Tags: Fed | QE | House | Goodfriend

House Subcommittee Looks at Fed's QE

By    |   Monday, 17 Mar 2014 12:16 PM

The House Financial Services Committee's Subcommittee on Monetary Policy and Trade, chaired by John Campbell, R-Calif., held a hearing March 12 titled "Federal Reserve Oversight: Examining the Central Bank's Role in Credit Allocation."

In his opening statement, Campbell declared that the hearing is part of the Subcommittee's ongoing series of oversight hearings in conjunction with the 100th anniversary of the Federal Reserve.

A panel of witnesses represented universities and think tanks, and I would advise that it was of uneven quality. Two of the statements represented familiar positions of the banking industry's opposition to regulation, in the case of Paul Kupiec, a resident scholar at the American Enterprise Institute (AEI), and in defense of the administration's use of monetary policy and other special programs to boost the economy in response to the 2008 episode of the ongoing financial crisis, in the case of Josh Bivens, research and policy director at the Economic Policy Institute, who represented the view of the Democrats.

By far the most rewarding statements were those of two conservative critics of quantitative easing (QE), Marvin Goodfriend, a professor of economics at Carnegie-Mellon University, and Lawrence White, an economics professor at George Mason University.

Kupiec devoted his statement to the economic consequences of bank regulation. As stated in other articles in this series, we know that the banking industry has cast itself as a victim of the financial crisis and has decided to fight regulations intended to prevent yet another crisis episode, as it has fought implementation of previous landmark legislation that was supposed to end the succession of periodic crises due to the high leverage with which the industry is allowed to operate.

Bivens supported the administration policy of using many levers to bring the economy back to what officials consider full potential, that it is good policy to target the housing industry for support and that it is entirely appropriate that bank regulation favor some asset classes, such as mortgage-backed securities, over others.

Goodfriend argued that Fed's actions to support specific sectors of the economy took the Fed beyond its traditional monetary policy mandate into the realm of fiscal policy, which should be the province of Congress.

White agreed with Goodfriend and added that the Fed's programs to support the economy have tended to divert credit toward less productive institutions, including insolvent banks.

In response to a question from Mick Mulvaney, R-S.C., as to what the effect might be on the one-year Treasury rate if QE ended, Goodfriend responded that the one-year rate might not move at all, but the three-year and longer maturities might, and he observed, "The Fed is overselling its ability to manage long-term rates."

I would suggest that this remark could become very significant if the market begins to anticipate Fed actions and rates spike, as they did briefly last summer when the market began to process the fact that the Fed was beginning to taper QE.

(Archived video, witness statements and the staff memorandum can be found here.)

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Robert-Feinberg
The House Financial Services Committee's Subcommittee on Monetary Policy and Trade, chaired by John Campbell, R-Calif., held a hearing March 12 titled "Federal Reserve Oversight: Examining the Central Bank's Role in Credit Allocation."
Fed,QE,House,Goodfriend
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2014-16-17
Monday, 17 Mar 2014 12:16 PM
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