[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
THE ANNUAL REPORT OF THE FINANCIAL
STABILITY OVERSIGHT COUNCIL
=======================================================================
HYBRID HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
MAY 12, 2022
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-84
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
47-651PDF WASHINGTON : 2022
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
C O N T E N T S
----------
Page
Hearing held on:
May 12, 2022................................................. 1
Appendix:
May 12, 2022................................................. 45
WITNESSES
Thursday, May 12, 2022
Yellen, Hon. Janet L., Secretary, U.S. Department of the
Treasury, and Chairperson, Financial Stability Oversight
Council (FSOC)................................................. 4
APPENDIX
Prepared statements:
Yellen, Hon. Janet L......................................... 46
Additional Material Submitted for the Record
Adams. Hon. Alma:
Various articles regarding Charlotte's housing crisis........ 50
Garcia, Hon. Sylvia:
Article from The Washington Post, ``Federal watchdog opens
`review' of Tex. use of covid aid on border crackdown,''
dated May 9, 2022.......................................... 165
Yellen, Hon. Janet L.:
Written responses to questions from Representative Gottheimer 168
Written responses to questions from Representative
Hollingsworth.............................................. 174
Written responses to questions from Representative Posey..... 172
Written responses to questions from Representative Timmons... 176
Written responses to questions from Representative Nikema
Williams................................................... 170
Written responses to questions from Representative Roger
Williams................................................... 173
THE ANNUAL REPORT OF THE FINANCIAL
STABILITY OVERSIGHT COUNCIL
----------
Thursday, May 12, 2022
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the committee] presiding.
Members present: Representatives Waters, Sherman, Green,
Perlmutter, Himes, Beatty, Vargas, Gottheimer, Gonzalez of
Texas, Casten, Torres, Lynch, Adams, Tlaib, Dean, Garcia of
Illinois, Garcia of Texas, Williams of Georgia, Auchincloss;
McHenry, Lucas, Posey, Luetkemeyer, Huizenga, Wagner, Barr,
Williams of Texas, Hill, Emmer, Zeldin, Loudermilk, Mooney,
Davidson, Kustoff, Hollingsworth, Gonzalez of Ohio, Rose,
Steil, Timmons, Taylor, and Sessions.
Chairwoman Waters. The Financial Services Committee will
come to order.
Without objection, the Chair is authorized to declare a
recess of the committee at any time.
I would like to start by letting our Members know that
although we had previously had an agreement with Secretary
Yellen to have a hard stop of 1:30 p.m. for this hearing, which
is consistent with committee precedent, she has since informed
us that she has a meeting at the White House that she needs to
get to, so the hard stop will now be at 12:30. Democratic
Members who were unable to ask their questions of Secretary
Yellen at the last hearing that she testified at will get
priority today in the question order, and I hope that we can
get to everyone, even with the truncated hard stop for today's
hearing.
Today's hearing is entitled, ``The Annual Report of the
Financial Stability Oversight Council.'' I now recognize myself
for 4 minutes to give an opening statement.
Good morning, and welcome, Secretary Yellen. Thank you for
testifying today on the annual report of the Financial
Stability Oversight Council, or FSOC.
Before the 2008 financial crisis, no governmental body was
so irresponsible in identifying and mitigating systemic risk
across our financial system. As a result, our economy was
unprepared for a near collapse of the financial system, which
resulted in 8 million foreclosures, 9 million people
unemployed, and the loss of $19 trillion in household wealth.
In response, Congress passed the Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2020 and established FSOC to
identify emerging vulnerabilities and mitigate threats to our
financial stability. And for a few years, FSOC took important
steps to address turmoil in our financial system, including
subjecting massive insurance companies, like AIG, to stricter
oversight. Unfortunately, the Trump Administration undermined
FSOC by cutting staff, conducting fewer and shorter meetings,
and removing regulatory safeguards on risky mega financial
institutions. The good news is that Secretary Yellen and FSOC
are taking steps to repair the damage that was done by Trump
and to focus on clear threats to our economy, including finally
labeling climate change as a systemic risk. I urge the
Secretary to also restore FSOC's ability to guard against the
threat of systemically important financial institutions.
Big Tech, crypto, and so-called shadow banks are causing
significant and fast changes in our economy, so FSOC must
remain vigilant in its ever-changing environment. Maintaining a
strong economy has been a key goal of my committee,
particularly for communities of color. The 2008 foreclosure
crisis was caused by banks steering borrowers, who were
disproportionately people of color, into predatory mortgage
products. History almost repeated itself during the pandemic as
millions of families almost lost their homes to evictions
through no fault of their own. I am proud to have fought hard
with my colleagues to secure $46.6 billion in emergency rental
assistance. And I am proud that by June, Treasury estimates
that States and localities will have successfully spent or
obligated all of those funds, all across America.
But the housing market needs more support. Home prices rose
nearly 19 percent in 2021, and despite the recent interest rate
increases, prices remain high. Housing now accounts for a core
part of inflation. It is clear that we must do more to increase
our nation's supply of affordable housing. This is why I
drafted and continue to advocate for the historic housing
provisions of the Build Back Better Act.
Finally, our economy can only be strong if everyone can
participate, and that includes America's women. The Supreme
Court's forthcoming decision to overturn Roe v. Wade would
threaten the financial security of women and our nation's
economic stability. I applaud Secretary Yellen's leadership
thus far and look forward to her testimony.
I now recognize the ranking member of the committee, the
gentleman from North Carolina, Mr. McHenry, for 5 minutes.
Mr. McHenry. Madam Chairwoman, let me begin by saying,
welcome back. We are glad you recovered and recovered so well.
We're glad to have you back in health and to welcome you back,
and also grateful that our vice ranking member is healthy as
well. We know that COVID is still very real, but I'm very
grateful that both of my friends on either side of me are
healthy. And, Secretary Yellen, welcome, and thank you for
being here.
The Financial Stability Oversight Council, or FSOC, is
charged with identifying and responding to emerging risk to our
financial system. That was the design of it. FSOC does not and
should not impose partisan policies. Today, Secretary Yellen, I
think we should be focused on the challenges posed by Russia's
invasion and the consequences to the global economy, the impact
that China's lockdowns and economic issues will have on the
financial system in the broader economy, the importance of
protecting the financial system from bad actors and foreign
adversaries, including cyber threats, and the performance of
domestic financial markets over the last several years. That
should be the FSOC's agenda, but it isn't the FSOC's agenda.
It seems that FSOC has become an arm of the
Administration's policy agenda rather than an objective body
evaluating real risk to the financial system. In fact, much of
what the FSOC has proposed to examine and what the Democrats
will discuss today is part of the left's political agenda.
Secretary Yellen, the economy is at a crossroads. A
Democrat-led Washington, Democrat regulators, and Democrat
policies are failing the American people. In the first quarter,
our economy shrank. The GDP came in at a negative 1.4 percent.
Democrat policies have helped fuel a surge of imports and a
decline in business inventories, both of which detract and
reduce the economy. Adding to the problem is a record 11
million jobs available, yet workers are still on the sidelines
because inflated wages are eroding the ability of the private
sector to hire employees to match production demands.
The root of the problem is out-of-control Democrat
spending, which has created persistent inflation. In fact, just
yesterday, the Bureau of Labor Statistics announced that
inflation rose again in April. It is now 8.3 percent over the
past year, remaining near a 40-year high. Inflation is killing
American consumers' household budgets. Wages are not keeping up
with inflation and the rising cost of things that families buy.
Instead of addressing the issue of rising prices and what
problems that is creating for the economy and American
families' financial well-being, Democrats will focus elsewhere.
Deep down, they know that their spending spree is hurting
America, but pulling back all that free money isn't popular,
and the midterms are looming, so they don't want to do that.
You would think that my colleagues across the aisle would
take this moment and reflect on their agenda and its
effectiveness or lack of effectiveness. Instead, they are
doubling down and using the FSOC to advance their radical
policies. So if you don't like something, well, let's just have
the FSOC label it as risky and regulate it away. And before you
know it, progressive policies will force lending decisions in
favor of those customers who are activists that progressives
support, while law-abiding American businesses will be forced
to close to appease the radical left.
Let's turn now, though, to an issue that is of consequence
to the stability of our economy. Let's turn to digital assets
and stablecoins for a moment. This week, we have seen dramatic
volatility within a particular algorithmic stablecoin. And by
its nature, it is not stable when it doesn't have backing by
something real and of substance. I want to be clear that not
all stablecoins and not all digital assets are the same. The
example this week is a clear sign to the broader world that
that is true. Not all of these assets are the same, nor should
they be regulated the same. And, in fact, we have no regulatory
sphere or recognition of digital assets. We don't have a
Federal regulatory regime for stablecoins, and we need it, and
I think there is bipartisan understanding of that.
At the beginning of last year, I made clear to this
committee that we need to come together to establish a clear
regulatory framework for stablecoins in the broader digital
asset ecosystem. It is time for Congress to act on these
important markets and provide stability. It is very important
in the short term and long term, and these technologies deserve
time to be understood before they are labeled as risks.
Madam Chairwoman, thank you, and I yield back.
Chairwoman Waters. Thank you very much, Ranking Member
McHenry.
I now recognize the gentleman from Colorado, Mr.
Perlmutter, who is also the Chair of our Subcommittee on
Consumer Protection and Financial Institutions, for 1 minute.
Mr. Perlmutter. Thank you, Madam Chairwoman. Madam
Secretary, it's good to see you. I want to highlight one of the
issues raised in the Financial Stability Oversight Council's
annual report.
Colorado continues to see increased climate-related risk in
the form of more wildfires. In December, the Marshall Fire
burned nearly 1,100 homes, businesses, and other structures,
making it the most destructive fire in Colorado history in
terms of property destroyed. The cost to rebuild our
communities is daunting, and nearly every homeowner was
underinsured. When it comes to climate risk, you can already
see the effect on the insurance market in the State of
Colorado. On Monday, I held a telephone town hall with almost
7,000 people on the line. We conducted a poll question--how
concerned are you about wildfire risk on a scale of 1 to 5--and
every single respondent answered with the highest level of
concern. We must ensure that our financial system serves as a
source of strength as we seek to address climate change.
And with that, I yield back.
Chairwoman Waters. Thank you very much. I want to welcome
today's distinguished witness, the Honorable Janet Yellen,
Secretary of the Department of the Treasury, and Chair of the
Financial Stability Oversight Council.
You will have 5 minutes to summarize your testimony. You
should be able to see a timer that will indicate how much time
you have left. I would ask you to be mindful of the timer and
quickly wrap up your testimony.
And without objection, your written statement will be made
a part of the record.
Secretary Yellen, you are now recognized for 5 minutes to
present your testimony.
STATEMENT OF THE HONORABLE JANET L. YELLEN, SECRETARY, U.S.
DEPARTMENT OF THE TREASURY, AND CHAIR, FINANCIAL STABILITY
OVERSIGHT COUNCIL (FSOC)
Secretary Yellen. Thank you, Chairwoman Waters, Ranking
Member McHenry, and members of the committee. I am pleased to
speak with you today about the Financial Stability Oversight
Council's 2021 annual report. The report is a collaborative
effort for Council member agencies. It is a vehicle for
providing Congress and the public with the Council's collective
assessment of potential risks to U.S. financial stability. And
today, I will highlight a few topics in the report and provide
an update on the Council's activities since the report's
publication.
First, the report discusses vulnerabilities in the non-
banked financial sector, which were highlighted by the turmoil
in financial markets in March 2020. While the Dodd-Frank Act
reforms increased the resiliency of the U.S. financial system,
the market turmoil in March 2020 demonstrated that the
liquidity mismatch and use of leverage by some non-bank
financial institutions can make them vulnerable to acute
financial stresses, and these stresses can be transmitted and
amplified to the broader financial system.
The Council has taken steps to examine these risks,
including reestablishing its Hedge Fund Working Group to
develop an interagency risk monitoring system and to propose
options to mitigate identified risks. And earlier this year,
the Council issued a statement to express support for the
Securities and Exchange Commission's efforts to reform money
market funds, and their work to consider potential reforms of
open-end funds. The Council is also working to support
improving the resilience of the Treasury market and is
coordinating with the Inter-Agency Working Group on Treasury
Market Surveillance. Potential steps to be taken include
improving data quality and availability, evaluating expanded
central clearing, and enhancing trading venue transparency and
oversight.
The SEC has proposed certain reforms to enhance
transparency and oversight over alternative trading systems to
trade government securities. The SEC has also proposed updating
the definition of a government securities dealer to include
market participants that play an increasingly significant
liquidity-providing role in overall trading and market
activity. Additionally, the Office of Financial Research is
working to fill identified data gaps for uncleared bilateral
repurchase agreements through a pilot data collection, which
should improve visibility into a major source of financing for
non-banked financial institutions and Treasury markets.
Additionally, the Council is working to ensure that
financial institutions better understand their climate-related
financial risks. In its October 2021 report on climate-related
financial risk, the Council outlined how climate change can be
a source of shocks to the financial system and can increase
risks to financial stability. To address these risks, the
Council recommended that regulators build their capacity and
expand their efforts to address climate-related risks, improve
the availability of data, enhance and standardize disclosures,
and assess and mitigate risks to financial stability.
The Council has also formed its staff-level Climate-related
Financial Risk Committee, which will serve as a coordinating
body for the Council to share information, facilitate the
development of common approaches and standards, and foster
communication across FSOC members. In addition, the Council is
establishing the Climate-related Financial Risk Advisory
Committee. This advisory body, which will include a broad array
of external stakeholders, will help the Council gather
information and analysis on climate-related financial risks.
With respect to digital assets, new products and
technologies may present opportunities to promote innovation
and increase efficiencies. However, digital assets may pose
risk to the financial system, and increased and coordinated
regulatory attention is necessary. On March 9th, President
Biden signed an Executive Order calling for a comprehensive
approach to digital asset policy, and the Council is drafting a
report that will identify financial stability risks and
regulatory gaps. I look forward to working with you on the
issues and opportunities posed by digital assets, and we are
also eager to work with you to ensure that payment-stablecoins
and their arrangements are subject to a Federal prudential
framework on a consistent and comprehensive basis.
Finally, there is the potential for continued volatility
and unevenness of global growth as countries continue to
grapple with the pandemic. Russia's unprovoked invasion of
Ukraine has further increased economic uncertainty. The U.S.
financial system has continued to function in an orderly
matter, although valuations of some assets remain high compared
with historical values. We stand firmly with the people of
Ukraine and have implemented an unprecedented sweep of
sanctions on Russia that have been implemented by financial
institutions. On February 28th, I convened the Council in the
wake of the invasion, and we will continue to monitor
developments and coordinate actions as the risk and threats
evolve.
The Council's report also discusses other potential
emerging threats and vulnerabilities that the Council continues
to monitor, including short-term wholesale funding markets,
central counterparties, alternative reference rates,
cybersecurity corporate credit markets, and real estate
markets. The Council remains committed to its mission of
identifying and responding to risks to U.S. financial
stability, and I look forward to working with this committee to
promote a more robust and resilient financial system.
Thank you.
[The prepared statement of Secretary Yellen can be found on
page 46 of the appendix.]
Chairwoman Waters. Thank you very much, Secretary Yellen.
I now recognize myself for 5 minutes.
Secretary Yellen, according to a recent study by the Gates
Foundation, family planning increases a woman's earnings and
control over their own assets. As you know, we recently became
aware of an imminent decision regarding the landmark case of
Roe v. Wade. Arguably the most important decision regarding a
woman's economic sovereignty is in jeopardy. A study from the
University of California-San Francisco found that women who
were unable to get an abortion were more likely to have more
debt and to suffer crippling financial events, like eviction or
bankruptcy.
Secretary Yellen, how might the Supreme Court's reversal of
Roe v. Wade impact our nation's financial stability and the
economic opportunities available to women?
Secretary Yellen. Thank you for that question, Madam
Chairwoman. I believe that decades of research have established
that there is a causal link between access to abortion and the
quality of women's lives. It affects their education, their
earnings, their careers, and the subsequent life outcomes of
their children, and I believe that overturning Roe would
prevent large numbers of women from managing their reproductive
lives, particularly many low-income and financially-vulnerable
individuals. The inability to access abortion would have a
profound impact on their personal and economic lives. There
have been studies which show that denying women access to
abortion increases their odds of living in poverty or their
need for public assistance. And in the recent Supreme Court
case, there was a group of economists who submitted an amicus
brief which summarizes the economic research that establishes
the relationship between legalization of abortion, birth rates,
women's educational attainment, and job opportunities, which
found very significant impacts.
Chairwoman Waters. Thank you very much. Secretary Yellen,
in FSOC's most recent annual report, FSOC noted that financial
innovation has the potential to bring benefits to the public,
but it can also create new risk. The report noted that many
digital assets are speculative and volatile, creating risks
related to illicit finance, cybersecurity, and privacy.
Further, the report noted that stablecoins, in particular, may
pose systemic risk if the stablecoin is not adequately backed
and there is a run on that stablecoin by investors, resulting
in a fire sale of reserve assets and similar runs on other
stablecoins. While I appreciate that the President's Working
Group has called on Congress to pass legislation focused on
stablecoins, we are exploring various ideas. FSOC has tools at
its disposal to address some of the systemic risk concerns
relating to digital assets. What is FSOC doing with its
existing authorities to ensure that cryptocurrencies, including
stablecoins, do not pose a threat to our financial system?
Secretary Yellen. The Financial Stability Oversight Council
has been tasked by President Biden in an Executive Order to
ensure responsible development of digital assets. It calls for
a number of reports by Treasury, but FSOC is charged with
producing a report that looks at financial stability risks
particularly, and we are working very hard on that. It will
address the risks that these assets pose. The Treasury report
will address many of the risks that you identified in your
question. But on the issue of stablecoins, which is a kind of
digital asset that is intended to have a one-to-one
relationship with the dollar, the President's Working Group on
Financial Markets regarded it as, frankly, urgent to push ahead
to write a report making recommendations to Congress. We have
called for Congress--and I would hope this would be a
bipartisan effort--to produce a comprehensive framework for the
regulation of these assets.
There are potentially useful innovations that could make
the payment system faster and more efficient, but we really
need a regulatory framework to guard against the risks. And
just this week, in the last couple of days, we have had a real-
life demonstration of the risks. A so-called algorithmic
stablecoin, known as a Terra, broke the buck. And this morning
and yesterday, the largest stablecoin, Tether, also briefly
broke the buck.
Chairwoman Waters. Thank you very much.
The gentleman from North Carolina, Mr. McHenry, who is the
ranking member of the committee, is now recognized for 5
minutes.
Mr. McHenry. Let's continue with that theme. We saw one
stablecoin is purported to be backed with assets that broke the
buck, and we have one algorithmic stablecoin that broke the
buck. Do you make a distinction between an asset-backed
stablecoin and an algorithmic stablecoin?
Secretary Yellen. Of course, there are significant
differences between these two.
Mr. McHenry. Yes. I welcome the President's Working Group
report that your group put forward to Congress and to the
public about recognizing stablecoins. And I think it is
important that we have a Federal framework and Federal law
around something which purports to be a U.S. dollar. That is a
proper remit for the Federal Reserve and for Treasury. Your
opinions matter significantly as we legislate here. And as I
said in my opening statement, I called for us to get on with
this question a year-and-a-half ago, and so I welcome the
report, and I think we should get to work here. But along those
lines, in your mind, how does limiting stablecoin issuances to
only banks promote innovation?
Secretary Yellen. I think that creating a framework which
is appropriate to the risks that stablecoins present really
provides the kind of certainty about the regulatory environment
that issuers of stablecoins need to thrive and to innovate. In
our discussions with the industry, one of the complaints that
we typically heard was that there is regulatory uncertainty,
and if we were to establish, if Congress were to establish a
framework, it would make it easier for the issuers of these
assets to know what the regulatory environment would be.
Mr. McHenry. The President's Working Group contemplates
that these would be issued only by banks. Is that your view,
and if these are risky assets, why does putting them in a bank
de-risk them?
Secretary Yellen. One of the key financial stability risks
associated with stablecoins is that they can experience runs,
and we have seen that--
Mr. McHenry. But if they are one-to-one backed, as the
President's Working Group says, with high-quality liquid
assets, high-quality bank assets, in essence, you don't have
runs if you have one-to-one backing with cash equivalents.
Secretary Yellen. We have money market funds, and money
market funds are very similar in many ways to stablecoins, and
they have been a source of instability in the financial system.
Mr. McHenry. And there has been 42 years of regulatory
fights over money markets. What we are trying to do here is
make this a very straightforward stable product.
Secretary Yellen. And that is what bank regulation has
accomplished, I believe, in the United States.
Mr. McHenry. But Dodd-Frank was about de-risking the big
banks, and now the President's Working Group contemplates that
we are going to add more risk to these institutions. So my
question is, is it a viable path for us to have a one-to-one
backing here of a stablecoin and not have it be domiciled
within a bank?
Secretary Yellen. The President's Working Group
contemplated different alternatives and unanimously recommended
the establishment of a bank framework for recognizing
stablecoins.
Mr. McHenry. A bank framework.
Secretary Yellen. It is a flexible framework. It involves
appropriate capital and liquidity requirements, which I think
are important, and is a framework in which payment system risks
can be addressed. I think this is something that we would be--
Mr. McHenry. Yes, and we welcome that.
Secretary Yellen. --working on, on a bipartisan basis to
discuss alternatives and evaluate them as something that I
think would be very worthwhile. And I would urge this committee
to engage, and we would be very glad to work with you.
Mr. McHenry. We welcome that. Now, one larger question
here, because we are talking about the Financial Stability
Oversight Council and the view. Inflation is raging. We have
growth that is stagnant right now with the latest numbers and
rising gas prices. What is your Administration doing to take on
these challenges the American people are feeling and what my
constituents are talking to me about?
Secretary Yellen. Clearly, inflation is a very substantial
issue, and I agree with the President's assessment that it is
really the number-one economic issue that faces the
Administration and the nation. It is having a substantial
adverse impact on many vulnerable households, and we are laser-
focused on addressing inflation. As you know, the Federal
Reserve plays an important role. They are charged with price
stability and full employment, and I would say, first and
foremost, it is the Fed's responsibility, and we support an
independent Fed making the judgements that they think are
appropriate.
For our own part, the Administration is taking a wide range
of steps to do what we can to address inflation, and that
ranges from things like releases from the Strategic Petroleum
Reserves that are substantial, that are intended to bring down
energy prices, and working on supply chain issues that are
contributing.
Chairwoman Waters. Thank you very much. The gentleman from
Connecticut, Mr. Himes, who is also the Chair of our
Subcommittee on National Security, International Development
and Monetary Policy, is now recognized for 5 minutes.
Mr. Himes. Thank you, Madam Chairwoman, and thank you,
Madam Secretary, for being with us. I want to continue this
conversation on stablecoins because, obviously, the activity
and the volatility of the last couple of weeks has been
interesting and concerning to watch. But since this is the
first time we have had you here since we have had really a
pretty substantial and robust recovery from the economic
devastation of COVID, I do want to take just 30 seconds to
reflect on Dodd-Frank and what it meant.
I am in the minority of panel members who were here when
that legislation was crafted, and I very much remember how it
was sort of the ugly stepchild legislation coming out of 2009.
We were assured by my Republican friends that it was going to
end capital markets in this country, liquidity was going to dry
up, credit availability was going to be gone, and the entire
capital market of the United States was going to migrate to
Europe and Asia. Of course, none of that happened. The banks
are much more profitable and larger today than they were at the
time. We have seen innovation.
To be fair, on the other side of the aisle, there were
people who were concerned that at the first sign of trouble,
the financial sector was going to crumble. That didn't happen
either. In fact, we just went through the mother of all stress
tests. We saw economic stress unlike what we saw back in 2007
and 2008, and what didn't happen? The sector did not come down.
I just wanted to take a minute to offer an encomium to the hard
work that was done back when Dodd-Frank was being crafted.
Let me turn, though, back to this really interesting
conversation. Some people estimate that there has been as much
as $1 trillion in value lost in a variety of different
stablecoins and other coins, other cryptocurrencies. I feel the
pain of those who lost money, but this is also an education for
people who thought that Bitcoin grew to the sky. I am not sure
there is any regulation we can pass that is quite as much of an
education for investors as seeing what volatility and risk look
like.
My question, Madam Secretary, and what does worry me as a
veteran of Dodd-Frank, is at what point do we see systemic risk
developing in this sector, and what does that look like? I
don't think that at $2 trillion in market cap, we are talking
about systemic risk, but I could be wrong. Where do you see the
possibility for systemic risk developing in the broader
cryptocurrency realm?
Secretary Yellen. Thank you. The Financial Stability
Oversight Council is analyzing right now, in response to the
President's Executive Order, potential financial stability
risks from digital assets writ large. But we have already
issued a report, the President's Working Group, which is a
subset of the FSOC unstable coins, because although I can't say
that they have reached the scale right now where there are
financial stability concerns, and we are seeing Terra having
broken the buck and Tether under some pressure as well, which
is the largest one. I wouldn't characterize it at this scale as
a real threat to financial stability, but they are growing very
rapidly, and they present the same kind of risks that we have
known for centuries in connection with bank runs. There are
assets that purport to guarantee conversion at will to the
dollar on a one-for-one basis, and--
Mr. Himes. Let me interrupt you. Thank you. I was looking
for validation that at $2 trillion in overall market cap, we
are not talking about systemic risk, so let me just ask you,
again, being a veteran of the meltdown of 2008 and Dodd-Frank,
I get very, very itchy around systemic risk. And actually, of
course, that market cap has decreased dramatically in the last
couple of months. At what point should this committee get
focused on the possibility of systemic risk? Are we talking $5
trillion in market cap, $10 trillion? At what point should the
red flag start to rise?
Secretary Yellen. I can't give you a numerical cutoff, but
what I do see is that the use of digital assets is rising very
rapidly, that they present the same kinds of run risks and
other risks, payment system risks, and, really, we need a
comprehensive framework so that there are no gaps in the
regulation.
Mr. Himes. Agreed. Thank you. I want to leave you 30
seconds. I have been doing a lot of work on a central bank
digital currency, which, as you know, the Federal Reserve has
opined on in a general way. In my remaining time, a central
bank digital currency, inasmuch as it was a liability--the
Federal Reserve would do away with a lot of the concerns that
we are talking about here with stablecoins, correct?
Secretary Yellen. I agree with that. That is the reason to
want to have the central bank digital currency, but there are
also concerns because it could have, depending on how it is
designed, a very significant impact on the structure of
financial intermediation. So, there are some tradeoffs here. We
will address this in the Treasury report that we will be
issuing.
Mr. Himes. Thank you. Thank you very much.
Chairwoman Waters. Excuse me. Members, I am going to ask
you to keep your questions within your 5 minutes, and I am
going to ask the Secretary, based on the fact that you have to
get out of here, and I am trying to accommodate all of our
Members--
Secretary Yellen. Thank you.
Chairwoman Waters. --who were not accommodated before,
let's keep within the 5 minutes. Thank you very much.
The gentlewoman from Missouri, Mrs. Wagner, is now
recognized for 5 minutes.
Mrs. Wagner. Thank you, Madam Chairwoman. Secretary Yellen,
thank you for joining us today.
During a public address on Tuesday, President Biden
attempted to once again blame record high inflation on the
pandemic and on Putin. Secretary Yellen, is it still your
belief that excessive government spending, trillions of
taxpayer dollars, is not a root cause of the rising prices that
my constituents in Missouri's 2nd Congressional District are
seeing every single day on gas, goods, groceries, and I could
go on and on? Is it not a root cause?
Secretary Yellen. There are many contributors to the
exceptionally high inflation that we are experiencing, and
certainly--
Mrs. Wagner. Is excessive government spending a root cause?
Secretary Yellen. Look, we had substantial programs to
address what I believe was the most significant risk we faced
as an economy at the time. Unemployment was extremely high.
Mrs. Wagner. It has now spun us into an inflation that is
at a 40-year high, and goods and services that are not
affordable in any way, shape, or form. We have literally had
CPI down for one quarter. God help us if it is down for a
second one; it would toss us into a recession. Supply chain
issues. I could go on and on. We have spent trillions and
trillions of dollars, and the Fed has been too late to get here
to help. Is the excessive spending a root cause?
Secretary Yellen. Look, inflation is a matter of demand and
supply, and it is certainly true--
Mrs. Wagner. Okay. Let me--
Secretary Yellen. --that government programs supported
demand.
Mrs. Wagner. Let me just reclaim my time.
Secretary Yellen. But the pandemic--
Mrs. Wagner. Let me just reclaim my time here, please, and
we will move on since you won't answer the question. The
ranking member also asked about inflation and asked what you
and the Administration are doing about it, and you assured us
it is all hands on deck and you are doing all sorts of things.
You identified that, in fact, there is a problem with
inflation, but what are you doing? What are you and the
President specifically doing? All you said was you were
releasing oil from the Strategic Petroleum Reserve, which does
nothing to help and actually jeopardizes our future petroleum
needs when there really is an emergency. What are you doing
specifically?
Secretary Yellen. The release from the Strategic Petroleum
Reserve has served to hold down oil prices--
Mrs. Wagner. No, it hasn't.
Secretary Yellen. I'm sorry, but it has.
Mrs. Wagner. It is $4.50 a gallon, and diesel is well over
$5. It is a drop in the bucket. What are you doing
specifically? You said it is all hands on deck.
Secretary Yellen. Russia's unprovoked attack on Ukraine has
had a substantial impact on global energy and crude markets.
Mrs. Wagner. Oh, for heaven's sakes. We have been at this
for 16 months, Madam Secretary. With all due respect, I can't
disagree more. You won't even admit that the root cause of this
is the spending and spending and spending. The Fed just got on
the job last month in terms of raising interest rates by 50
basis points, and they will do it again next month and perhaps
the month after, and the month after that. We are in a spiral.
The moms in my district can't find baby formula, okay? They
can't afford to fill up their cars with gas.
Secretary Yellen. We have to--
Mrs. Wagner. This is a serious situation, and making--
Secretary Yellen. Well--
Mrs. Wagner. What else are you doing besides the Strategic
Petroleum Reserve, ma'am?
Secretary Yellen. We are trying to unblock supply chains
that have become very clogged. We have put in place changes,
for example, at the ports of Los Angles and Long Beach that
have substantially diminished backlogs there that have been
raising prices and taken steps to--
Mrs. Wagner. How about energy independence? Let's open up
Keystone. Let's get some of these oil and natural gas leases
through so we can be once again energy-independent, not only
take care of our own energy supply and needs, but also maybe
provide that to Europe so they are not so dependent upon
Russia, and Iran, and other dictators. There are so many
things, ma'am, that we should be doing. And the problem with
unclogging the ports is that now they are paying $4.50 to $6 to
move that diesel to St. Louis, Missouri, in the middle of the
United States. It is untenable, it is unacceptable, and it is
unbelievable to me that we can't even get the Secretary of the
Treasury to admit that overspending by this Administration is
the root cause.
I yield back, sadly.
Chairwoman Waters. Thank you. The gentleman from
Massachusetts, Mr. Lynch, who is also the Chair of our Task
Force on Financial Technology, is now recognized for 5 minutes.
Mr. Lynch. Thank you, Madam Chairwoman. Madam Secretary,
thank you for being here. We really appreciate all of your good
work.
I want to follow up on Mr. Himes' question, and I know he
ran out of time sort of at the end, but I can't help but make a
comparison to what we are seeing in the stablecoin area with an
earlier part of our history when individual companies--coal
companies, railroads, lumber companies--were issuing their own
script. And what happened with all those privately-issued
currencies was that when the greenback came out, consumers and
businesses recognized the stability in the greenback, and all
of those script currencies went away. Some of them were banned
by the Fair Labor Standards Act and other pieces of
legislation, but some went out due to disuse. Right now, there
are 200 stablecoins in circulation. What are your expectations
that 200 stablecoins are going to survive the emergence of a
CBDC issued by the Fed?
Secretary Yellen. I think you have described the risks
associated with the proliferation of private stablecoins
extremely well, and I agree with it. And I think a benefit of
issuing a central bank digital currency would be that it might
diminish the proliferation of these stablecoins, but it depends
on the design of exactly how the central bank digital currency
is introduced. There are a variety of design choices there, and
there are issues around that. Privacy is an issue if a central
bank were to issue it directly to consumers in order to protect
against illicit finance, against account CFT/AML-type
considerations.
Mr. Lynch. Right.
Secretary Yellen. There would be privacy concerns for the
Fed amassing that data. An alternative that would seem more
likely to me would be relying on financial institutions to play
a role in dealing with customers. All of that would affect
stablecoins, but there could continue to be stablecoins that
coexist with the central bank digital currency. They may offer
some benefits in terms of faster, more efficient, and cheaper
payments. I think we should be open to innovation, but it is an
argument for a CBDC.
Mr. Lynch. I agree. The one aspect that you alluded to was
the disintermediation of the commercial banks. If the Fed was
going directly to the consumer, we don't need commercial banks,
and they wouldn't have a role here.
Secretary Yellen. It could draw a lot of funding away from
the banking sector--
Mr. Lynch. Right.
Secretary Yellen. --if it is a very attractive asset.
Mr. Lynch. Right.
Secretary Yellen. And, this is something under
consideration in many countries around the world.
Mr. Lynch. I do want to go on to one other thing, and I
appreciate the thoroughness of your answer. One of the things I
worry about is that many of these stablecoins being issued are
issued with nothing more than a White Paper, and trying to go
through that, even with an engineering degree, is extremely
difficult. And I go back to the mission of your Agency and of
FSOC, and the asymmetry between the issuer of the stablecoin
and the customer. Is there not some way that the regulators can
intervene to make sure that at least when they issue a
currency, there is some basis of judgment on the part of an
educated consumer on the viability of that individual
instrument?
Secretary Yellen. We would like to see a comprehensive
Federal regulatory framework which could ensure that
information is available and there is a regulatory framework
that would be in place. I really urge bipartisan action on
this. At present, there are some agencies that have some
authorities here. I don't want to opine on whether or not, say,
the CFTC and the SEC may have some regulatory authority here.
Mr. Lynch. Okay.
Secretary Yellen. We would like to see a comprehensive
framework.
Mr. Lynch. So would I. I just want to say that I am aware
that the Boston Federal Reserve is working with MIT on that
Hamilton Project, which is also one of the--
Secretary Yellen. Yes, on the technical--it would be a long
time before it could be introduced in that work.
Mr. Lynch. I yield back, Madam Chairwoman. Thank you.
Chairwoman Waters. The gentleman from Texas, Mr. Sessions,
is now recognized for 5 minutes.
Mr. Sessions. Madam Chairwoman, thank you very much. And
Madam Secretary, thank you for taking time to come up to us on
the Hill. You are going to be my reality up at this committee,
and the reality is, the way I see it is things are not working.
I will go back to President Clinton, who admitted before a
Joint Session of Congress that the era of Big Government is
over. President Clinton came in, tried to do exactly these same
things, and then found out it didn't work. President Obama
stated it is just not working in the way that we wanted. And I
would say to you, and it is a question, is the economy and the
success of an economy an art or a science?
Secretary Yellen. It is an art and a science, but I would
say to you that from the point of view of the ability of our
economy to produce goods and services and promote the well-
being of Americans requires--
Mr. Sessions. Then that is your science, because you
understand education, you can see what is good in education,
and you can see when somebody is headed for trouble. What you
are talking about art to me is politics, and today this
committee and you began going into art, not science. You went
into abortion. You went into stablecoin rather than the general
market, rather than the things which you are responsible for,
which is science, which is policy, which is those things that
make sense and are well-worn ways in a free enterprise system.
I think that what you have to do is have a dose of reality,
Madam Secretary. You are bound to have somebody in this Council
who can offer some advice that what we are doing, going back to
President Obama, and President Clinton, is not working. What
works is getting people in a free enterprise system to go to
work.
OPM has yet, if you look at their website, to give
instructions for the government workers to go back to work. If
you do not have the government working and you are leading the
way, how can you expect others to go to work? Now, it is true,
I am from Texas, and in Texas, we are working. We are doing
those things. We had an equal amount of COVID issues and
problems as the rest of the United States. But my point would
be that I think in your own opportunity to look at the San
Francisco Fed, they directly pointed to the $1.9 trillion
rescue plan as causing inflation. I openly say it, and I will
say it again. I think this Administration, I think this
Congress is making friends with inflation. I think they are
doing the things that caused it, and that it is a science, but
it is being treated as an art. Please defend that issue
yourself.
Secretary Yellen. I think that the American Rescue Plan
(ARP) played a hugely important role in putting people back to
work and ensuring that people throughout the pandemic were able
to keep roofs over their heads and food on the table. And think
about the set of problems we do not have because of the ARP. We
do not have starving families and children.
Mr. Sessions. How many jobs are available in the market
today that are unfilled?
Secretary Yellen. We have an extremely strong job market,
and we owe that to the ARP. If you remember the recovery from
the--
Mr. Sessions. But the question is, how many jobs are going
begging, and your statement seems to imply--
Secretary Yellen. We have a huge--
Mr. Sessions. --that jobs aren't available, and so the
government has to do it. The government has to pay the money
because people need it. How about jobs? How about free
enterprise? How about people paying into the Treasury as
opposed to taking out a loan? This is that art versus science
that I am talking about, and I would suggest that you invite a
couple members of the committee who are on this side to come
meet with the Council if they can't hear this. They need to
face reality. President Clinton had it right. The era of Big
Government was supposed to be over. President Obama: It is just
working the way we thought. This is a science not an art. I
thank you for being here. I am available to meet with them
also, and I yield back my time.
Chairwoman Waters. Thank you very much, and this committee
is not making friends with inflation.
The gentleman from New York, Mr. Torres, is now recognized
for 5 minutes.
Mr. Torres. Thank you, Madam Chairwoman. Madam Treasury
Secretary, a few months ago I asked the Chair of the Federal
Reserve about the risk of stagflation, and since then, in the
first quarter of 2021, the economy shrank by 1.4 percent, and
last month, inflation rose by 8.3 percent. Given these two
developments, how high, in your view, is the risk of
stagflation?
Secretary Yellen. I'm sorry. Could you repeat that? I
didn't--
Mr. Torres. How high, in your view, is the risk of
stagflation?
Secretary Yellen. We clearly have high inflation, and the
Federal Reserve has a critical role to play in bringing that
down. They are in the process, using their own independent
judgment, of tightening monetary policy to do so, and the
Administration is doing what we can to also address supply
chain issues and other contributors to inflation. We have a
really good, strong labor market. We have household balance
sheets that are in good shape. We have companies that,
although, as we note in our annual report, have a lot of debt,
the interest costs on that debt, it is very able to service it,
and we have a very strong banking sector. And all of those
things suggest that the Fed has a path to bring down inflation
without causing a recession, and I know it will be their
objective to try to accomplish that.
Mr. Torres. I have a question about improper payments. The
rate of improper payments in the Federal Government has risen
to levels never seen before. According to OMB, the improper
payment rate for unemployment insurance in Fiscal Year 2021
rose to 8.7 percent, and there have been reports that the
percentage could be even higher in June of 2021. Axios had an
alarming headline, ``Half of the Pandemic Employment Money
Might Have Been Stolen.'' I know the Treasury has the Payment
Integrity Center of Excellence. Does the Center have the
authorities, capabilities, and funding it needs to confront the
growing crisis of improper payments?
Secretary Yellen. I think that different agencies have
different authorities in terms of looking into that and trying
to address improper payments. Some of that authority for some
programs resides with the Treasury, and we are doing everything
that we can to make sure that the payments that we are making
under the programs that are our responsibilities are not
characterized by fraud. We have inspectors general, and fraud
prevention programs, and controls in place to address--
Mr. Torres. I just want to quickly interject. The Payment
Integrity Center of Excellence, is its authority restricted to
the Treasury or is it government-wide?
Secretary Yellen. I believe a number of different agencies
and, of course, DOJ plays an important role there as well.
Mr. Torres. The supply chain disruptions have been so
severe that parents are desperately searching for baby formula,
which is in dangerously short supply. As you know, some parents
have had to travel long distances to purchase baby formula.
Other parents have had to ration formula, water it down, and
still others have fallen victim to price gouging or panic
buying, and according to The New York Times, the out-of-stock
rate for baby formula has risen to 43 percent, up 10 percent
from just a month ago. What can be done in the short term to
alleviate the shortage of baby formula?
Secretary Yellen. I wish I had a good answer for you, but
what I can promise you is that the Administration is carefully
looking into this and will certainly do what they can to
address what is a very disturbing finding that you described.
Mr. Torres. A quick question about stablecoin. Suppose for
a moment there is a stablecoin issuer whose reserves are
verifiably backed by the dollar on a one-to-one basis, and
whose reserves can be immediately redeemed for a dollar on a
one-to-one basis. If the stablecoin issuer has no
fractionalization of reserves and has no lending, it would seem
to me that the stablecoin issuer is operating differently from
a bank and, therefore, should be regulated differently from a
bank. Is that a fair assessment, or what is your view on that?
Secretary Yellen. Certainly, there are differences, and
different banks operate differently and present different
risks.
Mr. Torres. But a bank, by definition, has fractional
reserves and a lending function, which are lacking in the case
of stablecoin issuers.
Secretary Yellen. That suggests that a slightly different
model should apply in regulating them. A bank framework has the
possibility of flexibility to address the differences.
Chairwoman Waters. Thank you very much. The gentleman from
Florida, Mr. Posey, is now recognized for 5 minutes.
Mr. Posey. Thank you, Chairwoman Waters.
With the Federal Reserve embarking upon their fight against
inflation it appears we are entering a period of increasing
interest rates. How much will a 1, 2, or 3 percentage point
increase in our interest rates end up increasing the interest
on the national debt and what actions are you planning to take
in that regard?
Secretary Yellen. At the moment, the real interest on the
national debt over the last couple of years has been negative
because nominal interest rates have been so low. In our own
projections of the interest burden of the debt in the years
ahead, we have assumed that interest rates would not stay at
that low level, and we have projected increases. Even so, you
can see that in our mid-session review, and we will be
producing another mid-session review, where we will update our
forecast interest rate path.
The real interest burden of the debt remains below 2
percent, which is a level that many economists regard as safe
and consistent with solid government finances.
Mr. Posey. Last October, the Financial Stability Oversight
Council issued a report on climate change. The consistent
position came through that the FSOC wants to rely on scenario
analyses to assess climate risk. I believe we must also
recognize that regulators and forecasters oftentimes make
errors as well.
Will your scenarios provide for assessing the potential
adverse impacts of regulatory decisions if they turn out to be
ill-advised or based on overly-pessimistic climate scenarios?
Secretary Yellen. I think it is important for financial
institutions to be prepared to have adequate capital liquidity
to address a variety of risks and shocks that can hit the
economy. No one ever expected a pandemic, but the Dodd-Frank
rules that were put in place ensured the resilience of the
financial sector, of the banking sector to be able to survive
shocks and meet the credit needs of the economy.
And similarly with climate change, we do not know exactly
how things will transpire, but we want to make sure that with
adverse scenarios remaining possible, that banks operate in a
way that is safe and sound.
Scenarios are widely used around the world in evaluating
the vulnerability of banking organizations to the risk from
climate change, and we are learning from what other regulators
do, and regulators of banking organizations are looking to such
scenarios to evaluate the range of risks that we could face.
Mr. Posey. Could you tell us who some of these foreign
regulator experts are that we are relying on, that we are
learning from?
Secretary Yellen. I would say the Bank of England is the
most advanced in devising scenarios and using them to evaluate
the safety and soundness of their banking organizations, and
there is a network of central banks that have worked on
designing scenario analysis for use of this sort, and this is
certainly a resource to us in the United States as we work on a
system for regulators to evaluate these risks.
Mr. Posey. I see my time is about up, Madam Chairwoman, so
I will yield back.
Chairwoman Waters. Thank you very much. The gentleman from
Texas, Mr. Gonzalez, is now recognized for 5 minutes.
Mr. Gonzalez of Texas. Thank you, Madam Chairwoman, and
thank you, Madam Secretary, for being here to testify before
us. I have, actually, a follow-up to some of the issues that
you just addressed. The devastating war in Ukraine and the
ensuing energy crisis in Europe have severely impacted economic
productivity echoing throughout the global economy. One of the
ways to fight against this would to be expand exports of our
liquefied natural gas (LNG) here in the United States. However,
the United States is at an effective export capacity, meaning
additional pipeline infrastructure and export terminals would
have to be built to expand the volume of LNG exports to our
allies in Europe and around the world.
The private sector faces challenges accessing capital to
invest in these projects, due in part to the regulatory
landscape that we have today that keeps investors away. How
does the FSOC's October 2021 report weigh this challenge and
potential risk to the global financial system?
Secretary Yellen. The issue that you are pointing to with
the necessity of helping our European allies, particularly,
reduce their dependence on Russia for a supply of natural gas
is a critically-important priority, and I know the Department
of Energy and the White House are looking at what we need to do
in the United States to facilitate that. I am not an expert on
the details about terminals, but I would be glad to get back to
you on that.
This is not really, I would say, a financial stability risk
that the FSOC has looked into or addressed in its report. It is
certainly an important economic issue.
With respect to the war in Ukraine, the Financial Stability
Oversight Council and the staffs of the agencies involved meet
on a regular basis to attempt to identify spillovers to the
financial system that are of concern. Frankly, the financial
system has functioned very well in the face of this unexpected
shock. But the issue that you mentioned is very important.
Mr. Gonzalez of Texas. Yes, it is a concern, because today
it is Europe, and maybe another part of the world at some point
in the future, and I think we should be prepared for something
like that.
Secretary Yellen. Yes, sure.
Mr. Gonzalez of Texas. Thank you, and I yield back.
Chairwoman Waters. Thank you very much.
The gentleman from Missouri, Mr. Luetkemeyer, is now
recognized for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman. Good morning,
Secretary Yellen.
Secretary Yellen, Director Chopra of the Consumer Financial
Protection Bureau (CFPB) is a member of FSOC, is he not?
Secretary Yellen. Yes, he is.
Mr. Luetkemeyer. He has recently recommending removing
deposit insurance from financial institutions as an enforcement
action. In his proposal, Director Chopra specifically named
financial institutions that have 27 percent of the U.S.
deposits combined, and he proposed that these institutions
should have harsher enforcement actions placed upon them, such
as revoking their FDIC insurance or placing them into
receivership.
Do you agree with removing deposit insurance as an
enforcement action against depository institutions?
Secretary Yellen. I'm sorry. I have not had a chance to
review his comments or proposals on this. I would say that
deposit insurance plays a critical role in the banking system
and it is something that has promoted financial stability.
Mr. Luetkemeyer. From that comment, I would assume that you
believe that deposit insurance is important to financial
stability in the United States.
Secretary Yellen. I agree with that.
Mr. Luetkemeyer. Okay.
Secretary Yellen. I am not knowledgeable about the details
of his proposal.
Mr. Luetkemeyer. So if you are concerned, if you believe
that the FDIC insurance is a key factor in continuing to have
stability in the banking area, especially when you have these
big banks just talking about perhaps a quarter of all U.S.
deposits not being insured, that would affect the stability of
the economy. And you sit on FSOC and he sits on FSOC, the
entity which is for looking at financial stability risks, as
you just stated a minute ago.
Do you think Mr. Chopra is a worthwhile member to have on
there, and should some actions be taken against him for making
a statement like that, that could endanger the stability of
financial markets?
Secretary Yellen. Look, I am not prepared to weigh in on
his proposals. I do not know the details of it. I agree with
you that deposit insurance is important. But it not automatic
that every institution is granted deposit insurance. That is
something that the FDIC reviews how banks are operating and
whether or not they--
Mr. Luetkemeyer. Madam Secretary.
Secretary Yellen. --deserve to have deposit insurance.
Mr. Luetkemeyer. Madam Secretary, when you have a member of
FSOC make that sort of inflammatory remark that could affect
the stability of the financial markets by saying these
institutions could have the FDIC insurance taken away from
them, that sent shockwaves from my position about what is going
on. To me, it is unacceptable. If I was in your position as the
head of FSOC, I would certainly have a little discussion with
Mr. Chopra and say, ``You cannot go out here and make those
kinds of wild accusations, and you cannot have those kinds of
enforcement actions that would destabilize the markets.''
But we will write you a letter and hope you respond to that
with regards to this situation, because I think it is paramount
that the Council be sure that they have members on there who
understand that their remarks could be inflammatory in a
situation like this. So, I thank you for that.
Next, on December 27, 2020, Congress passed the
Consolidated Appropriations Act of 2021, which funded the
government and also included additional stimulus related to the
pandemic, including another round of Paycheck Protection
Program (PPP) loans. Title III of that section established the
second round of PPP, and that Section 321 was entitled,
``Oversight.'' And it states that not later than the date that
is 120 days after the date of enactment of this Act, the
Administrator and the Secretary of the Treasury--that is you--
shall testify before the Committee on Small Business and
Entrepreneurship of the Senate and the Committee on Small
Business of the House of Representatives regarding
implementation of this Act and amendments made by this Act.
That means you were due, Madam Secretary, to appear before
the House Small Business Committee 381 days ago, and you still
have not shown up. I have sent you letters about this testimony
in May of 2021, June of 2021, July of 2021, and March of 2022,
and still have not received a response.
As someone who is head of FSOC, and someone who looks at
the stability of our economy, and someone who should want to
lend the support and stop some inflammatory discussions and
actions and allay fears, your lack of being able to appear
before us is very concerning. Do you any plans whatsoever to
appear before our committee, Madam Secretary, the Small
Business Committee?
Secretary Yellen. I appreciate very much the role that
Congress plays in oversight, and I come regularly to the Hill
and to this committee to testify. In the situation you are
referring to, Congress has expressly authorized me to delegate
duties and powers of the Secretary to another officer or
employee, and that includes the Deputy Secretary. And he has
offered to testify multiple times in front of the Small
Business Committee. I hope that you will agree to allow him to
come and do so.
Chairwoman Waters. The gentlewoman from North Carolina, Ms.
Adams, is now recognized for 5 minutes.
Ms. Adams. Thank you. Thank you, Madam Chairwoman, and Mr.
Ranking Member, for hosting the hearing today. Secretary
Yellen, it's good to see you again. Thank you for being here.
Madam Secretary, FSOC's annual report notes the significant
increase in home prices between 2016 and 2019, that the average
annual increase was only 6 percent, but from March 2021 to
March 2022, home prices rose 22 percent. Would you very briefly
agree that the rapid increase in housing and rental costs
presents a significant problem for those who are already home-
insecure? Would you agree to that?
Secretary Yellen. Yes, I definitely agree. I think the
supply of housing, particularly affordable housing, in this
country is a huge problem. We have had low construction really,
ever since 2008, and I believe we have a huge shortage of
affordable housing in this country. Of course, rising home
prices and rental prices are an enormous issue.
Ms. Adams. Yes, ma'am. In my district of Charlotte-
Mecklenburg, private equity firms have been snapping up single-
family homes and converting them to rental properties. Last
week, the Charlotte Observer, our local paper of record,
reported in their Security for Sale series that in North
Carolina, institutional investors have purchased over 40,000
homes in the past decade. The UNC Urban Institute reported that
over 10,000 of those are in Mecklenburg County and that the
average value of those properties is only two-thirds of the
average single-family home, which means that private equity
firms are squeezing the less-affluent out of the home-buying
market but depleting the supply.
Madam Chairwoman, I would like to, without objection,
submit the articles that I mentioned for the record, including
two others that touch on Charlotte's housing crisis, from The
New York Times and The Washington Post.
Chairwoman Waters. Without objection, it is so ordered.
Ms. Adams. Thank you.
Secretary Yellen, can you describe why it might be
dangerous for the housing market at large for private equity
firms to purchase and convert homes at the lower end of the
price range spectrum?
Secretary Yellen. I would simply say that we have a
shortage of housing and it is critically important that we do
everything in our power to increase the supply of housing. We
have to use the tools that we have. The President's Build Back
Better plan would have dedicated $150 billion to housing,
including making major investments in public housing and
homebuyer assistance. But we certainly have to use all of the
tools that are available to us now to address the housing
crisis.
Ms. Adams. Thank you. We should have passed the President's
Build Back Better agenda. It would have dedicated $150 billion
to housing, including making major investments. I am proud to
have worked with Senator Collins and Representative Rouzer to
introduce our bipartisan, bicameral LIFELINE Act, which would
allow cities and States to use a lot of the fiscal relief funds
to help with housing development. So, I encourage all of my
colleagues sitting here today to co-sponsor that legislation.
Madam Secretary, with the time we have left, would you tell
me how important it is to maintain a robust supply of
affordable housing during this time?
Secretary Yellen. I think it is critically important. We
are seeing huge shortages in affordable housing, especially in
high-priced areas of the country, and I think we need to do
everything we can to address the shortage. I think that States
and localities also have in place restrictions, zoning
restrictions that make it difficult to build affordable
housing, so I think action at that level is also important.
You mentioned fiscal relief funds, and we have certainly
urged State and local governments to use these funds to expand
affordable housing. It was an important issue in the pandemic.
Ms. Adams. Great. Thank you, Madam Secretary, for being
here. And Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you very much.
The gentleman from Michigan, Mr. Huizenga, is now
recognized for 5 minutes.
Mr. Huizenga. Thank you, Madam Chairwoman.
Secretary Yellen, I wanted to call you, ``Chair Yellen.''
You are still sort of Chair Yellen to me. That was how we
interacted for many years. But Secretary Yellen, just last
month when you were here, we talked a little bit--and I know
this is a little off-topic from FSOC, but we talked about
Iranian sanctions. And there had been a report in The
Washington Post about Iran demanding that they be taken off of
some of the designations as foreign terrorist lists.
You had said at the time that--and I have the transcript
from that interaction right here--``I am not deeply involved in
the detail of these negotiations.'' My question then, was,
``Have you or anyone else at Treasury been directed to reduce
Iranian sanctions enforcement so as not to interfere with those
Vienna talks?'' You replied, ``We have not changed our
sanctions on Iran.'' I said, ``That was not my question. Have
you been instructed to or requested to do anything?'' You said,
``There has been no change in the Administration policy, to the
best of my knowledge.''
What I am really concerned about, I guess, is the Secretary
of the Treasury not being read-in on those. Treasury is the
main source of sanctions. Is that still the case? Are you read-
in on these negotiations or not?
Secretary Yellen. Treasury is regularly updated about the
negotiations.
Mr. Huizenga. And you personally?
Secretary Yellen. I have been periodically updated on this
situation with the Iranians.
Mr. Huizenga. Then, I guess I will go back to my original
question. Have you or anyone else at Treasury been instructed
to back off on any of those sanctions, vis-a-vis Treasury
sanctions on Iran?
Secretary Yellen. No, not to my knowledge.
Mr. Huizenga. Okay. That is the kind of thing that makes us
very nervous, when you say, ``Not to my knowledge.'' So, will
you please go and investigate that, and I would like to find
out so that we can have assurances that Treasury, with your
knowledge or against your knowledge, has not been instructed by
this White House to back off on those sanctions?
Secretary Yellen. Nothing has changed with respect to
Iranian sanctions.
Mr. Huizenga. Okay. I still request that.
Here is the other question I wanted to really get at, FSOC
and its functions, talking about digital assets. Recently, the
SEC released a Staff Accounting Bulletin Number 121 related to
custody of digital assets for its platform user. Given FSOC's
focus on digital assets, was there any coordination with other
members, agencies, in those efforts from the SEC?
Secretary Yellen. I am not deeply knowledgeable about this
regulation. I need to look into it and get back to you.
Mr. Huizenga. I guess, if you would, that would be
extremely helpful. This is a sweet spot for this committee. The
SEC, in my opinion, should not be issuing one-off staff
bulletins and guidance on digital assets instead of following
the proper rulemaking process and coordinating with other
agencies. It seems to me as Chair of FSOC, that is a vital part
as we are dealing with these digital assets.
I have a minute and 40--
Secretary Yellen. The SEC and the CFTC certainly have
authorities--not comprehensive authorities over digital assets
but they certainly do have authorities and can act on their own
within those.
Mr. Huizenga. And I guess I want to know whether there is
coordination within the agencies of FSOC. So, we can continue
that.
In my last minute here, I want to talk a little bit about
the effects of spending on the economy, and I know Mrs. Wagner
from Missouri was talking about that, and ironically she is at
a press conference right now dealing with the lack of baby
formula and the inflationary prices and the supply chain there.
Let us just put it this way. Spending plus easy money
equals inflation, and that seems to be playing out. And I am
curious if you would prognosticate here a little bit on soft
landing versus hard landing versus very hard landing--what are
your expectations of what is going to be happening in the
economy?
Secretary Yellen. Inflation is a serious concern. Look, we
are not the only country experiencing inflation. Most advanced
countries--
Mr. Huizenga. But no other country is at this level.
Secretary Yellen. But it does show that there are factors
beyond spending in the United States that are critical to
inflation. We are seeing, because of the pandemic, supply chain
problems develop--
Mr. Huizenga. In my last 5 seconds, Fed Chair Powell agreed
with this: about 20 percent of inflation is due to energy; 20
percent to labor; 20 percent to supply chain; and 40 percent to
monetary policy and spending.
I yield back.
Chairwoman Waters. The gentlewoman from Pennsylvania, Ms.
Dean, is now recognized for 5 minutes.
Ms. Dean. Good morning, Secretary Yellen. I am delighted
that you are here again before us. Thank you, Madam Chairwoman,
for recognizing me. And I thank you for not minimizing the
risks and the realities of inflation and what it means to all
of our constituents. Clearly, the Fed has its work cut out for
it, and is stepping up to do just that.
At the same time, I want to make sure we balance the
conversation about the overall health of the economy. We can
all beat the drum about inflation because it is painful, but
let us talk about the underlying health of the economy
following a pandemic and a global economic closure.
Unemployment has fallen to 3.6 percent, down from a
pandemic high of nearly 15 percent in April of 2020. If you
compare that to 2008, the financial crisis, unemployment peaked
at about 10 percent in 2009, and did not fall to below 4
percent for nearly a decade.
Secretary Yellen, can you speak to how different this
recovery has been compared to the recovery from the financial
crisis? How have the steps taken by Congress, including the
American Rescue Plan--which you have spoken about several times
today, and my constituents appreciate--contributed to this
extraordinary recovery?
Secretary Yellen. I appreciate you making this point. It is
a critically important one. The American Rescue Plan deserves
substantial credit for the fact that the unemployment rate is
very low, that Americans have confidence in the job market. We
are seeing the quit rate rise to levels we have never seen in
the United States, and what that means is that individuals are
seeing huge opportunities in the job market. They are receiving
outside offers that let people move to better jobs and advance
in the jobs that they have and see wage increases.
The eviction rate in the United States is below pre-
pandemic levels. We had a year last year in which child poverty
dropped very substantially. For Americans, on average, their
household balance sheets are very strong. That is, in part,
because of the support provided by the American Rescue Plan,
and businesses are doing well. While some built up debt during
the pandemic, they are now finding it possible to pay it down.
We have a good, strong labor market. I spent that decade
following the financial crisis at the Fed, and I can tell you
how concerned we were that using every tool at our disposal, it
still took a decade to recover. And I can also tell you that
when President Biden was elected, the projections as to where
the economy might go were dire.
Ms. Dean. Exactly.
Secretary Yellen. The CBO projected high unemployment. The
American Rescue Plan addressed that. And the strong state of
our labor market and of household balance sheets, this is the
dog that has not barked in the night. That is the credit that
goes to the American Rescue Plan. Of course, we have to address
inflation.
Ms. Dean. I thank you for your legacy of dealing with these
issues and recognizing what the American Rescue Plan has done.
I had a father thank me for the American Rescue Plan because he
and his wife have two little children, and what it did in terms
of the child tax credit was meaningful to them. Sadly, not a
single Republican could bring himself or herself to vote for
the American Rescue Plan, and sadly, while we made a big
difference on child poverty and hunger, by not renewing the
increased child tax credit, of course, we send those families
back into poverty.
Just quickly, in the time I have left, when you were last
here you talked about the Russian economy reeling as a result
of the sanctions. Can you give us an update?
Secretary Yellen. It is absolutely reeling. By their own
estimation, the Russian economy looks set to contract at least
10 percent or more this year, inflation is expected to reach
double-digit levels, perhaps 20 percent, and there is an
enormous, because of our sanctions, shortage of goods and
services that Russia needs to replenish the munitions that it
is using in the war. Its high technology and defense industries
will be damaged for decades to come.
Ms. Dean. I yield back, and I thank you.
Chairwoman Waters. The gentleman from Kentucky, Mr. Barr,
is now recognized for 5 minutes.
Mr. Barr. Thank you. Madam Secretary, I want to focus on
your 2021 report on climate-related financial risk. I have
expressed in this committee before that it is implausible, if
not far-fetched, to suggest that climate change, a phenomenon
that occurs over decades, could somehow suddenly overwhelm the
banking system, the insurance sector, or the reinsurance
sector.
What evidence has FSOC found that banks, lenders, or
insurers have ever mispriced weather risks so substantially
that it would result in systemic risk?
Secretary Yellen. It is not just a matter of weather risks,
which are clearly rising in severity and could have a
significant impact on banking organizations, but there are also
so-called transition risks that--
Mr. Barr. So regulatory risks, risks that the government
could redirect capital away from fossil energy and increase
inflation. Is that what you are referring to, transition risks?
Secretary Yellen. It is an existential threat with respect
to climate change, leaving our children and grandchildren with
a planet that is all but uninhabitable--
Mr. Barr. Let's drill down on that--reclaiming my time. In
FSOC's report on climate-related financial risk, did FSOC
consider the risk of overinvestment in novel, unproven, and
highly risky, speculative green assets, and then the risk of
diverting investment away from stable, proven, and low-risk
brown assets?
Secretary Yellen. The FSOC and individual regulators are
not telling banks what they should or should not do.
Mr. Barr. I think FSOC should consider overinvestment in
risky assets. In FSOC's consideration of climate-related
financial risk, did FSOC consider the substantial risk that has
actually now materialized, that overregulation of the fossil
energy sector, ending Keystone, blocking lease sales on Federal
lands, constraining supply of energy, has actually undermined
financial stability, specifically historic inflation and $4.37-
a-gallon gas?
Secretary Yellen. I think we owe that to the failure of our
domestic industry to ramp up production to--
Mr. Barr. I do not think that is what they said. They say
they cannot get approval, and when they cannot ship through the
Keystone Pipeline, and when they cannot access capital because
of ESG disclosure mandates, that is why we have a shortage of
energy.
Did FSOC consider that the SEC's ESG disclosure proposal,
designed to redirect capital away from fossil energy, will
increase the cost of energy, creating a greater risk to
economic stability?
Secretary Yellen. Look, investors with over $100 trillion
worth of assets have said that in order to properly evaluate
investments, they need disclosures about the risks that
individual firms have with respect to climate, and regulators
all around the world are acting to--
Mr. Barr. I understand that but--
Secretary Yellen. --provide that information.
Mr. Barr. --will you commit to engaging Chairman Gensler in
FSOC to assess the risk to our energy markets and exacerbating
the inflation crisis posed by politicizing the allocation of
capital through ESG regulation, and will the FSOC consider the
risk of steering investors toward green or ESG firms that could
make them riskier, not safer, by inflating their asset values?
Secretary Yellen. I think you should note that the largest
banks in the United States and around the world voluntarily
joined an alliance this past year to commit--
Mr. Barr. I know what they did.
Secretary Yellen. --to reporting their portfolios--
Mr. Barr. I am asking you about--
Secretary Yellen. --and that is not--
Mr. Barr. --financial risk.
Secretary Yellen. --the reason--
Mr. Barr. I am asking you, Madam Secretary, about your job
as Chair of the FSOC to evaluate all financial risks. And I
want to know whether you acknowledge that stocks in many ESG-
related ETFs and investments trade at elevated priced earnings,
ratios, and multiples because investment returns are sacrificed
for non-pecuniary factors. Are you evaluating that risk to the
financial system, because returns are sacrificed?
Secretary Yellen. We do look at asset valuation and
recognize that significant shifts in them can be a risk to
financial stability.
Mr. Barr. Finally, will you commit to never, as long as you
are the Treasury Secretary and Chair of FSOC, to allow a single
minute of time, during any meeting of FSOC, to be devoted to
the topic of abortion?
Secretary Yellen. Abortion is not a topic--
Mr. Barr. Thank you.
Secretary Yellen. --that FSOC has looked at or that I--
Mr. Barr. I think the fact that there is a focus away from
actual financial stability risks and towards things like
abortion and meteorology means that we have our eye off the
ball at FSOC. And I yield back.
Secretary Yellen. FSOC has nothing to do with abortion.
Chairwoman Waters. The gentlewoman from Michigan, Ms.
Tlaib, is now recognized for 5 minutes.
Ms. Tlaib. Thank you for being here, Madam Secretary.
I want to talk about something that is really important to
my district, but I want to start with a few questions. When
defining financial stability risks from a climate crisis, do
you think we should be defining the risk as only government
policy change that would happen only with, potentially, that is
the only way that would create disruption? Do you think the
government policy is the only form of transition risk regarding
the climate crisis?
Secretary Yellen. The underlying risk is that we have a
process of climate change taking place which threatens the
viability of life on Earth and poses enormous risks to our
children and our grandchildren. I believe this risk is becoming
clearer from what all of us see happening around us every day,
and if that is not the case for some people, it will become
clear in the decades ahead and there will be adjustments and
they can contribute--
Ms. Tlaib. I am with you, and this is why I am asking. In
defining financial stability risks from a climate crisis--
during the Senate confirmation for Federal Reserve Chair
Powell, he defined transition risk as government policy change
that happens, which could potentially create disruption. But
what about rapid changes in technology or major shifts in
consumer consumption? Right now, are we considering the supply
chain impact due to rising sea levels or other climate-related
effects?
Secretary Yellen. I would agree with your statement that
these risks do not have to relate to government relation. They
could certainly relate to technological changes--
Ms. Tlaib. I am so glad to hear you say that.
Secretary Yellen. --or rapid shifts in consumer preferences
or other sources.
Ms. Tlaib. It is a huge economic risk, and we really need
to be looking at it.
G20 financial institutions currently have nearly $22
trillion of exposure to carbon-intensive sectors, and last year
the world's largest financial institutions, Madam Secretary,
pumped $742 billion into the fossil fuel industry. Secretary
Yellen, we actually saw more fossil fuel financing last year
than we did in 2015, the year the Paris Agreement was signed.
We are going in the wrong direction.
As the world's largest financial institutions continue to
grow their positions in carbon-intensive markets, will this
make our global transition from fossil fuels to clean energy
slower and more dangerous to our economy?
Secretary Yellen. I guess what I see is that the world's
largest institutions recognize the importance of shifting their
lending in ways that will help us, the globe, the U.S. and
other countries, achieve net zero by 2050, and are voluntarily
making--
Ms. Tlaib. They are saying that but they are not doing it,
Secretary.
Secretary Yellen. I think it is important for groups to
monitor those financial institutions and see that they--
Ms. Tlaib. I really think we need to--in FSOC's report on
risks posed by climate change last year, the Council outlined
several recommendations as first steps in addressing the
climate crisis, including increased scenario analysis, and
climate risk disclosures, and I applaud the report. I think
their recommendations were very clear.
However, I am really perplexed because as you were talking
about that, many of these financial institutions that are
financing fossil fuel projects have continued to say this thing
about net zero, public comments, and pledge to align with the
Paris Agreement but they are not. They are completely
contradictive.
Secretary Yellen, you saw the record flooding, everything.
How will better risk modeling and climate disclosures change
the behavior of these financial institutions?
Secretary Yellen. It will allow their supervisors to form a
clearer view of the risks that these institutions are taking
and then ensure that they are managing them properly, and it
will help the institutions themselves better appreciate the
risks that they are undertaking. They are probably not doing
that kind of analysis now, and want to promote that
understanding.
Ms. Tlaib. Yes, and just to be clear, I am for that, but I
think the result needs to be actual reduction, and to really
look at this in a very clear way. I do not think we are in line
with what Chairman Powell is talking about, and the fact that a
lot of other countries are looking at this as a risk very
clearly, an economic risk, I think is very telling.
Thank you, Madam Chairwoman.
Chairwoman Waters. Thank you. The gentleman from Texas, Mr.
Williams, is now recognized for 5 minutes.
Mr. Williams of Texas. Thank you, Madam Chairwoman. Madam
Secretary, thank you for being here.
I am a small business owner back in Texas, not, ``was,''
but, ``am.'' And I meet with families, businesses, ranchers,
and car dealers in my district all the time, and inflation is
one of the first things they bring up. And yesterday, CPI data
showed this phenomenon is not slowing down. Year over year,
gasoline is up 43 percent--you know these numbers--electricity
up 11, meat, fish, and eggs up 14 percent, and even used cars
are up 22 percent.
You are one of the top voices in the Administration
claiming inflation was transitory. Well, that has obviously
proven to be extremely wrong. And yesterday, the Wall Street
Editorial Board chided the President for lying to the American
people and blaming everything except for his own party's
policies as a contributing factor to these price increases.
Just a simple question. Keep it short. Very simple. Will
you admit that government spending is a contributing factor to
inflation?
Secretary Yellen. There are many factors that are
responsible for inflation. You can see inflation at
unacceptable levels in all advanced countries around the world.
Mr. Williams of Texas. I know. We have talked about that--
to get my time back--but we are just saying government spending
is a big cause, isn't it?
Secretary Yellen. We supported spending, it contributed to
demand, and it had a very favorable effect on most Americans'
well-being. We do have to deal with inflation.
Mr. Williams of Texas. Okay. The energy sector is an
important industry in my home State of Texas, and I keep
hearing from this Administration that it is the private
sector's fault that they are not producing more and have not
invested in any new capabilities to expand production. And
quite frankly, that is an insult. This is such a ridiculous
excuse to once again deflect blame away from their own
misguided policy decisions that are having a material impact on
American lives. It is just deflect all the time.
As a business owner, as a current business owner, certainty
is key before you deploy capital. Since President Biden's first
day in office, he made it abundantly clear that he is going to
be hostile towards this energy industry, and a few of these
actions were immediately canceling the Keystone Pipeline permit
when he came into office, and instituting a leasing moratorium
for onshore and offshore energy production, while threatening
to raise royalty rates, and pushing his climate agenda through
financial regulators to make people think twice before
providing financing.
Just today, this morning, the Interior Department cancelled
a 1-million-acre oil and gas lease in Alaska that could have
brought some relief to the American people when we are sky-high
in gas prices.
Madam Secretary, why would any domestic energy company want
to invest in new production capabilities when all this
Administration does is project uncertainty, they want to raise
taxes, they want to raise regulations, and they are just
frankly hostile, just mean and hostile towards this industry.
Why would anybody want to come here?
Secretary Yellen. I think when the pandemic struck, and gas
prices fell, a lot of oil companies and energy companies in the
United States suffered hard times and losses, and it was
natural for them to diminish production and reduce investments
in drilling. They probably did not expect such a rapid recovery
as we saw from the pandemic, and as demand increased, it drove
oil prices up.
I think this gives a good deal of impetus to domestic
energy companies to raise production in the short term. Over
the longer term, climate change remains critical, and I think
what we have seen happen with energy prices rising because of
Russia's invasion of Ukraine, it tells us that we need to move
to renewable energy sources where our supplies and well-being
and prices are not so vulnerable--
Mr. Williams of Texas. I might have a better idea. Maybe
incentivize the private sector and let the private sector
compete and help drive prices down. The government never gets
that done. The government creates the problems that we are in
today. So, I would say you might want to try incentivizing
these people.
In closing, as a result of foreign tax credit regulations
finalized by Treasury late last year, income and withholding
taxes that have been credible for decades are no longer
eligible for foreign tax credits. This could have an effect,
again, of incentivizing U.S.-based companies to move more of
their operations overseas.
Quickly, are you willing to reopen this rulemaking to
ensure that American businesses are not being put at a
competitive disadvantage, so they do not leave and cost us more
jobs? Because this is America, the greatest country in the
world. Would you be willing to do that?
Secretary Yellen. I'm sorry. What rulemaking are you
referring to?
Mr. Williams of Texas. Okay, my time is up. Thank you.
Chairwoman Waters. Thank you. The gentleman from Illinois,
Mr. Garcia, is now recognized for 5 minutes.
[Pause.]
Chairwoman Waters. Mr. Garcia? Are you unmuted? We will
wait for Mr. Garcia.
Meanwhile, the gentlewoman from Texas, Ms. Garcia, who is
also the Vice Chair of our Subcommittee on Diversity and
Inclusion, is now recognized for 5 minutes.
Ms. Garcia of Texas. Thank you, Chairwoman Waters, and
thank you, Secretary Yellen, for joining us again today with
this important annual report.
First, I would like to applaud you, Madam Secretary, for
the Treasury's handling of the financial stresses we have
experienced recently. COVID-19 has caused much social and
financial hardships to our community. Putin's unprovoked
invasion of Ukraine has only exacerbated these problems. I
commend Treasury's implementation of historic multilateral
sanctions against Russia, punishing them economically, and
isolating them politically.
You, this Congress, and the President have constructed a
broad and effective international coalition. We hear good news
of others that may be joining. Now, we must continue this
effort to maintain and expand help to Ukraine and turn up the
pressure on Putin. Congress' oversight counsel through this is
really, really important. This stability allows Americans to
trust their that hard-earned paychecks will be safe from
predatory bad actors.
I want to focus today on a couple of things that have
perhaps been talked about, and just to be clear, government
spending is not the only factor in inflation, is it not?
Secretary Yellen. There are supply chain bottlenecks. Look
at what is happening in China. The lockdowns that they are
using to handle the pandemic are disrupting supplies to our
economy. The war in Ukraine that Russia has launched is
impacting food prices. We have seen more than a doubling of
wheat prices. Not only is that impacting American food prices,
it is threatening starvation in many parts of the world where
there is already food insecurity. It is affecting energy. None
of this has anything to do with government spending.
Ms. Garcia of Texas. Right. In fact, the food shortage may
cause a bigger crisis than even the gas shortage, I understand.
Secretary Yellen. The food crisis is terribly worrisome.
With respect to wheat, both Russia and Ukraine are tremendously
important sources of exports, the bread baskets of the world.
And at the moment, Ukraine is really unable to ship wheat out
of the country. That is part of why wheat prices have risen so
much. There have also been droughts in many parts of the world,
and we are terribly concerned and are very focused on rising
food prices, and the impact that will have in many parts of the
world, including Africa.
Ms. Garcia of Texas. I want to focus on a couple of things
that have already been said, but just probe a little more. In
response to a question from one of my colleagues, you mentioned
the decrease in child poverty as a result of the child tax
credit and some of the steps that Congress has taken to help
the average working family.
Do you know exactly what percent of reduction has resulted
from all of the investment in the child tax credit?
Secretary Yellen. I do not have the exact figure but I do
know it was a substantial reduction in child poverty.
Ms. Garcia of Texas. I thought I heard 40 percent.
Secretary Yellen. That is the type of number I have in
mind, but I can get back to you. It was a very substantial
impact.
Ms. Garcia of Texas. Right. And I know that you received a
letter from some Texas Democrats asking your Inspector General
to look at what our governor is doing with perhaps misuse of
some of the--
[Audio malfunction.]
Ms. Garcia of Texas. Madam Chairwoman, I paused. Can I get
some of my seconds back?
But we sent care packages. We sent COVID dollars. We sent
them the dollars we sent them to recover from their loss of
revenues during the pandemic. And there is concern that some
States did not use the dollars as Congress intended. In fact, a
Washington Post article recently, I think it was last week or
yesterday, said that from refurbishing prisons to constructing
new golf courses, one State, Arizona, even used the money to
discourage schools from requiring students to wear masks,
prompting the Treasury Department to threaten to claw back the
aid.
What are we doing to claw back the aid? I know we sent a
letter, several Members from Texas, concerned about our
governor using those dollars for what he calls Operation Lone
Star, which is his attempt to control the border.
Secretary Yellen. We have clear guidelines in place about
permitted uses of that money and not permitted uses, and we are
monitoring and have a reporting system that will let us review
how States and localities are using that money. And I promise
you that if the funds are used in ways that are inappropriate,
we will claw it back.
Ms. Garcia of Texas. You will claw it back. And how much
time do you think that would take? I know what our governor is
doing, but I did not realize, until this article, that this was
happening in many other States.
Chairwoman Waters. The gentlewoman's time has expired.
Ms. Garcia of Texas. Madam Chairwoman, before you leave me,
I ask for unanimous consent to submit for the record an article
from The Washington Post, ``Federal watchdog opens `review' of
Tex. use of covid aid on border crackdown.''
Chairwoman Waters. Without objection, it is so ordered.
Ms. Garcia of Texas. Thank you.
Chairwoman Waters. The gentleman from Arkansas, Mr. Hill,
is now recognized for 5 minutes.
Mr. Hill. Thank you, Chairwoman Waters. And Madam
Secretary, it is so great to have you back before the
committee, and thanks for being responsive to our questions,
and thanks for the incredibly challenging times you are in, in
trying to guide our financial response to Ukraine's tragedy of
being invaded by Putin.
I want to start there, quickly, because I was looking back
at the FSOC meetings--and I am actually going to talk about
FSOC--and FSOC has met nine times since you have been confirmed
at the Treasury, and in only two of those meetings did you talk
about cyber concerns to our financial institutions. One of
those was just because of the invasion. And, of course, we have
been briefed up here on the cyber risks potentially posed by
Russia.
In contrast, the FSOC spent a lot of time on climate. So my
question to you is, do you think that cybersecurity incidents
due to the Russia conflict are a risk to the financial system
here in the United States?
Secretary Yellen. Cybersecurity is one of the key threats
to the financial sector, and FSOC has consistently identified
it, including in this report, as a serious concern. The
Treasury also has responsibilities in this regard and is very
focused on, especially with the Russia-Ukraine situation, we
are working very closely with financial institutions to make
sure that they have the information--
[Audio interruption.]
Mr. Hill. I tell you, those robocalls are a real problem in
our political--
Chairwoman Waters. Sorry for the interruption. We will make
up for the time. Go right ahead.
Mr. Hill. No worries. Thank you, Madam Chairwoman.
Let me stop you there just a for a second and say, since
you, in those nine FSOC meetings, you talked in seven of them
about climate change, and in only two about cyber, would you
say that at this time, in war, the global war in Ukraine--
Secretary Yellen. We have an ongoing and robust program to
deal with cybersecurity--
Mr. Hill. Ma'am, ma'am--
Secretary Yellen. --and have long recognized it is a
critical threat.
Climate change is something new that the Council has not
previously addressed, and the reason we have discussed it in so
many meetings is because it is a new initiative, it is a
complicated one, it is one that requires agencies to work
together, and it is a substantial, long-term threat. Both
things are important. One is not more important than the other.
Mr. Hill. But you would say that cyber resiliency right now
is a much more critical concern to the financial sector than
long-term talking and planning and thinking about climate
change, yes or no?
Secretary Yellen. Climate change is a substantial long-term
threat and cybersecurity is a long- and a short-term threat we
are very focused on.
Mr. Hill. Let me change subjects and talk about the reverse
repurchase market that your former organization, the Federal
Reserve, runs. Over the last couple of years, we have about
$1.9 trillion in an overnight repurchase agreement, showing
just how much liquidity is out in our system that is not being
able to be used. It cannot be used for productive lending
purposes. The banks have effectively too much stimulus from
fiscal contributions to the economy as well as the laxity of
our monetary policy recently.
Do you think that the reverse repurchase agreement balance
is a challenge to financial stability as we go through a
tightening phase at the Federal Reserve?
Secretary Yellen. I really do not want to comment on issues
that are in the domain of the Fed. It is the Fed's program and
I am going to refrain from commenting on it. But I will say
that FSOC is concerned about the functioning of the Treasury
market. We have had episodes in which liquidity has dried up,
and we are working very hard coordinating with the interagency
Treasury working group to look at reforms, to make sure this
critically important market for the United States and the globe
functions well, and has the liquidity that it needs.
Mr. Hill. Good. I would invite you to look very closely at
what Gary Gensler has said about the primary dealer market and
urge him to be very cautious about injecting any uncertainty in
our primarily Treasury dealers at this time of tough conditions
as we tighten and want to maintain that liquidity.
Thank you, Madam Chairwoman, and I yield back.
Chairwoman Waters. Thank you very much. The gentleman from
Massachusetts, Mr. Auchincloss, who is also the Vice Chair of
the committee, is now recognized for 5 minutes.
Mr. Auchincloss. Thank you, Madam Chairwoman. Madam
Secretary, welcome.
I would like to discuss in these 5 minutes what more the
United States Treasury can do to defeat Russia in Ukraine. The
central bank sanctions crafted by you and Deputy Secretary
Adeyemo have been the brass knuckles of NATO's one-two punch of
sanctions on Russia, plus support for Ukraine. They were
unexpected, they hurt bad, and you and the Deputy Secretary
deserve a lot of credit for crafting those.
Secretary Yellen. Thank you.
Mr. Auchincloss. I am concerned, though, that Russia's
continued exportation of almost eight million barrels per day
of oil continues to fund their barbaric war machine. The United
States and Canada, as you obviously know, have barred Russian
oil. The European Union is trying to, but Hungary is exercising
a veto on that effort.
First, what carrots and sticks do we have to compel Hungary
to support an EU blockade of Russian oil?
Secretary Yellen. We are working very closely with our
European allies. I am actually traveling to Europe next week
and will have discussions with them. Most of them were in
Washington--
Mr. Auchincloss. With Hungary, in particular, though.
Secretary Yellen. Ah, with Hungary. I have not had
conversations with Hungary. My NSC colleagues may have. The
European Union, the European Commission is working with all of
its members to--
Mr. Auchincloss. All of the members agree except for
Hungary. This is a monumental step, and I would encourage you
and the Administration to do your utmost to use carrots and
sticks with Hungary to get them on board here with the European
Union's approach. And that is because if the EU does blockade
Russian oil, that could force Russia to redirect up to 5
million barrels out of their 8 million total every day, and
they cannot. It seems very unlikely that they could actually
redirect that 5 million barrels per day going to Europe. Only
China and India have enough demand to even take it, and neither
seems willing to concentrate their supplier risk to that
degree, especially with the potential of secondary sanctions.
And furthermore, there is not even the pipeline or the shipping
capacity, really, to redirect that full 5 million, even if
there were a demand from China or India.
In short, what that means to me is that if and when Europe
does join our blockade--and again, I encourage you to do
everything you can to get Hungary and the EU on board--the West
is going to have a tremendous amount of leverage over Russian
oil production, more than I think we appreciate right now.
Keeping 5 million barrels a day in the ground in Russia is
going to be devastating to its oil production. They cannot do
it. They cannot do it for their upstream services. They cannot
do it for maintaining their oilfields.
Have you examined any potential effort with our NATO allies
to take advantage of that leverage that we would have?
Secretary Yellen. We have had many, many discussions with
them about energy and Russian oil. Let me just say, our
objective since day one has been to have as large a negative
impact as we possibly can on Russia, while, to the best of our
ability, protecting the rest of the world. And when it comes to
oil and energy and shutting it in, we do have to remember that
shutting in that Russian oil is likely to boost global energy
prices, which can have a very damaging effect and is, in the
rest of the world and also can counterintuitively, perhaps,
raise Russia's revenue in spite of the fact that it is
producing less oil
Mr. Auchincloss. To that point, Madam Secretary--
Secretary Yellen. At the same time we are working with
them, we are also considering possible things we could do that
would lower Russia's oil revenues while protecting the rest of
us.
Mr. Auchincloss. And I think we may be thinking of the same
lines of effort here, but would those other things that you
could do include a special payments authority where we could be
with our NATO allies actually purchasing Russian oil but only
remitting to Russia the cost of production, $20 to $25 per
barrel, but taking the excess, which would normally go to the
Kremlin as taxes, and instead directing that towards Ukrainian
reparations? This has been proposed by experts. I am sure you
are looking at it. And would you be willing, and your Deputy
Secretary, maybe, in particular, be willing to engage with me
on what that might look like and to what degree you have been
planning for it?
Secretary Yellen. We would be glad to engage with you on
that, and that is the kind of alternative that we have been
examining and discussing with our allies.
Mr. Auchincloss. I appreciate that. In my final 20 seconds,
Secretary, have we explored sanctions on oilfield services
providers who enable Russian oil production upstream of the
actual distribution of that oil? Those companies have escaped
sanctions, and they provided much-needed technical expertise
that Russia has not developed organically.
Secretary Yellen. The withdrawal of foreign oil companies
from Russia is really hurting their ability to extract oil now
and in the future. And we have put in place some sanctions--
Mr. Green. [presiding]. Madam Secretary, the gentleman's
time has expired. You may submit your response for the record.
Madam Secretary, welcome again, and thank you for your many
years of public service. The gentleman from Minnesota, Mr.
Emmer, is now recognized for 5 minutes.
Mr. Emmer. Thank you, Mr. Chairman, and thank you, Madam
Secretary, for appearing before the committee today.
The Democrat-created Financial Stability Oversight Council,
better known as the FSOC, as you have been referring to it, has
found itself in a unique regulatory position recently.
Secretary Yellen, as the Chair of the FSOC, you know better
than anyone that the FSOC operates independently and it is not
directed by an Administration to make and implement policy
decisions.
Historically, Madam Secretary, does the FSOC take direction
from the White House on activities and institutions in which to
investigate, and if appropriate, designate those activities or
institutions as systemic risks?
Secretary Yellen. The FSOC, as you said, is a group of
independent regulators--
Mr. Emmer. My question is a yes-or-no question. Does the
FSOC take direction from the White House?
Secretary Yellen. No, it does not.
Mr. Emmer. Thank you. That is what I thought. The FSOC
exists to independently identify emerging threats to our
financial stability and align regulatory frameworks around
those risks.
Secretary Yellen, by Executive Order, you convened the
President's Working Group on Financial Markets in July of 2021,
and you played a key role in the delivery of its November 2021
stablecoin report. The report recommends that Congress enact
legislation to limit stablecoin issuance to insured depository
institutions, banks. For the record, this is a recommendation
that does not have consensus in Congress, not even amongst
committee Democrats.
The report also states that in the absence of urgent
congressional action to enact this legislative recommendation,
the FSOC should step in to designate various stablecoin
activities as systemic risks, which would jump-start
Administration-wide regulatory rulemaking.
Secretary Yellen, has the FSOC officially designated
digital asset or stablecoin activities as systemic risks?
Secretary Yellen. No, it has not done so.
Mr. Emmer. Thank you. Digital asset and stablecoin
activities have not been officially designated as systemic
risks from the FSOC. Do you believe the FSOC should take action
if Congress does not urgently enact comprehensive crypto
legislation?
Secretary Yellen. We would very much like to see Congress
adopt a coherent--
Mr. Emmer. I will ask it again--
Secretary Yellen. --framework--
Mr. Emmer. I am asking you--
Secretary Yellen. --something we would look at.
Mr. Emmer. ho convenes the FSOC, do you believe that the
FSOC should take action if Congress does not urgently enact
comprehensive crypto legislation?
Secretary Yellen. It is something that I think FSOC should
look at--
Mr. Emmer. So, the answer is yes?
Secretary Yellen. I do not know that it is appropriate but
it is something that bears examination.
Mr. Emmer. Thank you. You previously explained to us that
the FSOC operates independently and does not take direction
from the White House on labeling systemic risks. However, it
seems pretty clear that absent urgent action by Congress, the
FSOC, under your leadership, is perhaps prepared--even though
you said that may not be appropriate, in your words--to
designate certain stablecoin activities as systemically risky
in response to the White House's digital asset agenda.
Now as everyone in this room is aware, Madam Secretary,
legislating takes time, and there is nothing more dangerous to
innovation and opportunity than when the Federal Government
rushes to legislate, or regulate, for that matter. The Biden
Administration knows this as well as any of us, but the
President's Working Group and President Biden's crypto
Executive Order still threaten to ignite the FSOC if Congress
does not do what the Biden Administration requests.
Secretary Yellen. The President--
Mr. Emmer. Put simply, Madam Secretary, the Administration
intends to weaponize the FSOC to circumvent Congress and the
American people on digital asset policy.
Secretary Yellen. I'm sorry--
Mr. Emmer. This recent history of activity demonstrates to
me that the FSOC is no longer independent of partisan pressures
and should be brought under congressional appropriations
supervision so elected officials can make sure the voices of
the voters are represented in the decisions of the FSOC. And
for that reason I introduced the FSOC Reform Act, which brings
the FSOC under congressional oversight and increases the
transparency of the Council. The future of crypto Web3 and the
ownership economy cannot and must not be dictated by any entity
that is supposed to be independent but instead takes its cues
from a political agenda.
Thank you, and I yield--
Secretary Yellen. I'm sorry. The FSOC is--
Mr. Emmer. --back the balance of my time.
Mr. Green. The gentleman yields back. The Chair now
recognizes the gentleman from Illinois, Mr. Garcia, for 5
minutes.
Mr. Garcia of Illinois. Thank you, Mr. Chairman. I made it
in the nick of time. Good afternoon, Secretary Yellen. Thank
you for being here. And thank you, Mr. Chairman, for hosting
this important hearing.
Secretary Yellen, you were the Chair of the Federal Reserve
in 2016, when FSOC finalized a study examining State and
Federal banking laws that could have a negative effect on the
safety and the soundness of the financial system. One of the
recommendations that the Federal Reserve made in that report
was to close a loophole known as the industrial loan company,
or ILC, loophole. The ILC loophole allows commercial companies
to operate banks that are not regulated like banks, and it has
caused financial stability problems in the past. As the Fed
wrote in that report to FSOC, ``It must also be noted that the
companies that failed the required assistance at the outset of
the 2008 financial crisis included a number of companies that
owned and controlled ILCs.''
Secretary Yellen, my question is this: In light of the
financial stability risks that we are discussing today,
including digital assets, shadow banks, and Big Tech entering
the financial services space, do you still agree with the past
recommendation by the Fed to close the ILC loophole?
Secretary Yellen. It is an issue I have not looked at
recently, but I have no reason to think that my view would
change on this. The Fed felt, at the time that report was
written, that there are great dangers in connection with ILCs,
and has long been opposed to mixing banking and commerce, for
reasons I think, if anything, are probably stronger now rather
than weaker than they were then. And I continue to believe that
it is likely to be appropriate.
Mr. Garcia of Illinois. Thank you, Secretary, and as I
mentioned before, the ILC loophole allows commercial and
technology firms like Amazon, Facebook, and Walmart to acquire
a full-service, FDIC-insured bank. Can you share why it is
important to maintain that separation of banking and commerce,
and please describe what systemic risks can come from allowing
non-financial companies, such as tech companies, to enter the
banking service space?
Secretary Yellen. There are a number of reasons why this
seems to be dangerous. One reason that the Fed always worried
about is that when a commercial company owns a bank, credit
decisions can be influenced by issues other than banking and
safety and soundness considerations, because of incentives that
come from the other part of the business, the commercial part
of the business.
In addition, this tends to diminish competition and to
promote monopoly and market power, and that is probably more
important than it ever was before. And if a sufficiently large
commercial company were to become dominant in the payment
system, I think there could certainly be financial stability
risks.
Mr. Garcia of Illinois. Thank you for that, Secretary.
Another question. I introduced the Bank Merger Review
Modernization Act of 2021, to ensure that bank mergers are in
the public interest by clarifying and strengthening the public
interest aspect of the merger review and require regulators to
use a quantifiable metric to evaluate systemic risk. Do you
support that bill?
Secretary Yellen. I would be glad to take a look at the
details and work with you on it. I think that is an important
area.
Mr. Garcia of Illinois. Okay. Thank you. And are there
other reforms that Congress can enact into law that would
promote competition and financial stability in consideration of
bank mergers?
Secretary Yellen. I will take a look at it. I certainly
believe it is important to have competition in banking and
appropriate regulation there.
Mr. Garcia of Illinois. And if I could just switch gears,
very quickly, since my time is running out, today, FSOC can
only make non-binding recommendations to financial regulators
to take actions to address systemically risky activities. The
Systemic Risk Mitigation Act, which I have previously
introduced, would give FSOC rulemaking authority to better
address systemically risky activities. Would you support giving
FSOC that authority?
Secretary Yellen. It is an area that I think is certainly
worth looking at, and I would like to have the opportunity to
work with you on that.
Mr. Garcia of Illinois. Thank you, Madam Secretary. I yield
back.
Mr. Green. The gentleman's time has expired. The Chair now
recognizes Mr. Loudermilk for 5 minutes.
Mr. Loudermilk. Thank you, Mr. Chairman. Secretary Yellen,
welcome. Thank you for being here.
I want to start off a little bit on some of the issues that
Mr. Hill started off with, talking about cybersecurity.
Personally, I was alarmed to see the FDIC's Chief Innovation
Officer's resignation in February. He had lamented that the
FDIC has outdated technology and has a tendency to resist
change. I believe that type of culture will not help the
financial regulatory agencies stay ahead of cyber threats, and
as someone who spent most of his work in the private industry
in the IT business, I know how significant these threats are.
Do you feel that the FSOC member agencies are open to
innovation, and if so, what are you doing to foster that
relationship or that willingness to bring in new technologies,
especially for cybersecurity?
Secretary Yellen. I absolutely believe that innovation is
important. It is a benefit to the U.S. economy, and in the long
run, it is probably the most significant source of growth and
well-being, so we should want to promote innovation. But we
need to have an appropriate regulatory framework so that the
innovations produce net benefits to society and we make sure
that they do not cause harm.
Mr. Loudermilk. Thank you, and I see a lot of resistance to
innovation, not only in regulatory agencies but even within
Congress. The only way that you are going to stay secure is to
stay ahead of the bad guy, and the bad guy is continually
innovating and bringing in new technologies. And if we lag
behind, we put the entire financial system at risk. We put
every American citizen who participates in our financial system
at risk. So, I highly encourage you to look at innovation as
friend, not as a foe, but quite often, regulatory agencies take
the other approach.
Another topic. In your confirmation hearing last year, you
said that designating non-bank companies as systemically
important may not be the right approach to addressing risks in
the financial system, and that an activities-based approach
would be more appropriate. And I appreciate that.
Do you still stand by those comments you made to the
Senate?
Secretary Yellen. Let me clarify. There are two different
tools--designation and an activities-based approach--and I
believe that in different circumstances, each can be
appropriate. It should not be one or the other.
Designation was meant for non-bank financial companies
whose material distress or failure would cause material risk to
the financial system. We are focused on non-bank. The FSOC is
focused right now on non-bank financial risks coming from money
market funds, from open-end mutual funds, and from hedge funds.
But the approach that we think is appropriate is not
designation. It is an activities-based approach.
Mr. Loudermilk. Thank you.
Secretary Yellen. And so, certainly that is an appropriate
approach. I would not say, though, there could be circumstances
in the future where designation is the right tool.
Mr. Loudermilk. I do not mean to cut you off, but I am
running short on time, and I have a couple other questions.
Unfortunately, one of the bills included for discussion in this
hearing ignores the very statement that you had made to the
Senate. In 2018, when a strong bipartisan group of lawmakers
reformed Dodd-Frank, we recognized that designating companies
as systemically risk-based on an arbitrary threshold is
unworkable. So, I hope my colleagues will remember those
lessons.
Moving on to another topic, one that Mr. Emmer touched on a
little bit, which is the President's Working Group on Financial
Markets and his recommendation that Congress pass legislation
to apply bank regulatory regimes to stablecoins. As everyone
understands, stablecoins are primarily used for trading crypto
and payments, and there are many significant differences
between stablecoin issuers and banks. For example, stablecoins
are not used for lending, so it would not make sense to apply
lending laws and regulations to stablecoins.
Do you agree that it would not make sense to apply the full
banking regulatory regime to stablecoins, and that a more
nuanced approach would be appropriate should you do, as Mr.
Emmer indicated, and regulate?
Secretary Yellen. There are certainly--
Mr. Green. The gentleman's time--excuse me, Madam
Secretary--
Secretary Yellen. --differences--
Mr. Green. The gentleman's time has expired. I am going to
ask that he submit the question for the record. We have many
Members who are waiting, and we will now move on to the
gentleman from California, Mr. Sherman, who is also the Chair
of our Subcommittee on Investor Protection, Entrepreneurship,
and Capital Markets. You are now recognized for 5 minutes.
Mr. Sherman. Some of my Republican colleagues seem to
believe we should be in an economic nirvana. That COVID killed
a million Americans, of course, is no laughing matter, and it
would have killed millions more if we had not taken action.
They somehow believe that there was some way that we were going
to get through COVID without any economic dislocation and that
the American Rescue Plan was a giant mistake.
Just for the record, wouldn't we have had millions more
Americans in poverty, hunger, evictions, homelessness, and
foreclosures had we not passed the American Rescue Plan?
Secretary Yellen. Absolutely. We can thank the American
Rescue Plan for the strong labor market we have now and the
strong financial position of most households.
Mr. Sherman. The greatest pandemic in history and economic
nirvana have not gone together, coincidentally, in any country
in the world. There was no perfect way to get through this.
I want to thank you, Secretary Yellen, for all the help
that Treasury provided in creating the Adjustable Interest Rate
(LIBOR) Act. Congress, much of out character, perhaps, solved
the problem a year and a half before the LIBOR hit the fan. It
is now up to the Fed to write the regulations, and I hope you
can inspire them to do so expeditiously because you have
testified that the whole LIBOR issue is one of systemic risk. I
see you nodding, so I assume you will be doing that.
Secretary Yellen. I appreciate Congress passing that law. I
think it is very helpful in dealing with legacy contracts.
Mr. Sherman. Some of my colleagues have put forward the
idea that gas prices are entirely a matter of U.S. oil
production, and that somehow a speech saying that we have to
move to a carbon-free future leads to higher prices in one
country, the United States. And they somehow say that the Biden
Administration has constrained oil production, and if it was
not for low oil production, we would have low gas prices.
Here are the facts. In 2021, America produced more oil than
we did in 2020, the last year of the Trump Administration, and
next year, we are going to produce more oil than we ever had in
history. Unfortunately, oil is a worldwide commodity, and while
we will produce more oil next year than at any time in history,
we will not have the lowest oil prices at any time in history.
If you open the dictionary to, ``oxymoron,'' it will say,
``see stablecoin.'' The coin says it is stable; it is not
stable. We have seen Terra drop from $18 billion of investment
down to, I think a value today of about $1 billion, maybe a bit
less. It is not Terra firma. It is Terra incognita. Tether is
much larger.
Tether has an $83 billion cap. It claims to be tied to the
dollar. But I am told that they have not issued any audited
financial statements, although they keep promising them, so I
have no idea whether their statements of what reserves they
have are accurate or not. But they apparently have invested
substantially in Chinese commercial paper, which may or may not
have value at various times, and they have invested in
cryptocurrencies, which have lost over half their value in just
the last few months. This does not look like my father's money
market fund or my grandfather's bank. Their assets do not
appear to be very liquid.
What are the implications for our economy if Tether, which
just broke the buck, goes all the way to Terra incognita?
Secretary Yellen. I think you have just illustrated, and we
have just had, over this last week with Terra and with Tether,
an illustration of the risks associated with stablecoins, that
there can be runs, and we have seen this historically with
private monies. We invented a good regulatory framework, I
think, for dealing with this--
Mr. Sherman. I am going to try to--
Secretary Yellen. --for a depository institution.
Mr. Sherman. --sneak in one more concept. Through our tax
system, we provide tens of billions of dollars of subsidies for
those who have pensions and 401(k)s. We do so so that they will
have a stable retirement and invest their money in operating
companies that provide jobs. I would say--
Mr. Green. The gentleman's time has expired. Please submit
your question to the Secretary in writing.
Mr. Sherman. --investments in cryptocurrencies do neither.
Mr. Green. The Chair will now recognize the gentleman from
Ohio, Mr. Davidson, for 5 minutes.
Mr. Davidson. Thank you, Mr. Chairman. Madam Secretary,
thank you for your time here today. I wish we all had a little
more of it. But yesterday, when you were at the Senate Banking
Committee, you stated that student loan forgiveness could be
good for the economy, and that you will, ``support anything
that President Biden decides as a part of his policy on the
issue.'' Do you really believe that?
Secretary Yellen. I'm sorry, on what issue?
Mr. Davidson. Student loan forgiveness. Whatever Joe Biden
says, you are good with?
Secretary Yellen. I believe all I have said on student
loans is that they can be extremely burdensome and make it
difficult for individuals to begin to buy a house or to save
for retirement.
Mr. Davidson. Of course, all debt has that effect. The
principle of compounding interest should be taught earlier and
often. As a consequence of the Federal takeover of the student
loan industry we are looking at, according to the Department of
Education's estimate, over $400 billion at risk of default
because students cannot repay them. There are complications in
the program, and yet no one who talks about canceling student
debt talks about stopping the problem, which is highly
correlated to the Federal Government's takeover of it.
I was just concerned by your response at the Senate Banking
Committee, about student loan forgiveness, and kind of an
unconditional support for whatever President Biden decides.
Secretary Yellen. All I said is that the President is
currently considering the options and trying to formulate his
position on this matter.
Mr. Davidson. Let us hope he sees the moral hazard of doing
that. And frankly, the people best equipped to pay back loans
sometimes would be the biggest beneficiaries, and so the
biggest debts are borne by people who are overwhelmingly,
thankfully, in a position to repay their loans.
Secretary Yellen. Many are.
Mr. Davidson. And lots of people have debts that could be
forgiven and have big impacts on the economy and they did not
have the same kind of challenges.
That aside, we were just talking about the crypto markets,
and obviously, everything in the news over the past couple of
days is related to the markets being down, but overwhelmingly,
crypto being down at an alarming rate. And just a bit ago you
said, we are so concerned about runs on stablecoins and the
hazard of stablecoins to the market. But my colleague, Mr.
McHenry, started off by making it clear that algorithmic
stablecoins have a different risk than a one-to-one fiat or a
one-to-one commodity-backed, because there is not even
fractional reserve banking there. There is 100 percent of the
assets liquid and available.
Would you like to qualify your distinction in terms of fear
of a run?
Secretary Yellen. It depends on the backing of a
stablecoin. Terra is algorithmic and does not really have a
backing as such. Tether is--
Mr. Davidson. Tether is a time bomb and it operates
completely outside U.S. markets. And it is maybe fair to say
that they are more like a money market fund, but an unregulated
one, because we do not really see the transparency in
disclosures. But others are regulated, as New York Trust. Most
of the stablecoins in the United States are well-regulated as
New York Trust. Do you see those as the same kind of risk and
the same regulatory approach?
Secretary Yellen. I just think there needs to be a
comprehensive and consistent regulatory approach for
stablecoins because of the risks they can pose to the financial
system. And I think that on a bipartisan basis, we ought to
work together to make sure stablecoins that are introduced have
such a regulatory framework.
Mr. Davidson. Yes, I think you cannot treat algorithmic
stablecoins the same as something that is--
Secretary Yellen. We have not proposed to do that.
Mr. Davidson. Okay. So, just common framework but not
common for algorithmic.
Secretary Yellen, I, and a number of Members wrote to you
earlier about the Section 6050I provision, and it was a
rulemaking for 8603 of the Infrastructure Act. And this was a
requirement, a reporting requirement to the IRS on transactions
in crypto that were supposed to mimic things that are cash
transactions. So it is a very complicated ruling, and it is
also not entirely technologically feasible for digital assets.
Treasury issued some opinion about it. What is the process
of the rulemaking right now?
Secretary Yellen. I'm sorry. I am going to have to look
into that and get back to you.
Mr. Davidson. Thank you. My time has expired, and I yield
back.
Mr. Green. The gentleman's time has expired. I now
recognize myself for 5 minutes.
Madam Secretary, there are those who believe that if you do
not vote for legislation, you have to denounce it as
ineffective. The American Rescue Plan was effective
legislation, and here is what my colleagues did not vote for.
They did not vote to help those who were unemployed during a
pandemic. They did not vote to save small businesses during a
pandemic. They did not vote to provide vaccines and to
distribute that vaccine to those who needed it during a
pandemic. They did not vote to help children and schools during
a pandemic. They did not vote for food for children during a
pandemic. And they did not vote to provide for working families
during a pandemic.
They would call all of that inflation, but I believe that
at some point the American people will understand that there
were many of us who were trying to save the economy and prevent
it from sliding into a deep, deep recession, and to help
persons who are suffering during a pandemic.
Madam Secretary, you have spoken quite well on this topic
today. I do not want you to entirely repeat yourself, but there
was a pandemic, and the American Rescue Plan was there to do
what the government should do during a pandemic. Would you
kindly give us additional thoughts on how the American Rescue
Plan prevented us from sliding into a deep, deep recession or
possibly something worse?
Secretary Yellen. We saw unemployment rise after the
pandemic struck to double-digit levels, something we had not
seen in the United States in decades, and there was immerse
suffering. The pandemic unfairly struck those low-income,
minority workers, those least able to bear its consequences.
Mr. Green. Who went to work every day, many of them, Madam
Secretary, and risked their lives to make sure that there was
food available for those of us who could stay at home and work
from home, during a pandemic.
Secretary Yellen. And we saw cars lining up in parking lots
to get food at food banks.
Mr. Green. And Madam Secretary, many of them, while in
line, their cars ran out of gas during a pandemic. Please
continue.
Secretary Yellen. And we worried that many people would
lose the roofs over their heads, and--
Mr. Green. It kept people from being thrown out on the
streets. That is what the American Rescue Plan did, during a
pandemic. Please continue.
Secretary Yellen. And we worried that children would suffer
and experience homelessness or loss of access to education,
that families and workers would be permanently scarred and
never really be able to get their lives back on track. And we
looked at forecasts--
Mr. Green. Madam Secretary, let me just say this, because I
am going to end this with my 5 minutes. But I want you to know
this: I appreciate what you did. Pandemics are not things that
you can predict, and we did not know what the actual solutions
were. But we saved a lot of lives. We helped a lot of people
who were suffering during a pandemic. And when we hear people
say, ``Oh, you spent too much,'' well, we spent too much on
unemployment during a pandemic. We spent too much to save small
businesses during a pandemic. We spent too much to provide
vaccines and to distribute that to people during a pandemic, to
help schools and schoolchildren, to keep people from being
thrown out on the street, to provide for childcare, as parents
have to work. It was a pandemic, and it was more than inflation
at risk. Lives were at risk and many were saved.
I thank you for your service, Madam Secretary, and I yield
back the balance of my time.
And with that said, Madam Secretary, your testimony has
been very valuable to us today.
The Chair notes that some Members may have additional
questions for this witness, 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 this witness and to place her 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 adjourned.
[Whereupon, at 12:34 p.m., the hearing was adjourned.]
A P P E N D I X
May 12, 2022
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]