Federal Reserve Transparency Billby Senator Patrick J. Toomey
Posted on 2016-01-12
TOOMEY. Mr. President, I rise this morning to speak about the
legislation we will be considering this afternoon. Specifically, my
understanding is we will be voting on a procedural measure which will
allow us to take up legislation that is commonly known as auditing the
Fed. I want to address that.
Let me start with the context that I think is important to think about when we consider whether we ought to even modestly change the relationship that exists between Congress and the Fed. It starts for me with the simple observation that the financial crisis of 2008 is over. It actually ended a long time ago. It has been a number of years now that our financial system and our economy has not been in the imminent- crisis-meltdown mode that it was in the fall of 2008. In fact, for several years now we have had meager but some economic growth. Our banking system has been massively recapitalized. There is no current or imminent wave of bankruptcies in really any segment of the economy.
Yet despite the fact that we are clearly not in a financial or economic crisis, we have crisis-era monetary policy, policy from the Fed that one would expect to occur--presumably--only in a crisis. The recent very modest change in Fed policy, the movement in the Fed funds rate from a target of zero to 25 basis points to 25 to 50 basis points is arguably the most modest tightening in Fed history. You couldn't even begin to suggest that this is a tightening of monetary policy. This is just a very slightly less easy money policy. That is what we have.
So in my view there are huge dangers and problems that are associated with the Fed pursuing this completely unprecedented and, I would say, radical experiment in monetary policy. I wish to talk about a few of those this morning.
One of the first and clearest problems is because the Fed has kept interest rates so low for so long, the Fed has caused a big misallocation of resources. This undoubtedly caused asset bubbles that are existing today that would not have occurred had it not been for the abnormal monetary policy. For instance, take sovereign debt markets. In many cases--especially in Europe--we have debt issued by governments and the return on those instruments is negative. In other words it doesn't cost the government money to borrow money, which is abnormal. You have to pay interest to borrow money normally. In fact, the government gets paid to borrow money, which is ridiculous and it is extremely abnormal. It has happened in the United States, not at the moment but in recent history. As a result of this Fed policy, we have had the bizarre world of negative interest rates. That is just one category that has clearly been in the bubble.
Most observers believe that the high-yield market, the junk bond market, was in a bubble. That has gone through a very turbulent time and a big selloff--arguably, some of the years coming out of that bubble, but who knows. There has been considerable speculation that there are real estate bubbles, other financial assets. This is inevitable when the Fed distorts monetary policy, and it is a disturbing echo of the distortion that occurred back in the early part of the very beginning of this century, when the Fed's extremely low monetary policy of very low interest rates contributed to a housing bubble which of course ended up collapsing in the financial crisis, but that is just one category of problems the Fed causes with these ultra- low interest rates.
Of course, the second is the corollary that people who have saved money and want to invest in a low-risk investment are completely denied an opportunity to get a return. The savers are forced to--the expression is--reach for yield, which is to say: Take your money out of the bank and buy something else because you are earning nothing with the bank.
Well, you know what, for a lot of people a savings account at the bank is appropriate for their circumstances, for their risk tolerance, but they are driven away from that because bank deposits yield pretty much zero.
Consider the case of an elderly couple who lives in Allentown, PA. They worked their whole lives, saved whenever they could, sacrificed, chose not to squander their money, and they lived modestly rather than lavishly. They did it in the expectation that when they retired, this nest egg that they had worked decades to build, this savings account at the bank, was going to yield a little bit of income to help them make ends meet in their retirement, to help supplement whatever Social Security and whatever pension they might have.
What we have done to those folks--and they are all over America--who have spent a lifetime living prudently, carefully, sacrificing savings, we have said: Well, you made a huge mistake because the government is making sure you earn nothing on those savings.
Joseph Stiglitz is a very respected economist. His research has demonstrated that this zero interest rate and quantitative easing--as it is described, this Fed monetary policy--has contributed significantly to expanding income and wealth inequality. It is not a surprise.
This Fed policy has been very good for stocks. Stock prices have gone up, generally. It has been terrible for people with a bank account. While wealthy people have a lot of money in stocks, people of much more modest means tend to have more of their money sitting in a savings account which, as I have just described, earned zero. So the income inequality problem is exacerbated.
In addition, what the Fed has been doing is encouraging fiscal irresponsibility in Washington. What the heck, borrowing is free, which it basically has been for the Federal Government. Why not run big deficits and borrow lots of money? That is an attitude that some people have. It frankly diminishes the pressure on Congress to pursue sensible and responsible monetary policy. When the Fed is willing to just buy up all the debt and buy it at an extremely low interest rate, it encourages irresponsible behavior.
Now, of course, because the Federal Government has accumulated this $18 trillion mountain of debt, if and when interest rates return to something like normal--which one day they will, whether the Fed likes it or not--then that is a devastating problem for our budget outlook.
So all of this is particularly disturbing to me when you consider that this massive creation of money, this flooding the world with dollars that the Fed has engaged in, does not create wealth. It is the difference between money and wealth.
So some people might feel wealthier when they see stock prices rise if they have stocks, but that can be a very artificial phenomenon. It is an inflation in asset prices. It is not an improvement in productivity. It is not an expansion in our economic output. It is not actual wealth. It is numbers on a piece of paper.
Of course, what the Fed is able to inflate in this artificial means by creating lots of money, well, that can eventually deflate. Whatever good they think they were accomplishing on the way up, why should we think we couldn't see the reverse on the way back down? This is what I think is the fundamental problem. The fact is, we have factors that are holding back our economy that are very real and very important, and the Fed's monetary policy can't correct that.
We have a Tax Code that is completely uncompetitive. It discourages work. It discourages savings. It discourages investment. It makes us less competitive in countries around the [[Page S47]] world that have more sensible tax codes than we have. We need to fix the Tax Code. Monetary policy cannot make up for a badly flawed Tax Code.
We have unsustainable entitlement programs. They are the ultimate drivers of large and growing deficits, and we will not be on a sustainable path until we fix these programs, and monetary policy can't make up for the cloud they cast over our economy. We have a declining percentage of Americans who are participating in the workforce. This is a huge problem for us. Again, monetary policy does nothing about that.
Finally, we have been overregulating this economy on a completely unprecedented scale. The massive wave of overregulation that this administration, and on some occasions Congress, has inflicted on our economy clearly contributes a great deal to the subpar economic growth we have been living through. Again, monetary policy doesn't reverse that. It doesn't change that. It seems to me that, despite all their good intentions, their intentions themselves were flawed in that the Fed seems to be trying to compensate for the flawed policy in these other areas.
Given the magnitude, the persistence, and the dangers of pursuing this kind of monetary policy, I think it is time that Congress reassert its authority over monetary affairs. The Constitution clearly gives Congress the responsibility to mint coins and to print money. In 1914, Congress delegated the management of our currency to the Fed. For a long time there was a sense that we ought to just leave them to their own devices and not pay very much attention. I think those days are past. I think the Fed's behavior obligates us to take a different approach.
One good beginning step is the legislation we are considering today, which would audit the Fed. All it really does is give Congress and the American people the opportunity to examine and understand the mechanics and the thinking behind changes in monetary policy in something close to real time. I think we absolutely need that. I will say that I was a skeptic about this for a long time. I thought: I am not so sure it is such a good idea to have Congress looking over the shoulders of the folks making monetary policy. But I think the dangerous behavior that the Fed has engaged in for years now means they have squandered the right to be independent. We need to have more supervision.
A next step which I think would be very important is for Congress to require the Fed to adopt a rule that would govern monetary policy. If we let the Fed decide what that rule should be and if circumstances require it, in the opinion of the Fed, they ought to be able to deviate from that rule. But they should come and explain to the American people and to Congress when and why they are deviating, rather than have year after year of this bizarre, unnatural policy that is very hard to explain and understand.
So I am going to support the legislation we are considering this afternoon, the audit the fed bill. It is one of many important steps we can take to restore the accountability that the Fed ought to have. It is important that we get on a different path with our monetary policy. I understand it is not going to occur overnight, and it is not going to occur entirely as a result of this legislation. But this policy has been going on too long, and it is time for Congress to reassert its authority.
I yield the floor.
The PRESIDING OFFICER. The Senator from Nevada.