[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
LENDING IN A CRISIS: REVIEWING THE
FEDERAL RESERVE'S EMERGENCY LENDING
POWERS DURING THE PANDEMIC AND
EXAMINING PROPOSALS TO ADDRESS
FUTURE ECONOMIC CRISES
=======================================================================
HYBRID HEARING
BEFORE THE
SUBCOMMITTEE ON NATIONAL SECURITY,
INTERNATIONAL DEVELOPMENT
AND MONETARY POLICY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 23, 2021
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-47
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
45-864 PDF WASHINGTON : 2021
-----------------------------------------------------------------------------------
HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri ANN WAGNER, Missouri
ED PERLMUTTER, Colorado ANDY BARR, Kentucky
JIM A. HIMES, Connecticut ROGER WILLIAMS, Texas
BILL FOSTER, Illinois FRENCH HILL, Arkansas
JOYCE BEATTY, Ohio TOM EMMER, Minnesota
JUAN VARGAS, California LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina
CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio
RITCHIE TORRES, New York JOHN ROSE, Tennessee
STEPHEN F. LYNCH, Massachusetts BRYAN STEIL, Wisconsin
ALMA ADAMS, North Carolina LANCE GOODEN, Texas
RASHIDA TLAIB, Michigan WILLIAM TIMMONS, South Carolina
MADELEINE DEAN, Pennsylvania VAN TAYLOR, Texas
ALEXANDRIA OCASIO-CORTEZ, New York PETE SESSIONS, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
Charla Ouertatani, Staff Director
Subcommittee on National Security, International
Development and Monetary Policy
JIM A. HIMES, Connecticut, Chairman
JOSH GOTTHEIMER, New Jersey ANDY BARR, Kentucky, Ranking
MICHAEL SAN NICOLAS, Guam Member
RITCHIE TORRES, New York FRENCH HILL, Arkansas
STEPHEN F. LYNCH, Massachusetts ROGER WILLIAMS, Texas
MADELEINE DEAN, Pennsylvania LEE M. ZELDIN, New York
ALEXANDRIA OCASIO-CORTEZ, New York WARREN DAVIDSON, Ohio
JESUS ``CHUY'' GARCIA, Illinois ANTHONY GONZALEZ, Ohio
JAKE AUCHINCLOSS, Massachusetts PETE SESSIONS, Texas
C O N T E N T S
----------
Page
Hearing held on:
September 23, 2021........................................... 1
Appendix:
September 23, 2021........................................... 35
WITNESSES
Thursday, September 23, 2021
Konczal, Mike, Director, Macroeconomic Analysis, Roosevelt
Institute...................................................... 7
Rhee, June, Director, Master of Management Studies in Systemic
Risk, Yale School of Management................................ 9
Russo, Christopher M., Post-Graduate Research Fellow, Mercatus
Center at George Mason University.............................. 13
Sahm, Claudia, Senior Fellow, Jain Family Institute.............. 11
Wooden, Hon. Shawn T., Treasurer, State of Connecticut........... 5
APPENDIX
Prepared statements:
Konczal, Mike................................................ 36
Rhee, June................................................... 47
Russo, Christopher M......................................... 53
Sahm, Claudia................................................ 57
Wooden, Hon. Shawn T......................................... 65
Additional Material Submitted for the Record
Himes, Hon. Jim A:
Written statement of Action Center on Race and the Economy
(ACRE)..................................................... 79
McHenry, Hon. Patrick:
George Selgin, Cato Institute Center for Monetary and
Financial Alternatives..................................... 83
Barr, Hon. Andy:
Committee on Capital Markets Regulation, ``Revising the Legal
Framework for Non-Bank Emergency Lending''................. 88
LENDING IN A CRISIS: REVIEWING
THE FEDERAL RESERVE'S EMERGENCY
LENDING POWERS DURING THE
PANDEMIC AND EXAMINING PROPOSALS
TO ADDRESS FUTURE ECONOMIC CRISES
----------
Thursday, September 23, 2021
U.S. House of Representatives,
Subcommittee on National Security,
International Development
and Monetary Policy,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:07 a.m., in
room 2128, Rayburn House Office Building, Hon. Jim A. Himes
[chairman of the subcommittee] presiding.
Members present: Representatives Himes, Gottheimer, Torres,
Dean, of Illinois, Auchincloss; Barr, Hill, Williams of Texas,
Zeldin, Davidson, Gonzalez of Ohio, and Sessions.
Ex officio present: Representative Waters.
Chairman Himes. The Subcommittee on National Security,
International Development and Monetary Policy will come to
order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time. Also, without
objection, Members of the full Financial Services Committee who
are not members of this subcommittee are authorized to
participate in today's hearing.
As a reminder, I ask all Members participating remotely to
keep themselves muted when they are not being recognized by the
Chair. The staff has been instructed not to mute Members,
except when a Member is not being recognized by the Chair and
there is inadvertent background noise.
Members are also reminded that they may only participate in
one remote proceeding at a time. If you are participating
remotely today, please keep your camera on, and if you choose
to attend a different remote proceeding, please turn your
camera off.
For the benefit of the witnesses, in case you haven't been
fully briefed, there will be Members who are participating in
the hearing remotely and, consequently, they will appear on the
various screens, and you will hear, just as you heard this sort
of voice of God, those questions coming in via the audio, and
so we will proceed. But not every Member will be in the room
the whole time.
Today's hearing is entitled, ``Lending in a Crisis:
Reviewing the Federal Reserve's Emergency Lending Powers During
the Pandemic and Examining Proposals to Address Future Economic
Crises.''
I now recognize myself for 4 minutes to give an opening
statement.
Last March, as COVID-19 tore through the economy, Congress
and the Federal Reserve stepped up to prevent further chaos and
to stabilize markets. With businesses shuttering, infection
rates rising, and the stock market in a freefall, the Federal
Reserve (Fed) took unprecedented action to keep credit flowing
and instill confidence in our financial system.
From the onset of the pandemic, Chair Powell made it clear
that the Federal Reserve would use its emergency lending tools
to help families, cities, and businesses weather the storm.
Now, more than 18 months removed from their establishment,
Congress should take this opportunity to measure their success,
identify their shortcomings and limitations, and perhaps, most
importantly, discuss ideas about how we should address the next
economic crisis.
I came to this institution in 2009 amidst another economic
crisis and a great deal of skepticism around Federal Reserve
authorities. I never imagined that a mere decade later we would
be using those authorities once again to save the economy.
So today, we will look at the three lending facilities that
were stood up by the Fed and supported by CARES Act funds: the
Secondary Market Corporate Credit Facility; the Municipal
Liquidity Facility; and the Main Street Lending Program. While
these three programs do not represent the full scope of the
coronavirus toolbox, they offer valuable insight into how the
Fed can help when the economy is in shock.
At a glance, and compared to other efforts like the widely-
used Paycheck Protection Program (PPP), these facilities look
like a blip on the radar, with relatively low rates of uptake.
It is possible, however, that the Fed's commitment to
supporting the economy itself helped calm the markets. Within
days of the Fed announcing programs to bolster the corporate
municipal bond markets, investors returned, liquidity
increased, and further disaster was likely avoided.
We learned that the Fed could play a powerful role when it
has the authority to make and execute plans. But this power
only goes so far. Despite markets calming, the pandemic still
forced hundreds of thousands of businesses to close and pushed
unemployment rates to unacceptable levels.
In times of economic stress, perhaps the two most important
institutions to stabilize the economy are Congress, with its
physical power, and the Fed. As policymakers, Congress can
learn from the accomplishments and setbacks we saw last year to
determine how we should confront the next recession. The Fed
should also learn from these experiences, seek feedback, and
fine-tune its crisis playbook so it, too, will be ready to
tackle future downturns.
Together, both Congress and the Fed must think seriously
about how to improve on emergency lending efforts, especially
when it comes to helping businesses, workers, and communities
who are left behind in the best of times.
As we saw last year, the time to discuss these ideas is
when the economy is on the upswing, not during a crisis. The
next economic crisis could be triggered by any number of
factors at any time.
Chair Powell stated before this committee that the Fed
would put its emergency tools away when the time was right.
Congress' job is to make sure that those tools remain sharp and
effective and ready to take on whatever challenge comes next.
With that, I would like to welcome our panel of witnesses,
and thank them for joining us today.
And I now recognize my friend, the ranking member from
Kentucky, Mr. Barr, for 5 minutes for an opening statement.
Mr. Barr. Thank you, Mr. Chairman, and I appreciate you
holding this very important hearing. And I welcome our
witnesses. Thank you all for being with us and for offering
your insights on the Fed's emergency lending authorities.
As the COVID-19 pandemic raged, and the nation and the
world were gripped with the economic uncertainty resulting from
this Black Swan health crisis, Congress acted swiftly to
contain the damage and aid struggling individuals and
businesses.
The Fed amplified the actions of Congress by providing
unprecedented liquidity and broad-based economic support.
Through its Section 13(3) emergency lending powers, the Fed was
able to leverage support provided by Congress to serve as a
backstop for various markets during times of severe stress and
uncertainty.
Today, we will take a look back at the Fed's actions during
the pandemic. A retrospective review of the emergency lending
powers will help us better understand what worked, what didn't,
and if and how the Section 13(3) authorities should be adjusted
to improve the Fed's response to future crises.
Specifically, we will hear from witnesses about the Fed's
Municipal Liquidity Facility, Main Street Lending Program, and
Secondary Market Corporate Credit Facility.
At a time when States and municipalities were facing
budgetary uncertainty due to lost tax revenue, decreased
tourism, and broader economic challenges, the Municipal
Liquidity Facility was designed to ensure that they could still
access markets for financing.
The Main Street Lending Program was designed to aid those
businesses that were perfectly healthy before the pandemic, but
were too big to utilize the Paycheck Protection Program, yet
too small to receive more targeted support.
The Secondary Market Corporate Credit Facility was intended
to ensure that secondary corporate bond markets continued to
function, allowing businesses across the nation to continue
operating.
We hope to discuss today how we measure the success of
these facilities. These three facilities distributed
approximately $38 billion, or just 2.3 percent of the funds
available to the Fed for those purposes.
Does this metric suggest that the facilities were
unsuccessful, or just the opposite, given that the mere
presence of the facilities reassured investors and allowed
markets to function?
Only two issuers utilized the Fed's Municipal Liquidity
Facility. Does that indicate that the Fed did not accomplish
Congress' goals for that facility or, once again, was the
existence of the facility enough to normalize the markets,
allowing issuers to finance their operations through standard
market channels?
It is important to remember that these are emergency
lending powers. The Fed is authorized under specific statutory
circumstances to deploy these tools.
However, as the crisis abates and economic conditions
improve, the Fed must put those tools back in the box. Reliance
on and utilization of the Fed's emergency lending powers in
excess of their intent risks blurring the lines between
monetary and fiscal policy.
As we discuss these Emergency Lending Facilities today, we
must also keep in mind the appropriate role of the Fed. The Fed
is independent and conducts monetary policy. Fiscal policy is
our responsibility as legislators.
The Fed is not an agent of social change or environmental
activism, and asking it to take on that role compromises its
independence.
This subcommittee has an important mandate of oversight of
monetary policy, and as we exercise that oversight over Fed
policy, I hope at some point, Mr. Chairman, in the near future,
we will have a hearing specifically on inflation. The inflation
data is staggering and concerning as perpetual accommodative
monetary policy and blow-out fiscal spending make us all
question whether it is truly transitory.
As the Wall Street Journal reported today, the Fed is
looking at this as not so transitory, and I will quote: the
message from the Fed's latest projections yesterday is that,
``transitory is lasting an awfully long time.''
Our constituents are feeling the pain of inflation at the
grocery store and at the gas pump, and Congress must do its
part to make sure we do not let it get out of control.
The economic response to the COVID-19 pandemic required
collaboration between Congress, the Administration, the Fed,
and the private sector. As we emerge from the pandemic, and
economic conditions normalize, it is a useful exercise to look
back at the impact our policies had.
Today's review of the Fed's Emergency Lending Facilities
should provide meaningful and helpful insight.
Mr. Chairman, I thank you for your leadership in holding
this hearing. And I look forward to hearing from our witnesses
today.
And again, Mr. Chairman, thank you for convening this
hearing. I yield back.
Chairman Himes. I thank the ranking member, and it is now
my privilege to recognize the Chair of the full Financial
Services Committee, the gentlewoman from California, Chairwoman
Waters, for one minute.
Chairwoman Waters. Thank you very much, Mr. Chairman, for
holding this important hearing.
Testifying before our committee in February 2020, Fed Chair
Powell warned that the Federal Reserve's ability to help the
economy in the next recession would be limited.
Remarkably, the pandemic was declared one month later, and
the Fed exercised an unprecedented expansion of its tools to
support the economy. I believe the Fed's actions were helpful
in jump-starting the recovery on Wall Street after a
devastating shutdown due to the pandemic, and we had to work
very hard with the Fed to talk about extending its support to
States, cities, and small businesses.
We engaged the Chair on the terms that were offered to both
small businesses and corporations. And I spent a considerable
amount of time dealing with all of these facilities that were
being created, particularly the Main Street Lending Program,
where we engaged, again, with Chairman Powell on how he could
be more helpful to very small businesses.
So, I look forward to hearing from this panel what worked,
what didn't, and what reforms are needed to make sure the Fed's
actions reach Main Street and not just Wall Street.
I yield back the balance of my time.
Chairman Himes. I thank the chairwoman for her attendance
and for her statement.
We now welcome the testimony of our distinguished
witnesses.
First, we have my friend, the honorable Shawn Wooden, the
treasurer of the State of Connecticut, and the president-elect
of the National Association of State Treasurers, and the
provider of the evidence to my belief that only good things
come from the State of Connecticut.
Second, we have Mike Konczal, director of macroeconomic
analysis and progressive thought with the Roosevelt Institute.
Third, June Rhee, director of master of management studies
in systemic risk with the Yale School of Management.
Fourth, Christopher Russo, a post-graduate research fellow
with the Mercatus Center.
And, finally, Dr. Claudia Sahm, a senior fellow with the
Jain Family Institute.
Witnesses are reminded that their oral testimony will be
limited to 5 minutes. You should be able to see a timer on the
desk in front of you that will indicate how much time you have
left.
And by the way, please, when you are speaking, pull the
microphone close--you can remove your mask and pull the
microphone close to you. Otherwise, we won't be able to
understand you.
I would ask that you be mindful of the timer, and quickly
wrap up your testimony once your 5 minutes has expired, so that
we can be respectful of both the witnesses' and the
subcommittee members' time.
And without objection, your written statements will be made
a part of the record.
Mr. Wooden, you are now recognized for 5 minutes to give an
oral presentation of your testimony.
STATEMENT OF THE HONORABLE SHAWN T. WOODEN, TREASURER, STATE OF
CONNECTICUT
Mr. Wooden. Thank you.
Chairman Himes, Ranking Member Barr, and distinguished
members of this subcommittee, I appreciate the opportunity to
testify before you today.
Specifically, I would like to share with you Connecticut's
experience with the Municipal Liquidity Facility, which I will
refer to as the MLF in my testimony.
As president-elect of the National Association of State
Treasurers, the bipartisan association of State treasurers from
across the country, I have worked with my colleagues on this
topic since the early days of the pandemic.
As treasurer of the State of Connecticut, I have three
responsibilities relevant to today's hearing: investment of the
State's pension and trust funds; management of the State's
borrowing; and management of the State's cash, including
maintenance of our liquidity.
For today's hearing, I am going to focus specifically on
liquidity issues. Our experience in Connecticut, fortunately,
was that the State and its municipalities were able to meet the
pandemic's unprecedented impact on State and local governments'
budgets and other fiscal challenges. This was due to prompt and
effective Federal action and assistance, as well as the State's
ability to adeptly draw on talent and quickly prepare.
At the--
[Technical issue.]
Mr. Wooden. --its Fiscal Year 2020 budget projections to a
much larger $934 million budget deficit.
During this time, in early spring 2020, I participated in
weekly calls with treasurers from across the country to discuss
in real time the challenges different States were facing. At
that point, all States were revising their budget projections
and liquidity positions. Several States moved ahead and put
lines of credit and other short-term borrowing facilities to
address what was at the time an unknown fiscal impact from the
quickly-spreading COVID-19.
However, several significant and timely actions taken by
the Federal Government provided substantial assistance to State
and local governments and mitigated liquidity concerns. One was
the Federal Reserve's establishment of the MLF.
A quick look at events in the municipal market at the time
shows that shortly after the declaration of the pandemic, the
municipal market experienced tremendous volatility. The
municipal bond yields rose dramatically as mutual fund
investors pulled over $41 billion of assets out of the
municipal market in less than 3 weeks.
At that point, market fluctuation had deteriorated to the
point that buyers and sellers had difficulty determining price,
because investors were concerned about our government's ability
to withstand the pandemic's related liquidity and revenue
shocks.
The primary market was, essentially, shuttered for 2 weeks
in mid-March, and municipal bond yields remained elevated even
as markets slowly reopened.
The Federal Reserve's initial actions helped shore up
market liquidity. The creation of the MLF provided critical
support for issuer solvency by standing ready to purchase
short-term notes from State and local governments in an
extremely uncertain economic environment, thereby helping State
and local governments better manage cash flow pressures.
The MLF was designed and implemented to serve as a lender
of last resort. Despite the limited utilization of the program,
it provided a necessary backstop to a large market without
replacing the normal municipal market mechanisms for raising
capital to alleviate liquidity concerns.
Today, I present seven changes for your consideration for
the purpose of improving the MLF to be shelf-ready for the next
fiscal crisis, and this reflects Connecticut's experience, as
well as the experience of treasurers across the country, on a
bipartisan basis, that was shared with Treasury at the time.
Number one, I recommend reducing the MLF's borrowing rates
to more competitive taxable market rates that move with the
market.
Number two, I recommend removing the requirement for
certification that borrowers are unable to secure adequate
credit accommodations from other banking institutions. The
above-market pricing model makes that certification redundant.
Number three, I recommend making the requirement that
State-guaranteed borrowings of municipalities that borrow
through the State be more flexible, and consider having the
Federal Reserve assume some of the credit risk.
Number four, the MLF should be available for pooled
borrowings, not one-off guaranteed borrowings for particular
municipalities.
Number five, allow for longer credit terms, and we
recommend that that will improve the relief available to
issuers by extending the MLF credit facility for longer-term
issuers.
Number six, make the program permanent. It would be
valuable and forward-thinking for the Federal Reserve to put in
place a permanent emergency MLF program and set parameters that
consider the variety of States' needs and circumstances.
In Connecticut, we found that legislative changes to our
statutes would be necessary in order to implement the prior
program.
And lastly, if I may, Mr. Chairman, create a bank-managed
program which would be much more efficient to execute.
Thank you for this opportunity.
[The prepared statement of Mr. Wooden can be found on page
65 of the appendix.]
Chairman Himes. Thank you, Mr. Wooden, and I will be
equivalently elastic on the time for the other witnesses.
With that, Mr. Konczal, you are now recognized for 5
minutes to give an oral presentation of your testimony.
STATEMENT OF MIKE KONCZAL, DIRECTOR, MACROECONOMIC ANALYSIS,
ROOSEVELT INSTITUTE
Mr. Konczal. Good morning, and thank you for inviting me to
testify at this hearing.
My name is Mike Konczal, and I am the director of
macroeconomic analysis at the Roosevelt Institute.
I would like to discuss the Emergency Lending Facilities
that the Federal Reserve used to respond to the COVID-19
crisis, and I would like to make three points.
First, the Municipal Liquidity Facility (MLF) and the
Secondary Market Corporate Credit Facility (SMCCF) were more
successful than people realize. We see dramatic effects if we
look not just at the total number of loans made, but instead at
their overall impact on interest rates.
Second, these programs are an evolution of unconventional
monetary policy in our era of low interest rates and are likely
to stay with us.
And third, there are multiple ways to improve these
facilities, going forward.
Take the MLF and municipal debt markets as the first
example. During March 2020, yields on municipal debts
dramatically increased. The MLF was poorly-designed to address
this crisis. Its original narrow terms meant it was very
difficult for any subnational entity to qualify, especially
cities with the highest concentration of Black and Brown
residents.
Even as the Fed expanded the eligibility threshold
throughout that summer, only two borrowers took advantage of
the program, borrowing only $6 billion out of the $500 billion
available for lending through this program.
Yet, the interest rates municipalities faced dropped
dramatically throughout this period. A wave of research over
the past year has found that this decrease was driven by the
announcement of the MLF and its subsequent expansions.
Research from the Federal Reserve Bank of New York found
that municipalities eligible for the expanded terms at the end
of April saw their interest rates decline around 70 basis
points.
Research from the Federal Reserve Bank of Dallas found that
the MLF kept rates from rising between an estimated 5 and 8
percent as the economy deteriorated.
Researchers at the Federal Reserve Bank of Chicago found an
impact of 110 basis points for a sample of U.S. States. This
research argues that the MLF disproportionately benefited
municipalities with higher credit risk.
There are many studies summarized in my written testimony,
and though they all use different methodology, they all point
in the same direction.
This same story plays out in the corporate sector. Interest
rates on corporate bonds spiked during March 2020. Although the
purchases of the SMCCF were only $13 billion, a trivial amount
in the world of corporate debt, the impact was dramatic.
Researchers across studies find a dramatic drop in the
interest rate corporations faced, with the general conclusion
that most of the impact occurred before the Fed even bought
anything.
These two programs mirror each other. Even though the
Federal Reserve purchased virtually nothing and incurred no
fiscal costs, the chance that it could was enough to drive down
borrowing costs and calm markets for these sectors.
It is through this lens, seeing asset purchases as an
extension of unconventional monetary policy that sets long-term
interest rates for users of funds in the economy, that the
impact and promise of these programs make the most sense.
We will likely still need such programs in the future.
Unconventional monetary policy is necessary during periods of
low interest rates, and over the past several decades, interest
rates have fallen across countries.
Right now, the 10-year Treasury rate is around 1.3 percent,
which is below the 6 decades preceding the pandemic. Economists
are engaged in debates over why interest rates have fallen,
with popular theories including increasing wealth inequality,
the aging of the population, and more concentration in sectors
across our economy. These trends are likely to stay with us.
And, indeed, this expansion of unconventional monetary
policy is also happening at other central banks across the
world. Multiple other central banks created or expanded already
existing corporate bond purchase facilities in 2020, in
response to the COVID crisis, including the central banks of
England, Europe, Japan, and Canada.
Luckily, there are multiple ways to improve these
facilities. The Federal Reserve should research how expansive
it can make eligibility requirements for any future Municipal
Lending Facility. This has significant benefits with low costs.
The eligibility does matter quite a bit in who gets to benefit
from this.
The Federal Reserve should remove or reduce its penalty
rate for any future programs like these. The penalty rate makes
perfect sense for times in which we want to guard against moral
hazard, especially in a financial crisis. But when programs are
being used as part of a general toolkit of unconventional
monetary policy and rate setting, the penalty rate makes less
sense.
And third, beyond program design, there are general policy
changes that should be considered. Better regulation of open-
ended mutual funds can help prevent debt markets from seizing
in crises on such short notice.
Also, these facilities are no substitute for fiscal policy.
Better automatic stabilizers would help maintain income and
spending in a recession and take some of the pressure off
unconventional policy.
Thank you for your time, and I look forward to any
questions you may have.
[The prepared statement of Mr. Konczal can be found on page
36 of the appendix.]
Chairman Himes. Thank you, Mr. Konczal.
Ms. Rhee, you are now recognized for 5 minutes to give an
oral presentation of your testimony.
STATEMENT OF JUNE RHEE, DIRECTOR, MASTER OF MANAGEMENT STUDIES
IN SYSTEMIC RISK, YALE SCHOOL OF MANAGEMENT
Ms. Rhee. Thank you.
Chairman Himes, Ranking Member Barr, and members of the
subcommittee, thank you for inviting me to testify at this
hearing.
My name is June Rhee. For the past 6 years, I have been
researching at the Yale Program on Financial Stability on
interventions used by the government and central banks in
response to financial crises around the world.
The focus of my research has been on market liquidity and
capital injection programs. In these remarks, I will focus on
my research in market liquidity programs by the Fed during the
global financial crisis (GFC) and the COVID-19 pandemic based
on papers I have co-authored.
We define market liquidity programs as interventions for
which the key motivation is to stabilize liquidity in a
specific wholesale funding market, which encompasses the three
facilities we are focusing on today in our hearing.
The Fed is allowed to extend loans to nonbanks in normal
times and its power to purchase market instrument is limited.
Therefore, the Fed relied on its authority under Section 13(3)
of the Federal Reserve Act to lend to nonbanks in unusually
exigent circumstances.
The Fed also created special purpose vehicles, or SPVs, to
purchase specific instruments and lend money to them using its
emergency authority. The SPVs, in turn, purchased assets to
help restore liquidity in troubled markets.
Lending under 13(3) also requires the Fed to be secured to
its satisfaction. The Fed has taken a variety of paths to make
sure it is secured to its satisfaction. In one facility during
the GFC, it required borrowers to pay fees, which in aggregate
function does a loss reserve.
In another facility, it required money market funds or
other investors that elected to sell assets to the SPV to then
purchase subordinated debt issued by the SPV equivalent to 10
percent of the value of the assets they sold.
It is also relevant to note that of all of the Fed's
lending facilities established under 13(3) during the GFC, only
one facility received credit protection from the Treasury,
which is quite different from this time around.
In part because the Fed's indirect asset purchase programs
during the global financial crisis were more complex than the
direct asset purchase programs set forth by other central banks
around the world, the implementation took a little bit--for
some of the programs, the implementation took a little bit more
time.
The ability to roll out a program quickly can provide
benefits in some cases, serving as a bridge as other programs
are put together. Fed economists involved in constructing some
of these programs have also stated that, in hindsight, an
earlier rollout of some of these programs might have made them
more effective.
Ultimately, however, whether an intervention was indirect
or direct does not seem to have had much influence on its
effectiveness.
Following the GFC, the Dodd-Frank Act added some
restrictions to Section 13(3). Under the revised law, the Fed
retains the ability to conduct market-wide liquidity programs,
but it now must obtain the Treasury Secretary's approval before
establishing such a program.
Also, it is required to report to Congress detailed
transaction-level information on any loan extended under a
Section 13(3) program within 7 days.
Disruptions caused by the COVID-19 pandemic, again, drove
the Fed to open market liquidity programs, some like GFC-era
ones and some new ones, using Section 13(3) authority.
Armed with the know-how from the GFC, the Fed was able to
quickly reintroduce four GFC-era market liquidity programs. It
also introduced new programs, and the three programs that we
are talking about today are the new programs that the Fed
introduced.
For the reopened programs, the Fed--much of the design was
the same as their GFC-era counterparts. However, unlike the
GFC-era facilities, again, the COVID-19-era facilities, aside
from two facilities, received Treasury's credit protection.
The relevance of this is that the Consolidated
Appropriations Act 2021, signed into law on December 27, 2020,
definitively closed these CARES Act facilities and rescinded
funds not needed to meet the commitments as of January 9, 2029,
of the programs and facilities established.
The Act preserves the Fed's authority under Section 13(3).
However, the Act removed Treasury's authority to use funds to
support a Fed facility that is the same as the three facilities
that we are talking about here today.
The Act made an exception for the Term Asset-Backed
Securities Loan Facility (TALF), which is a facility that was
also opened during the GFC era. How broadly the Treasury will
interpret the, ``same as,'' language in the future remains an
open question.
Therefore, if the Fed wanted to create a lending facility
that falls within the scope of the Act in the future, it may
have to find other ways to secure the loans to its
satisfaction, such as using risk management techniques used
during the GFC-era facilities.
But there also may be some need for the Treasury to support
a future lending facility. If you are comparing a GFC facility
versus the COVID-19 facility, the COVID-19 facility with the
Treasury support was able to accept a much broader range of
eligible collateral than a similar facility that was open
during the GFC era.
Of course, all Fed lending facilities under Section 13(3)
will continue to require the Treasury Secretary's approval.
This concludes my remarks, and thank you. I welcome all
questions.
[The prepared statement of Ms. Rhee can be found on page 47
of the appendix.]
Chairman Himes. Thank you, Ms. Rhee.
Dr. Sahm, you are now recognized for 5 minutes.
STATEMENT OF CLAUDIA SAHM, SENIOR FELLOW, JAIN FAMILY INSTITUTE
Ms. Sahm. Thank you.
I greatly appreciate the opportunity to give remarks on the
Municipal Liquidity Facility. I am going to focus on three ways
that this emergency facility for State and local governments
could be improved for the next crisis.
First, we should tailor the eligibility and the loan terms
so that they are specifically for State and local governments
experiencing financial distress.
To do so, use economic conditions, particularly conditions
in the local labor markets, to make those determinations, and
finally, improve the administrative systems so that it is as
easy as possible for those who need the relief to access it.
We know that swift and effective relief is absolutely
essential in times of crisis. I began at the Federal Reserve in
2007. In my first year, I watched the global financial crisis
in the Great Recession have an incredible toll on families,
small businesses, and communities, and that lasted for years.
This time, you all stepped in very aggressively, and
boldly, and what Congress did and what the Federal Reserve did
early in the crisis, in particular, was a godsend.
But when you are innovative and bold, you can always do
better, and so it is the perfect time to reflect, hold those
accountable who were in charge of implementing these policies,
and to prepare for the next crisis.
Before I go through the proposals in more detail, I just
want to focus on the stated purpose of the Municipal Liquidity
Facility, as it is stated on the Federal Reserve's website, to
help State and local governments better manage the cash flow
pressures they are facing as a result of the increase in State
and local government expenditures related to the COVID-19
pandemic and the delay and decrease of certain tax and other
revenues.
We have talked about the success metrics. The municipal
bond market did stabilize. It stabilized quickly. It took a
little longer for those that didn't have as good a credit
rating, but we got there. That is success and it should be
recognized.
That said, two loans were made to State and local
governments, and we know that there were more than two that
were suffering during this crisis and continued to, so let us
do better.
The key features that we have talked about, the size and
that only about 11\1/2\ percent of the loans were accessed, the
eligibility was, largely, by population. We now know that a lot
of the budget stresses were not concentrated in some of our
large States and cities.
We need to get the money to who needs it and, as was
mentioned before, the State and local governments only had
access to bonds up to 3 years of maturity. They were more than
that for corporations.
So with the first proposal to target eligibility, as I
said, we know that population was not enough. The Fed had to
reverse course and lower the population thresholds in August.
That was too long to wait for that. And if we do better
targeting, then it will be the State and local governments that
most need the aid and we can, potentially, reduce penalty
rates.
We can subsidize those rates because you aren't opening up
to all institutions. You can be very targeted and tailored in
the relief.
Now, it is a big question of, how do you do that targeting?
I suggest using local economic conditions. The Bureau of Labor
Statistics puts out very detailed subnational statistics. No
one can influence them, and they do tell us about the hardships
that workers are facing and businesses in a crisis.
And finally, administering these programs is essential. The
signing ceremonies are not enough. The Fed announcements are
not enough. The cash has to get to those who are eligible and
those who need the relief.
Innovation is hard. The Fed stood up a facility that did
not exist before this crisis. It was delayed relative to the
facilities that were directed at Wall Street. The terms had to
be adjusted. There was a lot of debate among Fed and Treasury
about exactly who should be eligible. That created uncertainty
for State and local governments.
We can't do a one-size-fits-all approach. State and local
governments, nearly all of them, have balanced budget
requirements. They have really faced a lot of uncertainty in
terms of revenues. We need to make it easier for them.
I just think the Federal Reserve is a way that Congress can
get money out. Congress needs to lead, but the Fed can be a
very effective way to implement the policies and the relief
that you want to see done.
Thank you.
[The prepared statement of Dr. Sahm can be found on page 57
of the appendix.]
Chairman Himes. Thank you, Dr. Sahm.
Mr. Russo, you are now recognized for 5 minutes.
STATEMENT OF CHRISTOPHER M. RUSSO, POST-GRADUATE RESEARCH
FELLOW, MERCATUS CENTER AT GEORGE MASON UNIVERSITY
Mr. Russo. Good morning.
Chairman Himes, Ranking Member Barr, and members of the
subcommittee, thank you for inviting me to speak today about
the Fed's Emergency Lending Facilities.
My name is Christopher Russo. Before joining the Mercatus
Center at George Mason University, I advised senior Fed
officials on a range of monetary policy decisions.
Today, I urge you to safeguard the Federal Reserve's
independence by keeping the Fed out of credit policy. Really,
my arguments can be boiled down to just three points.
First, the Fed's role as the lender of last resort is
essential to achieving its monetary policy objectives, these
same objectives that you have given it.
Second, 10 of the Fed's Emergency Lending Facilities cross
red lines from monetary policy into credit policy.
And third, crucially, using the Fed for credit policy
damages its independence, making it less effective in the next
crisis.
I think we will agree on my first point, that the Fed as a
lender of last resort is essential to achieving the goals you
have given it: maximum employment; and price stability.
Congress created the Fed for exactly this reason, following
a dash for cash on Wall Street in 1907 that led to a banking
panic and then a contraction on Main Street, a massive one. To
be clear, it is 1907, not 2007.
And we have known what to do since 1802. The Fed, as the
lender of last resort, lends to banks without limit in a timely
manner, based on good collateral and at a penalty rate.
Those five elements of the lender-of-last-resort doctrine
are essential. They have been developed during hundreds of
years of financial crises, since we started having them.
The purpose of the lender of last resort is liquidity, not
credit, and all five points matter for that purpose. The Fed's
first test came in 1929. Faced with yet another banking panic,
the Fed dramatically failed.
It did not lend to banks without limit or in a timely
manner, and in doing so, healthy banks were forced to fail.
These mistakes compounded what would have been a bad, but a
once-in-a-few-years recession into the Great Depression.
The Fed has learned the lesson from the Great Depression,
in my view, as former Fed Chairman Bernanke vowed never again.
I also think we will agree on my second point, that recent
emergency lending programs crossed red lines from monetary
policy into credit policy. Fed Chairman Powell said so himself.
Ten of the Emergency Lending Facilities were designed to assist
Congress and the Treasury in allocating credit, not liquidity,
to the broad financial system.
These credit programs don't meet the five requirements I
outlined for a lender of last resort. They lend to nonbanks at
favorable rates and with shady collateral, with respect.
For example, the Fed's Municipal Loan Facility made direct
loans, as we have recognized here, only to the State of
Illinois and the New York MTA. The Fed can't create new savings
from nothing. It can only shift them around. And like any
government subsidy, it benefits some, as has been described,
but the unseen harm comes to others, and that is less
recognizable in some of the studies that have been done.
I would also mention that when we talk about the effect of
the Fed on markets in these and other actions, market
volatility, price volatility, that itself is not dysfunction.
That itself is not illiquidity.
So for all of those reasons, I hope we will agree on my
third point, that involving the Fed in credit policy damages
its independence and its effectiveness.
Congress recognized this in the 2010 Dodd-Frank Act after
the global financial crisis. Congress specified that emergency
lending is for unusual and exigent circumstances. It must be
broad-based and only for the purpose of providing liquidity to
the financial system.
Congress put these restrictions in place because in the
global financial crisis, the Fed had lent to nonbanks on Wall
Street and it lent credit--it wasn't involved in liquidity--
because these firms were deemed too-big-to-fail.
Congressmen, Congresswomen, it is the same principle.
Whether it is nonbank borrowers on Wall Street, K Street, or
yes, even Main Street, credit policy is political and it is not
the Fed's proper role.
So, I ask you to resist this siren call of turning the Fed
from our central bank into our piggy bank. Whether the Fed
finances green energy or the construction of a border wall or
anything else, it would subject the Fed to immense political
pressure.
The damage to the Fed's independence would harm its
effectiveness in the next crisis, and as we saw in the
Depression, that does not end well.
Congress regularly asks the Fed to take on more power. As
far as I know, the Fed is the only government agency to refuse.
Instead, I ask, like Fed officials have many times, that
you safeguard their independence so they can do the important
jobs you have given them.
Thank you again. I look forward to answering all of your
questions.
[The prepared statement of Mr. Russo can be found on page
53 of the appendix.]
Chairman Himes. Thank you, Mr. Russo. I now recognize
myself for 5 minutes for questions.
Mr. Wooden, let me start with you. You are the one sitting
State Treasurer on the dais right now. There have been
proposals made to make these programs more permanent, more
predictable, and more stable.
One of the things Congress does worry about and should
worry about is moral hazard, the idea that if that backstop is
out there, it may cause folks in your position to know that it
is there and, therefore, perhaps be less prudent in the
decision-making.
How would a State Treasurer think about that, and how can
Congress be made more comfortable that if these programs were
more predictable and just simply there, that we wouldn't see
less prudent behavior on the part of decision-makers at the
State and municipal level?
Mr. Wooden. Thank you for that question.
And, first, let me say I think just based on the numbers
alone and what actually happened with the program, it was an
unmitigated success in terms of stabilizing the markets.
Part of the discussion--and as a treasurer, I am Main
Street. I see day to day on the front line what is happening
with governments and essential services and concern about
meeting payroll.
The moral hazard argument is that this program was
structured and implemented as a lender of last resort, in terms
of that standard was met.
Now, I think there is reasonable disagreement and debate on
whether or not there should have been the penalty associated
with it and off-market rates. But it did the job in terms of
being a lender of last resort.
And so I think there was, in fact, zero harm of moral
hazard in this event, and that was proved out by the fact that
there were only two issuers that utilized it.
But there were many issuers, like the State of Connecticut
and others, who benefited and helped stabilize our access to
the marketplace in a way that did not harm government but
helped government and helped Main Street and Connecticut.
Chairman Himes. Thank you, Mr. Wooden.
I have one more question that I just want to throw out
there as sort of (inaudible). I have watched or participated
now, sadly, in any number of interventions in the market. I
wasn't in Congress, but the Mexico bailout, then, of course,
the infamous Wall Street bailout, the auto industry, and now
everything that we have done.
That is not the way markets are supposed to work. But those
of us in Congress are put in the position of choosing between
doing something which buttresses markets, not the way they are
supposed to work, or watching the apocalypse unfold.
One of the things, if we are going to continue to do these
programs, I would point out that I think that all of the
programs I just mentioned actually didn't cause any loss to
taxpayers and, in fact, in many cases, provided a gain to
taxpayers.
But one of the challenges is that these programs are
perceived by my constituents and, I think, by Americans as
always benefiting the corporation or management. Why? Because
the proceeds are often used to pay bondholders.
And so, workers and others are left to say, wait a minute,
once again, you are bailing out the corporation I work for and
what do I get? And in many instances, those workers are laid
off.
Now, you don't need to be too far to the left of the
political spectrum to say that is a problem. So my question is,
and I posed this question to Fed Chair Powell some time ago,
how can these programs be thought of and restructured in ways
that at least alter the perception that they are all about
corporations and businesses servicing their debts rather than
standing by their workers?
Dr. Sahm, you are the first one with the mask off so--
Ms. Sahm. Okay. I buzzed in.
I think there was a big step forward in this crisis. You
have two new facilities that lend directly to Main Street.
Putting those on equal footing in terms of terms, eligibility,
how fast they get started, that is a big step forward. And so,
I really applaud that attempt to get money directly to Main
Street and I think that is what people want to see.
We don't want Wall Street to go down, but we don't want
Main Street to either.
Chairman Himes. So you are saying, and I agree with you,
that if we make these credit facilities available to smaller
businesses, that mitigates some of the sense of, we are just
bailing out the banks?
But what else? The Federal Reserve hasn't--and maybe the
answer is there is nothing you can do. You just, as an elected
official, need to explain to people that when you stabilize
Delta Airlines, you are doing a good thing for the economy,
even if Delta Airlines turns around and lays off employees.
But is there anything we can do to try to address that
perceptual issue?
Ms. Sahm. Fiscal policy. I don't think in a crisis people
care where the money is coming from, whether it is the Fed
helping keep interest rates low or it is Congress getting
stimulus checks in their pocket.
I think it is more about the concerted, all-hands-on-deck
approach. That would--
Chairman Himes. Thank you. I am out of time, but I
appreciate that response.
With that, I now recognize the distinguished ranking member
of the subcommittee, Mr. Barr, for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman.
Let us talk about how we measure the success of these
emergency liquidity programs. Members of Congress heard from
market participants that TALF, in particular, and the corporate
credit facilities were a psychological backstop, and even if
the utilization wasn't there, that the markets weren't seized,
that they actually functioned because there was this
psychological backstop that was there.
And so, I mentioned in my opening statement that it is
important that we grasp how to measure the success of these
facilities. Looking simply at utilization or take-up makes
them, perhaps, look unsuccessful, but a broader look at the
market and credit conditions in this unprecedented economic
shutdown and evaluating it through the lens of the Fed serving
just as a backstop but not as necessarily a provider of credit
might indicate that they were successful.
So, Mr. Russo, how would you evaluate the performance of
the Fed's facilities and what metrics should we actually use to
judge their success?
Mr. Russo. Congressman, thank you for that great question.
As an economist, I think it is important to look at the
benefits of a policy as well as the drawbacks. One thing that
hasn't been mentioned already in terms of the drawbacks of such
a policy is, first, there is only so much real economic savings
to be allocated. Again, that is all the Fed can do; they can
allocate savings.
So when the Congress or the Fed or anybody else decides to
allocate more savings to New York and Illinois, they are taking
away from somewhere else. You don't see where, but that is a
real drawback.
The second thing I will mention is that by trying to peg
prices--in this case, an interest rate--for credit, you do make
some better off and some worse off, like any subsidy.
For example, Illinois got better rates if we buy the
arguments that were put forth before, on these municipal loans.
That gave a worse return to the pensions that own those bonds
or that finance that new investment.
Again, I think there is a complicated cost-benefit analysis
we could do here. But I would just remind you of those other
sides of the ledger. And, again, it is not really the Fed's
role to be doing credit policy.
Mr. Barr. Yes, let me stick with you and the point that you
are making. Some of our colleagues have suggested that the Fed
should take a more active role in addressing social or
environmental issues. Some have even gone as far to suggest
that the long-run changes in weather patterns due to climate
change are emergencies and, thus, necessitate the Fed using its
13(3) emergency lending powers to directly finance green
energy.
Mr. Russo, what would the impact be on the Fed's
independence if it strayed outside of its mandate and actually
took a more active role in social and environmental issues?
Mr. Russo. I believe that its independence would be
irreparably damaged, and in doing so, it would weaken its
independence and its effectiveness in the next crisis.
Mr. Barr. Mr. Russo, I want to ask you now about the
penalty rate. Some have contended that the terms and rates and
some of your fellow panelists here have contended that the
terms and rates of some of the Fed's facilities are too
onerous, resulting in lower uptake if prices were more aligned
with market rates.
As you know, the Fed is required by regulation to charge a
penalty rate at a premium to market rates in normal
circumstances. This is, in part, to ensure that the Fed
maintains its role as a backstop and provider of liquidity
rather than replacing private markets.
What impact would an adjustment to the requirement of the
Fed to charge a penalty rate have on its role in the economy,
and could that change its role from a backstop to a direct
competitor with private entities?
Mr. Russo. Not, ``could,'' but, ``would,'' sir. Thank you
again for that question.
To give you some context here, the Fed's loan to Illinois
that was a direct loan had an interest rate of about 3 percent.
We have seen the inflation in the last year. In real terms--not
dollar terms, but in real terms inflation adjusted, that is a
negative return.
Just to summarize, when we reduce any of those five
criteria I set out for a lender of last resort, you no longer
have a lender of last resort and that includes getting rid of
penalty rates.
Mr. Barr. Yes, I think preserving the role as lender of
last resort is very important in not displacing the private
sector.
Final question to Mr. Russo, in the 115th Congress, when I
chaired this subcommittee, I sponsored a package of Federal
Reserve reform bills, which included a bill called the
Congressional Accountability for Emergency Lending Programs
Act. Mr. Hill was part of this effort.
The bill would require the affirmative vote of a greater
portion of the Federal Open Market Committee (FOMC) than is
currently required. It would also require an additional and
enhanced role from Congress to authorize these emergency
lending authorities.
Of course, the CARES Act did interject the Congress in
approving some of the emergency lending that we saw in the
pandemic.
But what are your thoughts on a bill like this to
strengthen the congressional role to limit the Fed's emergency
lending powers? Not eliminate 13(3), but just provide a little
better accountability, involve more of the members of the FOMC
in this?
Mr. Russo. Thank you, sir. I believe the Congress plays an
important role in the oversight of the Federal Reserve. I can't
comment on that legislation specifically, and I don't endorse
legislation. But I would be happy to work with your office on
these issues, going forward, if that would be helpful.
Mr. Barr. Thank you, Mr. Chairman, for your indulgence. I
yield back.
Chairman Himes. Thank you to the ranking member.
The Chair of the full Financial Services Committee,
Chairwoman Waters, is recognized for 5 minutes.
Chairwoman Waters. Thank you very much, Mr. Himes.
I would like to continue the discussion that you have
initiated around maximizing the public interest.
Mr. Konczal, we know that emergency financial system
assistance is sometimes necessary to rescue our economy when it
is in crisis. But carrying out this assistance in a way that
protects workers and has other reasonable conditions attached
is critical.
For example, in 2009, the Treasury Department extended $62
billion in assistance to General Motors and Chrysler, which
helped to save 1.5 million jobs. However, Treasury was eager to
exit its investment as quickly as possible. It sold its stake
in both companies without securing any improvement in workers'
wages or other corporate practices, and its sale came at a
loss, even though GM and Chrysler were profitable just a few
years later.
Last year, we set aside $17 billion in the CARES Act to
help national security firms like Boeing. We put conditions on
that assistance, including workforce maintenance requirements.
Boeing did not end up using that aid, instead, opting to sell a
corporate bond after the Fed's actions unfroze the corporate
bond market. Because the corporate bond market didn't have the
same strings attached as the CARES Act national security bonds,
Boeing proceeded to lay off 12,000 workers.
Mr. Konczal, what ideas should Congress consider to ensure
future emergency lending programs are carried out in a way that
is in the public interest and maximizes the vital goals of full
employment and economic stability?
Mr. Konczal. Thank you for that question. So, a few
thoughts on that.
One is that, in so much as a lot of these facilities are
setting market-wide interest rates and bringing them down when
traditional monetary policy is weaker at doing that, it is very
hard to put on conditions at that point.
So, you want to think about fiscal policy. You want to
think about managed settlements, particularly in times of
crisis, like we did with the airlines.
I contrast these programs with the Payroll Protection
Program. As compared to these programs, the Payroll Protection
Program had significant take-up, approximately $500 billion
with 5 million loans.
And there, you had a downside from the point of view of
business but an upside from the point of view of the public of
having significant terms on those loans, particularly payroll.
In exchange for that, there was the upside to the business
of having those loans turned into grants. With these emergency
lending programs, it is very difficult to have that kind of
balance because we are working through interest rates.
So you can try to put penalties on. The Primary Market
Corporate Credit Facility, which would have made direct loans
to corporations, had no uptake because it had a penalty rate.
The Main Street Lending Facility, for instance, had some
obligations that mirrored the Payroll Protection Program but
also saw limited uptake.
So one needs to think about the balance of upside and
downside for the business in terms of making sure that we can
carry out programs so we can carry out public obligations in
exchange for support.
I also think that automatic stabilizers are quite
important. I think unemployment insurance, the expansion in the
CARES Act and the American Rescue Plan was very important in
helping ensure that workers got through this and got an
equitable shake of the downturn that we went through.
And finally, direct support to cities and municipalities in
the American Rescue Plan was incredibly important.
Chairwoman Waters. Thank you very much. Let me just say
that despite the fact that in emergency assistance to these
companies, certainly, you are concerned with the economy and
what is happening and how can we protect having a safe and
sound economy, et cetera. But I certainly would not like to
think that we can excuse these corporations from using our
leverage to ensure that they protect workers in some way. Don't
you agree that both can be done?
Mr. Konczal. Yes, absolutely, and I think there are some
models we can look back at. What happened with the airlines, I
think, is one possible role and model, going forward.
Legislation has been introduced about a bailout manager
that I think is really worth discussing and thinking through
and reassessing. You look at the Main Street Lending Facility,
which put a ban on buybacks and dividends for firms that took
them and that was enforced, and the sky didn't fall when we
banned buybacks and dividends or slowed the rates at the
largest banks.
And so, there are obligations that can be put in place that
we saw a limited version of that worked perfectly fine and
still left corporations in a perfectly good place to be able to
expand in this recovery.
Chairwoman Waters. Thank you very much. I yield back.
Chairman Himes. Thank you.
The gentleman from Texas, Mr. Sessions, is now recognized
for 5 minutes.
Mr. Sessions. Mr. Chairman, thank you very much. I want to
thank the panel that is here before us today and I want to
engage several of the members of the panel.
Ms. Rhee, I listened very carefully when you talked about
liquidity, and liquidity in the marketplace is always an
indication to me about what is available and what exists and
those sorts of measures, and I, with great interest, listened
and I appreciate your comments.
Dr. Sahm, in looking at your written testimony on page--
well, the pages aren't here, so maybe 5 pages back, you talk
about changes in State revenues during COVID. And I note, among
others, Delaware, a huge increase of revenue to the State, and
I don't know whether this was above what was projected or what
it could be.
Did this include Federal money that would flow in or just
revenue generated by the State?
Ms. Sahm. No, these were just revenues by the State, but
they include, say, corporate profit, income taxes. So, that is
an important piece of Delaware.
The point of that chart is mainly to show that there are
wide variations in the tax revenue shortfalls, and to your
point or to your question, largely, the shortfalls were less
than expected in March of 2020.
Mr. Sessions. Yes, and in looking at those, I looked at
California as being a significant increase. Is that an
indication about business as usual and increases in a, ``COVID
era,'' or what would you look at that and draw a conclusion
about?
Ms. Sahm. Year to year, we do expect increases in tax
revenues. So the particular numbers, say, for the State of
California, I wouldn't generalize so broadly in terms of how
much relief they got in this crisis.
And also, this is only the tax side. Expenditures rose in a
lot of places. Again, I think that that is a really good
argument as to why the Municipal Liquidity Facility could have
been better targeted, and you might argue that the direct aid
that was in the American Rescue Plan could be also to where
there is really economic distress.
Mr. Sessions. Yes. And I think that is a point, going back
to Ms. Rhee, you need to look at the liquidity to see how sick
the patient is or how well the patient might be to draw that
conclusion.
Mr. Russo, in looking at your testimony, which, I really
appreciate, today, the Wall Street Journal has an article that
I engaged the president of the Dallas Fed on--really, he
engaged me on it--and that is the Fed prepares to pull back on
stimulus.
The president of the Dallas Fed talked to me about how he
believed--and I think the word is, ``tamper''--put a brake on,
reduce. The Wall Street Journal today talks about, really, what
I think should be part of this hearing. So, I am going to make
it part of the hearing.
The projections Wednesday show half the officials expect
interest rates would need to rise. The main catalyst--going to
another paragraph--of the problem is the fact that inflation
has accelerated faster than anticipated and it is remaining
elevated.
At some point, there is danger to what we are doing, isn't
there? Can you lend too much money or accelerate the
marketplace beyond normal? What would you say about that?
Mr. Russo. Sir, thank you for the question.
I think what you have articulated there is correct. The Fed
often looks at what they say are balances of risk. In the last
decade, the balance of risk has really been to the downside for
recession and for low inflation or even deflation.
Entering the coronavirus pandemic, my perception is that
they were trying to address that immediate issue with as much
monetary stimulus as they could, and I approve of those
actions--things like lowering interest rates to zero, doing
large-scale asset purchases, acting as an actual lender of last
resort.
Those, I think, are on point. And so long as the Fed
remains independent, they can modify those actions as
appropriate to keep inflation on track and that is, again, I
think, the important thing, their independence to be able to do
that.
Mr. Sessions. Thank you.
One question to the panel. And anybody can answer this.
During the last 2 years, there has been an extensive amount of
national debt that was taken on, in the trillions. What would
we anticipate the interest rates to be next year, just off that
new loan amount?
Has anybody looked at that, the interest payments that we
will need to make in 2023, just based upon the extension of
monetary money in the last 2 years?
Mr. Russo. Sir, based on where we are right now, in
general, interest rates are predicted to remain low, at least
into next year. Going further out, you might have more
uncertainty.
There is a question, though, as you have raised, I think
you are alluding to, that the unsustainable rise in debt could
lead to a situation either through a debt crisis, or not even a
crisis, in which you have sustained higher interest rates. That
is an economic possibility. We have seen many times in history
before--
Mr. Sessions. Mr. Chairman, if I could just have one more
minute, sir?
I am talking about the fact that we will have to pay
interest.
Mr. Russo. Yes.
Mr. Sessions. New interest payments based upon what has
occurred over the last 2 years. What is that incremental
amount? Has anybody figured that out at near zero interest
rates, but we still have to pay interest on this. Does anybody
know what that might be?
Mr. Russo. Sir, I don't have that number. But I would be
happy to talk to you afterwards and get that number for you.
Mr. Sessions. Right. Thank you very much.
Mr. Chairman, thank you very much.
Chairman Himes. Thank you. The gentleman from New York, Mr.
Torres, is now recognized for 5 minutes.
Mr. Torres. Thank you, Mr. Chairman.
Mr. Russo, I know you had a brief exchange with the ranking
member regarding climate change. My first question is, do you
think climate change is an emergency?
Mr. Russo. Sir, thank you for the question. With respect, I
am not an expert on climate change. I am here to talk about
monetary policy where I have expertise, not my personal views.
Mr. Torres. Right, but whether climate change is an
emergency will determine whether it poses a risk to the
financial stability of the country.
I have a question for Mr. Konczal. The House Select
Committee on the Coronavirus Crisis found that the credit
facilities of the Fed lend disproportionately to oil and gas
companies.
Do you think that the Fed is planting the seeds of long-
term financial instability in lending so heavily to fossil fuel
companies?
Mr. Konczal. The studies about the SMCCF, basically, found
that it helped industries across-the-board, and that specific
study found that it under-lent to finance and over-lent to many
other industries, including oil and gas.
The Fed should be accountable to that and should answer
Members' questions about whether or not their distribution of
the assets they purchased in the SMCCF is correct or not.
I think the biggest issue right now is the systemic risk
that climate poses to the financial system. There are very
basic and easy supervisory actions that they can take outside
the rulemaking process to force companies and banks to disclose
their exposures to climate.
Notably, insurance companies and asset managers like
BlackRock are trying to get this information and they have a
very difficult time doing that. That is the perfect spot for
regulators to interject that.
Mr. Torres. The stabilization of credit conditions during
COVID, it has been said, had more to do with the announcement
of the lending facilities rather than the lending facilities
themselves.
But as has been noted, these lending facilities,
particularly the Main Street and the Municipal Liquidity
Facility, have been shown to be ineffective.
Do you think that undermines their ability to be a
psychological backstop in the future, and does that strengthen
the case for reforming them?
Mr. Wooden?
Mr. Wooden. Just to clarify, did you say they have been
shown to be ineffective or effective?
Mr. Torres. Ineffective. The Municipal Liquidity Facility
had only two borrowers and, as I understand the Main Street
Lending Program, even though it had $600 billion of capacity,
it only lent $16 billion. So, that is hardly a success story,
in my mind.
Mr. Wooden. I believe it is a success story, not because of
the amount of capital, which represented about 2.3 percent
programmatically, but because of what it did for the market and
the access it provided and that stability at a time of extreme
volatility.
I think that is one extremely important metric of success.
As we have touched upon, actual delivering of capital and
support to municipalities across this country in that metric
was not as successful. But the first metric--
Mr. Torres. No, I will concede the point about psychology.
But how do we restructure these programs to be more effective?
Mr. Wooden. In the recommendations in my written testimony,
standing up a program now because speed is key. But what
happens, and we have seen this with virtually every fiscal
stimulus support program is it goes so fast and there is so
much that is missed.
And that is why I am recommending standing up a program not
for permanent ongoing usage but in advance. So, we look at
issues of size of municipalities. In the State of Connecticut,
there wasn't one municipality that could benefit from it as
initially structured to when it was revised. But standing these
up in times of fiscal distress will allow us to execute more
quickly and address some of these deficiencies that we are
highlighting today.
Mr. Torres. Mr. Konczal, according to Moody's, corporations
are 63 times more likely to default on loans than States and
municipalities, and yet States and municipalities, as well as
small businesses, were subject to a much steeper penalty rate.
I have the impression that the Fed is much more favorable
to corporations and Wall Street than to Main Street and States
and localities. Is that a fair analysis, or what is your
impression?
Mr. Konczal. That is absolutely true that as an empirical
matter, in the financial research that municipalities default
much less than their equivalent credit ratings from the ratings
agencies, which put them at a huge disadvantage for accessing
capital for our schools and for our roads and everything else.
I think the Fed was very selective and material even on how
it picked its discount rate it applied and where it applied it,
and in the future it should be held much more accountable and
much more standardized about how it does that.
Mr. Torres. My time has expired.
Chairman Himes. Thank you.
The gentleman from Texas, Mr. Williams, is now recognized
for 5 minutes.
Mr. Williams of Texas. Thank you, Mr. Chairman.
And thank you all for being here today.
The Federal Reserve took extraordinary measures during the
pandemic because there was so much economic uncertainty
surrounding the virus.
Now, looking back, it seems like we may have misjudged the
level of government involvement that was necessary to keep
businesses aloft with some of these lending facilities.
The private sector was willing and able to help businesses,
and many of the Federal Reserve actions were not utilized to
the extent that we assumed they would be needed.
So if we misjudged the need for these facilities when we
were in the heart of the pandemic, then we should not continue
the practice of having the Federal Reserve competing, as we
have talked about today, with the private sector when they are
able to provide proper liquidity for businesses.
Mr. Russo, can you talk about some of the unintended
consequences if we try to make these emergency measures
permanent and constantly have the government competing with the
private sector, which, I believe, is the power of America, the
small businessman?
Mr. Russo. Thank you, sir, for that question. I think it is
a very important one.
Let us take a step back and look at the economics. What are
we doing when we set up an Emergency Lending Facility to
provide credit, not liquidity? We are setting a price. We are
setting a price for credit of States, municipalities,
corporations, and businesses on Main Street.
Can the government set prices as well as a market? In my
view as an economist, no, they cannot. I believe that is
supported by over a hundred years of academic research on this
issue.
We get outcomes that are not the outcomes we could achieve
via market as a market is able to bring together all the sort
of information that a central planning board cannot.
Mr. Williams of Texas. Okay. Thank you.
I am greatly concerned that some Democrats in Congress are
looking to the Federal Reserve and other regulators to enact
their radical agendas when they fail to get them passed in
Congress.
As some of you may be aware, I am in the car business. I
have been a car dealer for 52 years, and I was targeted under
Operation Choke Point when some of our agencies took a more
proactive approach to achieve their policy goals.
For those of you who may not remember, the Obama
Administration decided which legal industries posed a risk of
money laundering and, therefore, must be debanked and denied
financial services. I was involved in that.
Bureaucrats behind closed doors were targeting legal
American businesses, and there was no recourse if you were
being targeted by our own government.
I am concerned the Federal Reserve will get back into the
business of picking winners and picking losers if we set up
permanent lending facilities with specific policy objectives.
So, again, Mr. Russo, can you talk about some of the risks
that could happen when the Federal Reserve sets up facilities
with specific policy goals outside of their dual mandate?
Mr. Russo. Yes, sir, and I share your concerns in what you
have articulated very much.
In general, when the Fed has less independence to set
interest rates and to do its large-scale asset purchases, it
politicizes that process. But these are not political
questions--the appropriate Fed funds rate, for example.
But by involving Congress, you will make the Fed less
effective not only in its everyday interactions or its everyday
actions like choosing how much to buy on Wall Street.
But even more than that, in a time of crisis, reducing the
Fed's independence has been shown in the past to reduce its
effectiveness in a crisis.
Let me give you one important example. Back in the Great
Depression, the Reconstruction Finance Corporation (RFC), set
up by Congress, was like a lender of last resort. Congress,
unfortunately, leaked the list of borrowers to the RFC and that
created great stigma for those borrowers, worsening the effect
of the Fed's interventions for the next hundred years. There is
now stigma around the Fed's discount window.
So, there are real risks here that are not easily
understood when you involve Congress in the monetary policy
decisions of the Federal Reserve.
Mr. Williams of Texas. I have a minute left.
Mr. Russo, I am going to let you have that time. I wanted
to give you the opportunity to talk about inflation and some
questions that you would like to get answered from Chairman
Powell since he will be before our committee next week.
Mr. Russo. Thank you, sir.
Let me just emphasize that I agree with the monetary policy
actions taken by the Federal Reserve. They have gotten national
income up to where it would have been in the absence of the
pandemic, and in my view and the view of my colleagues at the
Mercatus Center at George Mason University, that is a good
metric for how a successful monetary policy is going to be.
One question I would ask Chair Powell is, where, in his
mind, are thresholds for reexamining his views about inflation,
which, as you and others have articulated, he views as
transitory?
We have seen inflation expectations rise, and again, I
don't want to be an alarmist here. I believe that inflation is
transitory. But in his view, if we have inflation expectations
from, say, 3 to 4 percent or to 5 percent, where would he pause
and reexamine? I think that would be a very important question
to ask him.
Another question, and I think he would be reluctant to
answer but I think it is important to ask anyway, is what is
his timeframe for thinking about average inflation targeting?
Over the past 6 years, we have averaged 2 percent
inflation, according to the Fed's preferred measure. With all
the inflation we have had, again, we have gotten national
income right back on track. How long a window is he looking at?
Mr. Williams of Texas. Thank you.
Mr. Chairman, I yield back.
Chairman Himes. Thank you.
The gentlewoman from Pennsylvania, Ms. Dean, is now
recognized for 5 minutes.
Ms. Dean. Thank you, Mr. Chairman. And thank you to all of
our witnesses today.
And I am really delighted that the chairman chose to have
this hearing to examine and measure what successes we had in
this past year during an incredibly challenging time to health
and to our economy, and to learn what we can learn for the
future, to do it better in the future when other crises arrive.
One thing I wanted to look at is a possible barrier that we
believe took place last year. In July of last year, at our
hearing on monetary policy and the state of the economy, I
asked Chairman Powell about Nationally Recognized Statistical
Rating Organizations (NRSROs), and the Fed or Treasury's
decision to accept only ratings from the big three for
businesses applying to Emergency Lending Facilities.
We saw that the lending facilities were underused during
the pandemic. I will start with Mr. Konczal, do you believe
that accepting only the three big rating agencies was a barrier
to some businesses in their application for support?
Mr. Konczal. I believe the fundamental barrier for uptake
on a lot of these programs, for the physical loan uptake, was
the fact that there was a downside from the point of view of a
business of having a penalty rate but no corresponding upside.
So once the market stabilized, many borrowers could turn to
the market and, thus, really what the Fed was doing was setting
the interest rate in the same way it sets the short-term
interest rate.
I don't know enough about the nature of the ratings agency
business right now to answer.
Ms. Dean. Ms. Rhee, would you care to comment on that?
Would it have helped if small businesses who had acceptable
credit ratings with other nationally recognized rating agencies
would have been able to apply?
Ms. Rhee. I am specifically informed on the national rating
agencies part of it. But one of the reasons why the Fed does
have all the requirements and the barriers that goes in is,
really, these facilities are really meant to be emergency. It
is really meant to be short term. We talked a lot about how it
acts as sometimes a kind of a restarter for the market, a
backstop for the market.
So in some sense, I think just focusing on the utilization
itself is really not a fair judgment on whether a program was
effective or not. There are various factors that you look at,
and also look at what really was the intention of these
facilities when they were first announced by the Fed and the
Treasury.
We need to remember that when the Fed is enacting these
13(3) authorities, and announcing these facilities, it is
really in the hopes of returning the markets back to normal,
and then also exiting pretty quickly so that it is not
affecting the markets in the long term.
Ms. Dean. I appreciate that, and my questions are a way of
putting in a shameless plug for legislation that I introduced
last year, along with Chairwoman Waters and Ranking Member
Barr, which we did pass in a bipartisan way, that would have
the Fed treat all national credit rating agencies uniformly.
I hope we will be able to do that so the barriers to small
businesses, women-owned businesses, minority-owned businesses,
will be reduced in any way that we can.
I think I still have a moment.
Treasurer Wooden, in your testimony, you recommended a
number of reforms to the Municipal Liquidity Facility,
including establishing a permanent emergency program.
Would you mind just fleshing that out a little more?
Mr. Wooden. Sure. With these programs, we always, in the
first few weeks or months, discover in a moment of crisis how
many deficiencies exist, and going through this experience--
they say you should never let a good crisis go to waste, right?
In this case, we have a lot of learning from that, and I
think standing it up--because we do need the speed with which
Congress moved last time. We just need a better product.
And if we take the time now to incorporate the lessons,
improve on those deficiencies, and still leave it as an
emergency use authorization, that will create a better product
as well as going back to the State of Connecticut's experience,
we would have had to--and I drafted legislation to allow
municipalities to access the Federal program through the State
of Connecticut.
We had to stand that up. So, we couldn't use it. But having
an existing shelf-ready program will allow States and
municipalities to put mechanisms in place in advance should
that fiscal crisis emerge.
Ms. Dean. I thank you all for your thoughtful answers, and
I yield back.
Chairman Himes. Thank you.
The gentleman from Arkansas, Mr. Hill, is now recognized
for 5 minutes.
Mr. Hill. Thank you, Mr. Chairman. I appreciate Chairman
Himes and Ranking Member Barr for holding this hearing, an
opportunity to visit with all of you about your suggestions on
the recent crisis and the Fed and the Treasury's response to
it.
I spent the last--well, since April of last year, I have
been on the Oversight Commission appointed by Mr. McCarthy to
oversee the Fed and the Treasury's response, and it is down to
just Pat Toomey and me because Leader Schumer and Leader Pelosi
have not appointed any Democrats to that oversight
responsibility.
So, I don't know how seriously they take overseeing the
post-CARES Act funding. But let me make a couple of points.
One, I agree with Mr. Russo and Ms. Rhee that this is an
emergency facility, and the guardrails around that include all
of the things that Mr. Russo pointed out, including a penalty
rate, short term, abundant collateral, exigent circumstances,
broad-based eligibility, so that the Fed isn't targeting and
playing favorites and it is short term.
So the ability to, ``have a permanent emergency,'' is,
truly, the oxymoron that that is. We can't do that. We won't do
that.
And I would remind my friends on the other side of the
aisle that these classic, ageless, timeless central bank rules
about lending as the last resort in an emergency were codified
by whom? Democrats, in the Dodd-Frank Act.
And I agree with that aspect of the Dodd-Frank Act. I think
we should be very vigilant about not turning the Fed into, as
Mr. Russo says, a credit-allocating piggy bank.
Now, to my friend from New York saying that somehow these
facilities benefited the oil and gas industry, certainly not in
the TALF, which was trying to help short-term credit for
borrowers, student loans, housing, credit cards, certainly, not
in the corporate program that bought a broad section of
corporate bonds and corporate ETFs, certainly not in the
emergency facilities for airlines or for the defense industry.
So that leaves either the Municipal Liquidity Facility--I
don't believe there were any energy companies in the two
loans--or Main Street.
Now, Main Street--I looked it up while we were sitting
here--made 1,830 loans for $17.5 billion on Main Street. Eight
percent was to anybody in an industry classification of oil and
gas or mining. Eight percent.
So, I don't think that is overwhelming. I don't know what
oil and gas and mining are as a percentage of the GDP. But I
will also tell you that at the moment this crisis hit, oil and
gas prices collapsed. Reserve valuations in the oil and gas
industry collapsed last March--please remember that--and people
could not access the public markets.
So, I think the Fed and the Treasury, under the
circumstances, did outstanding work, and I think this Congress
responded to the emergency to benefit State and local
governments.
So, Mr. Russo, on this aspect of Federal credit allocation,
did that work well with syn-fuels with Jimmy Carter?
Mr. Russo. I'm sorry, sir. I missed the very end of your
question. Did it work well with--
Mr. Hill. With syn-fuels loan, with Jimmy Carter.
Mr. Russo. No.
Mr. Hill. You weren't born. But did it work well? Your
answer is no. Thank you.
Mr. Russo. That is why I didn't understand the reference.
Mr. Hill. How about Solyndra in the recovery plan after
2009? Was Solyndra a good allocation of credit?
Mr. Russo. I don't have an opinion, but I don't believe the
Wall Street Journal thought so.
Mr. Hill. Yes. Okay.
Let me say that when we get into the direct credit
allocation business we get into trouble, and we compromise the
Fed's credibility and independence.
And I will tell you, look at the national security loans in
the CARES Act authorized by this Congress. We helped airlines.
We were to help the defense industry.
I would ask you to read the Oversight Commission reports on
the defense industry. We loaned $750 billion to Yellow Freight
because it was essential, according to DOD, to national
security, when all of the testimony before our Commission said
it was not essential to national security.
Therefore, the largest loan there is, really, probably done
not in accordance with the CARES Act statute, but it was made.
It is an emergency. It is a crisis. But that is why credit
allocation is so troubling.
Mr. Chairman, I don't know what this legislation was that
was attached to the bill. We haven't talked about it today. So,
I have concerns why that has been noticed for this hearing but
never discussed.
So with that, let me yield back my time, and thank the
subcommittee and the witnesses.
Chairman Himes. Thank you.
The gentleman from Illinois, Mr. Garcia, is now recognized
for 5 minutes.
Mr. Garcia of Illinois. Thank you, Chairman Himes and
Ranking Member Barr, for holding this important discussion, and
I want to thank our witnesses for joining us today.
When I first saw that the Federal Reserve was establishing
a facility to help municipal bonds, I was relieved because I
know firsthand how challenging the municipal bond market can
be.
I served in the Chicago City Council, in the Illinois
Senate, and on the Cook County Board. Unfortunately, our bond
ratings make national news. But what that means for us who live
in working-class communities like mine is that schools,
clinics, and libraries closed. It means that my neighbors worry
about pay cuts and layoffs every budget season, and you don't
need an economist to see that makes our economy worse.
So, I had hoped that the Fed's Municipal Liquidity Facility
would offer some relief, but I represent one of the very few
communities that actually used the MLF and there is a reason
many jurisdictions didn't sign up for the program. My State,
Illinois, had to attest that we couldn't get financing in the
private market before getting help from the MLF, and once we
got help, the rates were barely better than the private bond
market.
So, I would like to direct my first question to Mr. Wooden.
When the Fed helped out the corporate bond market last year,
did they have to deal with similar terms, and the same level of
stigma?
Mr. Wooden. With respect to--I did not follow the corporate
bond market as I did with the municipal markets. But from my
general knowledge, I think the answer is, of course not. There
is always a different standard with respect to the corporate
markets than the municipal markets.
Mr. Garcia of Illinois. Okay. And do you think that the
Municipal Lending Facility was designed fairly or did it
stigmatize municipal borrowers?
Mr. Wooden. I will give you my, in the midst of the height
of the pandemic response, which is that I thought it was unfair
to State and local governments at the time--the penalty, the
off-market rates, and the burdens associated with accessing it,
and, certainly, the fact that it was designed so that not one
municipality in the State of Connecticut was eligible for it.
With that said, given how our finances turned out in the
State of Connecticut and our ability to access the traditional
markets and how the facility stabilized the markets, more
broadly, there was, certainly, a benefit to the State of
Connecticut and to most States in the country as a result on
that metric but not in our ability to actually help
municipalities in the midst of the pandemic.
Mr. Garcia of Illinois. Thank you.
Ms. Sahm, we are now going through a major crisis but, of
course, that doesn't seem to be anything new. Every few years,
municipal budgets get squeezed because of problems in
Washington or on Wall Street.
After the last financial crisis, municipal defaults and
bond rating cuts hurt cities across the country and cut our
recovery short. The MLF was a good idea but it was too little
and too limited.
How can we proactively address municipal bond issues in the
future so that my neighbors don't worry about budget cuts and
layoffs because of problems they didn't create?
Ms. Sahm. Right. I think one step forward would be to
create more certainty, so to take this time to really structure
those programs, make sure municipalities know how to access
them--to the point, make sure more municipalities can access
them if they need to.
I think we have heard a number of times this question of
whether Emergency Lending Facilities are permanent or not. That
power is in the Federal Reserve Act. Now, it has to be
authorized by Treasury.
But Emergency Lending Facilities will be used in future
crises, and I very much hope they will be used for State and
local governments, and that means that we should do everything
we can to make sure they work for State and local governments.
And I agree there is a long way to go here.
Mr. Garcia of Illinois. Thank you very much, Mr. Chairman.
I yield back.
Chairman Himes. Thank you.
The gentleman from Ohio, Mr. Davidson, is now recognized
for 5 minutes.
Mr. Davidson. I thank the chairman, and I thank our
witnesses for participating in this hearing, and our
colleagues.
But I really want to take a little bit of time to explain
what happened, not a theory, but what happened, because there
is really a range of things that I think have been misstated as
part of today's hearing.
Perhaps, people just don't understand. I note that there
aren't any actual market participants here. Municipal bonds--to
the treasurer, thank you for coming--are a huge part of the
market and a big part of what we are talking about today.
But during the last half of March and, really, a lot of
April of 2020, the Federal Reserve acted boldly and decisively
in an unprecedented way. I think PhDs will be writing for
decades about what went right and wrong there.
But for the action of the Federal Reserve, and 13(3)
provisions, which were, frankly, stretched to the max of their
statutory limit, we would have really had a massive collapse in
our markets.
Markets work when there is equilibrium between buyers and
sellers, and there was no buy side. I spoke to a hedge fund
manager who had $800 million in cash on his balance sheet at
the time in a pretty conservatively managed fund, and in a
period of 10 days, they burnt through over $500 million in
margin calls.
What are margin calls? Everyone in the room understands,
but not everyone listening or watching does. So, if a company
has a 50-percent leverage, i.e., they have borrowed 50 percent
and they put 50-percent equity in, and the value of, say, $10
million worth of bonds goes down to $4 million, well, now they
have a $3 million margin call. So call after call after call.
The market was in freefall. It was true in municipal bonds.
There was no buy side.
So, why did the Municipal Liquidity Facility work? Well, it
wasn't because of the two loans they made, Mr. Torres. It was
because of the hundreds of billions of dollars of loans that
were facilitated because the market now knew there would be a
buy side.
So, the freefall stopped. The margin call death spiral
stopped. It literally bankrupted hedge funds, and no one is
really sympathetic to hedge funds, but what happens when they
fail? Well, the pension dollars that are in those funds go
away.
So your teachers, firefighters, policemen, and whatnot are
out money. The hardworking men and women of America who are
counting on us to make this work are hurt.
And without decisive action, without these facilities, our
market would not have worked.
Now, there are some people who don't actually want us to
have a market economy, and when they say they want to
fundamentally remake America, that is code for they don't
actually want a market anymore. They want a centrally-planned,
centrally-controlled financial system and, frankly, one of the
features of our current monetary policy where we are no longer
constrained by the amount of tax revenue we collect or even
constrained by the amount of money we can borrow is that it
threatens our financial system. It could actually collapse it.
Now, it is hard to believe that people will actually think
that is a good thing, and very few will admit it publicly. But
this is something that people who support modern monetary
theory believe.
They believe--maybe some do--that it can continue to work
because we have a currency, and this is where things have
shifted. We went from good decisive action by the Fed in March
and April to monetizing debt. The Fed's balance sheet has grown
to $8 trillion. They have continued to inject $120 billion a
month in a predictable way.
They have two roles. They are supposed to protect stable
prices as the dollar as a store of value, and they are supposed
to promote full employment. They are not doing well on either
metric.
And their last role is as a regulator. As a regulator, they
have been schizophrenic. They have been encouraging all this
liquidity in the marketplace. Lots of the cash has flowed to
banks but then they are discouraging banks from making loans.
So because of that, they have acted as a lender of last
resort, and Mr. Hill and others, and Treasurer Wooden, I think
you highlighted some of the challenges that could be managed if
there was a predictable way 13(3) worked.
But, of course, it has to be known as an emergency, not a
structural way to operate. So, I wish there was a market
participant in the room.
I wish we could go into depth on all of the reasons why
modern monetary theory is a fallacy and why Congress, this
body, actually has to be responsible in setting parameters and
providing oversight.
But I wanted to use my time differently than expected, just
to correct the record. I yield back.
Chairman Himes. Thank you.
The gentleman from Massachusetts, Mr. Auchincloss, who is
also the Vice Chair of the Full Committee, is now recognized
for 5 minutes.
Mr. Auchincloss. Thank you, Mr. Chairman.
Mr. Russo, in your written testimony you indicate your
concern with monetary policy becoming credit policy and the
threat to political insulation that comes from that. I think
those are reasonable concerns.
You also refer to six programs that were stood up under the
Emergency Lending Facility that were designed to provide
liquidity to the shadow banking system, which is not eligible
for lending through the Fed's traditional lender of last resort
tools.
Can you explain more what the shadow banking system was in
this circumstance?
Mr. Russo. Yes. Thank you for that question, sir.
The shadow banking system is, effectively, financial
institutions on Wall Street that act like banks but that don't
fall under the Fed's usual regulatory apparatus.
They don't have access to the discount window, which is the
Fed's usual tool. These six programs I highlighted, these were
things that we were going to try to solve with Dodd-Frank, but,
in my opinion as an expert, were unsuccessful.
For example, lending to the primary dealers, making sure
they have the liquidity to keep markets moving, something that
we would hope had been solved by Dodd-Frank. But I think that
was incomplete.
So, I am uncomfortable with these programs. But in a
crisis, given that it is an emergency, I understand that this
is sort of an extension of lender of last resort to the shadow
banking system.
Mr. Auchincloss. Would you recommend that we incorporate
the shadow banking system into the rules that allow the Fed to
be a lender of last resort or that we regulate the shadow
banking system so that they are no longer banking?
Which one should we remove, the ``shadow'' or the
``banking'' from the shadow banking system?
Mr. Russo. Sir, I think that is an excellent question.
I am a bit off my skis here. Let me refer to a colleague of
mine who wrote a paper for the Mercatus Center on this topic
and about COVID-19.
One of his recommendations was moving the shadow banking
system under the umbrella of Fed regulation. Another thing that
he mentioned specifically, for example, the swap lines that the
Fed created to swap dollars with foreign currencies at other
central banks.
He, instead, suggested that Congress end those, and that
foreign banks that have liquidity problems in dollars, use
their local branches in New York to borrow from the discount
window as intended.
Mr. Auchincloss. Understood. You also referenced 10
programs that were intended to assist Congress and the Treasury
in allocating credit beyond the traditional lender of last
resort doctrine. And I know, of course, that you are very
concerned about these that these are really moving into credit
policy with monetary policy.
Basic question here, why is it that Treasury itself
couldn't give loans? Why did the Fed have to backstop those
loans?
Mr. Russo. If I understood the rationale correctly, when
you were passing the CARES Act, you desired for the Fed to sort
of act as a source of leverage. So, the Treasury committed X
amount and the Fed tried to leverage that up by printing money,
essentially.
And that was one of the views that was given. I think
another--and again, here, I am really speculating on your own
intentions--but it might be because the Fed as a central bank
has people who are very smart and able to work in these
incredibly difficult situations and have connections to market
participants.
I don't want to judge what was done in the past. But
looking ahead, let us get the system right so we don't have to
do it through the Fed again.
Mr. Auchincloss. Dr. Sahm had said in the last back and
forth that these Emergency Lending Facilities are here to stay
with the Fed, that they are statutory and that we should expect
to use them again.
I saw that you were shaking your head as she was saying
that. Are you disagreeing that they are permanent or are you
disagreeing that they should be used again or--
Mr. Russo. Sir, thank you.
I hope they are not permanent. And I am not a lawyer. I can
only read the plain language of the law. And so, when the Dodd-
Frank Act amended 13(3) to say that the 13(3) lending must be
broad-based in unusual and exigent circumstances, ``unusual and
exigent'' doesn't mean every day. Again, for the Fed's
independence, I would strongly urge Congress not to make these
a permanent part of the Fed's arsenal.
Mr. Auchincloss. Would you--and Dr. Sahm, please jump in
here--recommend that Congress provide more detail about what,
``unusual and exigent'' means?
Ms. Sahm. Right. And to be clear, I wasn't saying that I
think these should be standing facilities. I was just pointing
out that 13(3) is in the Federal Reserve Act. It is absolutely
the authority of Congress to amend that.
I think, in general, more broadly than your question,
Congress should really lean into its role of defining what it
wants the Fed to do. The Fed is going to follow orders. It is
good at that.
But guidance from Congress will help it achieve what you
all want it to achieve. So, what are exigent circumstances can
be defined. That language has been in there a long time.
Mr. Auchincloss. Ms. Rhee, in my last 30 seconds here, do
you want take a crack at it, given that your expertise is in
systemic risk? If you had to define unusual and exigent
circumstances in 20 seconds, how would you do it?
Ms. Rhee. I don't know if anyone can actually define that.
That is kind of prescribing what is going to happen in a
financial crisis, trying to decide what the predicators are for
a financial crisis. And I think that has been unsuccessful.
I think it is, really, you need to depend on the experience
of the policymakers. You also have to look beyond the U.S.
example and see what kind of creates a financial crisis and
what indicates that we are in a systemic risk.
I think one of the challenges--
Mr. Auchincloss. Ms. Rhee--may I ask one more question?
Are you familiar at all with the work that the Santa Fe
Institute has done on predicting systemic risk and--
Ms. Rhee. I have heard about that, yes.
Mr. Auchincloss. --do you think that that could be a tool
used by policymakers to understand where risk is getting so
correlated that it is becoming systemic and might be unusual
and exigent?
Ms. Rhee. I think there may be various factors, indicators,
that you can use. IMF has some indicators also.
But be it all that, it is going to be hard to prescribe
exactly what it means because the financial market is changing.
There are different factors and products that are going to come
out.
Mr. Auchincloss. Understood.
Mr. Chairman, thank you for the leniency. I yield back.
Chairman Himes. Thank you.
Since there are no more Members asking questions, we will
conclude this hearing now. I would like to thank our witnesses
for their testimony today.
The Chair notes that some Members may have additional
questions for these witnesses, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
The hearing is now adjourned.
[Whereupon, at 11:46 a.m., the hearing was adjourned.]
A P P E N D I X
September 23, 2021
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