>> the name of the bill was voted for as part of the bill. you lost that vote, so -- and nobody has reversed it yet. so, anyway -- >> if the gentleman would yield. >> -- let me get on to what we're here for. chairman bernanke, you know, one of the problems with setting these horizons out so far is that when you said in accommodated policy horizon out to 2014, the private sector starts to expect that, and if circumstances change, crawling back off that limb could be very difficult from a private sector perspective.

what if really things do change substantially in a different direction? i assume the fed has given itself enough leeway here to say, we can go back to a more agressi agressive, less accommodative policy, i presume; is that correct? >> yes, sir, the policy is a conditional policy that says based on where we are now, this is where we think we're going to be. if there was a substantial change in the outlook, we would have to change it. >> good luck. i know how the congress relies on accommodative policy. but i just want to make sure that everybody knows that you can go in the opposite direction. the fed has the authority to go in the opposite direction. on page 5 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. is there anything we can do as congress? i know you can't do anything as the fed, but are there things that we can do as a menu of possibilities that we might consider on the energy side? >> well, there are many things that you can debate about long-term development of natural resource hydrocarbons and so on. but in the short run, i think the main problems are coming

from some supply disruptions or some theory to supply disruptions, particularly iran. i think the best thing we could do would be to resolve that situation, but obviously that's well beyond my capacity or probably anyone's capacity. so i'm not sure what can be done to provide substantial relief in the very short term. >> i guess president gingrich was getting ready to tell us at some point how to solve the problem. although he didn't tell us how to solve it when he was the speaker, maybe he thinks he can solve it that way. let me ask one other question. even more major than all parts of this is what happens in europe. are you satisfied that they are

taking steps that -- 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 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 try to improve their budget balances. there has been some progress on a physical contact whereby there will be more coordination among countries, but there's still a lot to be done in the short term. there will be more effort on providing so-called firewalls that would be financial backstops in case there is a default or potential contagion. and 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 being fiscally challenged, but they are not competitive. they are large current account deficits and their costs are too high, and that's a process that could take a long time to fix. >> thank you, mr. chairman. i yield back. >> thank you. let me point out one thing about energy that we all need to look at, and that's natural gas. i think it was 1985 we estimated we had 200 tcfs of reserve. it's now 2,500. we ought to take advantage of that price differential, and i know we do that with natural gas vehicles, but it could be a game changer. miss hayworth? >> thank you, mr. chairman, and welcome, chair man bernanke. it's always a pleasure to hear you because you are eminently sane about all these issues. i have heard from our life insurers and granters and

providers of annuities that they're very concerned, as you can imagine, about an interest rate squeeze that may occur in the future. it almost feels predictable in certain 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 current accounting rules, their obligations to put money in the funds can be greater with lower interest rates. i agree that's a problem and once we've discussed with them. again, going back to my conversation with miss cotter on the other side, we're trying to strengt strengthen the economy that will give them higher returns on

their portfolios, so it cuts both ways. i've talked to the insurance companies. they recognize that lower interest rates is not a current condition, that the economy will get back to where interest rates can be more normal. 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 mandates and try to support the economy and keep inflation near its target. >> a 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? >> yes. i actually 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. the ability to make profitable loans depends on having a healthy economy, so the short run cost 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 crisis 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 and somehow how can we make your message

resonate? people like me are very sympathetic to it, obviously. >> well, 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 another. 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 understand it, they'll be more sympathetic to the tough choices we face as a country. but i also think that there is some scope for bargaining within the congress. you know, we've had some very close calls recently in terms of making progress than we have, as i mentioned before, this fiscal cliff on january 1st, that might prove an opportunity to negotiate a better longer term outcome. we'll 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 very much, sir, with that point of view and have said so myself as well, that it is about education and awareness. the fiscal cliff to which you refer would be the enormous tax increase that we face that will place -- >> we have a number of measures, including both tax increases, the expiration of the payroll tax cut, the sequestration that comes out of the supercommittee negotiations. all of those things are hitting on the same day, basically, and it's quite an impact. >> thank you for emphasizing how important that is, sir, and thank you for your great work. i yield back, chairman. >> very good point, mr. chairman and miss hayworth. mr. may, i appreciate your

thoughtful questions on every occasion. >> thank you, mr. chair. mr. chairman, i want to kick off where congressman watt left off. on this committee, of course, i'm also the democrat on the euro asian subcommittee, so you're very much on our mind. we recently came back from a trip to europe where the euro economy was very much discussed. i want to ask, too, because i know we're limited in time, two questions and see if i have any time left after your answer. first, given the close linkage between our economy, it seems access to the feds' swat line is crucial in terms of market, so can you discuss how americans benefit from the availability of the feds' swat lines and the difficulties that workers would face, if any, if those swat

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 our financial systems -- would you categorize its 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 ability in the united states. the rest of the money mostly going gz for trade finance which helps facilitate our trade and helps in prosperity. so we have a direct interest in having an international fund market to work well. indeed, it gains 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 the demand for those swaps is starting to go down as stress has been reduced. in terms of u.s. financial institutions, we are monitoring that very carefully. we continuously have looked at bank exposures. we're making them do stress tests of the european exposures. the direct exposure of european banks to sovereign debt is quite limited, particularly on the periphery. exposure to italy and spain is much greater, obviously, than to the smaller three countries. we think the banks generally have done a pretty good job of hedging the exposures they have to sovereign debt and to some extent the european banks. they will be reporting this information, the sec has provided some guidance on how to

report both their exposures and their hedges to the market, to the public. so a lot of progress is being made there, and having said that, i think if there was a major financial accident in europe that the main effects on our banks would not be so much through direct exposure as through just general contagion flight through risk taking, loss of face 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 than sovereigns in europe. [ audio trouble ] >> 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 think of companies like, you know, ford and gm which produce in europe as well as in the united states. however, we do think if europe has a mild downturn, which is currently what they're forecasting, and if the financial situation remains under control that the effect on the u.s. might not be terribly serious. at least, it would probably not threaten the recovery. but nevertheless, it would have an effect, certainly. >> let me just -- one of the things that was discussed when we were over in europe also was the fact that they said that greece equalled about 2% of the economy and they were going to try to keep them so they wouldn't have to lose urt othe euro. but they said if they did reach the fault that they wouldn't have to be contagious. they liked what was happening in

italy. i would just like to get from your viewpoint. if greece wasn't in default, do you see the possibility of contagion to italy, portugal and spain, or are they such a small part of this that it doesn't matter? >> the time of the gentleman is expired, so mr. chairman, if you could give a brief answer. >> i would just say that leaving the euro would be very difficult and unorderly default would create a lot of problems. >> the gentleman is recognized for five minutes. >> thank you, chairman, and thank you, general bernanke, for being with us today. if i could switch gears and ask about the vocal rule. it's obviously a topic of discussion in the financial services industry. in section 619, it becomes effective this july. just last month, the federal government's mentioned that it probably wouldn't be implemented, completed until january 2013. when do you expect the vocal 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 the -- just a few weeks ago, we closed the comment period. we had about 17,000 comments. we have a lot of very difficult issues to go through. so i don't know the exact date, but we'll obviously be working on it as fast as we can. as i understand it, the vocal 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. >> so i'm assuming, then, you're not going to be strictly enforcing, obviously, a rule that's not in place yet? >> obviously. >> so that does leave some am by

g -- ambiguity and bringing some certainty to the market should be part of the goal. >> it is. thank you. >> a question i've had for a while, mr. vogel was unable to give a clear definition, basically i'll know it when i see it. that's about as uncertain as you can get. do you have a definition of what proprietary trading is? >> proprietary trading short-term trading in the assets for the purpose of the bank itself as opposed to the customers. that's my best definition, but obviously it's hard to know in every case whether it fits that definition or not. >> but you believe that's what the regulators will use in promulgating the rule and enforcing the rule, something similar to that? >> the most difficult distinction is between proprietary trading and market making. in market making, firms often

have to buy assets which they hold for a short period and then they sell to a customer. so the question is, did they buy that asset for a proprietary purpose or did they buy it for a market purpose? we'll have to distinguish those two criteria to distinguish those two priorities. switching gears again, i'm concerned the president's proposed budget for 2013 could lead to massive increases in capital gains. i think as much as triple from 15% to almost 45. i believe a dramatic rate increase like that will discourage investment in entrepreneurship, and i'd like -- 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 would be a tax on investment, that's for sure.

i've been advocating at least consideration of doing a more comprehensive type of reform. we have a lot of inconsistencies, say, between the way corporations are taxed and the way private individuals are taxed. so, for example, if you eliminate the deductibility for interest at the corporate level and then you still have private individuals paying taxes, and you start double taxing interests as much as you're double taxing dividends. 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 at both individual tax codes that fits together and makes sense in the perspective of both the equity and efficiency goals. >> from a purely economic point of view, from an economist's point of view, we're seeing that in the u.k. they raised their top rate to 50%, and in their first month, they actually took in less 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 see and realize capital gains, and they may decide to delay that realization and that could affect that in the short run. in a longer run, it might be less elastic. >> i see my time has expired. i will yield back. thank you very much, chairman. >> the gentleman from texas, mr. inahosa, is now recognized for five minutes. >> thank you, mr. chairman. chairman bernanke, i want to thank you for visiting our committee and giving us your thoughts. i would 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 white paper. that paper explains that foreclosures are considered dead

weight loss to the economists we've heard from, meaning that they cost everyone. they cost the banks, they cost the government, they cost families and they cost society. i think there is no better word for the glut of properties in my district in deep south texas. i think that they are being dragged by this debt weight of foreclosed homes and by the headwinds of negative equity. project rebuild would put americans to work refurbishing and resurfacing current or closed properties to help ease the shortage of affordable housing options. so my question is, if 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 effect of not only the housing market but

the rental market? >> first, congressman, i agree that foreclosures have posed a lot of costs not only on the family, the borrowers and the lending institution but also on the neighborhood, the community and the international housing market. so 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 reo to rental. it would seem to make sense to remove any artificial barriers to letting the market do what the market seems to want to do which is giving high rents and low housing prices. it seems to make sense to put those houses into high rental programs. the issues have to do with whether or not there are enough foreclosed homes within a local area, is there financing

available for mass purchases of homes, are there supervisory restrictions on banks that would prevent them from doing it? i think there are some barriers that we can remove that might make this economically might see even the private sector undertaking this, and part of that would be refurbishing and repairing didlapidated homes. >> the biggest barrier i've seen is 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, a service member of our subcommittee. i'm deeply concerned about the higher level of education and the amount of debt our students are being burdened with. last year students received more than $100,000 in loans and the amount of college debt surpasses

$100 million. i would like to hear your insight on the possible effect 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 recently informed me that he expected to have $400,000 in debt when he graduates from school. i don't know about a bubble per se because going forward, most of the new lending is being done by the federal government. now, there could be, of course, a lawsuit 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 -- on the

one hand it's good that people who 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, for example, as a share of income earned or discounts for different types of service. there are various ways to look at how to repay student loans that might better adjust the cost of the loan to the capacity of the student. but student loans are a good thing in principle, but obviously the program has to be well managed and it's becoming increasely a federal responsibility to do that. >> the time of the gentleman has expired. the gentleman from texas, mr. cansako, is now recognized for five minutes. >> thank you, mr. chairman. chairman bernanke, thank you very much for being 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 baby boomers that are entering into the system. and former white house budget director alice ridlin and senior budget chairman have recently said the budget stabilizes debt over the next decade. and this is speaking about the president's budget. the real problem arises after the costs spiral out of control and the revenues are inadequate to deal with a wave of retiring baby boomers. you said before that 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 sustainability and pending insolvency of medicare and social security? >> i noted earlier that the current budgeting procedures focus on the next ten years, but many of the more serious problems incur after ten years, and they do include entitlement

and one major category of spending, so i do urge congress not to be artificially constrained but to be thinking even longer term, because the longer in advance you can make changes, the more time there will be more people to adjust to them and the easier it will be politically. >> excuse me, i don't mean to be putting words in your mouth, but you answered yes, we need to address that? >> particularly the health care side, i think costs are very high. >> and in your opinion, was the budget passed by the house of representatives last year a serious effort to address our nation's long-term fiscal health? >> i hope you'll forgive me if i don't get into a political debate like that. those are congress' decisions michdecisions. my role here is to help you address the long-term state of the fiscal issues. >> i highlight the words serious effort. >> i'd rather not answer that

question. >> it has to be addressed. would you say that dealing with our long-term fiscal health that doesn't address medicare or social security is not a serious proposal? >> well, it is a fact that health care costs, medicare and medicaid in particular, are become an increasingly 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 will ultimately see a situation where our entitlement programs are 90 or 80% of the budget and the rest we'll have to fight over. to your knowledge has the administration put forth a plan to address the impending bankruptcy of medicare and social security? >> well, again, i think the focus has been in the next ten