[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]