[Senate Hearing 111-839]
[From the U.S. Government Publishing Office]
S. Hrg. 111-839
NOMINATIONS OF: JANET L. YELLEN, PETER A.
DIAMOND, SARAH BLOOM RASKIN, OSVALDO
LUIS GRATACOS MUNET, AND STEVE A. LINICK
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
ON
Nominations of:
Janet L. Yellen, to be a Member and Vice Chair of the Board of
Governors, Federal Reserve
__________
Peter A. Diamond, to be a Member of the Board of Governors, Federal
Reserve System
__________
Sarah Bloom Raskin, to be a Member, Federal Reserve System
__________
Osvaldo Luis Gratacos Munet, to be Inspector General, Export-Import
Bank, Federal Housing Finance Agency
__________
Steve A. Linick, to be Inspector General, Federal Housing
Finance Agency
__________
JULY 15, 2010
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http://www.fdsys.gov
----------
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Washington, DC 20402-0001
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky
EVAN BAYH, Indiana MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii JIM DeMINT, South Carolina
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin KAY BAILEY HUTCHISON, Texas
MARK R. WARNER, Virginia JUDD GREGG, New Hampshire
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado
Edward Silverman, Staff Director
William D. Duhnke, Republican Staff Director and Counsel
Joe Hepp, Professional Staff Member
Marc Jarsulic, Chief Economist
Lisa Frumin, Legislative Assistant
Mark Oesterle, Republican Chief Counsel
Andrew Olmem, Republican Senior Counsel
Dawn Ratliff, Chief Clerk
William Fields, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
----------
THURSDAY, JULY 15, 2010
Page
Opening statement of Chairman Dodd............................... 1
Opening statements, comments, or prepared statement of:
Senator Shelby............................................... 9
Senator Reed................................................. 10
Senator Gregg................................................ 12
Senator Brown 12
Prepared statement....................................... 35
Senator Kerry
Prepared statement....................................... 35
Senator Mikulkski
Prepared statement....................................... 37
WITNESSES
Dianne Feinstein, Senator from the State of California........... 2
Benjamin L. Cardin, Senator from the State of Maryland........... 4
Paul Sarbanes, former Senator from the State of Maryland......... 5
NOMINEES
Janet L. Yellen, of California, to be a Member and Vice Chair of
the Board of Governors, Federal Reserve System................. 15
Prepared statement........................................... 38
Responses to written questions of:
Senator Shelby........................................... 43
Senator Vitter........................................... 46
Peter A. Diamond, of Massachusetts, to be a Member of the Board
of Governors, Federal Reserve System........................... 16
Prepared statement........................................... 38
Responses to written questions of:
Senator Shelby........................................... 50
Senator Vitter........................................... 55
Sarah Bloom Raskin, of Maryland, to be a Member, Federal Reserve
System......................................................... 17
Prepared statement........................................... 39
Responses to written questions of:
Senator Shelby........................................... 58
Senator Vitter........................................... 66
Osvaldo Luis Gratacos Munet, of Puerto Rico, to be Inspector
General, Export-Import Bank, Federal Housing Finance Agency.... 29
Prepared statement........................................... 40
Responses to written questions of:
Senator Shelby........................................... 71
Steve A. Linick, of Virginia, to be Inspector General, Federal
Housing Finance Agency......................................... 31
Prepared statement........................................... 41
Responses to written questions of:
Senator Shelby........................................... 73
Senator Vitter........................................... 74
Additional Material Supplied for the Record
Letter from Hector Ferrer Rios, Minority Leader, Puerto Rico
House of Representatives....................................... 76
(iii)
NOMINATIONS OF:
JANET L. YELLEN, OF CALIFORNIA,
TO BE A MEMBER AND VICE CHAIR OF THE BOARD
OF GOVERNORS,
FEDERAL RESERVE SYSTEM;
PETER A. DIAMOND, OF MASSACHUSETTS,
TO BE A MEMBER OF THE BOARD OF GOVERNORS,
FEDERAL RESERVE SYSTEM;
SARAH BLOOM RASKIN, OF MARYLAND,
TO BE A MEMBER,
FEDERAL RESERVE SYSTEM;
OSVALDO LUIS GRATACOS MUNET, OF PUERTO RICO,
TO BE INSPECTOR GENERAL,
EXPORT-IMPORT BANK, FEDERAL HOUSING
FINANCE AGENCY;
STEVE A. LINICK, OF VIRGINIA,
TO BE INSPECTOR GENERAL,
FEDERAL HOUSING FINANCE AGENCY
----------
THURSDAY, JULY 15, 2010
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee convened, at 9:06 a.m. in room 538, Dirksen
Senate Office Building, Christopher J. Dodd, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman Dodd. The Committee will come to order this
morning. Let me welcome all who are here this morning, and
particularly, and I would be remiss if I didn't begin my
remarks by welcoming the former Chairman of this Committee. At
any point you want to come up here and sit in this chair, Paul,
you are welcome to it.
[Laughter.]
Chairman Dodd. I will tell you, Paul and I love to tell
this----
Mr. Sarbanes. Thank you very much, but no thanks.
Chairman Dodd. Paul and I love to tell the story. Several
years ago now, I was sitting in the chair that Tim Johnson sits
in and Chairman Sarbanes was sitting in this chair with a gavel
in his hand and there was a rather chaotic hearing one day. I
can't remember the subject matter, but the room was exploding
with chaos of one kind or another and Paul had already made the
decision to retire from a very distinguished career in the U.S.
Congress.
In the midst of the chaos--I will never forget this
moment--he took his right arm and put it around my shoulder and
with his left hand swept across the room and he said, ``Just
think, in 6 months, all of this is yours.''
[Laughter.]
Chairman Dodd. And little did I know how prophetic that
would be in terms of what has happened over the years.
I am going to break tradition a little bit here because
these are busy days, obviously, and here we have very
distinguished friends and colleagues here. So normally, we
would begin with an opening statement and Senator Shelby would
make one, but in consultation with my friend from Alabama, what
I would like to do is invite our colleagues who are here to
introduce the witnesses and then we will make some opening
statements ourselves here and then we will get to our
witnesses. So if you will bear with us, the three very
distinguished nominees this morning, we will proceed in that
manner, if that is possible.
Dianne, why don't we begin with you, and then, Ben, I will
go to you. And Paul, with respect to you, you have got a little
more. We are not in session. You don't have to worry about
votes this morning or other committee hearings. So I will go to
you as the third introducer.
Senator Cardin. Mr. Chairman, I would really yield to the
former Chairman before me.
Chairman Dodd. All right. You have got a vote here yet,
Ben. Paul doesn't. So I want to make sure we take care of you.
Dianne, go ahead.
STATEMENT OF DIANNE FEINSTEIN, SENATOR FROM THE STATE OF
CALIFORNIA
Senator Feinstein. Thank you very much, Mr. Chairman,
Senator Shelby, Senator Reed. It is a great pleasure for me to
be here this morning to express my strong support for Dr. Janet
Yellen, President Obama's nominee for Vice Chairman of the
Federal Reserve.
I know Dr. Yellen. She has dedicated her life to
understanding the complex field of economics. Her background
makes her a strong candidate for Vice Chairman at a time when
the country is recovering from the economic crisis.
Dr. Yellen graduated Summa Cum Laude from Brown in 1967.
She earned a Doctorate in Economics from Yale in 1971. She
began her teaching career as an Assistant Professor at Harvard,
where she taught from 1971 to 1976. From 1977 to 1978, she
served as Economist at the Federal Reserve Board of Governors.
In 1979, she moved on to another teaching position, this time
at the London School of Economics.
In 1980, Dr. Yellen began as Assistant Professor at the
University of California-Berkeley, and she has been there ever
since. Today, she is Professor Emeritus of Business and
Economics. Twice, she has been awarded Teacher of the Year at
UC-Berkeley's Haas School of Business.
During her time at Berkeley and elsewhere, Dr. Yellen has
published numerous research works. They included the noted,
Waiting for Work: A Study of Unemployment, completed with her
husband, George Akerlof, a Nobel Prize winning economist who is
here with Janet today. Her work has been published in the
Journal of Economics, Business Economics, and the Brookings
Papers on Economic Policy, among other publications.
Dr. Yellen has also held a number of other academic and
advisory positions. These include serving as a Research
Associate in Monetary Economics at the National Bureau of
Economic Research, a member of the Advisory Board on Economic
Activity at Brookings, and an advisor to the Congressional
Budget Office.
Her research has focused on unemployment, monetary policy,
and international trade. This combination of expertise will be
beneficial as she weighs issues with our rising debt and high
unemployment levels. We were just talking about that on the
side waiting for my colleagues.
From 1994 to 1997, Dr. Yellen sat on the Board of Governors
of the Federal Reserve. There, she focused on consumer credit
and small business lending, two areas vital to our current
recovery. In 1997, she left the Federal Reserve to Chair the
Council of Economic Advisors during the Clinton administration.
And since 2004, she has led the Federal Reserve Regional
Districts from San Francisco. In this post, she has closely
monitored the regional economy and provided valuable input on
the direction of Federal Reserve monetary policy.
Along the way, she has received numerous awards and
commendations. These include the Wilbur Cross Medal from Yale
in 1997, fellowships at the Yale Corporation and the National
Academy of Arts and Sciences, the Maria and Sidney Rolfe Award
for National Economic Service by the Women's Economic
Roundtable, an honorary Doctor of Laws from Brown. Dr. Yellen's
substantial resume speaks for itself.
Her confirmation would add another professionally trained
economist to the Federal Reserve Board. This is important,
because with Vice Chairman Kohn's departure, Chairman Bernanke
would be the Board's only trained economist.
Bottom line: Janet Yellen has the depth of knowledge and
experience required to make the important decisions that could
possibly have a strong positive and profound impact on our
economy. I heartily recommend her to this Committee.
Chairman Dodd. Senator, thank you very, very much.
Senator Feinstein. Thank you. Happy to do it.
Chairman Dodd. That was a fine introduction. We are more
than happy to have you stay with us, if you care to, but we
also know what schedules are like, so----
Senator Feinstein. If I could be excused, I would
appreciate it.
Chairman Dodd. You are excused.
Senator Feinstein. Thank you.
Chairman Dodd. We thank you for coming.
Dr. Diamond, let me just tell you, Senator Kerry has an
opening statement for you which I will include in the record,
and a very gracious statement about your remarkable
qualifications, as well, to assume this position. So I will put
that in the record, but we want to thank you very much for
being here, as well.
Chairman Dodd. Let me turn to my two colleagues.
STATEMENT OF BENJAMIN L. CARDIN, SENATOR FROM THE STATE OF
MARYLAND
Senator Cardin. Thank you very much, Chairman Dodd and
Ranking Member Shelby and the Members of the Committee.
First, let me thank and welcome all three of the nominees
for the Federal Reserve Board of Governors. We very much
appreciate your willingness to serve our nation during this
very difficult time. And we also welcome your families, because
we know this is a joint effort that will require the sacrifices
of the family and we thank you very much for your willingness
to step forward on these very important responsibilities.
I am particularly pleased, along with my colleague, Senator
Sarbanes, to introduce to the Committee Sarah Bloom Raskin. We
are very proud of her service and we are very proud that she is
willing to put her name forward for the Federal Reserve Board
of Governors. She is joined by her husband, Jamie, who is a
State Senator in Maryland with a very distinguished career, and
their three children.
Sarah is a 1986 graduate of Harvard Law School. Sarah also
graduated from Amherst College in 1983, where she graduated
Magna Cum Laude in Economics and a Phi Beta Kappa.
In 2007, Sarah was appointed Commissioner of Financial
Regulation for the State of Maryland. In that role, she has
done an outstanding job of improving consumer protection and
supporting banks through the challenges of the financial
crisis. She has been praised by the Maryland Bankers
Association and the Maryland Consumer Rights Coalition for her
fair, balanced approach to regulation in our State. Mr.
Chairman, that is no easy task, to get both the bankers and the
consumers to believe that you are doing the right thing and I
applaud her for her balanced leadership in our State of
Maryland.
Her leadership has been significant for Marylanders working
on foreclosure prevention during the financial crisis,
improving legislation related to payday lending abuses, and
stopping unscrupulous debt collection agencies. These skills, I
think, will serve her well in regards to the Federal Reserve
Board of Governors.
She has spent much of her career in public service,
including serving as Banking Counsel to the Senate Banking
Committee under Senator Sarbanes, worked at the Federal Reserve
Bank of New York, and helped with the Joint Economic Committee
in Congress.
As a member of the Federal Reserve, I am certain she will
continue her commitment of keeping our banks safe and sound.
Her dedication and work ethic are tremendous assets to our
nation during these critical times and I wholeheartedly
recommend her confirmation to the Committee.
Chairman Dodd. I thank you, Senator, very, very much.
As you know, Senator Mikulski, by the way, was unable to be
here this morning but sent a very strong letter or statement in
support, Ms. Raskin, of your nomination, as well, and so we
thank her for that, and I will include that in the record, as
well.
Chairman Dodd. Paul, welcome back to the familiar haunts.
STATEMENT OF PAUL SARBANES, FORMER SENATOR FROM THE STATE OF
MARYLAND
Mr. Sarbanes. Thank you very much, Mr. Chairman. I am
pleased to be back with you, my good friend, Senator Shelby,
Senator Corker, Senator Gregg, and Jack Reed. We used to sit up
there and conspire together, I have to admit here.
I am pleased to join with Senator Cardin and Senator
Mikulski sending in a letter in very strong support of Sarah
Bloom Raskin to go on the Federal Reserve Board. This is a
terrific appointment and it really comes at the right time,
given the responsibilities that the Fed is assuming in the
legislation as well as the many other responsibilities it
already has.
I am not going to repeat the biographical statement that
Senator Cardin made, but I just want to make just a few quick
observations.
Sarah has been an outstanding Commissioner of Financial
Regulation for the State of Maryland over the last 3 years. In
the 1990s, she served for 5 years, roughly 5 years, on the
staff of the Banking Committee, where she was an outstanding
member of the staff, very measured in her judgment, extremely
hard working, very smart, and very able to deal with people
across the board. She was part of a terrific staff, including,
incidentally, Kathy Casey, who went from the Committee staff to
the SEC and is serving there now with distinction.
I want to take just a moment of the Committee's time to
quote from some letters that have come in in support of Sarah
because I think it gives you some sense of the breadth of
support for her.
The Commissioners of the Conference of State Bank
Supervisors has written to Chairman Dodd and Ranking Member
Shelby, and I will just quote one paragraph from this:
As Maryland Banking Commissioner, Commissioner Raskin has
played a hands-on role as a banking and financial service
regulator during a challenging period, bringing leadership to
her agency and to Maryland's banking and financial industry.
The Conference of State Bank Supervisors and its membership
have benefited from her leadership role as a member of our
Board of Directors and as Chair of our Legislative Committee.
Additionally, she chaired our regulatory restructuring task
force. Commissioner Raskin also was appointed to the Federal
Financial Institutions Examination Council's State Liaison
Committee, where she has effectively represented State banking
regulators in joint efforts with the Federal banking agencies
on a broad range of regulatory and supervisory issues.
So she has assumed in just a 3-year period of time an important
leadership role within the Conference of State Bank Supervisors
and I think that speaks well to her talents and her abilities.
The President and CEO of the Conference of State Bank
Supervisors closes his letter saying:
Commissioner Raskin enjoys the full personal and professional
support of her fellow Commissioners across the country. We hope
that the Committee and the full Senate will act quickly in
confirming her.
The Independent Community Bankers, whom we, of course, all
know and with whom we have interacted on a range of issues over
the years, Camden Fine has written to the Committee:
Ms. Raskin's service as Maryland Commissioner of Financial
Regulation has given her a practical understanding of the
operational concerns of community bankers as they serve their
communities and comply with regulatory demands. She appreciates
the vital role that community banking plays in the economic
life of small and mid-sized communities. Ms. Raskin serves on
the Board of the Conference of State Bank Supervisors, chairs
the Federal Legislative Committee, the Regulatory Restructuring
Task Force.
And then he goes on to close by saying:
I hope that Ms. Raskin can be confirmed quickly so that the
Board may have the benefit of her experience as they navigate
the remainder of the economic recovery.
And finally, a statement by Kathleen Murphy, who is the
President of the Maryland Bankers Association, says, in part:
Commissioner Raskin has been accessible to the Association and
member banks on a variety of important issues. She has worked
with the Association and the industry to achieve numerous
changes in Maryland law that have made the State Banking
Charter stronger and more competitive. Commissioner Raskin's
belief in a vibrant State banking system, as well as her
experience with the Federal Reserve Bank of New York, the U.S.
Senate Banking Committee, have led her to assuming the
chairmanship of the Legislative Committee of the Conference of
State Banks.
In addition to all of this, as my colleague pointed out,
Senator Cardin, Sarah got the award, Consumer Advocate of the
Year Award, from the Maryland Consumer Rights Coalition. So she
has obviously shown an ability to come up with some very
practical solutions to some very difficult problems.
Mr. Chairman and Senator Shelby and other Members of the
Committee, I simply close with this observation. We depended on
Sarah very much when she was on the staff of the Committee. She
was really one of our very top people. She brought terrific
analytical abilities to her work. She had measured and good
judgment. She had the capacity to work very well with others. I
think she is going to be a very important addition to the
Federal Reserve Board and I really commend her to you in a very
strong and unqualified manner.
Chairman Dodd. Senator, we thank you very, very much for
that recommendation.
Of course, all of us here who have been here for a little
while remember Sarah very much as a part of the Committee
staff, and I am sure, I don't know if you ever thought one day
sitting here that you might be sitting there, so welcome back
to the other side of the table. We are delighted to have you
with us this morning.
I am going to take a few minutes for some opening comments.
Then I will turn to Senator Shelby for any opening comments he
may have. And then I will ask any of my colleagues, those who
are here, obviously, now, if they want to make any opening
statements. And then we will swear in our witnesses and proceed
with some questioning for them.
But I thank Senator Sarbanes. We thank you, and Senator
Cardin, thank you very much for coming by this morning.
None of us could ever plan these things this way, but
obviously the coincidence of having the three nominees here
this morning and at some point later today we will be voting on
the financial regulatory reform bill, in a sense, so it is all
coming together, ironically in some ways, in having the three
of you here as such a critical part ultimately of whether or
not we are able to get back on our feet again and how well the
Federal Reserve is able to act and deal with these issues.
So today, as has been pointed out, we are considering five
very highly qualified nominees. There are two others we will be
considering later this morning on the panel. On the first panel
are three candidates, as we have all noted here, to serve as
the Federal Reserve Board of Governors, one of whom has been
nominated to a 4-year term as Vice Chairman of the Board. The
Committee will also consider a second panel of two candidates
to serve as Inspectors General. The first will serve for the
Export-Import Bank of the United States and the other for the
Federal Housing Finance Agency.
The Committee considers today the nominations of three
Federal Reserve Board Governors. These positions are
extraordinarily important because of the critical role the
Federal Reserve plays in our economy, be it through the
exercise of monetary policy, the supervision of financial
institutions, oversight of the payment system, or as lender of
the last resort. As arbiter of our nation's monetary policy,
the Federal Reserve is charged with promoting full employment
and maintaining price stability. The decisions it makes about
the money supply and interest rates have profound effects on
the performance of the real economy.
Under the financial reform legislation that Congress is
poised to consider, the Federal Reserve's supervisory functions
will be significantly enhanced. It will be incumbent,
obviously, then, on the Federal Reserve to establish a set of
robust prudential standards, including capital and liquidity,
to govern the activities of the nation's large interconnected
banking organizations. The Federal Reserve will be charged with
overseeing the functioning of these complex organizations and
identifying and addressing the type of excessive risk taking
that led this country to the verge of economic collapse.
And as we have seen during the financial crisis, the
Federal Reserve's role as lender of the last resort is pivotal
to limiting the threats to our financial system. And while the
financial reform legislation imposes new conditions on the
Federal Reserve's emergency lending authority, conditions that
Senator Shelby and I worked on together, the Fed will still
retain the awesome power to put billions of dollars of taxpayer
money on the line. Given its position in our economic system,
much depends, obviously, then, on how well the Fed carries out
its varied responsibilities.
In terms of performance, the Fed's track record, I will say
politely, has been mixed. While in my opinion the Fed managed
the crisis superbly, it clearly, in my view, fell down on the
job during the period before the financial crisis. The Fed had
authority under HOEPA that, if used, could have prevented, in
my view, the serious deterioration in mortgage underwriting
standards and the abusive and fraudulent lending practices. In
my view, the Fed declined to exercise its authority until well
after hundreds of billions of dollars of overvalued, unsuitable
mortgages had been originated, securitized, and distributed to
important financial institutions.
The Fed also had supervisory authority over bank holding
companies, but events have revealed that its supervision was
inadequate, again, to put it mildly. Large bank holding
companies were allowed to accumulate significant leveraged
exposures to mortgage-related assets. The losses they suffered
when the housing price bubble burst helped create the financial
crisis from yet we have yet to recover.
Because of these failures, the first draft of our
Committee's financial reform bill created both a new Consumer
Financial Protection Agency and a Consolidated Banking
Supervisor. To be very blunt, that draft bill contemplated
removing all of the Fed's authority in areas where it had
performed poorly, leaving it with the responsibility primarily
over monetary policy.
However, as we worked our way through over the last year or
so with the legislation, it became clear that the political
will of the Congress was to retain and strengthen the Fed's
supervisory role. The Federal Reserve will be part of the
Financial Stability Oversight Council, which will function as
an early warning system, responsible for spotting and
mitigating threats to overall financial stability.
As I stated at the outset of these remarks, the Fed will
have responsibility for devising and imposing heightened
capital, liquidity, and other standards for large bank holding
companies and designated non-bank financial companies. It will
help enforce the so-called Volcker Rule, which prohibits
proprietary trading and limits investment in hedge funds and
private equity funds at banks and bank holding companies. And
it will have a role in supervising systemically important
financial utilities, such as clearinghouses, that are important
to the stability of the payment system.
Moreover, the Fed will continue to play a very key role in
helping the economy recover from the effects of the financial
crisis. And while the economy is growing, it is not growing
fast enough, I believe all would acknowledge, to help millions
of Americans who lost their jobs as a result of this crisis.
The seasonally adjusted Civilian Unemployment Rate declined
from 9.7 percent in May to 9.5 percent in June, but remains far
too high. Business investment demand, as measured by data on
fixed non-residential investment, remains subdued because of
excess capacity. And while headline price indices continue to
increase at about 2 percent, year on year, other measures of
price change suggest that we are moving toward price deflation.
In May, the core CPI increased by just 0.9 percent.
It is evident, then, that the economy is going to need all
the help the Fed can provide over the coming years. Put simply,
the Federal Reserve is at the forefront of maintaining
financial stability. Congress is entrusting the Federal Reserve
with tremendous responsibilities, all of which the Fed, I might
point out, has sought in this process. Now the Fed must step up
and use these new powers to serve obviously the greater good of
our nation.
We have before us today a slate of very, very accomplished
candidates, and I mean that very sincerely. I have sat in this
Committee for 30 years and I can't think of another panel I
have seen that has come before us as qualified as this panel is
to take on these responsibilities, and I can't thank you enough
for your willingness to do so and to step up and go through the
arduous task in front of us. Our job, obviously, is to assess
whether they are up to the task of serving on the Federal
Reserve Board at this critical time, and I look forward this
morning to discussing their views with us on these issues.
I am going to apologize in advance. I am going to be in and
out in this process this morning because we are going to be
considering on the floor the financial regulatory reform bill
this morning, as well, so I need to be there, as well. So I
will be coming back and forth, and Tim Johnson and Jack Reed
and Sherrod, and I am confident maybe others on our minority
side will step in, as well, and be here for this process.
But again, I thank all three of you. I notice that two of
you, of course, had the benefit of a Connecticut education and
a third has a daughter named Grace, so you are in pretty good
stead with me to begin the process, having a daughter named
Grace, as well.
[Laughter.]
Chairman Dodd. With that, let me turn to Senator Shelby.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Mr. Chairman.
The Federal Reserve faces, as all of you know, some of the
greatest challenges it has ever confronted. The economy is
highly vulnerable and there is little clarity with respect to
the best way forward. The banking system struggles to emerge
from the financial crisis and hundreds of institutions will
likely fail before we recover fully.
During the crisis, the Fed created massive new liabilities
and ballooned its balance sheet from $850 billion to more than
$2.3 trillion. Earlier this year, the Fed talked mostly about
its strategy for removing its extraordinary support measures.
Lately, as the economy seems to have hit another soft patch,
discussion at the Fed has been a mixed bag. Some fear
inflation, while others fear deflation. Some talk of unwinding
the Fed's massive asset holdings while others talk about even
more asset purchases, further ballooning the Fed's balance
sheet.
The nominees for positions on the Federal Reserve Board, if
approved, will face difficult and important decisions for the
American economy. And while there are before us three talented
and experienced candidates, I believe that some inquiry is in
order, Mr. Chairman, to determine whether their qualifications
are aligned with the positions for which they have been
nominated. The work of the Federal Reserve is highly
specialized and demands the best qualified and most capable
people in the country that we can produce.
I will be interested to learn today if the nominees before
us meet that standard. I will also want to be assured that
these nominees will work to increase the Board's transparency,
both to the public and to Congress.
Many of my colleagues believe that the Fed's relationship
with Congress needs some mending. The Fed in the recent crisis
was overly opaque and not receptive to providing information to
Congress or the public. The Fed often seems more interested in
seeking additional power and authority, even though it failed
to use its current authorities in the run-up to the crisis, a
lot of us believe.
Ironically, despite its recent failures, the Fed could soon
be rewarded, as Senator Dodd said, with expanded authorities
and powers under the Dodd-Frank bill. With that in mind, I
would want to hear what lessons have been learned and how the
nominees intend to use those lessons as members of the Board.
The nominees, I believe, should identify what they learned
about monetary policy, transparency, accountability, and
financial regulation during the recent crisis. I will also be
interested to learn where each of the nominees would draw the
line between monetary and fiscal policy, a distinction that was
blurred by the Fed during the recent crisis. Finally, each
nominee should share their views, I believe, on credit
channeling by the Federal Reserve to preferred and specific
segments of financial markets, which amounts, I believe, to the
Fed picking winners and losers.
Our second panel, and Mr. Chairman, if you will indulge me,
I want to mention this, includes the President's nominee to be
the Inspector General of the Federal Housing Finance
Administration. And while we welcome this nomination, I would
like to point out, Mr. Chairman, that nearly 2 years after
passage of GSE legislation, we still have not received a
nominee to head the Federal Housing Finance Administration.
Both GSEs, as we all know, are in conservatorship, being run by
the Federal Housing Finance Administration. Taxpayers have
already lost $150 billion and counting on the bailouts of these
organizations. Two years would be much too long under normal
circumstances, but under the current circumstances, I think it
is inexcusable.
By law, the Federal Housing Finance Administration is
supposed to put the failed mortgage lenders into a safe and
sound condition and to preserve their value. But to accomplish
this goal, the Federal Housing Finance Administration acts with
all the powers of the shareholders, directors, and officers of
the entities. Consequently, only the Inspector General is
examining the practices of the conservator.
I look forward to hearing later on from Mr. Linick, if we
are here, on his plans for providing the Committee and the
American people with long-overdue oversight of FHFA, especially
as it relates to the conservatorship of Fannie Mae and Freddie
Mac.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator Shelby.
Senator Reed?
STATEMENT OF SENATOR JACK REED
Senator Reed. Well, thank you very much, Mr. Chairman.
I want to welcome the nominees that the President has
chosen very well and very wisely. You have got extraordinarily
talented individuals with long years of experience. Dr. Yellen,
of course, is a Brown graduate. We have to say no more.
[Laughter.]
Senator Reed. Mr. Diamond is an expert in economics from
Yale University as an undergraduate, couldn't get into Brown.
[Laughter.]
Senator Reed. And then Ms. Bloom Raskin is a graduate of
Harvard Law School, so nice to see, like me, you found a job.
But we are here at a critical moment, and there are those
that suggest that things are coming along and we have to start
focusing on sort of the great pivot away from support of the
economy. But for the thousands and thousands of unemployed
Rhode Islanders, nothing has changed much and we have to keep
our eyes focused on unemployment, and the Fed, for many
reasons, is the most significant actor in this situation,
continuing to support policies that will put people back to
work.
There is some encouraging news today. Claims seem to have
fallen much more than expected, so that is a good sign. We have
been increasing jobs over the last several months. But until we
have a solid growth in employment that is sustainable and
recognized by people, not here and on Wall Street but on Main
Street, then we haven't done the job. So I would urge you in
all your deliberations to keep that thought foremost in mind.
There are also some areas of innovation that might be
embraced. I have been suggesting a work-share plan in which the
unemployment funds are sort of used not to totally subsidize
someone, but to help a business maintain partial employment if
they maintain benefits. Chairman Bernanke has embraced that
principle. Several States recently, including Oklahoma, have
adopted it. So there are innovative ways we can make our funds
go further and help more people. I hope we do that.
As we have all discussed, the Chairman and the Ranking
Member, with the new Dodd-Frank bill that is just about to be
passed, significant responsibilities will be given to the
Federal Reserve. One of them will be, for the first time, there
will be a Vice Chairman of Supervision on the Federal Reserve
Board whose charge will be to look carefully at the regulatory
arrangements that are in place. And now, as one of the chief
voices on the proposed Financial Oversight Council, this person
and the Board in toto will be extraordinarily important.
So you are coming onto the Federal Reserve Board at a
critical moment, and I am very confident because of your skill
and your dedication that you will do a superb job.
One final point. I think these confirmation proceedings are
interesting. I am sure you find them interesting. But it does
send a very strong message that through the Senate, you
ultimately are accountable to the people of the United States,
and I would like to send that same message to the individuals
who operate as the President of the Federal Reserve Bank in New
York, because that position is one of the most significant
regulatory positions in the country. To have any confusion
about who he or she may work for, I think, is a mistake, so I
will continue to pursue that effort.
Thank you all.
Chairman Dodd. Thank you very much.
Before I turn to Senator Gregg, let me just mention, I
inquired of staff as to why we haven't had someone come over
from FHFA and let me use the opportunity here. I presume there
is someone from the Administration in the audience. It is long
overdue. The idea originally was to have the head of FHEO to
run that, and they did for a while, but it is a vacant seat and
they ought to get it filled. So I appreciate Senator Shelby
raising that point.
Judd, good to have you here this morning.
STATEMENT OF SENATOR JUDD GREGG
Senator Gregg. Thank you, Mr. Chairman, and it is good to
be here to participate in this hearing with three people who I
think are exceptional. I appreciate the President's choices
here and I appreciate your willingness to serve. It is nice to
have folks of your talent and ability coming into the
responsibility of the job of the Federal Reserve.
As we move forward over the next 3, 5, 10 years, the
Federal Reserve's role is going to become even more and more
critical. Regrettably, this country is on a track to fiscal
insolvency under the present spending activities of the
Congress and the debt which we are adding, and really, the only
stabilizing force right now is the Federal Reserve because the
Congress is totally irresponsible. And so your role is going to
become more and more important in the role of--you can't
correct our failures, but at least you can point them out and
hopefully maintain the stability of the currency while we try
to sort out the problems of domestic fiscal policy.
So this is going to be one of the most critical periods in
the history of the Federal Reserve, over the next five to 10
years and I appreciate the fact that talented people like
yourself are going to be there. Thank you.
Chairman Dodd. Well, very good. I am going to ask all three
of our witnesses to rise----
Senator Brown. Mr. Chairman?
Chairman Dodd. Oh, I am sorry. Senator Brown, I apologize.
Senator Brown. I am not that new still, Mr. Chairman.
Chairman Dodd. No, you are new enough, so go ahead. You
went to Yale anyway.
[Laughter.]
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. And I don't have that much to say, either,
Mr. Chairman, but thank you. I appreciate the three nominees
and I echo Senator Gregg's comments about how happy we are with
the President's appointments and the quality of appointments
and your willingness to do public service.
I want to briefly--obviously, I got the hint, Mr.
Chairman--very briefly mention two things that are not
necessarily historically in the sort of well-defined--not
historically a part of the Fed's, the well-defined part of the
Fed's job description. One is, as I mentioned in my office to
the three of you, is manufacturing.
You know, this country 30 years ago, about a third of our
GDP was manufacturing. About 11 percent was financial services.
Today, those numbers are almost flipped, and we know what
happened in a lot of ways. We obviously know what happened in
the financial crisis. We also know what happened to
particularly small town and medium-sized industrial town
America and those cities of 20,000 to 50,000 that dot our
landscapes, particularly in the Midwest, but really all over,
where a plant closes or two plants close and the devastation to
the town is long lasting. The young people that get educations
leave those communities because we don't offer them the kind of
job opportunities in so many ways.
So I would hope--and I think if you look in an historical
context, what happens when a country turns to financial
services and away from making things, and whether making things
is agriculture or transportation or especially manufacturing,
look what happens to the middle class. Look what happens to the
long-term prosperity of the nation. So I hope you will consider
that in your deliberations.
The other thing that I wanted to mention is, and I have
noticed this during the debate on the unemployment insurance
bill. I go to the Senate floor almost every day and read
letters from constituents, many of whom have been employed for
25 years, often with the same employer, paid into unemployment
for years, been laid off for a year and a half, are losing
their job skills in many ways. We have been reading more and
more about that.
And I mention that because I think that many people in your
position and my position talk a lot about numbers. Ninety-
thousand Ohioans will lose their unemployment if we don't act
next week, as I think we will. We cite all the numbers we do,
but we don't often enough put a human face on what we do. And I
hope that you find a way in the generally insulated jobs that
you all have and the insulated jobs that we have, and we are
guilty of this too often, of putting a face on the kinds of
human suffering that you see come across your desk in the form
of statistics.
I know that is a challenge sometimes, but whether--I know
the President gets ten letters every day that he reads from
people around the country. You aren't the focus of letter
writers from people that have stories to tell, obviously, as
much as the White House or as much as your offices, but I
encourage you to find ways to do that so that as you formulate
public policy, it really is more than just numbers and
statistics and theories and practice and all of that, because I
think it will serve our country well. I know from my
conversations with you, you have that inclination, that
proclivity anyway, and I hope you will find a way to drive it
home even more in the months ahead.
I wish you well in this hearing and wish you well as you
assume your jobs, which I assume that you will. Thanks.
Chairman Dodd. Senator, thank you very much. My apologies
again.
Now, we will ask you to stand, if I can, all three, and
raise your right hands, if you will. I will ask you, do you
swear or affirm that the testimony you are about to give is the
truth, the whole truth, and nothing but the truth, so help you,
God?
Ms. Yellen. I do.
Mr. Diamond. I do.
Ms. Raskin. I do.
Chairman Dodd. And do you agree to appear and testify
before any duly constituted Committee of the U.S. Senate?
Ms. Yellen. I do.
Mr. Diamond. I do.
Ms. Raskin. I do.
Chairman Dodd. I thank all three of you.
Before turning to you for your statements, let me ask you,
and I will begin with you, Dr. Yellen, any family members here
at all you would like to recognize?
Ms. Yellen. Thank you. My husband, George Akerlof, and my
son, Robert Akerlof.
Chairman Dodd. Very good. Glad to have you with us.
Dr. Diamond?
Mr. Diamond. My wife, Kate, and my son, Andy, are here.
Chairman Dodd. Very good, as well.
Ms. Raskin?
Ms. Raskin. I will introduce my husband, Jamie, and my
three teenagers, Hannah, Tommy, and Tabitha. My parents are
here from Connecticut----
Chairman Dodd. Good.
Ms. Raskin.----my mother, Arlene, my brother, Kenneth----
Chairman Dodd. Very smart to bring those from Connecticut
here.
[Laughter.]
Ms. Raskin. My sister-in-law Erica----
Chairman Dodd. Is anyone from the Raskin family not here in
this room today?
[Laughter.]
Ms. Raskin.----my father-in-law, his wife, and my niece and
nephew and another sister-in-law.
[Laughter.]
Chairman Dodd. You have done very well. I hope you didn't
miss anyone. That is all I can tell you. The ones you have
mentioned won't care. The ones you have forgotten will never
forget that you have avoided them.
[Laughter.]
Senator Shelby. Five years on the Committee helps.
Chairman Dodd. Yes, her 5 years on the Committee, being
here. Well, very, very good, and what we are going to do is
begin with you, Dr. Yellen, your opening statement.
Now, normally, having read over your statements last
evening, normally, I ask that the people try to restrain their
remarks to 5 minutes apiece, but having read your statements, I
want to urge you to speak for 5 minutes apiece. Rather brief
statements, well advised, I think, by some. Don't make too long
an opening statement.
So we will begin with you, Dr. Yellen, and let me just say
to my colleagues, as well, for the purpose of the record here,
any statements that Members of this Committee have, we will
include in the record, and any additional questions they don't
get to ask here this morning will also be included. We would
ask the nominees, as quickly as you possibly could, to respond
to those questions.
I believe it will be the appetite of this Committee to want
to move along as quickly as we can, recognizing we have a
relatively short amount of time left in this session of
Congress, and I believe it will be the desire to want to move
these nominees along, barring something that we are unfamiliar
with. So on the assumption of that being the case, we would ask
you to be as responsive as you can as quickly as you can.
And with that, Dr. Yellen, thank you once again. We are
delighted to have you back here with us, and again, I can't
begin to thank you. I loved last night reading over your
publications and that you worked on with your husband on some
very interesting subject matters and topics. In fact, I made
check marks on a few of them that don't really relate to this
Committee's jurisdiction, but I would be very interested in
going over and reading, so I thank you very much.
STATEMENT OF JANET L. YELLEN, OF CALIFORNIA, TO BE A MEMBER AND
VICE CHAIR OF THE BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM
Ms. Yellen. Thank you. Chairman Dodd, Senator Shelby, and
Members of the Committee, I am honored to appear before you as
President Obama's nominee to serve as a member and Vice Chair
of the Board of Governors of the Federal Reserve System. If I
am confirmed to these positions, I look forward to working with
this Committee in the coming years.
I am wholeheartedly committed to pursuing the Federal
Reserve's Congressionally mandated goals of maximum employment
and price stability and to strengthening our program of
supervision and regulation, building on the lessons learned
during the financial crisis. We must work together and in
cooperation with central banks and governments around the world
to mitigate systemic risk in the financial and payment systems
so that our country never again suffers such a devastating
episode of financial instability.
We have learned a harsh lesson about the dire consequences
a financial crisis has for ordinary Americans in the form of
lost jobs, lost homes, lost wealth, and lost businesses. And
those of us charged with overseeing the financial system should
always keep this human cost in mind.
I have served since 2004 as President and Chief Executive
Officer of the Federal Reserve Bank of San Francisco, and
before that, from 1994 through 1997, as a member of the Federal
Reserve Board. Through this service, I have gained experience
in every one of the Federal Reserve's areas of responsibility,
including monetary policy, banking supervision and regulation,
consumer and community affairs, and the operation of payment
system. I believe this extensive background equips me to work
under Chairman Bernanke as a leader of the Federal Reserve
System as we strive to carry out the missions Congress has
assigned to us.
Over the next few years, the Fed must craft policies that
ensure that our economy accelerates its progress along the
recovery path it has begun to trace. With unemployment still
painfully high, job creation must be a high priority of
monetary policy. But we must also avoid any threats to price
stability. That means that when the appropriate time comes, we
must withdraw the extraordinary monetary accommodation now in
place in a careful and deliberate fashion.
My approach going forward, as in the past, will be to bring
a thoughtful and independent voice to the Federal Open Market
Committee deliberations on monetary policy, drawing on the
insights of business and community leaders throughout the
country and thoroughly analyzing macroeconomic trends that
affect the economic outlook and the risks to our forecasts.
In my view, Congress has wisely granted the Federal Reserve
the freedom to make independent monetary policy decisions in
pursuit of Congressionally mandated goals based on a forward-
looking perspective and the best judgments of the Federal Open
Market Committee participants. I believe that experience in the
United States and around the globe demonstrates that central
bank independence in monetary policy produces clear societal
benefits. When central banks are independent, economies perform
better, inflation is lower and more stable, and long-term
interest rates are lower and less volatile. In other words, an
independent central bank is best equipped to promote both price
stability and high levels of growth in employment.
I should stress, though, that independence brings with it
both responsibility and accountability. The Federal Reserve is
fully accountable to Congress, and that is how it should be.
That means the Fed must explain its actions, outlook, and
strategy and provide the information necessary for Congress and
the public to understand and evaluate its policy decisions.
I strongly support Fed independence in monetary policy and
I am committed to enhancing the transparency that is essential
to accountability and democratic legitimacy.
Senator Johnson. [Presiding.] Mr. Diamond?
STATEMENT OF PETER A. DIAMOND, OF MASSACHUSETTS, TO BE A MEMBER
OF THE BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM
Mr. Diamond. Senator Johnson, Ranking Member Shelby,
Members of the Committee, I am honored to have been nominated
by President Obama to be a member of the Board of Governors of
the Federal Reserve System. I am grateful to this Committee for
scheduling this hearing.
If I am confirmed by the Senate, I will work to the best of
my abilities to fulfill the responsibilities of this office.
Those responsibilities have always been significant. The
experience of the recent financial crisis and the financial
reform legislation have underlined the multiple jobs the Fed
has in working to fulfill the dual mandate of high employment
and price stability. The Fed will have major work to do to
implement the tasks that the legislation will be placing at the
Fed. I would be honored and pleased to be able to be part of
the process of responding to this challenge.
I studied both mathematics and economics as an
undergraduate at Yale University. I received my Ph.D. in
Economics from the Massachusetts Institute of Technology in
June 1963. Since then, I have been a faculty member, first at
the University of California at Berkeley, and since 1966 at
MIT. Throughout this period, I have taught and done research in
economics.
My primary focus in both teaching and research has been
economic theory, particularly general equilibrium theory,
macroeconomics, search theory, and public finance. Within
public finance, my primary focus has been on taxes, pensions,
and social insurance, particularly Social Security. I have done
both theoretical analyses and policy analyses. I have also done
research in other areas, including behavioral economics and law
and economics. I took classes at Harvard Law School as part of
my preparation for doing research in law and economics. I
believe in being well grounded in a subject when doing research
or policy analysis.
In addition to microeconomics, macroeconomics, and public
finance, I have also taught money and banking and law and
economics. Being a member of two economics departments with
great collegial interactions, I have gained a wide knowledge of
a variety of economic topics as well as detailed knowledge in
my areas of expertise. As a consequence, I have considerable
awareness of the development of economic analyses of monetary
policy and its impacts on both inflation and employment, as
well as studies of the determinants of financial crises.
A central theme in my research career has been how the
economy deals with risks, both risks at the individual level
and risks that affect the entire economy. In all of my central
research areas, I have thought about and written about the
risks in the economy and how markets and Government can combine
to make the economy function better for the people there. If
confirmed, this background should be very helpful at the
Federal Reserve as part of the process of addressing our
heightened awareness of the dangers of systemic risks. My
background in behavioral economics and law and economics give
me high awareness of the issues involved in consumer protection
and in increasing financial literacy.
If confirmed, I would welcome the opportunity to help
address the important issues that have been raised by the
financial crisis as well as the longstanding issues and
concerns that the Federal Reserve faces, bringing my research
experience and expertise to bear on these difficult and
important issues. Thank you.
Senator Johnson. Ms. Bloom Raskin?
STATEMENT OF SARAH BLOOM RASKIN, OF MARYLAND, TO BE A MEMBER,
FEDERAL RESERVE SYSTEM
Ms. Raskin. Senator Johnson, Senator Shelby, Senator Brown,
and to all the able staff who are sitting in the seats I
remember so well, as a former Banking Counsel to your
Committee, I cannot quite express what an honor it is to appear
before you today. I never dreamed one day I would be here as a
nominee to the Federal Reserve Board, or maybe I did dream it
at some point, but I certainly never believed it.
I must thank, first of all, Senator Sarbanes, who has been
an extraordinary mentor to me over the course of my career and
has shown me how one can be passionately committed both to the
public interest and to one's family at the same time.
It is a great and humbling honor to be nominated by
President Obama to the Federal Reserve Board and I am very
grateful. If confirmed, I will participate in the essential and
difficult work of restraining inflation and maintaining price
stability, maximizing sustainable employment and economic
growth, and trying to continually reconcile and harmonize these
goals.
This is a challenging moment for the Federal Reserve. Every
Member of this Committee knows that even though the worst of
the crisis is over, it remains a precarious time for far too
many of our families and businesses. The Fed must do its part
to restore the underlying strength and vibrancy of the American
economy.
As Maryland's Commissioner of Financial Regulation over the
last 4 years, I have worked day and night to counter the
devastating effects on our communities of the national banking
and liquidity crisis, the terrible spikes of home foreclosures,
and high unemployment and underemployment. At the same time, as
a front-line banking regulator, I have worked to revise and
replace ineffectual and counterproductive State regulations
that do not put the Government properly on the side of economic
progress for our people. If I am confirmed, my experience
working through this crisis at the State level will deeply
inform my actions as a member of the Federal Reserve Board.
The proper conduct of monetary policy by our central bank
is essential to calming the waves of financial instability that
have engulfed so many of our communities, businesses, and
households. Over the course of the last generation, the Federal
Reserve has achieved price stability and successfully anchored
long-term inflationary expectations. This achievement is
critical to our economic strength and it remains a central
institutional objective that I subscribe to wholeheartedly.
But it is only a partial victory when many American
households continue to face the perils of unemployment and many
small businesses struggle with weakened consumer demand and
reduced access to credit. We need to strengthen this recovery
by expanding its foundations. This means that in addition to
maintaining stable inflationary expectations and keeping a
vigilant eye on the emergence of new bubbles, the Fed must seek
to fulfill the other part of its statutory mandate by
addressing unemployment, which has pervasive social costs.
In my State, I have seen these costs in the loss of
productive capacity, a weakened housing market, increased
strain on State and local resources and services, and a nervous
reluctance on the part of many businesses and banks to invest
and make loans. The Fed must work for a broad and sustained
recovery that not only controls inflation, but facilitates
growth and more robust business lending by banks.
In sum, I know that there is a lot of hard work to do at
the Fed. If you choose to confirm me, I will bring all of the
experience, knowledge, and commitment I have gained over the
course of my career to the task of fulfilling Congress's
statutory expectations, and I will maintain the standards of
professionalism, independence, and probity that I have always
tried to uphold in my career and that, to my mind, are
exemplified by the work of this Committee.
Thank you for the honor of hearing me today. I will be
happy to respond to any and all questions you may have,
verbally or promptly in writing, throughout this process and,
indeed, throughout my tenure at the Fed, if I am fortunate
enough to be confirmed.
Senator Johnson. Thank you.
In light of the fact that Senator Shelby has to go other
places, I defer to Senator Shelby.
Senator Shelby. Thank you, Mr. Chairman. Those other places
just follow Senator Dodd to the floor and see what he is saying
about this package.
[Laughter.]
Senator Shelby. But we must go in a few minutes.
I have a number of questions for the record, but I have a
question for each one of you. I will start with you, President
Yellen. President Yellen, the Fed's 12th District, which is
your responsibility, has experienced a large number of bank
failures, some 65 institutions, at an estimated loss of around
$28 billion, I have been told, since 2004. Your district
experienced failures of important firms with national
implications. Further, the housing sector in your district
displayed speculative excesses in the run-up to the crisis.
Regarding your tenure as President of the 12th District, I
have two questions. First, what role do you believe a breakdown
in regulatory oversight played in the failure of the
institutions in your district? And second, were you raising any
warning flags with respect to speculative excesses or lax
monetary policy during that period?
Ms. Yellen. So the first question was did a breakdown in--
--
Senator Shelby. Do you believe a breakdown in regulatory
oversight--what role do you believe that a breakdown in
regulatory oversight played in the failure of the institutions
in your district?
Ms. Yellen. Working with other regulators, I think that our
regulatory oversight was careful and appropriate, but I believe
that----
Senator Shelby. Excuse me. You say it is careful and
appropriate? Most people believe----
Ms. Yellen. Given the----
Senator Shelby.----it was lax and inappropriate.
Ms. Yellen. Well, I--in the institutions that have failed
in my district are mainly community banks----
Senator Shelby. OK.
Ms. Yellen.----with high exposure to commercial real
estate.
Senator Shelby. OK.
Ms. Yellen. And when I say careful and appropriate, I mean
that as early as 2001, people in the Federal Reserve System and
particularly in my bank were at the forefront of focusing on
high concentrations that existed in the banks we supervised in
commercial real estate. We saw that these exposures and
concentrations could be a source of vulnerability and we
monitored this carefully throughout.
I would say, the first briefing I ever received from my
banking supervision staff when I joined the Federal Reserve
Bank of San Francisco was on commercial real estate. They
pinpointed it as a vulnerability, and for the 65-odd banks in
my nine-State region, really, this is what is driving problems.
I would say that the regulatory response was insufficient
over a period of years. I believe guidance came out in 2006, I
believe it was, to the supervisors and to banks stating
essentially that banks with high exposures needed to carefully
manage risks around these exposures. I think what we have
learned in hindsight is it was very hard for all of the
regulators involved to take away the punch bowl in a timely
way, and as the supervisors in the field, we didn't really have
the ability to either limit concentrations or, for example, to
demand that banks hold higher capital against these
concentrations.
I would describe the guidance that came out as weak and the
material loss reviews that have been done of the institutions
that we supervise essentially say that this was the pitfall,
and I would hope that going forward, one thing we have learned
from this crisis is there is a need for all of us in regulation
to act in a timely way to take away the punch bowl and to
require more stringent capital requirements.
Senator Shelby. Thank you.
Commissioner Raskin, in testimony before the Congressional
Oversight Panel for the TARP, you said, ``In the run-up to this
financial crisis, both Wall Street and monetary policy were
spiking the punch bowl.'' Those are your words. I presume from
your comment that you believe that monetary policy was too
loose for too long prior to the crisis. At what point would you
have changed course? And what do you base your judgment on? And
as Dr. Yellen has said, what have you learned, you know, what
have we all learned but especially assuming you are confirmed
as Member of the Board of Governors of the Fed, what has the
Fed learned?
Ms. Raskin. Thank you, Senator Shelby. I think that there
have been a number of lessons learned, and there is clearly a
lot of blame to go around.
In terms of the Federal Reserve, I think that the Federal
Reserve has been subject to substantial and I believe justified
criticism regarding the run-up to the failure. There, I
believe, were failures both on the regulatory side and on the
monetary policy side.
From the regulatory perspective, I think that there was not
a sufficient focus given to the importance of capital and the
importance of building up capital and robust capital during
good times. We now know how difficult it is to find capital
when times are not so good.
I also think that there was an inappropriate treatment,
regulatory treatment given to off-balance-sheet assets. And as
we now know, those assets should have been more adequately
capitalized, and they were not.
So I think there was quite a bit of misjudgment regarding
asset quality, including the quality of mortgage-backed
securities, up to the run-up through the crisis on the
regulatory side. So I think there are a lot of lessons there
that are worth repeating and correcting.
From the monetary policy side, which you also mentioned in
that quote, I think the extent of the bubble, the housing
bubble that was developing, was not appropriately monitored or
taken seriously. And for those of us on the ground level, we
saw quite a number of disturbing trends in housing markets,
including sometimes weak regulation of the mortgage side of
origination.
So clearly there were signs, also signs of predatory
behaviors that were fueling this bubble, and it would have been
good if the Federal Reserve Board had been able to see some of
the determinants of that bubble.
Senator Shelby. Thank you.
Professor Diamond, in an interview with Macroeconomic
Dynamics, a publication, in 2007 you stated the following, and
I quote: ``I am a card-carrying behavioral economist, and I
think that matters in both micro and macro.''
Do you believe, Dr. Diamond, that behavioral economics can
be applied to the regulatory functions of the Federal Reserve?
And if so, in what ways? And should you? Or should we?
Mr. Diamond. Yes, I think it is very important, and the
clearest example, and something I learned in the background
information that the Fed has given me in preparation for the
hearings and, if confirmed, carrying on, there was discussion
of the treatment of disclosure with financial contracts. And
they told me that their attitude toward disclosure had been to
basically make sure everything was disclosed in the sense that
a lawyer could see it was accurate. And they had learned the
lesson, and now they were focusing on disclosure in a way that
the person engaging in a financial contract, the man in the
street, could understand what the financial contract was going
to do.
Behavioral economics draws heavily on cognitive psychology,
and cognitive psychology is very aware of the difficulty for
inexperienced people in interpreting complicated elements. And
this, I can add, is one of the things I also studied when I was
taking classes at Harvard Law School, the issue of contracts
that are hard to understand, contracts that are not available
for negotiation. I think the behavioral economics aspect on the
regulatory side is very important.
Senator Shelby. Mr. Chairman, I have a number of questions
that I would like to submit for the record. I appreciate you
deferring to me a minute ago. I have got to go to the floor.
Thank you.
Senator Johnson. Dr. Yellen, Dr. Diamond, and Ms. Bloom
Raskin, what do each of you believe will be the greatest
challenge for the Fed while implementing the Wall Street reform
legislation? Dr. Yellen?
Ms. Yellen. Thank you, Senator Johnson. We have enormous
responsibilities that will be given to us under this
legislation. The first key challenge will be to improve our
supervision particularly of the largest and most complex bank
holding companies based on what happened in this crisis and the
lessons that we have learned. And that is something that is
already taking place, partly building on what we learned from,
I think, the very successful stress tests that were conducted
of the 19 largest banking organizations last spring. I think
what we learned is that taking an approach to bank supervision
that involves horizontal simultaneous reviews of large
organizations using multidisciplinary teams, including
economists, we learn a great deal about the true situation and
comparative situation in large banking organizations. And this
is a strategy and tool where we are employing on a systemwide
basis to ramp up our supervision of these institutions.
Going forward, we are being asked in this bill,
appropriately so, to raise capital standards and liquidity
standards for these institutions to take account of their
impact on financial stability as well as to improve our
understanding of the risks in the financial system and how they
can impact these institutions. And we are working very hard to
make that improvement.
More broadly, the bill creates an oversight council in
which the Federal Reserve is expected to work collaboratively
with other regulators to assess and monitor potential threats
to financial stability that may occur anywhere in the financial
system, and I think it will be a challenge for us to enhance
our work in that area.
So these are among the challenges I see for us and tasks
coming from this legislative agenda.
Senator Johnson. Dr. Diamond, do you have any additional
insights?
Mr. Diamond. Yes, I do. If you look back over the last few
decades, we have seen an astonishing change in the financial
environment. Financial engineering has produced a vast array of
new instruments, and we have also seen an enormous growth in
hedge funds, new institutions engaging in using the new
instruments. And the financial engineering we have seen has
done a great deal of good, but in the crisis has done a great
deal of harm. And a big part of that problem was not just the
regulators, but also the financial institutions themselves did
not understand the risks they were taking on and the risks
associated with the interconnections of the different financial
institutions.
Going forward, I think we are going to see more change.
That is the way the world goes, particularly the American way,
and it is important that we not ask the simple question how
could we have prevented the last crisis and put in place a
Maginot Line for dealing with the last crisis but, rather, we
monitor how things are evolving and how regulation and
consultation and discussion with financial players can adapt to
the changing circumstance so we do not get another crisis which
is not the same old crisis but a brand-new and equally horrible
crisis.
Senator Johnson. Ms. Bloom Raskin, do you have anything to
add?
Ms. Raskin. Yes, I would add a bit. I think that as you
rightfully point out and observe, implementing the legislation
is going to be a huge challenge. What in essence the Federal
Reserve is going to have to step up to the plate to do is to
really put in place an enhanced, consolidated supervisory plan
for our largest institutions and those institutions that are
deemed to be systemically significant. And when we talk about
enhanced, consolidated supervision, it is really something
quite robust. It is a set of regulatory measures that include
capital and leverage, corporate governance, internal controls,
proper risk management systems, and these are all items that
are extremely complicated for the most complicated
institutions.
So I think the work really cannot be underestimated here. I
think that there is going to be quite a bit of organizational
work, too, that will need to be done internally at the Federal
Reserve to make this done correctly.
Senator Johnson. Senator Merkley.
Senator Merkley. Thank you very much, Mr. Chair, and thank
you to the panel.
I want to start with just a general issue and see if any of
you have thoughts you would like to share. There is an ongoing
debate here in Washington about deficit reduction versus
monetary and fiscal stimulus. And, in essence, it could be
reduced a little bit to how do you steer on the one side to
make sure that you do not have a Greek-like debt crisis, and on
the other side how you do not end up with a decade-long, Japan-
style recession? And so any insights on the relevance of the
experience of those two nations or insights for how we should
manage our way through to a healthier economy.
Ms. Yellen. I will begin. I think we have an outlook at
this point where we seem to be in recovery but the recovery is
not proceeding at a pace that is sufficient to bring down
unemployment very rapidly. And so it is clear that it is
appropriate--long-term unemployment is very high, it is clear
that it is appropriate for us to be asking what to do.
I would say as Congress considers the option for further
fiscal stimulus now, which is natural given the outlook, I
would emphasize that it is very important and Congress will
have more flexibility to move in the short run to support the
economy if simultaneously it can put in place and show
credibility on taking the measures that are necessary to attack
the long-term deficit, which I think is widely understood to be
an unsustainable situation that requires painful policy action.
So if simultaneously Congress were able to put in place
meaningful measures that would phase in over time to address
medium- and longer-term deficit issues, I believe that would
create greater scope in the shorter term for Congress to also
contemplate, if you consider it appropriate, actions to address
short-term weakness in the economy.
Senator Merkley. Thank you.
Ms. Raskin. Senator Merkley, I think your reference to
Japan actually is noteworthy because I think there are a couple
lessons there that we need to keep in mind, one having to do
with the fact that, you know, Japan's recovery was probably
slower than they would have liked, certainly, and it had
something to do with not having a strong, robust resurgence of
bank lending. The banking sector stayed weak there for quite a
number of years. So I think that is something that we want to
keep in mind here, especially as we have not yet seen an uptick
in bank lending, the kind of uptick that we would like to see
to actually spur growth. So I think that is one possible lesson
of Japan, and then the other being just the general stop-go
nature of that recovery, the importance to sort of think
through a more sustained way of moving forward.
Senator Merkley. Well, you mentioned lending so let me use
that as a segue, because I think many of my colleagues have the
same experience that I have had of going home and hearing from
every business group, every set of small business owners how
difficult it is to obtain lending. Just this morning I have a
group coffee, an Oregon coffee, and indeed the first small
business owner talked about the difficulty of accessing credit,
a long-time successful business. And we have in the small
business jobs bill recapitalization of community banks to help
assist them in lending more, but it feels like we need to find
some more aggressive way to make funds available for businesses
to seize opportunities and lead us forward and create jobs.
What should we be doing?
Ms. Raskin. Clearly, that is definitely a challenge. There
are a number of obstacles right now to bank lending, and I
think we have to work carefully to try to figure out what they
are. And what you are hearing, by the way, is not at all
dissimilar to what I hear in Maryland and what I know
regulators and commissioners are hearing across the country.
Bank lending is not where it should be.
Now, part of it has to do with the lack of robust demand.
You will hear a lot of anecdotes about the fact that there are
no enough borrowers actually seeking loans. But that is not the
whole story because we also hear stories of creditworthy
borrowers, borrowers who have an ability to repay and have
credible cash-flows. The bankers do not have to be dependent on
weak collateral coming from real estate. There is cash-flow
here. These are borrowers who can sustain new loans. So why
those borrowers are not able to get loans is a challenge, and I
think we need to do some work on that.
Also, significantly, bank lending to small businesses is a
critical factor in spurring employment, so I think the notion
of getting this right will also have good consequences for
employment.
Senator Merkley. Does anybody else want to jump in on that
conversation?
Ms. Yellen. Well, I would just say that the Federal Reserve
has just concluded actually on Tuesday 40-odd sessions we have
had around the country in which we have tried to bring together
lenders, small business owners, and others to understand
exactly what the problems are and all of the various items that
Sarah mentioned in her answer. This is a complex situation.
One of the things certainly we are aware of is that as
supervisors we need to be very careful not to be discouraging
lending that is sound, carefully underwritten, and will be
profitable. And we certainly hear frequently the complaint that
banks are afraid that they will be criticized for loans that
they make. So the regulators have jointly issued guidance to
supervisors emphasizing that small business lending that is
safe and sound is not only important to our communities and
growing out of this recession, but is also important for
profitability and the health of the institution. And we have
emphasized training. We have tried to train our examiners.
These are tough situations where they have to make judgment
calls when they are in banks. We do not want to inadvertently
stifle small business lending that would be very important to
an economic recovery.
Senator Merkley. Thank you all very much. My time has
expired. I appreciate your engagement.
Senator Johnson. Senator Corker.
Senator Corker. Thank you, Mr. Chairman, and I thank each
of you for your leadership and for coming by our office in the
last few days to talk with us personally. I wish you well at
the Fed. I am one of those folks that thinks the Fed needs to
function at a very high level for our country, and I hope you
will add to that.
Ms. Raskin, I know you have spent a lot of time in bank
regulation and bring a lot of that to the Fed. The Fed has a
number of people who already do that, and I think that, you
know, here in the Senate each of us has to sort of figure out
how we are going to make our mark and what we are going to
bring to a body like the Senate to hopefully make it a stronger
institution. There is obviously a number of people that do what
you do already, and I just was curious, as you move to the Fed
Board, joining people who have similar backgrounds in many
ways, what is it that you plan to do at the Fed, if you will,
to make the ``Raskin mark'' on the Fed governance?
Ms. Raskin. Well, I do not know if I will make a ``Raskin
mark'' on the Fed governance, but it is a very thoughtful
question, and I do agree that the staff at the Fed is really
exemplary as far as I have been able to interact with them and
a very impressive group of professionals, both economists and
examiners.
What I would like to add to the mix I think is a
perspective that really comes out of the work I have been doing
at a very local level. As the State banking commissioner, I
really have been able to see a lot of the spillover effects
having to do with the crisis and also problems related to the
run-up to the crisis. And I am not sure that all those
perspectives have been sufficiently incorporated into both the
monetary policy side of the Fed and the regulatory side.
One thing, for example, that we needed to do in Maryland
was to act very quickly to reform our laws. Some of those laws
were not at all fit for what the situation was developing, and
other laws needed to be put in place.
So I think that the ability to react nimbly is important,
and then the ability to move those observations into the more
macro picture I think would be critical to the Fed.
Senator Corker. We are getting ready to pass some
legislation in the next 35 minutes. Regardless of what your
testimony is, that is going to happen. Certainly in any 2,300-
page bill there are good provisions in it. And I am not going
to say this is the worst bill that has ever been created, but I
do look at it as a tremendous missed opportunity in many ways.
I wonder, based on the comments you just made, if there are
things that you would have liked to have seen in the
legislation--that is going to be passed, regardless of what you
say--that you would have liked to have seen in this legislation
that you think might have caused our country to maybe deal with
some of those things you saw in the run-up to the crisis we
just went through. This is your last chance.
[Laughter.]
Ms. Raskin. Well, I will point out that the legislation is
obviously the product of a lot of hard work. I know that there
has been a lot of very good minds put to the task of trying to
put in place a system of reforms that can almost assure that we
do not have a situation like this crisis happen again.
But to be completely candid, I think that one piece that we
still need to tackle--and when I say ``we,'' I should really
say the Congress needs to tackle--is GSE reform. That is a
piece of the legislation that--a piece that was not addressed
in the legislation, and it is something that I think still
needs to be on the forefront of the Congress.
Senator Corker. That is very astute.
[Laughter.]
Senator Corker. I will come back to you in just a minute.
Thank you very much for your testimony. I look forward to
serving with you.
Mr. Diamond, when we met, I looked over your resume, and
you have written more books than I have probably read in my
lifetime.
[Laughter.]
Senator Corker. Obviously, you are very well educated, and
I would not want to enter into a debate with you on any of the
topics that you have mastered.
I look at your background and think, God, this guy would be
awesome to run the Social Security Administration, or he would
be a great official at Treasury. It is not to be critical. I
actually, you know, wish I knew as much as you knew about those
topics. But as I see you being appointed to the Fed, I am sort
of wondering what the hook was, you know, a great head of
Social Security Administration, great at Treasury, but he is
going to the Fed. And I am just wondering, you obviously think
you are going to be a great Governor at the Board. What is it
that those of us who look at you and look at your resume should
think is the contribution you are going to make on the Board of
Governors?
Mr. Diamond. In my opening remarks, I talked about working
at how the economy and the economy with the regulatory guidance
of Government handles risks throughout the economy. And
obviously I have written heavily on how pension systems adapt
to risk. But the questions that were raised by this crisis, the
questions that the existing knowledge of the regulators and,
indeed, the academic community had done some on, but not a
great deal, we are now painfully aware of issues on how risks
get generated and how risks in one place affect all sorts of
other places, systemic risk. And my background is to think
about those things. What I have started doing is reading the
parts of the academic literature--some of it goes back
decades--on how interactions can happen, and what I hope to be
able to do is exploring how the regulatory structure will pay
more attention to the interactions which go from an individual
bank's risk to systemic risk. And I think that requires the
kind of background and the nature of economic equilibrium that
I bring to it, because the structure of the kinds of questions
and regulations and much of the economic analysis simply does
not engage with this, and we now know how important it is. And
the opportunity to work on something that important in an
environment as good for learning about the economy as the Fed
would just be a wonderful opportunity for me, and I would hope
to be very helpful at it.
Senator Corker. Thank you.
Ms. Yellen, I was out of the room for a moment. I know
Senator Shelby asked you a little bit about supervision. I know
that Ms. Raskin seemed to indicate in her testimony earlier
that she saw a lot of problems and felt the Fed should have
responded or could have responded a little more nimbly, and I
think talked a little bit about that a minute ago. You were
head of the Fed in San Francisco and obviously had pretty large
calamities out there. I know you addressed commercial real
estate earlier. But it seems to me a huge level out there in
residential real estate, and I am just curious. As you look
back, do you wish there were actions that you had taken or the
Fed had taken as it relates to the residential side? I know you
are still focused on commercial. I think that is--I agree with
you-- still a problem here in our system. But do you wish there
were actions that the Fed had taken as it relates to housing,
especially in your part of the country?
Ms. Yellen. I think we were monitoring housing prices very
carefully and became concerned certainly by 2005 that there
might well be a bubble in the housing market. I think
personally I gave speeches in 2005 warning of that possibility.
So this is something that we were attentive to and I think
tried to evaluate what the risks would be coming out of that. I
think we failed completely to understand the complexity of what
the impact of a decline, a national decline in housing prices
would be in the financial system. We saw a number of different
things, and we failed to connect the dots.
So while we thought about the risk coming from a housing
price decline, I think we failed to understand just how
seriously mortgage standards, underwriting standards had
declined, what had happened with the complexity of
securitization and the risks that we are building in the
financial system around that. So what was triggered by that
housing would be triggered by a housing price decline, I think
we missed critical elements of it that caused the crisis to be
as severe as it was.
Looking back on it, certainly I wish that regulators,
including the Fed, had taken more significant steps earlier to
appreciate what the risks were in underwriting, to understand
as I saw in the supervision that we were doing in San Francisco
mortgages that were being originated and packaged and sold into
the market where there was a clear deterioration in
underwriting standards. I think we should have focused, I wish
we had focused more on the systemic risk that that was causing
rather than being as focused as we were on safety and soundness
of banks. Particularly, we failed to focus enough on systemic
risk. I am pleased that this bill directs us to consider in our
supervision of consolidated supervision of bank holding
companies systemic risk, the risk that activities can pose to
the broader financial system. But on the underwriting side, I
believe we should have taken more significant steps to curtail
that sooner.
Senator Corker. Mr. Chairman, I know my time is up. Can I
keep going for a little while since nobody is here?
Senator Johnson. The second panel is coming up, and I know
that we must get out of here by 11 o'clock to vote.
Senator Corker. Can I ask two more questions?
Senator Johnson. One short one.
Senator Corker. That is a shame. I know we have a vote at
11, and yet I think there is a lot that could be gained.
I would just say to--I know that----
Senator Johnson. You may submit your questions.
Senator Corker. OK. Let me just ask, I guess, one simple
question then. Ms. Yellen, I tried to during our--first of all,
I would love to hear from Ms. Raskin about GSEs, and I will
talk to her a little bit later about that, and I understand
what she thinks we are actually pressing for, now trying to
understand and hopefully there will be a climate to deal with
GSEs down the road. I think we missed a great opportunity to do
that now.
But on underwriting, I tried to pass an amendment that
would have required every person who purchased a home and
borrowed money to have a minimum 5-percent downpayment. I know
that many countries that have not had the problems we have had
had 15-, 20-percent downpayments on average and still have the
same homeownership rates.
Ms. Yellen, I wonder just from your perspective if that one
requirement, that one simple requirement would have kept us
from having the type of bubble that you had out in California
and what we had here in the country and might have kept us from
having many of the problems we have now.
Ms. Yellen. Senator, I have not had a chance to think
through the details carefully of that proposal. I know----
Senator Corker. It is not very detailed. A 5-percent
downpayment. It is a very simple----
Ms. Yellen. Well, you know, I would say that there were
certainly mortgages that created problems that did have
downpayments at that level. We had Alt-A mortgages and Option
ARMs----
Senator Corker. Could not have happened with 5--yes, yes.
Ms. Yellen.----that became problematic, so I would not--you
know, I think that is an interesting proposal, and I do think
underwriting standards should have been tougher, but there were
a range of practices there that I think--no-doc lending and so
forth--really created problems.
Senator Corker. Thank you. I thank each of you for your
testimony. I wish we had more time. I am disappointed in that.
But I look forward to working with you, and, Mr. Chairman, I
understand the time constraints you are working under, and
thank you for the leeway.
Senator Johnson. I want to thank our first panel again and
congratulate you all on your nominations. You may be dismissed.
I will now call up our second panel. Our second panel
consists of two nominees to serve as Inspector General of two
different independent agencies.
Our first nominee is Osvaldo Luis Gratacos. Mr. Gratacos
has extensive experience working on issues related to the
Office of Inspector General. He is currently serving as an
Acting Inspector General for the Export-Import Bank, and he has
served as Deputy Inspector General and legal counsel in that
office as well. Mr. Gratacos has served as attorney adviser and
legal counsel to the Inspector General for the United States
Agency for International Development. Mr. Gratacos has
experience in the private sector, and he has worked as a
commercial counsel for Motorola, Incorporated. Mr. Gratacos
holds a B.A. summa cum laude from the American University of
Puerto Rico and an M.B.A. from the University of Massachusetts
and a J.D. from the University of Florida. The Committee
created the position of Inspector General of the Federal
Housing Finance Agency as part of the Housing and Economic
Reform Act of 2008 legislation.
Our second nominee, Steve A. Linick, has been nominated to
serve in this inaugural role. Mr. Linick is a career Federal
prosecutor who currently serves in two roles as Executive
Director of the National Procurement Fraud Task Force and the
Deputy Chief of the Fraud Section, Criminal Division of the
Department of Justice. As Deputy Chief, Mr. Linick manages and
supervises the investigation and prosecution of white-collar
criminal cases involving procurement fraud, public corruption,
corporate fraud, mortgage fraud, and money laundering, among
others. In October 2008, Mr. Linick received the Attorney
General's Distinguished Service Award for his efforts in
leading the Department's procurement fraud initiative.
Previously, Mr. Linick was an Assistant U.S. Attorney, first in
the Central District of California and then subsequently in the
Eastern District of Virginia. Before joining the Federal
Government, Mr. Linick was an Assistant District Attorney in
Philadelphia and an associate at Newman & Holtzinger in
Washington, D.C., from 1990 to 1992. Mr. Linick holds a J.D.,
M.A. in Philosophy, and a B.A. in Philosophy, all from
Georgetown University.
Will the witnesses on the second panel please stand and
raise your right hand while I administer the oath? Do you swear
or affirm that the testimony you are about to give will be the
truth, the whole truth, and nothing but the truth, so help you
God?
Mr. Gratacos. I do.
Mr. Linick. Yes.
Senator Johnson. Do you agree to appear and testify before
any duly constituted Committee of the Senate?
Mr. Gratacos. I do.
Mr. Linick. I do.
Senator Johnson. Thank you, and please take your seats.
Before you begin, please be assured that your written
statements will be part of the record. Please also note that
members of this Committee may submit written questions to you
for the record, and you need to respond to these questions
promptly in order that the Committee may proceed on your
nomination.
Thank you for joining us today. I would invite you to
introduce your family and loved ones in attendance before
proceedings with your statements.
Mr. Gratacos. Thank you, Senator Johnson and Senator
Merkley. I want to introduce my wife who is here, Debbie
Garcia; and my Dad, who came from Puerto Rico last night,
Alejandro; and some former colleagues from USAID, and bosses in
the past: Bill Perkins, Paula Hayes, and my former boss Mike
Tankersley, who is also coming from Texas.
Senator Johnson. Welcome to you all.
Mr. Linick. Senator Johnson, Senator Merkley, thank you. I
would like to introduce my wife, Mary Britton, and my two
teenaged children, Zackary and Sarah, who are sitting in the
front row over here.
Senator Johnson. Welcome.
Mr. Gratacos, you may proceed.
STATEMENT OF OSVALDO LUIS GRATACOS MUNET, OF PUERTO RICO, TO BE
INSPECTOR GENERAL, EXPORT-IMPORT BANK, FEDERAL HOUSING FINANCE
AGENCY
Mr. Gratacos. Thank you, Mr. Johnson. Thank you, Mr.
Merkley. Good morning. It is with great honor, humility, and
enthusiasm that I stand before you today as President Obama's
nominee to become the second Inspector General of the Export-
Import Bank of the United States. Before I continue, I would
like to thank the Almighty for this opportunity, my family, and
the members of the Ex-Im Bank Office of Inspector General
staff, a group of career public servants who make the work
possible and are committed to the OIG mission of preventing and
detecting fraud, waste, and abuse.
I had the privilege of joining the Ex-Im Bank OIG in 2008
as the first person hired by then-Inspector General Mike
Tankersley, after spending almost 8 years of my career at USAID
OIG and Motorola, Inc. The Ex-Im Bank OIG was established in
2007, and while I was hired as the legal counsel, I worked
closely with the IG in establishing the organization. Since
October 2009, I have had the honor of serving the American
people as the Ex-Im Bank's Acting Inspector General. During
this period, the OIG has had remarkable success and has met a
number of milestones as shown by the latest Semiannual Report
to Congress. Specifically, the OIG has issued 14 audit reports
containing over 40 recommendations and suggestions for
improving Ex-Im Bank programs and operations, and our
investigative efforts have resulted in a number of law
enforcement actions, including 24 arrests and indictments
related to over $45 million in claims paid by Ex-Im Bank; 17
pending indictments; one conviction, over 80 management
referrals for actions; and over $8.5 million in program savings
due to policy cancellations arising out of our investigative
efforts. Moreover, the OIG is currently investigating 35 open
matters representing approximately $327 million in claims paid
by Ex-Im Bank, or 13.6 percent of all Ex-Im Bank claims paid as
of the end of FY 2009. All of this has been accomplished with a
very modest annual budget of $2.5 million and a staff of ten
professionals. As a recently created office, our work is only
commencing, and if confirmed, I would work to continue to build
on these successes.
Through our work, the OIG is committed to helping Ex-Im
Bank meet it statutory mission of assisting in the financing of
exports of U.S. goods and services to international markets,
vital in protecting and creating American jobs. America
produces the world's best manufactured goods, and it is the
number one services provider in many global industries. Today
the opportunity for increasing American exports is an important
element to our Nation's economic recovery. Since 1934, Ex-Im
Bank has played a key role in financing the export of these
goods and services. That role has increased in recent years. In
FY 2009, Ex-Im Bank announced record authorization levels
reaching $21 billion and has reported authorization levels of
$14.7 billion for the first 8 months of FY 2010. Ex-Im Bank's
role coupled with these growth levels present a valuable
opportunity for the OIG to partner with Ex-Im Bank in support
of its mission while exercising OIG's statutory independence.
In only 3 years since its inception, and just over 1 year
since reaching current staff levels, our efforts are having a
noticeable impact on Ex-Im Bank's operations. While Ex-Im Bank
continues to provide export credit and financing as part of its
export credit agency functions, the OIG will enhance its
independent oversight role by focusing on Ex-Im Bank operations
in order to improve its operational efficiency as well as
strengthen its efforts in preventing and detecting, fraud,
waste, and abuse. I look forward to facing these challenges,
and if confirmed, I will carry out the duties of this office
with the highest standards of independence and integrity.
Mr. Chairman and members of this honorable Committee, thank
you once again for considering my nomination at this hearing
today. I would be pleased to respond to any questions from the
Committee. Thank you.
Senator Johnson. Mr. Linick.
STATEMENT OF STEVE A. LINICK, OF VIRGINIA, TO BE INSPECTOR
GENERAL, FEDERAL HOUSING FINANCE AGENCY
Mr. Linick. Senator Johnson, Senator Merkley, thank you for
this opportunity to appear before you today and provide
testimony. I am honored to be the President's nominee for
Inspector General of the Federal Housing Finance Agency.
By way of background, almost my entire professional career
has been dedicated to public service. I have served in a number
of leadership positions in the United States Department of
Justice. Currently, I am the Executive Director of the
Department of Justice's National Procurement Fraud Task Force,
and I am also Deputy Chief of the Fraud Section at the Criminal
Division.
In total, I have almost 16 years' experience as a Federal
prosecutor with extensive trial and supervisory experience at
the Department of Justice and in two United States Attorneys'
Offices. I have managed and coordinated grand jury
investigations and prosecutions involving health care fraud,
procurement fraud, public corruption, mortgage fraud, and other
financial frauds.
As a result of having investigated a wide variety of
financial frauds, I have the experience and ability to develop
effective strategies to prevent fraud, waste, and abuse
associated with the regulation of the Government- sponsored
enterprises.
I look forward to the prospect of serving as Inspector
General at the Federal Housing Finance Agency during this
critical time for both the FHFA and the Government-sponsored
enterprises. The Federal Housing Finance Agency is a relatively
new agency, which has never had an Inspector General. In 2008,
the Federal Housing Finance Agency placed Fannie Mae and
Freddie Mac in conservatorship out of concern that their
deteriorating financial condition threatened the stability of
the financial markets. Since then, the Department of Treasury
has provided billions of dollars to the enterprises. Under
these circumstances, the Federal Housing Finance Agency
Inspector General will play a critical role in safeguarding
taxpayer dollars and preventing fraud, waste, and abuse.
If I am fortunate enough to be confirmed as Inspector
General, I intend to be proactive in overseeing the operations
and programs of the Federal Housing Finance Agency, including
its management of the conservatorship. While I intend to
exercise complete independence that is required of an Inspector
General, I will make it a priority to maintain a good working
relationship with the Federal Housing Finance Agency Director
and management, along with this Committee and Congress as a
whole.
Thank you for your consideration. I look forward to
answering your questions.
Senator Johnson. Thank you.
Mr. Linick, with Fannie Mae and Freddie Mae under
conservatorship, did HERA provide enough resources to the
Inspector General's office at FHFA to provide strong,
independent oversight? Are there other tools that would help
you better do your job?
Mr. Linick. Thank you, Senator, for that question. In terms
of resources, because I am the nominee, I have not had a chance
to probe into my budget or the number of individuals who would
be on my staff.
That being said, I think that the resources will need to be
significant. This is an agency that is facing some challenges
and has significant responsibilities. The agency has never had
any oversight before, and its regulatory role has not been
tested. It is in conservatorship so, in effect, it is
regulating itself, and it is overseeing billions of dollars
that have been provided by Treasury, and I expect there is more
to come.
As to your second question as to other tools, I intend to
hit the ground running. I will be creative in trying to recruit
detailees from other agencies and hire contract employees, but
I will work with this Committee and I will also work with the
agency to staff up immediately from day one.
Senator Johnson. Mr. Gratacos, the Ex-Im Bank has
experienced great difficulty with fraud in its Medium Term
Guarantee Program. You have been part of at least 12 arrests,
numerous indictments, and other evidence of people trying to
defraud the U.S. Government. What is your view on this program
and its inherent difficulty serving U.S. exporters while not
allowing for individuals to commit fraud? Has Ex-Im Bank done
enough to deter fraud going forward? If not, what further steps
need to be taken?
Mr. Gratacos. Thank you, Senator Johnson. Ever since we
started at Ex-Im Bank, the Medium Term Program has been one of
the programs that has been exposed to fraud. A lot of cases
come out of the Medium Term Program. Part of that reflects the
fact there was no oversight and OIG presence at that time.
Since then, the Bank has taken a number of steps to
improve--lower the likelihood of fraud in some of these
transactions. Part of that has been enhancing our due diligence
process. Part of it has been in response to some of the audits
and recommendations we made on the medium term.
For example, we just issued a review of the initial
recommendations on the Medium Term Program, and we are glad to
report that the Bank has taken steps forward toward
implementing a number of the recommendations that we have,
including the creation of credit reviews and compliance
division requiring sometimes payments in some of the
transactions.
But we still think there are steps to be taken. There are
still some open recommendations and some steps that the Bank
could take. The Bank is in the process of a reorganization
internally that would allow the programs to merge some of the
different components into cell groups, allowing the intakers to
be sitting with the credit underwriters at the same time.
But we also think that there should be more monitors in the
performance of this program, and we still think that there is a
way to go in terms of protecting the taxpayers' money.
Senator Johnson. Thank you.
Senator Merkley.
Senator Merkley. Thank you very much, Mr. Chair.
Mr. Linick, I am going to focus primarily on questions to
you because of my interest in the challenges with housing, and
particularly in the future of Fannie and Freddie.
One of the aspects of the bill that we just passed is it
had three retail mortgage reforms. One was to end--well, I say
``just passed.'' We will hopefully just be passing it in a few
minutes. But one was to end liar loans, require full
underwriting. The second was to end steering payments in which
the loan originator's interests were put out of sync with the
interests of the customer. And the third was to ban prepayment
penalties on subprime loans which were used to lock people into
exploding interest rates.
Now, one of those, in essence, is about direct
misrepresentation or fraud, and that is certainly the issue of
fully documenting loans or misdocumenting loans. But the other
two play into the structure of the subprime market, which led
to many other issues regarding how loans were packaged and how
those packaged loans were represented, how they were rated, how
they were sold.
Can you give us any insights on how those different retail
issues might reverberate through the industry and affect the
issues that you will face as Inspector General?
Mr. Linick. Thank you, Senator. I do not have particular
information about those--let me rephrase that. Those three
issues are going to be key to several goals and objectives of
FHFA. Absolutely, underwriting is obviously a control that FHFA
obviously needs to make sure that it is part of their
operations and programs. One of the goals of FHFA is to limit
exposure, risk exposure in the future. And as Inspector
General, I will make sure that I will take a look at internal
controls to make sure that underwriting is adequately
accomplished.
As far as the conflicts of interest issue, conflicts of
interest obviously undermine the integrity of an institution
organizationally and personal conflicts of interest, and one of
my tasks as Inspector General will be to make sure that those
types of issues are transparently--are transparent and that
there are corrective actions taken to prevent them.
Senator Merkley. So in the news--I do not know, it must
have been about 10 days ago--was a story about a firm that had
allegedly misrepresented the packages of mortgages that it had
sold, I believe to Fannie. But is that the type of abuse that
you will be focusing on? If not, what do you see as kind of the
top three issues that really need to be scrutinized to bring
integrity to the process of writing mortgages and securitizing
those mortgages?
Mr. Linick. Senator, I think that the top three issues,
number one, that Fannie and Freddie do not buy loans or
mortgage-backed securities that are derived from fraud, and the
underwriting standards are going to be very important in
assuring that does not happen.
The second issue is the conservatorship. This is a
situation where FHFA is essentially regulating an operating the
company, so it is going to be critical to ensure that they are
acting independently in their regulatory role and that there is
a strong and credible regulator as well as a conservator.
And then the third issue is how is FHFA managing the
billions of dollars that Treasury is providing to the GSEs.
Conserving assets is one of the goals of FHFA, conserving and
mitigating risk. How are they conserving assets? In what manner
they are conserving assets? Is there some sort of exit strategy
for the conservatorship, which is not meant to be permanent?
And also how are they addressing foreclosure prevention within
the context of managing the conservatorship.
Senator Merkley. I have one second left, so my time is up.
I will yield back to the Chair. Thank you.
Senator Johnson. Thank you, Senator Merkley.
Today we have a set of nominees before us that, while very
different, will all play an important role as the Nation moves
forward from our financial crisis and begins implementation of
the Wall Street Reform and Consumer Protection Act as well as
the formation of other equally important measures to create
jobs, spur economic growth, and reduce our Nation's deficit.
Please also note that members of this Committee may submit
written questions to you for the record, and you need to
respond to these questions promptly in order that the Committee
may proceed with your nominations.
I thank you all again for being here today, and this
hearing is adjourned.
[Whereupon, at 11:03 a.m., the Committee was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF SENATOR SHERROD BROWN
July 15, 2010
Thank you, Mr. Chairman, and thank to the nominees for your
testimony today.
When Chairman Bernanke testified before use in February, we talked
about the troubling decline in manufacturing and rise in financial
services in the United States.
For most of our nation's history manufacturing, transportation, and
agriculture were the engines driving our economy.
But as many Ohioans can tell you, manufacturing has steadily
declined over the last three decades. At the same time the finance
industry has rapidly expanded, to the point that the two have switched
positions in our economy.
In the 1980s manufacturing made up 25 percent of GDP and financial
services was 11 to 12 percent. Then manufacturing began to decline and
finance began to expand and sometime in the 1990s the two industries
crossed paths. By 2004-05 the two sectors had flipped: manufacturing
was just 12 percent of GDP while the financial services industry was
about 20 to 21 percent.
A number of emerging economies have thriving manufacturing and
extraction industries.
First World export countries like Japan, Germany, and even
Switzerland all have economies in which the manufacturing sector is
larger than the financial sector. If we want to stay competitive with
other nations, we need to refocus on productive industries.
I've heard from a lot of businesses in Ohio that they are being
denied access to credit that they desperately need. Right now the
financial industry's prosperity is not helping the other sectors of our
economy.
I have repeatedly said that creating more jobs is essential. To do
this we must re-invest in the manufacturing and service industries that
have brought us prosperity since our nation's founding.
I'd like to hear what you think the Fed should be doing to promote
productive industries like manufacturing.
I also want to emphasize the importance of considering real world
perspectives when serving on the Board of Governors. In the luxuriant
halls of the Federal Reserve Bank, it can be easy to focus on numbers
like the inflation targets. But as you all know, the unemployment rate
has been high for a substantial period of time, and it remains an
unacceptable 9.3 percent. This is more than double the Fed's
statutorily mandated target of 4 percent.
I urge you not to forget that your economic policy decisions affect
the daily lives of Americans in your roles as Governors of the Federal
Reserve.
______
PREPARED STATEMENT OF SENATOR JOHN F. KERRY
July 15, 2010
Chairman Dodd and Senator Shelby, I am pleased to support the
nomination of Dr. Peter Diamond to become a member of the Board of
Governors of the Federal Reserve System. The experience that Dr.
Diamond has in economic and monetary policy will be a great asset to
the Federal Reserve. I am very pleased that he is willing to serve our
nation in this important role.
Our nation is facing its greatest economic crisis since the Great
Depression. A series of financial institution failures and frozen
credit markets imperiled our economy. I believe Dr. Diamond has the
experience and judgment to become an effective Governor on the Federal
Reserve Board. He will help the Federal Reserve take actions to provide
liquidity for businesses, especially small businesses and create jobs
that will help families who are currently bearing the weight of the
crisis. He will also help the Federal Reserve provide appropriate
oversight of financial institutions to insure that our recent financial
crisis will never happen again.
His work has literally changed the way all economists think about
national debt, taxes, risk and social security. Dr. Diamond is a
pioneer in the field of ``search theory'' which seeks to explain how
individual decisions in the labor market can build on each other to
have a broader impact on the economy.
Dr. Diamond is a former chair of MIT's Department of Economics. He
has made research advances in both macroeconomics and microeconomics
during a wide-ranging career, studying subjects including growth,
taxation and labor market searches. In recent decades he has analyzed
social insurance programs closely and become a prominent authority on
Social Security.
Dr. Peter Diamond first arrived at the Massachusetts Institute of
Technology (MIT) 1960 as a graduate student. In 1966, he became a
member of the MIT economics faculty. Today, he currently serves as an
Institute Professor at MIT. He has previously served as President of
the American Economic Association, President of the Econometric
Society, and President of the National Academy of Social Insurance.
Dr. Diamond is the author or editor of 12 books and more than 130
articles, Dr. Diamond is a fellow of the American Academy of Arts and
Sciences and a member of the National Academy of Sciences. He received
his bachelor's degree from Yale University and his Ph.D. from the
Massachusetts Institute of Technology.
Ricardo Caballero, chair of the MIT Department of Economics said
that ``Peter represents the very best that an academic economist has to
offer to Washington: a superb and open mind, an insatiable appetite for
understanding the institutional details of a problem and policy, and a
spirit of service.''
Chairman Dodd, you should be aware that Dr. Diamond is a fellow
long-time Boston Red Sox fan who started attending games back in the
1960s.
I hope the Banking Committee will give Dr. Diamond's nomination
full consideration.
______
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT
PREPARED STATEMENT OF JANET L. YELLEN
Nominee for Member and Vice Chair of the Board of Governors,
Federal Reserve System
July 15, 2010
Chairman Dodd, Senator Shelby, and members of the Committee, I am
honored to appear before you as President Obama's nominee to serve as a
Member and Vice Chair of the Board of Governors of the Federal Reserve
System. If I am confirmed to these positions, I look forward to working
with this Committee in the coming years. I am wholeheartedly committed
to pursuing the Federal Reserve's congressionally mandated goals of
maximum employment and price stability and to strengthening our program
of supervision and regulation, building on the lessons learned during
the financial crisis. We must work together, and in cooperation with
central banks and governments around the world, to mitigate systemic
risk in the financial and payments systems so that our country never
again suffers such a devastating episode of financial instability. We
have learned a harsh lesson about the dire consequences a financial
crisis has for ordinary Americans in the form of lost jobs, lost homes,
lost wealth, and lost businesses, and those of us charged with
overseeing the financial system should always keep this human cost in
mind.
I have served since 2004 as President and Chief Executive Officer
of the Federal Reserve Bank of San Francisco and, before that, from
1994 through 1997, as a member of the Federal Reserve Board. Through
this service, I have gained experience in every one of the Federal
Reserve's areas of responsibility, including monetary policy, banking
supervision and regulation, consumer and community affairs, and the
operation of the payments system. I believe this extensive background
equips me to work under Chairman Bernanke as a leader of the Federal
Reserve System as we strive to carry out the missions Congress has
assigned to us.
Over the next few years, the Fed must craft policies that ensure
that our economy accelerates its progress along the recovery path it
has begun to trace. With unemployment still painfully high, job
creation must be a high priority of monetary policy. But we must also
avoid any threats to price stability. That means that, when the
appropriate time comes, we must withdraw the extraordinary monetary
accommodation now in place in a careful and deliberate fashion. My
approach going forward, as in the past, will be to bring a thoughtful
and independent voice to Federal Open Market Committee deliberations on
monetary policy, drawing on the insights of business and community
leaders throughout the country, and thoroughly analyzing macroeconomic
trends that affect the economic outlook and the risks to our forecasts.
In my view, Congress has wisely granted the Federal Reserve the
freedom to make independent monetary policy decisions in pursuit of
congressionally mandated goals, based on a forward-looking perspective
and the best judgments of Federal Open Market Committee participants. I
believe that experience in the United States and around the globe
demonstrates that central bank independence in monetary policy produces
clear societal benefits. When central banks are independent, economies
perform better, inflation is lower and more stable, and long-term
interest rates are lower and less volatile. In other words, an
independent central bank is best equipped to promote both price
stability and high levels of growth and employment. I should stress
though that independence brings with it both responsibility and
accountability. The Federal Reserve is fully accountable to Congress,
and that's how it should be. That means the Fed must explain its
actions, outlook and strategy, and provide the information necessary
for Congress and the public to understand and evaluate its policy
decisions. I strongly support Fed independence in monetary policy and I
am committed to enhancing the transparency that is essential to
accountability and democratic legitimacy.
______
PREPARED STATEMENT OF PETER A. DIAMOND
Nominee for Member of the Board of Governors, Federal Reserve System
July 15, 2010
Chairman Dodd, Senator Shelby, and Members of the Committee, I am
honored to have been nominated by President Obama to be a member of the
Board of Governors of the Federal Reserve System and grateful to this
Committee for scheduling this hearing.
If I am confirmed by the Senate, I will work to the best of my
abilities to fulfill the responsibilities of this office. Those
responsibilities have always been significant. The experience of the
recent financial crisis and the financial reform legislation have
underlined the multiple jobs the Fed has in working to fulfill the dual
mandate of high employment and price stability. The Fed will have major
work to do to implement the tasks that the legislation is placing at
the Fed. I would be honored and pleased to be part of the process of
responding to this challenge.
I studied both mathematics and economics as an undergraduate at
Yale University. I received my Ph.D. in economics from the
Massachusetts Institute of Technology (MIT) in June 1963. Since then I
have been a faculty member, first at the University of California,
Berkeley, and, since 1966, at MIT. Throughout this period I have taught
and done research in economics. My primary focus in both teaching and
research has been economic theory, particularly general equilibrium
theory, macroeconomics, search theory, and public finance. Within
public finance, my primary focus has been on taxes, pensions, and
social insurance, particularly Social Security. I have done both
theoretical analyses and policy analyses. I have also done research in
other areas, including, behavioral economics, and law and economics. I
took classes at Harvard Law School as part of my preparation for doing
research in law and economics--I believe in being well-grounded in a
subject when doing research or policy analysis. In addition to
microeconomics, macroeconomics, and public finance, I have also taught
money and banking, and law and economics.
Being a member of two economics departments with great collegial
interactions, I have gained a wide knowledge of a variety of economics
topics, as well as detailed knowledge in my areas of expertise. As a
consequence, I have considerable awareness of the development of
economic analyses of monetary policy and its impacts on both inflation
and employment as well as studies of the determinants of financial
crises.
A central theme in my research career has been how the economy
deals with risks, both risks at the individual level and risks that
affect the entire economy. In all of my central research areas, I have
thought about and written about the risks in the economy and how
markets and Government can combine to make the economy function better
for individuals. If confirmed, this background should be very helpful
at the Federal Reserve as part of the process of addressing our
heightened awareness of the dangers of systemic risks. My background in
behavioral economics and law and economics give me high awareness of
the issues involved in consumer protection and increasing financial
literacy.
If confirmed, I would welcome the opportunity to help address the
important issues that have been raised by the financial crisis, as well
as the longstanding issues and concerns that the Federal Reserve faces,
bringing my research experience and expertise to bear on these
difficult and important issues.
______
PREPARED STATEMENT OF SARAH BLOOM RASKIN
Nominee for Member of the Board of Governors,
Federal Reserve System
July 15, 2010
Chairman Dodd, Senator Shelby, Distinguished Members of the
Committee, and to all the able staff who are sitting in seats I
remember so well:
As a former banking counsel to your Committee, I cannot quite
express what an honor it is to appear before you today. I never dreamed
I would one day be here as a nominee to the Federal Reserve Board. (Or
maybe I did dream it at some point, but I certainly never believed it.)
I must thank Senator Sarbanes who has been an extraordinary mentor
to me over the course of my career and has shown me how one can be
passionately committed both to the public interest and to one's family
at the same time.
It is a great and humbling honor to be nominated by President
Obama, and I am very grateful.
If confirmed, I will participate in the essential and difficult
work of restraining inflation and maintaining price stability,
maximizing sustainable employment and economic growth, and trying to
continually reconcile and harmonize these two goals.
This is a challenging moment for the Federal Reserve. Every member
of this Committee knows that even though the worst of the crisis is
over, it remains a precarious time for far too many of our families and
businesses. The Fed must do its part to restore the underlying strength
and vibrancy of the American economy.
As Maryland's Commissioner for Financial Regulation over the last 4
years, I have worked day and night to counter the devastating effects
on our communities of the national banking and liquidity crisis, the
terrible spikes in home foreclosures, and persisting high unemployment
and underemployment.
At the same time, as a front line banking regulator, I have worked
to revise and replace ineffectual and counterproductive State
regulations that do not put the Government on the side of economic
progress for our people.
If I am confirmed, my experience working through this crisis at the
state level will deeply inform my actions as a member of the Federal
Reserve Board.
The proper conduct of monetary policy by our central bank is
essential to calming the waves of financial instability that have
engulfed so many of our communities, businesses and households. Over
the course of the last generation, the Federal Reserve has achieved
price stability and successfully anchored long-term inflationary
expectations. This achievement is critical to our economic strength,
and it remains a central institutional objective that I subscribe to
wholeheartedly.
But it is only a partial victory when many American households
continue to face the perils of unemployment and many small businesses
struggle with weakened consumer demand and reduced access to credit.
We need to strengthen this recovery by expanding its foundations.
This means that, in addition to maintaining stable inflationary
expectations and keeping a vigilant eye on the emergence of new
bubbles, the Fed must seek to fulfill the other part of its statutory
mandate by addressing unemployment, which has pervasive social costs.
In my state, I have seen these costs in a loss of productive capacity,
a weakened housing market, increased strain on state and local
resources and services, and a nervous reluctance on the part of many
businesses and banks to invest and make loans. The Fed must work for a
broad and sustained recovery that not only controls inflation but
facilitates growth and more robust business lending by banks.
In sum, I know that there is a lot of hard work to do at the Fed.
If you choose to confirm me, I will bring all of the experience,
knowledge and commitment I have gained over the course of my career to
the task of fulfilling Congress's statutory expectations. And I will
maintain thestandards of professionalism, independence and probity that
I have always tried to uphold in my career and that, to my mind, are
exemplified by the work of this Committee.
Thank you for the honor of hearing me today. I will be happy to
respond to any and all questions you may have--verbally or promptly in
writing--throughout this process and indeed throughout my tenure at the
Fed if I am fortunate enough to be confirmed.
______
PREPARED STATEMENT OF OSVALDO LUIS GRATACOS MUNET
Nominee for Inspector General, Export-Import Bank of the United States
July 15, 2010
Good morning, Mr. Chairman, Christopher Dodd, Senator Shelby, and
distinguished members of this honorable Committee.
It is with great honor, humility and enthusiasm that I stand before
you today as President Obama's nominee to become the second Inspector
General at the Export-Import Bank of the United States. Before I
continue, I would like to thank the Almighty for this opportunity, my
family, and the members of the Ex-Im Bank Office of Inspector General
staff, a group of career public servants who make the work possible and
are committed to the OIG mission of preventing and detecting fraud,
waste and abuse.
I had the privilege of joining Ex-Im Bank OIG in 2008, as the first
person hired by then Inspector General, Michael W. Tankersley, after
spending almost eight (8) years of my career at the U.S. Agency for
International Development OIG and Motorola, Inc. The Ex-Im Bank OIG was
established in 2007 and while I was hired as the legal counsel, I
worked closely with the IG in establishing the organization. Since
October 2009, I have had the honor of serving the American people as
the Ex-Im Bank Acting Inspector General. During this period, the OIG
has had remarkable success and has met a number of milestones as shown
by our latest Semiannual Report to Congress. Specifically, the OIG has
issued fourteen (14) audit reports containing over forty (40)
recommendations and suggestions for improving Ex-Im Bank programs and
operations, and our investigative efforts have resulted in a number of
law enforcement actions) including: twenty-four (24) arrests and
indictments relating to over $45 million in claims paid by Ex-Im Bank;
seventeen (17) pending indictments; one conviction; over eighty (80)
management referrals for actions, and over $8.5 million in program
savings due to policy cancelations arising of our investigative
efforts. Moreover, the OIG is currently investigating thirty-five (35)
open matters representing approximately $327 million in claims paid by
Ex-Im Bank (or 13.6 percent of all Ex-Im Bank claims paid as of the end
of FY 2009). All of this has been accomplished with a very modest
annual budget of $2.5 million and a staff of ten professionals. As a
recently created office, our work is only commencing, and if confirmed,
I would work to continue to build on these successes.
Through our work, the OIG is committed to helping Ex-Im Bank meet
its statutory mission of assisting in the financing of exports of U.S.
goods and services to international markets, vital in protecting and
creating American jobs. America produces the world's best manufactured
goods and it is the number one services provider in many global
industries. Today the opportunity for increasing American exports is an
important element to our nation's economic recovery. Since 1934, Ex-Im
Bank's has played a key role in financing the export of these goods and
services. That role has increased in recent years. In FY 2009, Ex-Im
Bank announced record authorization levels reaching $21 billion and has
reported authorization levels of $14.7 billion for the first 8 months
of FY 2010. Ex-Im Bank's role coupled with these growth levels present
a valuable opportunity for the OIG to partner with Ex-Im Bank in
support of its mission while exercising OIG's statutory independence.
In only 3 years since its inception (and just over 1 year since
reaching current staff levels), our efforts are having a noticeable
impact on Ex-Im Bank's operations. While Ex-Im Bank continues to
provide export credit and financing as part of its export credit agency
functions, the OIG will enhance its independent oversight role by
focusing on Ex-Im Bank operations in order to improve its operational
efficiency as well as strengthen its efforts in preventing and
detecting fraud, waste and abuse. I look forward to facing these
challenges and, if confirmed, I will carry out the duties of this
office with the highest standards of independence and integrity.
Mr. Chairman and members of this honorable Committee, thank you
once again for considering my nomination at this hearing today. I would
be pleased to respond to any questions from the Committee. Thank you!
______
PREPARED STATEMENT OF STEVE A. LINICK
Nominee for Inspector General, Federal Housing Finance Agency
July 15, 2010
Chairman Dodd, Ranking Member Shelby, and Members of the Committee,
thank you for this opportunity to appear before you today and provide
testimony. I am honored to be the President's nominee for Inspector
General of the Federal Housing Finance Agency (``FHFA''). I also want
to thank members of the Committee's staff who gave of their time
generously in preparation for this hearing.
Before I proceed with a brief opening statement, I would like to
introduce my wife, Mary Britton, and my son and daughter, Zackary and
Sarah, who are here with me today.
By way of background, almost my entire professional life has been
dedicated to public service. I have served in a number of leadership
positions in the United States Department of Justice (``DOJ''). Since
2006, I have been Executive Director of DOJ's National Procurement
Fraud Task Force (the ``Task Force''), consisting of more than 30
Offices of Inspectors General and other law enforcement agencies. In
this capacity, I have been involved in developing and overseeing a
strategic plan and nationwide effort to strengthen the Government's
efforts to fight procurement and grant fraud, including fraud
associated with the American Recovery and Reinvestment Act. As part of
this effort, I have been the primary point of contact at DOJ for
contract fraud cases related to the wars and reconstruction efforts in
Iraq and Afghanistan.
Since 2006, I also have served as Deputy Chief of the Fraud
Section, Criminal Division, DOJ, where I currently supervise 18
attorneys and am responsible for supervising and managing the
investigation and prosecution of a wide range of financial frauds.
Between 2004 and 2006, I was Deputy Chief of the Fraud Unit in the U.S.
Attorney's Office for the Eastern District of Virginia, where I was
involved in both supervising attorneys and establishing office
initiatives and priorities.
In total, I have almost 16 years experience as a Federal prosecutor
with extensive trial, appellate, and supervisory experience at DOJ and
in two U.S. Attorneys' Offices, including the Eastern District of
Virginia and the Central District of California. I have managed and
coordinated grand jury investigations and prosecutions involving health
care fraud, procurement fraud, public corruption, securities fraud, and
other financial frauds. I have investigated and prosecuted individuals
who have committed various types of mortgage fraud, including fraud in
the loan origination process and real estate flip schemes. Recently, I
was involved in supervising a team of Fraud Section attorneys, who, in
partnership with the U.S. Attorney's Office in Las Vegas, charged 19
defendants as part of a nation-wide mortgage fraud sweep dubbed
``Operation Stolen Dreams.''
As a result of having investigated a wide variety of financial
frauds, I have the experience and ability to develop effective
strategies to prevent and detect fraud, waste, and abuse associated
with the regulation of the Government-sponsored enterprises. Moreover,
through my work on the Task Force, I have become very familiar with the
Inspector General community and the challenges that Inspectors General
face.
I look forward to the prospect of serving as Inspector General at
FHFA during this critical time for both FHFA and the Government-
sponsored enterprises. The FHFA is a relatively new agency, which has
never had an Inspector General. In 2008, FHFA placed Fannie Mae and
Freddie Mac in conservatorship out of concern that their deteriorating
financial condition threatened the stability of the financial markets.
Since then, the Department of Treasury has provided billions of dollars
to the enterprises. Under these circumstances, the FHFA Inspector
General will play a critical role in safeguarding taxpayer dollars and
preventing fraud, waste, and abuse. In addition, the FHFA Inspector
General will carry significant management responsibility in having to
establish a new office and hire a staff of highly qualified
individuals.
If confirmed as Inspector General, I intend to be proactive in
overseeing the operations and programs of FHFA, including its
management of the conservatorship. While I intend to exercise complete
independence that is required of an Inspector General, I will make it a
priority to maintain a good working relationship with the FHFA Director
and management, along with this Committee and Congress as a whole.
Thank you for your consideration. I look forward to answering your
questions.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM JANET L.
YELLEN
Q.1. President Yellen, Olivier Blanchard, chief economist of
the International Monetary Fund, recently floated the idea of 4
percent inflation targets for central banks, double the roughly
2 percent rate presumed by many to have governed Fed policy in
many recent years. Yet, Fed Chairman Bernanke, identifying the
significant investment central banks have made in creating low
and stable inflation expectations, has identified that he
thinks such a move would be ``a very risky transition.'' Do you
side with Mr. Blanchard or with Chairman Bernanke?
A.1. During the recent crisis and recession, the zero lower
bound on interest rates limited the amount of monetary stimulus
that the Federal Reserve and other central banks can provide.
Admittedly, a higher long-run inflation objective would give
the Fed more maneuvering room in the future. But, any such
benefit would be counterbalanced by other factors, including
the potential erosion of the Fed's hard-earned inflation
credibility and the economic costs of higher inflation and
interest rates. This issue will be debated by economists in the
years ahead, and I will follow such discussions with interest.
At this time, however, I agree with Chairman Bernanke that an
increase in the long-run inflation objective to 4 percent would
be a risky policy strategy.
Q.2. President Yellen, you identify in material provided to the
Banking Committee, that you acquired `` . . . first-hand
experience in the conduct of banking supervision through my
oversight of the Federal Reserve Bank of San Francisco's
banking supervision and regulation division.'' You began as
President and CEO of the San Francisco bank in 2004. What
actions or written work can you point to that indicates that
your oversight of supervision and regulation was designed to
help guard the Fed's 12th District and, indeed, the financial
system from growing speculative excesses in real estate?
A.2. In 2004, the Federal Reserve Bank of San Francisco became
concerned with relaxed underwriting standards and growing
commercial real estate concentrations at commercial banks in
our District. We initiated a horizontal review that resulted in
findings around deficiencies in risk management and governance
and demands for remedial action. Recognizing that these issues
were present not only in banks supervised by our Reserve Bank,
but also by other banks in our District and throughout the
country, we brought our findings and concerns to the Board of
Governors and urged that guidance be issued on an interagency
basis to address the risks to the banking sector that were
building as a result of these concentrations. We contributed to
the process led by Board of Governors staff that resulted in
the issuance of interagency guidance on commercial real estate
concentrations in December 2006. I personally emphasized my
concern about the dangers of growing commercial real estate
concentrations in speeches to community banking organizations
beginning in 2005. I cited the weak practices we had detected
in our supervision around risk management and capital planning,
indicated that our banking supervision staff had ``communicated
our high expectations around high commercial real estate
concentrations to the banks we supervise'', and noted that
``we're now at the early stages of developing potential
interagency guidance.'' Other examples of our supervisory
efforts are provided in the response to question 6.
In addition, I began to discuss risks relating to real
estate in economic outlook speeches that I gave starting in
2005. I cited evidence suggesting that housing prices were
overvalued and discussed the possibility that a significant
correction could occur. My intention, in part, was to use the
``bully pulpit'' to damp speculative excesses. I argued that
regulation, rather than monetary policy, was the most
appropriate tool to use to address developing excesses. I noted
the decline in mortgage underwriting standards and the
proliferation of loans with riskier terms but thought, wrongly
as it turned out, that much of the risk had been diversified
out of the financial sector via securitization, thereby
reducing the odds of widespread financial disruption were house
prices to decline.
Q.3. President Yellen, writing in a November 2009 edition of
your bank's publication Economic Letter, you say that `` . . .
monetary policy may also play a role in managing systemic
risk.'' You further say that `` . . . monetary policy could
play a role in restraining undesirable swings in leverage and,
by extension, reduce systemic risk.'' Do you advocate that the
Fed should use monetary policy to lean against swings in asset
prices? If so, how do you know which swings are potential
bubbles and which are temporarily outsized movement of asset
prices well grounded in fundamentals?
A.3. In that speech I also noted that the use of monetary
policy in managing systemic risk compromises the attainment of
our inflation and employment goals. Therefore, I concluded that
supervision and regulation of financial institutions should
provide the first line of defense against systemic risk, rather
than monetary policy. The events of the past few years teach us
that we need to closely monitor and analyze movements in
leverage and asset prices and be cognizant of their effects in
the conduct of monetary policy.
Q.4. President Yellen, do you have any ideas about how the
Federal Reserve Board could increase its transparency with
Congress?
A.4. I am committed to working with the Committee and with
Congress to consider ways in which transparency might be
enhanced. I believe that the Federal Reserve should provide any
and all information necessary for Congress and the public to
fully understand and evaluate the Federal Reserve's actions as
long as such disclosures are consistent with independence in
monetary policy formulation and the effective implementation of
monetary policy, including the operation of the discount
window. The Dodd-Frank Regulatory Reform bill includes
provisions, which I support, to further enhance transparency,
particularly a complete GAO audit of the Federal Reserve's 13-3
facilities and emergency actions. The bill also requires that
discount window loans be reported with an eight-quarter lag.
Confidentiality relating to discount window borrowing is
essential for this facility to retain its effectiveness. I
believe, however, that the reporting lag included in the Dodd-
Frank bill is sufficiently long to mitigate this concern.
Q.5. President Yellen, how many Federal Reserve-regulated banks
and bank holding companies failed in the 12th Federal Reserve
district, where you oversee regulation, and how do failures in
your district compare to those in other districts?
A.5. Since 2008, six state member banks and forty bank holding
companies supervised by the Federal Reserve have failed in the
12th Federal Reserve district. The number of bank failures in
the 12th district exceeds those in all other districts except
Chicago and Atlanta. The number of bank holding company
failures in the 12th district ranks second among districts,
just below Atlanta. Not surprisingly, those districts--San
Francisco and Atlanta--with the most significant collapse in
housing prices and the highest levels of concentrations in
residential construction and land development loans have
experienced the most significant failure rates in banks and
bank holding companies. It is important to note that the vast
majority of 12th district bank holding companies are considered
``shell'' holding companies with little activity outside of the
subsidiary bank. Consequently, the failure of bank holding
companies has been driven by the failure of the underlying
banks, which are predominately banks for which the Federal
Reserve is not the primary regulator. It is also noteworthy
that bank holding companies in the 12th District tended to hold
banks with significantly higher construction and land
development concentrations compared to holding companies in
other Districts, leading to a higher failure rate.
Q.6. President Yellen, did you warn about declines in
underwriting standards and increases in subprime lending prior
to 2007? What steps did you take, as a regulator, to address
the growing risks?
A.6. Starting in 2004, the San Francisco Fed provided several
warnings about subprime and residential lending through our
publication on banking risks in the West. Over several years,
we noted concerns regarding high loan-to-value ratios, cash-out
refinancing, the sustainability of housing price appreciation
and the vulnerability of subprime borrowers to these practices
and conditions. As I noted in my answer to question 2, starting
in 2005, I started to warn in my speeches that soaring housing
prices raised concerns about national economic stability and
suggested that tighter supervision and regulation might be one
viable strategy for addressing the bubble. Indeed, our
examiners intensified their focus on evaluating the adequacy of
underwriting, risk controls and management across a range of
mortgage-related activities, including subprime origination.
Specific examples of our examination work include evaluating
policies and practices to preclude predatory lending practices,
ensuring that a documented ``benefit to the borrower'' existed
in the transaction, and evaluating whether underwriting models
complied with Equal Credit Opportunity (ECOA) and Fair Housing
Act requirements. Data and insights gained from these efforts
were provided to the Board of Governors. This information
contributed to their efforts to restrain such practices through
the supervisory guidance on nontraditional mortgages issued in
2006.
Starting in 2004, the San Francisco Fed's community
development group began to address concerns in low-income
communities relating to both subprime and predatory lending. At
the National Community Reinvestment Conference in Los Angeles
in March 2004, the San Francisco Fed sponsored a special
session on predatory lending and community-based strategies for
preventing predatory lending. In addition, starting in the
spring of 2004, staff worked with Freddie Mac and other
community partners to establish ``Don't Borrow Trouble''
campaigns in both Arizona and California. In March 2005, the
San Francisco Fed hosted a meeting in collaboration with the
Greenlining Institute and Operation Hope to discuss the rising
prevalence of adjustable rate mortgages in low-income
communities with senior executives of banks within the 12th
District. The purpose of the meeting was to identify problems
that low-income families with ARMs would face if interest rates
were to rise, and to identify ways that the banks could work to
better protect both consumers and their business interests. In
June 2005, the San Francisco Fed hosted a luncheon for local
community leaders with Federal Reserve Governor Edward Gramlich
to discuss his concerns about subprime lending and to identify
strategies that could help promote sustainable homeownership,
particularly within the high-cost regions of the 12th District.
In June 2006, we hosted the Federal Reserve Board's HOEPA
hearings to gather community input into the HOEPA regulations.
We became increasingly concerned by the growing number of
reports from community groups about the problems with subprime
and predatory lending. In January 2006, we initiated a research
project to collect local data on foreclosure filings and
published a study in July 2006 that linked rising foreclosures
in California to higher-priced lending. This was followed by a
dedicated issue of our Community Investments publication on
foreclosure prevention in December 2006, which sounded concerns
about rising foreclosures and presented models from across the
country for mitigating the foreclosure crisis. These two
research publications laid the groundwork for an extensive
effort by our community development group to establish local
foreclosure prevention task forces in Arizona, California, and
Nevada in 2006 and 2007. In 2007, we sponsored 13 foreclosure
prevention forums throughout the 12th District to help launch
these task forces and to develop targeted prevention
strategies, which included detailed data analysis of
foreclosure ``hotspots'' to help guide local foreclosure
prevention activities.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER FROM JANET L.
YELLEN
Q.1. The Federal Reserve, as specified by the Federal Reserve
Act of 1913 and later the Federal Reserve Act of 1977, is
required to ``promote effectively the goals of maximum
employment, stable prices, and moderate long-term interest
rates.'' This is often referred to as the dual mandate because
the Federal Reserve is required to pursue maximum employment
and stable prices equally. Do you think it is efficient to
pursue one at a time?
A.1. I strongly support the Fed's dual mandate and pay close
attention to both inflation and employment at all times.
Typically these two objectives are not in conflict in terms of
their implications for monetary policy. In the current
situation, employment and inflation are below desired levels,
and both of these conditions argue for monetary stimulus.
Similarly, in an unsustainable economic boom, employment and
inflation will both tend to reach levels that call for
restrictive monetary policy. A supply shock, such as in
increase in oil prices, does create a short-run tradeoff
between our goals, but one which the Fed has effectively
navigated over the past quarter century.
Q.2. Currently, we are responding to the high unemployment in
the country. Later, we will respond to inflation. In the 1970s
that approach produced higher inflation and higher
unemployment. Why should we believe that won't happen again?
A.2. I think it would be more accurate to say that the Fed is
currently responding to both inflation, which is now below the
level that most FOMC members consider to be most consistent
with our dual mandate and is trending downward, and
unemployment, which is very high. A key lesson of the 1970s is
the critical importance of maintaining well-anchored inflation
expectations so that a wage-price spiral like we saw back then
does not break out again. The Federal Reserve earned a great
deal of inflation credibility over the past thirty years and
inflation expectations are now well anchored. Still, we monitor
closely a variety of measures of inflation expectations, and
inflation expectations are a key driver of policy decisions, as
emphasized in recent FOMC statements. This approach should
minimize the risks of seeing a recurrence of stagflation.
Q.3. Paul Volcker and Alan Greenspan have concluded that the
Phillips curve is a misleading guide. Do you agree or disagree
and why?
A.3. The modern version of the Phillips curve model--relating
movements in inflation to the degree of slack in the economy--
has solid theoretical and empirical support. Of course, in this
model other factors besides slack affect inflation, such as
commodity and other import prices and inflation expectations.
Moreover, the U.S. economy is evolving and the Phillips curve
changes as well. Despite these shortcomings, the Phillips curve
model provides a coherent and useful framework for thinking
about the influence of monetary policy on inflation. Of course,
no single model captures the complexity of the U.S. economy. As
a result, I find it necessary to consult a wide range of
models, examine data from many sources, and listen carefully to
the reports we receive business contacts around the country.
Q.4. The financial reform bill, Dodd-Frank, creates a consumer
regulator inside the Fed that is administered separately. How
will the Federal Reserve prevent conflict?
A.4. The Dodd-Frank bill calls for the Bureau of Consumer
Financial Protection to be completely autonomous within the
Federal Reserve and contains provisions designed to minimize
future conflict. The Bureau will have its own authority to hire
and fire personnel, set salaries and benefits, and organize
itself and its divisions. The legislation specifically
prohibits the Board of Governors from intervening in Bureau
proceedings and other matters. The Board of Governors is
committed to respecting Congress' intentions and instructions.
We will cooperate with the Treasury Department in planning a
smooth transition of functions and personnel.
Q.5. In a speech this last February you said:
Some people worry that sustained Federal budget deficits and
the huge increase in the Federal Reserve's lending and stimulus
programs could eventually lead to high inflation. Others take
the opposite view, arguing that economic slack and downward
pressure on wages and prices are pushing inflation down. I
would put myself squarely in the second camp. As far as
inflation is concerned, there's no evidence that big Government
deficits cause high inflation in advanced economies with
independent central banks.
Is high inflation the only thing to fear of sustained Federal
budget deficits and the huge increase in the Federal Reserve's
lending and stimulus programs? What other concerns should we be
monitoring?
A.5. Sustained structural deficits in the Federal budget will
likely put upward pressure on real interest rates as private
demand recovers and the economy moves back toward full
employment. Under these conditions, Federal Government
borrowing will crowd out private investment and other interest-
sensitive spending, with negative consequences for
productivity, economic growth, and living standards. In
addition, large structural deficits may induce larger capital
inflows from abroad, expanding the U.S. trade and current
account deficits. Appropriate policies by the Federal Reserve--
namely, the timely removal of the extraordinary monetary
accommodation currently in place as the economy recovers--are
necessary to guard against threats to price stability.
Q.6. Would you describe your view, that big Government deficits
do not cause high inflation in advanced economies with
independent central banks, as mainstream?
A.6. Yes, I consider it mainstream. It is commonly recognized
that large and chronic Government budget deficits generate high
inflation, or even hyperinflation, when a country turns to its
central bank to print money on an ongoing basis to finance
them. The temptation of a government to use seignorage as a
source of finance arises when deficits and/or debt become so
large that the Government faces exceptionally high borrowing
costs in domestic or international markets. In extreme cases,
the Government may find itself unable to float debt entirely.
Examples include the hyperinflations experienced in Germany and
Hungary in the aftermath of World War I, and prolonged episodes
of high inflation in many Latin American countries in the
aftermath of the debt crises of the 1980s. An independent
central bank, especially one that has established a credible
commitment to price stability, is best positioned to resist the
political pressure to monetize budget deficits. This
independence explains why there is no correlation between
inflation and budget deficits in advanced countries and is a
primary rationale for central bank independence.
Q.7. In a speech this March, Dr. Yellen, you said, ``so I'm not
alarmed by the current enormous deficits. I see them as
transitory and recession-related.'' Let us say in the future we
reach a point that we are truly out of this recession in a
meaningful way and the national deficits are where they are
projected, 4 to 7 percent, versus 2 \1/2\ percent. Would you
then become concerned with the enormous deficits? How quickly
would those deficits become a major problem in terms of the
economy? What would those problems be?
A.7. I am very concerned about the economic consequences of
sustained structural budget deficits in the United States.
While the U.S. debt/GDP ratio is currently not out of the range
of experience of many industrial countries, it is at its
highest level since the aftermath of World War II, and absent
material changes in current policies, it is projected to rise
considerably in the years ahead. Thus, it is important for the
Congress and the Administration to have an intermediate-term
strategy for fiscal consolidation and stabilization of the
ratio of debt to GDP at a sustainable level in order to avoid
the long-term costs and risks associated with a rapidly rising
debt-primarily, an increase in long-term interest rates that
crowds out private investment spending, weakening productivity
growth and harming long-run living standards, as well as
possible further increases in the U.S. trade deficit and our
net international indebtedness.
Q.8. In your role as a voting member of the FOMC, how many
times have you cast a dissenting vote from the Chairman? What
were the circumstances?
A.8. Never. Although I have voted with the Chairman, I have
consistently arrived at policy positions independently, based
on my own analysis and best judgment.
Q.9. A lot of thought has been put into how and when to remove
the excess liquidity that the Federal Reserve has pumped into
the economy since 2008. Do you think we have reached a point
where the Federal Reserve can begin withdrawing that liquidity?
If not, what metrics will you look at to make that
determination?
A.9. I do not think that we have reached the point where the
Federal Reserve should begin to withdraw monetary
accommodation. As the Federal Open Market Committee noted in
its most recent statement, it anticipates that economic
conditions, including low rates of resource utilization,
subdued inflation trends, and stable inflation expectations,
are likely to warrant exceptionally low levels of the Federal
funds rate for an extended period. I agree with this
assessment. At the same time, the Committee has prepared itself
to remove monetary accommodation in a timely fashion as the
economy recovers in order to avoid future threats to price
stability. To determine when to begin the process of removing
accommodation, I will be carefully monitoring economic and
financial developments, including evidence bearing on the
strength and durability of the recovery, the degree of slack in
the economy, and the evolution of inflation and inflation
expectations.
Q.10. The United States monetary policy is often described as
mixed policy, which indicates that the Fed funds rate responds
to shocks in inflation and output. However, many other well
developed economies such as the United Kingdom, Switzerland,
Canada, Australia, and countless others utilize an inflation
targeting approach. What do you think are the benefits of mixed
policy as opposed to inflation targeting.
A.10. In textbook descriptions of inflation targeting, the
central bank's only goal is to bring inflation back to its
target rate, regardless of the effects on employment. A key
component of that strategy is the clear articulation of a long-
run inflation goal. I think it is more accurate to describe the
listed countries as practicing ``flexible'' inflation
targeting, in which they aim for a balanced approach of
limiting movements of both inflation and employment (or GDP)
from their desired levels. The Fed's approach, based on the
dual mandate, does not differ fundamentally from that of
flexible inflation targeting, except that the Fed does not have
a specified numerical inflation objective. The Fed has taken
steps over the past few years to improve transparency of
monetary policy, including providing greater clarity on our
longer-run inflation goals.
Q.11. Economist Lawrence Mishel of the Economic Policy
Institute stated ``I think these are all great choices, and
ones that will move Fed policy in the needed direction--
responsive to the needs of middle-class and working families.''
Would you agree that this is the direction in which you plan to
take the Federal Reserve?
A.11. The Federal Reserve's dual mandate from Congress is to
foster price stability and promote maximum employment. I think
the Federal Reserve should remain focused on implementing
policies to attain these objectives, which are essential to the
well-being of middle-class and working families, and indeed all
Americans. A well-functioning labor market is necessary for
families to obtain the work they need for their support; and
price stability promotes economic growth and facilitates sound
economic decisions and financial and retirement planning. The
Federal Reserve must also identify and act to mitigate systemic
risks that threaten the financial system. As we have seen,
financial crises exact a heavy toll on middle-class and working
families in the form of lost jobs, homes, businesses and
wealth.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM PETER A.
DIAMOND
Q.1. Professor Diamond, in an interview with Macroeconomic
Dynamics in 2007, you stated that `` . . . it's not the case
that I stay abreast of macro developments.'' Yet the position
for which you have been nominated requires someone who stays
abreast of those developments. In material you submitted, you
identified that `` . . . I have considerable awareness of the
development of economic analyses of monetary policy and its
impacts on both inflation and employment.'' Has something
changed for you with respect to the attention you give to macro
events since 2007?
A.1. As an academic doing basic research and policy research on
public finance questions, staying abreast of day-to-day
developments in the economy and the latest macro research would
not have been germane to my research, although I naturally did
follow economic developments from a variety of sources and some
analyses of causes and consequences of macro developments in
seminars and discussions with colleagues. Since the start of
the possibility of my being appointed to the Fed, I have begun
focusing even more attention to such developments. If
confirmed, I will need to pay attention to macro developments
in great detail to perform my duties, and I will do so.
Q.2. Professor Diamond, in an interview with Macroeconomic
Dynamics in 2007, you stated the following: ``I think nominal
stuff really matters.'' Please clarify what you mean and how it
applies to monetary policy. To the extent you believe that
nominal stuff mattering means that the Fed can engineer real
effects from nominal changes, what are the transmission
mechanisms that are most important?
A.2. The quote in the question was the start of my answering
the question: ``Since we are interviewing for Macroeconomic
Dynamics, maybe the readers would like to hear your comments on
the state of macroeconomics, past, present, and future.'' There
has been a great deal of research using what are called ``real
business cycle'' models. As the name suggests these models, in
their pure form, do not have any role for ``nominal stuff.''
Yet the evidence is clear that prices and wages do not adjust
to the money supply in a simple market-clearing way. In other
words, prices and wages are ``sticky.'' As a result I believe
there are real effects from nominal changes. For example, if
the economy were to experience deflation, as Japan did, that
would be harmful to the level of employment, and monetary
policy to prevent deflation would have real effects. There are
multiple transmission mechanisms beyond the stickiness of
prices and wages through expectations about future
opportunities and through the credit channel.
Q.3. Professor Diamond, you have a long and impressive list of
published papers and books covering a variety of topics.
However, a very small fraction of the work you have done
directly involves monetary economics or monetary policy. Why
are you interested in serving on the Federal Reserve Board?
A.3. I have done considerable research, both basic and policy-
related, on the role of Government in helping markets to
improve the bearing of risks in the economy. The current crisis
has made us aware of systemic risks arising from behavior of
financial institutions and their interactions with other
financial institutions and markets more generally. Analysis of
systemic risks will draw on the type of analyses I have done
throughout my career.
Q.4. Professor Diamond, do you believe that there are tradeoffs
between inflation and unemployment? Do you believe that the Fed
should engage in active aggregate demand management to exploit
the tradeoff?
A.4. When Samuelson and Solow wrote their famous paper on the
Phillips curve, the paper included the warning that the
presence of the historic pattern did not imply that the pattern
would remain if there was a systematic attempt to exploit it;
that is, they warned that there might not be an exploitable
tradeoff. It is common in empirical work in macroeconomics to
assume that there is no long-run tradeoff between inflation and
unemployment as part of the assumptions underlying the
empirical work. Most economists believe that an attempt to
increase employment by steadily ratcheting up inflation is a
bad policy that will harm the economy in the long run, and I
agree. The widespread view, which I share, is that it is
advantageous to have a relatively low and stable inflation
rate, with policy responses to macroeconomic shocks built
around returning to the target range of inflation rates over
time. Thus I see the two parts of the Federal Reserve's dual
mandate of stable inflation and maximum employment as generally
complementary, because price stability adds to the economy's
employment prospects over the longer run. However, not all
stable inflation rates have the same impact on employment. I
believe an economy will function better with a stable 2 per
cent inflation rate than with a stable 10 per cent inflation
rate or a stable 2 per cent deflation rate. Moreover, the
economy is subject to periodic shocks and the ability to
respond to shocks is better with a 2 per cent inflation target
than with zero percent inflation or a 2 per cent deflation. In
these two senses, both long run efficiency and the ability to
respond to shocks, there is a tradeoff between the level of a
stable long run inflation target and the unemployment rate.
This does not contradict the absence of an exploitable tradeoff
that would make worthwhile a policy of steadily ratcheting up
inflation.
Q.5. Professor Diamond, what is your impression of views by
some within the Federal Reserve system that monetary policy is
too loose, and that if we continue with the monetary ease, we
risk the creation of new financial bubbles?
A.5. There is a long history of asset bubbles. It appears that
some investors base their decisions unduly on extrapolations of
recent asset price trends, which can encourage a bubble, in
part as other investors, even some aware that it is a bubble,
try to take advantage of what appears to be a favorable short-
term investment opportunity, hoping to get out before the
bubble bursts. Experimental economics has shown that bubbles
can happen in controlled environments where they could not
happen if all people were behaving in accord with the standard
rational model of economic behavior. Bubbles, once started, can
be fueled by borrowed funds, with lower borrowing rates making
investing during a bubble seem more attractive, and so adding
to the bubble. While there is this possible link between loose
monetary policy and the risks of bubbles, monetary policy is
not the best tool for addressing the risk of bubbles, as
regulatory policies can be more targeted and even tax policies
can influence the incentive to invest in such circumstances. In
current circumstances of very high unemployment and sluggish
growth, monetary ease is essential for economic growth, which
appears to be a more important issue right now than the risk of
a new widespread bubble. Nevertheless, our recent experience
makes it incumbent on policymakers to be attentive to the risk
of bubbles.
Q.6. Professor Diamond, it has been reported that you were a
mentor to Fed Chairman Bernanke when he was in graduate school.
What grade would you assign to Chairman Bernanke's Fed
Chairmanship, and where do you see room for improvement?
A.6. In the run up to the financial crisis, the Federal Reserve
did not address the mortgage origination issues and did not
consider regulatory tools to limit the housing price bubble,
although many of these developments were already in motion
before Bernanke became chair of the Fed. These are issues the
Fed should have pursued for consumer protection as well as for
trying to head off what became a financial crisis. While it
would have been good if the Fed had limited more tightly the
leverage of the financial institutions it regulated and the
degree of concentration of assets in particular classes of
assets (mortgage based and commercial real estate) the
widespread (although not universal) failure to recognize the
degree of risk and systemic implications imply less of a
downgrade than if these issues were ignored in a context of
widespread awareness of them. In part, failure of regulators to
keep up with the complexity coming from financial engineering
went along with failures of the financial institutions to
realize the risk characteristics of their own actions.
Since the start of the crisis I think Chairman Bernanke has
deserved high marks for recognizing the seriousness of the
situation, being willing to use the full range of powers of the
Fed (and to cooperate with the Treasury in use of its powers)
to limit the impact of the crisis on the economy. I also
applaud his willingness to try unusual approaches, since we
were in an unprecedented situation for which one could not
simply rely on the history of the use of past polices.
In his remarks at various times, Chairman Bernanke has
acknowledged the earlier failures of the Fed relative to the
housing market and indicated a heightened attention to
interactions of financial institutions and systemic risk. The
intended addressing of these issues, already begun, will mark
an improvement at the Fed going forward.
Q.7. Professor Diamond, do you believe that inflation or
deflation is the larger threat currently? Given your belief,
what do you intend to advocate in terms of the evolution of
monetary policy: further ease in policy; maintenance of the
existing amount of ease; or movement to begin firming policy?
A.7. Currently, I think deflation is the greater risk. While I
do not think that significant deflation is a likely outcome,
the risk from inflation rising beyond the desired range in the
near future appears even smaller. At present I favor
maintenance of the current level of ease, with vigilance to
circumstances that might call for a change in either direction.
Q.8. Professor Diamond, do you believe that the Federal Reserve
effectively used its lending power to channel equity into
subsidiaries of the American International Group by setting up
Maiden Lane II?
A.8. I played no role in the Fed's decisions (either directly
or as a commentator) that led to that transaction, and I have
no knowledge of the structure or details of Maiden Lane II.
Q.9. Professor Diamond, you describe yourself as a ``card
carrying'' behavioral economist. What discipline is there in
behavioral models to restrict bureaucrats from, let us say,
taking the results of a survey, extrapolating to national and
global markets, and unleashing rules to guide the behavior of
Americans to protect them from themselves?
A.9. In all of economics, and not just behavioral economics, to
extrapolate a single survey to national and global markets and
base policies on that alone would be unwise. The economy is a
complex system with great heterogeneity in behavior. Policy
needs to draw on a wide range of analyses to understand both
the workings of the economy and the possible effects (intended
and undesired) that might follow from a policy. As Alfred
Marshall put it:
it [is] necessary for man with his limited powers to go step by
step; breaking up a complex question, studying one bit at a
time, and at last combining his partial solutions into a more
or less complete solution of the whole riddle . . . The more
the issue is thus narrowed, the more exactly can it be handled:
but also the less closely does it correspond to real life. Each
exact and firm handling of a narrow issue, however, helps
toward treating broader issues, in which that narrow issue is
contained, more exactly than would otherwise have been
possible. With each step . . . exact discussions can be made
less abstract, realistic discussions can be made less inexact
than was possible at an earlier stage. [Alfred Marshall,
Principles of Economics, eighth edition. New York: The
Macmillan Company. 1948, page 366.]
I consider reliance on a narrow viewing of the economy to be
bad methodology for policy analyses. The discipline to base
policy on good analyses with good methodology must come from
the policy process, it does not come from basic research per
se, whether behavioral or not.
Q.10. Professor Diamond, you describe yourself as a ``card
carrying'' behavioral economist. An Assistant Secretary for
Financial Institutions at Treasury has written a so-called
``behavioral'' paper to inform financial regulation. One of his
proposals is to allow banks to charge late fees to discourage
such bad behavior. He suggests the banks be allowed to keep
some of those fees, but put the bulk of the fees into a
national trust for use in funding things like financial
literacy and other consumer initiatives. As a behavioral
economist, what is your assessment of such a proposal?
A.10. The policy referred to is to levy an implicit tax on late
fees, with the revenue dedicated to financial education and
assistance to troubled borrowers. I expect the new Consumer
Financial Protection Bureau to explore the appropriateness of
the current setting of late fees. The inability of consumers to
negotiate a credit card contract with a different fee structure
and the complexity of exploring across credit cards to find a
combination with different fees suggest the appropriateness of
such an exploration. Such an exploration would need to develop
far more information and modeling of the range of implications
of having different fees than the paper presents. Without such
study, it is difficult to see what pattern of fees across
different cards would best serve the public in general. And it
is difficult to see whether a tax would move the fee structure
in a desired direction. Indeed, the paper itself recognizes
that it is exploring ideas and approaches, not making concrete
recommendations: ``The purpose of this paper is not to champion
policies, but to illustrate how a behaviorally informed
regulatory analysis would lead to a deeper understanding of the
costs and benefits of specific policies.'' My preliminary view
is that this approach to addressing questions about fees is too
convoluted, that more straightforward approaches would do
better if significant problems are found in a more detailed
empirical study of equilibrium fee setting in the credit card
market. I do think that a proper study of the effects of fees
does need to consider actual behavior of cardholders, and not
just an idealized picture of optimal use of credit cards.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER FROM PETER A.
DIAMOND
Q.1. Mr. Diamond, you are a well respected expert on social
security and pensions and a professor of economics at MIT. How
do you plan to influence monetary policy decisions in a way
which would make you more than a rubber stamp for Chairman
Bernanke?
A.1. If confirmed, as a member of the FOMC, I will scrutinize
analyses of the state of the economy and the policy
implications of the picture of the economy that emerges. I will
express myself at meetings based on my evaluation of the
evidence and its implications. As my colleagues and others can
attest, I have a long history of thinking for myself and
expressing my own views.
Q.2. Do you believe that a Federal Reserve Board of Governors
that is comprised of only two experts in monetary policy will
provide enough balance and expertise on the Board to make
crucial monetary policy decisions like when and how to withdraw
the excess liquidity the Federal Reserve has flooded into the
economy?
A.2. The Federal Reserve has several important functions,
including regulation of financial institutions as well as
monetary policy. In addition, the Fed will play an important
role in monitoring systemic risks and developing policies to
address such risks. If my fellow nominees and I are confirmed
by the Senate, the Board of Governors will have a set of
individuals with a broad range of backgrounds and expertise
that should do well in addressing the various responsibilities
of the Board. Also, as you are aware, many significant monetary
policy decisions are made by the Federal Open Market Committee
(FOMC) rather than the Board. The FOMC also includes five of
the Federal Reserve Bank presidents, with all of the Reserve
Bank presidents participating in FOMC discussions. Some of the
Federal Reserve Bank presidents have substantial backgrounds in
macroeconomics or monetary economics.
Q.3. The Federal Reserve, as specified by the Federal Reserve
Act of 1913 and later the Federal Reserve Act of 1977, is
required to ``promote effectively the goals of maximum
employment, stable prices, and moderate long-term interest
rates.'' This is often referred to as the dual mandate because
the Federal Reserve is required to pursue maximum employment
and stable prices equally. Do you think it is efficient to
pursue one at a time?
A.3. I believe that, in general, the objectives of maximum
employment and stable prices are mutually reinforcing and that
both are very important objectives. High unemployment reflects
inadequate and inefficient output in the economy as a whole and
has very painful consequences for individual workers and their
families. Low and stable inflation contributes to the
efficiency in the economy and supports the attainment of
maximum employment. Pursuit of a single goal would not
adequately address the economic concerns that monetary policy
can address.
Q.4. Currently, we are responding to the high unemployment in
the country. Later, we will respond to inflation. In the 1970s
that approach produced higher inflation and higher
unemployment. Why should we believe that won't happen again?
A.4. The 1970s were marked by oil price shocks that boosted
inflation and also contributed to unemployment as the economy
adapted to the shocks and the policies followed by the
Government at the time. The current situation is very
different, with painfully high unemployment and very low
inflation, recently running below the 2 percent level widely
accepted as a good objective for the medium-to-long run. I
believe that at present monetary ease is appropriate for this
combination of high unemployment and low inflation.
Nonetheless, policymakers will need to be vigilant and respond
promptly and appropriately to changes in economic conditions
and expectations.
Q.5. Paul Volcker and Alan Greenspan have concluded that the
Phillips curve was a misleading guide. Do you agree or disagree
and why?
A.5. When Samuelson and Solow wrote their famous paper on the
Phillips curve, the paper included the warning that the
presence of the historic pattern did not imply that the pattern
would remain if there was a systematic attempt to exploit it;
that is, they warned that there might not be an exploitable
tradeoff. Most economists believe that an attempt to increase
employment by steadily ratcheting up inflation is a bad policy
that will harm the economy in the long run, and I agree. The
widespread view, which I share, is that it is advantageous to
have a relatively stable inflation rate, with policy responses
to macroeconomic shocks built around returning to the target
range of inflation rates over time.
Q.6. The financial reform bill, Dodd-Frank, creates a consumer
regulator inside the Fed that is administered separately. How
will the Federal Reserve prevent conflict?
A.6. The Consumer Financial Protection Bureau created by the
Dodd-Frank bill is to be an independent agency, within the
Federal Reserve Board. The independence includes autonomy in
hiring, operations, and policymaking activities. The Board
continues to have a consumer protection role in the small bank
sector of the economy. I anticipate that the Bureau and the
Board will develop a good working relationship, on the order of
the ones that currently exist between the Board and the other
Federal banking regulatory agencies. The relationship is likely
to include a mutually beneficial framework for sharing
information on consumer protection and safety and soundness
matters. As the Bureau will become a member of the FFIEC, that
will provide another source of collaboration with the Board.
Q.7. Earlier this year the N.Y. Times reported that the Triple-
A credit rating of the United States ``may be at risk in the
coming years as the Nation copes with its growing debts.''
Since 2007 the national has increased from $8.67 trillion to
$12.6 trillion-an increase of $3.93 trillion or 45.3 percent,
the debt limit has increased six times and the deficit has
increased from $161 billion in FY 2007 to $1.42 trillion in FY
2009. The FY 2010 deficit is projected to come in at another
$1.5 trillion. Do these deficits pose any harm to the economy
or economic growth?
A.7. Projections of the long-term fiscal position of the
Federal Government, for example, by the CBO, show an
unsustainable track. At some point, if Government debt follows
that projected path, the Triple-A credit rating would be at
risk. However, I think that that point is not imminent. Recent
large deficits have reflected both the effects of the deep
recession, which automatically reduces tax revenues and
increases outlays for income support programs, and
discretionary fiscal policy actions taken to directly counter
the recession and stabilize financial markets. I think the
fiscal stimulus has been important in limiting the size of the
current contraction as well as supporting some valuable public
programs. And I think that near-term deficit reduction would
not be helpful for supporting economic growth that can bring
down the painfully high unemployment rate. It is important,
however, to address the causes of the deficit's long-term
unsustainable path.
Q.8. Let us say in the future we reach a point that we are
truly out of this recession in a meaningful way and the
national deficits are where they are projected, 4 to 7 percent,
versus 2 \1/2\ percent. How quickly would that become a major
problem in terms of the economy? What would those problems be?
A.8. At some point, steady increases in the debt to GDP ratio,
together with expectations of a path of continuing increases
become a major problem for an economy. However, there is no
clear guide from either the experience of different countries
or from economic theory to clearly indicate at what point the
size of the U.S. Federal debt relative to GDP poses significant
risks of instability in financial markets and costs to the
functioning of the economy. A central concern is that the
expectation of future growth of the debt plays a key role in
how capital markets respond to any given level of debt. Since
the U.S. debt is denoted in our own currency, unlike many
countries which have had financial crises from too much debt,
and since U.S. Government debt has been viewed as the safest
place to invest during the recent crisis, it is difficult to
draw inferences from the experiences of other countries. Once
we are truly out of this recession, persistent budget deficits
that push up the debt to GDP ratio represent shifts of
financial burdens onto future generations, which, at some
point, do not represent good policy. Moreover, the reaction of
the capital market to a belief that the trend in debt will not
be reversed can be abrupt. For both reasons it would be good to
legislate policies that support projections of a stable debt to
GDP ratio and that do not hurt the process of getting truly out
of this recession.
Q.9. A lot of thought has been put into how to remove the
excess liquidity that the Federal Reserve has pumped into the
economy since 2008. Do you think we have reached a point where
the Federal Reserve can begin withdrawing that liquidity? If
not, what metrics will you look at to make that determination?
A.9. Much of the liquidity provided by the Federal Reserve
during the crisis has been withdrawn already, as nearly all of
the special liquidity facilities that were established have
expired. A key remaining legacy of addressing the financial
crisis is the large volume of agency mortgage-backed securities
and direct agency obligations held on the Fed's balance sheet,
and large reserves in the banking system as a consequence of
their purchases. At present the Fed is following a policy of
gradual decline in these holdings as assets mature or prepay.
In addition, it appears that the intention is to have gradual
and pre-announced sales of agency MBS at some point to speed
the return to a Treasury-securities-only portfolio. I think it
would be premature to begin such sales now given the high
unemployment and the low inflation (with low inflation
expectations) that we currently have and the ongoing potential
risks to the economy. A decision to begin such asset sales
needs to be made in the context of the overall policy
addressing price stability and maximum employment. Since I have
not participated in FOMC discussions of this topic, and since
the future track of the economy is uncertain, I am reserving
judgment at this point regarding when such asset sales should
begin.
Q.10. The United States monetary policy is often described as
mixed policy, which indicates that the Fed funds rate responds
to shocks in inflation and output. However, many other well
developed economies such as the United Kingdom, Switzerland,
Canada, Australia, and countless others utilize an inflation
targeting approach. What do you think are the benefits of mixed
policy as opposed to inflation targeting.
A.10. The objectives of price stability and maximum sustainable
employment are mutually supportive in that price stability
helps maintain economic conditions that are conducive to
maximum employment and employment at its maximum sustainable
level supports price stability, as fluctuations, both up and
down, of the rate of price increases can be harmful. I think it
could be harmful for a central bank to focus exclusively on
price stability. A financial crisis can be harmful to the
economy even if the inflation rate does not change and can be
usefully addressed by policies available to central banks.
Moreover, I think that in practice, some central banks with a
single objective of price stability will want to take economic
activity into account as well, and the recent crisis has seen
wide awareness of the need for addressing the crisis. Indeed,
central banks of all stripes have pursued broadly similar
policies in response to the global financial crisis and
recession.
Moreover, the Federal Reserve's congressionally mandated
dual objectives of price stability and maximum sustainable
employment reaffirm that the ultimate measure of prosperity for
Americans is ample employment and rising real incomes and that
long-run stability of price increases is necessary to foster
such outcomes.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM SARAH
BLOOM RASKIN
Q.1. The Federal Reserve has ballooned its balance sheet from a
pre-crisis level of around $850 billion to over $2.3 trillion
in reserve liabilities. There are differing views within the
Fed about how and when it should shrink the size of its balance
sheet, including possible asset sales. Commissioner Raskin, how
would you shrink the Fed's balance sheet, and when do you think
that sales of mortgage-related holdings should begin?
A.1. I believe that it is important to normalize the size and
composition of the Federal Reserve's balance sheet, but it
should be done in a way that does not endanger the recovery.
Given current conditions in the housing market, I would wait
for stabilization before selling mortgage-backed securities. I
also do not believe that active sales are necessary until after
the Federal funds rate is raised. After that, I believe it
would be appropriate to reduce the size of and shorten the
maturity of the Federal Reserve's holdings of Treasuries. When
the time has come for both normalizing the holding of
Treasuries and selling mortgage-backed securities, the process
the Federal Reserve follows should be announced in advance and
fully transparent.
Q.2. The European Central Bank, the Bank of England, and
central banks in Australia, Canada, and New Zealand use
versions of a ``corridor'' or ``channel'' method for setting
policy rates. The Fed has contemplated using such a system.
Commissioner Raskin, are you aware of any impediments to the
Fed's use of a corridor to help control variation in the
Federal funds rate by bracketing it between the discount rate
and the rate paid on reserves?
A.2. The corridor method has been successful at other central
banks and believe that it could work in the United States.
However, there are some technical problems--both with the
interest rate on reserves acting as a lower bound to the
corridor and with the discount rate acting as an upper bound to
the corridor. The technical problem at the lower bound has to
do with the Government-sponsored enterprises. The GSE's are
participants in the Federal funds market but are not eligible
to earn interest on the balances they hold at the Federal
Reserve. Consequently, they have an incentive to lend funds at
interest rates below the rate paid on reserves. Because of this
incentive, the Federal funds rate could be lower than the
interest rate paid on reserves. The technical problem at the
ceiling arises because the discount rate may not always cap the
Federal fund rate. Banks sometimes view borrowing from the
discount window as stigmatizing, and have at times been quite
reluctant to borrow there. Given this reluctance, the Federal
funds rate may need to rise somewhat above the discount rate
for banks to have sufficient incentive to use the window.
Despite these potential issues with the effectiveness of the
upper and lower bounds of a corridor system in the United
States, I believe that such a system could work here. However,
I have not seen much evidence that the Federal Reserve is
having difficulty being able to continue to keep the Federal
fund rates close to the target rate established by the FOMC.
Q.3. Commissioner Raskin, do you believe that the Fed should
follow some variant of the Taylor rule in setting monetary
policy?
A.3. The Taylor rule and its variants can provide a useful
diagnostic check to establish that monetary policy is
consistent with its two goals--maximum employment and stable
prices. As a matter of policymaking, however, the Federal
Reserve should attempt to use all information that it has at
its disposal to meet the dual mandate. Therefore, it is my view
at this point that it would not be prudent to set the conduct
of monetary policy on ``automatic pilot'' through rigid
adherence to a single rule. The Taylor rule and its variants
are best used as a check to the policy decisions that the
Federal Reserve makes after it takes into account the wide
range of indicators that are relevant to maximum employment and
stable prices.
Q.4. Commissioner Raskin, some forecasters in the Fed explain
that they look at core measures of inflation that exclude
volatile energy and food prices because they have better
forecasting properties than headline inflation numbers.
Alternative measures of core inflation consider growth in so-
called trimmed mean price indexes. Do you favor any of these
measures in formulating forecasts of future inflation?
A.4. I do not view either measure as superior in all
circumstances and think that it is not appropriate to ignore
any particular set of inflation measures in gauging current
inflation trends for the purposes of setting policy. For
example, while economists often focus on core inflation
measures that exclude food and energy prices because these
items sometimes exhibit sharp but temporary fluctuations, it is
also important to recognize that food and energy are important
components of a household's expenses. Thus, changes in these
prices must also be taken into account when considering
monetary policy actions.
Q.5. Commissioner Raskin, you have been a vocal advocate of a
Federal financial consumer protection bureau that sets a
``floor,'' not ceiling, for such protections. You have appeared
before Congress to urge adoption of a recommendation made by
Elizabeth Warren's Congressional Oversight Panel to, in your
words, ``eliminate Federal preemption of the application of
State consumer protection laws to national banks.'' That is,
you strongly favor a patchwork of State-by-State rules and
limited Federal preemption. In making your argument, you seem
to rely almost exclusively on the SAFE Act as a model for how
the States and the Federal regulators could interact. Is there
anything aside from your experience with the SAFE Act to
support your views on preemption?
A.5. In addition to my experience with the State and Federal
process around the SAFE Act, my work with the FFIEC, my work on
mortgage servicing and loss mitigation and my day-to-day work
with Federal regulators in the supervision of Maryland state-
chartered banks, has consistently highlighted that if Congress
establishes laws and regulatory structures that encourage State
and Federal cooperation the outcome leads to greater
consistency and uniformity without sacrificing the benefit of
local decisionmaking where it makes the greatest difference.
Those differences can mean survival for small to medium banks
and businesses and responsiveness and accountability to the
consumer. To be clear, I do not support difference for the sake
of difference, but rather a State-Federal dialogue that
balances the goals of uniformity with the need for flexibility
and responsiveness.
And as the chairman of the Conference of State Bank
Supervisors' Legislative Committee, I became sensitized to the
experiences of my colleague State bank commissioners and
realized that the issue of finding the appropriate State/
Federal balance is of critical importance to all State
regulators across the country. I witnessed the virtues of
American federalism which gives to the States the front-line
authority to respond to local conditions on behalf of the
public interest of their own communities. The State regulators
that I work with have been continuously dealing with an
extraordinary array of problems in their State and local
economies. For example, certain States have been confronting
the problem of capital flight; others have been dealing with
elevated rates of mortgage fraud; others have been working with
mortgage servicers that are unable to respond to requests for
modifications; others have been responding to changes in the
demand for agricultural loans or for energy loans.
I believe in the capacity of State governments to respond
to local conditions, often in a way that is far more effective
and nimble than what can be done from Washington. For this
reason, while the Supremacy Clause provides that Federal law
clearly trumps State law, I believe that, as a matter of public
policy, Federal policymakers should give the States their
proper due and permit them to act with administrative
dexterity, alacrity and precision to deal with problems that
arise at the local level. This is why I generally--though not
categorically and never blindly--favor Federal laws that create
floors rather than ceilings and leave room for some play in the
joints of our federalism.
There has always been a tension in American history between
those who favor more centralized power and Government and those
who want to make sure that the States and the people continue
to enjoy a measure of sovereign democratic freedom to advance
and protect local interests. I confess I find myself often in
the latter camp. What others sometimes describe critically as a
``patchwork'' of laws, I actually see as the decentralized
``laboratories of democracy'' that are the essence of American
constitutional federalism. In the case of the current crisis, I
have seen how several effective and independent State efforts
to deal with our problems have become the basis for successful
national efforts.
Federal preemption is not, and should not be an ``up or
down'' issue but an ongoing dialog to balance national
interests with local interests in pursuit of the more perfect
solutions.
Q.6. Commissioner Raskin, the New York Times labels you ``an
ally of consumer advocacy groups,'' and I notice that you
received the 2009 Maryland Consumer Rights Coalition Consumer
Advocate of the Year Award. Nothing I can see provides comfort
to me that you have the knowledge of monetary economics and
monetary policy to sit at the Board making decisions that
influence interest rates and economies globally. What can you
tell me to provide comfort that you will not focus simply on
consumer advocacy and activist issues, and will not serve
simply as a rubber stamp on monetary policy, deferring to
whatever are the whims of the Chairman?
A.6. Both my academic and professional background have provided
me with the knowledge of monetary economics and monetary policy
to ``sit at the Board making decisions that influence interest
rates and economies globally.'' From my undergraduate studies,
through my graduate years in law school, and in my 25 years of
experience in the private and public sectors, I have
experienced, written about, and taught both the theoretical and
practical aspects of monetary economics and policy.
My interest and work in monetary macroeconomics and
monetary policy began during my undergraduate years at Amherst
College, where I graduated Phi Beta Kappa and magna cum laude
in economics and wrote my senior thesis on the Federal Reserve
Board's experience with intermediate targeting of monetary
policy. This senior thesis was anchored in econometric analysis
but also discussed strategic issues related to central banking.
It earned me the James R. Nelson Prize in Economics which is
awarded to the top economics student in the graduating class.
Much of the analysis for that thesis was inspired by work I had
done during college at the Joint Economic Committee of
Congress.
Although I chose to go to Harvard Law School rather than
pursue a doctorate in economics, I was invited to teach
Economics 10 as a teaching fellow with Professors Martin
Feldstein and Lawrence Lindsey while I was a law student. This
course covered macroeconomic subjects, including monetary
policy and monetary macroeconomics. Then, the summer after my
second year of law school, I worked at the Federal Reserve Bank
of New York and continued to participate in projects related to
the Federal Reserve's role in monetary policy, regulation and
payments systems. I worked with a team of lawyers and
economists that summer to restructure the Brazilian debt escrow
accounts which are maintained by the Federal Reserve Bank of
New York. I prepared an analysis of interest rate swaps that
evolved into a paper when I returned to Harvard on the subject
of their structural implications.
My career trajectory has given me ample opportunity to
apply this academic immersion in monetary policy to concrete
problems in both the private and public sectors. I spent more
than a decade in the private sector as a banking attorney with
Mayer Brown and with Arnold and Porter. Subsequent to my work
at those law firms, I became a managing director of Promontory
Financial Group. In all of these positions, I have worked with
and represented a variety of banks and financial institutions
facing regulatory and transactional issues. I also served as an
adjunct professor at American University, where I have taught
International Economic Law.
My years as counsel to the Senate Banking Committee gave me
further opportunities to grapple with issues of monetary
macroeconomic policy and Federal Reserve System oversight. And,
as Maryland's Commissioner of Financial Regulation, I have been
steeped in all facets of economic policy and have paid close
and careful attention to actions and policies of the Federal
Reserve Board.
Both my academic background and my professional background
have thus provided me with the knowledge of monetary economics
and monetary policy. The Board's responsibilities also include
regulation and supervision and oversight of the payments
system. I believe that my background and expertise as a
regulator prepare me well to participate effectively in the
full breadth of Board responsibilities.
I have throughout my career, including as Maryland's
Commissioner for Financial Regulation, sought to independently
and critically analyze each decision I confront. I will
continue that practice, if confirmed by the Senate, as a
Governor of the Federal Reserve Board and member of the FOMC.
Q.7. Commissioner Raskin, there is little for us to go on
regarding your views on monetary policy, macroeconomics, or the
recent financial crisis. In testimony before the Congressional
Oversight Panel for the TARP, you stated that ``Housing
policies may have enabled this crisis, but they did not cause
it.'' It is difficult to imagine witnessing the recent crisis
and not finding that housing policies that promote over-
consumption of housing and increasingly speculative financing
mechanisms were, if at least not directly causal, quite
important. Please elaborate on your statement, because I fail
to grasp what distinguishes something that enables a crisis
from something that causes a crisis.
A.7. I agree that housing-related risks were an important
feature of the financial crisis. My statement that housing
policies did not by themselves cause the crisis reflects my
belief that the causes of the financial crisis were complex and
multi-faceted. In my view, there was excessive risk-taking
across a wide range of assets and financial institutions, both
here and abroad. There was also a failure by regulators to
understand the escalating dangers associated with weak mortgage
broker regulation, weak or nonexistent underwriting standards,
the absence of due diligence incentives in the securitization
process, the creation and trading of complex derivatives based
on mortgage backed assets, and absent or useless disclosures
that collectively helped to inflate the housing bubble. In
other words, the failure was not one merely of housing policy
but also one of regulatory policy and excessive private risk-
taking with the absence of sufficient internal controls.
Q.8. Commissioner Raskin, in testimony before the Congressional
Oversight Panel for the TARP, you identify that ``...the
Federal Government has so far proved itself incapable of
managing systemic risk.'' If you are appointed to the Board of
Governors and a new Financial System Oversight Council is
constructed, you will have input into the manner in which the
Federal Government manages systemic risk. How confident are you
that you, the Fed, or a new Council will be able to spot
growing systemic risks and deal with them before they turn into
the next new bubble?
A.8. The identification of systemic risk will be a challenging
endeavor. The financial crisis has highlighted shortcomings in
policymakers' abilities to identify and to respond to buildups
of risk. Financial reform legislation gives regulators new
tools and a more extensive framework of information with which
to monitor risk. These additions are intended to lay a
foundation for better performance by regulators going forward.
Members of the Board of Governors and the Financial System
Oversight Council will need to build on this foundation by not
forgetting the economic cost of the crisis, by maintaining the
needed focus on system-wide risk, and by exhibiting a
willingness to use the tools at their disposal when they
perceive that systemic risk is building.
Q.9. Commissioner Raskin, in testimony before the Congressional
Oversight Panel for the TARP, you cite your disagreement with
what you call an unstated assumption in a GAO report `` . . .
that Federal regulatory reforms can address the systemic risk
posed by our largest and most complex institutions.'' You
further argue that `` . . . there may be some institutions
whose size or complexity make their risks too large to
effectively manage or regulate. Regulators and Congress should
contemplate whether breaking up these institutions is in the
best interest of the marketplace and the public.'' Do you
believe that the Fed could and should take actions to break up
large institutions right now?
A.9. I believe that the systemic risk posed by our largest and
most complex institutions is not easy to control. The Federal
legislation attempts to address potential threats that these
institutions pose to financial stability, including subjecting
them to heightened capital and liquidity requirements and more
intensive supervision. In addition, the Federal Reserve will
have the authority to force a major financial firm to terminate
activities or sell businesses if the firm's operations pose a
grave threat to financial stability. I believe the Federal
Reserve should act upon these mandates if warranted by the
riskiness in the growth presented by these institutions. In
addition, I believe that it is important that the Federal
Reserve attend to potential systemic risks generated by growing
concentrations in the financial sector before they reach levels
that are dangerous.
Q.10. Fed Chairman Bernanke has argued in the past that a
global savings glut had, before the crisis, put downward
pressure on real interest rates globally and in the United
States despite large U.S. current account deficits. Do you
agree or disagree with Chairman Bernanke's global savings glut
hypothesis? Please cite supporting evidence for your view.
A.10. Chairman Bernanke's hypothesis makes sense. The large
current account surpluses in emerging economies did put
downward pressure on U.S. interest rates and required demand
from the United States to maintain high employment globally. An
excess of saving over investment in a number of foreign
countries--particularly the emerging Asian economies and
commodity exporters--appears to have put downward pressure on
U.S. and global interest rates. During the years preceding the
crisis, bond yields in the advanced economies, including the
United States, appeared to decline by more than could be
explained by movements in inflation, economic activity,
Government budget positions, and other factors. The substantial
inflows of funds coming into the United States at that time,
especially from China and other emerging Asian economies, to
purchase U.S. Treasury and Agency debt seem to have boosted the
demand for these securities and thus lowered their yields.
Q.11. Commissioner Raskin, we saw that ``repo'' activity was
important in the recent crisis. If you constructed a measure of
money in the economy that included repos, you may have detected
rapid growth, which would have signaled you, as a monetary
policymaker, that there were growing risks. Yet, with
abandonment of consideration of broad monetary aggregates like
M3, the Fed has potentially blinded itself to developments in
those aggregates. Do you believe that the Fed should begin,
again, to publish and monitor broad monetary aggregates such as
M3 or so-called ``Divisia'' indexes?
A.11. The buildup of risk in repo markets and other securities
financing markets played an important role in turning the loss
in confidence in the credit markets into a liquidity crisis.
This buildup was an important aspect of the financial crisis.
Fundamentally, investors were able to acquire a range of
longer-term assets with substantial credit and interest-rate
risk and fund those securities in short-term financing markets.
Much of this activity occurred outside of the traditional
banking sector in funding vehicles such as asset-backed
commercial paper conduits, collateralized debt obligations,
collateralized loan obligations, and structured investment
vehicles. The ready availability of credit in short-term
financing markets allowed investors to buildup very substantial
leverage in these securities financing transactions. In
addition, the types of securities financed in these
transactions became increasingly risky over time.
However, it is unlikely that data on M3 would have been
helpful in providing an advance warning of the nature and
extent of risks developing in securities financing markets
prior to the crisis. Measures of the money stock are based
largely on the obligations of depository institutions and, as
noted above, much of the expansion of risk and leverage in the
financial system occurred outside of the banking sector.
Q.12. Commissioner Raskin, do you have any views on the Special
Purpose Vehicle called Maiden Lane II that the Fed created to
make loans to AIG and that looked dangerously close to equity
injections into AIG by the Fed?
A.12. I was not involved in the Federal Reserve Board's
consideration of that transaction. Going forward, Congress has
determined that the Federal Reserve should not be permitted to
make such loans pursuant to its emergency lending authority.
Q.13. Commissioner Raskin, some of your expertise is in
financial supervision and regulation, and you seem to be
labeled often as a consumer advocate. As you know, there is
legislation afoot to set up a new consumer financial protection
bureaucracy. It is supposed to have the Fed's name on it but,
from what I can tell, only so that it can tap the Fed's
printing presses for undisciplined funding. Proponents of the
new bureaucracy speak of creating the right ``culture.'' Could
you explain what that means to you?
A.13. The basic framework that all of us, as public officials,
operate in is the culture of the rule of law. Our foremost
responsibility is to enforce the law and organize resources in
such a way that assures that we are adhering tightly to Federal
statutes and Congress's intent in passing laws. Accordingly,
the new Consumer Financial Protection Bureau should strive at
all times to operate squarely within the legal constraints and
mandates established for it by Congress.
In an operational sense, we should seek as public officials
to create a culture of professional ethics and excellence. In
the regulatory agency I lead in Maryland, I have consciously
attempted to raise the standards of professional performance in
such a way that we may be able to better execute the laws that
the State legislature enacted. Similarly, I would hope that the
leaders of the Consumer Financial Protection Bureau, which is a
creation of Congress, would establish expectations of
professional excellence in training employees to engage in the
appropriate rulemaking, examination and enforcement
responsibilities set forth by Congress.
The culture of the rule of law and the culture of
professional ethics and excellence imply also a culture of
accountability and transparency, values I have always striven
to uphold. Thus, I trust that the Consumer Financial Protection
Bureau would report to Congress periodically and maintain a
policy of accessibility, transparency and accountability.
Q.14. Commissioner Raskin, some of your expertise is in
financial supervision and regulation, and you seem to be
labeled often as a consumer advocate. Another consumer advocate
and an activist lawyer from Harvard has spoken of a need for a
consumer financial protection bureaucracy in an environment in
which, in her mind, it is banks against families. Do you share
the view that our financial markets can be characterized as
banks against the people?
A.14. No. The reason that our financial markets have inspired
confidence for most of our history and have been a catalyst for
extraordinary growth is because we have acted to regulate their
excesses and abuses when they become manifest and to conform
market behavior to the rule of law under our system of
constitutional Government.
Banks can be engines of local economic growth for our
communities. Small businesses depend on community banks for
credit, and their ability to access loans is necessary for
employment and economic growth. I have encouraged banks to
fulfill their lending role as Commissioner for Financial
Regulation in Maryland and will continue that effort, if
confirmed, at the Board of Governors.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER FROM SARAH
BLOOM RASKIN
Q.1. Please describe your background in monetary policy and how
you hope to impact the Board's discussions on the subject.
A.1. Both my academic and professional background have provided
me with the knowledge of monetary economics and monetary
policy. From my undergraduate studies, through my graduate
years in law school, and in my 25 years of experience in the
private and public sectors, I have experienced, written about,
and taught both the theoretical and practical aspects of
monetary economics and policy.
My interest and work in monetary macroeconomics and
monetary policy began during my undergraduate years at Amherst
College, where I graduated Phi Beta Kappa and magna cum laude
in economics and wrote my senior thesis on the Federal Reserve
Board's experience with intermediate targeting of monetary
policy. This senior thesis was anchored in econometric analysis
but also discussed strategic issues related to central banking.
It earned me the James R. Nelson Prize in Economics which is
awarded to the top economics student in the graduating class.
Much of the analysis for that thesis was inspired by work I had
done during college at the Joint Economic Committee of
Congress.
Although I chose to go to Harvard Law School rather than
pursue a doctorate in economics, I was invited to teach
Economics 10 as a teaching fellow with Professors Martin
Feldstein and Lawrence Lindsey while I was a law student. This
course covered macroeconomic subjects, including monetary
policy and monetary macroeconomics. Then, the summer after my
second year of law school, I worked at the Federal Reserve Bank
of New York and continued to participate in projects related to
the Federal Reserve's role in monetary policy, regulation and
payment systems. I worked with a team of lawyers and economists
that summer to restructure the Brazilian debt escrow accounts
which are maintained by the Federal Reserve Bank of New York. I
prepared an analysis of interest rate swaps that evolved into a
paper when I returned to Harvard on the subject of their
structural implications.
My career trajectory has given me ample opportunity to
apply this academic immersion in monetary policy to concrete
problems in both the private and public sectors. I spent more
than a decade in the private sector as a banking attorney with
Mayer Brown and with Arnold and Porter. Subsequent to my work
at those law firms, I became a managing director of Promontory
Financial Group. In all of these positions, I have worked with
and represented a variety of banks and financial institutions
facing regulatory and transactional issues. I also served as an
adjunct professor at American University, where I have taught
International Economic Law.
My years as counsel to the Senate Banking Committee gave me
further opportunities to grapple with issues of monetary
macroeconomic policy and Federal Reserve System oversight. And,
as Maryland's Commissioner of Financial Regulation, I have been
steeped in all facets of economic policy and have paid close
and careful attention to actions and policies of the Federal
Reserve Board.
Both my academic background and my professional background
have thus provided me with the knowledge of monetary economics
and monetary policy. The Board's responsibilities also include
regulation and supervision and oversight to the payment system.
I believe that my background and expertise as a regulator
prepare me well to participate effectively in the full breadth
of Board responsibilities.
Q.2. Commissioner Raskin you have a very well established
reputation as a ``consumer advocate,'' having worked at the
Federal Reserve Bank of New York and the Senate Banking
Committee before your current job as Maryland's Commissioner of
Financial Regulation, how do you plan to influence monetary
policy decisions in a way which would make you more than a
rubber stamp for Chairman Bernanke?
A.2. I view all American households and businesses as consumers
of financial products and services. As citizens, we become
consumers whenever we enter the marketplace to purchases goods
and services and businesses obviously do the same. Therefore, I
have been proud of the recognition I have received on behalf of
my work protecting consumers because this is work in service of
the public interest and the soundness of the economy generally.
I have been equally proud of the strong support my nomination
has received from banks and banking leaders, including the
Independent Community Bankers Association and the Maryland
Bankers Association. I believe that my work in Maryland has
produced marked improvements in the environment for banking and
financial services and that the banks in my State view me and
my agency as an honest broker with the interest of economic
progress and business investment constantly in mind. I have
always rejected the implication that the interests of citizens
as consumers must be adversarial to the interests of
profitable, safe and sound banks. On the contrary, it has been
a hallmark of my leadership in Maryland that my agency does not
see the public interest as structurally adverse in any way to a
sound and thriving banking sector; rather, they stand best when
they stand together.
I have throughout my career, including as Maryland's
Commissioner for Financial Regulation, sought to independently
and critically analyze each decision I confront. I will
continue that practice, if confirmed by the Senate, as a
Governor of the Federal Reserve Board and member of the FOMC.
Q.3. Do you believe that a Federal Reserve Board of Governors
that is comprised of only two experts in monetary policy will
provide enough balance and expertise on the Board to make
crucial monetary policy decisions like when and how to withdraw
the excess liquidity the Federal Reserve has flooded into the
economy?
A.3. The Board of Governors has had a long tradition of broad
representation from the business and financial community. One
prominent example is Marriner Eccles, the Chairman of the
Federal Reserve Board from 1934 to 1948. While Eccles is viewed
by many as one of the most successful chairmen, he was not a
trained economist.
I believe that, if my fellow nominees and I are confirmed
by the Senate, the Board of Governors will be comprised of
individuals who possess the broad range of backgrounds and
expertise necessary to carry out, in responsible and effective
fashion, the various monetary policy, regulatory, supervisory
and payments system responsibilities with which the Congress
has charged the Board.
Q.4. The Federal Reserve, as specified by the Federal Reserve
Act of 1913 and later the Federal Reserve Act of 1977, is
required to ``promote effectively the goals of maximum
employment, stable prices, and moderate long-term interest
rates.'' This is often referred to as the dual mandate because
the Federal Reserve is required to pursue maximum employment
and stable prices equally. Do you think it is efficient to
pursue one at a time?
A.4. Both goals of the dual mandate must be pursued
simultaneously. Currently, for example, we have both
unacceptably high unemployment and a falling rate of inflation.
The stimulative polices that the Federal Reserve and Congress
have pursued should help to lower the unemployment rate as well
as prevent further declines in inflation and the possibility of
deflation.
There are times, and the 1970s are an example of such
times, when the two goals for the dual mandate can conflict in
the short run. In those situations, it is still the case that
the Federal Reserve must focus on both goals simultaneously and
make clear that short-term increases in inflation will not be
tolerated in the longer term. In this way, the Federal Reserve
can stabilize inflationary expectations and thereby minimize
volatility in both inflation and unemployment.
Q.5. Currently, we are responding to the high unemployment in
the country. Later, we will respond to inflation. In the 1970s
that approach produced higher inflation and higher
unemployment. Why should we believe that won't happen again?
A.5. Those results will not happen again because over the last
30 years the Federal Reserve has earned a strong reputation for
its commitment to price stability. We can and must reinforce
this reputation by removing the extraordinary monetary stimulus
in a transparent and consistent manner when the time is
appropriate.
Q.6. Paul Volcker and Alan Greenspan have concluded that the
Phillips curve was a misleading guide. Do you agree or disagree
and why?
A.6. I believe that current and expected resource slack, as
measured by the unemployment rate or an output gap, is one
factor that influences inflation, in part through its effects
on the costs of production. However, it is not the only factor.
Movements in the prices of oil and other commodities, exchange
rates, and productivity all can influence inflation as well. In
addition, stable inflationary expectations and confidence in
the Federal Reserve's commitment to price stability play a key
role in keeping actual inflation in check. As a result, I will
be looking at many factors in assessing inflation and monetary
policy.
Q.7. The financial reform bill, Dodd-Frank, creates a consumer
regulator inside the Fed that is administered separately. How
will the Federal Reserve prevent conflict?
A.7. The financial reform bill establishes a Consumer Financial
Protection Bureau, as an independent agency, within the Federal
Reserve Board. The bill provides the Bureau with independent
operational and rulemaking authority. However, even with those
guideposts, the Board anticipates a close working relationship
with the Bureau, much as it has with other banking agencies.
The Bureau's membership on the Federal Financial Institutions
Examination Council will also give it contact with other
regulators and State supervisors.
Q.8. Earlier this year the N.Y. Times reported that the Triple-
A credit rating of the United States ``may be at risk in the
coming years as the Nation copes with its growing debts.''
Since 2007 the national has increased from $8.67 trillion to
$12.6 trillion-an increase of $3.93 trillion or 45.3 percent,
the debt limit has increased six times and the deficit has
increased from $161 billion in FY 2007 to $1.42 trillion in FY
2009. The FY 2010 deficit is projected to come in at another
$1.5 trillion. Do these deficits pose any harm to the economy
or economic growth?
A.8. The increase in the budget deficit over the last 2 years
in large part reflects both the effects of the deep recession
(which automatically reduces tax revenues and increases outlays
for support programs), and the effects of discretionary fiscal
policy actions taken to counteract the recession and stabilize
financial markets. In the near term, these stimulative fiscal
policies have helped support the recovery in the economy. As
the economy continues to recover and stimulus policies wind
down, the budget deficit should narrow over the next few years.
Over the longer term, the retirement of the baby boom
generation and fast-rising health care costs will put
significant pressure on the Federal budget. Large and
persistent increases in Federal debt would lead to higher
interest rates that restrain capital formation and productivity
growth, and, in turn, slow the rate of growth in real aggregate
economic activity. The ideal way to deal with this longer term
unsustainability is to adopt a credible long-term plan that
reduces the deficit and stabilizes the ratio of Federal debt to
gross domestic product.
Q.9. Let us say in the future we reach a point that we are
truly out of this recession in a meaningful way and the
national deficits are where they are projected, 4 to 7 percent,
versus 2 \1/2\ percent. How quickly would that become a major
problem in terms of the economy? What would those problems be?
A.9. It is difficult to know how soon an unsustainable fiscal
policy would adversely affect the economy. At the moment,
credit markets are viewing U.S. debt as extremely safe. If,
however, we do not get our house in order, this will not
continue indefinitely. In addition, as is illustrated in
Greece, when confidence disappears, it disappears quickly with
obviously devastating consequences. As noted above,
unsustainable budget deficits lead to higher interest rates
that restrain capital formation and productivity growth, and,
in turn, slow the rate of growth in the economy. Also, to the
extent that higher debt increases the reliance of United States
on foreign borrowing, an ever larger share of future income
would be devoted to interest payments on Federal debt held
outside of the United States, which would reduce the income
available for domestic consumption and investment.
Q.10. A lot of thought has been put into how to remove the
excess liquidity that the Federal Reserve has pumped into the
economy since 2008. Do you think we have reached a point where
the Federal Reserve can begin withdrawing that liquidity? If
not, what metrics will you look at to make that determination?
A.10. A substantial portion of the liquidity provided by the
Federal Reserve during the crisis has been withdrawn at this
point. Nearly all of the special liquidity facilities that were
established to address pressures in short-term funding markets
have expired. Moreover, the terms for the Federal Reserve's
regular lending program for depository institutions are now
similar to those prevailing prior to the crisis, and the amount
of credit outstanding to depository institutions is very low.
However, the Federal Reserve did purchase a large volume of
agency mortgage-backed securities and direct agency
obligations, and reserves in the banking system have increased
considerably as a result of these purchases. Accordingly,
gradual sales of these securities should be undertaken at some
point to speed the return to a Treasury-securities-only
portfolio. A decision to begin sales of assets or use other
tools to further drain liquidity needs to be made in the
context of the overarching goals of the Federal Reserve to
foster price stability and maximum employment.
Q.11. When asked how you would have handled monetary policy
differently in regards to the financial crisis by Senator
Shelby, you cited lapses in regulation and oversight. While
this is an important aspect of the Federal Reserve's duties,
you still did not inform us whether tighter or looser monetary
policy may have been in order leading up to the crisis. Do you
think loose monetary policy may have played a role in the
crisis, what would you do to correct this issue to avoid a
future crisis and in what timeframe should that be done?
A.11. It appears to me that in 2003-2004 there were prudent
reasons for keeping interest rates low. There was weakness in
the economy and a threat of excessive disinflation, and so the
considerable monetary accommodation put in place at that time,
and its subsequent gradual removal by the Federal Reserve,
appeared to be appropriate to promote the dual mandate of
maximum employment and stable prices.
I believe that the Federal Reserve should remain vigilant
in watching for the development of asset price bubbles, and
while monetary policy may not be the most effective method for
pricking such bubbles, I do believe that the Federal Reserve
should consider whether its regulatory and supervisory powers
permit it to address such bubbles in a manner that does not
have sudden and dramatic effects on the economy.
Q.12. The United States monetary policy is often described as
mixed policy, which indicates that the Fed funds rate responds
to shocks in inflation and output. However, many other well
developed economies such as the United Kingdom, Switzerland,
Canada, Australia, and countless others utilize an inflation
targeting approach. What do you think are the benefits of mixed
policy as opposed to inflation targeting.
A.12. I believe that the difference between the mixed policy
and inflation targeting is small. Most of the countries that
have adopted an inflation target follow what is called
``flexible inflation targeting.'' These countries pursue a
target for inflation in a flexible manner so as to provide
price stability and high employment. Inflation targeting
countries have found that the numerical target for inflation
helps in making monetary policy actions more transparent and
increasing accountability. In addition, an inflation target has
generally been useful in anchoring long-term inflationary
expectations in the targeting countries.
Given the Federal Reserve's well-earned reputation for its
commitment to price stability, a numerical target would provide
little added benefit and it is possible that it could even
create uncertainty about the Federal Reserve's commitment to
aid the recovery. In addition, the Federal Reserve has adopted
a number of measures to increase transparency that make an
inflation target less important.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER FROM OSVALDO
LUIS GRATACOS MUNET
Q.1. Mr. Gratacos, over the past year a number of schemes to
defraud the Ex-Im Bank have been discovered. These schemes
would have cost Ex-Im Bank millions of dollars. According to
your last semiannual report, your office presently has 35
ongoing investigations involving claims of more than $300
million. What accounts for the apparent increase in the number
of frauds being committed in Ex-Im Bank's loan guarantee
programs? Does the Ex-Im Bank have sufficient controls to
detect and prevent the fraudulent use of its loan guarantees?
A.1. Historically, Ex-Im Bank's fraud exposure (based upon what
has been uncovered by the AIG as of today) is concentrated in
the medium-term program. During the mid 2000s, Ex-Im Bank
reacted to market capacity related to medium-term financing and
aggressively promoted its medium-term program to lenders,
exporters and buyers. The medium-term program traditionally
provides financing to small to medium-sized businesses in
markets where accurate and reliable financial information is
not readily available, requiring more emphasis on Ex-Im Bank's
underwriting capacity. The increase in medium-term
participation was met with inappropriate internal allocation of
resources, lack of staff, and a culture of transaction
promotion incentivized to produce deals. Also, a number of
conditions affecting Ex-Im Bank and the medium-term program
increased its inherent fraud risk. These include:
(i) LEx-Im Bank's mission to extend credit in more than 160
countries and the resulting wide variations in business
and credit practices and legal systems between those
countries;
(ii) LEx-Im Bank's mission to accept risks that the private
sector cannot or will not accept;
(iii) LEx-Im Bank's public disclosure of its underwriting
standards, which can guide borrowers in misrepresenting
their financial statements;
(iv) Lthe limited resources of many medium-term program
lenders to verify the veracity of borrowers and conduct
thorough due diligence;
(v) Lthe limited resources available to Ex-Im Bank to fully
scrutinize every transaction within a reasonable time
after an application is submitted;
(vi) Lthe ``moral hazard'' resulting from the 100 percent
guarantee provided to medium-term program lenders
creates a disincentive for private sector participants
to conduct thorough due diligence inquiries that would
be more likely to identify potentially fraudulent
transactions; and
(vii) Lthe inexperience of many of the exporters, lenders and
buyer/borrowers supported by the medium-term program.
Since 2008, Ex-Im Bank has taken a number of steps in order to
improve its medium-term program. Some of the most visible steps
are: Know Your Customer guidance (providing guidance to lenders
in order to increase turn around time); enhancing due diligence
efforts in certain transactions; creating a Credit Review and
Compliance Division; utilizing different payment frequencies in
certain transactions; enhancing quality assurance efforts; and
implementing of a pilot program involving cross-functional
groups in order to scrutinize transactions submitted to Ex-Im
Bank.
Nonetheless, Ex-Im Bank still lacks adequate internal
controls to prevent and detect fraud. Ex-Im Bank management has
not implemented important OIG recommendations and suggestions
relevant to its ability to combat waste and fraud. These
recommendations and suggestions can only mitigate, but not
eliminate, the challenges present in the performance of the
medium-term and other guarantee programs. Specifically, the
following OIG recommendations and suggestions have not been
implemented:
a) LCreate a formal lender oversight function to actively
manage and monitor performance of transactions on a
lender-by-lender basis and to assess the quality of
lender due diligence performed;
i.) LThis lender oversight function should report to a
division, such as Credit Review and Compliance,
independent of front-office originations.
b) LRestructure the exposure fee pricing structure for non-
sovereign medium-term program transactions to more
effectively account for transaction-level risk;
c) LObtain, or require that parties to MT program
transactions provide Ex-Im Bank, documentary evidence
of the completed export transaction in the form of
shipping documents and U.S. and foreign customs
documents, promptly after the exported goods are
received.
d) LImplement more rigorous due diligence and underwriting
practices in transactions when complex or high-risk
markets, risky industries and products are being
considered.
e) LRequire participating lenders to undergo more rigorous
due diligence efforts and require such lenders to
highlight the transactional or credit risks identified.
f) LDevelop a more comprehensive strategic plan for Ex-Im
Bank products, specifically the medium-term program.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM STEVE A.
LINICK
Q.1. Mr. Linick, to date, the GSE's have received one of the
largest taxpayer-funded bailouts in our history. Unfortunately,
the taxpayer remains exposed to considerable losses going
forward. To properly review the FHFA's conservatorship of these
entities, it seems that one would need direct access to examine
Fannie and Freddie, especially since the Director of the FHFA
acts with all the powers of the shareholders, directors, and
officers of the regulated entity. Do you believe that the FHFA
IG can credibly determine if FHFA is acting properly as
conservator without having direct access to the institutions
themselves?
A.1. In order for the FHFA IG to credibly determine if FHFA is
acting properly as both conservator and regulator of Fannie and
Freddie, I believe that the FHFA IG will require direct access
to the institutions themselves.
Q.2. Mr. Linick, Federal law allows the FHFA to ``take such
action as may be: 1) necessary to put the regulated entity in a
sound and solvent condition; and 2) appropriate to carry on the
business of the regulated entity and preserve and conserve the
assets and property of the regulated entity.'' The FHFA, acting
as conservator of Fannie or Freddie, executes any directives
given to those institutions, whether those directives originate
within the FHFA or another entity. Given these facts, would you
agree that the FHFA IG has a duty to examine those directives
and to report on any impact that these directives may have on
the ability of the FHFA to properly execute its duties as
conservator or receiver? If so, how would you plan to fulfill
this duty?
A.2. The FHFA IG has responsibility for, among other things,
overseeing the manner in which FHFA carries out its management
of the conservatorship, including its actions to ensure that
Fannie and Freddie operate in a safe and sound manner and
preserve and conserve the assets of Fannie and Freddie. To the
extent that FHFA executes any directives (regardless of their
origination) that impact FHFA's ability to carry out its
management of the conservatorship, I believe the IG has a duty
to report on the impact of those directives. If confirmed as
IG, I intend to fulfill this duty by providing reports to
Congress as required by the Inspector General Act, and by
working closely with Congressional members and staff through
regular and open communication.
Q.3. Mr. Linick, in addition to the multiple challenges that
any IG would face, there is not currently, nor has there ever
been, an IG for the FHFA. As such, should you be confirmed, you
will be starting from scratch. As an unconfirmed nominee, I
certainly understand that you have not been able to undertake
the analysis necessary to determine the resources required to
properly perform your duties, and hence I won't ask you to
speculate on specifics today. Due to the importance of this
office having adequate resources to complete its mission,
however, it is vital that both the FHFA and Congress quickly
know what will be necessary. If you are confirmed, would you,
within a realistic timeframe, provide the Committee with an
estimate regarding the budgetary needs of your office?
A.3. The FHFA is a relatively new agency, whose regulatory role
has never been tested. In 2008, FHFA placed Fannie Mae and
Freddie Mac in conservatorship out of concern that their
deteriorating financial condition threatened the stability of
the financial markets. Since then, the Department of Treasury
has provided billions of dollars to the enterprises. Under
these circumstances, the FHFA IG will play a critical role in
safeguarding taxpayer dollars, ensuring transparency, and
preventing fraud, waste, and abuse. In addition, the FHFA IG
will carry significant management responsibility in having to
establish a new office and quickly hire a staff of highly
qualified individuals. Given the scope of the IG's mission,
substantial resources will be essential. If confirmed as IG, I
will commit to working expeditiously to provide this Committee
with an estimate regarding the budgetary needs of the office.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER FROM STEVE A.
LINICK
Q.1. In your testimony you say that you intend to be proactive
in overseeing the conservatorship of Fannie Mae and Freddie
Mac. I believe it is important for you to aggressively and
regularly, more often than annually, report to Congress on how
the conservatorship is being managed and how the two
institutions are being run in order to understand the impacts
of their business practices on the taxpayer. Did HERA, the law
which created the FHFA and the position of the IG for which you
are nominated, place any constraints on your ability to examine
these institutions as aggressively as Congress intends?
A.1. If confirmed as IG, I will work closely with Congressional
members and staff and regularly report on how FHFA is
fulfilling its mission as conservator and regulator. At this
time, I am not aware of anything in HERA that would constrain
the IG's ability to aggressively and proactively perform
oversight responsibilities.
Q.2. It is important that your office, as inspector general for
the agency running the conservatorship of Fannie Mae and
Freddie Mac and charged with overseeing the Federal Home Loan
Bank System, has enough resources and staff to aggressively do
your job. You may be aware that the Special Inspector General
for TARP's budget was 23 million in 2010, and 50 million in
2011. The SEC Inspector General budget is closer to 15 million.
Have you given any thought to the size of your budget given the
magnitude of the undertaking Congress is asking the FHFA IG
office to undertake?
A.2. The FHFA is a relatively new agency, whose regulatory role
has never been tested. In 2008, FHFA placed Fannie Mae and
Freddie Mac in conservatorship out of concern that their
deteriorating financial condition threatened the stability of
the financial markets. Since then, the Department of Treasury
has provided billions of dollars to the enterprises. Under
these circumstances, the FHFA IG will play a critical role in
safeguarding taxpayer dollars, ensuring transparency, and
preventing fraud, waste, and abuse. In addition, the FHFA IG
will carry significant management responsibility in having to
establish a new office and quickly hire a staff of highly
qualified individuals. Given the scope of the IG's mission,
substantial resources will be essential. If confirmed as IG, I
will commit to working expeditiously to provide this Committee
with an estimate regarding the budgetary needs of the office.
Q.3. Are you aware that the FHFA recently released a report to
Congress that stated that the condition and performance of 6 of
12 FHLBanks are less than adequate, four FHLBanks have negative
accumulated other comprehensive income and that Seattle FHLBank
has been designated ``undercapitalized''? Do you plan on
looking into the activities that lead these banks into such a
perilous position or are there legal impediments that would
prevent you from doing so?
A.3. One of FHFA's primary goals as regulator is to ensure that
the Government-sponsored enterprises, including the FHLBanks,
operate in a safe and sound manner, are adequately capitalized,
and comply with legal requirements. I am aware of FHFA's recent
report to Congress describing the poor condition and
performance of the FHLBanks referenced above. I believe it is
well within the IG's authority to review FHFA's oversight in
this area and the activities that led these banks into their
current condition. If confirmed as IG, I will develop a
proactive agenda to oversee the programs and operations of FHFA
with this and other important issues in mind.
Q.4. Is it within your ability as inspector general of the FHFA
to examine the impact of the affordable housing goals on Fannie
Mae and Freddie Mac and do you intend to use that authority to
help paint an accurate picture for Congress on the impacts of
all of its housing policies on the GSEs?
A.4. In addition to ensuring that Fannie and Freddie operate in
a safe and sound manner and conserving and preserving their
assets, FHFA is charged with promoting homeownership and
affordable housing and supporting an efficient secondary
market. I believe it is well within the authority of the IG to
evaluate the impact of the affordable housing goals on Fannie
and Freddie and FHFA's ability to operate them in a safe and
sound manner and conserve and preserve their assets. If
confirmed as IG, I will develop a proactive agenda to oversee
the programs and operations of FHFA with this and other
important issues in mind.
ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD
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