys it could be a problem. the u.s. and japan continuing to

increase treasurys but the u.k. and japan, the flat land treasury purchasers. the fed has been active that the european bailout starting in 2007 was forward with the discount window of operation and peaks in 2008. the largest european bar was a failed belgian bank. most of the discount windows loans that were paid we are still in the dark on the guarantees. recently the pcb through swap lines in november. these are seven day swaps trading 0.8% and the bank board the same amount in the prior week, etc.. it begs the question how long that will keep this fall line open. we cannot see the swap line's real-time the evidence indicates the swap is a short half-life meaning that it is able to drive

down the rates momentarily and rises back up showing that it was ineffective. recent disagreement of the size of a fed intervention of discount window and guarantees between and the fed and bloomberg markets. the bloomberg market said the fed committed $7.7 trillion as of march of 2009. almost the size of our national debt at one point recently. the financial system guarantees it is up. the fed is agreed and set on any given day we have credit from liquidity programs never more than $1.5 trillion. whatever we are looking at on a given day or cumulative effect these are large numbers historically indicating that the fed is attempting bailout of the euro zone. on the fed side is where the guarantee of the euro zone could be problematic to u.s. taxpayers and approved and i don't see the story for improvement in the euro zone.

swaps with europe to be costly as well. since there is little transparency on the fed's discount window, it is a difficult measure of taxpayer exposure. the imf which is the u.s.'s largest takeovers also active. a line of credit for the imf crisis in $100 billion given structural problems facing the euro zone. little likelihood that the euro zone will have problems since there is lack of will to cut government spending. expect $100 billion to be used and not paid back. in summary the euros and structural problem cannot be solved by low-interest rate guarantees from the fed or the imf. engaging with the lot of europe could jeopardize taxpayers in a perverse solution to the problem. best way to protect taxpayers is to decrease transparency to the fed to take back $100 billion line of credit that the imf undertake spending cuts in order

to reduce the deficit and a loan exposure. thank you. >> thank you. mr. elliott. >> let me add my own thanks to chairman mchenry and members of the subcommittee for inviting me here today. as has been noted i'm a fellow in economics studies of the brookings institution but i am here in an individual capacity, not representing the institution. i commend you for calling this hearing. the euro crisis is deeply worrying. there's a significant chance the crisis could go badly enough wrong that europe plunges into a deep recession that puts the u.s. into at least a mild recession. trouble in europe will communicate itself to our shores strongly and quickly because as the ranking member noted we have $400 billion of export dollars to europe annually, $1 trillion of direct investment and our banks have $5 trillion credit exposure.

the good news is the euro zone as a whole does have the resources to avoid that disaster if the 17 nations stick together effectively. europe is one of the world's largest economies. the euro zone as a whole has debt ratios meaning of the fiscal problems require serious action as ours do but the situation can be remedied. i personally believe there is a three in four chance that europe will muddle through but very complicated political constraints in europe leave us with a one in four chance of disaster in my view. even assuming a good outcome the crisis is likely to get worse before it gets better and will probably take the eminent possibility of catastrophe to allow politicians over there to break through those political constraints. at that point of crisis it may be necessary for european leaders to produce a comprehensive package backed by

as much as two trillion euros of available funds. not all of this would be used in practice as long as it backstops, credibility. the markets need to know there is assurance through the worst emergency in which case they are likely to go back to supplying at least some of the necessary funds themselves. i believe the imf could pay a useful role in a comprehensive solution. adding some funding to the mix would reassure financial markets the total resources necessary would in fact be available. ..

>> we all listen more carefully to people who are also providing money to us. if europe produces a credible and comprehensive plan that involves the imf appropriately, then we should support that imf role. i do not believe that this would require additional u.s. funding of the imf, but just the use of resources we've already provided. the imf has almost $400 billion of uncommitted resources, and europe is planning to commit another 200 million euros to the imf with the possibility of some matching funds from certain noneuropean nations not including the u.s. the risk to the u.s. taxpayer from imf lending, i believe, would be small for a variety of reasons. a key one is that imf lending is in a legally privileged position that makes it much safer than,

for example, the t.a.r.p. funds that were invested by u.s. taxpayers. imf loans are effectively senior in their claims to all other borrowings. this was done in order to stabilize the financial markets by protecting other suppliers of funds to the banks. in addition, even if everything does go wrong, the u.s. bears less than a fifth of the risk from imf lending. i want to etch sides our tax -- emphasize our taxpayers and citizens are already at great risk from the euro debt crisis. if it goes badly wrong, our citizens and the businesses they own will lose large sums of money, federal government tax receipts will fall significantly eventually requiring taxpayers to pay more than they otherwise would have done. in my view, it would reduce the

total risk to america by much more than the modest financial risk that our share of the imf funding would represent. sometimes the riskiest choice is to take no chances at all. there are few other things that america can do, principally along the lines of the fed swap facilities with the european central bank that have been described. however, this is a european problem, and they will need to provide the backbone of any solution. thank you for the opportunity to testify, and i welcome any questions when we get to that point. >> thank you, mr. elliot. mr. rosner. >> thank you, chairman mchenry. ranking member quigley and members of the subcommittee for inviting me to testify on this important subject. to fully assess the risks to the united states and our proper role in the eurozone crisis, it must first be clear what the crisis is and is not. it is not a bailout of populations of the weaker european economies such as greece, ireland, portugal, italy, spain, hungary or

belgium. after all, the populations of those cups are being forced to -- countries are being forced to give up portions of their austerity. rather, it is partially a bailout of banks in the core countries of europe, of their stockholders and creditors who failing to gain sufficient access to capital markets would need to be recapitalized by their host country governments. it is a transfer of losses from bank creditors onto the backs of ordinary people without requiring any cost to those banks whose practices helped lead us to the problem. it is much a tale of overlending as it is of overborrowing, and just as nobody should feel undue shy for those who miscalculated the amount of debt they could service, nobody should feel for those who miscalculated their lending risks. the basis depends on substantially different economies and different levels of competitiveness among those

economies sharing the same currency. those economies have proven unable to rationalize their differences in a monetary union. in the united states we have a transfer mechanism allowing tax dollars to be reallocated from the wealthiest states toward those less fortunate. the core european countries have demonstrated an unwillingness to accept such as necessity. the solution is either to move forward with a fiscal union complete with transfer of payments or break up. ultimately, these are political decisions, and currently there appears to be little popular support in germany, finland and the netherlands for such a real fiscal union. unless that changes, the euro zone will have to shrink membership or dissolve. proper u.s. policy should support our values around the world, not undermine them. we should support the apportioning of losses first to equity investors and then to

unsecured lenders according to long established and well understood rules of priority. we should no longer support privatization of gain and socialization of loss. doing so leads to distortion of market incentives and further risk taking by those who have demonstrated an inability to properly manage risk. the european crisis demonstrates all too clearly that the problem is now well beyond moral hazard. a great many of the decisions being made in the name of crisis management are not being made by the elect i have representatives of the people of the countries of europe. rather, they are being made by technocrats. accordingly, the crisis is moving into a stage where it may represent the death of representative democracy, but also the destruction of global markets. i urge you to consider whether this is truly the approach to crisis management that our country should be supporting and endorsing. in may 2010 the fed reopened swap lines to the european central bank in an effort to

bolster liquidity for institutions in these markets, but at what cost? on november 30th of 2011, to increase the attractiveness of these lines, the fed lowered the interest rate by half a percentage point. since then three month lending increased from 400 million to over 50 billion while the actions of the fed may well be justified and consistent with u.s. policy goal, they are none the less being made in near darkness and without substantial involvement by our own elected officials. as a result of this commitment of financial support, we're now supporting undemocratic approaches implemented largely by authorities who have demonstrated an ongoing inability to either recognize the scope and scale of the problems or come to a con seven suns on how to address the rolling crisis and prevent it from ceding. they've instead sought to down play the impacts. when they don't like the market's assessment of the problems, they've chosen to shoot the messenger and imperil market function through limitations of trading of

sovereign bonds and credit default swaps. are these proper policies for the united states to endorse? by providing unlimited swap lines to be used by institutions in the eurozone, institutions which may, in fact, be insolvent not just illiquid, we've effectively allowed the fed to direct u.s. foreign policy in support of a single currency for the eurozone. as the risk of losses rise, they seem likely to commit us further to support of that union in its current form. while the fed has technical expertise in these matters, such policy decisions should not be made without informing congress. i suggest that you consider whether the fed's efforts should be directed more towards quantification of the problem and providing technical advice to congress. dodd-frank sought to reduce the opacity and required the fed to disclose which firms receive loans from the discount window. in the spirit of that legislative intent, why hasn't the fed required the ecb inform

them of recipient of funds from the swap lines as condition for arrangement? these questions suggest there are real reasons for the fed to have concern about ongoing instability in highly interrelated markets of europe. there also appears to be a real and rational basis for the actions they've taken toward or short-term stability goals during the crisis. furthermore, we can believe the fed is acting appropriately, but without more information and a broad discussion, we don't know whether the fed's focus on short-term stabilization properly aligns with longer term u.s. policy goals. perhaps we should support a european union, but have our elected representatives affirmatively decided in favor of continued support for a single currency? it seems fair to consider that such decisions should rightly be made not by an independent central bank, but instead by the secretary of state, u.s. trade representative and the secretary of treasury with informed consent of the president and congress. thank you, and i'll be pleased to address your questions. >> thank you so much,

mr. rosner. mr. elie. >> mr. chairman mchenry, ranking member quigley and members of the subcommittee, i appreciate the opportunity to testify to you today about the euro crisis and what it could mean for u.s. taxpayers and our economy. i wish i could speak more positively about the euro situation than my fellow panelists, but i fear that i cannot. europe would not be experiencing its economic crisis if euro had never been created or if at least the eurozone had not been expanded to 17 countries. it ties 17 quite dissimilar economies to a common currency while the total population of the eurozone approaches that of the u.s., the eurozone lacks the economic, cultural and language integration that has long complemented the u.s. a key characteristic of a sustainable currency area such as the u.s. is that there are minimal barriers to the movement of goods, services and labor

within the currency area. unfortunately, these keys to sustainability are not present in the eurozone as it is now constituted as there still are many practical barriers to the movement of goods, services and labor within the e.u.. arguably, the euro subsidized the retention of national laws which impairedpaired the efficiy in the eurozone cups. consequently, exports produced in these countries have steadily lost international competitiveness. this is especially true across the southern tier of the zone, greece, italy, portugal and spain. in many regards, it stuffs the same weakness as the plastic gold standard or any commodities standard which ties several or many countries to a fixed relationship between the currency units of account of those countries. because national economies evolve at different rates of economic growth and public policy innovation, economic tensions develop among countries tied to each other by a common

currency. the fixed relationships between units of account become increasingly difficult to maintain until the fixed relationships are irretrievably broken. the same phenomenon is occurring within the eurozone. abandons the common currency represents a shift. abandoning the euro would be quite painful for a country. first, debts such as mortgages and bonds would have to be abrogated and rewritten in the new local currency to spare debtors from being crushed by repayment obligations in a now, suddenly more expensive euro. second, owners of the euros being forced to convert their euros into their country's new, less valuable currency, appear to be shifting their euros to banks in stronger countries. the recent lasting attempt to fix the euro by an e.u. treaty to improse greater fiscal discipline will not work in the short term because the fiscal problems are so deeply embedded

that they cannot be fixed within a few years. it will be a decades-long process that will not move at a uniform pace throughout the eurozone. my written testimony discusses these problems. bottom line, the weaker eurozone countries have much to do to enhance their ability to stay in the eurozone. turning to how a euro crisis could impact the u.s. economy and u.s. taxpayers, a euro crisis could throw the e.u. into a recession. however, if enough dominoes topple within the eurozone, europe could experience a long, deep recession or worse. given the highly interconnected nature of the global economy, exports would decline. it could trigger a global economic slowdown with the u.s. possibly falling into recession as the european economy sorted itself out. a slowing u.s. economy would increase the enormous budget. consequently, the u.s. economy would look like the most

troubled european countries. it would not be a pretty picture. unfortunately, the u.s. has few options for dealing with the euro crisis. the best it can do is urge the e.u. to aggressively address its problems in order to hold the eurozone together as best it can. i am skeptical as to how much help the imf can be. thereby improving the likelihood that we can stay in the eurozone. the federal government should not supply any direct assistance to help the eurozone such as buying the debt of any country. however, i do support the u.s. dollar swap arrangement the fed recently entered with five other central banks. these arrangements help provide liquidity while the e.u. works through its problems. i perceive no taxpayer risks from these swaps. this is yet another wake-up call that it must put its economic house in order by increasing

domestic savings, reducing the u.s.' net debtor position with the rest of the world, addressing entitlement challenges, removing taxes and disincentives for saving and investing and increasing the economy's international competitiveness. this is an enormous, politically challenging tasks, but we must undertake it. thank you for this opportunity to testify, i welcome your questions. >> i thank the panel's testimony. we'll now go to questions. i recognize myself for fife minutes -- five minutes. dr. sanders, let's begin at the beginning. the federal reserve has foreign currency swaps, it's a normal function of the l federal reserve for quite a number of years. explain what that means. >> well, in a nutshell, what it means is that the eurozone can actually swap currencies with us and others we send cheap dollars

over to europe, and they ship expensive euros over to the united states. >> okay. so why is this an issue that the federal reserve in this current environment, why is this foreign currency swap agreement an issue right now? >> well, again, it's not being done at parity which means we're just not providing them swapping them the current is at a market rate. it's actually a subsidized rate. we cut the rate on it. >> okay. >> so, in other words, again, we're subsidizing europe through the swap. >> okay. so really the issue here is that we've reduced the, the cost of this exchange and made it below what is the current market rate. therefore, incentivizing the european central bank to transact this type of swap agreement with the u.s. federal reserve.

so what is, so in light of that, um, dr. lockman, i've asked you this question before. what are your chances, what do you see in your view the likelihood that the euro makes it out of this, that the euro actually exists as a currency in the medium term? >> i think you need to distinguish between losing a number of countries and the whole euro disappearing. i think that it's very likely that within the next 18 months we're going to see several countries exit the euro. we're going to see countries like greece, portugal, ireland, probably spain be forced the the leave the euro, but the euro itself as a currency between germany and like countries, the northern european countries probably including france, that is very likely to continue to

exist. >> okay. let's go across the panel. dr. sanders, do you agree? >> um, again, as i said in my -- i don't think the euro can be saved. they can maybe safe the core -- save the core, but the fantasy that they can bail out the pigs whether it's the pig banks or whatever, it's mission impossible. they can't do it. so it's got to break up. >> okay. portugal, italy, ireland -- >> correct. greece. >> greece -- >> spain. >> spain. thank you. just want to make sure because occupy wall streeters have a different analysis what a pig is. mr. elliot. >> yes. i'm completely confident the euro will continue to exist. certainly, the core absolutely. and i think it's highly likely that all 17 members stay. >> mr. rosner. >> i think it's likely in the medium term that the euro continues to exist. i think that it will be difficult to have members exit, but i do expect there to be an exit of some peripheral members

within the medium term. >> okay. mr. elie. >> yes. i think i'm generally in agreement with my fellow panelists. i think the weaker countries are going to have to exit and, again, you know, basically, it's the southern tier countries plus possibly ireland. if they believe, you know, relatively soon, this actually could be -- despite the problems with transitioning back to their original, their previous currencies, this may actually be positive for them and for the global economy because they will have cheaper currencies, their exports will become more competitive, and this may be -- as painful as it's going to be for them to exit, this may be better both for those countries and really for the global economy if they leave sooner rather than later so that they can go through the adjustment process. for the remaining country iniesn the core, again, they have to address the classic problem of

any kind of common currency area, and that is that within any one country the policies are not too far out of sync from what they are in the other countries in that currency area. that's a huge long-term challenge. >> mr. rosner. >> yeah. you have to remember, though, part of the problem that we've watched in the way they've try today address the crisis thus far is that they've try today avoid that default from occurring in the friday friday by -- periphery by, you know, by any means. so we've watched attempts to come to voluntary write-downs of debts of greece, as an example. and try to do so without it becoming a default in name triggering the cds. that's part of the problem of the core is they don't want to allow it to be called a de235u89 because what that would mean for cds. it creates a problem, though, in the timing and the delay. we have delayed this and so at the point where greece was recognized as a problem, the credit was probably trading or should have been valued at about

80. and today we're trying to get 50% write-downs and the truth is the greek debt is not even worth that. the longer we wait, the larger the write-downs will be, but that's being stymied. the timing of that by this intent to do everything we can to avoid calling it a default when, ultimately, we'll end up a disorderly default unless we recognize it as something that needs to happen sooner that'ser than later. >> now, my time has expired, but the point here why this is the discussion and why we're having this hearing today is in light of opening up a below-market swap rate with the federal reserve and the survivability of the euro as it currently exists does expose the taxpayer to risk. that is the concern we have today as policymakers, and that's why we're trying to have this oversight hearing today. with that i recognize mr. quigley for five minutes. >> thank you, mr. chairman. mr. ely, you said something that

made me alter what i was originally going to ask. you said it might be better for the smaller countries to be forced out and just going through this adjustment period. are you assuming that they're going to get significant help before they're forced out, or are they just going to have to go through this painful adjustment process to get to that on their own? >> um, again, this is all highly speculative because we haven't had any exits in the euro before. my sense is that they would not get much help, but what the exiting would do would help in two regards. number one, it would probably lead to the kind of debt restructuring that josh was just talking about, but also it would enable them to, their currency would be more competitive, their export goods would be more competitive, you know, more attractive for tourism, that's particularly thought to be the case with greece. and i think that this would allow them to start to turn

around their economies. the alternative by staying in the eurozone is just an increasingly draconian austerity with potentially creates some very serious political problems. but i think it's like in any kind of bankruptcy situation, at some point in time you have to recognize the reality of it, go through the debt adjustment process and deal with competitiveness issues. and i think for some of these countries the only way they can do that is by leaving the euro southbound joan. >> if anyone else on the panel would like to chime in, i guess i want to address more thoroughly why standing alone would be good for them and what impact it might have on the united states. >> let me say two things. first is a background point which i'd be happy to expand on. you're hearing, in large part, political judgments here. you're hearing judgments as to whether these countries have the political will and capability to deal with their long standing problems. >> and while you answer that,

sorry for interrupting, if you could add -- it seems to me if your previous statements that they have the financial capability of solving this, and this is all about political will. >> that's certainly my view. if you take the eurozone as a whole, they have clearly the ability to keel with this -- deal with this commitically. will they take the political actions necessary to do so? as you can tell from my testimony, i'm significantly more positive about that than my fellow panelists. one are for that -- reason for that is i think too often we look at what has been agreed to to date. this is like looking at the debt ceiling debate here a few days before the agreement and concluding there'll never be an agreement because they're so far apart or looking at the current budget negotiations and assuming that because we can't seem to agree, the government will shut down and never start up again. i think there's very strong political will within europe to get through this together.

they've made a lot of mistakes. i'm not trying to say they've been brilliant about this at all. but my view is when they get to the edge of the abyss, they really will be likely to do what they have to do. >> dr. sanders, you seem agitated. >> i just want to throw in my two cents and agree with something, josh concern. >> that's one of our jobs here. >> i think the one of the only solutions is for them to write down the debt, but again that is politically, as mr. elliot said, politically dangerous and perhaps impossible. there was a report the other day saying greece is not following us austerity, they're not moving fast enough, in fact, they're kind of dragging their feet. is that a surprise? absolutely not. this was predicted a long time ago. so in other words, any bailout is going to have to be serious, banks are going to have to take it on the chin, governments are going to have to take it on the chin. and again, look at the debt loads and government spending of

even germany and france. they're massive socialist states. they can't do the -- [inaudible] in the long run. maybe they can do it for a year, but forget it for the long run. it's all too debt-laden and all too big. >> dr. lachman? >> i think that the essence of the problem in countries like greece, portugal and ireland is that these countries are insolvent, and providing them with additional funding isn't a solution. it's not just the question that it's a political problem, it's a problem that they can't reduce those imbalances within a fixed exchange rate system. if they try to do massive amount of disthe fiscal austerity within a fixed exchange rate system, you get the result that we're seeing in greece with the country collapsing. when the country's economy collapses, they don't collect the taxes, the debt ratios rise. greece's debt ratio at start of the imf program was supposed to

peak at 130%. the latest imf estimates are that it's going to peak at 190% of gdp. this country is clearly insolvent. one has to write-down the debt, and then one has to deal with the problems that that causes for the banking system. if i might just add one point just in connection with the swaps that the fed is making. you know, to be sure they're providing cheaper credit, but part of the reason for that is the united states' money market funds have huge amounts of deposits on the banks of the european banks that they're trying to repatriate back home. so by providing those kind of lines of credit we're not simply helping the europeans, we're helping ourselves by avoiding any of these money market funds eventually having to break the buck as they did in 2008.

>> thank you. my time's expired. >> mr. cooper for five minutes. >> thank you, mr. chairman, and thanks to the distinguished panelists. i think perhaps the most important question is the simplest. is this a crisis of the eurozone or really more of a crisis of the west? because most of you have pointed out that just the trade implications alone mean that we have a stake in this crisis whether we want one or not. so when you globally talk about taxpayer exposure, we have to remember that countless americans are shareholders, and they're shareholders in the institutions that perhaps have lent tens, hundreds of billions, maybe even trillions of dollars to countries or entities in the eurozone. it goes without saying that we share many cultural and other ties with this troubled area.

and sometimes unspoken is the idea that the entire capitalist system is built to some degree on confidence and leverage and trust. just a few years ago there was a prominent banker at citicorp, walther riston, who had the famous doctrine that no sovereign country could ever default. he was not a creature of government, he was one of the preeminent spokesmen of the u.s. private sector. so things have a way of changing. >> if i could address that. >> please. >> mr. riston, obviously, didn't know his history because there's certainly been plenty of sovereign defaults before he made that statement, and we have seen them since. and, unfortunately, they'll probably continue. with regard to the question whether this is a crisis of the west or of capitalism, i think things have become so intertwined globally that it's really alo