DODD STATEMENT ON THE SEMI-ANNUAL MONETARY POLICY REPORT TO CONGRESS

WASHINGTON – Today Senate Banking Committee Chairman Chris Dodd (D-CT) held a hearing on the Federal Reserve’s semi-annual monetary policy report to the Congress.  The committee heard testimony from Federal Reserve Chairman Ben Bernanke.

           

“Today the President signed into law the Wall Street reform bill.  This bill is a comprehensive response to the financial crisis that has devastated our economy.  The bill demands that regulators change the oversight of financial markets and financial institutions in fundamental ways,” said Chairman Dodd.

 

“But while the bill gives regulators substantial new authority, it does not contain the specific regulations that will translate authority into action.  Congress is not in a position to write them.  Those rules and regulations require expert knowledge, and they must adapt over time to changing circumstances.  Congress must rely on regulatory agencies to implement the goals of this reform bill.  However, it is the role of Congress to oversee the actions of our regulators.  Given the importance of getting financial reform right, it is a role that should be pursued with vigor.”

 

“The Federal Reserve is one of the institutions on which Congress will rely most heavily.  The additional authority it has been given is remarkable.” 

 

“As you are aware, I have been critical of the Fed’s past performance, and in fact advocated shrinking the Fed’s supervisory role.”

 

“However, as the financial reform bill worked its way through the legislative process, the Congress decided not only to preserve the Fed’s existing supervisory powers, but to bolster them.  Indeed, Mr. Chairman, you sought these additional powers.  And, as a result, the Fed is central to maintaining our financial stability.  I think it is fair to say that the success of the financial reform law depends in large measure on how the Fed meets its new responsibilities.  It is my fervent hope that, under your stewardship, the Fed will exercise these authorities wisely.”

Below is Chairman Dodd’s statement as prepared for delivery:

“The Committee will come to order.”

 

“We are pleased to welcome Chairman Bernanke, who today will deliver his semi-annual monetary report to the Congress.  The timing of his testimony could not be better.  Key questions about both financial regulation and economic policy will be answered in the coming months.  The Federal Reserve will play a key role in answering them.”

 

“Today the President signed into law the Wall Street reform bill.  This bill is a comprehensive response to the financial crisis that has devastated our economy.  The bill demands that regulators change the oversight of financial markets and financial institutions in fundamental ways.”

 

“It sets up a Financial Stability Oversight Council which will function as an early warning system responsible for spotting and addressing threats to overall financial stability.” 

 

“It creates a new orderly liquidation authority, to provide for the wind-down of large financial institutions whose failure threatens overall financial stability.” 

 

“It makes the markets for financial derivatives much more transparent, and requires regulators to establish capital standards and margin requirements for large derivatives dealers that will reduce the risks posed by these financial instruments.” 

 

“It limits the ability of banks and their owners to engage in risky trading strategies, or to invest in hedge funds or private equity funds.” 

 

“It requires higher prudential standards – including capital and liquidity -- for large bank holding companies and nonbank financial firms that have the potential to put the financial system at risk.” 

 

“It establishes for the first time a Consumer Financial Protection Bureau, with a mandate to focus exclusively on protecting consumers from financial abuses and ensuring that consumers get the financial information they need in a form they can understand.”

 

“But while the bill gives regulators substantial new authority, it does not contain the specific regulations that will translate authority into action.  Congress is not in a position to write them.  Those rules and regulations require expert knowledge, and they must adapt over time to changing circumstances.  Congress must rely on regulatory agencies to implement the goals of this reform bill.  However, it is the role of Congress to oversee the actions of our regulators.  Given the importance of getting financial reform right, it is a role that should be pursued with vigor.”

 

“The Federal Reserve is one of the institutions on which Congress will rely most heavily.  The additional authority it has been given is remarkable:” 

 

“The Federal Reserve will be a member of the Oversight Council, and the insights of its supervisors and researchers play an important part in identifying developing risks to the financial system. 

 

“It will be the Fed’s job to set the heightened prudential standards for the nation’s large banks and nonbank financial companies designated by the Oversight Council. 

 

“The Fed will help to decide when a failing financial firm needs to be put into the new resolution process.” 

 

“The Fed will have responsibility to oversee important financial utilities – including, for example, the clearing houses that will become increasingly central in derivatives markets.”

 

“As you are aware, I have been critical of the Fed’s past performance, and in fact advocated shrinking the Fed’s supervisory role.  While the Fed managed the financial crisis superbly, it did less well in the run-up to the crisis.  It failed to use its authority in HOEPA to prevent the serious deterioration in mortgage underwriting standards and abusive and fraudulent mortgage lending practices that fueled the financial crisis.  It also failed to adequately supervise some of our largest bank holding companies.  These holding companies were allowed to accumulate significant exposures to mortgage-related assets.  The losses they suffered when the house price bubble burst helped to produce the financial crisis from which we have not fully recovered.”

 

“However, as the financial reform bill worked its way through the legislative process, the Congress decided not only to preserve the Fed’s existing supervisory powers, but to bolster them.  Indeed, Mr. Chairman, you sought these additional powers.  And, as a result, the Fed is central to maintaining our financial stability.  I think it is fair to say that the success of the financial reform law depends in large measure on how the Fed meets its new responsibilities.  It is my fervent hope that, under your stewardship, the Fed will exercise these authorities wisely.”

 

“Of course the financial reform law left the Fed’s responsibilities for monetary policy unchanged.  And this gives the Fed more crucial work to do.”

 

“The devastation brought by the financial crisis is still with us.  While output has begun to grow, it is not growing rapidly enough to replace the millions of jobs lost during the crisis.  In the first quarter of this year GDP grew at an unimpressive 2.7 percent.  The unemployment rate in June was still at 9.5 percent, and nearly 7 million workers had been unemployed for 27 weeks or more.  As you have acknowledged in previous testimony, Mr. Chairman, the effects of long-term unemployment -- which destroys job skills and demoralizes those who suffer from it – has the potential to create serious long term problems.” 

 

“Although firms with access to credit markets are able to borrow at relatively low interest rates, the businesses and households that depend on banks for credit continue to find difficulty in accessing credit.  Apart from inventories, investment demand remains anemic, and real fixed investment declined in the first quarter of this year.”

 

“In this less than robust environment, it is not surprising that price inflation is hardly an issue.  Over the past year the CPI has increased by only 1.1 percent, and the core CPI has increased by only 0.9 percent.”

 

“In short, it looks like our economy is in need of additional help.  It is evident that the Fed takes this issue seriously:  the federal funds rate is now near zero, and the banks are now sitting on extraordinary quantities of excess reserves.  But one of the issues I would like to explore with you today is whether the Fed can do more to help expand output and employment.”  

 

“And now I would like to turn to my good friend from Alabama for any opening statement that he may want to make.”

  

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