WASHINGTON (Reuters) - The following are highlights of Federal Reserve Chairman Ben Bernanke's testimony on Thursday to the Senate Banking Committee as part of his semiannual testimony on the U.S. economy and monetary policy. Bernanke repeated prepared testimony he delivered to a House of Representatives panel on Wednesday.
For a text of Bernanke's prepared remarks, see http://financialservices.house.gov/UploadedFiles/071311bernanke.pdf
BERNANKE ON MONETARY EASING, ASSET PURCHASES
These asset purchases -- I recognize they're unconventional. But, in terms of their effects on the economy, they work more or less much in the same way as ordinary monetary policy works by easing financial conditions, lowering interest rates, and providing stimulus through that mechanism. Now, you may be entirely correct a) that it may not be needed, and b) that it might not be entirely effective given the configuration of problems that we have ...
"We're not proposing anything today. The main message I want to leave is that this is a serious situation. It involves a significant loss of human and economic potential. The Federal Reserve has a mandate and we want to meet that mandate, and to do that we just want to make sure we have the options when they become necessary. But at this point, we're not proposing to undertake that option.
BERNANKE ON EUROPEAN EXPOSURE:
"It is causing a good bit of anxiety in markets and that's been affecting our economy both last summer and now recently as well. We are spending a lot of time evaluating the exposures of U.S. financial institutions to these countries, including money market mutual funds and so on.
"The direct exposures to the three counties you mentioned are quite small and manageable, so we would not expect those direct impacts to be the critical channel if there were problems, a default for example. But I think that nevertheless, the U.S. economy is at risk from those developments, because were there to be a significant deterioration in conditions in Europe, we would see a general increase in risk aversion, declining asset prices, a lot of volatility in markets and we would suffer from that more ... than we would from the direct exposures to those sovereign countries.
BERNANKE ON GLOBAL EFFECTS OF TREASURY DEFAULT:
It would be a calamitous outcome. It would create a very severe financial shock that would have effects not only on the U.S. economy but the global economy. Treasury securities are critical to the entire financial system. They are used in many ways. For example, as collateral or as margin. Default on those securities would throw the financial system potentially into chaos. In any case, what would certainly be the case is that we would destroy the trust and confidence that global investors have in U.S. Treasury securities as being the safest and the most liquid assets in the world.
BERNANKE ON THE IMPACT OF HOUSING MARKET ON RECOVERY:
"The housing market is really at the epicenter of the problem we're having at the moment."
"Weakness in the housing market is one of the major sources of this slow recovery. Normally in an expansion, you would see the housing market strengthening, and adding jobs, and creating new opportunities. We're not seeing that."
"The big overhang of distressed sales, open, vacant homes, foreclosed homes, which are weighing on prices is creating a vicious circle where people don't want to buy because prices are falling and prices are falling because people don't want to buy."