[House Hearing, 117 Congress] [From the U.S. Government Publishing Office] LENDING IN A CRISIS: REVIEWING THE FEDERAL RESERVE'S EMERGENCY LENDING POWERS DURING THE PANDEMIC AND EXAMINING PROPOSALS TO ADDRESS FUTURE ECONOMIC CRISES ======================================================================= HYBRID HEARING BEFORE THE SUBCOMMITTEE ON NATIONAL SECURITY, INTERNATIONAL DEVELOPMENT AND MONETARY POLICY OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED SEVENTEENTH CONGRESS FIRST SESSION __________ SEPTEMBER 23, 2021 __________ Printed for the use of the Committee on Financial Services Serial No. 117-47 [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] __________ U.S. GOVERNMENT PUBLISHING OFFICE 45-864 PDF WASHINGTON : 2021 ----------------------------------------------------------------------------------- HOUSE COMMITTEE ON FINANCIAL SERVICES MAXINE WATERS, California, Chairwoman CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina, NYDIA M. VELAZQUEZ, New York Ranking Member BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York BILL POSEY, Florida DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri AL GREEN, Texas BILL HUIZENGA, Michigan EMANUEL CLEAVER, Missouri ANN WAGNER, Missouri ED PERLMUTTER, Colorado ANDY BARR, Kentucky JIM A. HIMES, Connecticut ROGER WILLIAMS, Texas BILL FOSTER, Illinois FRENCH HILL, Arkansas JOYCE BEATTY, Ohio TOM EMMER, Minnesota JUAN VARGAS, California LEE M. ZELDIN, New York JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia AL LAWSON, Florida WARREN DAVIDSON, Ohio MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio RITCHIE TORRES, New York JOHN ROSE, Tennessee STEPHEN F. LYNCH, Massachusetts BRYAN STEIL, Wisconsin ALMA ADAMS, North Carolina LANCE GOODEN, Texas RASHIDA TLAIB, Michigan WILLIAM TIMMONS, South Carolina MADELEINE DEAN, Pennsylvania VAN TAYLOR, Texas ALEXANDRIA OCASIO-CORTEZ, New York PETE SESSIONS, Texas JESUS ``CHUY'' GARCIA, Illinois SYLVIA GARCIA, Texas NIKEMA WILLIAMS, Georgia JAKE AUCHINCLOSS, Massachusetts Charla Ouertatani, Staff Director Subcommittee on National Security, International Development and Monetary Policy JIM A. HIMES, Connecticut, Chairman JOSH GOTTHEIMER, New Jersey ANDY BARR, Kentucky, Ranking MICHAEL SAN NICOLAS, Guam Member RITCHIE TORRES, New York FRENCH HILL, Arkansas STEPHEN F. LYNCH, Massachusetts ROGER WILLIAMS, Texas MADELEINE DEAN, Pennsylvania LEE M. ZELDIN, New York ALEXANDRIA OCASIO-CORTEZ, New York WARREN DAVIDSON, Ohio JESUS ``CHUY'' GARCIA, Illinois ANTHONY GONZALEZ, Ohio JAKE AUCHINCLOSS, Massachusetts PETE SESSIONS, Texas C O N T E N T S ---------- Page Hearing held on: September 23, 2021........................................... 1 Appendix: September 23, 2021........................................... 35 WITNESSES Thursday, September 23, 2021 Konczal, Mike, Director, Macroeconomic Analysis, Roosevelt Institute...................................................... 7 Rhee, June, Director, Master of Management Studies in Systemic Risk, Yale School of Management................................ 9 Russo, Christopher M., Post-Graduate Research Fellow, Mercatus Center at George Mason University.............................. 13 Sahm, Claudia, Senior Fellow, Jain Family Institute.............. 11 Wooden, Hon. Shawn T., Treasurer, State of Connecticut........... 5 APPENDIX Prepared statements: Konczal, Mike................................................ 36 Rhee, June................................................... 47 Russo, Christopher M......................................... 53 Sahm, Claudia................................................ 57 Wooden, Hon. Shawn T......................................... 65 Additional Material Submitted for the Record Himes, Hon. Jim A: Written statement of Action Center on Race and the Economy (ACRE)..................................................... 79 McHenry, Hon. Patrick: George Selgin, Cato Institute Center for Monetary and Financial Alternatives..................................... 83 Barr, Hon. Andy: Committee on Capital Markets Regulation, ``Revising the Legal Framework for Non-Bank Emergency Lending''................. 88 LENDING IN A CRISIS: REVIEWING THE FEDERAL RESERVE'S EMERGENCY LENDING POWERS DURING THE PANDEMIC AND EXAMINING PROPOSALS TO ADDRESS FUTURE ECONOMIC CRISES ---------- Thursday, September 23, 2021 U.S. House of Representatives, Subcommittee on National Security, International Development and Monetary Policy, Committee on Financial Services, Washington, D.C. The subcommittee met, pursuant to notice, at 10:07 a.m., in room 2128, Rayburn House Office Building, Hon. Jim A. Himes [chairman of the subcommittee] presiding. Members present: Representatives Himes, Gottheimer, Torres, Dean, of Illinois, Auchincloss; Barr, Hill, Williams of Texas, Zeldin, Davidson, Gonzalez of Ohio, and Sessions. Ex officio present: Representative Waters. Chairman Himes. The Subcommittee on National Security, International Development and Monetary Policy will come to order. Without objection, the Chair is authorized to declare a recess of the subcommittee at any time. Also, without objection, Members of the full Financial Services Committee who are not members of this subcommittee are authorized to participate in today's hearing. As a reminder, I ask all Members participating remotely to keep themselves muted when they are not being recognized by the Chair. The staff has been instructed not to mute Members, except when a Member is not being recognized by the Chair and there is inadvertent background noise. Members are also reminded that they may only participate in one remote proceeding at a time. If you are participating remotely today, please keep your camera on, and if you choose to attend a different remote proceeding, please turn your camera off. For the benefit of the witnesses, in case you haven't been fully briefed, there will be Members who are participating in the hearing remotely and, consequently, they will appear on the various screens, and you will hear, just as you heard this sort of voice of God, those questions coming in via the audio, and so we will proceed. But not every Member will be in the room the whole time. Today's hearing is entitled, ``Lending in a Crisis: Reviewing the Federal Reserve's Emergency Lending Powers During the Pandemic and Examining Proposals to Address Future Economic Crises.'' I now recognize myself for 4 minutes to give an opening statement. Last March, as COVID-19 tore through the economy, Congress and the Federal Reserve stepped up to prevent further chaos and to stabilize markets. With businesses shuttering, infection rates rising, and the stock market in a freefall, the Federal Reserve (Fed) took unprecedented action to keep credit flowing and instill confidence in our financial system. From the onset of the pandemic, Chair Powell made it clear that the Federal Reserve would use its emergency lending tools to help families, cities, and businesses weather the storm. Now, more than 18 months removed from their establishment, Congress should take this opportunity to measure their success, identify their shortcomings and limitations, and perhaps, most importantly, discuss ideas about how we should address the next economic crisis. I came to this institution in 2009 amidst another economic crisis and a great deal of skepticism around Federal Reserve authorities. I never imagined that a mere decade later we would be using those authorities once again to save the economy. So today, we will look at the three lending facilities that were stood up by the Fed and supported by CARES Act funds: the Secondary Market Corporate Credit Facility; the Municipal Liquidity Facility; and the Main Street Lending Program. While these three programs do not represent the full scope of the coronavirus toolbox, they offer valuable insight into how the Fed can help when the economy is in shock. At a glance, and compared to other efforts like the widely- used Paycheck Protection Program (PPP), these facilities look like a blip on the radar, with relatively low rates of uptake. It is possible, however, that the Fed's commitment to supporting the economy itself helped calm the markets. Within days of the Fed announcing programs to bolster the corporate municipal bond markets, investors returned, liquidity increased, and further disaster was likely avoided. We learned that the Fed could play a powerful role when it has the authority to make and execute plans. But this power only goes so far. Despite markets calming, the pandemic still forced hundreds of thousands of businesses to close and pushed unemployment rates to unacceptable levels. In times of economic stress, perhaps the two most important institutions to stabilize the economy are Congress, with its physical power, and the Fed. As policymakers, Congress can learn from the accomplishments and setbacks we saw last year to determine how we should confront the next recession. The Fed should also learn from these experiences, seek feedback, and fine-tune its crisis playbook so it, too, will be ready to tackle future downturns. Together, both Congress and the Fed must think seriously about how to improve on emergency lending efforts, especially when it comes to helping businesses, workers, and communities who are left behind in the best of times. As we saw last year, the time to discuss these ideas is when the economy is on the upswing, not during a crisis. The next economic crisis could be triggered by any number of factors at any time. Chair Powell stated before this committee that the Fed would put its emergency tools away when the time was right. Congress' job is to make sure that those tools remain sharp and effective and ready to take on whatever challenge comes next. With that, I would like to welcome our panel of witnesses, and thank them for joining us today. And I now recognize my friend, the ranking member from Kentucky, Mr. Barr, for 5 minutes for an opening statement. Mr. Barr. Thank you, Mr. Chairman, and I appreciate you holding this very important hearing. And I welcome our witnesses. Thank you all for being with us and for offering your insights on the Fed's emergency lending authorities. As the COVID-19 pandemic raged, and the nation and the world were gripped with the economic uncertainty resulting from this Black Swan health crisis, Congress acted swiftly to contain the damage and aid struggling individuals and businesses. The Fed amplified the actions of Congress by providing unprecedented liquidity and broad-based economic support. Through its Section 13(3) emergency lending powers, the Fed was able to leverage support provided by Congress to serve as a backstop for various markets during times of severe stress and uncertainty. Today, we will take a look back at the Fed's actions during the pandemic. A retrospective review of the emergency lending powers will help us better understand what worked, what didn't, and if and how the Section 13(3) authorities should be adjusted to improve the Fed's response to future crises. Specifically, we will hear from witnesses about the Fed's Municipal Liquidity Facility, Main Street Lending Program, and Secondary Market Corporate Credit Facility. At a time when States and municipalities were facing budgetary uncertainty due to lost tax revenue, decreased tourism, and broader economic challenges, the Municipal Liquidity Facility was designed to ensure that they could still access markets for financing. The Main Street Lending Program was designed to aid those businesses that were perfectly healthy before the pandemic, but were too big to utilize the Paycheck Protection Program, yet too small to receive more targeted support. The Secondary Market Corporate Credit Facility was intended to ensure that secondary corporate bond markets continued to function, allowing businesses across the nation to continue operating. We hope to discuss today how we measure the success of these facilities. These three facilities distributed approximately $38 billion, or just 2.3 percent of the funds available to the Fed for those purposes. Does this metric suggest that the facilities were unsuccessful, or just the opposite, given that the mere presence of the facilities reassured investors and allowed markets to function? Only two issuers utilized the Fed's Municipal Liquidity Facility. Does that indicate that the Fed did not accomplish Congress' goals for that facility or, once again, was the existence of the facility enough to normalize the markets, allowing issuers to finance their operations through standard market channels? It is important to remember that these are emergency lending powers. The Fed is authorized under specific statutory circumstances to deploy these tools. However, as the crisis abates and economic conditions improve, the Fed must put those tools back in the box. Reliance on and utilization of the Fed's emergency lending powers in excess of their intent risks blurring the lines between monetary and fiscal policy. As we discuss these Emergency Lending Facilities today, we must also keep in mind the appropriate role of the Fed. The Fed is independent and conducts monetary policy. Fiscal policy is our responsibility as legislators. The Fed is not an agent of social change or environmental activism, and asking it to take on that role compromises its independence. This subcommittee has an important mandate of oversight of monetary policy, and as we exercise that oversight over Fed policy, I hope at some point, Mr. Chairman, in the near future, we will have a hearing specifically on inflation. The inflation data is staggering and concerning as perpetual accommodative monetary policy and blow-out fiscal spending make us all question whether it is truly transitory. As the Wall Street Journal reported today, the Fed is looking at this as not so transitory, and I will quote: the message from the Fed's latest projections yesterday is that, ``transitory is lasting an awfully long time.'' Our constituents are feeling the pain of inflation at the grocery store and at the gas pump, and Congress must do its part to make sure we do not let it get out of control. The economic response to the COVID-19 pandemic required collaboration between Congress, the Administration, the Fed, and the private sector. As we emerge from the pandemic, and economic conditions normalize, it is a useful exercise to look back at the impact our policies had. Today's review of the Fed's Emergency Lending Facilities should provide meaningful and helpful insight. Mr. Chairman, I thank you for your leadership in holding this hearing. And I look forward to hearing from our witnesses today. And again, Mr. Chairman, thank you for convening this hearing. I yield back. Chairman Himes. I thank the ranking member, and it is now my privilege to recognize the Chair of the full Financial Services Committee, the gentlewoman from California, Chairwoman Waters, for one minute. Chairwoman Waters. Thank you very much, Mr. Chairman, for holding this important hearing. Testifying before our committee in February 2020, Fed Chair Powell warned that the Federal Reserve's ability to help the economy in the next recession would be limited. Remarkably, the pandemic was declared one month later, and the Fed exercised an unprecedented expansion of its tools to support the economy. I believe the Fed's actions were helpful in jump-starting the recovery on Wall Street after a devastating shutdown due to the pandemic, and we had to work very hard with the Fed to talk about extending its support to States, cities, and small businesses. We engaged the Chair on the terms that were offered to both small businesses and corporations. And I spent a considerable amount of time dealing with all of these facilities that were being created, particularly the Main Street Lending Program, where we engaged, again, with Chairman Powell on how he could be more helpful to very small businesses. So, I look forward to hearing from this panel what worked, what didn't, and what reforms are needed to make sure the Fed's actions reach Main Street and not just Wall Street. I yield back the balance of my time. Chairman Himes. I thank the chairwoman for her attendance and for her statement. We now welcome the testimony of our distinguished witnesses. First, we have my friend, the honorable Shawn Wooden, the treasurer of the State of Connecticut, and the president-elect of the National Association of State Treasurers, and the provider of the evidence to my belief that only good things come from the State of Connecticut. Second, we have Mike Konczal, director of macroeconomic analysis and progressive thought with the Roosevelt Institute. Third, June Rhee, director of master of management studies in systemic risk with the Yale School of Management. Fourth, Christopher Russo, a post-graduate research fellow with the Mercatus Center. And, finally, Dr. Claudia Sahm, a senior fellow with the Jain Family Institute. Witnesses are reminded that their oral testimony will be limited to 5 minutes. You should be able to see a timer on the desk in front of you that will indicate how much time you have left. And by the way, please, when you are speaking, pull the microphone close--you can remove your mask and pull the microphone close to you. Otherwise, we won't be able to understand you. I would ask that you be mindful of the timer, and quickly wrap up your testimony once your 5 minutes has expired, so that we can be respectful of both the witnesses' and the subcommittee members' time. And without objection, your written statements will be made a part of the record. Mr. Wooden, you are now recognized for 5 minutes to give an oral presentation of your testimony. STATEMENT OF THE HONORABLE SHAWN T. WOODEN, TREASURER, STATE OF CONNECTICUT Mr. Wooden. Thank you. Chairman Himes, Ranking Member Barr, and distinguished members of this subcommittee, I appreciate the opportunity to testify before you today. Specifically, I would like to share with you Connecticut's experience with the Municipal Liquidity Facility, which I will refer to as the MLF in my testimony. As president-elect of the National Association of State Treasurers, the bipartisan association of State treasurers from across the country, I have worked with my colleagues on this topic since the early days of the pandemic. As treasurer of the State of Connecticut, I have three responsibilities relevant to today's hearing: investment of the State's pension and trust funds; management of the State's borrowing; and management of the State's cash, including maintenance of our liquidity. For today's hearing, I am going to focus specifically on liquidity issues. Our experience in Connecticut, fortunately, was that the State and its municipalities were able to meet the pandemic's unprecedented impact on State and local governments' budgets and other fiscal challenges. This was due to prompt and effective Federal action and assistance, as well as the State's ability to adeptly draw on talent and quickly prepare. At the-- [Technical issue.] Mr. Wooden. --its Fiscal Year 2020 budget projections to a much larger $934 million budget deficit. During this time, in early spring 2020, I participated in weekly calls with treasurers from across the country to discuss in real time the challenges different States were facing. At that point, all States were revising their budget projections and liquidity positions. Several States moved ahead and put lines of credit and other short-term borrowing facilities to address what was at the time an unknown fiscal impact from the quickly-spreading COVID-19. However, several significant and timely actions taken by the Federal Government provided substantial assistance to State and local governments and mitigated liquidity concerns. One was the Federal Reserve's establishment of the MLF. A quick look at events in the municipal market at the time shows that shortly after the declaration of the pandemic, the municipal market experienced tremendous volatility. The municipal bond yields rose dramatically as mutual fund investors pulled over $41 billion of assets out of the municipal market in less than 3 weeks. At that point, market fluctuation had deteriorated to the point that buyers and sellers had difficulty determining price, because investors were concerned about our government's ability to withstand the pandemic's related liquidity and revenue shocks. The primary market was, essentially, shuttered for 2 weeks in mid-March, and municipal bond yields remained elevated even as markets slowly reopened. The Federal Reserve's initial actions helped shore up market liquidity. The creation of the MLF provided critical support for issuer solvency by standing ready to purchase short-term notes from State and local governments in an extremely uncertain economic environment, thereby helping State and local governments better manage cash flow pressures. The MLF was designed and implemented to serve as a lender of last resort. Despite the limited utilization of the program, it provided a necessary backstop to a large market without replacing the normal municipal market mechanisms for raising capital to alleviate liquidity concerns. Today, I present seven changes for your consideration for the purpose of improving the MLF to be shelf-ready for the next fiscal crisis, and this reflects Connecticut's experience, as well as the experience of treasurers across the country, on a bipartisan basis, that was shared with Treasury at the time. Number one, I recommend reducing the MLF's borrowing rates to more competitive taxable market rates that move with the market. Number two, I recommend removing the requirement for certification that borrowers are unable to secure adequate credit accommodations from other banking institutions. The above-market pricing model makes that certification redundant. Number three, I recommend making the requirement that State-guaranteed borrowings of municipalities that borrow through the State be more flexible, and consider having the Federal Reserve assume some of the credit risk. Number four, the MLF should be available for pooled borrowings, not one-off guaranteed borrowings for particular municipalities. Number five, allow for longer credit terms, and we recommend that that will improve the relief available to issuers by extending the MLF credit facility for longer-term issuers. Number six, make the program permanent. It would be valuable and forward-thinking for the Federal Reserve to put in place a permanent emergency MLF program and set parameters that consider the variety of States' needs and circumstances. In Connecticut, we found that legislative changes to our statutes would be necessary in order to implement the prior program. And lastly, if I may, Mr. Chairman, create a bank-managed program which would be much more efficient to execute. Thank you for this opportunity. [The prepared statement of Mr. Wooden can be found on page 65 of the appendix.] Chairman Himes. Thank you, Mr. Wooden, and I will be equivalently elastic on the time for the other witnesses. With that, Mr. Konczal, you are now recognized for 5 minutes to give an oral presentation of your testimony. STATEMENT OF MIKE KONCZAL, DIRECTOR, MACROECONOMIC ANALYSIS, ROOSEVELT INSTITUTE Mr. Konczal. Good morning, and thank you for inviting me to testify at this hearing. My name is Mike Konczal, and I am the director of macroeconomic analysis at the Roosevelt Institute. I would like to discuss the Emergency Lending Facilities that the Federal Reserve used to respond to the COVID-19 crisis, and I would like to make three points. First, the Municipal Liquidity Facility (MLF) and the Secondary Market Corporate Credit Facility (SMCCF) were more successful than people realize. We see dramatic effects if we look not just at the total number of loans made, but instead at their overall impact on interest rates. Second, these programs are an evolution of unconventional monetary policy in our era of low interest rates and are likely to stay with us. And third, there are multiple ways to improve these facilities, going forward. Take the MLF and municipal debt markets as the first example. During March 2020, yields on municipal debts dramatically increased. The MLF was poorly-designed to address this crisis. Its original narrow terms meant it was very difficult for any subnational entity to qualify, especially cities with the highest concentration of Black and Brown residents. Even as the Fed expanded the eligibility threshold throughout that summer, only two borrowers took advantage of the program, borrowing only $6 billion out of the $500 billion available for lending through this program. Yet, the interest rates municipalities faced dropped dramatically throughout this period. A wave of research over the past year has found that this decrease was driven by the announcement of the MLF and its subsequent expansions. Research from the Federal Reserve Bank of New York found that municipalities eligible for the expanded terms at the end of April saw their interest rates decline around 70 basis points. Research from the Federal Reserve Bank of Dallas found that the MLF kept rates from rising between an estimated 5 and 8 percent as the economy deteriorated. Researchers at the Federal Reserve Bank of Chicago found an impact of 110 basis points for a sample of U.S. States. This research argues that the MLF disproportionately benefited municipalities with higher credit risk. There are many studies summarized in my written testimony, and though they all use different methodology, they all point in the same direction. This same story plays out in the corporate sector. Interest rates on corporate bonds spiked during March 2020. Although the purchases of the SMCCF were only $13 billion, a trivial amount in the world of corporate debt, the impact was dramatic. Researchers across studies find a dramatic drop in the interest rate corporations faced, with the general conclusion that most of the impact occurred before the Fed even bought anything. These two programs mirror each other. Even though the Federal Reserve purchased virtually nothing and incurred no fiscal costs, the chance that it could was enough to drive down borrowing costs and calm markets for these sectors. It is through this lens, seeing asset purchases as an extension of unconventional monetary policy that sets long-term interest rates for users of funds in the economy, that the impact and promise of these programs make the most sense. We will likely still need such programs in the future. Unconventional monetary policy is necessary during periods of low interest rates, and over the past several decades, interest rates have fallen across countries. Right now, the 10-year Treasury rate is around 1.3 percent, which is below the 6 decades preceding the pandemic. Economists are engaged in debates over why interest rates have fallen, with popular theories including increasing wealth inequality, the aging of the population, and more concentration in sectors across our economy. These trends are likely to stay with us. And, indeed, this expansion of unconventional monetary policy is also happening at other central banks across the world. Multiple other central banks created or expanded already existing corporate bond purchase facilities in 2020, in response to the COVID crisis, including the central banks of England, Europe, Japan, and Canada. Luckily, there are multiple ways to improve these facilities. The Federal Reserve should research how expansive it can make eligibility requirements for any future Municipal Lending Facility. This has significant benefits with low costs. The eligibility does matter quite a bit in who gets to benefit from this. The Federal Reserve should remove or reduce its penalty rate for any future programs like these. The penalty rate makes perfect sense for times in which we want to guard against moral hazard, especially in a financial crisis. But when programs are being used as part of a general toolkit of unconventional monetary policy and rate setting, the penalty rate makes less sense. And third, beyond program design, there are general policy changes that should be considered. Better regulation of open- ended mutual funds can help prevent debt markets from seizing in crises on such short notice. Also, these facilities are no substitute for fiscal policy. Better automatic stabilizers would help maintain income and spending in a recession and take some of the pressure off unconventional policy. Thank you for your time, and I look forward to any questions you may have. [The prepared statement of Mr. Konczal can be found on page 36 of the appendix.] Chairman Himes. Thank you, Mr. Konczal. Ms. Rhee, you are now recognized for 5 minutes to give an oral presentation of your testimony. STATEMENT OF JUNE RHEE, DIRECTOR, MASTER OF MANAGEMENT STUDIES IN SYSTEMIC RISK, YALE SCHOOL OF MANAGEMENT Ms. Rhee. Thank you. Chairman Himes, Ranking Member Barr, and members of the subcommittee, thank you for inviting me to testify at this hearing. My name is June Rhee. For the past 6 years, I have been researching at the Yale Program on Financial Stability on interventions used by the government and central banks in response to financial crises around the world. The focus of my research has been on market liquidity and capital injection programs. In these remarks, I will focus on my research in market liquidity programs by the Fed during the global financial crisis (GFC) and the COVID-19 pandemic based on papers I have co-authored. We define market liquidity programs as interventions for which the key motivation is to stabilize liquidity in a specific wholesale funding market, which encompasses the three facilities we are focusing on today in our hearing. The Fed is allowed to extend loans to nonbanks in normal times and its power to purchase market instrument is limited. Therefore, the Fed relied on its authority under Section 13(3) of the Federal Reserve Act to lend to nonbanks in unusually exigent circumstances. The Fed also created special purpose vehicles, or SPVs, to purchase specific instruments and lend money to them using its emergency authority. The SPVs, in turn, purchased assets to help restore liquidity in troubled markets. Lending under 13(3) also requires the Fed to be secured to its satisfaction. The Fed has taken a variety of paths to make sure it is secured to its satisfaction. In one facility during the GFC, it required borrowers to pay fees, which in aggregate function does a loss reserve. In another facility, it required money market funds or other investors that elected to sell assets to the SPV to then purchase subordinated debt issued by the SPV equivalent to 10 percent of the value of the assets they sold. It is also relevant to note that of all of the Fed's lending facilities established under 13(3) during the GFC, only one facility received credit protection from the Treasury, which is quite different from this time around. In part because the Fed's indirect asset purchase programs during the global financial crisis were more complex than the direct asset purchase programs set forth by other central banks around the world, the implementation took a little bit--for some of the programs, the implementation took a little bit more time. The ability to roll out a program quickly can provide benefits in some cases, serving as a bridge as other programs are put together. Fed economists involved in constructing some of these programs have also stated that, in hindsight, an earlier rollout of some of these programs might have made them more effective. Ultimately, however, whether an intervention was indirect or direct does not seem to have had much influence on its effectiveness. Following the GFC, the Dodd-Frank Act added some restrictions to Section 13(3). Under the revised law, the Fed retains the ability to conduct market-wide liquidity programs, but it now must obtain the Treasury Secretary's approval before establishing such a program. Also, it is required to report to Congress detailed transaction-level information on any loan extended under a Section 13(3) program within 7 days. Disruptions caused by the COVID-19 pandemic, again, drove the Fed to open market liquidity programs, some like GFC-era ones and some new ones, using Section 13(3) authority. Armed with the know-how from the GFC, the Fed was able to quickly reintroduce four GFC-era market liquidity programs. It also introduced new programs, and the three programs that we are talking about today are the new programs that the Fed introduced. For the reopened programs, the Fed--much of the design was the same as their GFC-era counterparts. However, unlike the GFC-era facilities, again, the COVID-19-era facilities, aside from two facilities, received Treasury's credit protection. The relevance of this is that the Consolidated Appropriations Act 2021, signed into law on December 27, 2020, definitively closed these CARES Act facilities and rescinded funds not needed to meet the commitments as of January 9, 2029, of the programs and facilities established. The Act preserves the Fed's authority under Section 13(3). However, the Act removed Treasury's authority to use funds to support a Fed facility that is the same as the three facilities that we are talking about here today. The Act made an exception for the Term Asset-Backed Securities Loan Facility (TALF), which is a facility that was also opened during the GFC era. How broadly the Treasury will interpret the, ``same as,'' language in the future remains an open question. Therefore, if the Fed wanted to create a lending facility that falls within the scope of the Act in the future, it may have to find other ways to secure the loans to its satisfaction, such as using risk management techniques used during the GFC-era facilities. But there also may be some need for the Treasury to support a future lending facility. If you are comparing a GFC facility versus the COVID-19 facility, the COVID-19 facility with the Treasury support was able to accept a much broader range of eligible collateral than a similar facility that was open during the GFC era. Of course, all Fed lending facilities under Section 13(3) will continue to require the Treasury Secretary's approval. This concludes my remarks, and thank you. I welcome all questions. [The prepared statement of Ms. Rhee can be found on page 47 of the appendix.] Chairman Himes. Thank you, Ms. Rhee. Dr. Sahm, you are now recognized for 5 minutes. STATEMENT OF CLAUDIA SAHM, SENIOR FELLOW, JAIN FAMILY INSTITUTE Ms. Sahm. Thank you. I greatly appreciate the opportunity to give remarks on the Municipal Liquidity Facility. I am going to focus on three ways that this emergency facility for State and local governments could be improved for the next crisis. First, we should tailor the eligibility and the loan terms so that they are specifically for State and local governments experiencing financial distress. To do so, use economic conditions, particularly conditions in the local labor markets, to make those determinations, and finally, improve the administrative systems so that it is as easy as possible for those who need the relief to access it. We know that swift and effective relief is absolutely essential in times of crisis. I began at the Federal Reserve in 2007. In my first year, I watched the global financial crisis in the Great Recession have an incredible toll on families, small businesses, and communities, and that lasted for years. This time, you all stepped in very aggressively, and boldly, and what Congress did and what the Federal Reserve did early in the crisis, in particular, was a godsend. But when you are innovative and bold, you can always do better, and so it is the perfect time to reflect, hold those accountable who were in charge of implementing these policies, and to prepare for the next crisis. Before I go through the proposals in more detail, I just want to focus on the stated purpose of the Municipal Liquidity Facility, as it is stated on the Federal Reserve's website, to help State and local governments better manage the cash flow pressures they are facing as a result of the increase in State and local government expenditures related to the COVID-19 pandemic and the delay and decrease of certain tax and other revenues. We have talked about the success metrics. The municipal bond market did stabilize. It stabilized quickly. It took a little longer for those that didn't have as good a credit rating, but we got there. That is success and it should be recognized. That said, two loans were made to State and local governments, and we know that there were more than two that were suffering during this crisis and continued to, so let us do better. The key features that we have talked about, the size and that only about 11\1/2\ percent of the loans were accessed, the eligibility was, largely, by population. We now know that a lot of the budget stresses were not concentrated in some of our large States and cities. We need to get the money to who needs it and, as was mentioned before, the State and local governments only had access to bonds up to 3 years of maturity. They were more than that for corporations. So with the first proposal to target eligibility, as I said, we know that population was not enough. The Fed had to reverse course and lower the population thresholds in August. That was too long to wait for that. And if we do better targeting, then it will be the State and local governments that most need the aid and we can, potentially, reduce penalty rates. We can subsidize those rates because you aren't opening up to all institutions. You can be very targeted and tailored in the relief. Now, it is a big question of, how do you do that targeting? I suggest using local economic conditions. The Bureau of Labor Statistics puts out very detailed subnational statistics. No one can influence them, and they do tell us about the hardships that workers are facing and businesses in a crisis. And finally, administering these programs is essential. The signing ceremonies are not enough. The Fed announcements are not enough. The cash has to get to those who are eligible and those who need the relief. Innovation is hard. The Fed stood up a facility that did not exist before this crisis. It was delayed relative to the facilities that were directed at Wall Street. The terms had to be adjusted. There was a lot of debate among Fed and Treasury about exactly who should be eligible. That created uncertainty for State and local governments. We can't do a one-size-fits-all approach. State and local governments, nearly all of them, have balanced budget requirements. They have really faced a lot of uncertainty in terms of revenues. We need to make it easier for them. I just think the Federal Reserve is a way that Congress can get money out. Congress needs to lead, but the Fed can be a very effective way to implement the policies and the relief that you want to see done. Thank you. [The prepared statement of Dr. Sahm can be found on page 57 of the appendix.] Chairman Himes. Thank you, Dr. Sahm. Mr. Russo, you are now recognized for 5 minutes. STATEMENT OF CHRISTOPHER M. RUSSO, POST-GRADUATE RESEARCH FELLOW, MERCATUS CENTER AT GEORGE MASON UNIVERSITY Mr. Russo. Good morning. Chairman Himes, Ranking Member Barr, and members of the subcommittee, thank you for inviting me to speak today about the Fed's Emergency Lending Facilities. My name is Christopher Russo. Before joining the Mercatus Center at George Mason University, I advised senior Fed officials on a range of monetary policy decisions. Today, I urge you to safeguard the Federal Reserve's independence by keeping the Fed out of credit policy. Really, my arguments can be boiled down to just three points. First, the Fed's role as the lender of last resort is essential to achieving its monetary policy objectives, these same objectives that you have given it. Second, 10 of the Fed's Emergency Lending Facilities cross red lines from monetary policy into credit policy. And third, crucially, using the Fed for credit policy damages its independence, making it less effective in the next crisis. I think we will agree on my first point, that the Fed as a lender of last resort is essential to achieving the goals you have given it: maximum employment; and price stability. Congress created the Fed for exactly this reason, following a dash for cash on Wall Street in 1907 that led to a banking panic and then a contraction on Main Street, a massive one. To be clear, it is 1907, not 2007. And we have known what to do since 1802. The Fed, as the lender of last resort, lends to banks without limit in a timely manner, based on good collateral and at a penalty rate. Those five elements of the lender-of-last-resort doctrine are essential. They have been developed during hundreds of years of financial crises, since we started having them. The purpose of the lender of last resort is liquidity, not credit, and all five points matter for that purpose. The Fed's first test came in 1929. Faced with yet another banking panic, the Fed dramatically failed. It did not lend to banks without limit or in a timely manner, and in doing so, healthy banks were forced to fail. These mistakes compounded what would have been a bad, but a once-in-a-few-years recession into the Great Depression. The Fed has learned the lesson from the Great Depression, in my view, as former Fed Chairman Bernanke vowed never again. I also think we will agree on my second point, that recent emergency lending programs crossed red lines from monetary policy into credit policy. Fed Chairman Powell said so himself. Ten of the Emergency Lending Facilities were designed to assist Congress and the Treasury in allocating credit, not liquidity, to the broad financial system. These credit programs don't meet the five requirements I outlined for a lender of last resort. They lend to nonbanks at favorable rates and with shady collateral, with respect. For example, the Fed's Municipal Loan Facility made direct loans, as we have recognized here, only to the State of Illinois and the New York MTA. The Fed can't create new savings from nothing. It can only shift them around. And like any government subsidy, it benefits some, as has been described, but the unseen harm comes to others, and that is less recognizable in some of the studies that have been done. I would also mention that when we talk about the effect of the Fed on markets in these and other actions, market volatility, price volatility, that itself is not dysfunction. That itself is not illiquidity. So for all of those reasons, I hope we will agree on my third point, that involving the Fed in credit policy damages its independence and its effectiveness. Congress recognized this in the 2010 Dodd-Frank Act after the global financial crisis. Congress specified that emergency lending is for unusual and exigent circumstances. It must be broad-based and only for the purpose of providing liquidity to the financial system. Congress put these restrictions in place because in the global financial crisis, the Fed had lent to nonbanks on Wall Street and it lent credit--it wasn't involved in liquidity-- because these firms were deemed too-big-to-fail. Congressmen, Congresswomen, it is the same principle. Whether it is nonbank borrowers on Wall Street, K Street, or yes, even Main Street, credit policy is political and it is not the Fed's proper role. So, I ask you to resist this siren call of turning the Fed from our central bank into our piggy bank. Whether the Fed finances green energy or the construction of a border wall or anything else, it would subject the Fed to immense political pressure. The damage to the Fed's independence would harm its effectiveness in the next crisis, and as we saw in the Depression, that does not end well. Congress regularly asks the Fed to take on more power. As far as I know, the Fed is the only government agency to refuse. Instead, I ask, like Fed officials have many times, that you safeguard their independence so they can do the important jobs you have given them. Thank you again. I look forward to answering all of your questions. [The prepared statement of Mr. Russo can be found on page 53 of the appendix.] Chairman Himes. Thank you, Mr. Russo. I now recognize myself for 5 minutes for questions. Mr. Wooden, let me start with you. You are the one sitting State Treasurer on the dais right now. There have been proposals made to make these programs more permanent, more predictable, and more stable. One of the things Congress does worry about and should worry about is moral hazard, the idea that if that backstop is out there, it may cause folks in your position to know that it is there and, therefore, perhaps be less prudent in the decision-making. How would a State Treasurer think about that, and how can Congress be made more comfortable that if these programs were more predictable and just simply there, that we wouldn't see less prudent behavior on the part of decision-makers at the State and municipal level? Mr. Wooden. Thank you for that question. And, first, let me say I think just based on the numbers alone and what actually happened with the program, it was an unmitigated success in terms of stabilizing the markets. Part of the discussion--and as a treasurer, I am Main Street. I see day to day on the front line what is happening with governments and essential services and concern about meeting payroll. The moral hazard argument is that this program was structured and implemented as a lender of last resort, in terms of that standard was met. Now, I think there is reasonable disagreement and debate on whether or not there should have been the penalty associated with it and off-market rates. But it did the job in terms of being a lender of last resort. And so I think there was, in fact, zero harm of moral hazard in this event, and that was proved out by the fact that there were only two issuers that utilized it. But there were many issuers, like the State of Connecticut and others, who benefited and helped stabilize our access to the marketplace in a way that did not harm government but helped government and helped Main Street and Connecticut. Chairman Himes. Thank you, Mr. Wooden. I have one more question that I just want to throw out there as sort of (inaudible). I have watched or participated now, sadly, in any number of interventions in the market. I wasn't in Congress, but the Mexico bailout, then, of course, the infamous Wall Street bailout, the auto industry, and now everything that we have done. That is not the way markets are supposed to work. But those of us in Congress are put in the position of choosing between doing something which buttresses markets, not the way they are supposed to work, or watching the apocalypse unfold. One of the things, if we are going to continue to do these programs, I would point out that I think that all of the programs I just mentioned actually didn't cause any loss to taxpayers and, in fact, in many cases, provided a gain to taxpayers. But one of the challenges is that these programs are perceived by my constituents and, I think, by Americans as always benefiting the corporation or management. Why? Because the proceeds are often used to pay bondholders. And so, workers and others are left to say, wait a minute, once again, you are bailing out the corporation I work for and what do I get? And in many instances, those workers are laid off. Now, you don't need to be too far to the left of the political spectrum to say that is a problem. So my question is, and I posed this question to Fed Chair Powell some time ago, how can these programs be thought of and restructured in ways that at least alter the perception that they are all about corporations and businesses servicing their debts rather than standing by their workers? Dr. Sahm, you are the first one with the mask off so-- Ms. Sahm. Okay. I buzzed in. I think there was a big step forward in this crisis. You have two new facilities that lend directly to Main Street. Putting those on equal footing in terms of terms, eligibility, how fast they get started, that is a big step forward. And so, I really applaud that attempt to get money directly to Main Street and I think that is what people want to see. We don't want Wall Street to go down, but we don't want Main Street to either. Chairman Himes. So you are saying, and I agree with you, that if we make these credit facilities available to smaller businesses, that mitigates some of the sense of, we are just bailing out the banks? But what else? The Federal Reserve hasn't--and maybe the answer is there is nothing you can do. You just, as an elected official, need to explain to people that when you stabilize Delta Airlines, you are doing a good thing for the economy, even if Delta Airlines turns around and lays off employees. But is there anything we can do to try to address that perceptual issue? Ms. Sahm. Fiscal policy. I don't think in a crisis people care where the money is coming from, whether it is the Fed helping keep interest rates low or it is Congress getting stimulus checks in their pocket. I think it is more about the concerted, all-hands-on-deck approach. That would-- Chairman Himes. Thank you. I am out of time, but I appreciate that response. With that, I now recognize the distinguished ranking member of the subcommittee, Mr. Barr, for 5 minutes. Mr. Barr. Thank you, Mr. Chairman. Let us talk about how we measure the success of these emergency liquidity programs. Members of Congress heard from market participants that TALF, in particular, and the corporate credit facilities were a psychological backstop, and even if the utilization wasn't there, that the markets weren't seized, that they actually functioned because there was this psychological backstop that was there. And so, I mentioned in my opening statement that it is important that we grasp how to measure the success of these facilities. Looking simply at utilization or take-up makes them, perhaps, look unsuccessful, but a broader look at the market and credit conditions in this unprecedented economic shutdown and evaluating it through the lens of the Fed serving just as a backstop but not as necessarily a provider of credit might indicate that they were successful. So, Mr. Russo, how would you evaluate the performance of the Fed's facilities and what metrics should we actually use to judge their success? Mr. Russo. Congressman, thank you for that great question. As an economist, I think it is important to look at the benefits of a policy as well as the drawbacks. One thing that hasn't been mentioned already in terms of the drawbacks of such a policy is, first, there is only so much real economic savings to be allocated. Again, that is all the Fed can do; they can allocate savings. So when the Congress or the Fed or anybody else decides to allocate more savings to New York and Illinois, they are taking away from somewhere else. You don't see where, but that is a real drawback. The second thing I will mention is that by trying to peg prices--in this case, an interest rate--for credit, you do make some better off and some worse off, like any subsidy. For example, Illinois got better rates if we buy the arguments that were put forth before, on these municipal loans. That gave a worse return to the pensions that own those bonds or that finance that new investment. Again, I think there is a complicated cost-benefit analysis we could do here. But I would just remind you of those other sides of the ledger. And, again, it is not really the Fed's role to be doing credit policy. Mr. Barr. Yes, let me stick with you and the point that you are making. Some of our colleagues have suggested that the Fed should take a more active role in addressing social or environmental issues. Some have even gone as far to suggest that the long-run changes in weather patterns due to climate change are emergencies and, thus, necessitate the Fed using its 13(3) emergency lending powers to directly finance green energy. Mr. Russo, what would the impact be on the Fed's independence if it strayed outside of its mandate and actually took a more active role in social and environmental issues? Mr. Russo. I believe that its independence would be irreparably damaged, and in doing so, it would weaken its independence and its effectiveness in the next crisis. Mr. Barr. Mr. Russo, I want to ask you now about the penalty rate. Some have contended that the terms and rates and some of your fellow panelists here have contended that the terms and rates of some of the Fed's facilities are too onerous, resulting in lower uptake if prices were more aligned with market rates. As you know, the Fed is required by regulation to charge a penalty rate at a premium to market rates in normal circumstances. This is, in part, to ensure that the Fed maintains its role as a backstop and provider of liquidity rather than replacing private markets. What impact would an adjustment to the requirement of the Fed to charge a penalty rate have on its role in the economy, and could that change its role from a backstop to a direct competitor with private entities? Mr. Russo. Not, ``could,'' but, ``would,'' sir. Thank you again for that question. To give you some context here, the Fed's loan to Illinois that was a direct loan had an interest rate of about 3 percent. We have seen the inflation in the last year. In real terms--not dollar terms, but in real terms inflation adjusted, that is a negative return. Just to summarize, when we reduce any of those five criteria I set out for a lender of last resort, you no longer have a lender of last resort and that includes getting rid of penalty rates. Mr. Barr. Yes, I think preserving the role as lender of last resort is very important in not displacing the private sector. Final question to Mr. Russo, in the 115th Congress, when I chaired this subcommittee, I sponsored a package of Federal Reserve reform bills, which included a bill called the Congressional Accountability for Emergency Lending Programs Act. Mr. Hill was part of this effort. The bill would require the affirmative vote of a greater portion of the Federal Open Market Committee (FOMC) than is currently required. It would also require an additional and enhanced role from Congress to authorize these emergency lending authorities. Of course, the CARES Act did interject the Congress in approving some of the emergency lending that we saw in the pandemic. But what are your thoughts on a bill like this to strengthen the congressional role to limit the Fed's emergency lending powers? Not eliminate 13(3), but just provide a little better accountability, involve more of the members of the FOMC in this? Mr. Russo. Thank you, sir. I believe the Congress plays an important role in the oversight of the Federal Reserve. I can't comment on that legislation specifically, and I don't endorse legislation. But I would be happy to work with your office on these issues, going forward, if that would be helpful. Mr. Barr. Thank you, Mr. Chairman, for your indulgence. I yield back. Chairman Himes. Thank you to the ranking member. The Chair of the full Financial Services Committee, Chairwoman Waters, is recognized for 5 minutes. Chairwoman Waters. Thank you very much, Mr. Himes. I would like to continue the discussion that you have initiated around maximizing the public interest. Mr. Konczal, we know that emergency financial system assistance is sometimes necessary to rescue our economy when it is in crisis. But carrying out this assistance in a way that protects workers and has other reasonable conditions attached is critical. For example, in 2009, the Treasury Department extended $62 billion in assistance to General Motors and Chrysler, which helped to save 1.5 million jobs. However, Treasury was eager to exit its investment as quickly as possible. It sold its stake in both companies without securing any improvement in workers' wages or other corporate practices, and its sale came at a loss, even though GM and Chrysler were profitable just a few years later. Last year, we set aside $17 billion in the CARES Act to help national security firms like Boeing. We put conditions on that assistance, including workforce maintenance requirements. Boeing did not end up using that aid, instead, opting to sell a corporate bond after the Fed's actions unfroze the corporate bond market. Because the corporate bond market didn't have the same strings attached as the CARES Act national security bonds, Boeing proceeded to lay off 12,000 workers. Mr. Konczal, what ideas should Congress consider to ensure future emergency lending programs are carried out in a way that is in the public interest and maximizes the vital goals of full employment and economic stability? Mr. Konczal. Thank you for that question. So, a few thoughts on that. One is that, in so much as a lot of these facilities are setting market-wide interest rates and bringing them down when traditional monetary policy is weaker at doing that, it is very hard to put on conditions at that point. So, you want to think about fiscal policy. You want to think about managed settlements, particularly in times of crisis, like we did with the airlines. I contrast these programs with the Payroll Protection Program. As compared to these programs, the Payroll Protection Program had significant take-up, approximately $500 billion with 5 million loans. And there, you had a downside from the point of view of business but an upside from the point of view of the public of having significant terms on those loans, particularly payroll. In exchange for that, there was the upside to the business of having those loans turned into grants. With these emergency lending programs, it is very difficult to have that kind of balance because we are working through interest rates. So you can try to put penalties on. The Primary Market Corporate Credit Facility, which would have made direct loans to corporations, had no uptake because it had a penalty rate. The Main Street Lending Facility, for instance, had some obligations that mirrored the Payroll Protection Program but also saw limited uptake. So one needs to think about the balance of upside and downside for the business in terms of making sure that we can carry out programs so we can carry out public obligations in exchange for support. I also think that automatic stabilizers are quite important. I think unemployment insurance, the expansion in the CARES Act and the American Rescue Plan was very important in helping ensure that workers got through this and got an equitable shake of the downturn that we went through. And finally, direct support to cities and municipalities in the American Rescue Plan was incredibly important. Chairwoman Waters. Thank you very much. Let me just say that despite the fact that in emergency assistance to these companies, certainly, you are concerned with the economy and what is happening and how can we protect having a safe and sound economy, et cetera. But I certainly would not like to think that we can excuse these corporations from using our leverage to ensure that they protect workers in some way. Don't you agree that both can be done? Mr. Konczal. Yes, absolutely, and I think there are some models we can look back at. What happened with the airlines, I think, is one possible role and model, going forward. Legislation has been introduced about a bailout manager that I think is really worth discussing and thinking through and reassessing. You look at the Main Street Lending Facility, which put a ban on buybacks and dividends for firms that took them and that was enforced, and the sky didn't fall when we banned buybacks and dividends or slowed the rates at the largest banks. And so, there are obligations that can be put in place that we saw a limited version of that worked perfectly fine and still left corporations in a perfectly good place to be able to expand in this recovery. Chairwoman Waters. Thank you very much. I yield back. Chairman Himes. Thank you. The gentleman from Texas, Mr. Sessions, is now recognized for 5 minutes. Mr. Sessions. Mr. Chairman, thank you very much. I want to thank the panel that is here before us today and I want to engage several of the members of the panel. Ms. Rhee, I listened very carefully when you talked about liquidity, and liquidity in the marketplace is always an indication to me about what is available and what exists and those sorts of measures, and I, with great interest, listened and I appreciate your comments. Dr. Sahm, in looking at your written testimony on page-- well, the pages aren't here, so maybe 5 pages back, you talk about changes in State revenues during COVID. And I note, among others, Delaware, a huge increase of revenue to the State, and I don't know whether this was above what was projected or what it could be. Did this include Federal money that would flow in or just revenue generated by the State? Ms. Sahm. No, these were just revenues by the State, but they include, say, corporate profit, income taxes. So, that is an important piece of Delaware. The point of that chart is mainly to show that there are wide variations in the tax revenue shortfalls, and to your point or to your question, largely, the shortfalls were less than expected in March of 2020. Mr. Sessions. Yes, and in looking at those, I looked at California as being a significant increase. Is that an indication about business as usual and increases in a, ``COVID era,'' or what would you look at that and draw a conclusion about? Ms. Sahm. Year to year, we do expect increases in tax revenues. So the particular numbers, say, for the State of California, I wouldn't generalize so broadly in terms of how much relief they got in this crisis. And also, this is only the tax side. Expenditures rose in a lot of places. Again, I think that that is a really good argument as to why the Municipal Liquidity Facility could have been better targeted, and you might argue that the direct aid that was in the American Rescue Plan could be also to where there is really economic distress. Mr. Sessions. Yes. And I think that is a point, going back to Ms. Rhee, you need to look at the liquidity to see how sick the patient is or how well the patient might be to draw that conclusion. Mr. Russo, in looking at your testimony, which, I really appreciate, today, the Wall Street Journal has an article that I engaged the president of the Dallas Fed on--really, he engaged me on it--and that is the Fed prepares to pull back on stimulus. The president of the Dallas Fed talked to me about how he believed--and I think the word is, ``tamper''--put a brake on, reduce. The Wall Street Journal today talks about, really, what I think should be part of this hearing. So, I am going to make it part of the hearing. The projections Wednesday show half the officials expect interest rates would need to rise. The main catalyst--going to another paragraph--of the problem is the fact that inflation has accelerated faster than anticipated and it is remaining elevated. At some point, there is danger to what we are doing, isn't there? Can you lend too much money or accelerate the marketplace beyond normal? What would you say about that? Mr. Russo. Sir, thank you for the question. I think what you have articulated there is correct. The Fed often looks at what they say are balances of risk. In the last decade, the balance of risk has really been to the downside for recession and for low inflation or even deflation. Entering the coronavirus pandemic, my perception is that they were trying to address that immediate issue with as much monetary stimulus as they could, and I approve of those actions--things like lowering interest rates to zero, doing large-scale asset purchases, acting as an actual lender of last resort. Those, I think, are on point. And so long as the Fed remains independent, they can modify those actions as appropriate to keep inflation on track and that is, again, I think, the important thing, their independence to be able to do that. Mr. Sessions. Thank you. One question to the panel. And anybody can answer this. During the last 2 years, there has been an extensive amount of national debt that was taken on, in the trillions. What would we anticipate the interest rates to be next year, just off that new loan amount? Has anybody looked at that, the interest payments that we will need to make in 2023, just based upon the extension of monetary money in the last 2 years? Mr. Russo. Sir, based on where we are right now, in general, interest rates are predicted to remain low, at least into next year. Going further out, you might have more uncertainty. There is a question, though, as you have raised, I think you are alluding to, that the unsustainable rise in debt could lead to a situation either through a debt crisis, or not even a crisis, in which you have sustained higher interest rates. That is an economic possibility. We have seen many times in history before-- Mr. Sessions. Mr. Chairman, if I could just have one more minute, sir? I am talking about the fact that we will have to pay interest. Mr. Russo. Yes. Mr. Sessions. New interest payments based upon what has occurred over the last 2 years. What is that incremental amount? Has anybody figured that out at near zero interest rates, but we still have to pay interest on this. Does anybody know what that might be? Mr. Russo. Sir, I don't have that number. But I would be happy to talk to you afterwards and get that number for you. Mr. Sessions. Right. Thank you very much. Mr. Chairman, thank you very much. Chairman Himes. Thank you. The gentleman from New York, Mr. Torres, is now recognized for 5 minutes. Mr. Torres. Thank you, Mr. Chairman. Mr. Russo, I know you had a brief exchange with the ranking member regarding climate change. My first question is, do you think climate change is an emergency? Mr. Russo. Sir, thank you for the question. With respect, I am not an expert on climate change. I am here to talk about monetary policy where I have expertise, not my personal views. Mr. Torres. Right, but whether climate change is an emergency will determine whether it poses a risk to the financial stability of the country. I have a question for Mr. Konczal. The House Select Committee on the Coronavirus Crisis found that the credit facilities of the Fed lend disproportionately to oil and gas companies. Do you think that the Fed is planting the seeds of long- term financial instability in lending so heavily to fossil fuel companies? Mr. Konczal. The studies about the SMCCF, basically, found that it helped industries across-the-board, and that specific study found that it under-lent to finance and over-lent to many other industries, including oil and gas. The Fed should be accountable to that and should answer Members' questions about whether or not their distribution of the assets they purchased in the SMCCF is correct or not. I think the biggest issue right now is the systemic risk that climate poses to the financial system. There are very basic and easy supervisory actions that they can take outside the rulemaking process to force companies and banks to disclose their exposures to climate. Notably, insurance companies and asset managers like BlackRock are trying to get this information and they have a very difficult time doing that. That is the perfect spot for regulators to interject that. Mr. Torres. The stabilization of credit conditions during COVID, it has been said, had more to do with the announcement of the lending facilities rather than the lending facilities themselves. But as has been noted, these lending facilities, particularly the Main Street and the Municipal Liquidity Facility, have been shown to be ineffective. Do you think that undermines their ability to be a psychological backstop in the future, and does that strengthen the case for reforming them? Mr. Wooden? Mr. Wooden. Just to clarify, did you say they have been shown to be ineffective or effective? Mr. Torres. Ineffective. The Municipal Liquidity Facility had only two borrowers and, as I understand the Main Street Lending Program, even though it had $600 billion of capacity, it only lent $16 billion. So, that is hardly a success story, in my mind. Mr. Wooden. I believe it is a success story, not because of the amount of capital, which represented about 2.3 percent programmatically, but because of what it did for the market and the access it provided and that stability at a time of extreme volatility. I think that is one extremely important metric of success. As we have touched upon, actual delivering of capital and support to municipalities across this country in that metric was not as successful. But the first metric-- Mr. Torres. No, I will concede the point about psychology. But how do we restructure these programs to be more effective? Mr. Wooden. In the recommendations in my written testimony, standing up a program now because speed is key. But what happens, and we have seen this with virtually every fiscal stimulus support program is it goes so fast and there is so much that is missed. And that is why I am recommending standing up a program not for permanent ongoing usage but in advance. So, we look at issues of size of municipalities. In the State of Connecticut, there wasn't one municipality that could benefit from it as initially structured to when it was revised. But standing these up in times of fiscal distress will allow us to execute more quickly and address some of these deficiencies that we are highlighting today. Mr. Torres. Mr. Konczal, according to Moody's, corporations are 63 times more likely to default on loans than States and municipalities, and yet States and municipalities, as well as small businesses, were subject to a much steeper penalty rate. I have the impression that the Fed is much more favorable to corporations and Wall Street than to Main Street and States and localities. Is that a fair analysis, or what is your impression? Mr. Konczal. That is absolutely true that as an empirical matter, in the financial research that municipalities default much less than their equivalent credit ratings from the ratings agencies, which put them at a huge disadvantage for accessing capital for our schools and for our roads and everything else. I think the Fed was very selective and material even on how it picked its discount rate it applied and where it applied it, and in the future it should be held much more accountable and much more standardized about how it does that. Mr. Torres. My time has expired. Chairman Himes. Thank you. The gentleman from Texas, Mr. Williams, is now recognized for 5 minutes. Mr. Williams of Texas. Thank you, Mr. Chairman. And thank you all for being here today. The Federal Reserve took extraordinary measures during the pandemic because there was so much economic uncertainty surrounding the virus. Now, looking back, it seems like we may have misjudged the level of government involvement that was necessary to keep businesses aloft with some of these lending facilities. The private sector was willing and able to help businesses, and many of the Federal Reserve actions were not utilized to the extent that we assumed they would be needed. So if we misjudged the need for these facilities when we were in the heart of the pandemic, then we should not continue the practice of having the Federal Reserve competing, as we have talked about today, with the private sector when they are able to provide proper liquidity for businesses. Mr. Russo, can you talk about some of the unintended consequences if we try to make these emergency measures permanent and constantly have the government competing with the private sector, which, I believe, is the power of America, the small businessman? Mr. Russo. Thank you, sir, for that question. I think it is a very important one. Let us take a step back and look at the economics. What are we doing when we set up an Emergency Lending Facility to provide credit, not liquidity? We are setting a price. We are setting a price for credit of States, municipalities, corporations, and businesses on Main Street. Can the government set prices as well as a market? In my view as an economist, no, they cannot. I believe that is supported by over a hundred years of academic research on this issue. We get outcomes that are not the outcomes we could achieve via market as a market is able to bring together all the sort of information that a central planning board cannot. Mr. Williams of Texas. Okay. Thank you. I am greatly concerned that some Democrats in Congress are looking to the Federal Reserve and other regulators to enact their radical agendas when they fail to get them passed in Congress. As some of you may be aware, I am in the car business. I have been a car dealer for 52 years, and I was targeted under Operation Choke Point when some of our agencies took a more proactive approach to achieve their policy goals. For those of you who may not remember, the Obama Administration decided which legal industries posed a risk of money laundering and, therefore, must be debanked and denied financial services. I was involved in that. Bureaucrats behind closed doors were targeting legal American businesses, and there was no recourse if you were being targeted by our own government. I am concerned the Federal Reserve will get back into the business of picking winners and picking losers if we set up permanent lending facilities with specific policy objectives. So, again, Mr. Russo, can you talk about some of the risks that could happen when the Federal Reserve sets up facilities with specific policy goals outside of their dual mandate? Mr. Russo. Yes, sir, and I share your concerns in what you have articulated very much. In general, when the Fed has less independence to set interest rates and to do its large-scale asset purchases, it politicizes that process. But these are not political questions--the appropriate Fed funds rate, for example. But by involving Congress, you will make the Fed less effective not only in its everyday interactions or its everyday actions like choosing how much to buy on Wall Street. But even more than that, in a time of crisis, reducing the Fed's independence has been shown in the past to reduce its effectiveness in a crisis. Let me give you one important example. Back in the Great Depression, the Reconstruction Finance Corporation (RFC), set up by Congress, was like a lender of last resort. Congress, unfortunately, leaked the list of borrowers to the RFC and that created great stigma for those borrowers, worsening the effect of the Fed's interventions for the next hundred years. There is now stigma around the Fed's discount window. So, there are real risks here that are not easily understood when you involve Congress in the monetary policy decisions of the Federal Reserve. Mr. Williams of Texas. I have a minute left. Mr. Russo, I am going to let you have that time. I wanted to give you the opportunity to talk about inflation and some questions that you would like to get answered from Chairman Powell since he will be before our committee next week. Mr. Russo. Thank you, sir. Let me just emphasize that I agree with the monetary policy actions taken by the Federal Reserve. They have gotten national income up to where it would have been in the absence of the pandemic, and in my view and the view of my colleagues at the Mercatus Center at George Mason University, that is a good metric for how a successful monetary policy is going to be. One question I would ask Chair Powell is, where, in his mind, are thresholds for reexamining his views about inflation, which, as you and others have articulated, he views as transitory? We have seen inflation expectations rise, and again, I don't want to be an alarmist here. I believe that inflation is transitory. But in his view, if we have inflation expectations from, say, 3 to 4 percent or to 5 percent, where would he pause and reexamine? I think that would be a very important question to ask him. Another question, and I think he would be reluctant to answer but I think it is important to ask anyway, is what is his timeframe for thinking about average inflation targeting? Over the past 6 years, we have averaged 2 percent inflation, according to the Fed's preferred measure. With all the inflation we have had, again, we have gotten national income right back on track. How long a window is he looking at? Mr. Williams of Texas. Thank you. Mr. Chairman, I yield back. Chairman Himes. Thank you. The gentlewoman from Pennsylvania, Ms. Dean, is now recognized for 5 minutes. Ms. Dean. Thank you, Mr. Chairman. And thank you to all of our witnesses today. And I am really delighted that the chairman chose to have this hearing to examine and measure what successes we had in this past year during an incredibly challenging time to health and to our economy, and to learn what we can learn for the future, to do it better in the future when other crises arrive. One thing I wanted to look at is a possible barrier that we believe took place last year. In July of last year, at our hearing on monetary policy and the state of the economy, I asked Chairman Powell about Nationally Recognized Statistical Rating Organizations (NRSROs), and the Fed or Treasury's decision to accept only ratings from the big three for businesses applying to Emergency Lending Facilities. We saw that the lending facilities were underused during the pandemic. I will start with Mr. Konczal, do you believe that accepting only the three big rating agencies was a barrier to some businesses in their application for support? Mr. Konczal. I believe the fundamental barrier for uptake on a lot of these programs, for the physical loan uptake, was the fact that there was a downside from the point of view of a business of having a penalty rate but no corresponding upside. So once the market stabilized, many borrowers could turn to the market and, thus, really what the Fed was doing was setting the interest rate in the same way it sets the short-term interest rate. I don't know enough about the nature of the ratings agency business right now to answer. Ms. Dean. Ms. Rhee, would you care to comment on that? Would it have helped if small businesses who had acceptable credit ratings with other nationally recognized rating agencies would have been able to apply? Ms. Rhee. I am specifically informed on the national rating agencies part of it. But one of the reasons why the Fed does have all the requirements and the barriers that goes in is, really, these facilities are really meant to be emergency. It is really meant to be short term. We talked a lot about how it acts as sometimes a kind of a restarter for the market, a backstop for the market. So in some sense, I think just focusing on the utilization itself is really not a fair judgment on whether a program was effective or not. There are various factors that you look at, and also look at what really was the intention of these facilities when they were first announced by the Fed and the Treasury. We need to remember that when the Fed is enacting these 13(3) authorities, and announcing these facilities, it is really in the hopes of returning the markets back to normal, and then also exiting pretty quickly so that it is not affecting the markets in the long term. Ms. Dean. I appreciate that, and my questions are a way of putting in a shameless plug for legislation that I introduced last year, along with Chairwoman Waters and Ranking Member Barr, which we did pass in a bipartisan way, that would have the Fed treat all national credit rating agencies uniformly. I hope we will be able to do that so the barriers to small businesses, women-owned businesses, minority-owned businesses, will be reduced in any way that we can. I think I still have a moment. Treasurer Wooden, in your testimony, you recommended a number of reforms to the Municipal Liquidity Facility, including establishing a permanent emergency program. Would you mind just fleshing that out a little more? Mr. Wooden. Sure. With these programs, we always, in the first few weeks or months, discover in a moment of crisis how many deficiencies exist, and going through this experience-- they say you should never let a good crisis go to waste, right? In this case, we have a lot of learning from that, and I think standing it up--because we do need the speed with which Congress moved last time. We just need a better product. And if we take the time now to incorporate the lessons, improve on those deficiencies, and still leave it as an emergency use authorization, that will create a better product as well as going back to the State of Connecticut's experience, we would have had to--and I drafted legislation to allow municipalities to access the Federal program through the State of Connecticut. We had to stand that up. So, we couldn't use it. But having an existing shelf-ready program will allow States and municipalities to put mechanisms in place in advance should that fiscal crisis emerge. Ms. Dean. I thank you all for your thoughtful answers, and I yield back. Chairman Himes. Thank you. The gentleman from Arkansas, Mr. Hill, is now recognized for 5 minutes. Mr. Hill. Thank you, Mr. Chairman. I appreciate Chairman Himes and Ranking Member Barr for holding this hearing, an opportunity to visit with all of you about your suggestions on the recent crisis and the Fed and the Treasury's response to it. I spent the last--well, since April of last year, I have been on the Oversight Commission appointed by Mr. McCarthy to oversee the Fed and the Treasury's response, and it is down to just Pat Toomey and me because Leader Schumer and Leader Pelosi have not appointed any Democrats to that oversight responsibility. So, I don't know how seriously they take overseeing the post-CARES Act funding. But let me make a couple of points. One, I agree with Mr. Russo and Ms. Rhee that this is an emergency facility, and the guardrails around that include all of the things that Mr. Russo pointed out, including a penalty rate, short term, abundant collateral, exigent circumstances, broad-based eligibility, so that the Fed isn't targeting and playing favorites and it is short term. So the ability to, ``have a permanent emergency,'' is, truly, the oxymoron that that is. We can't do that. We won't do that. And I would remind my friends on the other side of the aisle that these classic, ageless, timeless central bank rules about lending as the last resort in an emergency were codified by whom? Democrats, in the Dodd-Frank Act. And I agree with that aspect of the Dodd-Frank Act. I think we should be very vigilant about not turning the Fed into, as Mr. Russo says, a credit-allocating piggy bank. Now, to my friend from New York saying that somehow these facilities benefited the oil and gas industry, certainly not in the TALF, which was trying to help short-term credit for borrowers, student loans, housing, credit cards, certainly, not in the corporate program that bought a broad section of corporate bonds and corporate ETFs, certainly not in the emergency facilities for airlines or for the defense industry. So that leaves either the Municipal Liquidity Facility--I don't believe there were any energy companies in the two loans--or Main Street. Now, Main Street--I looked it up while we were sitting here--made 1,830 loans for $17.5 billion on Main Street. Eight percent was to anybody in an industry classification of oil and gas or mining. Eight percent. So, I don't think that is overwhelming. I don't know what oil and gas and mining are as a percentage of the GDP. But I will also tell you that at the moment this crisis hit, oil and gas prices collapsed. Reserve valuations in the oil and gas industry collapsed last March--please remember that--and people could not access the public markets. So, I think the Fed and the Treasury, under the circumstances, did outstanding work, and I think this Congress responded to the emergency to benefit State and local governments. So, Mr. Russo, on this aspect of Federal credit allocation, did that work well with syn-fuels with Jimmy Carter? Mr. Russo. I'm sorry, sir. I missed the very end of your question. Did it work well with-- Mr. Hill. With syn-fuels loan, with Jimmy Carter. Mr. Russo. No. Mr. Hill. You weren't born. But did it work well? Your answer is no. Thank you. Mr. Russo. That is why I didn't understand the reference. Mr. Hill. How about Solyndra in the recovery plan after 2009? Was Solyndra a good allocation of credit? Mr. Russo. I don't have an opinion, but I don't believe the Wall Street Journal thought so. Mr. Hill. Yes. Okay. Let me say that when we get into the direct credit allocation business we get into trouble, and we compromise the Fed's credibility and independence. And I will tell you, look at the national security loans in the CARES Act authorized by this Congress. We helped airlines. We were to help the defense industry. I would ask you to read the Oversight Commission reports on the defense industry. We loaned $750 billion to Yellow Freight because it was essential, according to DOD, to national security, when all of the testimony before our Commission said it was not essential to national security. Therefore, the largest loan there is, really, probably done not in accordance with the CARES Act statute, but it was made. It is an emergency. It is a crisis. But that is why credit allocation is so troubling. Mr. Chairman, I don't know what this legislation was that was attached to the bill. We haven't talked about it today. So, I have concerns why that has been noticed for this hearing but never discussed. So with that, let me yield back my time, and thank the subcommittee and the witnesses. Chairman Himes. Thank you. The gentleman from Illinois, Mr. Garcia, is now recognized for 5 minutes. Mr. Garcia of Illinois. Thank you, Chairman Himes and Ranking Member Barr, for holding this important discussion, and I want to thank our witnesses for joining us today. When I first saw that the Federal Reserve was establishing a facility to help municipal bonds, I was relieved because I know firsthand how challenging the municipal bond market can be. I served in the Chicago City Council, in the Illinois Senate, and on the Cook County Board. Unfortunately, our bond ratings make national news. But what that means for us who live in working-class communities like mine is that schools, clinics, and libraries closed. It means that my neighbors worry about pay cuts and layoffs every budget season, and you don't need an economist to see that makes our economy worse. So, I had hoped that the Fed's Municipal Liquidity Facility would offer some relief, but I represent one of the very few communities that actually used the MLF and there is a reason many jurisdictions didn't sign up for the program. My State, Illinois, had to attest that we couldn't get financing in the private market before getting help from the MLF, and once we got help, the rates were barely better than the private bond market. So, I would like to direct my first question to Mr. Wooden. When the Fed helped out the corporate bond market last year, did they have to deal with similar terms, and the same level of stigma? Mr. Wooden. With respect to--I did not follow the corporate bond market as I did with the municipal markets. But from my general knowledge, I think the answer is, of course not. There is always a different standard with respect to the corporate markets than the municipal markets. Mr. Garcia of Illinois. Okay. And do you think that the Municipal Lending Facility was designed fairly or did it stigmatize municipal borrowers? Mr. Wooden. I will give you my, in the midst of the height of the pandemic response, which is that I thought it was unfair to State and local governments at the time--the penalty, the off-market rates, and the burdens associated with accessing it, and, certainly, the fact that it was designed so that not one municipality in the State of Connecticut was eligible for it. With that said, given how our finances turned out in the State of Connecticut and our ability to access the traditional markets and how the facility stabilized the markets, more broadly, there was, certainly, a benefit to the State of Connecticut and to most States in the country as a result on that metric but not in our ability to actually help municipalities in the midst of the pandemic. Mr. Garcia of Illinois. Thank you. Ms. Sahm, we are now going through a major crisis but, of course, that doesn't seem to be anything new. Every few years, municipal budgets get squeezed because of problems in Washington or on Wall Street. After the last financial crisis, municipal defaults and bond rating cuts hurt cities across the country and cut our recovery short. The MLF was a good idea but it was too little and too limited. How can we proactively address municipal bond issues in the future so that my neighbors don't worry about budget cuts and layoffs because of problems they didn't create? Ms. Sahm. Right. I think one step forward would be to create more certainty, so to take this time to really structure those programs, make sure municipalities know how to access them--to the point, make sure more municipalities can access them if they need to. I think we have heard a number of times this question of whether Emergency Lending Facilities are permanent or not. That power is in the Federal Reserve Act. Now, it has to be authorized by Treasury. But Emergency Lending Facilities will be used in future crises, and I very much hope they will be used for State and local governments, and that means that we should do everything we can to make sure they work for State and local governments. And I agree there is a long way to go here. Mr. Garcia of Illinois. Thank you very much, Mr. Chairman. I yield back. Chairman Himes. Thank you. The gentleman from Ohio, Mr. Davidson, is now recognized for 5 minutes. Mr. Davidson. I thank the chairman, and I thank our witnesses for participating in this hearing, and our colleagues. But I really want to take a little bit of time to explain what happened, not a theory, but what happened, because there is really a range of things that I think have been misstated as part of today's hearing. Perhaps, people just don't understand. I note that there aren't any actual market participants here. Municipal bonds--to the treasurer, thank you for coming--are a huge part of the market and a big part of what we are talking about today. But during the last half of March and, really, a lot of April of 2020, the Federal Reserve acted boldly and decisively in an unprecedented way. I think PhDs will be writing for decades about what went right and wrong there. But for the action of the Federal Reserve, and 13(3) provisions, which were, frankly, stretched to the max of their statutory limit, we would have really had a massive collapse in our markets. Markets work when there is equilibrium between buyers and sellers, and there was no buy side. I spoke to a hedge fund manager who had $800 million in cash on his balance sheet at the time in a pretty conservatively managed fund, and in a period of 10 days, they burnt through over $500 million in margin calls. What are margin calls? Everyone in the room understands, but not everyone listening or watching does. So, if a company has a 50-percent leverage, i.e., they have borrowed 50 percent and they put 50-percent equity in, and the value of, say, $10 million worth of bonds goes down to $4 million, well, now they have a $3 million margin call. So call after call after call. The market was in freefall. It was true in municipal bonds. There was no buy side. So, why did the Municipal Liquidity Facility work? Well, it wasn't because of the two loans they made, Mr. Torres. It was because of the hundreds of billions of dollars of loans that were facilitated because the market now knew there would be a buy side. So, the freefall stopped. The margin call death spiral stopped. It literally bankrupted hedge funds, and no one is really sympathetic to hedge funds, but what happens when they fail? Well, the pension dollars that are in those funds go away. So your teachers, firefighters, policemen, and whatnot are out money. The hardworking men and women of America who are counting on us to make this work are hurt. And without decisive action, without these facilities, our market would not have worked. Now, there are some people who don't actually want us to have a market economy, and when they say they want to fundamentally remake America, that is code for they don't actually want a market anymore. They want a centrally-planned, centrally-controlled financial system and, frankly, one of the features of our current monetary policy where we are no longer constrained by the amount of tax revenue we collect or even constrained by the amount of money we can borrow is that it threatens our financial system. It could actually collapse it. Now, it is hard to believe that people will actually think that is a good thing, and very few will admit it publicly. But this is something that people who support modern monetary theory believe. They believe--maybe some do--that it can continue to work because we have a currency, and this is where things have shifted. We went from good decisive action by the Fed in March and April to monetizing debt. The Fed's balance sheet has grown to $8 trillion. They have continued to inject $120 billion a month in a predictable way. They have two roles. They are supposed to protect stable prices as the dollar as a store of value, and they are supposed to promote full employment. They are not doing well on either metric. And their last role is as a regulator. As a regulator, they have been schizophrenic. They have been encouraging all this liquidity in the marketplace. Lots of the cash has flowed to banks but then they are discouraging banks from making loans. So because of that, they have acted as a lender of last resort, and Mr. Hill and others, and Treasurer Wooden, I think you highlighted some of the challenges that could be managed if there was a predictable way 13(3) worked. But, of course, it has to be known as an emergency, not a structural way to operate. So, I wish there was a market participant in the room. I wish we could go into depth on all of the reasons why modern monetary theory is a fallacy and why Congress, this body, actually has to be responsible in setting parameters and providing oversight. But I wanted to use my time differently than expected, just to correct the record. I yield back. Chairman Himes. Thank you. The gentleman from Massachusetts, Mr. Auchincloss, who is also the Vice Chair of the Full Committee, is now recognized for 5 minutes. Mr. Auchincloss. Thank you, Mr. Chairman. Mr. Russo, in your written testimony you indicate your concern with monetary policy becoming credit policy and the threat to political insulation that comes from that. I think those are reasonable concerns. You also refer to six programs that were stood up under the Emergency Lending Facility that were designed to provide liquidity to the shadow banking system, which is not eligible for lending through the Fed's traditional lender of last resort tools. Can you explain more what the shadow banking system was in this circumstance? Mr. Russo. Yes. Thank you for that question, sir. The shadow banking system is, effectively, financial institutions on Wall Street that act like banks but that don't fall under the Fed's usual regulatory apparatus. They don't have access to the discount window, which is the Fed's usual tool. These six programs I highlighted, these were things that we were going to try to solve with Dodd-Frank, but, in my opinion as an expert, were unsuccessful. For example, lending to the primary dealers, making sure they have the liquidity to keep markets moving, something that we would hope had been solved by Dodd-Frank. But I think that was incomplete. So, I am uncomfortable with these programs. But in a crisis, given that it is an emergency, I understand that this is sort of an extension of lender of last resort to the shadow banking system. Mr. Auchincloss. Would you recommend that we incorporate the shadow banking system into the rules that allow the Fed to be a lender of last resort or that we regulate the shadow banking system so that they are no longer banking? Which one should we remove, the ``shadow'' or the ``banking'' from the shadow banking system? Mr. Russo. Sir, I think that is an excellent question. I am a bit off my skis here. Let me refer to a colleague of mine who wrote a paper for the Mercatus Center on this topic and about COVID-19. One of his recommendations was moving the shadow banking system under the umbrella of Fed regulation. Another thing that he mentioned specifically, for example, the swap lines that the Fed created to swap dollars with foreign currencies at other central banks. He, instead, suggested that Congress end those, and that foreign banks that have liquidity problems in dollars, use their local branches in New York to borrow from the discount window as intended. Mr. Auchincloss. Understood. You also referenced 10 programs that were intended to assist Congress and the Treasury in allocating credit beyond the traditional lender of last resort doctrine. And I know, of course, that you are very concerned about these that these are really moving into credit policy with monetary policy. Basic question here, why is it that Treasury itself couldn't give loans? Why did the Fed have to backstop those loans? Mr. Russo. If I understood the rationale correctly, when you were passing the CARES Act, you desired for the Fed to sort of act as a source of leverage. So, the Treasury committed X amount and the Fed tried to leverage that up by printing money, essentially. And that was one of the views that was given. I think another--and again, here, I am really speculating on your own intentions--but it might be because the Fed as a central bank has people who are very smart and able to work in these incredibly difficult situations and have connections to market participants. I don't want to judge what was done in the past. But looking ahead, let us get the system right so we don't have to do it through the Fed again. Mr. Auchincloss. Dr. Sahm had said in the last back and forth that these Emergency Lending Facilities are here to stay with the Fed, that they are statutory and that we should expect to use them again. I saw that you were shaking your head as she was saying that. Are you disagreeing that they are permanent or are you disagreeing that they should be used again or-- Mr. Russo. Sir, thank you. I hope they are not permanent. And I am not a lawyer. I can only read the plain language of the law. And so, when the Dodd- Frank Act amended 13(3) to say that the 13(3) lending must be broad-based in unusual and exigent circumstances, ``unusual and exigent'' doesn't mean every day. Again, for the Fed's independence, I would strongly urge Congress not to make these a permanent part of the Fed's arsenal. Mr. Auchincloss. Would you--and Dr. Sahm, please jump in here--recommend that Congress provide more detail about what, ``unusual and exigent'' means? Ms. Sahm. Right. And to be clear, I wasn't saying that I think these should be standing facilities. I was just pointing out that 13(3) is in the Federal Reserve Act. It is absolutely the authority of Congress to amend that. I think, in general, more broadly than your question, Congress should really lean into its role of defining what it wants the Fed to do. The Fed is going to follow orders. It is good at that. But guidance from Congress will help it achieve what you all want it to achieve. So, what are exigent circumstances can be defined. That language has been in there a long time. Mr. Auchincloss. Ms. Rhee, in my last 30 seconds here, do you want take a crack at it, given that your expertise is in systemic risk? If you had to define unusual and exigent circumstances in 20 seconds, how would you do it? Ms. Rhee. I don't know if anyone can actually define that. That is kind of prescribing what is going to happen in a financial crisis, trying to decide what the predicators are for a financial crisis. And I think that has been unsuccessful. I think it is, really, you need to depend on the experience of the policymakers. You also have to look beyond the U.S. example and see what kind of creates a financial crisis and what indicates that we are in a systemic risk. I think one of the challenges-- Mr. Auchincloss. Ms. Rhee--may I ask one more question? Are you familiar at all with the work that the Santa Fe Institute has done on predicting systemic risk and-- Ms. Rhee. I have heard about that, yes. Mr. Auchincloss. --do you think that that could be a tool used by policymakers to understand where risk is getting so correlated that it is becoming systemic and might be unusual and exigent? Ms. Rhee. I think there may be various factors, indicators, that you can use. IMF has some indicators also. But be it all that, it is going to be hard to prescribe exactly what it means because the financial market is changing. There are different factors and products that are going to come out. Mr. Auchincloss. Understood. Mr. Chairman, thank you for the leniency. I yield back. Chairman Himes. Thank you. Since there are no more Members asking questions, we will conclude this hearing now. I would like to thank our witnesses for their testimony today. The Chair notes that some Members may have additional questions for these witnesses, which they may wish to submit in writing. Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. The hearing is now adjourned. [Whereupon, at 11:46 a.m., the hearing was adjourned.] A P P E N D I X September 23, 2021 [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] [all]