[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

WHAT THE EURO CRISIS MEANS FOR TAXPAYERS AND THE U.S. ECONOMY, PART I

=======================================================================

HEARING

before the

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES
AND BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS

of the

COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

__________

DECEMBER 15, 2011

__________

Serial No. 112-97

__________

Printed for the use of the Committee on Oversight and Government Reform

Available via the World Wide Web: http://www.fdsys.gov
http://www.house.gov/reform

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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

DARRELL E. ISSA, California, Chairman
DAN BURTON, Indiana ELIJAH E. CUMMINGS, Maryland,
JOHN L. MICA, Florida Ranking Minority Member
TODD RUSSELL PLATTS, Pennsylvania EDOLPHUS TOWNS, New York
MICHAEL R. TURNER, Ohio CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina ELEANOR HOLMES NORTON, District of
JIM JORDAN, Ohio Columbia
JASON CHAFFETZ, Utah DENNIS J. KUCINICH, Ohio
CONNIE MACK, Florida JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan JIM COOPER, Tennessee
ANN MARIE BUERKLE, New York GERALD E. CONNOLLY, Virginia
PAUL A. GOSAR, Arizona MIKE QUIGLEY, Illinois
RAUL R. LABRADOR, Idaho DANNY K. DAVIS, Illinois
PATRICK MEEHAN, Pennsylvania BRUCE L. BRALEY, Iowa
SCOTT DesJARLAIS, Tennessee PETER WELCH, Vermont
JOE WALSH, Illinois JOHN A. YARMUTH, Kentucky
TREY GOWDY, South Carolina CHRISTOPHER S. MURPHY, Connecticut
DENNIS A. ROSS, Florida JACKIE SPEIER, California
FRANK C. GUINTA, New Hampshire
BLAKE FARENTHOLD, Texas
MIKE KELLY, Pennsylvania

Lawrence J. Brady, Staff Director
John D. Cuaderes, Deputy Staff Director
Robert Borden, General Counsel
Linda A. Good, Chief Clerk
David Rapallo, Minority Staff Director

Subcommittee on TARP, Financial Services and Bailouts of Public and
Private Programs

PATRICK T. McHENRY, North Carolina, Chairman
FRANK C. GUINTA, New Hampshire, MIKE QUIGLEY, Illinois, Ranking
Vice Chairman Minority Member
ANN MARIE BUERKLE, New York CAROLYN B. MALONEY, New York
JUSTIN AMASH, Michigan PETER WELCH, Vermont
PATRICK MEEHAN, Pennsylvania JOHN A. YARMUTH, Kentucky
JOE WALSH, Illinois JACKIE SPEIER, California
TREY GOWDY, South Carolina JIM COOPER, Tennessee
DENNIS A. ROSS, Florida

C O N T E N T S

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Page
Hearing held on December 15, 2011................................ 1
Statement of:
Lachman, Desmond, Ph.D., resident fellow, American Enterprise
Institute; Anthony Sanders, Ph.D., distinguished professor
of real estate finance; Douglas J. Elliott, fellow,
economic studies, Initiative on Business and Public Policy,
Brookings Institute; Joshua Rosner, managing director,
Graham Fisher & Co., Inc.; and Bert Ely, principal, Ely &
Co., Inc................................................... 7
Elliott, Douglas J....................................... 31
Ely, Bert................................................ 46
Lachman, Desmond, Ph.D................................... 7
Rosner, Joshua........................................... 39
Sanders, Anthony, Ph.D................................... 20
Letters, statements, etc., submitted for the record by:
Elliott, Douglas J., fellow, economic studies, Initiative on
Business and Public Policy, Brookings Institute, prepared
statement of............................................... 33
Ely, Bert, principal, Ely & Co., Inc., prepared statement of. 48
Lachman, Desmond, Ph.D., resident fellow, American Enterprise
Institute, prepared statement of........................... 10
McHenry, Hon. Patrick T., a Representative in Congress from
the State of North Carolina, prepared statement of......... 4
Rosner, Joshua, managing director, Graham Fisher & Co., Inc.,
prepared statement of...................................... 42
Sanders, Anthony, Ph.D., distinguished professor of real
estate finance, prepared statement of...................... 22

WHAT THE EURO CRISIS MEANS FOR TAXPAYERS AND THE U.S. ECONOMY, PART I

----------

THURSDAY, DECEMBER 15, 2011

House of Representatives,
Subcommittee on TARP, Financial Services and
Bailouts of Public and Private Programs,
Committee on Oversight and Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:04 a.m., in
room 2154, Rayburn House Office Building, Hon. Patrick T.
McHenry (chairman of the subcommittee) presiding.
Present: Representatives McHenry, Meehan, Ross, Issa,
Quigley, Maloney, Welch, and Cooper.
Staff present: Michael R. Bebeau, assistant clerk; Molly
Boyl, parliamentarian; Katelyn E. Christ, research analyst;
Linda Good, chief clerk; Peter Haller, senior counsel; Ryan M.
Hambleton, professional staff member; Christopher Hixon, deputy
chief counsel, oversight; Ryan Little, manager of floor
operations; Mark D. Marin, senior professional staff member;
Jaron Bourke, minority director of administration; Ashley
Etienne, minority director of communications; Adam Koshkin,
minority staff assistant; Lucinda Lessley, minority policy
director; Jason Powell and Steven Rangel, minority senior
counsels; and Brian Quinn, minority counsel.
Mr. McHenry. Good morning. This is the Subcommittee on
TARP, Financial Services and Bailouts of Public and Private
Programs. Our hearing today is, What the Euro Crisis Means for
Taxpayers and the U.S. Economy. This is the first of two
hearings; we have an additional hearing tomorrow morning at
9:30 a.m. in this room with the New York Fed President, a
representative from our Central Bank right downtown, and a
representative from Treasury as well.
It is the tradition of this subcommittee to read the
mission statement of the Oversight and Government Reform
Committee.
We exist to secure two fundamental principles: first,
Americans have a right to know that the money Washington takes
from them is well spent and, second, Americans deserve an
efficient, effective Government that works for them. Our duty
on the Oversight and Government Reform Committee is to protect
these rights. Our solemn responsibility is to hold Government
accountable to taxpayers because taxpayers have a right to know
what they get from their Government. We will work tirelessly in
partnership with citizen watchdogs to deliver the facts to the
American people and bring genuine reform to the Federal
bureaucracy. This is the mission of the Oversight and
Government Reform Committee.
I recognize myself now for 5 minutes for an opening
statement.
Over 3 years ago Americans witnessed domestic and global
markets deteriorate, resulting in missions of job losses and
unprecedented measures by governments and central banks to prop
up financial institutions. As the U.S. economy remains
vulnerable in the midst of our recovery, just across the
Atlantic, the European Union, our friends, fight to fend off a
second wave of economic and financial turmoil.
Today's hearing examines the economic unrest facing Europe,
actions undertaken by central banks and international
organizations in response, options that remain in our disposal,
and potential consequences to the U.S. economy and taxpayers.
In 2010, what first appeared as a Greek crisis spread
throughout the EU and now dictates global headlines, stock
markets, and the way European nations are categorized. As
events worsened this summer, the crisis began to take out heads
of European states and even managed to build the closest of
relationships between President Sarkozy of France and
Chancellor Merkel of Germany in their efforts to save the Euro.
Notably, the EU instituted the European Financial Stability
Facility and encouraged the European Central Bank and the IMF
to take extraordinary measures to address the liquidity and
perhaps the solvency issue in the crisis generally facing
European nations and their banks.
Thus far, it seems their actions have failed to be the
bazooka markets desired. Consequently, the Greek crisis
transformed into a full-fledged and full-blown Eurozone crisis,
intensifying the contagion to the larger economies of Italy and
Spain that have a cumulative sovereign debt of roughly $4
trillion.
Today, as European leaders work to strengthen the framework
of the EU, financial markets have become more dependent on the
continued willingness of central banks to use their balance
sheets to rescue the global economy. The central banks are not
shying away from this. Just last month, in an effort to aid
European banks that had trouble accessing dollars due to market
skepticism about their health, six central banks, led by the
Federal Reserve, made it cheaper for banks to borrow dollars to
ease Europe's sovereign debt crisis.
While welcomed by the markets, some financial experts have
warned that the Federal Reserve is allowing the European
Central Bank to create unlimited amounts of claims against the
Fed. Since Fed currency swaps reached nearly $600 billion
during the height of the 2008-2009 crisis, it is important to
recognize what the Federal Reserve determines is prudent
exposure to the European Central Bank.
Furthermore, it is prudent for the Fed to review whether
this precedent reduced the incentives of European banks to sell
underperforming assets during the intervening calm. For
instance, would European banks have acted to raise capital and
sell bad assets sooner if they could not rely on capital
injection from the Fed?
Another item worth examination is the role of the Eurozone
leaders in determining the conditions of credit default swaps
on Greek bonds. After leaders declared that holders of Greek
bonds would take voluntary haircuts, billions of dollars of
credit default swaps were unable to serve their purpose. By
these actions, the sanctity of a contract is questioned. Such
uncertainty may have long-term consequences as market
participants must now factor in such risk to a great degree in
the agreements that they make.
If we learned anything from the last crisis, it is that
impromptu precedents by governments increases uncertainty and
the likelihood of capital injections on behalf of the
taxpayers. In addition to market uncertainty, the reality of
European banks' spreadsheets and spreading their assets and
reducing lending due to undercapitalization has global markets
fearful of another recession.
The implications of a European recession on a recovering
U.S. economy are significant. A second recession out of Europe
would reduce U.S. exports, negatively impact the health of our
banks and non-bank financials, and visibly influence the value
of the U.S. dollar.
With that said, the severity of these effects on the U.S.
economy is anyone's guess. Consequently, the only certainty is
Europe's crisis is now a global crisis. As daily headlines
proclaim, capital injections to the tune of billions and
trillions of Euros and dollars, reinforcing the
interconnectedness of the global economy, it is vital that the
Congress conduct vigorous oversight on rescue proposals and
threats to our economy, threats to American jobs, threats to
American people's way of life, threats to American people's
value of the currency that they hold, their savings.
Simple questions still need to be answered, such as, Are
the actions of the Federal Reserve consistent with its mandate
and are the firms that are seeking liquidity simply illiquid or
perhaps insolvent? I am interested to hear from our expert
witnesses today about their views on the Eurozone current
potential rescue efforts and the consequences the crisis may
have on the U.S. economy and its citizens.
I appreciate your attendance on the panel and I now
recognize the ranking member, Mr. Quigley of Illinois, for 5
minutes.
[The prepared statement of Hon. Patrick T. McHenry
follows:]

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Mr. Quigley. Thank you, Mr. Chairman.
Today's hearing will examine what the European debt crisis
means for U.S. taxpayers and the U.S. economy. Trillions of
Euros in debt remain outstanding for Eurozone countries like
Italy, Spain, Greece, Portugal, and others. Weak revenues from
a weak economy have imperilled the capacity of these
governments to repay their debts, thereby risking default. A
default by a major European economy would have devastating
consequences for the American taxpayer.
As Mr. Elliott will testify, in 2010, our exports to the
European Union totaled $400 billion. We have over $1 trillion
of foreign direct investment in the European Union and we are
exposed to nearly $5 trillion in potential losses on loans and
commitments to European governments, banks, and corporations.
If economic powerhouses like Spain or Italy were to become
insolvent, the ripple effect throughout the global economy
would be catastrophic. If Europe sinks into prolonged
recession, American small businesses that export to Europe
would lose out on valuable customers, retirees whose retirement
plans are invested in European assets would be put at risk, our
economy would grow more slowly or slide into recession, and
American standards of living would decline.
There can be no question that a healthy European economy is
vital to the national interest of the United States and the
American taxpayer. But we must protect the American taxpayer if
the Euro crisis is not successfully resolved. I look forward to
hearing testimony from our Government witnesses on what they
see as the proper role, if any, of the U.S. Government.
Either way, Europe must reform itself. Countries like
Greece, Italy, and others need to address their short-term
financial challenges, but they also need to develop credible,
long-term debt reduction plans. Of course, if this sounds to
you like the pot calling the kettle black, you would be right.
Here in the United States we have repeatedly failed to
legislate a credible long-term debt reduction plan. Politics,
not economics, nearly saw the U.S. Government default on its
debt in early August.
Europe's challenge is also political. While Europe surely
has the economic resources to resolve this crisis, it has
repeatedly failed to do so. European leaders will have to
surmount their political differences and agree that saving the
European Union will require a shared sacrifice. It would be a
tragedy if the post-war European spirit of cooperation
floundered on this crisis. It would be equally tragic if our
own leaders were unable to come to an agreement on steps to
reduce our own long-term debt.
The truth is that the mission of government matters, but
reckless decisions have made it harder to fulfill that mission.
I join my colleague, Chairman McHenry, in urging leaders at
home and abroad to take the necessary steps to resolve this
crisis and help restore the global economy to a sustainable
growth.
Thank you and I yield back.
Mr. McHenry. I thank the ranking member.
Members may have 7 days to submit opening statements for
the record.
We will now recognize our panel before us today. Dr.
Desmond Lachman is a resident fellow at the American Enterprise
Institute and holds a Ph.D. in economics from Cambridge
University; Dr. Anthony Sanders is professor of finance in the
School of Management at George Mason University; Mr. Douglas J.
Elliott is a fellow at the Brookings Institute; Mr. Joshua
Rosner is a partner at Graham Fisher & Co.; Mr. Bert Ely is a
principal of Ely & Co., Inc., and an adjunct scholar at the
Cato Institute.
I believe I know at least four of you have testified
before, but it is the standard practice of the Oversight and
Government Reform Committee that all witnesses be sworn, so if
you would please rise and raise your right hands.
[Witnesses sworn.]
Mr. McHenry. All right, you may be seated.
Let the record reflect that all the witnesses answered in
the affirmative.
Seeing as you have testified before, if you will summarize
your statement. You see the red, yellow, and green lights
before you. When yellow pops up, that means, well, it means
just what it means when you are at a stop light: hurry up. And
obviously green means go and red means stop.
So, with that, we will recognize Dr. Lachman for 5 minutes.

STATEMENTS OF DESMOND LACHMAN, PH.D., RESIDENT FELLOW, AMERICAN
ENTERPRISE INSTITUTE; ANTHONY SANDERS, PH.D., DISTINGUISHED
PROFESSOR OF REAL ESTATE FINANCE; DOUGLAS J. ELLIOTT, FELLOW,
ECONOMIC STUDIES, INITIATIVE ON BUSINESS AND PUBLIC POLICY,
BROOKINGS INSTITUTE; JOSHUA ROSNER, MANAGING DIRECTOR, GRAHAM
FISHER & CO., INC.; AND BERT ELY, PRINCIPAL, ELY & CO., INC.

STATEMENT OF DESMOND LACHMAN, PH.D.

Dr. Lachman. Thank you, Chairman McHenry, Ranking Member
Quigley, members of the committee, for giving me this honor to
testify before you this morning.
In my oral statement, what I would like to do is three
things: I would like to set out the reasons that I think that
there is going to be a significant intensification of the Euro
debt crisis in the months immediately ahead that could result
in the Euro's unraveling within the next 12 months, so this is
a crisis that really does have a sense of urgency; I would then
like to draw out the serious risks that the Euro crisis poses
to the U.S. economic recovery should there be an
intensification of the Euro crisis; and, last, I want to
consider the potential cost to the U.S. taxpayer of the various
measures that have been undertaken by the IMF and by the
Federal Reserve to diffuse the crisis.
Over the past few months there has been a marked
intensification of the European debt crisis that suggests we
could get an unraveling even as early as 2012. The Greek
economy now appears to be in virtual free fall. Its banks are
losing deposits. It is only a matter of time, a matter of
months, before we are going to get a hard default of Greece.
Second, there is contagion from the Greek crisis that is
now affecting Italy and Spain, Europe's third and fourth
largest economies, which are regarded in the markets as too big
to fail, but too big to bail. Should those problems intensify,
the question of the Euro's existence would be very much in
question.
The European debt crisis is also having a material impact
on the European banking system, which is in the throes of a
credit crunch that is likely to intensify in the months ahead,
and what we are seeing is we are seeing the German and French
economies showing the clearest of signs of slowing, moving into
recession.
Now, European policymakers and the IMF are hoping that the
countries in the European periphery can correct their large
public finance and external imbalances by several years of the
severest of fiscal austerity within the framework of a fixed
exchange rate system that doesn't allow them to devalue to
boost exports as an offset to the fiscal tightening. I very
much doubt whether such an approach can work because it is more
than likely to throw those countries into the deepest of
recessions that is going to make the collection of taxes
difficult and is going to have a very big political backlash.
A deepening of the European crisis could very well derail
the U.S. recovery. We have already had mentioned the idea that
it could diminish U.S. export prospects, it could result in a
weakening of the Euro that would make it difficult for the
United States in third markets, but the most important channel
through which the European crisis could affect the United
States would be through the financial crisis. U.S. money market
funds have close to a trillion dollars deposited with European
banks. The U.S. banks are very exposed to Germany and France.
Let me touch on the IMF and the Federal Reserve. The IMF
lending commitments to Greece, Ireland, and Portugal already
total around $100 billion. Considering that the United States
has a 17.5 percent share in the IMF, this lending puts U.S.
taxpayers at risk to the tune of $20 billion. In assessing how
serious is the risk for U.S. taxpayers, it is of note that the
IMF has never lent money on this scale to any country in
relation to the size of those countries as it has to Greece,
Ireland, and Portugal. The IMF's commitment to these countries
are as much as 10 percent of their GDPs and one-quarter to a
third of their tax collections.
At the recent European Summit, the European countries are
proposing to make bilateral loans to the IMF to the tune of
$260 billion, or $200 billion Euros, that would be intended to
loan to Italy and Spain. It is important to recognize that if
those bilateral loans by the European countries give those
countries a claim on the IMF, as opposed to a claim on Italy
and Spain, the U.S. taxpayer would be put at risk for those
loans to Italy and Spain.
If Italy and Spain do have to go to the IMF for large-scale
loans, the exposure to the U.S. taxpayers to those countries
could be enormous. Considering that the IMF's combined lending
commitment to Italy and Spain could well exceed a trillion
dollars, what we are talking about is U.S. taxpayers could be
at risk for up to $200 billion.
In assessing the potential risk to the U.S. taxpayer from
IMF lending to European periphery, one has to consider that the
risk of the unraveling of the Euro is a distinct possibility.
Were that unraveling to occur in a disorderly manner, it would
have a devastating impact on the European periphery's economic
outlook and its public finances. Considering that IMF loans to
the periphery could reach levels that would be unprecedentedly
high in relation to those countries' taxpayers, there would be
a material chance that those countries would have difficulty in
repaying those loans.
Last, judging by its 2008-2009 experience with currency
swaps, the Federal Reserve's dollar swap lines could reach $600
billion in the event that the European crisis were to
intensify. However, one must suppose that the risk to the U.S.
taxpayer from the Federal Reserve swaps would be circumscribed
by the fact that the main counter-party to those swaps would be
the European Central Bank, rather than the countries in the
European periphery, and one should suppose that the European
Central Bank could print the Euros to buy the dollars to repay
those loans.
Thank you.
[The prepared statement of Dr. Lachman follows:]

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Mr. McHenry. Thank you, Dr. Lachman.
Dr. Sanders.

STATEMENT OF ANTHONY SANDERS, PH.D.

Dr. Sanders. Chairman McHenry, Ranking Member Quigley, and
members of the subcommittee, thank you for inviting me to
testify today.
The Eurozone is teetering on collapse and it has been
decades in the making. The cause of their problems is excessive
government spending, leading to excessive government debt,
coupled with slow GDP growth.
The largest European countries are expected to have real
GDP growth of 1.3 percent for 2012 and unemployment of 9.9
percent. The IMF has also produced a long-term real GDP
forecast in which they have discovered that most of the
European zone will have less than 2 percent GDP growth by 2016.
And if we take a look at the household and financial debt
in Europe, we find out that the U.K.'s debt-to-GDP ratio,
including households and financials, is over 900 percent. Japan
is over 600 percent and Europe is almost 500 percent debt-to-
GDP. The United States is over 300 percent. In summary, the
Eurozone, Japan, and the United States are drowning in debt.
In a recent article from an economist at the European
Central Bank itself shows that there is a significant negative
effect of the size of government on growth.
The European Union will unify, break up, or downsize, but
regardless of what option they choose, they are still spending
too much money and have taken on too much debt and have reduced
the ability to pay for it, which is slow GDP growth. Additional
debt is not the answer; it is the problem.
The obvious solution is austerity. But making loans to the
European Central Bank and individual countries does not solve
the underlying structural problem, it only makes the debt-to-
GDP problem even worse; it is simply a short-term solution to
lower GDP growths. And how is this possibly going to help bail
out the European situation?
Now, if Germany and France are successful in creating a
fiscally integrated Europe, there will be less of a rush to
purchase U.S. treasuries, leading Treasury rates to rise as
people flee our markets. But given that the Fed is already the
largest purchaser of U.S. treasuries, this could be a problem.
China is flat on Treasury purchases and the U.K. and Japan
continue to increase their purchases of treasuries. But the
U.K. and Japan are not enough to pick up the slack from China's
flat-line Treasury purchases.
Now, the Fed has been active in the European bailout
starting in 2007, actually, a little bit before, with its
discount window of operations, and it peaked in 2008. The
largest European borrower from the Fed was the failed Belgian
bank Dexia. While most of the discount window loans have been
repaid, we are still in the dark on the guarantees.
Recently, the ECB drew $552 million from the Fed's swap
line last week, in November. These are 7 day swaps at an
interest rate of 1.08 percent. The Central Bank also borrowed
the same amount in the prior week, etc. It begs the question,
how long will the Fed keep the swap line open? While we cannot
see the swap line in real time, the evidence indicates that the
basis swap has a very short half-life, meaning that it is able
to drive down the Euro rate momentarily, then immediately rises
back up, showing that this is ineffective.
A recent disagreement about the size of the Fed's
intervention, discount window, and guarantees was in the media
between the Fed and the Bloomberg Markets Magazine. The
Bloomberg Markets said that the Fed had committed $7.7 trillion
as of March 2009, almost the size of our national debt at one
point recently, to rescuing the financial system when all
guarantees and lending limits were added up. The Fed disagreed
and said that any given day the Fed emergency credit from its
liquidity programs was never more than $1.5 trillion. Whether
we are looking at any given day or the cumulative impact, these
are very large numbers historically, indicating the Fed is in
fact attempting a bailout of the Eurozone.
Now, on the Fed side, it is clear that the guarantees of
the Eurozone could be problematic to U.S. taxpayers if things
do not improve, and I just don't see the story for improvement
in the Eurozone. And the swaps with Europe could be costly as
well. Since there is little transparency on the Fed's discount
window and guarantees, it is difficult to measure taxpayer
exposure.
In addition to the Fed, the IMF, which is the U.S.'s
largest stakeholder, is also active. They have a line of credit
for IMF crisis funding in the amount of $100 billion. Given the
structural problems facing the Eurozone, there is little
likelihood that the Eurozone will continue to have problems
since there is a lack of will to cut government spending and
entitlements, so I would expect that $100 billion LOC to be
used and not paid back.
In summary, the Eurozone's structural problems cannot be
solved by low interest rates and guarantees from the Fed or the
IMF. In fact, engaging in a bailout of Europe could actually
jeopardize U.S. taxpayers and is a perverse solution to the
problem. The best way to protect U.S. taxpayers is to increase
transparency of the Fed, take back the $100 billion line of
credit at the IMF, and undertake spending cuts ourselves in
order to reduce our deficit and massive debt loan exposure.
Thank you.
[The prepared statement of Dr. Sanders follows:]

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Mr. McHenry. Thank you, Dr. Sanders.
Mr. Elliott.

STATEMENT OF DOUGLAS J. ELLIOTT

Mr. Elliott. Let me add my own thanks to you, Chairman
McHenry, Ranking Member Quigley, and members of the
subcommittee, for inviting me here today. As has been noted, I
am a fellow in economic studies at the Brookings Institution,
but I am here in an individual capacity and not representing
the Institution, which does not take policy positions.
I commend you for calling this hearing, since the Euro
crisis is deeply worrying. There is a significant chance that
the crisis could go badly enough wrong that Europe plunges into
a deep recession that puts the United States into at least a
mild recession. Trouble in Europe will communicate itself to
our shores strongly and quickly because, as the ranking member
noted, we have $400 billion of exports to Europe annually, a
trillion dollars of direct investment there, and our banks have
almost $5 trillion of credit exposure.
Now, the good news is that the Eurozone as a whole does
have the resources to avoid that kind of disaster if the 17
nations stick together effectively. Europe is one of the
world's largest economies and the Eurozone as a whole has debt
ratio similar to the United States, meaning that their fiscal
problems require serious action, as ours do, but the situation
can certainly be remedied.
I personally believe there is a three in four chance that
Europe will muddle through, but very complicated political
constraints in Europe still leave us with a one in four chance
of disaster, again, in my view. Even assuming a good outcome,
the crisis is likely to get worse before it gets better, as it
will probably take the imminent possibility of catastrophe to
allow politicians over there to break through those tough
political constraints. At that point of crisis, it may be
necessary for European leaders to produce a comprehensive
package backed by as much as two trillion Euros of available
funds. Not all of this would be used in practice, as long as a
backstop this large is credibly committed. The markets need to
know that there is insurance for the worst emergency, in which
case they are likely to go back to supplying at least some of
the necessary funds themselves.
I believe the IMF could play a very useful role in any
comprehensive solution. First, adding some IMF funding to the
mix would help reassure financial markets that the total
resources necessary would in fact be available. Second, it
would be a clear sign that the rest of the world stands ready
to help Europe through its troubles, which should also be
viewed positively by the markets. But most importantly, the IMF
is in the best position to impose conditions on lending to
troubled Eurozone countries since it is viewed as more
dispassionate and less political about Europe's situation than
would be true for purely European institutions. Further, it can
provide a great deal of technical advice, which is more likely
to be taken when the IMF is also a provider of funding. We all
listen more carefully to people who are also providing money to
us.
If Europe produces a credible and comprehensive plan that
involves the IMF appropriately, then we should support that IMF
role. I do not believe that this would require additional U.S.
funding of the IMF, but just the use of resources we have
already provided. The IMF has almost $400 billion of
uncommitted resources and Europe is planning to commit another
$200 billion Euros to the IMF, with the possibility of some
matching funds from certain non-European nations not including
the United States.
The risk to the U.S. taxpayer from IMF lending, I believe,
would be small for a variety of reasons. A key one is that IMF
lending is in a legally privileged position that makes it much
safer than, for example, the TARP funds that were invested by
U.S. taxpayers. IMF loans are effectively senior in their
claims to all other borrowings; whereas, the TARP funds were
deliberately invested at the level of equity, which is much
riskier. This was done in order to stabilize the financial
markets by protecting other suppliers of funds to the banks. In
addition, even if everything does go wrong, the United States
bears less than a fifth of the risk from IMF lending.
I want to emphasize our taxpayers and other citizens are
already at great risk from the Euro crisis. If it goes badly
wrong, our citizens and the businesses they own will lose large
sums of money both here and abroad. Federal Government tax
receipts will fall significantly, eventually requiring
taxpayers to pay more than they otherwise would have done. In
my view, supporting IMF intervention would reduce the total
risk to America by much more than the quite modest financial
risk that our share of the IMF funding would represent.
Sometimes the riskiest choice is to take no chances at all.
There are a few other things that America can do,
principally along the lines of the Fed swap facilities with the
European Central Bank that have been described and the
provision of technical advice. However, this is a European
problem and they will need to provide the backbone of any
solution.
Thank you for the opportunity to testify and I welcome any
questions when we get to that point.
[The prepared statement of Mr. Elliott follows:]

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Mr. McHenry. Thank you, Mr. Elliott.
Mr. Rosner.

STATEMENT OF JOSHUA ROSNER

Mr. Rosner. Thank you, Chairman McHenry, Ranking Member
Quigley, and members of the subcommittee, for inviting me to
testify on this important subject.
To fully assess the risks to the United States and our
proper role in the Eurozone crisis, it must first be clear what
the crisis is and is not. It is not a bailout of populations of
the weaker European economy such as Greece, Ireland, Portugal,
Italy, Spain, Hungary, or Belgium. After all, the populations
of those countries are being forced to give up portions of
their sovereignty in the name of austerity toward a fiscal
union.
Rather, it is partially a bailout of banks in the core
countries of Europe, of their stockholders and creditors who,
failing to gain sufficient access to capital markets, would
need to be recapitalized by their host country governments. It
is a transfer of losses from bank creditors onto the backs of
ordinary people without requiring any cost to those banks whose
practices helped lead us to the problem. It is much a tale of
overlending as it is of overborrowing. And just as nobody
should feel undue sympathy for those who miscalculated the
amount of debt they could service, nobody should feel for those
who miscalculated their lending risks.
The fundamental construct of the Euro is flawed, and its
basis depends on substantially different economies and
different levels of competitiveness among those economies
sharing the same currency. Those economies have proven unable
to rationalize their differences in a monetary union. In the
United States we have a transfer mechanism allowing tax dollars
to be reallocated from the wealthiest states toward those less
fortunate. The core European countries have demonstrated an
unwillingness to accept such as necessity. The solution is
either to move forward with a fiscal union complete with
transfer of payments or break up. Ultimately, these are
political decisions and currently there appears to be little
popular support in Germany, Finland, and the Netherlands for
such a real fiscal union. Unless that changes, the Eurozone
will have to shrink its membership or dissolve. Either result
will inevitably lead to significant stakeholder losses, which
importantly may now include the Fed.
Proper U.S. policy should support our values around the
world, not undermine them. We should support the apportioning
of losses first to equity investors and then to unsecured
lenders according to long-established and well understood rules
of priority. We should no longer support privatization of gain
and socialization of loss. Doing so leads to distortion of
market incentives and further risk-taking by those who have
demonstrated an inability to properly manage risk.
The European crisis demonstrates all too clearly that the
problem is now well beyond moral hazard. A great many of the
decisions being made in the name of crisis management are not
being made by the elective representatives of the people of the
countries of Europe. Rather, they are being made by
technocrats. Accordingly, the crisis is moving into a stage
where it may represent the death of representative democracy,
but also the destruction of global markets. I urge you to
consider whether this is truly the approach to crisis
management that our country should be supporting and endorsing.
In May 2010, the Fed reopened swap lines to the European
Central Bank in an effort to bolster liquidity for institutions
in these markets, but at what cost? On November 30, 2011, to
increase the attractiveness of these lines, the Fed lowered the
interest rate by a half percentage point. Since then, 3-month
lending through the lines increased from $400 million to over
$50 billion. While the actions of the Fed may well be justified
and consistent with U.S. policy goals, they are nonetheless
being made in near darkness and without substantial involvement
by our own elected officials. As a result of this commitment of
financial support, we are now supporting undemocratic
approaches implemented largely by authorities who have
demonstrated an ongoing inability to either recognize the scope
and scale of the problems or come to a consensus on how to
address the rolling crisis and prevent it from spreading. They
have, instead, sought to deny the problems and downplay the
impacts. When they don't like the market's assessment of the
problems, they have chosen to shoot the messenger and imperil
market function through limitations of trading of sovereign
bonds and credit default swaps. Are these proper policies for
the United States to endorse?
By providing unlimited swap lines to be used by
institutions in the Eurozone, institutions which may in fact be
insolvent, not just illiquid, we have effectively allowed the
Fed to direct U.S. foreign policy in support of a single
currency for the Eurozone. As the risks of the losses of the
Fed rise in the event of a breakup of the Eurozone, they seem
likely to commit us further to support of that union in its
current form. While the Fed has technical expertise in these
matters, such policy decisions should not be made without
informing Congress. I suggest that you consider whether the
Fed's efforts should be directed more toward quantification of
the problem and providing technical advice to Congress.
Dodd-Frank sought to reduce the opacity and require the Fed
to disclose which firms receive loans from the discount window.
In the spirit of that legislative intent, why hasn't the Fed
required the ECB to inform them of recipients of funds from
swap lines as condition of the arrangement?
While there are many more questions to be asked and
answered, these questions suggest there are real reasons for
the Fed to have concern about ongoing instability in highly
interrelated markets of Europe. There also appears to be a real
and rational basis for the actions they have taken toward
short-term stability goals during the crisis. Furthermore, we
can believe the Fed is acting appropriately, but without more
information and a broad discussion, we don't know whether the
Fed's focus on short-term stabilization properly aligns with
longer term U.S. policy goals.
Perhaps we should support a European Union, but have our
elected representatives affirmatively decided in favor of
continued support for a single currency? It seems fair to
consider that such foreign policy decisions should rightly be
made not by an independent central bank, but, instead, by the
Secretary of State, U.S. Trade Representative, and the
Secretary of Treasury with informed consent of the President
and Congress.
Thank you, and I would be pleased to address your
questions.
[The prepared statement of Mr. Rosner follows:]

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Mr. McHenry. Thank you so much, Mr. Rosner.
Mr. Ely.

STATEMENT OF BERT ELY

Mr. Ely. Chairman McHenry, Ranking Member Quigley, and
members of the subcommittee, I appreciate the opportunity to
testify to you today about the Euro crisis and what it could
mean for U.S. taxpayers and our economy.
I wish I could speak more positively about the Euro
situation than my fellow panelists, but I feel that I cannot.
Europe would not be experiencing its economic crisis if the
Euro had never been created or if at least the Eurozone had not
been expanded to 17 countries. The fundamental problem with the
Eurozone is that it ties 17 quite dissimilar economies to a
common currency. While the total population of the Eurozone
approaches that of the United States, the Eurozone lacks the
economic, cultural, and language integration that has long
benefited the United States. The Eurozone's insufficient
integration greatly impairs the sustainability of the Eurozone
as it is now constituted.
A key characteristic of a sustainable currency are such as
the United States is that there are minimal barriers to the
movement of goods, services, and labor within the currency
area.
Unfortunately, these keys to sustainability are not present
in the Eurozone as it is now constituted, as there still are
many practical barriers to the movement of goods, services, and
labor within the EU. Arguably, the Euro subsidized the
retention of national laws, which impair the efficiency of
industry in the Eurozone countries, and especially export-
oriented industries. Consequently, export goods produced in
these countries have steadily lost international
competitiveness. This is especially true across the southern
tier of the Eurozone, Greece, Italy, Portugal, and Spain.
In many regards, the Euro suffers the same weaknesses as
the classic gold standard, which the United States abandoned in
1933, or any commodity standard which ties several or many
countries to a fixed relationship between the currency units of
account of those countries. Because national economies evolve
at different rates of economic growth and public policy
innovation, economic tensions develop among countries tied to
each other by a common currency. The fixed relationships
between units of account become increasingly difficult to
maintain until a breaking point is reached and the fixed
relationships are irretrievably broken. The same phenomena is
occurring within the Eurozone.
Abandoning a common currency represents a country's shift
to a fixed to a floating exchange rate. Abandoning the Euro,
though, would be quite painful for a country. First, debts such
as mortgages and bonds denominated in Euros would have to be
abrogated and rewritten in the new local currency to spare
debtors from being crushed by repayment obligations in a now
suddenly more expensive Euro.
Second, owners of Euros in the weak Euro nations fearful of
being forced to convert their Euros into their country's new,
less valuable currency appear to be shifting their Euros to
banks in stronger Eurozone countries. The recent last ditch
attempt to fix the Euro by amending the EU treaty to impose
greater fiscal discipline in the EU will not work in the short-
term because the fiscal problems in many Eurozone countries are
so deeply imbedded that they cannot be fixed within a few
years. It will be a decades-long process that will not move at
a uniform pace throughout the Eurozone. My written testimony
discusses these problems.
Bottom line, the weaker Eurozone countries have much to do
to enhance their ability to stay in the Eurozone. How many will
succeed in doing so is a huge question with global
implications.
Turning to how a Euro crisis could impact the U.S. economy
and U.S. taxpayers, a Euro crisis could throw the EU into a
recession. However, if enough dominoes topple within the
Eurozone, Europe could experience a long, deep recession or
worse. Given the highly interconnected nature of the global
economy, U.S. experts to Europe would decline, which would harm
the U.S. economy. A European recession could trigger a global
economic slowdown, with the United States possibly falling into
a recession as the European economy sorted itself out.
A slowing U.S. economy would increase the already enormous
U.S. budget deficit as tax receipts declined and Federal
spending rose. Consequently, the U.S. economy would
increasingly look like the most troubled European countries,
huge amounts of deficits and rapidly rising debt-to-GDP ratio.
It would not be a pretty picture.
Unfortunately, the United States has few options for
dealing with a Euro crisis. The best it can is urge the EU to
aggressively address its problems in order to hold the Eurozone
together as best it can. I am skeptical as to how much help the
IMF can be. In particular, the United States should encourage
the weaker Eurozone countries to address structural problems to
improve their competitiveness, thereby improving the likelihood
that they can stay in the Eurozone.
Given its financial weaknesses, the Federal Government
should not supply any direct assistance to help the Euro such
as buying the debt of any Eurozone country. However, I do
support the U.S. dollar swap arrangements the Fed recently
entered into with five other central banks. These arrangements
provide liquidity to help the European financial system
function while the EU works through its problems. I foresee no
taxpayer risk from these swaps.
The United States should take the Euro crisis as yet
another wake-up call that it must put its economic house in
order by trimming budget deficits, reducing its debt-to-GDP
ratio, increasing domestic savings, reducing the U.S.'s net
debtor position with the rest of the world, addressing
entitlement challenges, removing taxes and disincentives for
savings and investing, and increasing the economy's
international competitiveness. This is an enormous politically
challenging task, but as a country we must undertake it, for we
are not immune to being laid low by excessive debt and deficit
spending, as has Greece and possibly other Eurozone countries.
Thank you for this opportunity to testify. I welcome your
questions.
[The prepared statement of Mr. Ely follows:]

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Mr. McHenry. I thank the panel's testimony. We will now go
to questions. I recognize myself for 5 minutes.
Dr. Sanders, let's begin at the beginning The Federal
Reserve has foreign currency swaps, it is a normal function of
the Federal Reserve for quite a number of years. Explain what
that means.
Dr. Sanders. Well, in a nutshell, what it means is that the
Eurozone can actually swap currencies with us. In other words,
we send cheap dollars over to Europe and they ship expensive
Euros over to the United States.
Mr. McHenry. Okay. So why is this an issue to the Federal
Reserve in this current environment? Why is this foreign
currency swap agreement an issue right now?
Dr. Sanders. Well, again, it is not being done at parity,
which means we are just not providing them, swapping the
currencies at a market rate; it is actually a subsidized rate,
we cut the rate on it.
Mr. McHenry. Okay.
Dr. Sanders. So, in other words, we are, again, subsidizing
Europe for the swap.
Mr. McHenry. Okay. So really the issue here is that we have
reduced the cost of this exchange and made it below what is the
current market rate; therefore, incentivizing the European
Central Bank to transact this type of swap agreement with the
U.S. Federal Reserve.
So, in light of that, Dr. Lachman, I have asked you this
question before, what do you see, in your view, the likelihood
that the Euro makes it out of this, that the Euro actually
exists as a currency in the medium term?
Dr. Lachman. Well, I think you need to distinguish between
losing a number of countries and the whole Euro disappearing. I
think that it is very likely that within the next year, 18
months, we are going to see several countries exit the Euro, we
are going to see countries like Greece, Portugal, Ireland,
probably Spain be forced to leave the Euro. But the Euro itself
as a currency between Germany and like countries, the northern
European countries, probably including France, that is very
likely to continue to exist.
Mr. McHenry. Let's go across the panel. Dr. Sanders, do you
agree?
Dr. Sanders. Again, as I have said in my reply, I don't
think the Euro can be saved. They can save the core, but the
fantasy that they can bail out the pigs, whether it is the pig
banks or the loans to the pigs, whatever, it is mission
impossible, they can't do it, so it has to break up.
Mr. McHenry. Okay. Portugal, Italy, Ireland.
Dr. Sanders. Greece.
Mr. McHenry. Greece.
Dr. Sanders. Spain.
Mr. McHenry. Spain. Thank you. Just want to make sure,
because Occupy Wall Streeters have a different analysis for
what a pig is.
Mr. Elliott.
Mr. Elliott. Yes, I am completely confident the Euro will
continue to exist, certainly the core absolutely, and I think
it is highly likely that all 17 members stay.
Mr. McHenry. Mr. Rosner.
Mr. Rosner. I think it is likely in the medium term that
the Euro continues to exist. I think that it will be difficult
to have members exit, but I do expect there to be an exit of
some peripheral members within the medium term.
Mr. McHenry. Okay.
Mr. Ely.
Mr. Ely. Yes. I think I am generally in agreement with my
fellow panelists. I think the weaker countries are going to
have to exit, and basically it is the southern tier countries
plus possibly Ireland. If they leave relatively soon, despite
the problems of transitioning back to their previous
currencies, this may actually be positive for them and for the
global economy because they will have cheaper currencies, their
exports will become more competitive, and this may be, as
painful as it is going to be for them to exit, this may be
better both for those countries and for the global economy if
they leave sooner, rather than later, so they can go through
the adjustment process. For the remaining countries in the
core, again, they have to address the classic problem of any
kind of common currency area, and that is that within any one
country the policies are not too far out of sync from what they
are in the other countries in that currency area. That is a
huge long-term challenge.
Mr. McHenry. Mr. Rosner.
Mr. Rosner. Yes. You have to remember, though, part of the
problem that we have watched in the way they have tried to
address the crisis thus far is that they have tried to avoid
that default from occurring in the periphery by any means. So
we have watched attempts to come to voluntary write-downs of
debts, of Greece, as example, and tried to do so without it
becoming a default in name, triggering the CDS. That is part of
the problem of the core, is they don't want to allow it to be
called a default because of what that would mean for CDS. It
creates a problem, though, in the timing and the delay. We have
delayed this. So at the point where Greece was recognized as a
problem, the credit was probably trading or should have been
valued at about 80; and today we are trying to get 50 percent
write-downs, and the truth is the Greek debt is not even worth
that. The longer we wait, the larger the write-downs will be,
but that is being stymied, the timing of that, by this intent
to do everything we can to avoid calling it a default, when
ultimately it will end up a disorderly default unless we
recognize it as something that needs to happen sooner, rather
than later.
Mr. McHenry. Now, my time has expired, but the point here,
why this is a discussion and why we are having this hearing
today, is in light of opening up a below market swap rate with
the Federal Reserve and the view that the survivability of the
Euro as it currently exists does expose the taxpayer to risk,
that is the concern we have today as policymakers and that is
why we are trying to have this oversight hearing today.
With that, I recognize Mr. Quigley for 5 minutes.
Mr. Quigley. Thank you, Mr. Chairman.
Mr. Ely, you said something that made me alter what I was
originally going to ask. You said it might be better for these
smaller countries to be forced out than go through this
adjustment period. Are you assuming that they are going to get
significant help before they are forced out, or they are just
going to have to go through this painful adjustment process to
get to that on their own?
Mr. Ely. Again, this is all highly speculative because we
haven't had any exits from the Euro before. My sense is that
they would not get much help, but what the exiting would do
would help in: number one, it would probably lead to the kind
of debt restructuring that Joshua was just talking about, but,
also, it would enable them to--their currency would be more
competitive, their export goods would be more competitive, they
would be more attractive for tourism. That is particularly
thought to be the case with Greece. And I think that this would
allow them to start to turn around their economies.
The alternative, by staying in the Eurozone, is just an
increasingly Draconian austerity which potentially can create
some very serious political problems. But I think it is like in
any kind of bankruptcy situation; at some point in time you
have to recognize the reality of it, go through the debt
adjustment process and deal with competitiveness issues. And I
think that for some of these countries the only way they can do
that is by leaving the Eurozone.
Mr. Quigley. If anyone else on the panel would like to
chime in. I guess I want to understand more thoroughly, Mr.
Elliott, why standing alone would be good for them and what
impact it might have on the United States.
Mr. Elliott. I would like to say two things. First is a
background point which I would be happy to expand on. You are
hearing, in large part, political judgments here. You are
hearing judgments as to whether these countries have the
political will and capability to deal with their longstanding
problems.
Mr. Quigley. And while you are into that, sorry for
interrupting, if you could add. It seems to me, from your
previous statements, that they have the financial capability of
solving this and this is all about political will.
Mr. Elliott. That is certainly my view. If you take the
Eurozone as a whole, they have, clearly, the ability to deal
with this economically. So then the question is will they take
the political actions necessary to do so. As you can tell from
my testimony, I am significantly more positive about that than
my fellow panelists. One reason for that is I think too often
we look at what has been agreed to date and think that tells us
what the ultimate outcome will be. This is like looking at the
debt ceiling debate here a few days before the agreement and
concluding there will never be an agreement because they are so
far apart, or looking at the current budget negotiations and
assuming that, because we can't seem to agree, the Government
will shut down and never startup again.
I think there is very strong political will within Europe
to get through this together. They have made a lot of mistakes.
I am not trying to say they have been brilliant about this at
all. But my view is, when they get to the edge of the abyss,
they really will be likely to do what they have to do.
Mr. Quigley. Dr. Sanders, you seem----
Dr. Sanders. Agitated?
Mr. Quigley [continuing]. Interested in----
Dr. Sanders. I just want to throw in my two cents and agree
with something Josh said.
Mr. Quigley. That is one of our jobs here.
Dr. Sanders. I think one of the only solutions for them is
to write down the debt. But again, that is politically, as Mr.
Elliott said, dangerous, but it is also economically dangerous
and perhaps impossible. They just came out with a report the
other day saying Greece is not following austerity, they are
not moving fast enough, in fact, they are kind of dragging
their feet. Is that a surprise? Absolutely not. This was
predicted a long time ago. So, in other words, any bailout is
going to have to be serious. Banks are going to have to take it
on the chin, governments are going to have to take it on the
chin, and, again, look at the debt loads and government
spending of even Germany and France. They have massive social
states. They can't do this either, in the long run. Maybe they
can do it for a year, but forget it over the long run. There is
all too debt-laden and all too big.
Mr. Quigley. Dr. Lachman.
Dr. Lachman. I think that the essence of the problem in
countries like Greece, Portugal, and Ireland is that these
countries are insolvent, and providing them with additional
funding isn't a solution. It is not just a question that this
is a political problem; it is a problem that they can't reduce
those imbalances within a fixed exchange rate system. If they
try to do massive amount of fiscal austerity within a fixed
exchange rate system, you get the result that we are seeing in
Greece, with a country collapsing. When a country's economy
collapses, they don't collect the taxes; the debt ratios rise.
Greece's debt ratio at the start of the IMF program was
supposed to peak at 130 percent. The latest IMF estimates are
that it is going to peak at 190 percent of GDP. This country is
clearly insolvent. One has to write down the debt and then one
has to deal with the problems that that causes for the banking
system.
If I might just add one point just in connection with the
swaps that the Fed is making. To be sure, they are providing a
cheaper credit, but part of the reason for that is the U.S.
money market funds have huge amounts of deposits on the banks
of the European banks that they are trying to repatriate back
home. So by providing those kinds of lines of credit, we are
not simply helping the Europeans, we are helping ourselves by
avoiding any of these money market funds eventually having to
break the buck as they did in 2008.
Mr. Quigley. Thank you. My time has expired.
Mr. McHenry. Mr. Cooper for 5 minutes.
Mr. Cooper. Thank you, Mr. Chairman, and thank the
distinguished panelists.
I think perhaps the most important question is the
simplest: Is this a crisis of the Eurozone or really more of a
crisis of the west? As most of you have pointed out that just
the trade implications alone mean that we have a stake in this
crisis, whether we want one or not. So when you globally talk
about taxpayer exposure, we have to remember that countless
Americans are shareholders, and they are shareholders in
institutions that perhaps have lent tens, hundreds of billions,
maybe even trillions of dollars to countries or entities in the
Eurozone.
It goes without saying that we share many cultural and
other ties with this troubled area, and sometimes unspoken is
the idea that the entire capitalist system is built, to some
degree, on confidence and leverage and trust. Just a few years
ago there was a prominent banker at Citicorp, Walter Wristin,
who had the famous doctrine that no sovereign country could
ever default. And he was not a creature of government; he was
one of the preeminent spokesmen of the U.S. private sector. So
things have a way of changing.
Mr. Ely. If I could address that. Mr. Wristin obviously
didn't know his history because there certainly have been
plenty of sovereign defaults before he made that statement and
we have seen them since, and unfortunately they will probably
continue.
With regard to the question whether this is a crisis of the
west or of capitalism, I think things have become so
intertwined globally that it is really a global or potentially
a global crisis, and when we look beyond the west, let's say to
Japan or to China, to pick two countries in Asia, each of them
have some very serious problems; different in some regards, but
in Japan, for instance, we have a debt-to-GDP ratio that
exceeds, I believe, any country in Europe, and in China I think
a lot of people are just waiting for that bubble to blow up. So
I think that it is more than just a crisis of the west or of
capitalism; I think it comes back to the issue of just too much
debt. I believe Josh made that point, that there is just too
much spending on the global credit card, so to speak, and that
that is what has to be reined in, including in the United
States.
Mr. Cooper. Those are all valid points. This is a complex
issue. Too much debt generally depends on the ability to repay,
and that is itself subject to many different factors. David
Walker, the former Comptroller General of the United States,
pointed out that, at least according to his measure of fiscal
responsibility, of the top 34 nations, that the United States
ranks 28th, behind some of the countries in Europe, in terms of
our fiscal responsibility. Now, there are different ways to
measure this and none of us wants to be unduly alarmist, but we
clearly have a lot of work to do in our own country since our
own credit rating was threatened this summer for the first time
in modern history.
So as we approach these issues, another dimension seems to
be almost the longer you wait to deal with it, the more the
contagion spreads and the greater the risk to confidence. I
wonder almost if we had intervened early with Ireland and
Greece or one of these most troubled nations, if the contagion
could have been limited. Of course, the origin of all this
seems to be excessive debt, inability to repay, promises that
can't be kept, and we are certainly subject to that in this
country, when so often we even refuse to acknowledge the real
debts of our own country, the real obligations.
So I see that my time is expiring. I recall that one person
has called for a competition to have the best idea to calmly
allow a sovereign nation to default or a sovereign nation to
leave the Eurozone. Are you aware of any good ideas in that
area so that the dismemberment can be managed in a sensible
way, if indeed that is what it comes to?
Mr. Ely. I believe I am the one who made that comment.
There actually is a little bit of historical experience with
currency arrangements, currency common areas and the like
coming unglued. It is not quite, certainly nothing of the
magnitude that we have today. It is not going to be an easy
process, but I think it comes down to a question of what are
the alternatives. As bad as it may be for someone to exit, it
is potentially worse not only for the particular country, but
for the broader economy, to delay the inevitable, and I frankly
think, the more I look at this, the more I think the sooner the
problems are addressed the better.
Mr. Cooper. Thank you, Mr. Chairman. I see my time has
expired.
Mr. McHenry. Mr. Meehan of Pennsylvania for 5 minutes.
Mr. Meehan. Thank you, Mr. Chairman. I want to thank each
of the panelists for your preparation for this and the
remarkable capacity you had to take these complex issues and
try to put them down into 5 minutes. That, in and of itself, is
a challenge, but this is a sobering issue and I thank you for
the work you are putting into it.
Dr. Sanders, you mentioned something that I wasn't quite
sure I understood, that there was a discrepancy in the
identification of whether some of these commitments were $7
trillion or $1.5 trillion, the Fed disagreed. What is that
about and why aren't we getting unanimity about something that
fundamental?
Dr. Sanders. What that is about was the Fed did not
disclose the discount window operations, and they still haven't
disclosed exactly fine details on it and they have not
disclosed their guarantee programs yet. But what happened was,
with the Freedom of Information Act, Fox News and Bloomberg
asked for the discount window information, it was produced, but
the Fed and Bloomberg counted it differently.
Mr. Meehan. I think it was Mr. Rosner that used the word
opacity, but isn't this the essence? Why are they entitled to
be able to keep that kind of fundamental information, if it is
tying back to guarantees from U.S. taxpayers, private?
Dr. Sanders. Well, I think the way I would answer that is I
think they are worried about bank runs. So if they don't
disclose the discount window, then there is not information out
there. Although, again, I would argue the exact opposite. I
would say if there is a threat of a bank run, I want to know
that information in advance. I don't think the Fed should be
putting American taxpayers at risk, although they have lowered
interest rates so low that retirees and fixed income households
are already getting pummeled, but that is a different issue, so
they are getting harmed by the Euro crisis that way. But,
again, I think Chairman Bernanke will defend the Fed being
secret. I think a lot of these problems would be settled down a
little bit if we had made them transparent. They really should
be.
Mr. Meehan. Mr. Rosner, you used the word opacity. I was
struck by that, I made a note on it, and I think that why isn't
the European Central Bank being asked to tell who is getting
the loans? Or respond to my first question. I am interested in
your insight.
Mr. Rosner. Well, I think it is a great question and I
think that part of the problem here is that there is a huge
difference between illiquidity and insolvency, and one has to
wonder whether part of the reason of the opacity is to protect
those who were seen as illiquid from being shown to be
insolvent. Okay? And I think that is something----
Mr. Meehan. What do you see is the difference? What is the
difference between illiquidity and insolvency?
Mr. Rosner. If you have short-term funding issues, but the
assets on your balance sheet actually allow you to be well
capitalized over the longer term, you are solvent. If you are
fundamentally insolvent, you are insolvent, and no amount of
liquidity will repair that, it will just smooth over the market
impact of that for the short-term. But this is part of the
problem that is going on, is the Europeans have taken step
after step to make claims of solvency over institutions that
are fundamentally insolvent and mask it in illiquidity or
liquidity problems.
Mr. Meehan. And would they be principally the countries
Italy----
Mr. Rosner. No, I think it is also the core. I think, as we
have seen, you have had problems at Dexia, you have had
problems at Commerce Bank, you have had problems at several of
the German and French banks, and it is not clear to me that
there just is liquidity problems; it seems to me that in some
cases there are insolvency problems. In fact, I think we also
have to realize that part of the fiscal disciplines that
everyone is talking about, everyone is calling for includes
getting governments out of the business of providing funding
for creditors' benefit on institutions that are fundamentally
insolvent. That is a commitment of fiscal resources toward
private creditors, as opposed to allowing market discipline to
force losses to be recognized by----
Mr. Meehan. And what do we do, then, to make those
creditors, who I guess are passing on that risk, so to speak,
how do we put them back into their appropriate place in the
line so that they are the ones who accept both the benefit of
the risk, but the impact of the downturn?
Mr. Rosner. I think to some degree it is by stepping away.
It is certainly not by doing what the Troika in Europe did to
Ireland, which is force the Irish government to recognize the
debts of its banks as sovereign obligations as a way of
preventing core banks from having to take losses on those
obligations.
Mr. Meehan. Would the run on the banks, then, cause there
to be an overall run on the whole European system?
Mr. Rosner. I think there would be runs on insolvent
institutions if we had enough information. I don't think that
there is a problem if regulators stepped in ahead of that run
and shut down or forced good bank, bad bank resolutions of
those institutions that were fundamentally insolvent. We would
head off the bank runs, as opposed to what we are doing, which
is the capital markets keep trying to give information to the
European leadership, telling them where the problems are, and
the leadership does everything they can to avoid that coming
out. We saw a bank stress test in Europe in the spring of 2010
saying that only 7 of 91 institutions had real problems. Now,
we have seen since then that that stress test was deeply flawed
and inaccurate. We have done quite a bit to cover up insolvency
issues in the name of illiquidity or liquidity issues.
Mr. Meehan. Thank you, Mr. Chairman. I yield back.
Mr. McHenry. I thank you.
Mr. Rosner, I know you detail that in the American
financial system in your book, Reckless Endangerment, which is
quite a read.
Mr. Welch for 5 minutes.
Mr. Welch. Thank you, Mr. Chairman, for calling the
hearing. I thank the panel.
Is it basically the consensus that Congressman Meehan's
question that implied more information is better is a point
that all of you agree with?
Mr. Rosner. No.
Mr. Welch. Do the others agree with it?
Dr. Lachman. Yes.
Dr. Sanders. Yes.
Mr. Ely. I agree that more information is better, but the
key question is how do people and how do policymakers,
specifically, react on it. What counts is not what is spoken,
but what actions are taken.
Mr. Welch. So is that a you can't handle the truth?
Mr. Ely. That is, to a great extent.
Mr. Welch. Let's go to Mr. Elliott. You say no. It is hard
to understand--what sounds like what we like; as long as we can
confuse voters, we may be alright. But voters don't like that,
and rightly so. So why do we have that standard that appears to
apply to bankers? Mr. Elliott, you seem to be saying there is
some upside to keeping things obscure.
Mr. Elliott. It is a question of balance. That is, I agree
in many ways with what Josh was saying, but the problem is, in
practice, particularly in the middle of a crisis, it is often
very hard to tell the difference between illiquidity and
insolvency, so there is a fear that, for example, if you
publish the discount window borrowings in the short-term so
people know very quickly, that if a bank does borrow a lot of
the discount window, which is secured borrowing, they actually
bring good assets, generally, to get that money, that if they
do that, which is important for liquidity, they will be seen as
potentially insolvent.
Mr. Welch. So let me ask----
Mr. Elliott. So I think most people agree that the discount
window, if you do publish it, that you do at least want a delay
of time.
Mr. Welch. So there would be a difference, in your view, if
I understand what you are saying, about managing information in
the midst of a crisis, where the market may react emotionally
and hair-trigger. But what about having systems that allow
markets to digest over time in realtime what is going on?
Mr. Elliott. I think if there is enough of a gap of time,
then I am definitely comfortable with that. Figuring out what
the right gap is is hard, and it is very important not to
create a stigma----
Mr. Welch. Let me go to Mr. Rosner. I don't have that much
time, so I appreciate that.
Mr. Rosner. If we believe that these shareholder-owned
corporations have an obligation to shareholders, and we believe
that markets can only work efficiently where there is symmetry
of information, how can we argue against the disclosure of that
information on the belief that there is no such thing as a
rational investor who can read a balance sheet, understand an
income statement, and know what assets are on a bank's balance
sheet?
Mr. Welch. Thank you.
Dr. Sanders and then Mr. Ely.
Dr. Sanders. Again, I see Mr. Elliott's point. A delay may
make some sense; however, the problem is if you look at many
major banks around the world, Europe, the United States, if you
mark their books to market on all their asset-backed securities
and MBS, they would all be insolvent. So I think that signal is
already out there. So under those set of circumstances I don't
see the necessity to the Fed keeping everything blind.
Mr. Welch. Okay, let's go to Mr. Ely and then finish with
Dr. Lachman.
Mr. Ely. Just very quickly, I just think in this day and
age it is naive to think that you can keep the markets ignorant
of what is really going on. There is an enormous amount of
chatter that takes place in the money markets and you have the
analysts. But the real downside of trying not to disclose
information in any approaching realtime basis is rumors
develop, so people may make judgments and basically kind of see
false negatives in the sense that they will assume that maybe
the problem is more widespread or is spread by a particular
institution, when in fact it is not. So there is a downside to
not disclosing information.
Mr. Welch. Thank you very much.
My remaining time to Dr. Lachman.
Dr. Lachman. I think in the European context the problem is
a lot deeper, it is that the Europeans have allowed the banks
to keep the sovereign debt of the periphery on their banking
books at 100 cents on the dollar, which is patently not
correct. So we get the ridiculous result that we had that Mr.
Rosner mentioned, that you have a stress test that says all of
these banks are just fine because we are assuming that it is
impossible for any of the countries to default. So I think that
they are not doing a service by being very opaque and actually
encouraging the perpetuation of some sort of myth that these
debts are in fact going to be repaid.
Mr. Welch. Okay, I want to thank the panel. Great panel.
Mr. Chairman, I yield back.
Mr. McHenry. I thank my colleague.
We will now start a second round and I recognize myself for
5 minutes.
So I guess the question is how large do you envision the
swap line? How large do you think it can get? In the crisis in
2008-2009, we hit about $600 billion in the swap line. Dr.
Lachman, what is your view?
If you all could just keep it brief on this round.
Dr. Lachman. No, I think that you could quite easily go up
to $600 billion Euro. You are talking about a European banking
system that is huge in relation to that of the United States.
You are talking about an economy that is a third of the global
economy, that the banking sector is really very important. So
the chances of you going to $600 billion, I am just thinking in
terms of the amount of money that the U.S. money market funds
have parked a trillion dollars, so to get above $600 billion
wouldn't seem to me a stretch.
Mr. McHenry. Dr. Sanders.
Dr. Sanders. Oh, I agree with Dr. Lachman. I think, in
fact, it could get above that amount and get to the $1 trillion
level or perhaps even higher. And, again, the problem is, since
we are not seeing what is going on in real time, I know
Chairman Bernanke, yesterday, said no plans to bail out Europe,
but again, since it is all off balance sheet, we can't see it,
I would say that they probably are going to expand the swap
lines.
Mr. McHenry. Mr. Elliott.
Mr. Elliott. Short answer is I don't know. I am not deeply
worried about it, though; the European Central Bank is a very,
very good credit.
Mr. Rosner. I don't think you can know until you have a
sense to how they are going to move forward in trying to
resolve the crisis, recognize the losses, address it.
Obviously, from a dollar funding need in the European banking
system today, if we continue on this trajectory, I don't
disagree with either Dr. Sanders or Dr. Lachman. But it is
unknowable at this point.
Mr. McHenry. Sure.
Mr. Ely. I agree that it is unknowable; however, the longer
these problems continue and the greater the continued
uncertainty about the strength of these banks and their parent
governments, then one can easily see the amount drawn under the
swap lines going up and up and up.
So what I worry about as much as anything else is the
prolongation of it. When is the fever going to break? When will
things start to turn around? When will banks be able to resume
or be able to fund themselves more in the private markets?
That, to me, is what the real key issue is. And until we get to
that point where there is greater market confidence in the
banks, we are going to see substantial amounts drawn on the
lines and maybe even approaching a trillion dollars.
Mr. McHenry. Mr. Elliott, let's say the Fed goes beyond
simply the swap line, which they have in the last crisis. We
are expressing concern now based on our view of the
survivability of Europe and the Eurozone as it is currently
constructed. What if they go beyond that? What policy options
do you believe the Fed has in the event of even greater stress
in the European financial markets? Throw out some scenarios
that you could envision happening.
Mr. Elliott. Sure. The scenarios I am going to throw out, I
think, are extremely unlikely, and I don't think we would
probably want them to do it. I mean, look, the Fed could do the
same thing. Actually, I haven't checked legally, but I imagine
that they could do the same thing that the various central
banks in Europe are doing, which is find a way to get some
money into the IMF, for example, or find a way to loan money to
the European Financial Stability Fund or something like that.
But I just don't see, nor do I think it would be desirable, for
the Fed to be putting money directly into any of these rescue
funds.
I think mostly the Fed is at the limit of what it can do
directly as regard to Europe. Obviously, it could do more
monetary stimulus here to deal with concerns about Europe, but
I don't think there is a lot of room to do things.
Mr. McHenry. And European banks that have a presence in the
United States already have an open line with the Fed as it
stands now, with their open markets function, because they too
are American banks, have a presence here.
Mr. Elliott. Exactly.
Mr. McHenry. Could you envision the Fed purchasing
American-originated assets held by European banks? Could they
do that?
Mr. Elliott. I believe they could. I think it is hard to
imagine unless they were making the same opportunity available
to other banks to sell the same kind of assets.
Mr. McHenry. Okay. But American-originated, I mean, that
would be sort of the nexus there.
Mr. Elliott. Yeah.
Mr. McHenry. Could you imagine a TALF-like facility for
European assets, European bank assets?
Mr. Elliott. I think if the assets are U.S. assets, yes, I
could imagine doing another version of the TALF. If the assets
are basically European-based assets, it is hard for me to
imagine us doing that.
Mr. McHenry. Okay. I am just asking scenarios because the
range of options. What we saw the Fed do in the last crisis,
and to Dr. Sanders' point, this question about was it $7
trillion or was it $1 trillion or a trillion and a half, the
real question that the average American citizen has is what is
the Federal Reserve doing. So this lack of information means
that many Americans will just simply fill in the blanks on what
happens in that black box.
To Mr. Rosner's point, which is a bank's actual assets, as
a stockholder of a bank, it is hard to tell if the bank is
doing great or awfully or what the range is in between. So that
lack of information, that is the reason why I want to at least
have some scenarios, so we are not completely surprised by the
Fed.
Mr. Rosner.
Mr. Rosner. I was just going to say in the short-term it
doesn't seem like the Fed is going to have to take a lot more
action than they have done with the swap line, in part because,
again, in an attempt to kick the can down the road, we have
seen the European Central Bank offer 1 percent money for 3
years to their banks.
It seems increasingly likely that the way they are going to
deal with sovereign debt auctions next year is banks within
each sovereign nation are going to be increasingly called on to
be the large purchasers of those issuances, which has negative
implications for economic growth and for the overall economies
on the other side, as much as they are helpful in the short-
term. But I would think that the approaches to kicking the can
actually are going to, in the short-term, ameliorate much
further need for U.S. involvement, or Fed involvement, I should
say.
Mr. McHenry. Because the ECB will actually do what is
necessary or will it be the policymakers that are kicking the
can down the road?
Mr. Rosner. Well, the policymakers are kicking the can and
the ECB is, at this point, trying to step back from the fold
and the pressure of stepping in. I think ultimately they will
end up folding and stepping in in a large way.
Mr. McHenry. Well, my time is expired. I now recognize Mr.
Meehan for 5 minutes.
Mr. Meehan. Thank you, Mr. Chairman. Where do you jump in
with all of this?
We are talking here about monetary policy sort of in the
current situation. Is there anything that is being implicated
here by a failure for certain of these countries to really
adopt austerity measures that may be able to address some of
this, or do we need to continue the sort of IMF support and
otherwise to sustain it from a meltdown? Anybody can jump in on
that.
Dr. Sanders. I will start off. Again, to start off at the
top, bear in mind that Commerce Bank is in deep problem in
Germany, Dexia is gone, Credit Agricole in France. If we have
any of these write-downs, it is just going to sink the European
banks, which will then result in who is going to come to the
rescue. I just don't think this is a solvable solution. Greece,
there are riots; Italy, there are riots about austerity.
Mr. Meehan. Right.
Dr. Sanders. I just don't think it is solvable. Again, it
is not a liquidity problem; it is definitely a problem of the
fact that they are all insolvent. The Titanic sank in a highly
liquid environment.
Mr. Meehan. Well, then if that is the conclusion, then are
we just--if we kick this can down the road, so to speak, when
is the day of reckoning? Dr. Lachman.
Dr. Lachman. The trouble is that the road is getting
shorter. We can't keep kicking this can down the road. My view
is that we are going to come to some resolution fairly quickly.
It is difficult to see how you can string this along for
another year given the state of the economies, given the
political resistance to adopting different measures. The point
is that a number of these countries are insolvent, but the
second point I would make is you are talking about huge amounts
of debts in question.
So if we just look at Portugal, Greece, Ireland, we are
talking about a trillion dollars. If you add in Spain you are
talking about another trillion. If you throw in Italy you are
talking about another two trillion. We are talking about $4
trillion that is going to have to be written down at some
stage, so that is going to have a huge impact on the European
banking system when that occurs. And given the interconnections
between the European banking system and the U.S. banking
system, it is very difficult to see how the United States
avoids a financial crisis if you do get Europe playing out in a
bad way.
Mr. Meehan. And what would be the specific implications on
the United States from that scenario?
Dr. Lachman. Well, the specific impact on the United States
is that U.S. banks would be put under huge amount of stress,
that you would have a credit crunch in the United States, the
United States would go into a meaningful recession. That would
compound the problems. I think that the way to look at it is
like what occurred in the United States during the Lehman
crisis.
Mr. Meehan. That is what I was going to say. We are right
back where we were before, right?
Dr. Lachman. The same way as that ricocheted around the
world, now what we would be having is we would be having a
crisis where the origin was in Europe, the world's third
largest economy, a much larger economy than that of the United
States. That would have reverberations through the globe and
the United States would be impacted.
Mr. Meehan. Mr. Elliott, then Mr. Rosner.
Mr. Elliott. Thank you. I just wanted to say, to give you a
wider view, I think that the countries that much of the panel
here thinks are insolvent aren't necessarily insolvent. Greece,
clearly. But Italy, for example, Italy, this year, is going to
run a primary surplus, meaning that absent the interest
payments, it is actually in surplus. It has had, in the past
decade, a number of years in which the primary surplus was 4
percent or 5 percent of GDP.
Mr. Meehan. What is that attributable to?
Mr. Elliott. Basically, in the last decade or so they have
managed their deficits much better than they had historically,
and certainly far better than us. In the last decade, they had
deficits--and these aren't primary, these are actual deficits
as we normally look at--they have had deficits lower than
Germany over that decade, lower than France. So my point about
the politics earlier is assuming that Italy is insolvent
essentially assumes their political system is so bad they can't
find a way to pair a few more points of GDP off of their
deficit; and they have shown in the past they can, even under
worse political environment.
Mr. Rosner. Two things. First of all, just in response to
this, you have to remember that we are talking about the
problems in Europe that we are talking about with the backdrop
of the past 3 years having had decent growth in the Eurozone,
and that is over. They are heading into recession. Even the
core is going to be suffering that.
Second, though, I think it is important to remember the
more recent European bank authority stress tests and the
agreement that the banks raise core capital to 9 percent by
next summer are being done in a way that is even more damaging
to growth and is going to put more risk----
Mr. Meehan. Because there is going to be less capital out
in the European market?
Mr. Rosner. Well, because rather than forcing them to, in
short order, regardless of the dilution, issue equity to raise
real capital, we are giving the banks enough time that they are
going to try and get there by reducing their books, by de-
leveraging; and that de-leveraging is going to create further
problems, kicking the can further and shrinking growth further,
as opposed to forcing dilutive equity raises, which should be
forced. That is where the capital should be coming from, the
markets, regardless of price right now.
I would point back to our crisis. Had we forced Freddie Mac
to raise equity in January and February 2008, and not accepted
their arguments that those would have been highly dilutive
capital raisings, we might not have ended up where we ended up.
Instead, we allowed it to string along, and that had a zombie
institution that was fundamentally increasingly taking risks,
with less economic returns on those risks, to cover up or try
and hide the problem.
So we are now partaking in a game of allowing the European
banks to get their house in order by reducing credit
availability to the Eurozone, instead of forcing them to dilute
shareholders'----
Mr. Meehan. That is going to have an impact as well on the
overall ability for that economy to----
Mr. Rosner. Absolutely, which is why I find it so offensive
that we are supporting policies that put the burden on
taxpayers rather than on equity holders, preferred holders,
subdebt, unsecured creditors, rather than in manners that allow
them to negatively impact the economy in another way, which is
the de-leveraging.
Mr. Meehan. Mr. Ely, you have some thoughts?
Mr. Ely. If I could just put another angle on this. The
problem in many of the European countries, particularly the
weaker ones, isn't just the current level of debt and the debt-
to-GDP ratio, but it is the ongoing deficits, many of which
reflect structural barriers in the economy, entitlement
programs, early retirement, and so forth. So these countries
are in a situation where it is not only at a high debt level,
but it is a debt level that is continuing to rise, so these
countries not only face the challenge of rolling over existing
debt, but also having to borrow more and more in order to
finance the continuing----
Mr. Meehan. That was the implication of my question about
austerity. Is that what you are talking--that is the language I
used, austerity, but are you----
Mr. Ely. Right. Now, it gets worse than that. When the
austerity starts kicking in and unemployment starts rising, you
have a shrinking GDP, you are going to have shrinking
government receipts, increased spending. So the financing
needed in an absolute sense goes up, and what we are starting
to see in some of these countries now are increasing interest
rates on government debt as they try to roll it over, and the
question then becomes one of when will some of these countries
hit the wall and they simply can't roll all their debt.
We got a little bit of a wake-up call on that a couple
weeks ago when Germany could not sell all of some 10-year debt
that it came to market with, and where I think the real crunch
comes is when a country has debt coming due and it simply can't
roll it over at any interest rate; the markets won't buy it.
This is essentially the same as a bank not being able to roll
over its funding. And then that is when the real crunch hits
and you get an honest to God government debt default.
Mr. Meehan. When we get default, we get hyperinflation,
what will be the result?
Mr. Ely. Well, I don't think we can have hyperinflation
because governments don't pay their bills in currency anymore.
But I think what happens is that governments, I would think,
would be in a situation where they just would have to cut back
on the payments they make, whether they cut back on social
security or pension payments or whatever. And again going to a
point that I think Josh referenced earlier, that is when you
start to see the riots. So I think that that is a very, very
serious concern, when these countries simply can't not just
roll over their debt, but also finance the ongoing deficits.
Mr. Meehan. Mr. Chairman, I yield back.
Mr. McHenry. This was an amazing exchange and fascinating,
fascinating discussion.
Mr. Rosner, you mentioned in your testimony and you have
mentioned a number of times you believe many of these European
banks are insolvent, so to that point the ECB actually levied a
penalty in order to force European banks to pay off the swap
line, the Fed swap line. Would that be an indication of
insolvency, that they are using short-term paper for long-term
debt?
Mr. Rosner. It could be, but it could be just, on the other
side, that could be just liquidity. Depends on the funding of
assets. It depends on the assets. So it is unclear, which is,
again, part of the reason it would be nice to understand who
was drawing, so we could then actually trace it back, take a
better look at the assets that they have, if we got those
disclosures, to see what they are funding.
Mr. McHenry. But at a time when the Fed----
Mr. Rosner. And, by the way, it would be nice to be assured
that the Fed knows who is drawing on the swap lines and what
the assets are that the ultimate borrower from----
Mr. McHenry. Actually, to that point, Mr. Elliott, do you
agree that the disclosure of those swap lines would be helpful?
Mr. Elliott. I am of mixed minds about it because the thing
is our swap is with the European Central Bank. That is our
credit risk. It is up to them what they do with that. Now, the
reason I might agree that it would be useful is, to the extent
that we are deliberately helping them with their policy, I
could see a desire to know what they are doing. But I don't
know what we need the level of detail that is being asked for
in terms of that.
Mr. McHenry. Even with our U.S. banks have risk, counter-
party risk associated with that?
Mr. Elliott. I mean, that we would want to know in general,
obviously. We would want our banks to have reasonable
information about the situation of their counter-parties. But
there are multiple ways to get that information, it doesn't
necessarily have to be knowing whether and when they have been
using the swap line.
I might also add the dollar is the world's currency. The
fact----
Mr. McHenry. And we are hopeful to retain that.
Mr. Elliott. I would love to retain that too. The fact that
there are European banks who have trouble getting enough
dollars in this environment, as Joshua was saying, might be a
problem of solvency, but it might very easily not be. I would
worry that, again about the stigma issue, that in this
environment that investment managers who want to keep their
jobs by just not taking chances would look at the information
and say, oh, good, those guys use the swap line; I better just
stay away from them because staying away from them won't hurt
me that much and being there, if it turns out they go under,
means I lose my job.
Mr. McHenry. Well, we are only disclosing--I think the Fed
discloses 2 years after the fact on this, so is it a year, is
it 6 months? But it certainly----
Mr. Elliott. I don't have a problem with something like 2
years. I thought you were talking about in this case with the
ECB----
Mr. McHenry. Well, we don't even know with the disclosure
of $600 billion with this swap line, at the height of the
crisis, we don't even know where that went. That is really the
crux of this discussion; that is the reason why that came up.
Mr. Rosner.
Mr. Rosner. Yes, I just wanted to say whether the Fed
discloses the information or not, I can't imagine why the Fed
wouldn't and shouldn't demand of the ECB to know who is
ultimately drawing upon those lines so the Fed can see whether
their swap lines, which were intended to provide liquidity in
dollar funding markets, were being used to prop up insolvent
institutions. Whether that is disclosed broadly or not to the
public is an area that I think deserves debate. I know where I
fall on it, but I can understand the arguments on both sides.
That the Fed should not want that information for their own
analysis, for their own prudential purposes doesn't make sense
to me.
Mr. McHenry. So here is a broad question. What is the
American financial system's exposure to Europe? Because the
question is if we have an extraordinary exposure, then we have
an extraordinary policy desire to bail them out in order to
save our institutions.
Mr. Elliott. The BIS figure, Bank for International
Settlement, says that our banking system, not insurers and
pension funds, but the banking system has about $2 trillion of
credit exposure of various kinds to the Eurozone, or 2.7, I
think, and 2 to the U.K. or I may have the two reversed. I
usually roll the U.K. into this because it is so closely tied
in with the Eurozone.
Mr. McHenry. Even though they are trying to extricate
themselves.
Mr. Elliott. Exactly. If you combine those, that is about
$5 trillion. But, again, that doesn't count some other parts of
our financial system.
Mr. Ely. Could I add to that?
Mr. McHenry. Sure.
Mr. Ely. Talk also in terms of what I will call direct
exposure, as Doug was talking about, and then what I am going
to call an indirect or macro exposure, and that is that if
Europe really blows up, and I certainly hope it doesn't, but if
it really does blow up and they get an enormous economic
contraction in Europe, that is going to have dramatic global
effects on the macro economies, certainly on the United States;
and then you ask what kind of new problems does that create for
the U.S. financial system and the banks, for instance, with
regard to house prices.
Will we have rising unemployment? So we have to be
cognizant not only of what I will call the direct balance sheet
risk, but then the indirect, but potentially very expensive,
macro economic indirect risk.
Mr. Elliott. Some of which we are already seeing as the
dollar continues to strengthen, right? The dollar strengthening
is going to have a negative impact on the export markets; it
will, on the other side, have positive impact on some of our
domestic asset prices, as capital flows back into the country.
So it is very hard to quantify.
I would just point out that when we keep throwing out this
multi-trillion dollar number, that we also have to remember
that that is a total exposure. You need to net out of that
private capital and private capital structures, which I think
at some point we are there with a priority of capital for an
understanding that that was risk capital. That capital may end
up being wiped out and needs to be backed out of those
assumptions, because I am not sure it is necessarily prudent
for us to consider that obligations that the Government really
needs to consider, as opposed to private creditors and
shareholders to consider.
Mr. McHenry. Dr. Lachman, do you want to follow up with
that?
Dr. Lachman. Back to a point that Mr. Rosner raised, which
I think is crucial. The idea that the European banks do have an
enormous hole in their balance sheets. The IMF has estimated
that number is at least something like $300 billion, and what
that is producing, because of the way in which they are letting
the banks get to the capital ratio of 9 percent by June, is
they are going to have a capital production, they are going to
be reducing credit to the tune of something like $2 trillion
over the next year.
When you have that kind of credit contraction at the same
time that you are asking the countries to engage in massive
fiscal tightening, it is the equivalent of tightening monetary
policy, tightening fiscal policy in the middle of economic
weakening. That is a recipe for deep recession, and that is the
reason that I don't think this can work.
Mr. McHenry. Dr. Sanders.
Dr. Sanders. To build on what Dr. Lachman said, the ECB
announced, I believe it was yesterday, that they are going to
modify capital requirements for the banks in Europe. Why?
Because they see credit contraction being very serious, as we
just saw here. And so what that probably means is they are
going to require less capital, which again just makes the
financial institutions more risky, which will eventually put
American taxpayers at more risk. This is kind of a never-ending
game.
Mr. McHenry. Well, they were thinly capitalized going in,
because Basel said if you are holding sovereigns, there is no
risk associated with it. It is kind of a fascinating situation.
So there are so many questions about this.
Dr. Lachman, you mentioned the exposure through money
markets. We had one money market, one fund that broke the buck.
Most investors don't quite understand what a money market fund
is, it is not FDIC insured. And part of what happened in the
crisis is actually making that worse in people's mind, that
there will be some government savior of the money market fund.
What is that exposure to the European financial system, all
money market funds to their European financial system?
Dr. Lachman. The estimates made around about June by the
Fitz rating agency suggested that U.S. money market funds had
around about 45 percent of their funds on deposit with European
banks. The money market industry is something like an industry
of $2.7 trillion, so if you take 45 percent of $2.7 trillion,
you are well over a trillion. What has occurred in recent
months is that they have brought down that exposure to 35
percent. But that is still a very large exposure.
Mr. McHenry. Mr. Rosner.
Mr. Rosner. It was, as recently as, if I recall, 12 or 18
months ago, over 60 percent, but a lot of that was peripheral
economies in Europe. There is almost no exposures to peripheral
economies at this point by U.S. money market funds, it is
almost all the core, with some smattering, until recently, of
Spain and Italy.
Dr. Lachman. Yes, but I don't take much comfort in that
argument, because if the banks in the core are exposed to the
periphery, then so are the money market funds exposed to the
periphery if they have deposits on with the core.
Mr. Rosner. I agree completely with that point and would
suggest that I made it just to point out that this is not a
peripheral problem, as it is constantly being fund; it is a
problem of the core banks as much as it is a problem of
anything else.
Mr. McHenry. So, okay. Mr. Elliott, you mentioned in your
opening three out of four chance basically that the Euro will
survive, to paraphrase you. Give me your view on Greece
remaining in the Euro. Give me your percentage chance that they
are still in the Euro a year, whatever the timeframe is you
want to choose.
Mr. Elliott. Sure. And just to clear up any potential
confusion, the three in four probability that I put out, which
is obviously a quantification of an intuition, because this is
very, very hard to know. But what I meant was more than just
the Euro surviving, but that there would be no defaults beyond
Greece. So I meant it stronger than you may have seen that.
Mr. McHenry. Oh, okay.
Mr. Elliott. And then in terms of Greece staying in the
Euro, I actually think it is pretty likely that Greece will
stay in the Euro in that there are a lot of advantages, even
with defaulting, which they clearly are going to do, whatever
it is called, there are a lot of advantages to staying within
the Euro. Now, I know Dr. Lachman very much disagrees with
that, but there are pros and cons. Most of the people I talk to
feel that Greece will actually try very hard to stay in the
Euro.
Mr. McHenry. Okay, but since Greece has become a modern
country, the last 150, 170 years, they don't really have a
great track record on paying people back. That is just history.
Mr. Elliott. They are defaulting. There is no question they
are defaulting. I am saying that is a different thing from
pulling out of the Euro.
Mr. McHenry. So it is a matter of what they call it and
when it happens is what you are saying?
Mr. Elliott. Yes. I don't think there is anybody on this
planet at this point that thinks the Greeks are going to pay
back 100 Euro cents on the Euro on their debt. We know that is
not going to happen. And then, as has been pointed out, there
has been this rather dangerous thing of trying to arrange it so
it doesn't technically act as a default, which I think has done
terrible damage to the credit default swap market.
Mr. McHenry. And everybody agrees on that on the panel?
Does anybody disagree that the harm in the credit default swap
market is serious when we have this type of action? Okay.
So about Greece, so everybody agrees they are going to
default, is that true? Okay. Now, it is a question of what they
call it when it happens. Is that really the question?
Mr. Elliott. And how much.
Mr. McHenry. Okay.
Mr. Ely. And if I could add to that, to what extent are the
issuers of CDS going to have to take a loss. And then you get
into--this is where another set of dominoes could start
toppling, in terms of where is the CDS risk on the German debt
and how are those losses going to hit, and who are they going
to hit; and I assume it is not just banks, but insurers and
insurance companies and other types of institutional risk
takers. And that is unknown, from what I can tell.
Mr. McHenry. Dr. Lachman.
Dr. Lachman. I think when you are discussing Greece
defaulting on its debts and having a disorderly default that
might involve writing down the debt by 70, 80 cents on the
dollar, what you also have to take into account is the
contagion effect that that is going to have through the rest of
the periphery. The European Central Bank, for the past year and
a half, has been trying to fight the idea of default. Because
they know that if Greece defaults, what you are going to have
is the Greek banking system wiped out, you are going to have
capital controls, you are going to have runs on banks, and all
the rest that will set an example for depositors in Portugal,
in Ireland, and so on.
So it is very likely that if you do get a disorderly Greek
default, you are going to get real pressure on the rest of the
periphery that is going to cause a chain of defaults, and that
is the reason that the European Central Bank has been putting
up this fight, which I am pretty sure that they won't when--in
the case of Greece it is really a matter of time; we are
talking about months, if not weeks before this event is going
to occur.
Mr. McHenry. Now, I have heard the one theory that they
just need a current account balance, then it is absolutely in
their national interest to simply walk away from their debt, as
long as they can cash-flow their government, in essence. Is
that similar to your point of view?
Dr. Lachman. But it is a question that Greece is not in a
position to pay the debt, that what is occurring is that over
the last 2 years Greece's GDP has contracted by 12 percent, the
unemployment rate is at 18.5 percent. Their economy is
literally now in free-fall. That is eroding their tax base.
They can't meet the budget target, so they have to do more
austerity, and the people are out in the streets.
Greece is not in a position to take more fiscal measures,
and at that stage it is very difficult for the IMF to keep
throwing more and more money at a country that is palpably
insolvent. That is the point at which Greece defaults, and we
are not far away from it. There is a new government; there are
going to be elections in Greece around about February, middle
of February, end of February. I would expect that round about
that time that you will see Greece leaving.
Mr. McHenry. So, with my accent, that would sound like doom
and gloom, but you make it sound more upbeat. I am only joking.
So, Mr. Elliott, you believe the IMF doesn't need further
capitalization. There is this authorization within Dodd-Frank
that has been discussed that Treasury could authorize another
$100 billion for the IMF and they have that legal right; the
administration would just simply have to make that decision.
But your view is that the IMF is fully capitalized enough to
take on what you would view as sort of the crest of this crisis
in your scenarios.
Mr. Elliott. That is my view in the sense I believe this
has to be basically solved in Europe. I think it is very useful
to have the IMF bring in enough funds to be a serious player,
but I don't think that takes it beyond its present resources.
Mr. McHenry. What is that dollar amount?
Mr. Elliott. Well, they have $390 billion now that is
available and they will have more if the various central banks
within Europe do contribute to the IMF.
Mr. McHenry. Does anyone on the panel disagree? Dr.
Lachman.
Dr. Lachman. I think that if you look at the amount of
money that the IMF would have to provide to Italy and Spain if
they did the same thing as they did to Greece, Portugal, and
Ireland, you would be talking about $750 billion for Italy
alone, you would be talking about another $400 billion for
Spain. The IMF simply does not have that kind of money.
I totally agree with Mr. Elliott that the onus of sorting
this out should be Europe, it should not be the U.S. taxpayer.
What the Europeans are trying to do is they are trying to loan
money to the IMF, get a claim on the IMF and have the IMF loan
money to Italy, which would put the U.S. taxpayer on the hook
for 17.75 percent of whatever the size of the loan is. I think
that that should not be permitted.
Mr. McHenry. Now, the opportunity for China to inject
themselves in the IMF and put forward the equivalent amount in
order to take on that sort of crest, another $200 billion,
let's say. Is that sort of in your range of options that are
likely?
Dr. Lachman. Well, that could very well occur, but you have
the same problem as you do with the Europeans lending to the
IMF: if the loans are made in a form that China has a claim on
the IMF and the IMF then goes and uses that money to lend to
Italy, the U.S. taxpayer is exposed to that loan to Italy as a
shareholder having 17.75 percent in the IMF. The way that those
loans should be made is they should be made through an
administered account where the IMF is just a conduit and it
doesn't expose the shareholders to any risk of those loans.
Mr. McHenry. Mr. Ely.
Mr. Ely. Yes. One of the things that I think we have to do
is step back a little bit and realize that, whether it is
through the IMF or other lending facilities, you essentially
have governments, either directly or through the IMF, becoming
funders of these really deeply indebted countries. In other
words, the private market pulls back, governments step into the
void and fill it.
But as I mentioned earlier in an earlier reply, you still
have these ongoing deficits in these countries, so all this
does is kind of keep the ship afloat for a little bit longer.
We are kind of bailing faster, but the ship still has big holes
in it and is sinking.
So the question is do you have enough time for these
liquidity provisions to enable these governments to make the
structural reforms they need and get back on track? And I don't
think the liquidity can keep things afloat long enough for
these countries to make those changes. Plus, we are seeing
backsliding in Greece, for instance, as has mentioned earlier.
So the question is are we really solving anything or are we
just digging a deeper and deeper hole with now the taxpayers,
not just the United States, but elsewhere, increasingly at risk
as we try to protect creditors by the governments being, if you
will, taking out, if you will, paying off private sector
creditors that have lent to these countries.
Mr. McHenry. All right. Thank you.
I now yield to Mr. Meehan, and we will finish after that,
just so the panel is aware of our timeframe. After his line of
questioning, we will finish.
Mr. Meehan. I thank you again for your very interesting
testimony.
Mr. Ely, what you were just discussing, wasn't Dr. Lachman,
didn't you, in your testimony, more or less suggest that the
combination of austerity and the growing challenges in Greece
make them incapable of taking on more right now? We are
starting to see this, potentially, then, those same demands, as
we talked about austerity, if you move them into Ireland and
Italy and other kinds of places, this just becomes a cascading
effect. Is that what we are seeing?
Mr. Ely. I will let Desmond speak for himself, but I think
that is a very serious risk in the most indebted of the
countries who are experiencing the greatest degrees of
austerity with all the negative consequences, that of rising
unemployment and declining tax receipts and increased
government spending. It just means that the current deficit in
these countries just continues on, and that means that they
have to borrow more, their debt-to-GDP ratio goes up. The
question is how high can it go before they simply can't roll
over existing debt and fund next month's deficit.
Dr. Lachman. I would say that the problem certainly extends
beyond Greece, that countries like Portugal and Ireland are in
not that much better shape than Greece. Italy and Spain, their
positions are stronger than that of Greece, but they
conceptually have to do the same sort of thing that Greece had
to do, which is tighten the budget by a large amount. We are
talking about 2 percent of GDP in Italy in 2012, again in 2013,
again in 2014. And as Josh Rosner was pointing out, they are
having to do it in the context where there is a credit crunch
and where there is a deterioration in the external environment.
So it remains to be seen whether countries like Spain and Italy
can withstand many years of fiscal austerity, declining growth,
rising unemployment, calls for more austerity. The social
fabric generally doesn't hold up well to this.
It is just of note that already relatively, early in the
crisis, we have seen five governments fall in the five affected
countries, so I am not sure that they can stick to this road of
austerity and very poor economic outlook for a very long time,
when it would be perceived that the reason that they are doing
it is to keep the banks in France and Germany afloat.
Mr. Elliott. May I make one quick point?
Mr. Meehan. Sure.
Mr. Elliott. Each of the governments that fell was replaced
by a government that was more favorable to the austerity
measures.
Mr. Meehan. I just really have two other questions. We have
talked a lot about this in the context, as I have been
following this, Europe having to deal with its internal crisis
and its relationship back to the United States because of our
involvement with supporting the IMF and, therefore, assuming
some of this responsibility.
I also take from this that we are worried about the
recessionary implications on our own economy if we have
problems in Europe. How about other thriving economies, the
Asian economy, South America? Are we watching them being
isolated in any way or are they similarly going to be impacted
by this and effectively we are seeing the front end of a global
recession? And please jump in.
Mr. Rosner. I think it is an important point to raise
because I think that is another piece of it. Large portions of
the Chinese economy are funded through European banks. Europe
is obviously China's largest export market. Much of the South
and Central American economies are funded also through European
banks. So it definitionally is a global crisis. How deep it
impacts various parts of the globe are obviously going to be
different and dependent on the outcomes here. But it certainly
is worth considering as far more than just a European crisis,
especially since many of those economies to which we export, to
the degree that we do, get their funding from Europe.
Mr. Ely. If I could just add to that. I think it is not
just a funding issue, but particularly for China it is
ultimately a social unrest potential because, again, they
export so much to Europe and, of course, the United States, and
if we have a slowdown in both the United States and Europe,
that is going to have a negative impact on China and on its
level of employment.
And I have always been concerned about China being somewhat
of a tinderbox. It is amazing how often we read of local
disturbances in China, so there is a fabric there that is not
as socially strong as it is in this country. So I think we do
have to be worried about those secondary and tertiary effects,
and particularly in China, since it is such an export-driven
economy.
Mr. Meehan. My last questions relate to points that I
wasn't really able to fully understand. As I was listening to
American exposure, it largely was discussed in the context of
our participation in the IMF. How about some of our other
institutions, and how does that relate back to the typical
American investor, the guy who buys into a money market fund,
whose retirement is dependent, to some extent, on these kinds
of things?
So my questions relate to how does the everyday American
who has some portfolio of investments going to be impacted by
these things and do we have impacts on our pension funds or any
other kinds of insurers like we had with AIG that aren't really
being considered or being discussed as much, but may have
genuine exposure? This is the last question that I have.
Mr. Ely. I will take a stab at that. Ultimately,
individuals are the owners of the economy. There are various
levels of financial institutions, and you have rattled off
insurance companies, pension funds, and so forth. To the extent
that there are capital losses borne by American financial
institutions, that is going to reverberate back to individuals
either in terms of losses in their own portfolio, a hit on,
let's say, corporate pension funds, union pension funds.
It could be across a broad range of financial
intermediaries, but ultimately that loss is going to come back
to individuals and families in this country, it is unavoidable.
There is no someone standing behind the curtain that is going
to absorb those losses; they come back onto us, everybody in
this room.
Mr. Elliott. And if I could emphasize a point Bert made
earlier that I am sure we all agree on, the indirect effects
will be larger. If you think about what it would be like to go
through another recession after we are still in this very slow
recovery, that is going to be an even bigger effect than the
direct market impacts.
Dr. Sanders. And I want to add one other thing. I do agree
with Mr. Elliott, but if you look at my Figure 11 in my
presentation, the Fed is literally out of bullets. We are not
going to have really a great ability for the Fed to step in and
provide any sort of intervention, or the Government issuing
more treasuries. This doesn't affect GDP anymore; we are kind
of numb to further Government intervention. So now we are in a
rock and a hard place.
Mr. Meehan. Well, on that bright note, Mr. Chairman, I
yield back.
Mr. McHenry. I thank my colleague, Mr. Meehan. Thank you so
much.
Now, I said that was the end of the questions. I have one
more, if you don't mind, and we will just start with Mr. Ely
and go across. Tomorrow we will have President Dudley of the
New York Fed, we have the individual of the Federal Reserve
Board downtown here who deals with international markets, we
also have a representative from Treasury. I know it is a long
commute from them; they are even closer than the Fed and
certainly closer than New York. But what questions would you
ask tomorrow? What question, if you had to boil it down, would
you ask in tomorrow's hearing?
Mr. Ely. The question I would ask is, ladies and gentlemen,
how is this going to play out over the next 6 months to a year?
Now, I don't expect you to get a very candid answer, but I
think that that is the question. What are various scenarios as
to how this situation will play out over the next 6 months to a
year and what are going to be the feedback effects on the U.S.
economy?
Mr. McHenry. Mr. Rosner.
Mr. Rosner. I provided specific questions in my testimony.
Mr. McHenry. Yes. What is your number one?
Mr. Rosner. Well, what comfort do they have that 17
countries, each with different political dynamics at home, are
going to be able to come to a solution and what is the purpose
of their policy tied to that, short-term, medium-term, long-
term? What is the Fed's policy purpose here in an environment
where, while most of the 17 leaders actually do have some
agreement as to what they would like to see have happen, they
have very different social dynamics in their home countries
with their population of constituents, making it difficult to
achieve that. So what is the purpose of Fed policy and Treasury
policy in the short-term, in the medium-term, in the long-term
as it relates to the single currency?
Mr. McHenry. Okay.
Mr. Elliott.
Mr. Elliott. I think if I had one question, I would ask
them to talk about the solvency versus liquidity question. Do
they believe that the weaker countries in Europe, X, Greece,
are suffering from a liquidity problem or is it a solvency
problem? And I assume they are going to say liquidity. And then
the followup question would be how do you come to that
conclusion.
Mr. McHenry. Dr. Sanders.
Dr. Sanders. I would ask the question, if you had one
bullet left, would you use it for the American economy? Not to
shoot ourselves, I mean to help us out. [Laughter.]
Or would you use it for Europe? And then for the Treasury,
which I would be most interested in hearing, I want to hear
their assessment. And I agree with Dr. Lachman, I have the same
calculation, $4 trillion is really the tab to really bail out
Italy and those peripherals. And if we are talking about $100
billion of the additional $200 billion, is that like throwing
the money away or is this going to end up being a much, much,
much bigger amount? And I don't want to say that will never
happen. Come on, we have already seen a lot of bad things
happen.
Mr. McHenry. Dr. Lachman.
Dr. Lachman. I would just suggest a couple of questions.
One of them would be the variant of Mr. Elliott's solvency
versus liquidity problem. I would phrase it differently. I
would phrase it why do you expect imposing fiscal austerity on
countries at a time of economic weakening and at a time of
major credit crunch in Europe is not going to lead to a big
recession that is going to unravel the public finances of the
countries involved?
A second question I would ask is why do they think that a
policy approach to Italy and Spain that they have tried and has
failed in Greece, Portugal, and Ireland, is going to work this
time around. And I guess the most important question I would
want to ask would be how are they going to be safeguarding U.S.
taxpayers' money from these loans that the Europeans are making
to the IMF, which is putting the U.S. taxpayer on the hook if
that money is then used to lend to Italy and Spain.
Mr. McHenry. Okay. Quite a number of questions.
What is clear about this hearing, and I thank you so much
for being here. This is very helpful, very useful information,
and a very wide-ranging discussion. I appreciate the panel's
willingness to engage in that conversation. What is clear is
there are enormous number of questions that experts have about
Fed policy and about this administration's policy and American
taxpayer exposure to the European financial crisis that they
are facing.
Dr. Sanders, in your opening, this was about excessive
government spending and excessive debt, as well as what Mr.
Rosner said, this was about over-lending and over-borrowing.
One is more focused on the government; the other is more
focused on the banking and the institutions.
But the economic risk is real to the American taxpayer. It
is a question of the magnitude of that risk. Our exposure to
Europe is real, both to the American taxpayer and these
institutions, such as the IMF, as well as to the American
worker and their ability to get a job and to have a growing
economy.
But there is some consensus here about the likelihood of a
Greek default. The question is what does that look like, when
does that happen, and what is that raw cost in terms of
currency. But obviously a mixed assessment on the survival and
the ability of the Euro to survive in the medium and long-term;
there is not consensus there.
But this has been very helpful and very instructive. I
appreciate your time.
Members will have 7 legislative days to submit opening
statements.
With that, this meeting is now adjourned.
[Whereupon, at 12:09 p.m., the subcommittee was adjourned.]
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