House Financial Services Committee Studies the Fed

Friday, 27 Dec 2013 06:55 AM

By Robert Feinberg

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The House Financial Services Committee, chaired by Jeb Hensarling, R-Texas, held a hearing on Dec. 12 titled "Rethinking the Federal Reserve's Many Mandates on Its 100-Year Anniversary," the first in a series that will support an inquiry called the Federal Reserve Centennial Oversight Project.

Hensarling said that for the Project, the Committee would conduct "the most rigorous examination of the Fed's purposes, policies and track record it its history." When this ordeal is completed next fall, Hensarling plans to consider legislation. A prudent a priori assumption would be that this product would languish in the special inbox the Senate Banking Committee maintains for unbidden House legislation.

The rest of Hensarling's remarks included a useful rendition of the course of Fed monetary policy, which has mixed periods of consistent policy with periods of loose policy that led to bouts of inflation, including the housing bubble that preceded the 2008 episode of the ongoing financial crisis. However, in discussing the bailouts of insolvent institutions, he "missed it by that much" when he referred to insolvent nonbanks, stopping short of recognizing that the "too big to fail" banks are chronically insolvent.

Ranking Democrat Maxine Waters, D-Calif., read a speech in defense of the Fed that read like it was written by the Fed. This is entirely possible, because the Fed has been known to send speeches to friendly members, and agencies tend to sprinkle congressional staff with their people. The result is that the agencies tend to conduct oversight of Congress, rather than the other way around.

She urged the Committee not to "rush into reform merely for the sake of doing so." It would be hard to accuse Congress of "rushing into reform," but from the Fed's point of view, and that of many other agencies, congressional oversight is a threat to be preempted, if possible.

Among the panelists, Douglas Holtz-Eakin, former director of the Congressional Budget Office (CBO) and sometime adviser to Republican presidential candidates, praised the Fed for its quick action to help turn the economy around after the 2008 episode, but said he is "not a fan" of what the Fed has done since and the exercise of its lender of last resort powers should be examined.

Alice Rivlin, a former Fed governor and the founding director of the CBO, also credited the Fed for its response to the 2008 episode, but she blamed the Fed for not acting to curb the risky lending practices, including what she called "the overleveraged pyramid of housing-related derivatives" that created the 2008 episode.

In testimony before the Senate Banking Committee when it was considering Dodd-Frank, Rivlin supported removing the regulatory function from the Fed on the ground that the Fed does not refer to this information in making monetary policy, but she did not repeat this message.

Marvin Goodfriend, a professor of economics at Carnegie-Mellon University, also praised the Fed for its actions in 2008, but worried that it has stretched these powers too far in its more recent interventions.

Hester Peirce, a senior research fellow at the Mercatus Center at George Mason University, criticized the new Volcker rule as too complex and lacking in cost/benefit analysis, which she argued falls short of the Fed's own standards.

(Archived and the staff memorandum can be found here.)

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