i just wanted to make sure that -- that everybody knows that you can go in the opposite direction. the feds that authority to go in the opposite direction. on page five of your statement you talked about continuing to monitor energy markets carefully. and one of the real uncertainties out there is gas prices and the extent to which we rely on gas prices as an indicator of how the economy is going and what we can do in our own individual lives. are there really any -- any things that we can do as congress? i know you can't do anything as the fed. but are there things that we can do -- is there a menu of possibilities that we might

consider on the energy side? >> well, there are many things you can debate about long-term development of natural resource hydro carbons and so on. but in the short run, i think the main problems are coming from some supply disruptions or fear to supply disrussiaptionsd particularly iran, i guess the best thing to do would be to resolve that situation. obviously that's well beyond my capacity. probably anyone's capacity. so i'm not sure what can be done to provide substantial relief in the very short term. >> i guess -- i guess president gingrich is getting ready to tell us at some hoint how to solve that problem, although he didn't solve it when he was is t. speaker. maybe he thinks he can solve it that way. let me ask one other question.

europe obviously is the major -- even more major than oil prices is what happens in europe. are you satisfied that they're taking steps in the right direction to try to satisfy their problems and have we done as much as we can reasonably do to help with that? >> well, they've taken some positive steps recently, as i mentioned in my testimony. the ecb had its second long-term refinancing operation today, three-year lending to the banks. they're still working on getting the greek deal done. a number of the countries in fiscal trouble have been taking strong steps to improve their budget balances. there has been progress on a fiscal compact whereby there will be more coordination among countries. but there's still a lot to be done. in the short term there still

needs to be more effort on providing so-called firewalls, financial backstop,s in case there is a default or potential contagi contagion. in the long run, the real problem or a very serious problem that has not been solved is that many of these countries are not only fiscally challenged but not competitive. large current account deficits but costs are too high. process can take a long time to fix. >> thank you, mr. chairman. i yield back. >> thank you. >> we ought to take advantage of that price differential. and i know we do that with natural gas vehicles. but it would be a game changer. ms. hayworth? >> thank you, mr. chairman. welcome, chairman bernanke. it's always a pleasure to hear

you because you are eminently sane about all of these issues. i have heard from our life insurers and grantors or providers of annuities that they are very concerned, as you can imagine, about an interest rate squeeze that may occur in the future. almost feels predictable in some respects. how do you recommend that they proceed, that they anticipate the challenges that we're facing because of the way in which we have to have an accommodative monetary policy? >> well, we've had numerous discussions with insurance companies and pension funds and others. and there certainly is a problem in the sense that they're under a current accounting rules. obligations to put money into the fund or what can be greater with low interest rates.

i agree that's a problem and one we've discussed with them. again, going back to my conversation to mr. mccotter, on the other side we're trying to strengthen an economy that gives them higher return on portfolios. so it cuts both ways. i've talked to the insurance -- as i said i've talked to the insurance companies. they recognize that a low interest rates are not a permanent condition. that at some point the economy will get back to a situation where interest rates can be more normal. that we're trying to help the economy. tha that we recognize there are some side effects of low interest rates and we're attentive to that. but again, our first responsibility is to meet our dual mandate and try to support the economy and keep inflation near its target. >> similar question obviously could be asked on behalf of our community banks who are concerned about, you know, their long-term loans that are being obviously offered at very low

interest rates. same sort of approach, i assume. >> i discussed this point in a speech i gave a couple weeks ago at the fdic and i made essentially the same point, which is the net interest margin has two parts. the difference between deposit rates and safe rates, but also the difference between safe rates and loan rates. and on loans is having a healthy economy so the short-return costs of low rates should be worth it if we can get the economy moving again. >> chairman, if i may, a bit broader question or perhaps more of a 30,000-foot question. you have many, many times including here today pointed out how important it is to have federal policy that reflects the impending prices that we face in terms of managing the debt and how that weighs on economic

growth. do you ever feel as though you're talking past your administration and congress, that, you know, we're talking past each other? how can we make your message resonate? people like me are very sympathetic to it, obviously. >> well, i -- these criticisms are easy for me to make. i don't have to deal with the politics. and i know they're very, very difficult. it's always hard to explain to people why you have to tighten your belt one way or the other. i think on the one hand that educating the voters is an important thing and making sure people understand what the tradeoffs are. and i think if they urchs nders it, it will be the tough choices they face in the country. but i also think that there is some scope for bargaining within the congress. we've had some very close calls recently in terms of making progress and we have, as i

mentioned before, the fiscal cliff on january 1st. that might prove an opportunity to negotiate a better longer-term outcome. well see. but i think those are the two directions. one is trying to create a framework in congress for debates. maybe a set of goals, for example, and the other is to get the voters on our side by education. >> i sympathize were much with that point of view and have said so myself as well, that it isn't bad education and awareness. the fiscal cliff to which refer would be the enormous tax increase that we face, that will place -- >> including both tax increases, expiration of the payroll tax cut, the sequestration that comes out of the committee. all of those are hitting on the

same day. that's quite a big impact. >> thank you femphasizing how important that is. i yield back, mr. chairman. >> very good point, mr. chairman and ms. hayworth. i appreciate your thoughtful questions on every occasion. >> thank you, mr. chair. mr. chairman, i want to pick off where congressman watt left off on this committee and i'm the lead democrat you're asia and subcommittee. europe is very much on the mind. we just recently came back from a trip over in europe where their economy of cost is what was much discussed. so i'm going to -- would like to ask, too, because i know i'm limited in time. two questions and see if i have any time left thereafter, after your answer. first, given the close linkage between our economies, it seems access to the feds swat lines is crucial in times of market

tension. and so can you discuss how american companies benefit from the availability of the fed swap lines with foreign central banks and the difficulties u.s. companies and workers would face, if any, if those swap lines did not exist? and secondly, could you also tell us what is the exposure of u.s. financial institutions to european sovereign debt? and can you categorize it as exposure as significant? >> very good questions. on the swap lines, european banks have significant -- do significant business in dollars. so they need dollars in order to conduct that business. they were having a great deal of difficulty accessing those dollars. what those dollars are used for, about half of them are used for making loans in the united states so they directly affect credit availability in the united states and therefore affect households and business necessary this country. the rest of the money mostly

goes for trade finance, helps facilitate financial trade and adds for prosperity. we have a direct interest in having international dollar funding markets work well. indeed it creates confidence in the dollar that those markets are working properly. the swap lines seem to have been very successful. they have reduced the stress in dollar funding markets and it looks at this point that demand for those swaps are starting to go down as stress has been reduced. in terms of the u.s. financial institutions, we remonitoring that very carefully. we continuously looked at banks exposures. making them do stress tests of the european exposures. our basic conclusion is that the direct exposure, say, of u.s. banks to european sovereign debt is quite limited, particularly on the periphery. exposure to italy and spain is somewhat greater obviously than to the smaller three countries.

we think the banks generally have done a good job of hedging the exposures they have to sovereign debt shs and to some extent the european banks. they will be reporting this information. the s.e.c. provided some guidance on how to report both their exposures and their hedges to the market, to the public. so a let of progress is being made there. having said that, a major financial accident in europe, the main effects on our banks would not be be so much direct exposure but through general contagion, flight from risk taking, loss of faith in the financial system, economic stress and so on. so i think there is a significant risk even though we've done what we can to make sure banks are managing their direct exposures to banks and sovereigns in europe.

>> we're obviously very integrated. about 2% of our gdp is in the form of exports to europe. so europe has a significant slowdown. we will feel that. our companies are highly integrated. you know, you think of companies like, you know, ford and gm which produce, you know, in europe as well as in the united states. however, we do think that if europe has a mild downturn, which is what they are currently forecasting, and if the financial situation remains under control, the effect on the u.s. might not be terribly serious, at least it would probably not threaten the recovery. but never the less it would certainly. >> now, one of the things that we discussed when over in europe, said that greece equalled about 2% of the

economy. they were going to try to keep them into -- so they wouldn't have to lose the euro. if they did, greece default, they would not be contagion, they thought it would be pretty much contained and move on likely what was happening in italy. i would like to get from your viewpoint, if greece were to default do you see the possibility of contagion to italy and portugal and spain or are they such a small part in this it doesn't matter? >> time for the gentleman expired so, mr. chairman, give a brief answer. >> leaving the euro would be very difficult and uncontrolled sis orderly default would create a lot of problems. >> the gentleman from new york, mr. grimm, is recognized for five minutes. >> thank you, chairman. thank you, chairman bernanke, for being with us today. if i could switch gears and skrks obviously the volcker rule rule is the topic of discussion. in section 619 becomes effective

this july. but just last month the federal reserve government mentioned that it probably wouldn't be implemented, completed until january 2013. when do you expect the volcker rule to be finalized and do you expect that there will be a reproposal for public comment? >> well, i don't think it will be ready for july. we have closed just a few weeks ago we closed the comment period. we have about 17,000 comments. we have a lot of very difficult issues to go through. so i don't know the exact date. obviously working on it as fast as we can. as i understand it, the volcker rule includes a two-year transition period starting in july. and as we did for example with the interchange fee where we were also late relative to the statute we will make sure that firms have an adequate period of time to adjust their systems and comply with the rule.

>> i'm assume that you're not going to be strictly enforcing a rule that's not in place yet. >> obviously. >> so that does leave some ambiguity and uncertainty how to treat underwriting. we are laid den with so much uncertainty and i would just emphasize that bringing some certainty to the market is obviously should be part of the goal. >> it is. thank you. >> a question that i've had for a while, you know, mr. volcker was unable to really give a clear definition. it's basically, i'll know it when i see it. that is as uncertain, i think, as you can get. do you have a definition of what proprietary trading is? >> proprietary trading is short-term trading in financial assetses for the purposes of the profits of the bank itself as opposed to its customers. that's my best definition. obviously it's hard to know in every case whether it fits that

definition or not. >> that's what the regulators would use the promulgating the prul a rule and enforcing the rule, something similar to that? >> the most difficult distinction is priority they trading and market making. market making the firms have tobias set which they hold for a short period and then sell to a customer. so the question is did they buy that asset for a proprietary purpose or for a market making purpose and we'll need to develop mess triks and other criteria to distinguish between those two types of activities. >> okay. switching gears again. i'm concerned the president's proposed budget for 2013 could lead to massive increases in capital gains. as much as possible. i think as much as triple. from 15% to almost 45%. you know, i believe a dramatic rate increase like that will discourage investment in entrepreneurship and i would like, you know, over the long

term, i think it would be detrimental. your views on increasing capital gains that much significantly, do you think it could have a negative effect? >> it will be a tax on investment. that's for sure. i think -- i've been advocating, at least consideration of doing a more comprehensive type of reform. we have a lot of -- we have a lot of inconsistencies say between the corporations were taxed and the way private individuals are taxed. so, for example, if you eliminate the deductible for interest at the corporate level, you still have private individuals paying taxes an interest, you're double taxing interest as much as you're double taxing dividends. so you know, i think these decisions are ultimately congressional decisions. but i think it would be useful to put this all in a broader framework and try to find a reform of both the corporate and individual tax codes that fits together and makes sense from

the perspective of achieving the equity and efficiency goals. >> from a purely economic point of view, economist point of view, we're seeing in the uk they topped 50% and took in last revenue than they did before the increase. is it logical to say that that is a possibility and a strong possibility if we were to raise our rates substantially that way and see that deduction? >> yes in the short run because capital gains, people can choose when they realize capital gains. they may decide to delay that realization and that could affect that in the short run. in the longer run it may be less elastic. >> i see my time has expired. ly yield back. thank you very much, chairman. >> the gentleman from texas is now recognized for five minutes. >> thank you, mr. chairman. chairman bernanke, i want to thank you for coming to this with our committee and giving us your thoughts. i'd like to thank you and your staff at the federal reserve for

offering your insights on the drag of the housing market on our economy in that recent paper. that paper explains that foreclosures are considered debt weight loss to the economists we heard from. meaning that they cost everyone. they cost the banks, they cost the government, they cost families and society. i think there's no better word for the glut of properties in my district in deep south texas. i think that they are being dragged by this dead weight for foreclosed homes and headwinds of negative equity. project rebuild would put americans to work, refurbishing and repurposing current foreclosed properties to help ease the shortage of affordable housing options. so my question is, if brokers

such as -- programs such as the real estate owned to rent program, second, the housing trust fund and the project rebuild were to be enacted and funded, what do you predict would be the infect effect of t housing market and the rental market? >> congressman, i degree foreclosures impose a lot of cost on the family, borrowers and lending institution but also on the neighborhood, community, and national housing market. >> that's right. >> this is a very -- it's very costly. i'm not all that familiar with the specific programs you're referring to. but we have discussed in the white paper the idea of to rental. it would make sense to remove any artificial barriers to letting the market do what the ard wants to do. it seems like it would make sense to take the empty houses and put them up into rental. as you know, the gses are doing

a pilot program to see if that will work. the issues have to do with whether or not there are enough foreclosed homes within a local area. is there financing available for mass purposes of homes? are there supervisory restrictions on banks? i think there are barriers that we can remove that might make this economically -- we might see even the private sector undertaking this. part of that will be refurnishing -- refurbishing and repairing dilapidated homes. >> the biggest barrier i see has been the lack of community banks giving loans to those who want to carry out those programs. but let me move to another question that is of great interest to me. i serve as higher education committee. i'm concerned about higher education and ever increases

amount of debt that our students are being burdened with. last year students received more than $100 billion in college loans for the first time ever. and the total outstanding college loans are projected to surpass a trillion. student debt exceeds credit card rate for the first time and default rates have jumped up. i'd like to hear your insights on the possible effects of such unprecedented student college loan debt on our economy and the possibility of a student loan bubble crisis here in our country. >> student loans are becoming a very large category of loans. my son in medical school informed me he expected to have $400,000 in debt when he graduates from school. i don't foe about a bubble, per se. going forward, most of the new lending is being done by the federal government. there could be, of course,

losses that might affect the taxpayer if that program is not adequately managed. so i think it does require some careful oversight. there may be ways to, you know, on the one hand it's good that people don't have the means can obtain the means to go to school. that's important. and student loans play an important role in that respect. but one might consider whether there are ways of tying repayment to financial conditions, for example, as a share of income earned or with discounts for certain types of service. the various ways to look at how to repay student loans that might better adjust the cost of the loans to capacity of the student. but student loans are a good thing in principle. but obviously the program has to be well managed and is becoming increasingly a federal responsibility to do that. >> the time of the gentleman has

expired. >> thank you. >> the gentleman from texas is now recognized for five minutes. >> thank you, mr. chairman. and chairman bernanke, thank you very much for being here with us today. our nation's fiscal health is in very bad shape and only getting worse as medicare and social security begin to absorb all of the babyboomers that are entering into the system. and former white house budget director alice rivlin and senate budget chairman pete domenici recently said while his budget stabilizes debt over the next decade, this is speaking about the president's budget, the real problem arrives there after as entitlement costs spiral out of control and revenues are inadequate to deal with a wave of retiring babyboomers. so you said before the congress needs to act now to put our fiscal house in order. so would you agree that in order to do that congress must address the unsustainability and

impending insolvency of medicare and social security? >> i noted earlier that the current budgeting procedures focus on the next ten years. many of the most serious problems occur after ten years. and they include -- they do include entitlements and as one major category of spending. so i do urge congress and thinking about this not to be artificially constrained by the window but thinking even longer term because the longer in advance you can make changes, the more time there will be for people to adjust to them and the easier it will be politically. >> i don't mean to be putting words in your mouth but your answer is yes, we need to address that? >> particularly the health care side, yes, costs are very high. >> and in your opinion, was the budget passed by the house represent last year a serious effort to address our nation's long-term fiscal help snj. >> i hope you forgive me if i don't get into a political debate like that. those are congress' decisions. my role here, i think, is to try

to encourage you to address the long run sustainable issue. >> i hope i'm not putting you in a political situation. i highlight the word serious effort.>> i -- >> it has to be addressed. would you stha any legislative effort to deal with our nation's long term fiscal health that doesn't address medicare and social security is not a serious proposal? >> well, it is a fact that health care costs, medicare and medicaid in particular, are going to be become a large part of the federal budget. and that unless you're willing to have the government be a much bigger share of the economy than it is now, ultimately those programs would basically squeeze out the other components of federal spending. >> and we'll ultimately see a situation where our entitlement programs are 90% or 80% of the budget and the rest we'll have

to fight over. well -- to your knowledge, has the administration put forward a plan to address the impending bankruptcy of medicare and social security? >> well, again, i think the focus has been on next ten years. the administration has addressed the long run issues to some extent through some of the aspects of the affordable care act that have, you know, oversight boards and other kinds of things that we try to reduce costs. but obviously, it's still a major challenge for congress to address health care costs. >> in your opinion, would you say that the administration's budget would not seriously address our long term deficits because it does not address our entitlements? >> reiterate that the budget they put out was for the next ten years. by definition, you know, if you're only looking at the n ten years, you're not addressing the very long run implications. >> thank you very much. let me go now to regulations.

i don't know if you read this cover of last week's "economist" entitled overregulated america. it presents a pretty dark portrait of our financial system in the wake of dodd-frank and stein. i think the article sums it up in ambitious is often welcomed but in this case it is leaving the roots of the financial crisis underaddressed and more or less everything else in financial overwhelmed. mr. chairman, dodd-frank required the regulators write over 400 rules for the financial system, yet, over 300 of these remain unwritten. would you agree that this lack of clarity is a hindrance on financial sector? >> i think so. we're working as quickly as we can. we want to create as much clarity as we can.