DODD STATEMENT: HEARING ON FEDERAL RESERVE NOMINATIONS AND INSPECTOR GENERAL NOMINATIONS
July 15, 2010
WASHINGTON – Today Senate Banking Committee Chairman Chris Dodd (D-CT) held a hearing on three Federal Reserve Governor nominations and two Inspector General nominations.
The committee heard testimony from nominees Janet L. Yellen for Vice Chair and a member of the Federal Reserve Board of Governors, Peter A. Diamond and Sarah Bloom Raskin for membership on the Federal Reserve Board of Governors, Osvaldo Luis Gratacós Munet for Inspector General of the Export-Import Bank, and Steve A. Linick for Inspector General of the Federal Housing Finance Agency.
“Under the financial reform legislation that Congress appears poised to adopt, the Federal Reserve’s supervisory functions will be significantly enhanced,” said Dodd. “It will be incumbent on the Federal Reserve to establish a set of robust prudential standards, including capital and liquidity, to govern the activities of the nation’s large, interconnected banking organizations. The Federal Reserve will be charged with overseeing the functioning of these complex organizations and identifying and addressing the type of excessive risk-taking that led this country to the verge of economic collapse.”
“It is evident that the economy is going to need all the help the Fed can provide over the coming year.”
“Put simply, the Federal Reserve is at the forefront of maintaining financial stability. Congress is entrusting the Federal Reserve with tremendous responsibilities – all of which the Fed has sought. Now the Fed must step up and use these new powers to serve the greater good.”
Below is Chairman Dodd’s statement as prepared for delivery:
“The Committee will come to order.
“Today we will be considering five highly qualified nominees. On the first panel will be three candidates to serve as Federal Reserve Board Governors one of whom has also been nominated to a 4 year term as the Vice Chairman of the Board. The Committee will also consider a second panel of two candidates to serve as Inspectors General. The first will serve at the Export-Import Bank of the United States and the other for the Federal Housing and Finance Agency.
“The Committee considers today the nominations of three Federal Reserve Board Governors. These positions are extraordinarily important because of the critical role the Federal Reserve plays in our economy – be it through the exercise of monetary policy, the supervision of financial institutions, oversight of the payment system, or as lender of last resort.
“As arbiter of the nation’s monetary policy, the Federal Reserve is charged with promoting full employment and maintaining price stability. The decisions it makes about the money supply and interest rates have profound effects on the performance of the real economy.
“Under the financial reform legislation that Congress appears poised to adopt, the Federal Reserve’s supervisory functions will be significantly enhanced. It will be incumbent on the Federal Reserve to establish a set of robust prudential standards, including capital and liquidity, to govern the activities of the nation’s large, interconnected banking organizations. The Federal Reserve will be charged with overseeing the functioning of these complex organizations and identifying and addressing the type of excessive risk-taking that led this country to the verge of economic collapse.
“And, as we have seen during the financial crisis, the Federal Reserve’s role as lender of last resort is pivotal to limiting threats to the financial system. While the financial reform legislation imposes new conditions on the Federal Reserve’s emergency lending authority (conditions that Senator Shelby and I worked to craft), the Fed will still retain the awesome power to put billions of dollars of taxpayer money on the line.
“Given its position in our economic system, much depends on how the Fed carries out its varied responsibilities. In terms of performance, the Fed’s track record has been mixed.
“While, in my opinion, the Fed managed the crisis superbly, it clearly fell down on the job during the period before the financial crisis. The Fed had authority under HOEPA that if used, could have prevented the serious deterioration in mortgage underwriting standards and the abusive and fraudulent lending practices. The Fed declined to exercise its authority until well after hundreds of billions of dollars of overvalued, unsuitable mortgages had been originated, securitized, and distributed to important financial institutions.
“The Fed also had supervisory authority over bank holding companies, but events have revealed that its supervision was inadequate. Large bank holding companies were allowed to accumulate significant, leveraged exposures to mortgage-related assets. The losses they suffered when the house price bubble burst helped to create the financial crisis from which we have yet to recover fully.
“Because of these failures, the first draft of our committee’s financial reform bill created both a new consumer financial protection agency, and a new consolidated banking supervisor. To be blunt, that draft bill contemplated removing all of the Fed’s authority in areas where it had performed poorly, leaving it with responsibility primarily over monetary policy.
“However, as we worked through the legislative process, it became clear that the political will of the Congress was to retain and strengthen the Fed’s supervisory role.
“The Federal Reserve will be part of the Financial Stability Oversight Council, which will function as an early warning system responsible for spotting and mitigating threats to overall financial stability. As I stated at the outset of my remarks this morning, the Fed will have responsibility for devising and imposing heightened capital, liquidity and other standards for large bank holding companies and designated nonbank financial companies. It will help enforce the Volcker rule, which prohibits proprietary trading and limits investment in hedge funds and private equity funds at banks and bank holding companies. And it will have a role in supervising systemically important financial utilities – such as clearing houses -- that are important to the stability of the payment system.
“Moreover, the Fed will continue to play a key role in helping the economy recover from the effects of the financial crisis.
“While the economy is growing, it is not growing fast enough to help the millions of Americans who lost their jobs as the result of the crisis. The seasonally adjusted civilian unemployment rate declined from 9.7 percent in May to 9.5 percent in June, but remains far too high. Business investment demand – as measured by data on fixed nonresidential investment – remains subdued because of excess capacity. And while headline price indices continue to increase at about 2 percent year-on-year, other measures of price change suggest that we are moving toward price deflation. In May both the core CPI increased by just 0.9 percent.
“It is evident that the economy is going to need all the help the Fed can provide over the coming year.
“Put simply, the Federal Reserve is at the forefront of maintaining financial stability. Congress is entrusting the Federal Reserve with tremendous responsibilities – all of which the Fed has sought. Now the Fed must step up and use these new powers to serve the greater good.
“We have before us today a slate of very accomplished candidates. Our job is to assess whether they are up to the task of serving on the Federal Reserve Board at such a critical time for our nation. I look forward to discussing their views this morning.
“And now I would like to turn to my good friend from Alabama for any opening statement that he may want to make.”