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Michael C.
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  • Executive Session

    by Senator Mike Crapo

    Posted on 2014-01-06

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    CRAPO. Madam President, Dr. Yellen's nomination is an opportunity [[Page S13]] to review the unprecedented actions of the Federal Reserve over the last several years.

    Five years ago, the Fed began using unconventional monetary policy tools, aggressively pursuing quantitative easing and holding interest rates near or at zero percent.

    The Fed now has a balance sheet of $4 trillion, a level roughly equal to one-quarter of annual U.S. economic output.

    The Fed has accumulated this balance sheet by buying Treasuries and mortgage-backed securities at a pace of up to $85 billion each month.

    I have been a long-time critic of the Fed's quantitative easing purchases.

    Several noted economists have called into question the benefits of these purchases, suggesting they may be outweighed by risks.

    These policies, specifically purchasing billions in long-term bonds, can distort pricing in markets and lead to excessive risk taking, creating ``bubble-like'' conditions according to experts like Larry Fink at BlackRock.

    Bill Gross of PIMCO stated that ``all asset prices, whether it be bonds, stocks, or alternative assets are basically mispriced, artificially elevated'' as a result of the Fed's actions.

    I am concerned that the markets have become exceedingly reliant on quantitative easing, circumventing pure economic fundamentals in favor of government-stimulated economy.

    Although a reduction in the pace of asset purchases will finally begin this month, in her nomination hearing Dr. Yellen would not commit to a firm deadline for cutting off purchases.

    Even after the Fed stops adding to its balance sheet, the question of unwinding the balance sheet remains.

    Chairman Bernanke and others have suggested that the Fed might maintain the size of the balance sheet for some time, rather than reducing it to a normal level.

    This would mean that the money created to purchase those assets would remain in place.

    The President of the Richmond Federal Reserve Bank has called this ``tinder on the books of the banking system.'' He describes a process where banks begin to rapidly lend out those reserves, creating an increase in deposit growth that would put inflationary pressure on the economy.

    All of this unconventional monetary policy has failed to produce the benefits that were promised.

    A noted economist recently observed that over the last 4 years, the share of adults who are working has not increased and ``GDP has fallen further behind potential as we would have defined it in the fall of 2009.'' All that is to say that despite unprecedented amounts of monetary intervention, the economy has barely responded.

    I voted against a second term for Chairman Bernanke due to my concerns with the Fed's unconventional monetary policy.

    I voted against Dr. Yellen in 2010 for the position of Vice Chair for similar reasons.

    Since joining the Board as Vice Chair, Dr. Yellen continues to promote the policies that led me to vote against her initially.

    My position remains unchanged, and I will not vote in support of her nomination.

    In addition to unprecedented monetary policy, the next Fed Chair will finalize several key financial regulatory reform rules.

    These rules must balance the financial stability with the inherent need for markets to take on and accurately price risk.

    They must be done without putting the U.S. markets at an undue competitive disadvantage or harming consumers with unintended consequences.

    The Chair of the Federal Reserve must understand how different rules interact with each other, what impact they have on the affected entities and the economy at large.

    For example, a number of community banks were surprised by certain provisions in the recently adopted Volcker rule pertaining to their ownership of certain securitized products, including trust-preferred securities.

    Notwithstanding assurances by regulators that the final Volcker rule would not disrupt their business model, community banks may now potentially have to divest hundreds of millions of dollars in assets to comply with the rule.

    I am concerned that the rush to finalize the Volcker rule before year's end--for purely political reasons--was a cause of this carelessness by regulators with respect to community banks.

    It remains to be seen what other unintended consequences will result from the Volcker rule's adoption.

    Just as some worried that we did not have enough regulations on the books to prevent the economic crisis, some of us worry that the post- crisis response will result in a regulatory regime that stifles growth and job creation.

    The Chair of the Federal Reserve must understand the need for that balance and how to carefully manage competing demands without harming the economy.

    I appreciate Dr. Yellen's comments about the need to monitor the risks to financial stability that current monetary policy creates.

    I also share her stated concerns about the need to avoid ``one-size- fits-all'' regulations on different kinds of financial institutions, especially ensuring that community banks are subject to ``less onerous'' supervision and regulation.

    However, given my concerns about the Fed's monetary policy and Dr. Yellen's support of quantitative easing and excessively low interest rates, I will not vote in favor of her nomination.

    I yield the floor. I suggest the absence of a quorum.

    The PRESIDING OFFICER. The clerk will call the roll.

    The assistant legislative clerk proceeded to call the roll.

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