Tags: Bernanke | Senate | banks | Warren

Senate Banking Bids Farewell to Bernanke

By    |   Friday, 19 July 2013 01:32 PM

On July 18, the Senate Banking Committee, chaired by Tim Johnson, D-S.D., held its semi-annual hearing to receive the report from the chairman of the Federal Reserve on monetary policy.

Everyone in the room saw this hearing as the swan song for the two terms of Ben Bernanke, and all of the senators took a moment to praise his service. Under the alternating format of these hearings, the Senate side held the second day of hearings, but it will receive priority here because the Senate is the more powerful body. Also, the Senate hearing lends itself more readily to analysis, because three issues stand out as the most significant topics:

1. Future of Quantitative Easing (QE). Too often in the past, these hearings tended to stray far from the subject of monetary policy, perhaps because few of the senators know what monetary policy is and because they often have what they consider to be more pressing matters, such as whatever was making headlines at the time.

That has changed with the advent of QE. Every senator knows what monetary policy is, most have formulated a view of how the Fed should administer it and the senators collectively surrounded the subject with questions about whether the policy goes too far or not far enough and whether it will be tapered and unwound sooner or perhaps much later.

In response to the many questions, Bernanke repeated his testimony, in which he laid out three stages of withdrawal that are supposed to occur, depending on how the economy performs in the coming months and quarters. One wag has quipped that unwinding QE is like trying to land a jet plane on a residential driveway.

The Fed has consistently sought to reassure the financial world that it has all of the tools it needs to unwind QE when the time is right. When Bernanke assumed the job, commentators said he would face a difficult task in unwinding the accommodative policies of his predecessor, Alan Greenspan. Now that Bernanke has presided over an even looser monetary policy than Greenspan did, the same refrain is heard again, that it will be very difficult for his successor to unwind.

While the president dismissed Bernanke in a historically tactless manner, it was nearly inevitable that Bernanke would be replaced, because otherwise, this president would have served two terms without ever appointing a Fed chairman.

2. Excesses of Wall Street. The two departures from the theme of monetary policy were highly significant. First, Sherrod Brown, D-Ohio, the lead sponsor of legislation to raise the capital requirements to be imposed on the "too big to fail" banks under Basel III, took extra time to lead Bernanke on an excursion through polluted streams and hollowed out mines, beginning with a question on the adequacy of the basic 3 percent capital standard, and he asked whether Bernanke agreed with a statement by Fed Governor Daniel Tarullo that the Fed should lead the major industrial countries toward a higher standard.

Bernanke responded that the Basel process is one of consensus, and the United States is free to adopt a higher standard and should do so in the interest of a safer financial system regardless of whether other countries follow.

Brown then brought up the strong earnings reports of the megabanks, which nevertheless persist in complaining that banking regulations are killing them. He quoted the Financial Times as asking, "Where are the ill effects?" Of course, one could answer simply that there are no ill effects because the higher standards have not been implemented.

However, in his lengthy discourse, Brown argued that in order to make the financial system safer, it would be worthwhile for the largest banks to suffer some reductions in executive compensation, profits and dividends.

He also asked Bernanke whether there is reason to fear that higher capital requirements would result in less credit to support the economy. Bernanke agreed with Brown that higher standards are needed, and he added that the regulators need to monitor the financial system to see if risks are migrating to other segments than the largest banks.

Brown's colloquy with Bernanke proved a perfect segue for Elizabeth Warren, D-Mass., to ask whether what she called the "staggering" profits reported by the largest banks were due to ramping up trading risk, as opposed to "boring banking."

She offered two responses, and Bernanke agreed to one of them. First, she offered the proposal to reinstitute the Glass-Steagall separation between commercial and investment banking that several senators have introduced, but Bernanke insisted that the Fed is "quite aware of these portfolios" and is managing the risk through capital requirements and other regulatory measures such as stress tests.

Then Warren pointedly asked Bernanke whether he agreed with remarks by Treasury Secretary Jack Lew that if, at the end of the year, "we cannot honestly, straight face, say that we have ended too big to fail, we're going to have to look at other options." Bernanke suggested waiting another year, and Warren express satisfaction with that idea.

3. Mortgage Settlement Mess.
Following her modest breakthrough on tightening the capital screws for too big to fail banks, Warren reopened a topic from prior hearings — the fallout from the settlement by the Fed and the Office of the Comptroller of the Currency (OCC) of charges that the largest mortgage servicers have committed "systemic foreclosure fraud."

She referred to a recent announcement by the OCC that checks had been sent out to 52,000 people in Massachusetts averaging $800, which would amount to 0.2 percent of the home values. She complained that she had asked six months ago to get the basic documents, so that the victims could determine whether they were fairly treated, but, "So far, the Fed and OCC have disclosed very little of what I've asked for."

Bernanke responded that the regulators had ended the investigation "well before all 4.2 million were analyzed," but he promised that there would be a report "on this whole thing in the next couple months that will lay out basically all the information we have." He reminded the senator that the recipients of the checks retain the right to pursue the matter further.

Based on the earlier hearings on the mortgage fraud cases, readers might look for another flare-up several months hence or whenever Warren next gets a chance to quiz the regulators, both on this issue and on their squishy policies on enforcing banking laws and regulations against the too big to fail banks.

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On July 18, the Senate Banking Committee, chaired by Tim Johnson, D-S.D., held its semi-annual hearing to receive the report from the chairman of the Federal Reserve on monetary policy.
Friday, 19 July 2013 01:32 PM
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