component of the so-called cliff. >> in keeping with my orders on time i'm going to turn to vice chairman brady. >> thank you. you mentioned options on a third round quantitative easing. would purchases in third round be confined to treasuries or other debt securities be purchased? >> again, obviously made no decision. the law permits us to purchase treasuries and agencies -- government agency securities. those are the securities that we have purchased in the past and i wouldn't want to take anything off the table at this juncture. but i want to emphasize again really in some sense two steps. the first is to determine whether we think that growth will be adequate to lead to further improvement in employment, and i think at the same time of course we'll be assessing the price stability

mandate and the outlook for inflation. if we determine that further action is at least potentially warranted then obviously we have a number of different options that we'd have to consider each of them and the cost and benefits associated with them. but at this point i really can't say that anything is completely off the table. >> i guess my more direct question is, long term interest rates, other than financial crisis, we haven't seen this level since the 1950s. do you think that is holding back our economy? >> well, the question is, again, could -- again, if additional stimulus is -- could the actions of the federal reserve might take achieve additional financial accommodation, putting aside potential bad side effects or costs that might be associated with that. i recognize that rates are quite low, so that clearly is consideration.

i do think that we do have methods, we do have tools that would allow us to get further accommodation in the economy and provide some support. it's one thing -- it's not the same thing to say that the problem of the u.s. economy is not low -- is not lack of financial accommodation. it's a different thing -- it's not the same thing to say that and say that you know, even if the main problems are coming from elsewhere, that the federal reserve might provide some support from using the tools that it has. but i do want to say and i said this before, that monetary policy is not a panacea, it will be much better to have a broad based policy effort addressing a varieties of issues, i leave the details to congress who has considered many of these issues. so, i'd be much more comfortable if congress would take some of this burden from us and address those issues. >> i think that's the point i would like to make.

my believercy wish you would take a third round of quantitative easing off the table. i wish you would look the market in the eye and say the fed has done all it can, perhaps too much and i wish you would look this president and congress in the eye and say it is time to do your job. it's your tax policy, right, get your financial house in order, rebalance your regulations so that you're encouraging job creation, and mitigate uncertainty and concern over the president's new health care law. i'm not asking you to say that today but i wish you would because back home on main street i believe those are the elements that are holding this economy back and until we get that right, no actions from the fed will get this recovery moving in a way i think we would all be satisfied with. may i ask quickly, on europe, a lot of concerns about what will happen with greece as far as exiting the euro, what type of

contagion will occur in europe. earlier, you said -- or last october you said the tools you believed are important are providing liquidity through the currency swaps, ensuring american banks are in strong financial condition and being there to provide liquidity to solvent banks. are there any other tools than that that you're considering should that contagion reach us from europe? >> no, you have a pretty good list there. we did the swaps as you know. they were very helpful in reducing stress in dollar funding markets. they have been coming down quite significantly from a peak of about 110 billion down to 20 billion. so their need seems to be declining. i would like to emphasize that on the banking side we have worked really hard to try to make sure the banks and the financial system would be resilient to shocks coming from across the atlantic including our stress tests which have

shown very strong capital positions and liquidity positions, our reviews, ongoing reviews of exposures of banks to europe, so we are taking steps to try to make sure that we're as well prepared as possible in the financial system. and then as i said in my remarks, the federal reserve retains broad based authority to provide liquidity in the event of intense financial stress that was retained in dodd/frank. and in its role the federal reserve stands ready to do whatever is necessary to protect your financial system. >> thank you, vice chairman brady. congresswoman sanchez. >> thank you, mr. chairman. and thank you, mr. chairman, for being before us today. i want to go back to -- okay. i want to go back to something you just said to my colleague

from the senate. you were talking about one of the biggest portions of that fiscal cliff would be the expiration of the bush tax cuts. but you said i'm not advocating that necessarily, there are other steps that -- that congress could do. could you -- in your wisdom tell us what those other steps might be, articulate them so i have a to do list if that's the case. i think i know them but -- >> i think i'm wise enough not to tell you the answer to that question. what i'm saying is that the concern here in the short-term is that all of these measures together if they all occur will amount to a withdrawal of spending and an increase in taxation, depending on how you count, between 3 and 5% of gdp which would have a significant impact on the near term recovery, whatever benefit us see in those programs in the very long term. and what i'm saying is that in

ways that are up to congress, steps should be taken to mitigate that overall impact and what combination of tax reductions and spending increases that's really up to you. but if no action is taken, i mean what is particularly striking here is that this is all preprogrammed, if you all go on vacation it's still going to happen. so it's important to be thinking about that and working with your colleagues to see how you might address that concern at the appropriate time. >> that leads me into my second question because i hear this out a lot, i hear it on television, among some of my colleagues even, i hear it from people back home. that we're all headed towards the greece situation. now, to some people the greece situation is, hey, you spent too much, you didn't -- you retired

early. there are not enough workers, there's not enough economy going to sustain the people who are living on payments if you will, mostly from the taxpayers. then there are other people who are saying you know, the greece situation is, you cut too much spending and you're trying to collect taxes too fast and the economy has contracted and it's almost like a vicious cycle going on. so my question to you is, for those people who are saying we're headed toward the greece situation, what do you think the greece situation is? and is it really true that we are mirroring in any form that? because i see it in a totally different manner. are we really subject to what's going on in greece with the type of real economy that we have? >> no, i think the united states and greece are extremely different economies. greece is a very small economy.

it did, in fact -- the causes of the crisis are vary quite a bit from country to country. greece was a country that overspent and owe veer borrowed. and that's a major reason why it's currently in such trouble. the united states is a large diverse economy with deep financial markets, international reserve currency, independent monetary policy. great credibility after 200 years of paying our debts which by the way we should be as a strength that we should not squander if at all possible. that being said, so i don't think we're in a greek situation, and the evidence for that is that we are currently paying 1.5% for 10-year money where greece can't borrow at any price, essentially. that being said, i don't think we should be complacent.

obviously we have a situation which is not sustainable and we do need to be thinking very seriously how to put the fiscal budget on -- the federal budget on a path that will be sustainable in the longer term. >> thank you. in the interests because we have so many members i'll yield back my time. and i will call on mr. campbell from california for his five minutes. >> thank you, miss sanchez. chairman bernanke, you made it quite clear that so called qe 3 is a decision that hasn't been made and won't be made for at least 11 days or whatever you said. what i would like to ask is from my perspective i'm not -- a qe3 would affect interest rates and potentially liquidity neither of which it seems to me are obstacles to growth at the moment. if the interest rates being historically low and appears to be plenty of liquidity.

my question is why, in considering a qe3, if the decision were made to do it, i understand you haven't made that, but in what way do we believe or does someone believe it would help the current economic situation? >> so again, putting aside the question of whether we need further steps, putting aside the question of the adverse side effects that are risks and costs with given policies, our analysis is that the quantitative easing programs we did in the past did ease financial conditions, they lowered interest rates, they lowered the spreads between private rates and government rates so in other words, even given a level of treasury security interest rates, it could lower the rate paid by corporations. we've lowered mortgage rates. it's raised stock prices and

increased therefore wealth effects for consumers. so, in general, we continue to believe that while some may think that the effects are less powerful than they were, for example, in 2009, we continue to believe that potentially that these sorts of measures could still add additional accommodation, additional support to the economy. but then again, you know, as you point out, there may be some diminishing returns and that would be a consideration we'd have to look at as we try to analyze what our options are. >> okay. let me move over to europe if i can. in your testimony you said that we should monitor the situation and that the federal reserve remains prepared to take action. you outline what some of that action should be. what should we as policymakers

be monitoring? and what action might we be prepared to consider or to take? obviously, in europe we can't control their fiscal policy, their monetary policy nor their political decisions. if there were to be a deterioration, a rapid deterioration of some situation in europe, be it the currency or the banks or whatever, how can we put up a fire wall or can we or what things might we be prepared to do, you mentioned you're doing what you can, to minimize the impact on the u.s. economy? >> well, the congress and the administration have not, you know, agreed to any kinds of direct support to europe. administration has not, for example, asked for additional imf funds, for example. so i think the main things that congress could do would be to

help strengthen our own economy, the more momentum, the stronger our economy, the better able we would be to withstand the financial spillover from problems in europe. so that goes back to my earlier points about getting our fiscal situation clarified. taking appropriate steps to help troubled parts of our economy from the employment market to the housing market to whatever else you would be looking at. but again, i think my bottom line here is that there's not a lot that can be done that i can think of to attenuate the problems in europe. we have to monitor carefully. i think the best thing we can do is try to make sure we're strong and prepared here in the united states. >> are the risks to our economy in europe, are they greater today than they were six months

ago? >> well, the risks have waxed and waned. this problem has been going on for more than two years, this crisis for more than two years. there are periods of greater intensity and lesser intensity. earlier this year, particularly following the long term refinancing operations conducted by the european central bank as well as the debt restructuring of greece, the situation calmed down fairly notably for a while. but for a number ever reasons including the greek election which raised questions whether greece would meet the requirements of its program, and concerns about spain and italy, the spanish banking system and so on, the stresses have risen pretty significantly in the recent month or two. so, i'm not sure whether it's the highest point it's been but it certainly is at a point where

it's important for european leaders to take additional effective steps to contain the problem. >> thank you, mr. chairman. >> i'll recognize representative cummings from maryland for five minutes. >> thank you. good to see you again. when you appeared before this committee last october, you testified that in most recessions the housing sector is usually and i quote, a big part of the recovery process, end quote. you testified that many people are under water and that their loss of equity means that they are poorer, they are less willing to spend, and that addressing the housing situation is very, very important. in january the federal reserve issued a report on current conditions in the u.s. housing market, the report says this, and i quote, continued weakness in the housing market poses a significant barrier to more vigorous economic recovery.

chairman bernanke, i assume you still believe that addressing the housing crisis is critical to resolving our situation, is that correct? >> yes. >> and economists and experts across the political spectrum believe that one key tool to addressing the housing crisis is targeted principle reductions for under water mortgages. because they help homeowners and save taxpayers money by avoiding default. mr. chairman, in 2008 you said this to the independent committee bankers of america and i quote. enthis environment principle reductions that restore some equity for the home owner may abrelatively more effective means of avoiding delinquency and foreclosure. a lot of people characterized principle reduction as helping only homeowners. can you explain why in some cases it could help the taxpayers too.

>> well, i think we made some progress on this. first of all, the housing market looks to be stabilizing, which is -- which, if true, would be good news, in going forward it would be helpful i think to the recovery. there has been a lot of effort, since i gave that speech, to try to modify mortgages, to try to reduce foreclosures and so on. some of that has taken the form of principle reduction, notably fanny and freddie decided some principal reduction or looking at it as a tool for reducing foreclosures. and principle reduction is part of the settlement, you know, with the large servicers. we'll get more evidence on this, i think very soon. the board of governors does not have an official position on principle reduction versus other

means of modifying mortgages or otherwise avoiding foreclosure. i think as a practical matter, you would want, if there is a limited amount of resources available you would want to consider whether, say, for example reducing payments is more effective than reducing principle owed. so i think there's important questions there. but generally speaking, i think the point that i was trying to make a few years ago is that while we all focus on the help that avoiding unnecessary foreclosures gives to the homeowner, it also, if it's successfully done it also reduces the losses to the lender, it supports the housing market and that in turn helps the broader economy. so to the extent we can avoid unnecessary foreclosures and do so in a cost efficient way, then there are benefits that are broader than just the help to the individual homeowner.

>> last november william dudley tment of the federal reserve, back in new york testified before the house oversight committee and he said this and i quote. we think that you can devise a program devise a program that for home buyers that have mortgages that are under water to incent them to continue to pay on those mortgages by giving them some program of principal reduction. obviously, the devil is in the details so you have to have good program design, but we are confident that one design program which would be beneficial knelt positive to the taxpayer." do you agree with mr. dudley that a targeted principal reduction program could be designed in way that would net present positive for tax, investors, and homeowners? >> well, first, president dudley was speaking for himself. as i said -- i understand. >> -- the board doesn't have an official position on that. where i do agree with him is to say that the devil's in the details. i mean, a lot would depend on what the criteria are for being

eligible for principal reduction and how it would be structured. for example, some think a useful approach would be to give principal reduction but to have an equity-sharing arrangement whereby if there are future gains, those would flow back to the lender. so i think it depends very much on the way the principal reduction is structured. no doubt there are some situation where is that would be the most effective method of averting unnecessary foreclosures. but i do think we should look not only at that, we should look at the whole range of tools for averting unnecessary foreclosures, and we should look at other issues like the conversion of foreclosed homes to rentals, steps to improve the access to credit of mortgage borrowers and so on to really address the whole range of issues in the housing market. >> thank you very much, mr. chairman. >> thank you very much, representative mulvaney. >> thank you, dr. bernanke.

i want to talk about an esoteric topic that may not be of interest to a lot of folks but it caught my attention. the interest rate derivative market, specifically the market for swaps. if i've got any numbers correctly, the size of this market has grown from $682 billion in 1987 to over $400 trillion today, roughly six size of the world economy. that's notional value but it implies a gross to this market. there was a federal reserve of new york report back in march called an analysis of otc interest rate derivative transactions that essentially said that this market was very difficult to measure, very difficult to see, very difficult to value so that most of the transactions occurred over the counter and not in the broader exchanges. they actually said that the lack of comprehensive transaction data has been a barrier to understanding how the otc

derivatives markets operate. as i was reading this, it struck me that a lot of those words could be used to describe what happened with the mortgage-backed securities and the collateralized debt obligations issues we had back in 2008. so i guess my first question is shouldn't we be concerned about this market and its lack of transparency? >> well, it's probably one of the most important derivatives markets, and we pay a lot of attention to it, as do the s.e.c. and the cftc, who have a lot of the jurisdiction over those swaps. i think it's important to say first on one hand that those numbers that you cite greatly overstate the actual exposures that the people involved in the swap are facing. those are just notional values. it's also true that interest rate swaps are typically among the most straightforward and simple to understand of

derivatives so that many of them are vanilla swaps that are pretty easy for regulators and for participants in the market to understand. so in some ways it doesn't pose the risk that the credit fault swaps during the crisis posed, for example. all that being said, you know, i agree with the general thrust, which is that we've seen that over-the-counter derivatives can be dangerous, and following the spirit of financial reform from this congress, we and our fellow regulators are working to put as big a share as possible of swaps on centrally cleared central counterparty-type exchanges and to increase the transparency so that the regulators in the public will have more information. so we are working in that direction. i agree with you, it's an important objective. >> does the size of this overall

market somehow give a false impression for the true demand for debt and thus a false impression for the true interest rates? >> well, interest rate swaps are basically ways in which participants can convert, for example, a fixed interest payment -- interest payment which is floating. it depends on some indicator. so it's rally a way of just customizing the flow of interest received or interest paid. you can have enormous amounts of interest rate swaps based on a relatively modest amount of underlying debt. so i don't think it overstates the amount of actual debt in the market. it's really a hedging tool for market participants who want to customize the flow of their payments and receipts and interest rates. >> does the size of the market and the risks that some of the larger financial institutions --

because i think that mostly just large financial institutions are doing this -- given the losses that have occurred, does it impair your ability to perform your job? does it impair your ability to exercise independence in monetary policy? >> no, i don't think it does, because the underlying instruments, credit instruments, are still the same. it's just a away of sharing the risk of -- or the pattern of interest receipts and payments. i should have said that, to the extent that interest rate swaps are not traded on central counterparties, we are also working -- and if they're traded over the counter, the regulators are also working to make sure that, a, that there is sufficient margin posted on both sides of the swaps so that if there are rapid changes in the value of the swaps that both

parties will be protected, and also, in fact, this afternoon we're going to have a meeting at -- open meeting at the federal reserve to discuss basel three, and our discussion will include capital requirements for the market -- the market book including derivatives. so in other words even over the counter financial institutions are going to be protected both by the capital that they hold and by the margin that they place.

the counterexample is aig and when it lost the bets it lost enormous amounts of money that brought down the company. so we want to avoid a situation like that, and that means as much central counterparty trading as possible and adequate capital and margin for over-the-counter transactions. >> thank you, mr. chairman. >> thank you very much. senator cove char. >> thank you very much. thank you, mr. chairman, for being here. i continue to work with a bipartisan group of senators, something like 45 of us, democrats, republicans, trying to come up with a comprehensive solution for the debt. we've made some headway. and it would be a mix of spending cuts and revenue to get us to that $4 trillion figure in ten years in debt reduction. you made it clear that you believe we need to do something significant to address these fiscal challenges. i do think a balanced approach would be the best way to do it with a mix of the spending cuts and the revenues. >> well, first of all, i congratulate you on these efforts. i think that -- i'm glad to see

people are working hard on this. it's really not my place to advise congress on the particular mix of spending and tax changes. so i hope you'll understand that. but i am glad to see that there's a bipartisan effort involved in trying to address this important problem. >> i remember the last time we talked, you did talk about the hearing. you talked about how, if we failed to act again and went to the brink as happened last sum we are the debt ceiling, that that clearly created some problems with our economy and the fiscal situation in this country. >> the debt creeling is is a somewhat separate issue. it's a strange thing that congress can approve, say, spend $5 and to tax $3 and not approve the $2 issuance of debt, which is implied by the two previous decisions. no other country that i know of has anything like the debt limit rule that we have. and the br