By Steven K. Beckner

Bernanke mused that “maybe some of the headwinds that have been
concerning us like, you know, weakness in the financial sector, problems
in the housing sector, devaluing issues, some of these may be strong are
or more persistent than we thought and I think it’s an appropriate
balance to attribute the slowdown partly to the identifiable temporary
factors and to acknowledge the possibility that some of the slowdown is
due to factors which are longer lived and will be operative still next
year.”

The Fed chairman also said that possible defaults by Greece or
other “peripheral” European countries also loom in the FOMC’s
considerations of potential downside risks. He said U.S. fianncial
institutions’ direct exposure is small, but that their indirect exposure
could be considerable.

“The banks that we regulate are not significantly exposed to
those countries directly at least,” he said, but “they have significant
exposures to European banks in the nonperipheral counties so indirectly
they have that exposure and that includes credit default swaps and so
on.”

He said the Fed has “asked the banks to do essentially stress tests
looking at all their positions and hedges, what would the affect on
their capital be if Greece defaulted. The answer is that the affects are
very small.”

Bernanke said the Fed is also “keeping a close eye” on money market
mutual funds, even though it doesn’t supervise them.

“There again, the situation is similar in some sense in that with
very few exceptions the money market mutual funds don’t have much direct
exposure to the three peripheral countries what are currently dealing
with debt problems,” he said. But “they do have substantial exposure to
European banks in the so-called core countries, Germany, France, et
cetera.”

“So to the extent that there is indirect impact on the core
European banks that does pose some concern to many money market mutual
funds and there is a reason why the Federal Reserve and other regulators
are continuing to look at ways to strengthen those funds,” he went on.

Summing up the overall impact of the “problem in Greece” on the
U.S., Bernanke said “direct exposures are pretty small and we’re doing
all we can to monitor those exposures.”

“However, as we saw in a small situation, a small case last spring,
a disorderly default in one of those countries would no doubt impact
global financial markets, credit spreads, stock prices and so on, so in
that respect the affects in the United States would be quite
significant,” he added.

Bernanke reiterated his call for a long-term solution to the U.S.
government’s debt problems and emphasized that sharp, short-term budget
cuts would be harmful.

“Ot’s desirable that we take strong action to lower our budget
deficits over the longer term,” he said. “In doing that I think it would
be best not to, in light of the weakness of the recovery, it would be
best not to have sudden and sharp fiscal consolidation in the near
term.”

“That doesn’t do so much for the long-run budget situation, it’s a
negative for growth,” he added.

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** Market News International Washington Bureau: 202-371-2121 **

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