[Congressional Record Volume 158, Number 112 (Wednesday, July 25, 2012)]
[Extensions of Remarks]
[Pages E1322-E1323]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                FEDERAL RESERVE TRANSPARENCY ACT OF 2012

                                 ______
                                 

                               speech of

                           HON. GEORGE MILLER

                             of california

                    in the house of representatives

                         Tuesday, July 24, 2012

  Mr. GEORGE MILLER of California. Mr. Speaker, while I fully believe 
that the Federal Reserve is in need of greater transparency and 
accountability, I rise in opposition to this bill, which I believe 
approaches the issue in a problematic way. I want to be clear that the 
Fed should not take my vote against this bill as a vote of confidence.
  In order for the Federal Reserve to function properly as an 
independent central bank, I believe that its monetary policy functions 
must be independent of pressure from Congress, which would be 
jeopardized by a GAO audit of

[[Page E1323]]

the Fed's monetary policy. We've seen recently the harmful impact that 
congressional pressure can have on the Fed's monetary policy even 
without this audit, such as Republican members of Congress urging the 
Fed to take no further actions to rescue the economy, which is why I 
bring to my colleagues' attention the below column by former Federal 
Reserve Vice Chairman, Alan Blinder, in which he points out additional 
options for the Fed to tackle the elevated unemployment rate that are 
not being used.
  That said, it is clear that cultural change is needed at the Federal 
Reserve, which has too often put the needs of America's biggest banks 
ahead of the interests of the American public. As just the latest 
example, JP Morgan Chase CEO, Jamie Dimon, has refused to resign from 
the board of the New York Federal Reserve Bank, despite the fact that 
the New York Fed is investigating misbehavior at JPMorgan Chase's Chief 
Investment Office that contributed to its recent multi-billion dollar 
trading loss.
  Furthermore, I strongly supported a provision in the Dodd-Frank Act 
that has increased transparency at the Fed, providing for an audit of 
the emergency financial assistance provided by the Fed during the 
financial crisis, as well as requiring the Fed to release information 
going forward about parties participating in emergency lending programs 
and the details of those transactions. The bill also importantly 
limited the power of bankers like Mr. Dimon who serve on the boards of 
regional Federal Reserve Banks.
  There is one aspect of today's bill that I strongly support, the 
provision of this bill added in committee by Mr. Cummings, which 
provides for an audit of the Independent Foreclosure Review, which has 
been grossly mismanaged by the Fed and the Office of the Comptroller of 
the Currency and does not appear to be on track to provide appropriate 
compensation to homeowners who were abused. I believe that the Fed 
needs to know that their role is to look out for the American public, 
and I hope they hear that loud and clear today.

                How Bernanke Can Get Banks Lending Again

                          (By Alan S. Blinder)

       If the Fed reduces the reward for holding excess reserves, 
     banks will have to find something else to do with their 
     money, like making loans or putting it in the capital 
     markets.
       The U.S. economy could use another boost, and it won't come 
     from fiscal policy. Can the Federal Reserve provide it?
       Chairman Ben Bernanke keeps insisting that the central bank 
     is not out of ammunition, and in a literal sense he is right. 
     After all, the Fed has not yet exhausted its bag of tricks. 
     It is still twisting the yield curve. It can purchase more 
     assets. It can tell us that its federal funds target interest 
     rate will remain 0-25 basis points beyond late 2014. It can 
     even nudge the funds rate down within that range. The 
     operational question is: How powerful are any of these 
     weapons?
       Let's start with Operation Twist, which was recently 
     extended through the end of this year. The Fed seeks to 
     flatten the yield curve by buying longer-term Treasurys and 
     selling shorter-term ones. And it's probably succeeding--a 
     bit. But Federal Reserve activity in the Treasury markets is 
     modest compared with the vast volume of trading. 
     Realistically, the U.S. yield curve is probably influenced 
     far more by daily developments in Europe. In any case, the 
     Fed will be out of short-term Treasurys to sell by December.
       The logical next step would be more quantitative easing--
     QE3--or, as the Fed likes to call it, more large-scale asset 
     purchases. Purchases of what? There are two main choices. One 
     is Treasurys. But does anyone really think that lower U.S. 
     Treasury rates are what this country needs?
       Mortgage-backed securities (MBS) are a better choice, the 
     idea being to reduce mortgage rates by shrinking the spread 
     between MBS and Treasurys. But mortgage rates are already 
     falling toward 3.5%. With 10-year expected inflation around 
     2.1%, can a 1.4% real interest rate be deterring many 
     prospective home buyers? No, they are shut out of the market 
     by the unavailability of credit. Posted rates are low, but 
     try getting a mortgage.
       The third available weapon is what the Fed calls ``forward 
     guidance''--that is, indicating (please don't say promising!) 
     that the 0-25 basis points funds rate will be maintained for 
     years to come. The Fed's current guidance (please don't call 
     it a pledge!) extends ``at least through late 2014.'' While 
     that's pretty far into the future, the Fed could stretch 
     it to 2015, 2016 or 2025 for that matter.
       In rational models, the yield curve should flatten a bit 
     every time the Fed pushes that date out further. But the key 
     words here are ``rational'' and ``a bit.'' To most bond 
     traders, two and a half years is already an eternity. Would 
     they really respond much if 2015 replaced 2014?
       This brief analysis paints a pretty grim picture: The Fed 
     has three weak weapons, one of which will be exhausted by 
     year's end.
       Fortunately, there is more the Fed can do. I have two out-
     of-the-box suggestions to make, one in today's column and 
     another in a companion piece soon.
       The simpler option is one I've been urging on the Fed for 
     more than two years: Lower the interest rate paid on excess 
     reserves. The basic idea is simple. If the Fed reduces the 
     reward for holding excess reserves, banks will hold less of 
     them--which means they will have to find something else to do 
     with the money, such as lending it out or putting it in the 
     capital markets.
       The Fed sees this as a radical change. But remember that it 
     paid no interest on reserves before the 2008 crisis and, not 
     surprisingly, banks held practically no excess reserves then. 
     In early October of that year, Congress gave the Fed 
     authority to pay interest on reserves, which it promptly 
     started doing. When the Fed trimmed the federal funds rate to 
     its current 0-25 basis-point range in December 2008, it also 
     lowered the interest rate on reserves to 25 basis points, 
     where it has been ever since.
       My suggestion is to push it lower in two stages. First, 
     test the waters by cutting the interest on excess reserves 
     (in Fedspeak, the ``IOER'') to zero. Then, if nothing goes 
     wrong, drop it to, say, minus-25 basis points--that is, 
     charge banks a fee for holding their money at the Fed. Doing 
     so would provide a powerful incentive for banks to disgorge 
     some of their idle reserves. True, most of the money would 
     probably find its way into short-term money-market 
     instruments such as fed funds, T-bills and commercial paper. 
     But some would probably flow into increased lending, which is 
     just what the economy needs.
       The Fed has steadfastly opposed this idea for years. Why? 
     One objection is true but silly: Lowering the IOER might not 
     be a very powerful instrument. No kidding. Are there a lot of 
     powerful instruments sitting around unused?
       The other objection is that making the IOER zero or 
     negative would push other money-market rates even closer to 
     zero than they are now, thereby hurting money-market funds 
     and otherwise impeding the functioning of money markets. My 
     answer two years ago was that we have more important things 
     to worry about. My answer today is that it has mostly 
     happened anyway: U.S. money-market rates are negligible.
       It is noteworthy that the European Central Bank just jumped 
     ahead of the Fed by cutting the rate it pays on bank deposits 
     to zero--and European money markets did not die. Denmark's 
     National Bank went even further, dropping its deposit rate to 
     minus 20 basis points. Yet the Little Mermaid still sits in 
     Copenhagen harbor.
       The Fed's hostility toward lowering the interest on excess 
     reserves is almost self-contradictory. When Mr. Bernanke 
     lists the weapons the Fed plans to use when the time comes to 
     tighten monetary policy, he always gives raising the IOER a 
     prominent role. His reasoning is straightforward and sound: 
     If the Fed makes holding reserves more attractive, banks will 
     hold more of them. Why doesn't the same reasoning apply in 
     the other direction?
       But suppose it doesn't work. Suppose the Fed cuts the IOER 
     from 25 basis points to minus 25 basis points, and banks 
     don't lend one penny more. In that case, the Fed stops paying 
     banks almost $4 billion a year in interest and, instead, 
     starts collecting roughly equal fees from banks.
       That would be almost an $8 billion swing from banks to 
     taxpayers. There are worse things.
       Mr. Blinder, a professor of economics and public affairs at 
     Princeton University, is a former vice chairman of the 
     Federal Reserve.

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