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Vice Chair Janet Yellen Confirmation Hearing

Vice Chair Janet L. Yellen

Confirmation hearing (My comments in red)

Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.

November 14, 2013

Chairman Johnson, Senator Crapo, and members of the Committee, thank you for this opportunity to appear before you today. It has been a privilege for me to serve the Federal Reserve at different times and in different roles over the past 36 years, and an honor to be nominated by the President to lead the Fed as Chair of the Board of Governors.  36 years in a leading role for an organization that has missed every single major shift in global macroeconomic forces.  Missed the housing finance bubble, missed the tech bubble in 2000, missed the vulnerability of the investment banks’ balance sheets that led to Lehman and Bear’s demise, missed the commercial banks’ weak balance sheets and the European sovereign debt crisis too.  What policy changes have been enacted on her watch that would lead anyone to believe that she’s learned a thing?

I approach this task with a clear understanding that the Congress has entrusted the Federal Reserve with great responsibilities. Its decisions affect the well being of every American and the strength and prosperity of our nation. That prosperity depends most, of course, on the productiveness and enterprise of the American people, but the Federal Reserve plays a role too, promoting conditions that foster maximum employment, low and stable inflation, and a safe and sound financial system.  A proper appreciation of the great responsibilities that the Fed has might have led to a more gentle and cautious experimentation with QE, which is both untested and unproven.  The responsibility to maintain a safe and sound financial system has proven time and again to be well beyond the capabilities of the Fed or any other regulatory body.  As to fostering maximum employment, it would seem to me that many other variables must factor into this other than monetary policy including perhaps most importantly a nation’s educations system.  Giving away cheap money to stimulate economic growth has proven to have severe limitations, has produced virtually no worthwhile jobs, and has had a very temporary effect, if at all, on a nation’s level of prosperity.  Monetary distortions, like all sleights of hand, have no lasting impact, and when they are unwound the movements are magnified.

The past six years have been challenging for our nation and difficult for many Americans. Thank you very much, Mr. Greenspan and Mr. Bernanke, and all Fed governors.  We endured the worst financial crisis and deepest recession since the Great Depression. The effects were severe, but they could have been far worse. Couldn’t these “effects” have also been far less severe had the Fed not pumped the system full of cheap capital and had proved to be a capable financial industry regulator in the first place? Working together, government leaders confronted these challenges and successfully contained the crisis. Under the wise and skillful leadership of Chairman Bernanke, the Fed helped stabilize the financial system, arrest the steep fall in the economy, and restart growth. It is true that we haven’t suffered the “run-on-the-banks” sort of downturn, however, we must remember that we got into this mess with the wise Chairman Bernanke sitting right next to the wise Chairman Greenspan, and the wise Governor Yellen.  Under the wise Bernanke and Yellen’s guidance we have a rip-roaring stock market and a broader malaise.  This is something to be proud of?  This is a record to defend?  We are taking one of the top people in this lineage of complete and utter failure and entrusting her with the mantle of leadership?  Really?

Today the economy is significantly stronger and continues to improve. The private sector has created 7.8 million jobs since the post-crisis low for employment in 2010. Housing, which was at the center of the crisis, seems to have turned a corner--construction, home prices, and sales are up significantly. The auto industry has made an impressive comeback, with domestic production and sales back to near their pre-crisis levels.

We have made good progress, but we have farther to go to regain the ground lost in the crisis and the recession. Unemployment is down from a peak of 10 percent, but at 7.3 percent in October, it is still too high, reflecting a labor market and economy performing far short of their potential. Labor market participation is at the lowest point in American history.  In the “Bernanke Recovery” more people of working age have left the job market, despondent at their prospects.  Further, the level of “under-employed” is also at record levels, with more college grads working fast food, janitorial jobs, etc, than ever before.  At the same time, inflation has been running below the Federal Reserve's goal of 2 percent and is expected to continue to do so for some time.  What have any of you purchased that is up by less than 2% year-over-year?

For these reasons, the Federal Reserve is using its monetary policy tools to promote a more robust recovery. A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy. And, who pray tell us Ms. Yellen, will buy the bonds that the Fed will be selling.  Who will buy the bonds that the government issues to finance its deficit with the Fed out of the market?  Ending QE?  Never happening.  No one in finance ever thought a $4 trillion Fed balance sheet was possible, but no one outside of finance can understand why not, or for that matter why a $40 trillion Fed balance sheet is a problem either.

In the past two decades, and especially under Chairman Bernanke, the Federal Reserve has provided more and clearer information about its goals. Like the Chairman, I strongly believe that monetary policy is most effective when the public understands what the Fed is trying to do and how it plans to do it. At the request of Chairman Bernanke, I led the effort to adopt a statement of the Federal Open Market Committee's (FOMC) longer-run objectives, including a 2 percent goal for inflation. I believe this statement has sent a clear and powerful message about the FOMC's commitment to its goals and has helped anchor the public's expectations that inflation will remain low and stable in the future. In this and many other ways, the Federal Reserve has become a more open and transparent institution. I have strongly supported this commitment to openness and transparency, and will continue to do so if I am confirmed and serve as Chair. This means that the market will be able to continue to buy financial assets with leverage and know with certainty they’ll continue to make money…that is until things somehow get out of the Fed’s control.  Prudence and conservativeness will continue to be punished in the Yellen Fed.

The crisis revealed weaknesses in our financial system. I believe that financial institutions, the Federal Reserve, and our fellow regulators have made considerable progress in addressing those weaknesses. Banks are stronger today, regulatory gaps are being closed, and the financial system is more stable and more resilient. Investment banks that were not Fed members had the audacity to try to compete with Fed member banks.  They’re gone now and with every remaining lending and depository institution having access to the Fed’s printing press there will never be a liquidity crisis again…unless the Fed somehow loses control of things that is.  Safeguarding the United States in a global financial system requires higher standards both here and abroad, so the Federal Reserve and other regulators have worked with our counterparts around the globe to secure improved capital requirements and other reforms internationally. Today, banks hold more and higher-quality capital and liquid assets that leave them much better prepared to withstand financial turmoil. Large banks are now subject to annual "stress tests" designed to ensure that they will have enough capital to continue the vital role they play in the economy, even under highly adverse circumstances.  It’s noteworthy to recall that all of the Greek banks passed the last ECB stress tests.  That is before they all went down.

We have made progress in promoting a strong and stable financial system, but here, too, important work lies ahead. I am committed to using the Fed's supervisory and regulatory role to reduce the threat of another financial crisis. I believe that capital and liquidity rules and strong supervision are important tools for addressing the problem of financial institutions that are regarded as "too big to fail." In writing new rules, however, the Fed should continue to limit the regulatory burden for community banks and smaller institutions, taking into account their distinct role and contributions. Overall, the Federal Reserve has sharpened its focus on financial stability and is taking that goal into consideration when carrying out its responsibilities for monetary policy. I support these developments and pledge, if confirmed, to continue them.  Again, are we to trust the same regulators who missed the last crisis completely to properly measure and regulate systemic risk?  I don’t get it.  Do you?  Who over there has ever worked in a bank, or on a trading desk? 

Our country has come a long way since the dark days of the financial crisis, but we have farther to go. Likewise, I believe the Federal Reserve has made significant progress toward its goals but has more work to do.  We could start by cleaning house and dumping everyone who failed so miserably in the past and who presided over the crisis in 2008.  Whether one agrees with steps taken since, the missing of all the signs leading up to 2008 (or 2000 for that matter) should have led to such a housecleaning.  And, if you say that no one could have anticipated these things then what is the purpose of the Fed and all of their economists in the first place.  So, either they are terrible at their job and we need to give others a chance, or they have a job that is impossible, and we ought to shut down the Fed, or severely curtail its powers and mission to reflect this possible reality.

Thank you for the opportunity to appear before you today. I would be happy to respond to your questions.  

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