Bernanke Delivers Monetary Policy Report to HFSC
AT TODAY’S HOUSE FINANCIAL SERVICES COMMITTEE HEARING, Federal Reserve Chairman Ben Bernanke made his second appearance before Congress this week to deliver the semiannual monetary policy report.
In an admission of bipartisan failure, Chairman Spencer Bachus (R-Ala.) said the decisions of Congress and the president created the “spending-driven debt crisis,” conceding that sole reliance on the Fed’s monetary policies is not sufficient to address a sustainable, long-term economic recovery. He also acknowledged the appearance of panel member, Rep. Ron Paul (R-Texas), noting Paul’s bill to audit the Federal Reserve (H.R. 459) may be considered by the full House next week.
Question and Answer
Libor Manipulation
Rep. Michael Capuano (D-Mass.) asked whether banks and specific employees should be held accountable if deliberate manipulation of Libor rates is proven. Bernanke agreed that accountability is needed, noting that a number of enforcement agencies are investigating the issue and will “apply the law appropriately.”
Rep. Brad Miller (D-N.C.) discussed press coverage regarding transcripts between certain traders from Barclays and Fed officials on possible Libor manipulation, and asked why regulators did not provide a referral for criminal prosecution. Bernanke explained that Barclays’ traders were discussing rumors they had heard and that the New York Federal Reserve informed all the appropriate authorities about such allegations.
Rep. Frank Lucas (R-Okla.) inquired about whether the Federal Reserve in Washington, DC was notified of potential Libor manipulation in 2008. Bernanke cited the CFTC’s investigation, noting that two types of behavior were identified: manipulation of rates by derivatives traders for short-term profit, which is the most recent discovery in the investigation, and banks responsible for setting Libor underreporting borrowing costs in order to avoid appearing weak in the market during the height of the financial crisis. Bernanke went on to explain that in 2008 the Fed made presentations to British authorities, the Treasury Department and the White House regarding its findings.
Rep. Carolyn Maloney (D-N.Y.) asked what current courses of action regulators are considering in response to any Libor manipulation. Bernanke acknowledged there are still problems with the current Libor system and cited a number of alternatives that are being considered but noted that the Fed has not yet endorsed any. These alternatives include: repo rates, the overnight index swaps (OIS), and potential Treasury bill rates. Bernanke also noted that he recently met with Mark Carney, head of the Financial Stability Board (FSB), who said the FSB will look at the Libor controversy and provide “possible ways to move forward.”
Rep. Randy Neuegebauer (R-Texas) asked whether the investigation shows price fixing on the Libor rates. Bernanke explained that the effect of individual misreporting on Libor overall has to be looked at. He said it comes down to a question of misreporting or “shading of estimates” and said regulators don’t have enough details yet.
Fiscal Cliff
Rep. Donald Manzullo (R-Ill.) asked what role uncertainty in the marketplace plays on the economic recovery. Bernanke said regulatory and tax uncertainty play a role in a broader set of issues, but that it is hard to judge whether regulatory uncertainty is a large factor or a small factor in impeding growth.
Manzullo followed up by noting that manufacturing growth has slowed and asked what sector will lead the recovery. Bernanke explained that slowing demand in Europe and Asia contributed to the slowing of the manufacturing sector. He said the housing sector will be a contributing factor to growing the economy overtime but other influences, such as the extension of credit, have been hard hit by the financial crisis.
Rep. David Scott (D-Ga.) discussed the negative effects the pending sequestration cuts will have on employment and asked what effects the expiration of the Bush tax cuts will have on the labor market. Bernanke reiterated his recommendations for a “more moderate fiscal retrenchment” in the short term, noting his concern about the “contraction of the entire program” as it relates to the tax cuts expiring at the end of the year. He indicated that more moderate austerity measures coupled with actions that address longer term fiscal sustainability would be most beneficial.
Audit the Fed Bill
Bachus asked Bernanke for his thoughts on H.R. 459. Bernanke stated that his only concern with the bill related to a specific provision that would eliminate the exemption from the Government Accountability Office (GAO) to audit monetary policy deliberations and decisions due to concerns that such decisions would then become politicized. In later questioning he articulated a hypothetical scenario in which such audits would be used by lawmakers to scrutinize future Fed chairmen over their monetary policy decisions, which he said would have a chilling effect on those determinations. Bernanke added that an independent central bank is more likely to promote longer term, sustainable economic growth as opposed to a politicized one.
Basel III/Non-Bank SIFIs
Rep. Ed Royce (R-Calif.) said Basel III was a “step in the right direction” but voiced his concern over the continued reliance on internal risk models as it relates to setting capital levels and said institutional investors want to get rid of model discretion. Bernanke responded that the overall system has been strengthened but acknowledged that models have to be “good,” noting that regulators have to approve and validate such models.
Rep. Judy Biggert (R-Ill.) inquired about the Fed’s expected treatment of insurance firms and banks. Bernanke said any insurance companies that owns a thrift or is designated as a nonbank systemically important financial institution (SIFI) would be brought under the Fed’s supervision. He clarified that insurance subsidiaries of such firms would continue to be regulated by state authorities and that the Fed would impose bank-like capital requirements only at the holding company level.
Biggert followed up by referencing the Fed’s June 7 proposal outlining capital rules that intend to regulate insurance companies and banks, and raised concern that the 90-day comment period may not be sufficient for interested parties to provide responses. Bernanke said “we can certainly consider extending” the comment period if it is found to be insufficient.
San Bernardino Eminent Domain Proposal, Housing Proposals
Rep. Maxine Waters (D-Calif.) referenced the current proposal in San Bernardino County, California regarding the use of eminent domain to purchase the mortgages of underwater homeowners and asked for Bernanke’s thoughts on the measure. Bernanke said the proposal raises legal issues but that he was not qualified to comment on whether or not it is a good vehicle to help the housing recovery.
Rep. Gary Miller (R-Calif.) discussed the Federal Housing Finance Agency’s pilot program to turn real estate owned properties into rentals. He said such programs were taking place in communities under his jurisdiction that already had low levels of inventory and willing buyers, and asked why such programs would be targeted in areas where houses could be listed and sold. Bernanke replied that he “had a good point” and suggested talking to FHFA Director Edward DeMarco. Miller responded that he had already spoken to DeMarco, who said pulling out of the program when commitments had already been made was not feasible.
Testimony
In his testimony, Bernanke described current economic conditions and discussed threats to the stability of the U.S. economy, most notably the euro zone crisis and the “fiscal cliff.” He said the economy continued to recover in the past year, but that growth has decelerated in recent quarters. He said economic growth can be influenced through appropriate monetary policy, despite low levels of confidence and investor demand. Still, he warned that job growth will be “frustratingly slow” as predicted levels of growth are not much greater than the growth of labor supply.
Bernanke highlighted two major sources of uncertainty and risk to economic growth. First, he provided an overview of the euro zone crisis. Although admitting that the crisis has intensified recently amidst political uncertainty in Greece and losses in Spanish banks, he said effects could be moderated by European Union strategies, such as three year bank financing. Second, he addressed the U.S. “fiscal cliff,” regarding the number of tax increases and spending cuts that are scheduled to take effect at the end of the year. Referring to a Congressional Budget Office report warning that a recession could occur if no action is taken, Bernanke stressed the importance of a solution that achieves long run sustainability while recognizing the “fragility of the recovery.”
For testimony and a webcast of the hearing, please click here.
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AT TODAY’S HOUSE FINANCIAL SERVICES COMMITTEE HEARING, Federal Reserve Chairman Ben Bernanke made his second appearance before Congress this week to deliver the semiannual monetary policy report.
In an admission of bipartisan failure, Chairman Spencer Bachus (R-Ala.) said the decisions of Congress and the president created the “spending-driven debt crisis,” conceding that sole reliance on the Fed’s monetary policies is not sufficient to address a sustainable, long-term economic recovery. He also acknowledged the appearance of panel member, Rep. Ron Paul (R-Texas), noting Paul’s bill to audit the Federal Reserve (H.R. 459) may be considered by the full House next week.
Question and Answer
Libor Manipulation
Rep. Michael Capuano (D-Mass.) asked whether banks and specific employees should be held accountable if deliberate manipulation of Libor rates is proven. Bernanke agreed that accountability is needed, noting that a number of enforcement agencies are investigating the issue and will “apply the law appropriately.”
Rep. Brad Miller (D-N.C.) discussed press coverage regarding transcripts between certain traders from Barclays and Fed officials on possible Libor manipulation, and asked why regulators did not provide a referral for criminal prosecution. Bernanke explained that Barclays’ traders were discussing rumors they had heard and that the New York Federal Reserve informed all the appropriate authorities about such allegations.
Rep. Frank Lucas (R-Okla.) inquired about whether the Federal Reserve in Washington, DC was notified of potential Libor manipulation in 2008. Bernanke cited the CFTC’s investigation, noting that two types of behavior were identified: manipulation of rates by derivatives traders for short-term profit, which is the most recent discovery in the investigation, and banks responsible for setting Libor underreporting borrowing costs in order to avoid appearing weak in the market during the height of the financial crisis. Bernanke went on to explain that in 2008 the Fed made presentations to British authorities, the Treasury Department and the White House regarding its findings.
Rep. Carolyn Maloney (D-N.Y.) asked what current courses of action regulators are considering in response to any Libor manipulation. Bernanke acknowledged there are still problems with the current Libor system and cited a number of alternatives that are being considered but noted that the Fed has not yet endorsed any. These alternatives include: repo rates, the overnight index swaps (OIS), and potential Treasury bill rates. Bernanke also noted that he recently met with Mark Carney, head of the Financial Stability Board (FSB), who said the FSB will look at the Libor controversy and provide “possible ways to move forward.”
Rep. Randy Neuegebauer (R-Texas) asked whether the investigation shows price fixing on the Libor rates. Bernanke explained that the effect of individual misreporting on Libor overall has to be looked at. He said it comes down to a question of misreporting or “shading of estimates” and said regulators don’t have enough details yet.
Fiscal Cliff
Rep. Donald Manzullo (R-Ill.) asked what role uncertainty in the marketplace plays on the economic recovery. Bernanke said regulatory and tax uncertainty play a role in a broader set of issues, but that it is hard to judge whether regulatory uncertainty is a large factor or a small factor in impeding growth.
Manzullo followed up by noting that manufacturing growth has slowed and asked what sector will lead the recovery. Bernanke explained that slowing demand in Europe and Asia contributed to the slowing of the manufacturing sector. He said the housing sector will be a contributing factor to growing the economy overtime but other influences, such as the extension of credit, have been hard hit by the financial crisis.
Rep. David Scott (D-Ga.) discussed the negative effects the pending sequestration cuts will have on employment and asked what effects the expiration of the Bush tax cuts will have on the labor market. Bernanke reiterated his recommendations for a “more moderate fiscal retrenchment” in the short term, noting his concern about the “contraction of the entire program” as it relates to the tax cuts expiring at the end of the year. He indicated that more moderate austerity measures coupled with actions that address longer term fiscal sustainability would be most beneficial.
Audit the Fed Bill
Bachus asked Bernanke for his thoughts on H.R. 459. Bernanke stated that his only concern with the bill related to a specific provision that would eliminate the exemption from the Government Accountability Office (GAO) to audit monetary policy deliberations and decisions due to concerns that such decisions would then become politicized. In later questioning he articulated a hypothetical scenario in which such audits would be used by lawmakers to scrutinize future Fed chairmen over their monetary policy decisions, which he said would have a chilling effect on those determinations. Bernanke added that an independent central bank is more likely to promote longer term, sustainable economic growth as opposed to a politicized one.
Basel III/Non-Bank SIFIs
Rep. Ed Royce (R-Calif.) said Basel III was a “step in the right direction” but voiced his concern over the continued reliance on internal risk models as it relates to setting capital levels and said institutional investors want to get rid of model discretion. Bernanke responded that the overall system has been strengthened but acknowledged that models have to be “good,” noting that regulators have to approve and validate such models.
Rep. Judy Biggert (R-Ill.) inquired about the Fed’s expected treatment of insurance firms and banks. Bernanke said any insurance companies that owns a thrift or is designated as a nonbank systemically important financial institution (SIFI) would be brought under the Fed’s supervision. He clarified that insurance subsidiaries of such firms would continue to be regulated by state authorities and that the Fed would impose bank-like capital requirements only at the holding company level.
Biggert followed up by referencing the Fed’s June 7 proposal outlining capital rules that intend to regulate insurance companies and banks, and raised concern that the 90-day comment period may not be sufficient for interested parties to provide responses. Bernanke said “we can certainly consider extending” the comment period if it is found to be insufficient.
San Bernardino Eminent Domain Proposal, Housing Proposals
Rep. Maxine Waters (D-Calif.) referenced the current proposal in San Bernardino County, California regarding the use of eminent domain to purchase the mortgages of underwater homeowners and asked for Bernanke’s thoughts on the measure. Bernanke said the proposal raises legal issues but that he was not qualified to comment on whether or not it is a good vehicle to help the housing recovery.
Rep. Gary Miller (R-Calif.) discussed the Federal Housing Finance Agency’s pilot program to turn real estate owned properties into rentals. He said such programs were taking place in communities under his jurisdiction that already had low levels of inventory and willing buyers, and asked why such programs would be targeted in areas where houses could be listed and sold. Bernanke replied that he “had a good point” and suggested talking to FHFA Director Edward DeMarco. Miller responded that he had already spoken to DeMarco, who said pulling out of the program when commitments had already been made was not feasible.
Testimony
In his testimony, Bernanke described current economic conditions and discussed threats to the stability of the U.S. economy, most notably the euro zone crisis and the “fiscal cliff.” He said the economy continued to recover in the past year, but that growth has decelerated in recent quarters. He said economic growth can be influenced through appropriate monetary policy, despite low levels of confidence and investor demand. Still, he warned that job growth will be “frustratingly slow” as predicted levels of growth are not much greater than the growth of labor supply.
Bernanke highlighted two major sources of uncertainty and risk to economic growth. First, he provided an overview of the euro zone crisis. Although admitting that the crisis has intensified recently amidst political uncertainty in Greece and losses in Spanish banks, he said effects could be moderated by European Union strategies, such as three year bank financing. Second, he addressed the U.S. “fiscal cliff,” regarding the number of tax increases and spending cuts that are scheduled to take effect at the end of the year. Referring to a Congressional Budget Office report warning that a recession could occur if no action is taken, Bernanke stressed the importance of a solution that achieves long run sustainability while recognizing the “fragility of the recovery.”
For testimony and a webcast of the hearing, please click here.