Mr. Speaker, while I fully believe that the Federal Reserve is in need of greater transparency and accountability, I rise in opposition to this bill, which I believe approaches the issue in a problematic way. I want to be clear that the…
Mr. Speaker, while I fully believe that the Federal Reserve is in need of greater transparency and accountability, I rise in opposition to this bill, which I believe approaches the issue in a problematic way. I want to be clear that the Fed should not take my vote against this bill as a vote of confidence.
In order for the Federal Reserve to function properly as an independent central bank, I believe that its monetary policy functions must be independent of pressure from Congress, which would be jeopardized by a GAO audit of
the Fed's monetary policy. We've seen recently the harmful impact that congressional pressure can have on the Fed's monetary policy even without this audit, such as Republican members of Congress urging the Fed to take no further actions to rescue the economy, which is why I bring to my colleagues' attention the below column by former Federal Reserve Vice Chairman, Alan Blinder, in which he points out additional options for the Fed to tackle the elevated unemployment rate that are not being used.
That said, it is clear that cultural change is needed at the Federal Reserve, which has too often put the needs of America's biggest banks ahead of the interests of the American public. As just the latest example, JP Morgan Chase CEO, Jamie Dimon, has refused to resign from the board of the New York Federal Reserve Bank, despite the fact that the New York Fed is investigating misbehavior at JPMorgan Chase's Chief Investment Office that contributed to its recent multi-billion dollar trading loss.
Furthermore, I strongly supported a provision in the Dodd-Frank Act that has increased transparency at the Fed, providing for an audit of the emergency financial assistance provided by the Fed during the financial crisis, as well as requiring the Fed to release information going forward about parties participating in emergency lending programs and the details of those transactions. The bill also importantly limited the power of bankers like Mr. Dimon who serve on the boards of regional Federal Reserve Banks.
There is one aspect of today's bill that I strongly support, the provision of this bill added in committee by Mr. Cummings, which provides for an audit of the Independent Foreclosure Review, which has been grossly mismanaged by the Fed and the Office of the Comptroller of the Currency and does not appear to be on track to provide appropriate compensation to homeowners who were abused. I believe that the Fed needs to know that their role is to look out for the American public, and I hope they hear that loud and clear today.
How Bernanke Can Get Banks Lending Again
(By Alan S. Blinder)
If the Fed reduces the reward for holding excess reserves,
banks will have to find something else to do with their
money, like making loans or putting it in the capital
markets.
The U.S. economy could use another boost, and it won't come
from fiscal policy. Can the Federal Reserve provide it?
Chairman Ben Bernanke keeps insisting that the central bank
is not out of ammunition, and in a literal sense he is right.
After all, the Fed has not yet exhausted its bag of tricks.
It is still twisting the yield curve. It can purchase more
assets. It can tell us that its federal funds target interest
rate will remain 0-25 basis points beyond late 2014. It can
even nudge the funds rate down within that range. The
operational question is: How powerful are any of these
weapons?
Let's start with Operation Twist, which was recently
extended through the end of this year. The Fed seeks to
flatten the yield curve by buying longer-term Treasurys and
selling shorter-term ones. And it's probably succeeding--a
bit. But Federal Reserve activity in the Treasury markets is
modest compared with the vast volume of trading.
Realistically, the U.S. yield curve is probably influenced
far more by daily developments in Europe. In any case, the
Fed will be out of short-term Treasurys to sell by December.
The logical next step would be more quantitative easing--
QE3--or, as the Fed likes to call it, more large-scale asset
purchases. Purchases of what? There are two main choices. One
is Treasurys. But does anyone really think that lower U.S.
Treasury rates are what this country needs?
Mortgage-backed securities (MBS) are a better choice, the
idea being to reduce mortgage rates by shrinking the spread
between MBS and Treasurys. But mortgage rates are already
falling toward 3.5%. With 10-year expected inflation around
2.1%, can a 1.4% real interest rate be deterring many
prospective home buyers? No, they are shut out of the market
by the unavailability of credit. Posted rates are low, but
try getting a mortgage.
The third available weapon is what the Fed calls ``forward
guidance''--that is, indicating (please don't say promising!)
that the 0-25 basis points funds rate will be maintained for
years to come. The Fed's current guidance (please don't call
it a pledge!) extends ``at least through late 2014.'' While
that's pretty far into the future, the Fed could stretch
it to 2015, 2016 or 2025 for that matter.
In rational models, the yield curve should flatten a bit
every time the Fed pushes that date out further. But the key
words here are ``rational'' and ``a bit.'' To most bond
traders, two and a half years is already an eternity. Would
they really respond much if 2015 replaced 2014?
This brief analysis paints a pretty grim picture: The Fed
has three weak weapons, one of which will be exhausted by
year's end.
Fortunately, there is more the Fed can do. I have two out-
of-the-box suggestions to make, one in today's column and
another in a companion piece soon.
The simpler option is one I've been urging on the Fed for
more than two years: Lower the interest rate paid on excess
reserves. The basic idea is simple. If the Fed reduces the
reward for holding excess reserves, banks will hold less of
them--which means they will have to find something else to do
with the money, such as lending it out or putting it in the
capital markets.
The Fed sees this as a radical change. But remember that it
paid no interest on reserves before the 2008 crisis and, not
surprisingly, banks held practically no excess reserves then.
In early October of that year, Congress gave the Fed
authority to pay interest on reserves, which it promptly
started doing. When the Fed trimmed the federal funds rate to
its current 0-25 basis-point range in December 2008, it also
lowered the interest rate on reserves to 25 basis points,
where it has been ever since.
My suggestion is to push it lower in two stages. First,
test the waters by cutting the interest on excess reserves
(in Fedspeak, the ``IOER'') to zero. Then, if nothing goes
wrong, drop it to, say, minus-25 basis points--that is,
charge banks a fee for holding their money at the Fed. Doing
so would provide a powerful incentive for banks to disgorge
some of their idle reserves. True, most of the money would
probably find its way into short-term money-market
instruments such as fed funds, T-bills and commercial paper.
But some would probably flow into increased lending, which is
just what the economy needs.
The Fed has steadfastly opposed this idea for years. Why?
One objection is true but silly: Lowering the IOER might not
be a very powerful instrument. No kidding. Are there a lot of
powerful instruments sitting around unused?
The other objection is that making the IOER zero or
negative would push other money-market rates even closer to
zero than they are now, thereby hurting money-market funds
and otherwise impeding the functioning of money markets. My
answer two years ago was that we have more important things
to worry about. My answer today is that it has mostly
happened anyway: U.S. money-market rates are negligible.
It is noteworthy that the European Central Bank just jumped
ahead of the Fed by cutting the rate it pays on bank deposits
to zero--and European money markets did not die. Denmark's
National Bank went even further, dropping its deposit rate to
minus 20 basis points. Yet the Little Mermaid still sits in
Copenhagen harbor.
The Fed's hostility toward lowering the interest on excess
reserves is almost self-contradictory. When Mr. Bernanke
lists the weapons the Fed plans to use when the time comes to
tighten monetary policy, he always gives raising the IOER a
prominent role. His reasoning is straightforward and sound:
If the Fed makes holding reserves more attractive, banks will
hold more of them. Why doesn't the same reasoning apply in
the other direction?
But suppose it doesn't work. Suppose the Fed cuts the IOER
from 25 basis points to minus 25 basis points, and banks
don't lend one penny more. In that case, the Fed stops paying
banks almost $4 billion a year in interest and, instead,
starts collecting roughly equal fees from banks.
That would be almost an $8 billion swing from banks to
taxpayers. There are worse things.
Mr. Blinder, a professor of economics and public affairs at
Princeton University, is a former vice chairman of the
Federal Reserve.