producer in the world. that they're employing 1.3 million americans and that they are now exporting the volt. i would call that an american success story. i call that american dream. if it is true that you are the architect of this program, ooh im not so sure that you are. many people, i'm sure, worked on it. if it's true you were the architect of it, we should be carrying him around on our shoulders and thanking him for saving american jobs, building american exports, building up the economy of our country. i would like to say thank you, secretary geithner. now, i would also like to continue on mr. turner's questioning that i think was a really valid one and that we need to learn from the crisis that we just went through. and i would like to ask both of you what lessons we've learned as a country. and how we're going to be better prepared in the future. very specifically, how would you

compare the actions that were taken by the american government in the face of the crisis that we faced in 2008 and 2009 and the alcohctions we took, with t actions that have been taken by europe? i would like to begin with chairman bernanke and then secretary geithner on what was the difference in the response, what are the levels we've learned to make us stronger in preventing it? i would just like to close by saying that christina romer testified before congress that the economic shocks of this particular downturn in our economy was three times greater than the great depression. so, because of the lessons and refo reforms we put in after the great depression, we were better able to combat it. and, hopefully, the lessons we've learned now will help us not only to combat it, but

prevent it in the future. chairman bernanke? and thank you for your service. >> thank you, congresswoman. we made a very strong effort to arrest the crisis. it was a global crisis. we worked with the europeans in order to do that. and i think in relative to the history of financial crisis, given the size of this one, i think we were pretty successful in stopping it. since then, i think the united states has been more aggressive in trying to restrengthen our financial system. i would cite, for example, our 2009 stress tests, which were highly credible. led to our banking system. capital in our largest banks has increased in the last two years by 75%, something in the order of $300 billion. so, we have, i think, taken a lot of positive steps to strengthening our system. there are many aspects of -- including early liquidation. we also have to learn lessons

from how we got into the mess in the first place. there were certainly gaps and weaknesses in our regulatory system, mistakes by regulators, including the federal reserve. obviously, lots of problems in business practices, which we're still seeing. and i think we will not really have learned the lesson unless we can correct those issues as well. >> mr. geithner? >> the best way to look at what we did is to judge us on the results. if you look at the path of the american economy since the beginning of 2009, compare that record against the record of europe or other countries in past -- >> thank you, mr. geithner. my time is almost over. i would like to put in the record that europe has the ability to avoid the debt crisis, geithner, and a direct quote was that the european

union has the ability to avoid a worsening crisis and speak with one voice about plans to solve their debt problems. i have no time left but yes or no, chairman bernanke, do you agree with that statement that europe has the ability to solve this debt problem? >> certainly have the economic and financial resources, as pointed out, about the same size as that of the united states. they face very difficult political problems, getting agreement among 17 countries on a path forward. but -- so it's not going to be easy. but, yes, i do think they have the capacity. >> thank you. >> mr. mehan from pennsylvania, five minutes. >> thank you, mr. chairman. let me express my appreciation to both of you, as public servants for make iing this commitment you have at a very challenging time for our nation and our world. i'm grateful for your efforts. there are many complexing questions as part of this. as i was listening to your testimony, chairman bernanke,

one thing that struck me in your review of the totality of the circumstance circumstances in europe, one of the places where, in my estimation, seem ed to apply hesitancy was with respect to the issue of currency swab swa which we take american dollars and make them available to the european banks, as i understand it, and they'll be paid back again in american dollars by the central bank. what is the purpose of that? is that different from the imf funding and other things? >> it's a liquidity issue, not a long-term loan. longest of these loans ever made is three months. we have -- our counter party is not the country, it's not the bank. it's the european central bank, which we'll have every confidence will repay.

as i said, we have the collateral with the currency. so, we have a lot of confidence in the financial integrity of those swaps. they have very substantial benefits for the united states. european banks do a lot of their business in dollars for two main reas reasons. one is that they lend in the united states. it directly affects their ability to make loans to american businesses and households. secondly, they do a lot of lending to support trade globally, a lot of which takes place in dollars. and that activity strengthens the role of the dollar as the principle trade currency and leading currency. so our regulators are very much involved and at no financial cost. we have achieved a significant improvement in funding conditions in europe. and, as i mentioned earlier, because of that improvement, the demand for those swaps is actually going down. so, we think that's going to been a successful step.

the president of the eucb has made a point of saying how important the swaps were to the stabilization. >> is this more or less a rolling line of credit, so to speak, that over the course of the three-month period you get repayments and then you make new available credit as well or access to the -- >> yes. yes, but we approve not just the program, but every single draw. so, we can -- there's never a period -- never a point where we couldn't end the program. >> what's our exposure currently? what's the totality of our exposure? >> the totality of our exposure currently is $69 billion, of which $54 billion is to the ecb. >> what's our total exposure in terms of other things by the united states to the european sovereign debt? other forms of -- >> as our stress test analyzed, the exposure of our banking system to the debt of the weaker

countries is, on net, about zero. they hold some such debt and they have -- they've written some insurance on that debt. they have hedges in the other direction to protect them from loss. >> what's the credibility in the hedges? where does the strength of the hedges come? >> written by a variety of strong -- a stronger european institutions and we're quite comfortable that -- we can't imagine a scenario where essentially every major consequen constitution -- >> explain to me. if i'm not correct, you did express some reservation, there was one area of exposure -- currency swaps, i thought i heard that in your testimony. >> no, we're quite comfortable with the securities and swaps. >> let me ask one closing question from either of you. we're also living in a very

dangerous world and i know you run these with respect to models. the instability currently existing in the relationship with iran and what may happen, to what extent may these models be impacted by what may be a very problematic future with regard to global unrest? can this whole system be subject to a complete reordering if we have significant instability in the middle east? >> you mean our banking system? >> yes. >> so, we haven't done stress test based on a shock to oil prices. but we have done a stress test based on a much more severe u.s. recession, 13% unemployment and a 50% drop in stock prices. so, i think, you know, a geopolitical event that caused oil prices to double, as mr. dowdy, perhaps, was suggesting,

would have effects to that sort and we believe our banking system has sufficient capital to deal with that. of course, it would be very costly to the american economy, the banks and the financial system more generally. >> thank you, mr. chairman. my time is expired. >> the gentleman yields back. mr. kelly from pennsylvania. >> i would like to yield my time back to the chair. >> thank you. i'll use it briefly. this has been very constructive. originally we said we would get you out of here before 1:00. if we get you out of here before 12:00, would you be willing to stay for a second round? good. but before we go to that, a couple of quick questions. the european -- i just want to clarify, i guess. the european central bank can print an unlimited amount of euros, correct, the same we can print an unlimited amount of

dollars, theoretically? >> yes. it has an inflation objective, which it's very scrupulous about. >> they've only cheated on that a few hundred times, is that right, mr. chairman? >> they've had a good record of keeping inflation around 2%. >> but have cheated on other monetary things? greece is where it is because nobody was watching what greece was doing while greece was pumping up its debt. is that pretty much true? >> i would argue that was basically both greece and some of the other authorities rather than the ecb that was responsible for that. >> but isn't the european central bank somewhat the arbiter of whether or not they're obeying? who is responsible to prevent violations by theur the euro zo? they're agreeing to live within certain guidelines, which clearly nobody was watching when many countries just ignored the guidelines.

at least as to debt. >> right. there was a stability in growth, which in principle was supposed to limit debt deficit. and it was violated and, for political reasons, there wasn't sufficient enforcement of that. they've try ied to strengthen tt now with the fiscal compact they've agreed to more recently. >> back to my original question, then. within the obligation we have for currency swaps, are they obligated -- notwithstanding political pressure -- to make us hold? hypothetically, if the euro were to fall to half, they would have to give us twice as many euros. is that within their grasp or -- >> that's entirely in the jurisdiction of the ecb. i have no doubt whatsoever that they would honor their obligation. >> that's the underpinning of your confidence that these swaps are, in fact, extremely safe? >> yes, sir.

>> and i appreciate that. i think the american people have to understand that the swaps we're talking about today are not the swaps we were talking about in the aig era. one more question that i know the answer to, but i want to make sure the american people hear. secretary geithner, the ranking member addressed it toward you. he talked about the huge amount of debt built up in this country in mortgages. and may have noticed that the word principle reduction comes out in every question. he's very good about it. very disciplined. isn't it true that in europe, in fact, their loans are recourse and in the u.s., almost uniquely within the world, ours are nonrecourse? meaning they can't walk away from their loan until they've exhausted all of their resources? in the u.s., you can have a pile of money -- of millions -- and you can walk away from your mortgage if it's upside down and

you don't want to deal with it. is that essentially your understanding? >> i'm sure you're right in some countries. i can't speak to the broader pattern across europe. >> we found no countries in europe that were nonrecourse. that doesn't mean you can't have a loan chosen to be nonrecourse but the ordinary default in europe apparently is you sign like you would for any personal loan. they take the house and come after you for the deficit. >> you did see very, very substantial increases in borrowing by households not just for mortgage but in many of those countries in europe, anyway. even with that slightly different system, you saw in some countries in europe very, very large rises in debt by individuals. >> now, i went to the debt clock. that may not be the best one, but mr. chairman, it's the one we all tend to use because it's on the internet. i looked. and in round numbers at the time of the crisis, we were at like $14 trillion, about a trillion

more in mortgage debt than we have today. that shows me that overall debt of mortgages has fallen, if you will, relatively small amount. certainly less than 10%. what does that really say to you from a standpoint of debt to equity if debt is down by that relatively small amount but housing values are down less? and how does that make you feel relative to the security of home mortgages? and i realize that's outside the original scope of this hearing. you don't have to respond if you're not prepared. >> well, by the decline in house prices, obviously leverage in the housing sector is up. but things are moving in a direction as home purchases have gone down, home ownership has gone down and as people have

paid down their debts. >> i'll now take advantage of this opportunity. wait a second. to call on one last first round member. >> actually, mr. chairman, i would like to yield my time to mr. mchenry. >> the gentleman is recognized. >> i thank my colleague for yielding. chairman bernanke, is there a current fiscal trajectory sustainable? >> in the united states? >> the united states. >> no, it's not. >> what is a sustainable debt load for a country such as ours? >> well, there's no exact number. i think that the current levels would be sustainable if they were kept more or less constant relative to the gdp. i think that's an important criteria. if we could, over a period of years, get the debt to gdp ratio to some level like 75% and then,

overtime, begin to improve that, that would be a much better situation. as it stands, the cbo projections show that under current law the debt to gdp ratio begins to explode in the next couple of decades. >> so, explain what happens. you mentioned this before. and just to clarify, what happens at the end of this year in terms of our fiscal situation? >> well, for a number of reasons if current law, no further action is taken, there will be what i've termed a fiscal cliff january 31st, 2015, including the bush tax cuts, payroll tax, ui benefits expire and at the same time on the spending side, arising from the failure of the super committee to agree kicks in and if all those things happen, that would be a very sharp and rapid fiscal

contraction and serious negative for the country. i hope congress would take the opportunity to think through where they want fiscal policy to go and in some sense an enforcing event. >> so austerity too fast and spending cuts too soon and tax increases that would have a negative impact on economic growth? that's the fiscal cliff you're speaking of? >> a very sharp change in fiscal stance in a short period of time would have a negative effect on growth, yes. again, it is important to achieve sustainability over a longer period, but one day is kind of a short period to have such a big change in position. >> secretary geithner, i know you've spoken of this. you obviously that kind of spokesman for the administration and you've taken that role on in a vigorous fashion.

i've heard you speak about the tax increases, proponent of the president's budget, raises a number of folks' taxes at the end of this year. under that scenario of sustainability, the president's budget that he has submitted to congress falls short of that. and there's only one fiscal plan that actually puts us on that sustainable path over the long term, over the next decade, over the next 20 years, the next 30 years. and that is the budget we passed out of the house last year. the president's budget he submitted this year puts us in a very harsh spiral based on the debt to gdp ratio, based on the tax increases and for not addressing the cost drivers of our budget. i'll give you an opportunity to respond. >> i have a different view,

obviously. but let's look at it this way. cbo did an assessment of the implications of the president's budget on the long-term fiscal path and they concluded, as did we, that if congress were to adopt those policies that we would reduce the debt that would make them sustainable over time. they would bring the deficits down as to gdp where our debt burden would stop growing and start to fall. that's for the next ten years. >> that's done through a number of increases in the revenue to government as a percentage to the economy above the historical norm? >> i'll explain the mix. go back to where we were last summ summer, before the agreement last summer, we needed to find savings of roughly $4 trillion over ten years to achieve that objective. we had to hit a $4 trillion target. the congress agreed on about 1

trillion of cuts last summer, which were obligated to hold to. that leaves us with about three trillion left to do. what we propose to do is half of that through increasing tax rates through the top percent of americans. and savings across the government. >> unspecified or specified? >> very specified, very detailed set of savings in medicare, medicaid and other mandatory farm subsidies and things like that. they would provide an additional $1.5 trillion of savings. the overall balance we propose is roughly $2.50 cuts for every spending dollar. no one likes to raise revenues or raise taxes. if we don't find that additional tax revenues out of our current system, we have to find $1.5 trillion in spending cuts in medicare, low-income programs, education, or defense.

which we don't think we can justify. or we have to ask somebody else to pay higher tacks. we don't think that's a fair thing to do for the american people. that's the proposal we made. and we've got some other differences between us, of course, which is -- those mostly relate to over the longer term how we bring our commitments in health care to a more sustainable level. we have fundamental disagreements on what it will take to do that. reduce the rate of cost and preserve that basic commitment of medicare to retirees. we have millions and millions and millions more americans retiring in the coming decades. that's an approach which is very different from the approach you guys embrace in that budget. >> i thank the gentleman. i would also mention we'll ask that the record indicate the ceo scarring for obama care be put in at the same time to compliment the two cbo change.

>> that helps us, though. >> not so much. >> mr. burton, would you like to lead off the first round -- second round as chairman emeritus? the gentleman is recognized. >> sure. my colleague, i think mr. mehan, asked about the exposure of the united states and our financial institutions. according to crs, in u.s. dollars in 2011, september 2011, our total exposure is $2.08 trillion. can you quantify that? you said you didn't know what i was talking about. >> i'm not clear of whose exposure you're talking about, banks or u.s. economy? i'm not quite sure what it refers to. >> well, since you don't

understand it, if i submit this to you, will you check it out and let me know? >> certainly. >> second thing i would like to ask, one more time, i'm not a banker, financier or financial expert. i would lake to ask this question one more time. that is, if there is a default in europe by greece, italy, spain, portugal, some of these other countries, and the european central bank has to start printing more euros, which would cause an inflationary problem and devalue their currency, you said a while ago that we were not in any trouble because they would pay us back in dollars that were in holding. but what if they can't? they have to pay for the dollars they're going to repay us with currency that's been devalued substantially. how are we going to get our money, number one? number two, would we refinance

that debt? >> ecb has been very clear that they are not going to be financing sovereign debtors. and they have not. and their primary commitment is to the 2% inflation rate in the euro. i don't see any necessity or even likelihood that the ecb would print inflationary amounts of money in order to address a sovereign default. >> it seems to me that europe is absolutely committed to keeping greece in the european union and make sure that nobody is leaving. and if these continue, these expenses continue in greece and they have these civil disorders and possibly in italy and these other countries, the european central bank and germany and other countries will have to pay the freight to keep these countries afloat. now, if they do that, it seems to me that the european central bank -- i talked to some of the

leaders over there. they said, of course, they would do like we did. they would print whatever currency they needed. if they did that, there would be an inflationary spike, it seems to me, at some point. if we had to recover our debt, how would they repay us? >> well, first, the european central bank itself has capital. it has -- >> what do you mean? they have u.s. dollars. >> i guess their capital is in euros. that's correct. >> how would they repay us? >> from the banks they lent to in dollars that would give them dollar. >> many of those bank koss go belly up as well. they'll have trouble recovering that. the inflationary problem is a real problem. how will we get our money back? >> well, again, the european central bank is a highly solvent institution. it is committed to low inflation. it is, in turn, supported by a whole network of central banks of the 17 countries which have

their own -- >> i understand. that's not really answering my question. >> the kind of scenario you're envisioning where they couldn't pay us back would be absolutely apocalyptic. it would mean a major collapse of governments in europe, a collapse in -- >> let me follow up with this question. let's say greece doesn't default. >> it's already defaulted. >> i understand. let's say they are forced to leave the european union because they don't comply with the new finance. and we have a cascading effect into italy, maybe portugal and spain. in a worst case scenario, the european central bank and the other countries say, okay, we're going to try to keep this from becoming a catastrophe and start printing euros. we're obligated and we're involved, to a large degree, according to the figures i have. how would we fair in the united states and how would we get repaid? and what kind of impact would that have on our country? you used the term apocalyptic.

i would like for you to explain more thoroughly. >> again, the money we lent -- first of all, the swap we've made, we've taken collateral for it, which is coming down. it is backed, first of all, by the european central bank. behind it is 17 national banks which have gold, other kinds of assets. those central banks, in turn, are backed by the governments of the euro zone. it's an extraordinarily unlikely situation we would lose any money. it's a three-month obligation. you're talking about a situation where national governments are defaulting across the euro zone -- >> if i might follow up. >> 30 seconds. >> 30 seconds. some of those governments over there are having political problems. and they're not anxious to pour more of their money and their resources into saving other

countries. germany in particular has had some political problems. >> i agree. >> maybe more severe. >> so you say these 17 other central banks will come across and help to keep everything afloat, there's a political problem involved in that, too. that's why i asked about a worst case scenario. it's important we understand all the prbs we might be facing. >> i didn't say they were going to support the individual countries. i said that they would pay the united states back the swap money. >> thank you. we now go to the ranking member, mr. cummings, for a second round. >> thank you very much, mr. chairman. the chairman had mentioned earlier i'm very disciplined with regard to this foreclosure issue, and i am because so many of my neighbors and people across this country are suffering tremendously. i think it was you, secretary geithner, who mentioned the $7 trillion in wealth that has been lost. that's why i -- i realize it's going to be kind