business to raise capital while maintaining critical investor potential. do you generally agree that these types of proposals will create jobs and strengthen our economic recovery? >> mr. chairman, i don't know the specific proposals, but it is certainly true that startup companies, companies under five years old, create a very substantial part of the jobs that are added in our economy. of course, if there's anything that can be done to encourage startups and entrepreneurship, whether it's reducing burdensome regulations or providing other kinds of assistance, of course, congress makes all the decisions, but, again, promoting startups is i think abimportant direction for job creation. in particular, the fact that

startups and job -- business creation has been quite weak during the expansion is one of the reasons that job creation has lagged behind the usual recovery pattern. mr. chairman, at our last hearing right here in the committee on the european debt crisis, i asked the federal reserve witness about the ex-pocher of our largest banks to the european financial system. the fed is yet to respond to my request for this information. will you provide the committee with this information regarding the individual exposures of our largest banks to europe? >> of course, supervisory information has legal protections, but we would be happy to provide you with the information. >> we need to know what's going on as far as our exposure of our banks to europe. >> yes. we want to make sure that you

understand the situation, and you have all the information you need to make good decisions. i wanted to add that the s.e.c., working with other agencies, has provided now some guidance and templates to banks to provide public information on a quarterly basis about their exposures and hedges. but we can work with you to help you understand everything you need to know to make good decisions. >> are you concerned with exposures, some exposure of our largest banks to europe? >> we're concerned in the sense that we're paying a lot of attention it to. our sense is that, and having done a lot of work on this, including asking banks to stress their european positions in their current capital stress test that they're doing now, our sense is that the direct exposure of u.s. banks to sovereign debt in europe is

quite limited and is well hedged and that those hedges in turn are good hedges. so if you look more broadly, our banks are exposed to european companies and banks. again, they've been working hard to have -- to provided a -- provided a get hedges. >> could you explain to the committee, to this member, too, the situation as far as credit default swaps and why they're not deemed to have -- some nations default to trigger the action on that. what's going on here?

is this a government intervention? >> no, sir. there is a private body, the isda, which makes determinations whether a credit event has occurred. >> when a default happens? >> that's right. and in the case of greece, thus far there has been a so-called private sector involvement, a voluntary agreement with the private sector bondholders. there's also been exchange of bonds by ecb and other government agencies with greece that essentially give some protection to the ecb for its greek debt holdings. the news this morning, i believe, is that the isda determined those two events did not constitute a credit event for the purpose of the cds activation. >> why did it not create the

dynamic there? why did it not? >> well, i guess their view is that so far, the negotiations have been volunteer. the possibility exists, the greek government has retro actively created so-called action clauses, which it could force other investors to take losses, and in that case, the isda would look at it again and perhaps in that case would declare a fault had occurred. >> i want to go into one other thing. the dodd-frank accused created a new position at the fed, which is subject to senate confir mapgs. it's almost two years later, the president has still not nominated anyone for this position. who is currently fulfilling

those duties as vice merrimar ct the fed? >> the duties are distributed across the governors and the staff. but i would say the point person, as you know, is governor truello. i would like to see the position filled and see the board filled, as well. >> and my last question has to do with a balance sheet, which is about $2.9 trillion. how are you going to shrink that? do you have a plan? i'm sure you've talked ant it, we've talked about it a little bit at times. but that is a huge balance sheet

to start shrinking. probably is not the time to shrink it now. how are you going to do that? >> senator, we have provided in numerous occasions an exit plan. for example, in the minutes i think some time ago we provided an agreement of the committee how we would proceed. in the very short term, we can both -- of course, allow securities to run off, which we've been reinvesting them at this point. and reduce the impact of the -- those securities on the economy, through various measures and by raising the interest rate we pay on reserves to keep them locked up at the fed. our goal is to get back to, at the appropriate time, our goal is to get back to a more normal

size balance sheet. >> thank you. >> senator reid? >> thank you very much, mr. chairman, and let me just add, i thought that the federal reserves, white paper on housing was thoughtful and nonprescriptive. i think also thinking back, such an analytical paper might have been extremely useful to us in 2005 or '6 or '7 to alert policymakers to develop into a houser market that proved to be catastrophic. there are short term programs that might, in the long-term

produce more returns, enhanced value to the government and taxpayers. but if they're not pursued, if there's an upfront cost that ironically we could have a further deterioration in the profit, profitability, assets of these uses. can you elaborate on that, mr. chairman? >> certainly. i would like to mention to senator shelby, that the speeches given by president dudley and governor duke, they don't represent official fed positions. and the fed members often give their own individual views. one point that we make is that in a typical negotiation with a modification or some other arrangement like a short sale, or other activities like rentals are taken on a narrow economic

basis, that benefits the lender and the bow rower. but in the current situation, it's important to at least recognize that the problems in the housing sector, including massive numbers of foreclosures, whole neighborhoods with many empty houses, all have implications for the borrower and lender but for the neighborhood, the community and the national economy. the weaknessst in the housing market are slowing the pace of the recovery and from the fed's point of view, are probably muting to some extent the impact of our low interest rate policy. >> one other point, we have

several challenges facing us economically. one is the housing market. the other is potential emergency spikes. it seems they have much more ability to influence effectively and correctly housing policy here than international energy prices. as a result, it would be i think a good investment of our time and effort to do so. is that a fair comment? >> i think if there was a goal, if the white paper was to encourage congress to look at these issues, which represent i think one of the directions where we could be doing something on a policy basis, that would help the recovery be stronger. >> let me turn to the issue of the rule, which is pending. european governments are urging that their sovereign equities be treated preferentially in the

rule and under the bazzle rules, there's a zero risk rating to sovereign date, is that correct? >> yes. >> so the greek debt has no risk? >> the way it's been handled at the moment is to force banks to write down their sovereign debt and that affects the amount of capital they can claim. >> in addition too, the level of capital and resulting liquidity for european banks is rather substantial. is that also accurate? >> at the moment, there are several issues. in principal, we're agreeing to

the same set of three rules. but there's at least two questions. one has to do with the fact that the ratio is lower in europe than in the united states. the question therefore is, are european supervisors allowing lower risk weights. the committee takes this seriously and has a process under way to verify that the two continents are operating comparably. the other issue is that the rules have not been implemented in europe or in the united states either. there is a european union directive in process, which we are looking at carefully. it does not in our view completely consistent with the agreements. but it's not a final document. we want to be sure that the

capital rules in europe do in fact adhere to the agreement that we all signed on to. >> just a final quick point. in the context, you are still looking closely at these differentials of the european treatment of their sovereign debt and the way the voeka rule will treat it? >> the issue is that because there's an exemption for u.s. treasuries but not for foreign sovereignty, they plooech they're being -- we take this seriously. we are in close discussions and of course, we'll be looking carefully to see if changes are needed and do what's necessary. >> thank you, mr. chairman. >> i want to follow up on the volker rule. i read with interest your comments yesterday that the

regulators will not be ready to issue the rule by the deadline of july, which i think is becoming more and more self-evident. i assume the reason for that is that because you have 17,000 comments, you have the issues that were just raised by senator reid with regard to the reaction of other markets in the world with do what we may do with that rule and the need to conduct a cost benefit analysis just likely not to happen by the time we hit the statutory timeline in january. >> that's correct. we are be working as quickly as we can to get it done. >> the question i have is, as i read the statute, there's a deadline in july for the agencies to act. but if the agencies don't act, the rule, whatever it is, goes into effect.

the market participants are concerned what they should do on july 21? the question i have to you is, couldn't be help if congress were to kre correct that and make it clear on july 21, we are not going to have a volker rule go into effect that does not have the cost benefit analysis and fine tuning that the agencies are troying to give it. >> we don't expect people to obey a rule that doesn't exist. there is a two-year conformance period that allows two years from july of this year, before they have to conform to the rule. we will certainly make sure that firms have all the time they need to respond. i think two years will probably be adequate in that respect.

>> reporter: thank you. i would like to shift during the remainder of my questions and a topic that the chairman asked you about, whether it's time for us to aggressively control congress' spending habits or do we need to hold off? i believe as i understood your response, you indicated in january we're going to see tax cuts expire and we're going to see is sequestration impact, a numb of or things will happen. i believe your answer was that soon we need to take some action. and i want to pursue that with you a little bit in this context. we've been having this debate in congress for a number of years but i want to go back to the bowl simpson commission which issued its report two plus years ago now. and in that report, it was recognized there needed to be an easying into the aggressive

control of spending in washington and immediately following that, we had if debate over the $800 billion stimulus bill. between that and now, we have basically put another $5 trillion on the national debt. not to count the trillions that have been used to help sustain economic activity. whether we agree with them or not from the fed's actions, and we still see the argument being made that it's not time yet for us to become aggressively engaged in controlling the spending excesses in washington. even though we have over 40 cents on the dollar boar lowed today. and the budgets being proposed continue on that trend. >> i would like to ask you, when

will it be time? i believe it's past time. but when will it with be time for us to start dealing with the fiscal structure of our country on the spending side of the equation? >> just a word on the fed. the fed's purchases of securities reduce the deficit because of the interest that comes back. the two things are not inco incompatible. you haven't taken any actions. you haven't passed the laws that will bring us on a glide path in sustainability over the next day or so. i want to add that i think bun concern there is that as i mentioned yesterday, the budget artificially constrain some of the things congress is thinking about, because many of the issues we face are multidecade

issues. and i think you could take strong actions that would be taking place over time. i think about the early '80s social security reform that phased in a bunch of of things including the later retirement age, still happening today 30 years later. you could take those actions and lock them in and get the benefit of the confidence there, but it wouldn't have as big an impact as the very big shock that would otherwise occur next january 1st. i'm not saying that you can't do it and take serious action. i just think you should balance those objectives. >> thank you. i take it that you're saying we need to adopt a long-term plan to deal with it this crisis. >> absolutely. >> i would observe at this point the budgets proposed simply go the other direction. the boles simpson commission and others, we still haven't got

proposals on the table in congress to deal with that long-term plan. i think it's time we get at it. >> senator menendez. >> thank you, mr. chairman. thank you, chairman bernanke, for your service. i read your statement, and i'm just obviously creating jobs is the singular most important issue in our country for families, for our collective in an economy when such a large part of our gdp is consumer nand. obviously, without income there isn't the opportunity to make that demand. how would you describe -- how are the latest programs of quantitative easing and operation twist helping us get to a more robust growth in creating those opportunities? >> of course, it's very difficult to figure out exactly how on attribute the progress we have made to monetary policy to

fiscal policy to other sources of growth. if you look at the record, for example, if you look back at the quantitative easing 2 so-called in november 2010, the concerns at the time were that it would be highly inflationary. it would hurt the dollar. that it would not have much effect on growth, et cetera. since november 2010 where we've had since then the qe-2 and the so-called operation twist we had about 2.5 million jobs created. we've seen big gains in stock prices, improvements, and credit markets. the dollar is about flat. commodity prices x oil are not much changed. inflation is doing well in the sense that we are looking at about 2% inflation rate for this

year. so i think that, you know, at least -- one other point is that in november 2010, we had some concerns about deflation, and i think we have sort of gotten rid of those and brought ourselves back to a more stable inflation environment as well. i think that, you know, the record is positive, again, acknowledging you can't necessarily disentangle all the different factors. it is a constructive tool, but obviously monetary policy cannot do it all. we need to have good policies across the board, including housing, including fiscal policy and so on. but i think that looking back, i think that those actions played a constructive role. >> let me go to that point you just made on one other element, housing as one of them. mr. dudley is the president of the federal reserve bank of new york. in a recent speech in my home state of new jersey, he talked about those borrowers who were

underwater. and he said in part without a significant turn-around it in home prices and employment, a substantial portion of those loans deeply underwater will ultimately default absent an earned principal reduction program. do you agree with his analysis? >> no. i want to be clear. the federal reserve doesn't have an official position to principal reduction, and i think it's a complicated issue. it depends on what your objectives are. in terms of avoiding delinquency, there's a reasonable debate in the literature about before reducing principal or payments is more important. so that's one issue. in terms of issues like mobility, for example, able to sell your home and move elsewhere, there are also alternatives to principal reductions included deed in lieu and short sales. there's circumstances where principal reduction would be

constructive and would be cost-effective in terms of reducing default risk and improving the economy, but i don't think there's a blanket statement you can make on that. >> let me ask you a broader question. right now fannie and freddie mac own or guarantee 60% of the mortgage market in the country. do you think that their regulator has been aggressive enough in using their market power to stabilize the housing market? >> well, he takes -- i mean, he estimates judgments about the effect of those policies on the balance sheet of the gses and whether or not they meet the conservatorship requirements and he made judgments about that th that. you can make a mix of different things and be experimental, and the gses look to be doing that to some extent. we see the experimental reo to rental program, for example.

they have done the harp two, so they've been taking steps in that direction. i think there's a big element here of trying to figure out what works best per dollar of cost. fhfa and the gses, we may not all agree exactly on the particular actions, but i think they are trying some things and we'll see what benefits accrue from them. >> a final note that there's two ways of preserving, you know, the corpus of your interests. one is foreclosure and the other one is looking at the whole process of refinancing and where appropriate the private sector has taken about 20% of its portfolio in the banks and said, it makes sense to do, you know, a reduction, the principal. i worry the whole focus is on those entities.

>> thank you, mr. chairman, for being here. i know we alternate between the house and senate going first. this is sort of a postgame interview. we thank you for being here today. i want to hone in on the volcker rule, because there's a lot of testimony about the economy and quantitative easing and all those things related to prices and savers and all of that over the last day and a half. i'm trying to make it work now. we understand that it's passed. why were treasuries and mortgage-backed securities excluded from the volcker rule

in the first place? it's odd those are the only two instruments it didn't apply to? >> congress made that decision. i assume it had to do with a desire to maintain the depth and liquidity of the treasury market. >> and so by that statement you just made, we've taken away the depth of liquidity and all other instruments and we've had an outcry from foreign governments and just middle american companies that realize they don't have the depth of liquidity, and i know you focus on economic issues. you're a renowned economist. is it something that's good for our country to lose liquidity with those other instruments, or would we be better off putting treasuries and mortgage-backed securities on the same basis and then moving them into the volcker arraignment. >> there's certainly a tradeoff. there's a marginal effect from volcker on markets in principal.

there's a market making exemptions, as you know, and we try to clarify our distinction. >> you think market making is a good thing for the country and by virtue of that statement, is that correct? >> i do. it's exempted from the volcker rule. we have to draw that line by a way na doesn't inhibit good market making. >> you know, i've talked with some of the folks that are add voe katds for the volcker reduce and we've tried to come up with a one-sentence solution to allow it to take place by the regulated entities. at least the people we talked to want to see the volcker rule used as a way to get to the glass eagle through the back door. by virtue of what you just said, i think you would believe that not to be a good thing for your country, is that correct, or at least as it relates to market making? >> i haven't been an advocate of