[Senate Hearing 111-839]
[From the U.S. Government Printing Office]


                                                        S. Hrg. 111-839
 
               NOMINATIONS OF: JANET L. YELLEN, PETER A. 
                  DIAMOND, SARAH BLOOM RASKIN, OSVALDO 
                LUIS GRATACOS MUNET, AND STEVE A. LINICK 

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                                   ON

                            Nominations of:

    Janet L. Yellen, to be a Member and Vice Chair of the Board of 
                       Governors, Federal Reserve

                               __________

  Peter A. Diamond, to be a Member of the Board of Governors, Federal 
                             Reserve System

                               __________

       Sarah Bloom Raskin, to be a Member, Federal Reserve System

                               __________

  Osvaldo Luis Gratacos Munet, to be Inspector General, Export-Import 
                  Bank, Federal Housing Finance Agency

                               __________

       Steve A. Linick, to be Inspector General, Federal Housing 
                             Finance Agency

                               __________

                             JULY 15, 2010

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


                   Available at: http://www.fdsys.gov


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 KAY BAILEY HUTCHISON, Texas
MARK R. WARNER, Virginia             JUDD GREGG, New Hampshire
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                    Edward Silverman, Staff Director

        William D. Duhnke, Republican Staff Director and Counsel

                  Joe Hepp, Professional Staff Member

                     Marc Jarsulic, Chief Economist

                   Lisa Frumin, Legislative Assistant

                Mark Oesterle, Republican Chief Counsel

                Andrew Olmem, Republican Senior Counsel

                       Dawn Ratliff, Chief Clerk

                     William Fields, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)





















                            C O N T E N T S

                              ----------                              

                        THURSDAY, JULY 15, 2010

                                                                   Page
Opening statement of Chairman Dodd...............................     1
Opening statements, comments, or prepared statement of:
    Senator Shelby...............................................     9
    Senator Reed.................................................    10
    Senator Gregg................................................    12
    Senator Brown                                                    12
        Prepared statement.......................................    35
    Senator Kerry
        Prepared statement.......................................    35
    Senator Mikulkski
        Prepared statement.......................................    37

                               WITNESSES

Dianne Feinstein, Senator from the State of California...........     2
Benjamin L. Cardin, Senator from the State of Maryland...........     4
Paul Sarbanes, former Senator from the State of Maryland.........     5

                                NOMINEES

Janet L. Yellen, of California, to be a Member and Vice Chair of 
  the Board of Governors, Federal Reserve System.................    15
    Prepared statement...........................................    38
    Responses to written questions of:
        Senator Shelby...........................................    43
        Senator Vitter...........................................    46
Peter A. Diamond, of Massachusetts, to be a Member of the Board 
  of Governors, Federal Reserve System...........................    16
    Prepared statement...........................................    38
    Responses to written questions of:
        Senator Shelby...........................................    50
        Senator Vitter...........................................    55
 Sarah Bloom Raskin, of Maryland, to be a Member, Federal Reserve 
  System.........................................................    17
    Prepared statement...........................................    39
    Responses to written questions of:
        Senator Shelby...........................................    58
        Senator Vitter...........................................    66
Osvaldo Luis Gratacos Munet, of Puerto Rico, to be Inspector 
  General, Export-Import Bank, Federal Housing Finance Agency....    29
    Prepared statement...........................................    40
    Responses to written questions of:
        Senator Shelby...........................................    71
Steve A. Linick, of Virginia, to be Inspector General, Federal 
  Housing Finance Agency.........................................    31
    Prepared statement...........................................    41
    Responses to written questions of:
        Senator Shelby...........................................    73
        Senator Vitter...........................................    74

              Additional Material Supplied for the Record

Letter from Hector Ferrer Rios, Minority Leader, Puerto Rico 
  House of Representatives.......................................    76

                                 (iii)


                            NOMINATIONS OF:

                    JANET L. YELLEN, OF CALIFORNIA,

              TO BE A MEMBER AND VICE CHAIR OF THE BOARD 
                             OF GOVERNORS,

                        FEDERAL RESERVE SYSTEM;

                  PETER A. DIAMOND, OF MASSACHUSETTS,

               TO BE A MEMBER OF THE BOARD OF GOVERNORS,

                        FEDERAL RESERVE SYSTEM;

                    SARAH BLOOM RASKIN, OF MARYLAND,

                            TO BE A MEMBER,

                        FEDERAL RESERVE SYSTEM;

              OSVALDO LUIS GRATACOS MUNET, OF PUERTO RICO,

                        TO BE INSPECTOR GENERAL,

                  EXPORT-IMPORT BANK, FEDERAL HOUSING 
                            FINANCE AGENCY;

                     STEVE A. LINICK, OF VIRGINIA,

                        TO BE INSPECTOR GENERAL,

                     FEDERAL HOUSING FINANCE AGENCY

                              ----------                              


                        THURSDAY, JULY 15, 2010

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee convened, at 9:06 a.m. in room 538, Dirksen 
Senate Office Building, Christopher J. Dodd, Chairman of the 
Committee, presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The Committee will come to order this 
morning. Let me welcome all who are here this morning, and 
particularly, and I would be remiss if I didn't begin my 
remarks by welcoming the former Chairman of this Committee. At 
any point you want to come up here and sit in this chair, Paul, 
you are welcome to it.
    [Laughter.]
    Chairman Dodd. I will tell you, Paul and I love to tell 
this----
    Mr. Sarbanes. Thank you very much, but no thanks.
    Chairman Dodd. Paul and I love to tell the story. Several 
years ago now, I was sitting in the chair that Tim Johnson sits 
in and Chairman Sarbanes was sitting in this chair with a gavel 
in his hand and there was a rather chaotic hearing one day. I 
can't remember the subject matter, but the room was exploding 
with chaos of one kind or another and Paul had already made the 
decision to retire from a very distinguished career in the U.S. 
Congress.
    In the midst of the chaos--I will never forget this 
moment--he took his right arm and put it around my shoulder and 
with his left hand swept across the room and he said, ``Just 
think, in 6 months, all of this is yours.''
    [Laughter.]
    Chairman Dodd. And little did I know how prophetic that 
would be in terms of what has happened over the years.
    I am going to break tradition a little bit here because 
these are busy days, obviously, and here we have very 
distinguished friends and colleagues here. So normally, we 
would begin with an opening statement and Senator Shelby would 
make one, but in consultation with my friend from Alabama, what 
I would like to do is invite our colleagues who are here to 
introduce the witnesses and then we will make some opening 
statements ourselves here and then we will get to our 
witnesses. So if you will bear with us, the three very 
distinguished nominees this morning, we will proceed in that 
manner, if that is possible.
    Dianne, why don't we begin with you, and then, Ben, I will 
go to you. And Paul, with respect to you, you have got a little 
more. We are not in session. You don't have to worry about 
votes this morning or other committee hearings. So I will go to 
you as the third introducer.
    Senator Cardin. Mr. Chairman, I would really yield to the 
former Chairman before me.
    Chairman Dodd. All right. You have got a vote here yet, 
Ben. Paul doesn't. So I want to make sure we take care of you.
    Dianne, go ahead.

   STATEMENT OF DIANNE FEINSTEIN, SENATOR FROM THE STATE OF 
                           CALIFORNIA

    Senator Feinstein. Thank you very much, Mr. Chairman, 
Senator Shelby, Senator Reed. It is a great pleasure for me to 
be here this morning to express my strong support for Dr. Janet 
Yellen, President Obama's nominee for Vice Chairman of the 
Federal Reserve.
    I know Dr. Yellen. She has dedicated her life to 
understanding the complex field of economics. Her background 
makes her a strong candidate for Vice Chairman at a time when 
the country is recovering from the economic crisis.
    Dr. Yellen graduated Summa Cum Laude from Brown in 1967. 
She earned a Doctorate in Economics from Yale in 1971. She 
began her teaching career as an Assistant Professor at Harvard, 
where she taught from 1971 to 1976. From 1977 to 1978, she 
served as Economist at the Federal Reserve Board of Governors. 
In 1979, she moved on to another teaching position, this time 
at the London School of Economics.
    In 1980, Dr. Yellen began as Assistant Professor at the 
University of California-Berkeley, and she has been there ever 
since. Today, she is Professor Emeritus of Business and 
Economics. Twice, she has been awarded Teacher of the Year at 
UC-Berkeley's Haas School of Business.
    During her time at Berkeley and elsewhere, Dr. Yellen has 
published numerous research works. They included the noted, 
Waiting for Work: A Study of Unemployment, completed with her 
husband, George Akerlof, a Nobel Prize winning economist who is 
here with Janet today. Her work has been published in the 
Journal of Economics, Business Economics, and the Brookings 
Papers on Economic Policy, among other publications.
    Dr. Yellen has also held a number of other academic and 
advisory positions. These include serving as a Research 
Associate in Monetary Economics at the National Bureau of 
Economic Research, a member of the Advisory Board on Economic 
Activity at Brookings, and an advisor to the Congressional 
Budget Office.
    Her research has focused on unemployment, monetary policy, 
and international trade. This combination of expertise will be 
beneficial as she weighs issues with our rising debt and high 
unemployment levels. We were just talking about that on the 
side waiting for my colleagues.
    From 1994 to 1997, Dr. Yellen sat on the Board of Governors 
of the Federal Reserve. There, she focused on consumer credit 
and small business lending, two areas vital to our current 
recovery. In 1997, she left the Federal Reserve to Chair the 
Council of Economic Advisors during the Clinton administration.
    And since 2004, she has led the Federal Reserve Regional 
Districts from San Francisco. In this post, she has closely 
monitored the regional economy and provided valuable input on 
the direction of Federal Reserve monetary policy.
    Along the way, she has received numerous awards and 
commendations. These include the Wilbur Cross Medal from Yale 
in 1997, fellowships at the Yale Corporation and the National 
Academy of Arts and Sciences, the Maria and Sidney Rolfe Award 
for National Economic Service by the Women's Economic 
Roundtable, an honorary Doctor of Laws from Brown. Dr. Yellen's 
substantial resume speaks for itself.
    Her confirmation would add another professionally trained 
economist to the Federal Reserve Board. This is important, 
because with Vice Chairman Kohn's departure, Chairman Bernanke 
would be the Board's only trained economist.
    Bottom line: Janet Yellen has the depth of knowledge and 
experience required to make the important decisions that could 
possibly have a strong positive and profound impact on our 
economy. I heartily recommend her to this Committee.
    Chairman Dodd. Senator, thank you very, very much.
    Senator Feinstein. Thank you. Happy to do it.
    Chairman Dodd. That was a fine introduction. We are more 
than happy to have you stay with us, if you care to, but we 
also know what schedules are like, so----
    Senator Feinstein. If I could be excused, I would 
appreciate it.
    Chairman Dodd. You are excused.
    Senator Feinstein. Thank you.
    Chairman Dodd. We thank you for coming.
    Dr. Diamond, let me just tell you, Senator Kerry has an 
opening statement for you which I will include in the record, 
and a very gracious statement about your remarkable 
qualifications, as well, to assume this position. So I will put 
that in the record, but we want to thank you very much for 
being here, as well.
    Chairman Dodd. Let me turn to my two colleagues.

  STATEMENT OF BENJAMIN L. CARDIN, SENATOR FROM THE STATE OF 
                            MARYLAND

    Senator Cardin. Thank you very much, Chairman Dodd and 
Ranking Member Shelby and the Members of the Committee.
    First, let me thank and welcome all three of the nominees 
for the Federal Reserve Board of Governors. We very much 
appreciate your willingness to serve our nation during this 
very difficult time. And we also welcome your families, because 
we know this is a joint effort that will require the sacrifices 
of the family and we thank you very much for your willingness 
to step forward on these very important responsibilities.
    I am particularly pleased, along with my colleague, Senator 
Sarbanes, to introduce to the Committee Sarah Bloom Raskin. We 
are very proud of her service and we are very proud that she is 
willing to put her name forward for the Federal Reserve Board 
of Governors. She is joined by her husband, Jamie, who is a 
State Senator in Maryland with a very distinguished career, and 
their three children.
    Sarah is a 1986 graduate of Harvard Law School. Sarah also 
graduated from Amherst College in 1983, where she graduated 
Magna Cum Laude in Economics and a Phi Beta Kappa.
    In 2007, Sarah was appointed Commissioner of Financial 
Regulation for the State of Maryland. In that role, she has 
done an outstanding job of improving consumer protection and 
supporting banks through the challenges of the financial 
crisis. She has been praised by the Maryland Bankers 
Association and the Maryland Consumer Rights Coalition for her 
fair, balanced approach to regulation in our State. Mr. 
Chairman, that is no easy task, to get both the bankers and the 
consumers to believe that you are doing the right thing and I 
applaud her for her balanced leadership in our State of 
Maryland.
    Her leadership has been significant for Marylanders working 
on foreclosure prevention during the financial crisis, 
improving legislation related to payday lending abuses, and 
stopping unscrupulous debt collection agencies. These skills, I 
think, will serve her well in regards to the Federal Reserve 
Board of Governors.
    She has spent much of her career in public service, 
including serving as Banking Counsel to the Senate Banking 
Committee under Senator Sarbanes, worked at the Federal Reserve 
Bank of New York, and helped with the Joint Economic Committee 
in Congress.
    As a member of the Federal Reserve, I am certain she will 
continue her commitment of keeping our banks safe and sound. 
Her dedication and work ethic are tremendous assets to our 
nation during these critical times and I wholeheartedly 
recommend her confirmation to the Committee.
    Chairman Dodd. I thank you, Senator, very, very much.
    As you know, Senator Mikulski, by the way, was unable to be 
here this morning but sent a very strong letter or statement in 
support, Ms. Raskin, of your nomination, as well, and so we 
thank her for that, and I will include that in the record, as 
well.
    Chairman Dodd. Paul, welcome back to the familiar haunts.

 STATEMENT OF PAUL SARBANES, FORMER SENATOR FROM THE STATE OF 
                            MARYLAND

    Mr. Sarbanes. Thank you very much, Mr. Chairman. I am 
pleased to be back with you, my good friend, Senator Shelby, 
Senator Corker, Senator Gregg, and Jack Reed. We used to sit up 
there and conspire together, I have to admit here.
    I am pleased to join with Senator Cardin and Senator 
Mikulski sending in a letter in very strong support of Sarah 
Bloom Raskin to go on the Federal Reserve Board. This is a 
terrific appointment and it really comes at the right time, 
given the responsibilities that the Fed is assuming in the 
legislation as well as the many other responsibilities it 
already has.
    I am not going to repeat the biographical statement that 
Senator Cardin made, but I just want to make just a few quick 
observations.
    Sarah has been an outstanding Commissioner of Financial 
Regulation for the State of Maryland over the last 3 years. In 
the 1990s, she served for 5 years, roughly 5 years, on the 
staff of the Banking Committee, where she was an outstanding 
member of the staff, very measured in her judgment, extremely 
hard working, very smart, and very able to deal with people 
across the board. She was part of a terrific staff, including, 
incidentally, Kathy Casey, who went from the Committee staff to 
the SEC and is serving there now with distinction.
    I want to take just a moment of the Committee's time to 
quote from some letters that have come in in support of Sarah 
because I think it gives you some sense of the breadth of 
support for her.
    The Commissioners of the Conference of State Bank 
Supervisors has written to Chairman Dodd and Ranking Member 
Shelby, and I will just quote one paragraph from this:

        As Maryland Banking Commissioner, Commissioner Raskin has 
        played a hands-on role as a banking and financial service 
        regulator during a challenging period, bringing leadership to 
        her agency and to Maryland's banking and financial industry. 
        The Conference of State Bank Supervisors and its membership 
        have benefited from her leadership role as a member of our 
        Board of Directors and as Chair of our Legislative Committee. 
        Additionally, she chaired our regulatory restructuring task 
        force. Commissioner Raskin also was appointed to the Federal 
        Financial Institutions Examination Council's State Liaison 
        Committee, where she has effectively represented State banking 
        regulators in joint efforts with the Federal banking agencies 
        on a broad range of regulatory and supervisory issues.

So she has assumed in just a 3-year period of time an important 
leadership role within the Conference of State Bank Supervisors 
and I think that speaks well to her talents and her abilities.
    The President and CEO of the Conference of State Bank 
Supervisors closes his letter saying:

        Commissioner Raskin enjoys the full personal and professional 
        support of her fellow Commissioners across the country. We hope 
        that the Committee and the full Senate will act quickly in 
        confirming her.

    The Independent Community Bankers, whom we, of course, all 
know and with whom we have interacted on a range of issues over 
the years, Camden Fine has written to the Committee:

        Ms. Raskin's service as Maryland Commissioner of Financial 
        Regulation has given her a practical understanding of the 
        operational concerns of community bankers as they serve their 
        communities and comply with regulatory demands. She appreciates 
        the vital role that community banking plays in the economic 
        life of small and mid-sized communities. Ms. Raskin serves on 
        the Board of the Conference of State Bank Supervisors, chairs 
        the Federal Legislative Committee, the Regulatory Restructuring 
        Task Force.

And then he goes on to close by saying:

        I hope that Ms. Raskin can be confirmed quickly so that the 
        Board may have the benefit of her experience as they navigate 
        the remainder of the economic recovery.

    And finally, a statement by Kathleen Murphy, who is the 
President of the Maryland Bankers Association, says, in part:

        Commissioner Raskin has been accessible to the Association and 
        member banks on a variety of important issues. She has worked 
        with the Association and the industry to achieve numerous 
        changes in Maryland law that have made the State Banking 
        Charter stronger and more competitive. Commissioner Raskin's 
        belief in a vibrant State banking system, as well as her 
        experience with the Federal Reserve Bank of New York, the U.S. 
        Senate Banking Committee, have led her to assuming the 
        chairmanship of the Legislative Committee of the Conference of 
        State Banks.

    In addition to all of this, as my colleague pointed out, 
Senator Cardin, Sarah got the award, Consumer Advocate of the 
Year Award, from the Maryland Consumer Rights Coalition. So she 
has obviously shown an ability to come up with some very 
practical solutions to some very difficult problems.
    Mr. Chairman and Senator Shelby and other Members of the 
Committee, I simply close with this observation. We depended on 
Sarah very much when she was on the staff of the Committee. She 
was really one of our very top people. She brought terrific 
analytical abilities to her work. She had measured and good 
judgment. She had the capacity to work very well with others. I 
think she is going to be a very important addition to the 
Federal Reserve Board and I really commend her to you in a very 
strong and unqualified manner.
    Chairman Dodd. Senator, we thank you very, very much for 
that recommendation.
    Of course, all of us here who have been here for a little 
while remember Sarah very much as a part of the Committee 
staff, and I am sure, I don't know if you ever thought one day 
sitting here that you might be sitting there, so welcome back 
to the other side of the table. We are delighted to have you 
with us this morning.
    I am going to take a few minutes for some opening comments. 
Then I will turn to Senator Shelby for any opening comments he 
may have. And then I will ask any of my colleagues, those who 
are here, obviously, now, if they want to make any opening 
statements. And then we will swear in our witnesses and proceed 
with some questioning for them.
    But I thank Senator Sarbanes. We thank you, and Senator 
Cardin, thank you very much for coming by this morning.
    None of us could ever plan these things this way, but 
obviously the coincidence of having the three nominees here 
this morning and at some point later today we will be voting on 
the financial regulatory reform bill, in a sense, so it is all 
coming together, ironically in some ways, in having the three 
of you here as such a critical part ultimately of whether or 
not we are able to get back on our feet again and how well the 
Federal Reserve is able to act and deal with these issues.
    So today, as has been pointed out, we are considering five 
very highly qualified nominees. There are two others we will be 
considering later this morning on the panel. On the first panel 
are three candidates, as we have all noted here, to serve as 
the Federal Reserve Board of Governors, one of whom has been 
nominated to a 4-year term as Vice Chairman of the Board. The 
Committee will also consider a second panel of two candidates 
to serve as Inspectors General. The first will serve for the 
Export-Import Bank of the United States and the other for the 
Federal Housing Finance Agency.
    The Committee considers today the nominations of three 
Federal Reserve Board Governors. These positions are 
extraordinarily important because of the critical role the 
Federal Reserve plays in our economy, be it through the 
exercise of monetary policy, the supervision of financial 
institutions, oversight of the payment system, or as lender of 
the last resort. As arbiter of our nation's monetary policy, 
the Federal Reserve is charged with promoting full employment 
and maintaining price stability. The decisions it makes about 
the money supply and interest rates have profound effects on 
the performance of the real economy.
    Under the financial reform legislation that Congress is 
poised to consider, the Federal Reserve's supervisory functions 
will be significantly enhanced. It will be incumbent, 
obviously, then, on the Federal Reserve to establish a set of 
robust prudential standards, including capital and liquidity, 
to govern the activities of the nation's large interconnected 
banking organizations. The Federal Reserve will be charged with 
overseeing the functioning of these complex organizations and 
identifying and addressing the type of excessive risk taking 
that led this country to the verge of economic collapse.
    And as we have seen during the financial crisis, the 
Federal Reserve's role as lender of the last resort is pivotal 
to limiting the threats to our financial system. And while the 
financial reform legislation imposes new conditions on the 
Federal Reserve's emergency lending authority, conditions that 
Senator Shelby and I worked on together, the Fed will still 
retain the awesome power to put billions of dollars of taxpayer 
money on the line. Given its position in our economic system, 
much depends, obviously, then, on how well the Fed carries out 
its varied responsibilities.
    In terms of performance, the Fed's track record, I will say 
politely, has been mixed. While in my opinion the Fed managed 
the crisis superbly, it clearly, in my view, fell down on the 
job during the period before the financial crisis. The Fed had 
authority under HOEPA that, if used, could have prevented, in 
my view, the serious deterioration in mortgage underwriting 
standards and the abusive and fraudulent lending practices. In 
my view, the Fed declined to exercise its authority until well 
after hundreds of billions of dollars of overvalued, unsuitable 
mortgages had been originated, securitized, and distributed to 
important financial institutions.
    The Fed also had supervisory authority over bank holding 
companies, but events have revealed that its supervision was 
inadequate, again, to put it mildly. Large bank holding 
companies were allowed to accumulate significant leveraged 
exposures to mortgage-related assets. The losses they suffered 
when the housing price bubble burst helped create the financial 
crisis from yet we have yet to recover.
    Because of these failures, the first draft of our 
Committee's financial reform bill created both a new Consumer 
Financial Protection Agency and a Consolidated Banking 
Supervisor. To be very blunt, that draft bill contemplated 
removing all of the Fed's authority in areas where it had 
performed poorly, leaving it with the responsibility primarily 
over monetary policy.
    However, as we worked our way through over the last year or 
so with the legislation, it became clear that the political 
will of the Congress was to retain and strengthen the Fed's 
supervisory role. The Federal Reserve will be part of the 
Financial Stability Oversight Council, which will function as 
an early warning system, responsible for spotting and 
mitigating threats to overall financial stability.
    As I stated at the outset of these remarks, the Fed will 
have responsibility for devising and imposing heightened 
capital, liquidity, and other standards for large bank holding 
companies and designated non-bank financial companies. It will 
help enforce the so-called Volcker Rule, which prohibits 
proprietary trading and limits investment in hedge funds and 
private equity funds at banks and bank holding companies. And 
it will have a role in supervising systemically important 
financial utilities, such as clearinghouses, that are important 
to the stability of the payment system.
    Moreover, the Fed will continue to play a very key role in 
helping the economy recover from the effects of the financial 
crisis. And while the economy is growing, it is not growing 
fast enough, I believe all would acknowledge, to help millions 
of Americans who lost their jobs as a result of this crisis. 
The seasonally adjusted Civilian Unemployment Rate declined 
from 9.7 percent in May to 9.5 percent in June, but remains far 
too high. Business investment demand, as measured by data on 
fixed non-residential investment, remains subdued because of 
excess capacity. And while headline price indices continue to 
increase at about 2 percent, year on year, other measures of 
price change suggest that we are moving toward price deflation. 
In May, the core CPI increased by just 0.9 percent.
    It is evident, then, that the economy is going to need all 
the help the Fed can provide over the coming years. Put simply, 
the Federal Reserve is at the forefront of maintaining 
financial stability. Congress is entrusting the Federal Reserve 
with tremendous responsibilities, all of which the Fed, I might 
point out, has sought in this process. Now the Fed must step up 
and use these new powers to serve obviously the greater good of 
our nation.
    We have before us today a slate of very, very accomplished 
candidates, and I mean that very sincerely. I have sat in this 
Committee for 30 years and I can't think of another panel I 
have seen that has come before us as qualified as this panel is 
to take on these responsibilities, and I can't thank you enough 
for your willingness to do so and to step up and go through the 
arduous task in front of us. Our job, obviously, is to assess 
whether they are up to the task of serving on the Federal 
Reserve Board at this critical time, and I look forward this 
morning to discussing their views with us on these issues.
    I am going to apologize in advance. I am going to be in and 
out in this process this morning because we are going to be 
considering on the floor the financial regulatory reform bill 
this morning, as well, so I need to be there, as well. So I 
will be coming back and forth, and Tim Johnson and Jack Reed 
and Sherrod, and I am confident maybe others on our minority 
side will step in, as well, and be here for this process.
    But again, I thank all three of you. I notice that two of 
you, of course, had the benefit of a Connecticut education and 
a third has a daughter named Grace, so you are in pretty good 
stead with me to begin the process, having a daughter named 
Grace, as well.
    [Laughter.]
    Chairman Dodd. With that, let me turn to Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman.
    The Federal Reserve faces, as all of you know, some of the 
greatest challenges it has ever confronted. The economy is 
highly vulnerable and there is little clarity with respect to 
the best way forward. The banking system struggles to emerge 
from the financial crisis and hundreds of institutions will 
likely fail before we recover fully.
    During the crisis, the Fed created massive new liabilities 
and ballooned its balance sheet from $850 billion to more than 
$2.3 trillion. Earlier this year, the Fed talked mostly about 
its strategy for removing its extraordinary support measures. 
Lately, as the economy seems to have hit another soft patch, 
discussion at the Fed has been a mixed bag. Some fear 
inflation, while others fear deflation. Some talk of unwinding 
the Fed's massive asset holdings while others talk about even 
more asset purchases, further ballooning the Fed's balance 
sheet.
    The nominees for positions on the Federal Reserve Board, if 
approved, will face difficult and important decisions for the 
American economy. And while there are before us three talented 
and experienced candidates, I believe that some inquiry is in 
order, Mr. Chairman, to determine whether their qualifications 
are aligned with the positions for which they have been 
nominated. The work of the Federal Reserve is highly 
specialized and demands the best qualified and most capable 
people in the country that we can produce.
    I will be interested to learn today if the nominees before 
us meet that standard. I will also want to be assured that 
these nominees will work to increase the Board's transparency, 
both to the public and to Congress.
    Many of my colleagues believe that the Fed's relationship 
with Congress needs some mending. The Fed in the recent crisis 
was overly opaque and not receptive to providing information to 
Congress or the public. The Fed often seems more interested in 
seeking additional power and authority, even though it failed 
to use its current authorities in the run-up to the crisis, a 
lot of us believe.
    Ironically, despite its recent failures, the Fed could soon 
be rewarded, as Senator Dodd said, with expanded authorities 
and powers under the Dodd-Frank bill. With that in mind, I 
would want to hear what lessons have been learned and how the 
nominees intend to use those lessons as members of the Board.
    The nominees, I believe, should identify what they learned 
about monetary policy, transparency, accountability, and 
financial regulation during the recent crisis. I will also be 
interested to learn where each of the nominees would draw the 
line between monetary and fiscal policy, a distinction that was 
blurred by the Fed during the recent crisis. Finally, each 
nominee should share their views, I believe, on credit 
channeling by the Federal Reserve to preferred and specific 
segments of financial markets, which amounts, I believe, to the 
Fed picking winners and losers.
    Our second panel, and Mr. Chairman, if you will indulge me, 
I want to mention this, includes the President's nominee to be 
the Inspector General of the Federal Housing Finance 
Administration. And while we welcome this nomination, I would 
like to point out, Mr. Chairman, that nearly 2 years after 
passage of GSE legislation, we still have not received a 
nominee to head the Federal Housing Finance Administration. 
Both GSEs, as we all know, are in conservatorship, being run by 
the Federal Housing Finance Administration. Taxpayers have 
already lost $150 billion and counting on the bailouts of these 
organizations. Two years would be much too long under normal 
circumstances, but under the current circumstances, I think it 
is inexcusable.
    By law, the Federal Housing Finance Administration is 
supposed to put the failed mortgage lenders into a safe and 
sound condition and to preserve their value. But to accomplish 
this goal, the Federal Housing Finance Administration acts with 
all the powers of the shareholders, directors, and officers of 
the entities. Consequently, only the Inspector General is 
examining the practices of the conservator.
    I look forward to hearing later on from Mr. Linick, if we 
are here, on his plans for providing the Committee and the 
American people with long-overdue oversight of FHFA, especially 
as it relates to the conservatorship of Fannie Mae and Freddie 
Mac.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator Shelby.
    Senator Reed?

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Well, thank you very much, Mr. Chairman.
    I want to welcome the nominees that the President has 
chosen very well and very wisely. You have got extraordinarily 
talented individuals with long years of experience. Dr. Yellen, 
of course, is a Brown graduate. We have to say no more.
    [Laughter.]
    Senator Reed. Mr. Diamond is an expert in economics from 
Yale University as an undergraduate, couldn't get into Brown.
    [Laughter.]
    Senator Reed. And then Ms. Bloom Raskin is a graduate of 
Harvard Law School, so nice to see, like me, you found a job.
    But we are here at a critical moment, and there are those 
that suggest that things are coming along and we have to start 
focusing on sort of the great pivot away from support of the 
economy. But for the thousands and thousands of unemployed 
Rhode Islanders, nothing has changed much and we have to keep 
our eyes focused on unemployment, and the Fed, for many 
reasons, is the most significant actor in this situation, 
continuing to support policies that will put people back to 
work.
    There is some encouraging news today. Claims seem to have 
fallen much more than expected, so that is a good sign. We have 
been increasing jobs over the last several months. But until we 
have a solid growth in employment that is sustainable and 
recognized by people, not here and on Wall Street but on Main 
Street, then we haven't done the job. So I would urge you in 
all your deliberations to keep that thought foremost in mind.
    There are also some areas of innovation that might be 
embraced. I have been suggesting a work-share plan in which the 
unemployment funds are sort of used not to totally subsidize 
someone, but to help a business maintain partial employment if 
they maintain benefits. Chairman Bernanke has embraced that 
principle. Several States recently, including Oklahoma, have 
adopted it. So there are innovative ways we can make our funds 
go further and help more people. I hope we do that.
    As we have all discussed, the Chairman and the Ranking 
Member, with the new Dodd-Frank bill that is just about to be 
passed, significant responsibilities will be given to the 
Federal Reserve. One of them will be, for the first time, there 
will be a Vice Chairman of Supervision on the Federal Reserve 
Board whose charge will be to look carefully at the regulatory 
arrangements that are in place. And now, as one of the chief 
voices on the proposed Financial Oversight Council, this person 
and the Board in toto will be extraordinarily important.
    So you are coming onto the Federal Reserve Board at a 
critical moment, and I am very confident because of your skill 
and your dedication that you will do a superb job.
    One final point. I think these confirmation proceedings are 
interesting. I am sure you find them interesting. But it does 
send a very strong message that through the Senate, you 
ultimately are accountable to the people of the United States, 
and I would like to send that same message to the individuals 
who operate as the President of the Federal Reserve Bank in New 
York, because that position is one of the most significant 
regulatory positions in the country. To have any confusion 
about who he or she may work for, I think, is a mistake, so I 
will continue to pursue that effort.
    Thank you all.
    Chairman Dodd. Thank you very much.
    Before I turn to Senator Gregg, let me just mention, I 
inquired of staff as to why we haven't had someone come over 
from FHFA and let me use the opportunity here. I presume there 
is someone from the Administration in the audience. It is long 
overdue. The idea originally was to have the head of FHEO to 
run that, and they did for a while, but it is a vacant seat and 
they ought to get it filled. So I appreciate Senator Shelby 
raising that point.
    Judd, good to have you here this morning.

                STATEMENT OF SENATOR JUDD GREGG

    Senator Gregg. Thank you, Mr. Chairman, and it is good to 
be here to participate in this hearing with three people who I 
think are exceptional. I appreciate the President's choices 
here and I appreciate your willingness to serve. It is nice to 
have folks of your talent and ability coming into the 
responsibility of the job of the Federal Reserve.
    As we move forward over the next 3, 5, 10 years, the 
Federal Reserve's role is going to become even more and more 
critical. Regrettably, this country is on a track to fiscal 
insolvency under the present spending activities of the 
Congress and the debt which we are adding, and really, the only 
stabilizing force right now is the Federal Reserve because the 
Congress is totally irresponsible. And so your role is going to 
become more and more important in the role of--you can't 
correct our failures, but at least you can point them out and 
hopefully maintain the stability of the currency while we try 
to sort out the problems of domestic fiscal policy.
    So this is going to be one of the most critical periods in 
the history of the Federal Reserve, over the next five to 10 
years and I appreciate the fact that talented people like 
yourself are going to be there. Thank you.
    Chairman Dodd. Well, very good. I am going to ask all three 
of our witnesses to rise----
    Senator Brown. Mr. Chairman?
    Chairman Dodd. Oh, I am sorry. Senator Brown, I apologize.
    Senator Brown. I am not that new still, Mr. Chairman.
    Chairman Dodd. No, you are new enough, so go ahead. You 
went to Yale anyway.
    [Laughter.]

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. And I don't have that much to say, either, 
Mr. Chairman, but thank you. I appreciate the three nominees 
and I echo Senator Gregg's comments about how happy we are with 
the President's appointments and the quality of appointments 
and your willingness to do public service.
    I want to briefly--obviously, I got the hint, Mr. 
Chairman--very briefly mention two things that are not 
necessarily historically in the sort of well-defined--not 
historically a part of the Fed's, the well-defined part of the 
Fed's job description. One is, as I mentioned in my office to 
the three of you, is manufacturing.
    You know, this country 30 years ago, about a third of our 
GDP was manufacturing. About 11 percent was financial services. 
Today, those numbers are almost flipped, and we know what 
happened in a lot of ways. We obviously know what happened in 
the financial crisis. We also know what happened to 
particularly small town and medium-sized industrial town 
America and those cities of 20,000 to 50,000 that dot our 
landscapes, particularly in the Midwest, but really all over, 
where a plant closes or two plants close and the devastation to 
the town is long lasting. The young people that get educations 
leave those communities because we don't offer them the kind of 
job opportunities in so many ways.
    So I would hope--and I think if you look in an historical 
context, what happens when a country turns to financial 
services and away from making things, and whether making things 
is agriculture or transportation or especially manufacturing, 
look what happens to the middle class. Look what happens to the 
long-term prosperity of the nation. So I hope you will consider 
that in your deliberations.
    The other thing that I wanted to mention is, and I have 
noticed this during the debate on the unemployment insurance 
bill. I go to the Senate floor almost every day and read 
letters from constituents, many of whom have been employed for 
25 years, often with the same employer, paid into unemployment 
for years, been laid off for a year and a half, are losing 
their job skills in many ways. We have been reading more and 
more about that.
    And I mention that because I think that many people in your 
position and my position talk a lot about numbers. Ninety-
thousand Ohioans will lose their unemployment if we don't act 
next week, as I think we will. We cite all the numbers we do, 
but we don't often enough put a human face on what we do. And I 
hope that you find a way in the generally insulated jobs that 
you all have and the insulated jobs that we have, and we are 
guilty of this too often, of putting a face on the kinds of 
human suffering that you see come across your desk in the form 
of statistics.
    I know that is a challenge sometimes, but whether--I know 
the President gets ten letters every day that he reads from 
people around the country. You aren't the focus of letter 
writers from people that have stories to tell, obviously, as 
much as the White House or as much as your offices, but I 
encourage you to find ways to do that so that as you formulate 
public policy, it really is more than just numbers and 
statistics and theories and practice and all of that, because I 
think it will serve our country well. I know from my 
conversations with you, you have that inclination, that 
proclivity anyway, and I hope you will find a way to drive it 
home even more in the months ahead.
    I wish you well in this hearing and wish you well as you 
assume your jobs, which I assume that you will. Thanks.
    Chairman Dodd. Senator, thank you very much. My apologies 
again.
    Now, we will ask you to stand, if I can, all three, and 
raise your right hands, if you will. I will ask you, do you 
swear or affirm that the testimony you are about to give is the 
truth, the whole truth, and nothing but the truth, so help you, 
God?
    Ms. Yellen. I do.
    Mr. Diamond. I do.
    Ms. Raskin. I do.
    Chairman Dodd. And do you agree to appear and testify 
before any duly constituted Committee of the U.S. Senate?
    Ms. Yellen. I do.
    Mr. Diamond. I do.
    Ms. Raskin. I do.
    Chairman Dodd. I thank all three of you.
    Before turning to you for your statements, let me ask you, 
and I will begin with you, Dr. Yellen, any family members here 
at all you would like to recognize?
    Ms. Yellen. Thank you. My husband, George Akerlof, and my 
son, Robert Akerlof.
    Chairman Dodd. Very good. Glad to have you with us.
    Dr. Diamond?
    Mr. Diamond. My wife, Kate, and my son, Andy, are here.
    Chairman Dodd. Very good, as well.
    Ms. Raskin?
    Ms. Raskin. I will introduce my husband, Jamie, and my 
three teenagers, Hannah, Tommy, and Tabitha. My parents are 
here from Connecticut----
    Chairman Dodd. Good.
    Ms. Raskin.----my mother, Arlene, my brother, Kenneth----
    Chairman Dodd. Very smart to bring those from Connecticut 
here.
    [Laughter.]
    Ms. Raskin. My sister-in-law Erica----
    Chairman Dodd. Is anyone from the Raskin family not here in 
this room today?
    [Laughter.]
    Ms. Raskin.----my father-in-law, his wife, and my niece and 
nephew and another sister-in-law.
    [Laughter.]
    Chairman Dodd. You have done very well. I hope you didn't 
miss anyone. That is all I can tell you. The ones you have 
mentioned won't care. The ones you have forgotten will never 
forget that you have avoided them.
    [Laughter.]
    Senator Shelby. Five years on the Committee helps.
    Chairman Dodd. Yes, her 5 years on the Committee, being 
here. Well, very, very good, and what we are going to do is 
begin with you, Dr. Yellen, your opening statement.
    Now, normally, having read over your statements last 
evening, normally, I ask that the people try to restrain their 
remarks to 5 minutes apiece, but having read your statements, I 
want to urge you to speak for 5 minutes apiece. Rather brief 
statements, well advised, I think, by some. Don't make too long 
an opening statement.
    So we will begin with you, Dr. Yellen, and let me just say 
to my colleagues, as well, for the purpose of the record here, 
any statements that Members of this Committee have, we will 
include in the record, and any additional questions they don't 
get to ask here this morning will also be included. We would 
ask the nominees, as quickly as you possibly could, to respond 
to those questions.
    I believe it will be the appetite of this Committee to want 
to move along as quickly as we can, recognizing we have a 
relatively short amount of time left in this session of 
Congress, and I believe it will be the desire to want to move 
these nominees along, barring something that we are unfamiliar 
with. So on the assumption of that being the case, we would ask 
you to be as responsive as you can as quickly as you can.
    And with that, Dr. Yellen, thank you once again. We are 
delighted to have you back here with us, and again, I can't 
begin to thank you. I loved last night reading over your 
publications and that you worked on with your husband on some 
very interesting subject matters and topics. In fact, I made 
check marks on a few of them that don't really relate to this 
Committee's jurisdiction, but I would be very interested in 
going over and reading, so I thank you very much.

STATEMENT OF JANET L. YELLEN, OF CALIFORNIA, TO BE A MEMBER AND 
  VICE CHAIR OF THE BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM

    Ms. Yellen. Thank you. Chairman Dodd, Senator Shelby, and 
Members of the Committee, I am honored to appear before you as 
President Obama's nominee to serve as a member and Vice Chair 
of the Board of Governors of the Federal Reserve System. If I 
am confirmed to these positions, I look forward to working with 
this Committee in the coming years.
    I am wholeheartedly committed to pursuing the Federal 
Reserve's Congressionally mandated goals of maximum employment 
and price stability and to strengthening our program of 
supervision and regulation, building on the lessons learned 
during the financial crisis. We must work together and in 
cooperation with central banks and governments around the world 
to mitigate systemic risk in the financial and payment systems 
so that our country never again suffers such a devastating 
episode of financial instability.
    We have learned a harsh lesson about the dire consequences 
a financial crisis has for ordinary Americans in the form of 
lost jobs, lost homes, lost wealth, and lost businesses. And 
those of us charged with overseeing the financial system should 
always keep this human cost in mind.
    I have served since 2004 as President and Chief Executive 
Officer of the Federal Reserve Bank of San Francisco, and 
before that, from 1994 through 1997, as a member of the Federal 
Reserve Board. Through this service, I have gained experience 
in every one of the Federal Reserve's areas of responsibility, 
including monetary policy, banking supervision and regulation, 
consumer and community affairs, and the operation of payment 
system. I believe this extensive background equips me to work 
under Chairman Bernanke as a leader of the Federal Reserve 
System as we strive to carry out the missions Congress has 
assigned to us.
    Over the next few years, the Fed must craft policies that 
ensure that our economy accelerates its progress along the 
recovery path it has begun to trace. With unemployment still 
painfully high, job creation must be a high priority of 
monetary policy. But we must also avoid any threats to price 
stability. That means that when the appropriate time comes, we 
must withdraw the extraordinary monetary accommodation now in 
place in a careful and deliberate fashion.
    My approach going forward, as in the past, will be to bring 
a thoughtful and independent voice to the Federal Open Market 
Committee deliberations on monetary policy, drawing on the 
insights of business and community leaders throughout the 
country and thoroughly analyzing macroeconomic trends that 
affect the economic outlook and the risks to our forecasts.
    In my view, Congress has wisely granted the Federal Reserve 
the freedom to make independent monetary policy decisions in 
pursuit of Congressionally mandated goals based on a forward-
looking perspective and the best judgments of the Federal Open 
Market Committee participants. I believe that experience in the 
United States and around the globe demonstrates that central 
bank independence in monetary policy produces clear societal 
benefits. When central banks are independent, economies perform 
better, inflation is lower and more stable, and long-term 
interest rates are lower and less volatile. In other words, an 
independent central bank is best equipped to promote both price 
stability and high levels of growth in employment.
    I should stress, though, that independence brings with it 
both responsibility and accountability. The Federal Reserve is 
fully accountable to Congress, and that is how it should be. 
That means the Fed must explain its actions, outlook, and 
strategy and provide the information necessary for Congress and 
the public to understand and evaluate its policy decisions.
    I strongly support Fed independence in monetary policy and 
I am committed to enhancing the transparency that is essential 
to accountability and democratic legitimacy.
    Senator Johnson. [Presiding.] Mr. Diamond?

STATEMENT OF PETER A. DIAMOND, OF MASSACHUSETTS, TO BE A MEMBER 
       OF THE BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM

    Mr. Diamond. Senator Johnson, Ranking Member Shelby, 
Members of the Committee, I am honored to have been nominated 
by President Obama to be a member of the Board of Governors of 
the Federal Reserve System. I am grateful to this Committee for 
scheduling this hearing.
    If I am confirmed by the Senate, I will work to the best of 
my abilities to fulfill the responsibilities of this office. 
Those responsibilities have always been significant. The 
experience of the recent financial crisis and the financial 
reform legislation have underlined the multiple jobs the Fed 
has in working to fulfill the dual mandate of high employment 
and price stability. The Fed will have major work to do to 
implement the tasks that the legislation will be placing at the 
Fed. I would be honored and pleased to be able to be part of 
the process of responding to this challenge.
    I studied both mathematics and economics as an 
undergraduate at Yale University. I received my Ph.D. in 
Economics from the Massachusetts Institute of Technology in 
June 1963. Since then, I have been a faculty member, first at 
the University of California at Berkeley, and since 1966 at 
MIT. Throughout this period, I have taught and done research in 
economics.
    My primary focus in both teaching and research has been 
economic theory, particularly general equilibrium theory, 
macroeconomics, search theory, and public finance. Within 
public finance, my primary focus has been on taxes, pensions, 
and social insurance, particularly Social Security. I have done 
both theoretical analyses and policy analyses. I have also done 
research in other areas, including behavioral economics and law 
and economics. I took classes at Harvard Law School as part of 
my preparation for doing research in law and economics. I 
believe in being well grounded in a subject when doing research 
or policy analysis.
    In addition to microeconomics, macroeconomics, and public 
finance, I have also taught money and banking and law and 
economics. Being a member of two economics departments with 
great collegial interactions, I have gained a wide knowledge of 
a variety of economic topics as well as detailed knowledge in 
my areas of expertise. As a consequence, I have considerable 
awareness of the development of economic analyses of monetary 
policy and its impacts on both inflation and employment, as 
well as studies of the determinants of financial crises.
    A central theme in my research career has been how the 
economy deals with risks, both risks at the individual level 
and risks that affect the entire economy. In all of my central 
research areas, I have thought about and written about the 
risks in the economy and how markets and Government can combine 
to make the economy function better for the people there. If 
confirmed, this background should be very helpful at the 
Federal Reserve as part of the process of addressing our 
heightened awareness of the dangers of systemic risks. My 
background in behavioral economics and law and economics give 
me high awareness of the issues involved in consumer protection 
and in increasing financial literacy.
    If confirmed, I would welcome the opportunity to help 
address the important issues that have been raised by the 
financial crisis as well as the longstanding issues and 
concerns that the Federal Reserve faces, bringing my research 
experience and expertise to bear on these difficult and 
important issues. Thank you.
    Senator Johnson. Ms. Bloom Raskin?

 STATEMENT OF SARAH BLOOM RASKIN, OF MARYLAND, TO BE A MEMBER, 
                     FEDERAL RESERVE SYSTEM

    Ms. Raskin. Senator Johnson, Senator Shelby, Senator Brown, 
and to all the able staff who are sitting in the seats I 
remember so well, as a former Banking Counsel to your 
Committee, I cannot quite express what an honor it is to appear 
before you today. I never dreamed one day I would be here as a 
nominee to the Federal Reserve Board, or maybe I did dream it 
at some point, but I certainly never believed it.
    I must thank, first of all, Senator Sarbanes, who has been 
an extraordinary mentor to me over the course of my career and 
has shown me how one can be passionately committed both to the 
public interest and to one's family at the same time.
    It is a great and humbling honor to be nominated by 
President Obama to the Federal Reserve Board and I am very 
grateful. If confirmed, I will participate in the essential and 
difficult work of restraining inflation and maintaining price 
stability, maximizing sustainable employment and economic 
growth, and trying to continually reconcile and harmonize these 
goals.
    This is a challenging moment for the Federal Reserve. Every 
Member of this Committee knows that even though the worst of 
the crisis is over, it remains a precarious time for far too 
many of our families and businesses. The Fed must do its part 
to restore the underlying strength and vibrancy of the American 
economy.
    As Maryland's Commissioner of Financial Regulation over the 
last 4 years, I have worked day and night to counter the 
devastating effects on our communities of the national banking 
and liquidity crisis, the terrible spikes of home foreclosures, 
and high unemployment and underemployment. At the same time, as 
a front-line banking regulator, I have worked to revise and 
replace ineffectual and counterproductive State regulations 
that do not put the Government properly on the side of economic 
progress for our people. If I am confirmed, my experience 
working through this crisis at the State level will deeply 
inform my actions as a member of the Federal Reserve Board.
    The proper conduct of monetary policy by our central bank 
is essential to calming the waves of financial instability that 
have engulfed so many of our communities, businesses, and 
households. Over the course of the last generation, the Federal 
Reserve has achieved price stability and successfully anchored 
long-term inflationary expectations. This achievement is 
critical to our economic strength and it remains a central 
institutional objective that I subscribe to wholeheartedly.
    But it is only a partial victory when many American 
households continue to face the perils of unemployment and many 
small businesses struggle with weakened consumer demand and 
reduced access to credit. We need to strengthen this recovery 
by expanding its foundations. This means that in addition to 
maintaining stable inflationary expectations and keeping a 
vigilant eye on the emergence of new bubbles, the Fed must seek 
to fulfill the other part of its statutory mandate by 
addressing unemployment, which has pervasive social costs.
    In my State, I have seen these costs in the loss of 
productive capacity, a weakened housing market, increased 
strain on State and local resources and services, and a nervous 
reluctance on the part of many businesses and banks to invest 
and make loans. The Fed must work for a broad and sustained 
recovery that not only controls inflation, but facilitates 
growth and more robust business lending by banks.
    In sum, I know that there is a lot of hard work to do at 
the Fed. If you choose to confirm me, I will bring all of the 
experience, knowledge, and commitment I have gained over the 
course of my career to the task of fulfilling Congress's 
statutory expectations, and I will maintain the standards of 
professionalism, independence, and probity that I have always 
tried to uphold in my career and that, to my mind, are 
exemplified by the work of this Committee.
    Thank you for the honor of hearing me today. I will be 
happy to respond to any and all questions you may have, 
verbally or promptly in writing, throughout this process and, 
indeed, throughout my tenure at the Fed, if I am fortunate 
enough to be confirmed.
    Senator Johnson. Thank you.
    In light of the fact that Senator Shelby has to go other 
places, I defer to Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman. Those other places 
just follow Senator Dodd to the floor and see what he is saying 
about this package.
    [Laughter.]
    Senator Shelby. But we must go in a few minutes.
    I have a number of questions for the record, but I have a 
question for each one of you. I will start with you, President 
Yellen. President Yellen, the Fed's 12th District, which is 
your responsibility, has experienced a large number of bank 
failures, some 65 institutions, at an estimated loss of around 
$28 billion, I have been told, since 2004. Your district 
experienced failures of important firms with national 
implications. Further, the housing sector in your district 
displayed speculative excesses in the run-up to the crisis.
    Regarding your tenure as President of the 12th District, I 
have two questions. First, what role do you believe a breakdown 
in regulatory oversight played in the failure of the 
institutions in your district? And second, were you raising any 
warning flags with respect to speculative excesses or lax 
monetary policy during that period?
    Ms. Yellen. So the first question was did a breakdown in--
--
    Senator Shelby. Do you believe a breakdown in regulatory 
oversight--what role do you believe that a breakdown in 
regulatory oversight played in the failure of the institutions 
in your district?
    Ms. Yellen. Working with other regulators, I think that our 
regulatory oversight was careful and appropriate, but I believe 
that----
    Senator Shelby. Excuse me. You say it is careful and 
appropriate? Most people believe----
    Ms. Yellen. Given the----
    Senator Shelby.----it was lax and inappropriate.
    Ms. Yellen. Well, I--in the institutions that have failed 
in my district are mainly community banks----
    Senator Shelby. OK.
    Ms. Yellen.----with high exposure to commercial real 
estate.
    Senator Shelby. OK.
    Ms. Yellen. And when I say careful and appropriate, I mean 
that as early as 2001, people in the Federal Reserve System and 
particularly in my bank were at the forefront of focusing on 
high concentrations that existed in the banks we supervised in 
commercial real estate. We saw that these exposures and 
concentrations could be a source of vulnerability and we 
monitored this carefully throughout.
    I would say, the first briefing I ever received from my 
banking supervision staff when I joined the Federal Reserve 
Bank of San Francisco was on commercial real estate. They 
pinpointed it as a vulnerability, and for the 65-odd banks in 
my nine-State region, really, this is what is driving problems.
    I would say that the regulatory response was insufficient 
over a period of years. I believe guidance came out in 2006, I 
believe it was, to the supervisors and to banks stating 
essentially that banks with high exposures needed to carefully 
manage risks around these exposures. I think what we have 
learned in hindsight is it was very hard for all of the 
regulators involved to take away the punch bowl in a timely 
way, and as the supervisors in the field, we didn't really have 
the ability to either limit concentrations or, for example, to 
demand that banks hold higher capital against these 
concentrations.
    I would describe the guidance that came out as weak and the 
material loss reviews that have been done of the institutions 
that we supervise essentially say that this was the pitfall, 
and I would hope that going forward, one thing we have learned 
from this crisis is there is a need for all of us in regulation 
to act in a timely way to take away the punch bowl and to 
require more stringent capital requirements.
    Senator Shelby. Thank you.
    Commissioner Raskin, in testimony before the Congressional 
Oversight Panel for the TARP, you said, ``In the run-up to this 
financial crisis, both Wall Street and monetary policy were 
spiking the punch bowl.'' Those are your words. I presume from 
your comment that you believe that monetary policy was too 
loose for too long prior to the crisis. At what point would you 
have changed course? And what do you base your judgment on? And 
as Dr. Yellen has said, what have you learned, you know, what 
have we all learned but especially assuming you are confirmed 
as Member of the Board of Governors of the Fed, what has the 
Fed learned?
    Ms. Raskin. Thank you, Senator Shelby. I think that there 
have been a number of lessons learned, and there is clearly a 
lot of blame to go around.
    In terms of the Federal Reserve, I think that the Federal 
Reserve has been subject to substantial and I believe justified 
criticism regarding the run-up to the failure. There, I 
believe, were failures both on the regulatory side and on the 
monetary policy side.
    From the regulatory perspective, I think that there was not 
a sufficient focus given to the importance of capital and the 
importance of building up capital and robust capital during 
good times. We now know how difficult it is to find capital 
when times are not so good.
    I also think that there was an inappropriate treatment, 
regulatory treatment given to off-balance-sheet assets. And as 
we now know, those assets should have been more adequately 
capitalized, and they were not.
    So I think there was quite a bit of misjudgment regarding 
asset quality, including the quality of mortgage-backed 
securities, up to the run-up through the crisis on the 
regulatory side. So I think there are a lot of lessons there 
that are worth repeating and correcting.
    From the monetary policy side, which you also mentioned in 
that quote, I think the extent of the bubble, the housing 
bubble that was developing, was not appropriately monitored or 
taken seriously. And for those of us on the ground level, we 
saw quite a number of disturbing trends in housing markets, 
including sometimes weak regulation of the mortgage side of 
origination.
    So clearly there were signs, also signs of predatory 
behaviors that were fueling this bubble, and it would have been 
good if the Federal Reserve Board had been able to see some of 
the determinants of that bubble.
    Senator Shelby. Thank you.
    Professor Diamond, in an interview with Macroeconomic 
Dynamics, a publication, in 2007 you stated the following, and 
I quote: ``I am a card-carrying behavioral economist, and I 
think that matters in both micro and macro.''
    Do you believe, Dr. Diamond, that behavioral economics can 
be applied to the regulatory functions of the Federal Reserve? 
And if so, in what ways? And should you? Or should we?
    Mr. Diamond. Yes, I think it is very important, and the 
clearest example, and something I learned in the background 
information that the Fed has given me in preparation for the 
hearings and, if confirmed, carrying on, there was discussion 
of the treatment of disclosure with financial contracts. And 
they told me that their attitude toward disclosure had been to 
basically make sure everything was disclosed in the sense that 
a lawyer could see it was accurate. And they had learned the 
lesson, and now they were focusing on disclosure in a way that 
the person engaging in a financial contract, the man in the 
street, could understand what the financial contract was going 
to do.
    Behavioral economics draws heavily on cognitive psychology, 
and cognitive psychology is very aware of the difficulty for 
inexperienced people in interpreting complicated elements. And 
this, I can add, is one of the things I also studied when I was 
taking classes at Harvard Law School, the issue of contracts 
that are hard to understand, contracts that are not available 
for negotiation. I think the behavioral economics aspect on the 
regulatory side is very important.
    Senator Shelby. Mr. Chairman, I have a number of questions 
that I would like to submit for the record. I appreciate you 
deferring to me a minute ago. I have got to go to the floor. 
Thank you.
    Senator Johnson. Dr. Yellen, Dr. Diamond, and Ms. Bloom 
Raskin, what do each of you believe will be the greatest 
challenge for the Fed while implementing the Wall Street reform 
legislation? Dr. Yellen?
    Ms. Yellen. Thank you, Senator Johnson. We have enormous 
responsibilities that will be given to us under this 
legislation. The first key challenge will be to improve our 
supervision particularly of the largest and most complex bank 
holding companies based on what happened in this crisis and the 
lessons that we have learned. And that is something that is 
already taking place, partly building on what we learned from, 
I think, the very successful stress tests that were conducted 
of the 19 largest banking organizations last spring. I think 
what we learned is that taking an approach to bank supervision 
that involves horizontal simultaneous reviews of large 
organizations using multidisciplinary teams, including 
economists, we learn a great deal about the true situation and 
comparative situation in large banking organizations. And this 
is a strategy and tool where we are employing on a systemwide 
basis to ramp up our supervision of these institutions.
    Going forward, we are being asked in this bill, 
appropriately so, to raise capital standards and liquidity 
standards for these institutions to take account of their 
impact on financial stability as well as to improve our 
understanding of the risks in the financial system and how they 
can impact these institutions. And we are working very hard to 
make that improvement.
    More broadly, the bill creates an oversight council in 
which the Federal Reserve is expected to work collaboratively 
with other regulators to assess and monitor potential threats 
to financial stability that may occur anywhere in the financial 
system, and I think it will be a challenge for us to enhance 
our work in that area.
    So these are among the challenges I see for us and tasks 
coming from this legislative agenda.
    Senator Johnson. Dr. Diamond, do you have any additional 
insights?
    Mr. Diamond. Yes, I do. If you look back over the last few 
decades, we have seen an astonishing change in the financial 
environment. Financial engineering has produced a vast array of 
new instruments, and we have also seen an enormous growth in 
hedge funds, new institutions engaging in using the new 
instruments. And the financial engineering we have seen has 
done a great deal of good, but in the crisis has done a great 
deal of harm. And a big part of that problem was not just the 
regulators, but also the financial institutions themselves did 
not understand the risks they were taking on and the risks 
associated with the interconnections of the different financial 
institutions.
    Going forward, I think we are going to see more change. 
That is the way the world goes, particularly the American way, 
and it is important that we not ask the simple question how 
could we have prevented the last crisis and put in place a 
Maginot Line for dealing with the last crisis but, rather, we 
monitor how things are evolving and how regulation and 
consultation and discussion with financial players can adapt to 
the changing circumstance so we do not get another crisis which 
is not the same old crisis but a brand-new and equally horrible 
crisis.
    Senator Johnson. Ms. Bloom Raskin, do you have anything to 
add?
    Ms. Raskin. Yes, I would add a bit. I think that as you 
rightfully point out and observe, implementing the legislation 
is going to be a huge challenge. What in essence the Federal 
Reserve is going to have to step up to the plate to do is to 
really put in place an enhanced, consolidated supervisory plan 
for our largest institutions and those institutions that are 
deemed to be systemically significant. And when we talk about 
enhanced, consolidated supervision, it is really something 
quite robust. It is a set of regulatory measures that include 
capital and leverage, corporate governance, internal controls, 
proper risk management systems, and these are all items that 
are extremely complicated for the most complicated 
institutions.
    So I think the work really cannot be underestimated here. I 
think that there is going to be quite a bit of organizational 
work, too, that will need to be done internally at the Federal 
Reserve to make this done correctly.
    Senator Johnson. Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair, and thank 
you to the panel.
    I want to start with just a general issue and see if any of 
you have thoughts you would like to share. There is an ongoing 
debate here in Washington about deficit reduction versus 
monetary and fiscal stimulus. And, in essence, it could be 
reduced a little bit to how do you steer on the one side to 
make sure that you do not have a Greek-like debt crisis, and on 
the other side how you do not end up with a decade-long, Japan-
style recession? And so any insights on the relevance of the 
experience of those two nations or insights for how we should 
manage our way through to a healthier economy.
    Ms. Yellen. I will begin. I think we have an outlook at 
this point where we seem to be in recovery but the recovery is 
not proceeding at a pace that is sufficient to bring down 
unemployment very rapidly. And so it is clear that it is 
appropriate--long-term unemployment is very high, it is clear 
that it is appropriate for us to be asking what to do.
    I would say as Congress considers the option for further 
fiscal stimulus now, which is natural given the outlook, I 
would emphasize that it is very important and Congress will 
have more flexibility to move in the short run to support the 
economy if simultaneously it can put in place and show 
credibility on taking the measures that are necessary to attack 
the long-term deficit, which I think is widely understood to be 
an unsustainable situation that requires painful policy action.
    So if simultaneously Congress were able to put in place 
meaningful measures that would phase in over time to address 
medium- and longer-term deficit issues, I believe that would 
create greater scope in the shorter term for Congress to also 
contemplate, if you consider it appropriate, actions to address 
short-term weakness in the economy.
    Senator Merkley. Thank you.
    Ms. Raskin. Senator Merkley, I think your reference to 
Japan actually is noteworthy because I think there are a couple 
lessons there that we need to keep in mind, one having to do 
with the fact that, you know, Japan's recovery was probably 
slower than they would have liked, certainly, and it had 
something to do with not having a strong, robust resurgence of 
bank lending. The banking sector stayed weak there for quite a 
number of years. So I think that is something that we want to 
keep in mind here, especially as we have not yet seen an uptick 
in bank lending, the kind of uptick that we would like to see 
to actually spur growth. So I think that is one possible lesson 
of Japan, and then the other being just the general stop-go 
nature of that recovery, the importance to sort of think 
through a more sustained way of moving forward.
    Senator Merkley. Well, you mentioned lending so let me use 
that as a segue, because I think many of my colleagues have the 
same experience that I have had of going home and hearing from 
every business group, every set of small business owners how 
difficult it is to obtain lending. Just this morning I have a 
group coffee, an Oregon coffee, and indeed the first small 
business owner talked about the difficulty of accessing credit, 
a long-time successful business. And we have in the small 
business jobs bill recapitalization of community banks to help 
assist them in lending more, but it feels like we need to find 
some more aggressive way to make funds available for businesses 
to seize opportunities and lead us forward and create jobs.
    What should we be doing?
    Ms. Raskin. Clearly, that is definitely a challenge. There 
are a number of obstacles right now to bank lending, and I 
think we have to work carefully to try to figure out what they 
are. And what you are hearing, by the way, is not at all 
dissimilar to what I hear in Maryland and what I know 
regulators and commissioners are hearing across the country. 
Bank lending is not where it should be.
    Now, part of it has to do with the lack of robust demand. 
You will hear a lot of anecdotes about the fact that there are 
no enough borrowers actually seeking loans. But that is not the 
whole story because we also hear stories of creditworthy 
borrowers, borrowers who have an ability to repay and have 
credible cash-flows. The bankers do not have to be dependent on 
weak collateral coming from real estate. There is cash-flow 
here. These are borrowers who can sustain new loans. So why 
those borrowers are not able to get loans is a challenge, and I 
think we need to do some work on that.
    Also, significantly, bank lending to small businesses is a 
critical factor in spurring employment, so I think the notion 
of getting this right will also have good consequences for 
employment.
    Senator Merkley. Does anybody else want to jump in on that 
conversation?
    Ms. Yellen. Well, I would just say that the Federal Reserve 
has just concluded actually on Tuesday 40-odd sessions we have 
had around the country in which we have tried to bring together 
lenders, small business owners, and others to understand 
exactly what the problems are and all of the various items that 
Sarah mentioned in her answer. This is a complex situation.
    One of the things certainly we are aware of is that as 
supervisors we need to be very careful not to be discouraging 
lending that is sound, carefully underwritten, and will be 
profitable. And we certainly hear frequently the complaint that 
banks are afraid that they will be criticized for loans that 
they make. So the regulators have jointly issued guidance to 
supervisors emphasizing that small business lending that is 
safe and sound is not only important to our communities and 
growing out of this recession, but is also important for 
profitability and the health of the institution. And we have 
emphasized training. We have tried to train our examiners. 
These are tough situations where they have to make judgment 
calls when they are in banks. We do not want to inadvertently 
stifle small business lending that would be very important to 
an economic recovery.
    Senator Merkley. Thank you all very much. My time has 
expired. I appreciate your engagement.
    Senator Johnson. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman, and I thank each 
of you for your leadership and for coming by our office in the 
last few days to talk with us personally. I wish you well at 
the Fed. I am one of those folks that thinks the Fed needs to 
function at a very high level for our country, and I hope you 
will add to that.
    Ms. Raskin, I know you have spent a lot of time in bank 
regulation and bring a lot of that to the Fed. The Fed has a 
number of people who already do that, and I think that, you 
know, here in the Senate each of us has to sort of figure out 
how we are going to make our mark and what we are going to 
bring to a body like the Senate to hopefully make it a stronger 
institution. There is obviously a number of people that do what 
you do already, and I just was curious, as you move to the Fed 
Board, joining people who have similar backgrounds in many 
ways, what is it that you plan to do at the Fed, if you will, 
to make the ``Raskin mark'' on the Fed governance?
    Ms. Raskin. Well, I do not know if I will make a ``Raskin 
mark'' on the Fed governance, but it is a very thoughtful 
question, and I do agree that the staff at the Fed is really 
exemplary as far as I have been able to interact with them and 
a very impressive group of professionals, both economists and 
examiners.
    What I would like to add to the mix I think is a 
perspective that really comes out of the work I have been doing 
at a very local level. As the State banking commissioner, I 
really have been able to see a lot of the spillover effects 
having to do with the crisis and also problems related to the 
run-up to the crisis. And I am not sure that all those 
perspectives have been sufficiently incorporated into both the 
monetary policy side of the Fed and the regulatory side.
    One thing, for example, that we needed to do in Maryland 
was to act very quickly to reform our laws. Some of those laws 
were not at all fit for what the situation was developing, and 
other laws needed to be put in place.
    So I think that the ability to react nimbly is important, 
and then the ability to move those observations into the more 
macro picture I think would be critical to the Fed.
    Senator Corker. We are getting ready to pass some 
legislation in the next 35 minutes. Regardless of what your 
testimony is, that is going to happen. Certainly in any 2,300-
page bill there are good provisions in it. And I am not going 
to say this is the worst bill that has ever been created, but I 
do look at it as a tremendous missed opportunity in many ways.
    I wonder, based on the comments you just made, if there are 
things that you would have liked to have seen in the 
legislation--that is going to be passed, regardless of what you 
say--that you would have liked to have seen in this legislation 
that you think might have caused our country to maybe deal with 
some of those things you saw in the run-up to the crisis we 
just went through. This is your last chance.
    [Laughter.]
    Ms. Raskin. Well, I will point out that the legislation is 
obviously the product of a lot of hard work. I know that there 
has been a lot of very good minds put to the task of trying to 
put in place a system of reforms that can almost assure that we 
do not have a situation like this crisis happen again.
    But to be completely candid, I think that one piece that we 
still need to tackle--and when I say ``we,'' I should really 
say the Congress needs to tackle--is GSE reform. That is a 
piece of the legislation that--a piece that was not addressed 
in the legislation, and it is something that I think still 
needs to be on the forefront of the Congress.
    Senator Corker. That is very astute.
    [Laughter.]
    Senator Corker. I will come back to you in just a minute. 
Thank you very much for your testimony. I look forward to 
serving with you.
    Mr. Diamond, when we met, I looked over your resume, and 
you have written more books than I have probably read in my 
lifetime.
    [Laughter.]
    Senator Corker. Obviously, you are very well educated, and 
I would not want to enter into a debate with you on any of the 
topics that you have mastered.
    I look at your background and think, God, this guy would be 
awesome to run the Social Security Administration, or he would 
be a great official at Treasury. It is not to be critical. I 
actually, you know, wish I knew as much as you knew about those 
topics. But as I see you being appointed to the Fed, I am sort 
of wondering what the hook was, you know, a great head of 
Social Security Administration, great at Treasury, but he is 
going to the Fed. And I am just wondering, you obviously think 
you are going to be a great Governor at the Board. What is it 
that those of us who look at you and look at your resume should 
think is the contribution you are going to make on the Board of 
Governors?
    Mr. Diamond. In my opening remarks, I talked about working 
at how the economy and the economy with the regulatory guidance 
of Government handles risks throughout the economy. And 
obviously I have written heavily on how pension systems adapt 
to risk. But the questions that were raised by this crisis, the 
questions that the existing knowledge of the regulators and, 
indeed, the academic community had done some on, but not a 
great deal, we are now painfully aware of issues on how risks 
get generated and how risks in one place affect all sorts of 
other places, systemic risk. And my background is to think 
about those things. What I have started doing is reading the 
parts of the academic literature--some of it goes back 
decades--on how interactions can happen, and what I hope to be 
able to do is exploring how the regulatory structure will pay 
more attention to the interactions which go from an individual 
bank's risk to systemic risk. And I think that requires the 
kind of background and the nature of economic equilibrium that 
I bring to it, because the structure of the kinds of questions 
and regulations and much of the economic analysis simply does 
not engage with this, and we now know how important it is. And 
the opportunity to work on something that important in an 
environment as good for learning about the economy as the Fed 
would just be a wonderful opportunity for me, and I would hope 
to be very helpful at it.
    Senator Corker. Thank you.
    Ms. Yellen, I was out of the room for a moment. I know 
Senator Shelby asked you a little bit about supervision. I know 
that Ms. Raskin seemed to indicate in her testimony earlier 
that she saw a lot of problems and felt the Fed should have 
responded or could have responded a little more nimbly, and I 
think talked a little bit about that a minute ago. You were 
head of the Fed in San Francisco and obviously had pretty large 
calamities out there. I know you addressed commercial real 
estate earlier. But it seems to me a huge level out there in 
residential real estate, and I am just curious. As you look 
back, do you wish there were actions that you had taken or the 
Fed had taken as it relates to the residential side? I know you 
are still focused on commercial. I think that is--I agree with 
you-- still a problem here in our system. But do you wish there 
were actions that the Fed had taken as it relates to housing, 
especially in your part of the country?
    Ms. Yellen. I think we were monitoring housing prices very 
carefully and became concerned certainly by 2005 that there 
might well be a bubble in the housing market. I think 
personally I gave speeches in 2005 warning of that possibility. 
So this is something that we were attentive to and I think 
tried to evaluate what the risks would be coming out of that. I 
think we failed completely to understand the complexity of what 
the impact of a decline, a national decline in housing prices 
would be in the financial system. We saw a number of different 
things, and we failed to connect the dots.
    So while we thought about the risk coming from a housing 
price decline, I think we failed to understand just how 
seriously mortgage standards, underwriting standards had 
declined, what had happened with the complexity of 
securitization and the risks that we are building in the 
financial system around that. So what was triggered by that 
housing would be triggered by a housing price decline, I think 
we missed critical elements of it that caused the crisis to be 
as severe as it was.
    Looking back on it, certainly I wish that regulators, 
including the Fed, had taken more significant steps earlier to 
appreciate what the risks were in underwriting, to understand 
as I saw in the supervision that we were doing in San Francisco 
mortgages that were being originated and packaged and sold into 
the market where there was a clear deterioration in 
underwriting standards. I think we should have focused, I wish 
we had focused more on the systemic risk that that was causing 
rather than being as focused as we were on safety and soundness 
of banks. Particularly, we failed to focus enough on systemic 
risk. I am pleased that this bill directs us to consider in our 
supervision of consolidated supervision of bank holding 
companies systemic risk, the risk that activities can pose to 
the broader financial system. But on the underwriting side, I 
believe we should have taken more significant steps to curtail 
that sooner.
    Senator Corker. Mr. Chairman, I know my time is up. Can I 
keep going for a little while since nobody is here?
    Senator Johnson. The second panel is coming up, and I know 
that we must get out of here by 11 o'clock to vote.
    Senator Corker. Can I ask two more questions?
    Senator Johnson. One short one.
    Senator Corker. That is a shame. I know we have a vote at 
11, and yet I think there is a lot that could be gained.
    I would just say to--I know that----
    Senator Johnson. You may submit your questions.
    Senator Corker. OK. Let me just ask, I guess, one simple 
question then. Ms. Yellen, I tried to during our--first of all, 
I would love to hear from Ms. Raskin about GSEs, and I will 
talk to her a little bit later about that, and I understand 
what she thinks we are actually pressing for, now trying to 
understand and hopefully there will be a climate to deal with 
GSEs down the road. I think we missed a great opportunity to do 
that now.
    But on underwriting, I tried to pass an amendment that 
would have required every person who purchased a home and 
borrowed money to have a minimum 5-percent downpayment. I know 
that many countries that have not had the problems we have had 
had 15-, 20-percent downpayments on average and still have the 
same homeownership rates.
    Ms. Yellen, I wonder just from your perspective if that one 
requirement, that one simple requirement would have kept us 
from having the type of bubble that you had out in California 
and what we had here in the country and might have kept us from 
having many of the problems we have now.
    Ms. Yellen. Senator, I have not had a chance to think 
through the details carefully of that proposal. I know----
    Senator Corker. It is not very detailed. A 5-percent 
downpayment. It is a very simple----
    Ms. Yellen. Well, you know, I would say that there were 
certainly mortgages that created problems that did have 
downpayments at that level. We had Alt-A mortgages and Option 
ARMs----
    Senator Corker. Could not have happened with 5--yes, yes.
    Ms. Yellen.----that became problematic, so I would not--you 
know, I think that is an interesting proposal, and I do think 
underwriting standards should have been tougher, but there were 
a range of practices there that I think--no-doc lending and so 
forth--really created problems.
    Senator Corker. Thank you. I thank each of you for your 
testimony. I wish we had more time. I am disappointed in that. 
But I look forward to working with you, and, Mr. Chairman, I 
understand the time constraints you are working under, and 
thank you for the leeway.
    Senator Johnson. I want to thank our first panel again and 
congratulate you all on your nominations. You may be dismissed.
    I will now call up our second panel. Our second panel 
consists of two nominees to serve as Inspector General of two 
different independent agencies.
    Our first nominee is Osvaldo Luis Gratacos. Mr. Gratacos 
has extensive experience working on issues related to the 
Office of Inspector General. He is currently serving as an 
Acting Inspector General for the Export-Import Bank, and he has 
served as Deputy Inspector General and legal counsel in that 
office as well. Mr. Gratacos has served as attorney adviser and 
legal counsel to the Inspector General for the United States 
Agency for International Development. Mr. Gratacos has 
experience in the private sector, and he has worked as a 
commercial counsel for Motorola, Incorporated. Mr. Gratacos 
holds a B.A. summa cum laude from the American University of 
Puerto Rico and an M.B.A. from the University of Massachusetts 
and a J.D. from the University of Florida. The Committee 
created the position of Inspector General of the Federal 
Housing Finance Agency as part of the Housing and Economic 
Reform Act of 2008 legislation.
    Our second nominee, Steve A. Linick, has been nominated to 
serve in this inaugural role. Mr. Linick is a career Federal 
prosecutor who currently serves in two roles as Executive 
Director of the National Procurement Fraud Task Force and the 
Deputy Chief of the Fraud Section, Criminal Division of the 
Department of Justice. As Deputy Chief, Mr. Linick manages and 
supervises the investigation and prosecution of white-collar 
criminal cases involving procurement fraud, public corruption, 
corporate fraud, mortgage fraud, and money laundering, among 
others. In October 2008, Mr. Linick received the Attorney 
General's Distinguished Service Award for his efforts in 
leading the Department's procurement fraud initiative. 
Previously, Mr. Linick was an Assistant U.S. Attorney, first in 
the Central District of California and then subsequently in the 
Eastern District of Virginia. Before joining the Federal 
Government, Mr. Linick was an Assistant District Attorney in 
Philadelphia and an associate at Newman & Holtzinger in 
Washington, D.C., from 1990 to 1992. Mr. Linick holds a J.D., 
M.A. in Philosophy, and a B.A. in Philosophy, all from 
Georgetown University.
    Will the witnesses on the second panel please stand and 
raise your right hand while I administer the oath? Do you swear 
or affirm that the testimony you are about to give will be the 
truth, the whole truth, and nothing but the truth, so help you 
God?
    Mr. Gratacos. I do.
    Mr. Linick. Yes.
    Senator Johnson. Do you agree to appear and testify before 
any duly constituted Committee of the Senate?
    Mr. Gratacos. I do.
    Mr. Linick. I do.
    Senator Johnson. Thank you, and please take your seats.
    Before you begin, please be assured that your written 
statements will be part of the record. Please also note that 
members of this Committee may submit written questions to you 
for the record, and you need to respond to these questions 
promptly in order that the Committee may proceed on your 
nomination.
    Thank you for joining us today. I would invite you to 
introduce your family and loved ones in attendance before 
proceedings with your statements.
    Mr. Gratacos. Thank you, Senator Johnson and Senator 
Merkley. I want to introduce my wife who is here, Debbie 
Garcia; and my Dad, who came from Puerto Rico last night, 
Alejandro; and some former colleagues from USAID, and bosses in 
the past: Bill Perkins, Paula Hayes, and my former boss Mike 
Tankersley, who is also coming from Texas.
    Senator Johnson. Welcome to you all.
    Mr. Linick. Senator Johnson, Senator Merkley, thank you. I 
would like to introduce my wife, Mary Britton, and my two 
teenaged children, Zackary and Sarah, who are sitting in the 
front row over here.
    Senator Johnson. Welcome.
    Mr. Gratacos, you may proceed.

STATEMENT OF OSVALDO LUIS GRATACOS MUNET, OF PUERTO RICO, TO BE 
INSPECTOR GENERAL, EXPORT-IMPORT BANK, FEDERAL HOUSING FINANCE 
                             AGENCY

    Mr. Gratacos. Thank you, Mr. Johnson. Thank you, Mr. 
Merkley. Good morning. It is with great honor, humility, and 
enthusiasm that I stand before you today as President Obama's 
nominee to become the second Inspector General of the Export-
Import Bank of the United States. Before I continue, I would 
like to thank the Almighty for this opportunity, my family, and 
the members of the Ex-Im Bank Office of Inspector General 
staff, a group of career public servants who make the work 
possible and are committed to the OIG mission of preventing and 
detecting fraud, waste, and abuse.
    I had the privilege of joining the Ex-Im Bank OIG in 2008 
as the first person hired by then-Inspector General Mike 
Tankersley, after spending almost 8 years of my career at USAID 
OIG and Motorola, Inc. The Ex-Im Bank OIG was established in 
2007, and while I was hired as the legal counsel, I worked 
closely with the IG in establishing the organization. Since 
October 2009, I have had the honor of serving the American 
people as the Ex-Im Bank's Acting Inspector General. During 
this period, the OIG has had remarkable success and has met a 
number of milestones as shown by the latest Semiannual Report 
to Congress. Specifically, the OIG has issued 14 audit reports 
containing over 40 recommendations and suggestions for 
improving Ex-Im Bank programs and operations, and our 
investigative efforts have resulted in a number of law 
enforcement actions, including 24 arrests and indictments 
related to over $45 million in claims paid by Ex-Im Bank; 17 
pending indictments; one conviction, over 80 management 
referrals for actions; and over $8.5 million in program savings 
due to policy cancellations arising out of our investigative 
efforts. Moreover, the OIG is currently investigating 35 open 
matters representing approximately $327 million in claims paid 
by Ex-Im Bank, or 13.6 percent of all Ex-Im Bank claims paid as 
of the end of FY 2009. All of this has been accomplished with a 
very modest annual budget of $2.5 million and a staff of ten 
professionals. As a recently created office, our work is only 
commencing, and if confirmed, I would work to continue to build 
on these successes.
    Through our work, the OIG is committed to helping Ex-Im 
Bank meet it statutory mission of assisting in the financing of 
exports of U.S. goods and services to international markets, 
vital in protecting and creating American jobs. America 
produces the world's best manufactured goods, and it is the 
number one services provider in many global industries. Today 
the opportunity for increasing American exports is an important 
element to our Nation's economic recovery. Since 1934, Ex-Im 
Bank has played a key role in financing the export of these 
goods and services. That role has increased in recent years. In 
FY 2009, Ex-Im Bank announced record authorization levels 
reaching $21 billion and has reported authorization levels of 
$14.7 billion for the first 8 months of FY 2010. Ex-Im Bank's 
role coupled with these growth levels present a valuable 
opportunity for the OIG to partner with Ex-Im Bank in support 
of its mission while exercising OIG's statutory independence.
    In only 3 years since its inception, and just over 1 year 
since reaching current staff levels, our efforts are having a 
noticeable impact on Ex-Im Bank's operations. While Ex-Im Bank 
continues to provide export credit and financing as part of its 
export credit agency functions, the OIG will enhance its 
independent oversight role by focusing on Ex-Im Bank operations 
in order to improve its operational efficiency as well as 
strengthen its efforts in preventing and detecting, fraud, 
waste, and abuse. I look forward to facing these challenges, 
and if confirmed, I will carry out the duties of this office 
with the highest standards of independence and integrity.
    Mr. Chairman and members of this honorable Committee, thank 
you once again for considering my nomination at this hearing 
today. I would be pleased to respond to any questions from the 
Committee. Thank you.
    Senator Johnson. Mr. Linick.

  STATEMENT OF STEVE A. LINICK, OF VIRGINIA, TO BE INSPECTOR 
            GENERAL, FEDERAL HOUSING FINANCE AGENCY

    Mr. Linick. Senator Johnson, Senator Merkley, thank you for 
this opportunity to appear before you today and provide 
testimony. I am honored to be the President's nominee for 
Inspector General of the Federal Housing Finance Agency.
    By way of background, almost my entire professional career 
has been dedicated to public service. I have served in a number 
of leadership positions in the United States Department of 
Justice. Currently, I am the Executive Director of the 
Department of Justice's National Procurement Fraud Task Force, 
and I am also Deputy Chief of the Fraud Section at the Criminal 
Division.
    In total, I have almost 16 years' experience as a Federal 
prosecutor with extensive trial and supervisory experience at 
the Department of Justice and in two United States Attorneys' 
Offices. I have managed and coordinated grand jury 
investigations and prosecutions involving health care fraud, 
procurement fraud, public corruption, mortgage fraud, and other 
financial frauds.
    As a result of having investigated a wide variety of 
financial frauds, I have the experience and ability to develop 
effective strategies to prevent fraud, waste, and abuse 
associated with the regulation of the Government- sponsored 
enterprises.
    I look forward to the prospect of serving as Inspector 
General at the Federal Housing Finance Agency during this 
critical time for both the FHFA and the Government-sponsored 
enterprises. The Federal Housing Finance Agency is a relatively 
new agency, which has never had an Inspector General. In 2008, 
the Federal Housing Finance Agency placed Fannie Mae and 
Freddie Mac in conservatorship out of concern that their 
deteriorating financial condition threatened the stability of 
the financial markets. Since then, the Department of Treasury 
has provided billions of dollars to the enterprises. Under 
these circumstances, the Federal Housing Finance Agency 
Inspector General will play a critical role in safeguarding 
taxpayer dollars and preventing fraud, waste, and abuse.
    If I am fortunate enough to be confirmed as Inspector 
General, I intend to be proactive in overseeing the operations 
and programs of the Federal Housing Finance Agency, including 
its management of the conservatorship. While I intend to 
exercise complete independence that is required of an Inspector 
General, I will make it a priority to maintain a good working 
relationship with the Federal Housing Finance Agency Director 
and management, along with this Committee and Congress as a 
whole.
    Thank you for your consideration. I look forward to 
answering your questions.
    Senator Johnson. Thank you.
    Mr. Linick, with Fannie Mae and Freddie Mae under 
conservatorship, did HERA provide enough resources to the 
Inspector General's office at FHFA to provide strong, 
independent oversight? Are there other tools that would help 
you better do your job?
    Mr. Linick. Thank you, Senator, for that question. In terms 
of resources, because I am the nominee, I have not had a chance 
to probe into my budget or the number of individuals who would 
be on my staff.
    That being said, I think that the resources will need to be 
significant. This is an agency that is facing some challenges 
and has significant responsibilities. The agency has never had 
any oversight before, and its regulatory role has not been 
tested. It is in conservatorship so, in effect, it is 
regulating itself, and it is overseeing billions of dollars 
that have been provided by Treasury, and I expect there is more 
to come.
    As to your second question as to other tools, I intend to 
hit the ground running. I will be creative in trying to recruit 
detailees from other agencies and hire contract employees, but 
I will work with this Committee and I will also work with the 
agency to staff up immediately from day one.
    Senator Johnson. Mr. Gratacos, the Ex-Im Bank has 
experienced great difficulty with fraud in its Medium Term 
Guarantee Program. You have been part of at least 12 arrests, 
numerous indictments, and other evidence of people trying to 
defraud the U.S. Government. What is your view on this program 
and its inherent difficulty serving U.S. exporters while not 
allowing for individuals to commit fraud? Has Ex-Im Bank done 
enough to deter fraud going forward? If not, what further steps 
need to be taken?
    Mr. Gratacos. Thank you, Senator Johnson. Ever since we 
started at Ex-Im Bank, the Medium Term Program has been one of 
the programs that has been exposed to fraud. A lot of cases 
come out of the Medium Term Program. Part of that reflects the 
fact there was no oversight and OIG presence at that time.
    Since then, the Bank has taken a number of steps to 
improve--lower the likelihood of fraud in some of these 
transactions. Part of that has been enhancing our due diligence 
process. Part of it has been in response to some of the audits 
and recommendations we made on the medium term.
    For example, we just issued a review of the initial 
recommendations on the Medium Term Program, and we are glad to 
report that the Bank has taken steps forward toward 
implementing a number of the recommendations that we have, 
including the creation of credit reviews and compliance 
division requiring sometimes payments in some of the 
transactions.
    But we still think there are steps to be taken. There are 
still some open recommendations and some steps that the Bank 
could take. The Bank is in the process of a reorganization 
internally that would allow the programs to merge some of the 
different components into cell groups, allowing the intakers to 
be sitting with the credit underwriters at the same time.
    But we also think that there should be more monitors in the 
performance of this program, and we still think that there is a 
way to go in terms of protecting the taxpayers' money.
    Senator Johnson. Thank you.
    Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair.
    Mr. Linick, I am going to focus primarily on questions to 
you because of my interest in the challenges with housing, and 
particularly in the future of Fannie and Freddie.
    One of the aspects of the bill that we just passed is it 
had three retail mortgage reforms. One was to end--well, I say 
``just passed.'' We will hopefully just be passing it in a few 
minutes. But one was to end liar loans, require full 
underwriting. The second was to end steering payments in which 
the loan originator's interests were put out of sync with the 
interests of the customer. And the third was to ban prepayment 
penalties on subprime loans which were used to lock people into 
exploding interest rates.
    Now, one of those, in essence, is about direct 
misrepresentation or fraud, and that is certainly the issue of 
fully documenting loans or misdocumenting loans. But the other 
two play into the structure of the subprime market, which led 
to many other issues regarding how loans were packaged and how 
those packaged loans were represented, how they were rated, how 
they were sold.
    Can you give us any insights on how those different retail 
issues might reverberate through the industry and affect the 
issues that you will face as Inspector General?
    Mr. Linick. Thank you, Senator. I do not have particular 
information about those--let me rephrase that. Those three 
issues are going to be key to several goals and objectives of 
FHFA. Absolutely, underwriting is obviously a control that FHFA 
obviously needs to make sure that it is part of their 
operations and programs. One of the goals of FHFA is to limit 
exposure, risk exposure in the future. And as Inspector 
General, I will make sure that I will take a look at internal 
controls to make sure that underwriting is adequately 
accomplished.
    As far as the conflicts of interest issue, conflicts of 
interest obviously undermine the integrity of an institution 
organizationally and personal conflicts of interest, and one of 
my tasks as Inspector General will be to make sure that those 
types of issues are transparently--are transparent and that 
there are corrective actions taken to prevent them.
    Senator Merkley. So in the news--I do not know, it must 
have been about 10 days ago--was a story about a firm that had 
allegedly misrepresented the packages of mortgages that it had 
sold, I believe to Fannie. But is that the type of abuse that 
you will be focusing on? If not, what do you see as kind of the 
top three issues that really need to be scrutinized to bring 
integrity to the process of writing mortgages and securitizing 
those mortgages?
    Mr. Linick. Senator, I think that the top three issues, 
number one, that Fannie and Freddie do not buy loans or 
mortgage-backed securities that are derived from fraud, and the 
underwriting standards are going to be very important in 
assuring that does not happen.
    The second issue is the conservatorship. This is a 
situation where FHFA is essentially regulating an operating the 
company, so it is going to be critical to ensure that they are 
acting independently in their regulatory role and that there is 
a strong and credible regulator as well as a conservator.
    And then the third issue is how is FHFA managing the 
billions of dollars that Treasury is providing to the GSEs. 
Conserving assets is one of the goals of FHFA, conserving and 
mitigating risk. How are they conserving assets? In what manner 
they are conserving assets? Is there some sort of exit strategy 
for the conservatorship, which is not meant to be permanent? 
And also how are they addressing foreclosure prevention within 
the context of managing the conservatorship.
    Senator Merkley. I have one second left, so my time is up. 
I will yield back to the Chair. Thank you.
    Senator Johnson. Thank you, Senator Merkley.
    Today we have a set of nominees before us that, while very 
different, will all play an important role as the Nation moves 
forward from our financial crisis and begins implementation of 
the Wall Street Reform and Consumer Protection Act as well as 
the formation of other equally important measures to create 
jobs, spur economic growth, and reduce our Nation's deficit.
    Please also note that members of this Committee may submit 
written questions to you for the record, and you need to 
respond to these questions promptly in order that the Committee 
may proceed with your nominations.
    I thank you all again for being here today, and this 
hearing is adjourned.
    [Whereupon, at 11:03 a.m., the Committee was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
              PREPARED STATEMENT OF SENATOR SHERROD BROWN
                             July 15, 2010
    Thank you, Mr. Chairman, and thank to the nominees for your 
testimony today.
    When Chairman Bernanke testified before use in February, we talked 
about the troubling decline in manufacturing and rise in financial 
services in the United States.
    For most of our nation's history manufacturing, transportation, and 
agriculture were the engines driving our economy.
    But as many Ohioans can tell you, manufacturing has steadily 
declined over the last three decades. At the same time the finance 
industry has rapidly expanded, to the point that the two have switched 
positions in our economy.
    In the 1980s manufacturing made up 25 percent of GDP and financial 
services was 11 to 12 percent. Then manufacturing began to decline and 
finance began to expand and sometime in the 1990s the two industries 
crossed paths. By 2004-05 the two sectors had flipped: manufacturing 
was just 12 percent of GDP while the financial services industry was 
about 20 to 21 percent.
    A number of emerging economies have thriving manufacturing and 
extraction industries.
    First World export countries like Japan, Germany, and even 
Switzerland all have economies in which the manufacturing sector is 
larger than the financial sector. If we want to stay competitive with 
other nations, we need to refocus on productive industries.
    I've heard from a lot of businesses in Ohio that they are being 
denied access to credit that they desperately need. Right now the 
financial industry's prosperity is not helping the other sectors of our 
economy.
    I have repeatedly said that creating more jobs is essential. To do 
this we must re-invest in the manufacturing and service industries that 
have brought us prosperity since our nation's founding.
    I'd like to hear what you think the Fed should be doing to promote 
productive industries like manufacturing.
    I also want to emphasize the importance of considering real world 
perspectives when serving on the Board of Governors. In the luxuriant 
halls of the Federal Reserve Bank, it can be easy to focus on numbers 
like the inflation targets. But as you all know, the unemployment rate 
has been high for a substantial period of time, and it remains an 
unacceptable 9.3 percent. This is more than double the Fed's 
statutorily mandated target of 4 percent.
    I urge you not to forget that your economic policy decisions affect 
the daily lives of Americans in your roles as Governors of the Federal 
Reserve.
                                 ______
                                 
              PREPARED STATEMENT OF SENATOR JOHN F. KERRY
                             July 15, 2010
    Chairman Dodd and Senator Shelby, I am pleased to support the 
nomination of Dr. Peter Diamond to become a member of the Board of 
Governors of the Federal Reserve System. The experience that Dr. 
Diamond has in economic and monetary policy will be a great asset to 
the Federal Reserve. I am very pleased that he is willing to serve our 
nation in this important role.
    Our nation is facing its greatest economic crisis since the Great 
Depression. A series of financial institution failures and frozen 
credit markets imperiled our economy. I believe Dr. Diamond has the 
experience and judgment to become an effective Governor on the Federal 
Reserve Board. He will help the Federal Reserve take actions to provide 
liquidity for businesses, especially small businesses and create jobs 
that will help families who are currently bearing the weight of the 
crisis. He will also help the Federal Reserve provide appropriate 
oversight of financial institutions to insure that our recent financial 
crisis will never happen again.
    His work has literally changed the way all economists think about 
national debt, taxes, risk and social security. Dr. Diamond is a 
pioneer in the field of ``search theory'' which seeks to explain how 
individual decisions in the labor market can build on each other to 
have a broader impact on the economy.
    Dr. Diamond is a former chair of MIT's Department of Economics. He 
has made research advances in both macroeconomics and microeconomics 
during a wide-ranging career, studying subjects including growth, 
taxation and labor market searches. In recent decades he has analyzed 
social insurance programs closely and become a prominent authority on 
Social Security.
    Dr. Peter Diamond first arrived at the Massachusetts Institute of 
Technology (MIT) 1960 as a graduate student. In 1966, he became a 
member of the MIT economics faculty. Today, he currently serves as an 
Institute Professor at MIT. He has previously served as President of 
the American Economic Association, President of the Econometric 
Society, and President of the National Academy of Social Insurance.
    Dr. Diamond is the author or editor of 12 books and more than 130 
articles, Dr. Diamond is a fellow of the American Academy of Arts and 
Sciences and a member of the National Academy of Sciences. He received 
his bachelor's degree from Yale University and his Ph.D. from the 
Massachusetts Institute of Technology.
    Ricardo Caballero, chair of the MIT Department of Economics said 
that ``Peter represents the very best that an academic economist has to 
offer to Washington: a superb and open mind, an insatiable appetite for 
understanding the institutional details of a problem and policy, and a 
spirit of service.''
    Chairman Dodd, you should be aware that Dr. Diamond is a fellow 
long-time Boston Red Sox fan who started attending games back in the 
1960s.
    I hope the Banking Committee will give Dr. Diamond's nomination 
full consideration.
                                 ______
                                 
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                 PREPARED STATEMENT OF JANET L. YELLEN
     Nominee for Member and Vice Chair of the Board of Governors, 
                         Federal Reserve System
                             July 15, 2010
     Chairman Dodd, Senator Shelby, and members of the Committee, I am 
honored to appear before you as President Obama's nominee to serve as a 
Member and Vice Chair of the Board of Governors of the Federal Reserve 
System. If I am confirmed to these positions, I look forward to working 
with this Committee in the coming years. I am wholeheartedly committed 
to pursuing the Federal Reserve's congressionally mandated goals of 
maximum employment and price stability and to strengthening our program 
of supervision and regulation, building on the lessons learned during 
the financial crisis. We must work together, and in cooperation with 
central banks and governments around the world, to mitigate systemic 
risk in the financial and payments systems so that our country never 
again suffers such a devastating episode of financial instability. We 
have learned a harsh lesson about the dire consequences a financial 
crisis has for ordinary Americans in the form of lost jobs, lost homes, 
lost wealth, and lost businesses, and those of us charged with 
overseeing the financial system should always keep this human cost in 
mind.
    I have served since 2004 as President and Chief Executive Officer 
of the Federal Reserve Bank of San Francisco and, before that, from 
1994 through 1997, as a member of the Federal Reserve Board. Through 
this service, I have gained experience in every one of the Federal 
Reserve's areas of responsibility, including monetary policy, banking 
supervision and regulation, consumer and community affairs, and the 
operation of the payments system. I believe this extensive background 
equips me to work under Chairman Bernanke as a leader of the Federal 
Reserve System as we strive to carry out the missions Congress has 
assigned to us.
    Over the next few years, the Fed must craft policies that ensure 
that our economy accelerates its progress along the recovery path it 
has begun to trace. With unemployment still painfully high, job 
creation must be a high priority of monetary policy. But we must also 
avoid any threats to price stability. That means that, when the 
appropriate time comes, we must withdraw the extraordinary monetary 
accommodation now in place in a careful and deliberate fashion. My 
approach going forward, as in the past, will be to bring a thoughtful 
and independent voice to Federal Open Market Committee deliberations on 
monetary policy, drawing on the insights of business and community 
leaders throughout the country, and thoroughly analyzing macroeconomic 
trends that affect the economic outlook and the risks to our forecasts.
    In my view, Congress has wisely granted the Federal Reserve the 
freedom to make independent monetary policy decisions in pursuit of 
congressionally mandated goals, based on a forward-looking perspective 
and the best judgments of Federal Open Market Committee participants. I 
believe that experience in the United States and around the globe 
demonstrates that central bank independence in monetary policy produces 
clear societal benefits. When central banks are independent, economies 
perform better, inflation is lower and more stable, and long-term 
interest rates are lower and less volatile. In other words, an 
independent central bank is best equipped to promote both price 
stability and high levels of growth and employment. I should stress 
though that independence brings with it both responsibility and 
accountability. The Federal Reserve is fully accountable to Congress, 
and that's how it should be. That means the Fed must explain its 
actions, outlook and strategy, and provide the information necessary 
for Congress and the public to understand and evaluate its policy 
decisions. I strongly support Fed independence in monetary policy and I 
am committed to enhancing the transparency that is essential to 
accountability and democratic legitimacy.
                                 ______
                                 
                 PREPARED STATEMENT OF PETER A. DIAMOND
  Nominee for Member of the Board of Governors, Federal Reserve System
                             July 15, 2010
    Chairman Dodd, Senator Shelby, and Members of the Committee, I am 
honored to have been nominated by President Obama to be a member of the 
Board of Governors of the Federal Reserve System and grateful to this 
Committee for scheduling this hearing.
    If I am confirmed by the Senate, I will work to the best of my 
abilities to fulfill the responsibilities of this office. Those 
responsibilities have always been significant. The experience of the 
recent financial crisis and the financial reform legislation have 
underlined the multiple jobs the Fed has in working to fulfill the dual 
mandate of high employment and price stability. The Fed will have major 
work to do to implement the tasks that the legislation is placing at 
the Fed. I would be honored and pleased to be part of the process of 
responding to this challenge.
    I studied both mathematics and economics as an undergraduate at 
Yale University. I received my Ph.D. in economics from the 
Massachusetts Institute of Technology (MIT) in June 1963. Since then I 
have been a faculty member, first at the University of California, 
Berkeley, and, since 1966, at MIT. Throughout this period I have taught 
and done research in economics. My primary focus in both teaching and 
research has been economic theory, particularly general equilibrium 
theory, macroeconomics, search theory, and public finance. Within 
public finance, my primary focus has been on taxes, pensions, and 
social insurance, particularly Social Security. I have done both 
theoretical analyses and policy analyses. I have also done research in 
other areas, including, behavioral economics, and law and economics. I 
took classes at Harvard Law School as part of my preparation for doing 
research in law and economics--I believe in being well-grounded in a 
subject when doing research or policy analysis. In addition to 
microeconomics, macroeconomics, and public finance, I have also taught 
money and banking, and law and economics.
    Being a member of two economics departments with great collegial 
interactions, I have gained a wide knowledge of a variety of economics 
topics, as well as detailed knowledge in my areas of expertise. As a 
consequence, I have considerable awareness of the development of 
economic analyses of monetary policy and its impacts on both inflation 
and employment as well as studies of the determinants of financial 
crises.
    A central theme in my research career has been how the economy 
deals with risks, both risks at the individual level and risks that 
affect the entire economy. In all of my central research areas, I have 
thought about and written about the risks in the economy and how 
markets and Government can combine to make the economy function better 
for individuals. If confirmed, this background should be very helpful 
at the Federal Reserve as part of the process of addressing our 
heightened awareness of the dangers of systemic risks. My background in 
behavioral economics and law and economics give me high awareness of 
the issues involved in consumer protection and increasing financial 
literacy.
    If confirmed, I would welcome the opportunity to help address the 
important issues that have been raised by the financial crisis, as well 
as the longstanding issues and concerns that the Federal Reserve faces, 
bringing my research experience and expertise to bear on these 
difficult and important issues.
                                 ______
                                 
                PREPARED STATEMENT OF SARAH BLOOM RASKIN
             Nominee for Member of the Board of Governors, 
                         Federal Reserve System
                             July 15, 2010
    Chairman Dodd, Senator Shelby, Distinguished Members of the 
Committee, and to all the able staff who are sitting in seats I 
remember so well:
    As a former banking counsel to your Committee, I cannot quite 
express what an honor it is to appear before you today. I never dreamed 
I would one day be here as a nominee to the Federal Reserve Board. (Or 
maybe I did dream it at some point, but I certainly never believed it.)
    I must thank Senator Sarbanes who has been an extraordinary mentor 
to me over the course of my career and has shown me how one can be 
passionately committed both to the public interest and to one's family 
at the same time.
    It is a great and humbling honor to be nominated by President 
Obama, and I am very grateful.
    If confirmed, I will participate in the essential and difficult 
work of restraining inflation and maintaining price stability, 
maximizing sustainable employment and economic growth, and trying to 
continually reconcile and harmonize these two goals.
    This is a challenging moment for the Federal Reserve. Every member 
of this Committee knows that even though the worst of the crisis is 
over, it remains a precarious time for far too many of our families and 
businesses. The Fed must do its part to restore the underlying strength 
and vibrancy of the American economy.
    As Maryland's Commissioner for Financial Regulation over the last 4 
years, I have worked day and night to counter the devastating effects 
on our communities of the national banking and liquidity crisis, the 
terrible spikes in home foreclosures, and persisting high unemployment 
and underemployment.
    At the same time, as a front line banking regulator, I have worked 
to revise and replace ineffectual and counterproductive State 
regulations that do not put the Government on the side of economic 
progress for our people.
    If I am confirmed, my experience working through this crisis at the 
state level will deeply inform my actions as a member of the Federal 
Reserve Board.
    The proper conduct of monetary policy by our central bank is 
essential to calming the waves of financial instability that have 
engulfed so many of our communities, businesses and households. Over 
the course of the last generation, the Federal Reserve has achieved 
price stability and successfully anchored long-term inflationary 
expectations. This achievement is critical to our economic strength, 
and it remains a central institutional objective that I subscribe to 
wholeheartedly.
    But it is only a partial victory when many American households 
continue to face the perils of unemployment and many small businesses 
struggle with weakened consumer demand and reduced access to credit.
    We need to strengthen this recovery by expanding its foundations. 
This means that, in addition to maintaining stable inflationary 
expectations and keeping a vigilant eye on the emergence of new 
bubbles, the Fed must seek to fulfill the other part of its statutory 
mandate by addressing unemployment, which has pervasive social costs. 
In my state, I have seen these costs in a loss of productive capacity, 
a weakened housing market, increased strain on state and local 
resources and services, and a nervous reluctance on the part of many 
businesses and banks to invest and make loans. The Fed must work for a 
broad and sustained recovery that not only controls inflation but 
facilitates growth and more robust business lending by banks.
    In sum, I know that there is a lot of hard work to do at the Fed. 
If you choose to confirm me, I will bring all of the experience, 
knowledge and commitment I have gained over the course of my career to 
the task of fulfilling Congress's statutory expectations. And I will 
maintain thestandards of professionalism, independence and probity that 
I have always tried to uphold in my career and that, to my mind, are 
exemplified by the work of this Committee.
    Thank you for the honor of hearing me today. I will be happy to 
respond to any and all questions you may have--verbally or promptly in 
writing--throughout this process and indeed throughout my tenure at the 
Fed if I am fortunate enough to be confirmed.
                                 ______
                                 
           PREPARED STATEMENT OF OSVALDO LUIS GRATACOS MUNET
 Nominee for Inspector General, Export-Import Bank of the United States
                             July 15, 2010
    Good morning, Mr. Chairman, Christopher Dodd, Senator Shelby, and 
distinguished members of this honorable Committee.
    It is with great honor, humility and enthusiasm that I stand before 
you today as President Obama's nominee to become the second Inspector 
General at the Export-Import Bank of the United States. Before I 
continue, I would like to thank the Almighty for this opportunity, my 
family, and the members of the Ex-Im Bank Office of Inspector General 
staff, a group of career public servants who make the work possible and 
are committed to the OIG mission of preventing and detecting fraud, 
waste and abuse.
    I had the privilege of joining Ex-Im Bank OIG in 2008, as the first 
person hired by then Inspector General, Michael W. Tankersley, after 
spending almost eight (8) years of my career at the U.S. Agency for 
International Development OIG and Motorola, Inc. The Ex-Im Bank OIG was 
established in 2007 and while I was hired as the legal counsel, I 
worked closely with the IG in establishing the organization. Since 
October 2009, I have had the honor of serving the American people as 
the Ex-Im Bank Acting Inspector General. During this period, the OIG 
has had remarkable success and has met a number of milestones as shown 
by our latest Semiannual Report to Congress. Specifically, the OIG has 
issued fourteen (14) audit reports containing over forty (40) 
recommendations and suggestions for improving Ex-Im Bank programs and 
operations, and our investigative efforts have resulted in a number of 
law enforcement actions) including: twenty-four (24) arrests and 
indictments relating to over $45 million in claims paid by Ex-Im Bank; 
seventeen (17) pending indictments; one conviction; over eighty (80) 
management referrals for actions, and over $8.5 million in program 
savings due to policy cancelations arising of our investigative 
efforts. Moreover, the OIG is currently investigating thirty-five (35) 
open matters representing approximately $327 million in claims paid by 
Ex-Im Bank (or 13.6 percent of all Ex-Im Bank claims paid as of the end 
of FY 2009). All of this has been accomplished with a very modest 
annual budget of $2.5 million and a staff of ten professionals. As a 
recently created office, our work is only commencing, and if confirmed, 
I would work to continue to build on these successes.
    Through our work, the OIG is committed to helping Ex-Im Bank meet 
its statutory mission of assisting in the financing of exports of U.S. 
goods and services to international markets, vital in protecting and 
creating American jobs. America produces the world's best manufactured 
goods and it is the number one services provider in many global 
industries. Today the opportunity for increasing American exports is an 
important element to our nation's economic recovery. Since 1934, Ex-Im 
Bank's has played a key role in financing the export of these goods and 
services. That role has increased in recent years. In FY 2009, Ex-Im 
Bank announced record authorization levels reaching $21 billion and has 
reported authorization levels of $14.7 billion for the first 8 months 
of FY 2010. Ex-Im Bank's role coupled with these growth levels present 
a valuable opportunity for the OIG to partner with Ex-Im Bank in 
support of its mission while exercising OIG's statutory independence.
    In only 3 years since its inception (and just over 1 year since 
reaching current staff levels), our efforts are having a noticeable 
impact on Ex-Im Bank's operations. While Ex-Im Bank continues to 
provide export credit and financing as part of its export credit agency 
functions, the OIG will enhance its independent oversight role by 
focusing on Ex-Im Bank operations in order to improve its operational 
efficiency as well as strengthen its efforts in preventing and 
detecting fraud, waste and abuse. I look forward to facing these 
challenges and, if confirmed, I will carry out the duties of this 
office with the highest standards of independence and integrity.
    Mr. Chairman and members of this honorable Committee, thank you 
once again for considering my nomination at this hearing today. I would 
be pleased to respond to any questions from the Committee. Thank you!
                                 ______
                                 
                 PREPARED STATEMENT OF STEVE A. LINICK
     Nominee for Inspector General, Federal Housing Finance Agency
                             July 15, 2010
    Chairman Dodd, Ranking Member Shelby, and Members of the Committee, 
thank you for this opportunity to appear before you today and provide 
testimony. I am honored to be the President's nominee for Inspector 
General of the Federal Housing Finance Agency (``FHFA''). I also want 
to thank members of the Committee's staff who gave of their time 
generously in preparation for this hearing.
    Before I proceed with a brief opening statement, I would like to 
introduce my wife, Mary Britton, and my son and daughter, Zackary and 
Sarah, who are here with me today.
    By way of background, almost my entire professional life has been 
dedicated to public service. I have served in a number of leadership 
positions in the United States Department of Justice (``DOJ''). Since 
2006, I have been Executive Director of DOJ's National Procurement 
Fraud Task Force (the ``Task Force''), consisting of more than 30 
Offices of Inspectors General and other law enforcement agencies. In 
this capacity, I have been involved in developing and overseeing a 
strategic plan and nationwide effort to strengthen the Government's 
efforts to fight procurement and grant fraud, including fraud 
associated with the American Recovery and Reinvestment Act. As part of 
this effort, I have been the primary point of contact at DOJ for 
contract fraud cases related to the wars and reconstruction efforts in 
Iraq and Afghanistan.
    Since 2006, I also have served as Deputy Chief of the Fraud 
Section, Criminal Division, DOJ, where I currently supervise 18 
attorneys and am responsible for supervising and managing the 
investigation and prosecution of a wide range of financial frauds. 
Between 2004 and 2006, I was Deputy Chief of the Fraud Unit in the U.S. 
Attorney's Office for the Eastern District of Virginia, where I was 
involved in both supervising attorneys and establishing office 
initiatives and priorities.
    In total, I have almost 16 years experience as a Federal prosecutor 
with extensive trial, appellate, and supervisory experience at DOJ and 
in two U.S. Attorneys' Offices, including the Eastern District of 
Virginia and the Central District of California. I have managed and 
coordinated grand jury investigations and prosecutions involving health 
care fraud, procurement fraud, public corruption, securities fraud, and 
other financial frauds. I have investigated and prosecuted individuals 
who have committed various types of mortgage fraud, including fraud in 
the loan origination process and real estate flip schemes. Recently, I 
was involved in supervising a team of Fraud Section attorneys, who, in 
partnership with the U.S. Attorney's Office in Las Vegas, charged 19 
defendants as part of a nation-wide mortgage fraud sweep dubbed 
``Operation Stolen Dreams.''
    As a result of having investigated a wide variety of financial 
frauds, I have the experience and ability to develop effective 
strategies to prevent and detect fraud, waste, and abuse associated 
with the regulation of the Government-sponsored enterprises. Moreover, 
through my work on the Task Force, I have become very familiar with the 
Inspector General community and the challenges that Inspectors General 
face.
    I look forward to the prospect of serving as Inspector General at 
FHFA during this critical time for both FHFA and the Government-
sponsored enterprises. The FHFA is a relatively new agency, which has 
never had an Inspector General. In 2008, FHFA placed Fannie Mae and 
Freddie Mac in conservatorship out of concern that their deteriorating 
financial condition threatened the stability of the financial markets. 
Since then, the Department of Treasury has provided billions of dollars 
to the enterprises. Under these circumstances, the FHFA Inspector 
General will play a critical role in safeguarding taxpayer dollars and 
preventing fraud, waste, and abuse. In addition, the FHFA Inspector 
General will carry significant management responsibility in having to 
establish a new office and hire a staff of highly qualified 
individuals.
    If confirmed as Inspector General, I intend to be proactive in 
overseeing the operations and programs of FHFA, including its 
management of the conservatorship. While I intend to exercise complete 
independence that is required of an Inspector General, I will make it a 
priority to maintain a good working relationship with the FHFA Director 
and management, along with this Committee and Congress as a whole.
    Thank you for your consideration. I look forward to answering your 
questions.

 RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM JANET L. 
                             YELLEN

Q.1. President Yellen, Olivier Blanchard, chief economist of 
the International Monetary Fund, recently floated the idea of 4 
percent inflation targets for central banks, double the roughly 
2 percent rate presumed by many to have governed Fed policy in 
many recent years. Yet, Fed Chairman Bernanke, identifying the 
significant investment central banks have made in creating low 
and stable inflation expectations, has identified that he 
thinks such a move would be ``a very risky transition.'' Do you 
side with Mr. Blanchard or with Chairman Bernanke?

A.1. During the recent crisis and recession, the zero lower 
bound on interest rates limited the amount of monetary stimulus 
that the Federal Reserve and other central banks can provide. 
Admittedly, a higher long-run inflation objective would give 
the Fed more maneuvering room in the future. But, any such 
benefit would be counterbalanced by other factors, including 
the potential erosion of the Fed's hard-earned inflation 
credibility and the economic costs of higher inflation and 
interest rates. This issue will be debated by economists in the 
years ahead, and I will follow such discussions with interest. 
At this time, however, I agree with Chairman Bernanke that an 
increase in the long-run inflation objective to 4 percent would 
be a risky policy strategy.

Q.2. President Yellen, you identify in material provided to the 
Banking Committee, that you acquired `` . . . first-hand 
experience in the conduct of banking supervision through my 
oversight of the Federal Reserve Bank of San Francisco's 
banking supervision and regulation division.'' You began as 
President and CEO of the San Francisco bank in 2004. What 
actions or written work can you point to that indicates that 
your oversight of supervision and regulation was designed to 
help guard the Fed's 12th District and, indeed, the financial 
system from growing speculative excesses in real estate?

A.2. In 2004, the Federal Reserve Bank of San Francisco became 
concerned with relaxed underwriting standards and growing 
commercial real estate concentrations at commercial banks in 
our District. We initiated a horizontal review that resulted in 
findings around deficiencies in risk management and governance 
and demands for remedial action. Recognizing that these issues 
were present not only in banks supervised by our Reserve Bank, 
but also by other banks in our District and throughout the 
country, we brought our findings and concerns to the Board of 
Governors and urged that guidance be issued on an interagency 
basis to address the risks to the banking sector that were 
building as a result of these concentrations. We contributed to 
the process led by Board of Governors staff that resulted in 
the issuance of interagency guidance on commercial real estate 
concentrations in December 2006. I personally emphasized my 
concern about the dangers of growing commercial real estate 
concentrations in speeches to community banking organizations 
beginning in 2005. I cited the weak practices we had detected 
in our supervision around risk management and capital planning, 
indicated that our banking supervision staff had ``communicated 
our high expectations around high commercial real estate 
concentrations to the banks we supervise'', and noted that 
``we're now at the early stages of developing potential 
interagency guidance.'' Other examples of our supervisory 
efforts are provided in the response to question 6.
    In addition, I began to discuss risks relating to real 
estate in economic outlook speeches that I gave starting in 
2005. I cited evidence suggesting that housing prices were 
overvalued and discussed the possibility that a significant 
correction could occur. My intention, in part, was to use the 
``bully pulpit'' to damp speculative excesses. I argued that 
regulation, rather than monetary policy, was the most 
appropriate tool to use to address developing excesses. I noted 
the decline in mortgage underwriting standards and the 
proliferation of loans with riskier terms but thought, wrongly 
as it turned out, that much of the risk had been diversified 
out of the financial sector via securitization, thereby 
reducing the odds of widespread financial disruption were house 
prices to decline.

Q.3. President Yellen, writing in a November 2009 edition of 
your bank's publication Economic Letter, you say that `` . . . 
monetary policy may also play a role in managing systemic 
risk.'' You further say that `` . . . monetary policy could 
play a role in restraining undesirable swings in leverage and, 
by extension, reduce systemic risk.'' Do you advocate that the 
Fed should use monetary policy to lean against swings in asset 
prices? If so, how do you know which swings are potential 
bubbles and which are temporarily outsized movement of asset 
prices well grounded in fundamentals?

A.3. In that speech I also noted that the use of monetary 
policy in managing systemic risk compromises the attainment of 
our inflation and employment goals. Therefore, I concluded that 
supervision and regulation of financial institutions should 
provide the first line of defense against systemic risk, rather 
than monetary policy. The events of the past few years teach us 
that we need to closely monitor and analyze movements in 
leverage and asset prices and be cognizant of their effects in 
the conduct of monetary policy.

Q.4. President Yellen, do you have any ideas about how the 
Federal Reserve Board could increase its transparency with 
Congress?

A.4. I am committed to working with the Committee and with 
Congress to consider ways in which transparency might be 
enhanced. I believe that the Federal Reserve should provide any 
and all information necessary for Congress and the public to 
fully understand and evaluate the Federal Reserve's actions as 
long as such disclosures are consistent with independence in 
monetary policy formulation and the effective implementation of 
monetary policy, including the operation of the discount 
window. The Dodd-Frank Regulatory Reform bill includes 
provisions, which I support, to further enhance transparency, 
particularly a complete GAO audit of the Federal Reserve's 13-3 
facilities and emergency actions. The bill also requires that 
discount window loans be reported with an eight-quarter lag. 
Confidentiality relating to discount window borrowing is 
essential for this facility to retain its effectiveness. I 
believe, however, that the reporting lag included in the Dodd-
Frank bill is sufficiently long to mitigate this concern.

Q.5. President Yellen, how many Federal Reserve-regulated banks 
and bank holding companies failed in the 12th Federal Reserve 
district, where you oversee regulation, and how do failures in 
your district compare to those in other districts?

A.5. Since 2008, six state member banks and forty bank holding 
companies supervised by the Federal Reserve have failed in the 
12th Federal Reserve district. The number of bank failures in 
the 12th district exceeds those in all other districts except 
Chicago and Atlanta. The number of bank holding company 
failures in the 12th district ranks second among districts, 
just below Atlanta. Not surprisingly, those districts--San 
Francisco and Atlanta--with the most significant collapse in 
housing prices and the highest levels of concentrations in 
residential construction and land development loans have 
experienced the most significant failure rates in banks and 
bank holding companies. It is important to note that the vast 
majority of 12th district bank holding companies are considered 
``shell'' holding companies with little activity outside of the 
subsidiary bank. Consequently, the failure of bank holding 
companies has been driven by the failure of the underlying 
banks, which are predominately banks for which the Federal 
Reserve is not the primary regulator. It is also noteworthy 
that bank holding companies in the 12th District tended to hold 
banks with significantly higher construction and land 
development concentrations compared to holding companies in 
other Districts, leading to a higher failure rate.

Q.6. President Yellen, did you warn about declines in 
underwriting standards and increases in subprime lending prior 
to 2007? What steps did you take, as a regulator, to address 
the growing risks?

A.6. Starting in 2004, the San Francisco Fed provided several 
warnings about subprime and residential lending through our 
publication on banking risks in the West. Over several years, 
we noted concerns regarding high loan-to-value ratios, cash-out 
refinancing, the sustainability of housing price appreciation 
and the vulnerability of subprime borrowers to these practices 
and conditions. As I noted in my answer to question 2, starting 
in 2005, I started to warn in my speeches that soaring housing 
prices raised concerns about national economic stability and 
suggested that tighter supervision and regulation might be one 
viable strategy for addressing the bubble. Indeed, our 
examiners intensified their focus on evaluating the adequacy of 
underwriting, risk controls and management across a range of 
mortgage-related activities, including subprime origination. 
Specific examples of our examination work include evaluating 
policies and practices to preclude predatory lending practices, 
ensuring that a documented ``benefit to the borrower'' existed 
in the transaction, and evaluating whether underwriting models 
complied with Equal Credit Opportunity (ECOA) and Fair Housing 
Act requirements. Data and insights gained from these efforts 
were provided to the Board of Governors. This information 
contributed to their efforts to restrain such practices through 
the supervisory guidance on nontraditional mortgages issued in 
2006.
    Starting in 2004, the San Francisco Fed's community 
development group began to address concerns in low-income 
communities relating to both subprime and predatory lending. At 
the National Community Reinvestment Conference in Los Angeles 
in March 2004, the San Francisco Fed sponsored a special 
session on predatory lending and community-based strategies for 
preventing predatory lending. In addition, starting in the 
spring of 2004, staff worked with Freddie Mac and other 
community partners to establish ``Don't Borrow Trouble'' 
campaigns in both Arizona and California. In March 2005, the 
San Francisco Fed hosted a meeting in collaboration with the 
Greenlining Institute and Operation Hope to discuss the rising 
prevalence of adjustable rate mortgages in low-income 
communities with senior executives of banks within the 12th 
District. The purpose of the meeting was to identify problems 
that low-income families with ARMs would face if interest rates 
were to rise, and to identify ways that the banks could work to 
better protect both consumers and their business interests. In 
June 2005, the San Francisco Fed hosted a luncheon for local 
community leaders with Federal Reserve Governor Edward Gramlich 
to discuss his concerns about subprime lending and to identify 
strategies that could help promote sustainable homeownership, 
particularly within the high-cost regions of the 12th District. 
In June 2006, we hosted the Federal Reserve Board's HOEPA 
hearings to gather community input into the HOEPA regulations. 
We became increasingly concerned by the growing number of 
reports from community groups about the problems with subprime 
and predatory lending. In January 2006, we initiated a research 
project to collect local data on foreclosure filings and 
published a study in July 2006 that linked rising foreclosures 
in California to higher-priced lending. This was followed by a 
dedicated issue of our Community Investments publication on 
foreclosure prevention in December 2006, which sounded concerns 
about rising foreclosures and presented models from across the 
country for mitigating the foreclosure crisis. These two 
research publications laid the groundwork for an extensive 
effort by our community development group to establish local 
foreclosure prevention task forces in Arizona, California, and 
Nevada in 2006 and 2007. In 2007, we sponsored 13 foreclosure 
prevention forums throughout the 12th District to help launch 
these task forces and to develop targeted prevention 
strategies, which included detailed data analysis of 
foreclosure ``hotspots'' to help guide local foreclosure 
prevention activities.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER FROM JANET L. 
                             YELLEN

Q.1. The Federal Reserve, as specified by the Federal Reserve 
Act of 1913 and later the Federal Reserve Act of 1977, is 
required to ``promote effectively the goals of maximum 
employment, stable prices, and moderate long-term interest 
rates.'' This is often referred to as the dual mandate because 
the Federal Reserve is required to pursue maximum employment 
and stable prices equally. Do you think it is efficient to 
pursue one at a time?

A.1. I strongly support the Fed's dual mandate and pay close 
attention to both inflation and employment at all times. 
Typically these two objectives are not in conflict in terms of 
their implications for monetary policy. In the current 
situation, employment and inflation are below desired levels, 
and both of these conditions argue for monetary stimulus. 
Similarly, in an unsustainable economic boom, employment and 
inflation will both tend to reach levels that call for 
restrictive monetary policy. A supply shock, such as in 
increase in oil prices, does create a short-run tradeoff 
between our goals, but one which the Fed has effectively 
navigated over the past quarter century.

Q.2. Currently, we are responding to the high unemployment in 
the country. Later, we will respond to inflation. In the 1970s 
that approach produced higher inflation and higher 
unemployment. Why should we believe that won't happen again?

A.2. I think it would be more accurate to say that the Fed is 
currently responding to both inflation, which is now below the 
level that most FOMC members consider to be most consistent 
with our dual mandate and is trending downward, and 
unemployment, which is very high. A key lesson of the 1970s is 
the critical importance of maintaining well-anchored inflation 
expectations so that a wage-price spiral like we saw back then 
does not break out again. The Federal Reserve earned a great 
deal of inflation credibility over the past thirty years and 
inflation expectations are now well anchored. Still, we monitor 
closely a variety of measures of inflation expectations, and 
inflation expectations are a key driver of policy decisions, as 
emphasized in recent FOMC statements. This approach should 
minimize the risks of seeing a recurrence of stagflation.

Q.3. Paul Volcker and Alan Greenspan have concluded that the 
Phillips curve is a misleading guide. Do you agree or disagree 
and why?

A.3. The modern version of the Phillips curve model--relating 
movements in inflation to the degree of slack in the economy--
has solid theoretical and empirical support. Of course, in this 
model other factors besides slack affect inflation, such as 
commodity and other import prices and inflation expectations. 
Moreover, the U.S. economy is evolving and the Phillips curve 
changes as well. Despite these shortcomings, the Phillips curve 
model provides a coherent and useful framework for thinking 
about the influence of monetary policy on inflation. Of course, 
no single model captures the complexity of the U.S. economy. As 
a result, I find it necessary to consult a wide range of 
models, examine data from many sources, and listen carefully to 
the reports we receive business contacts around the country.

Q.4. The financial reform bill, Dodd-Frank, creates a consumer 
regulator inside the Fed that is administered separately. How 
will the Federal Reserve prevent conflict?

A.4. The Dodd-Frank bill calls for the Bureau of Consumer 
Financial Protection to be completely autonomous within the 
Federal Reserve and contains provisions designed to minimize 
future conflict. The Bureau will have its own authority to hire 
and fire personnel, set salaries and benefits, and organize 
itself and its divisions. The legislation specifically 
prohibits the Board of Governors from intervening in Bureau 
proceedings and other matters. The Board of Governors is 
committed to respecting Congress' intentions and instructions. 
We will cooperate with the Treasury Department in planning a 
smooth transition of functions and personnel.

Q.5. In a speech this last February you said:

        Some people worry that sustained Federal budget deficits and 
        the huge increase in the Federal Reserve's lending and stimulus 
        programs could eventually lead to high inflation. Others take 
        the opposite view, arguing that economic slack and downward 
        pressure on wages and prices are pushing inflation down. I 
        would put myself squarely in the second camp. As far as 
        inflation is concerned, there's no evidence that big Government 
        deficits cause high inflation in advanced economies with 
        independent central banks.

Is high inflation the only thing to fear of sustained Federal 
budget deficits and the huge increase in the Federal Reserve's 
lending and stimulus programs? What other concerns should we be 
monitoring?

A.5. Sustained structural deficits in the Federal budget will 
likely put upward pressure on real interest rates as private 
demand recovers and the economy moves back toward full 
employment. Under these conditions, Federal Government 
borrowing will crowd out private investment and other interest-
sensitive spending, with negative consequences for 
productivity, economic growth, and living standards. In 
addition, large structural deficits may induce larger capital 
inflows from abroad, expanding the U.S. trade and current 
account deficits. Appropriate policies by the Federal Reserve--
namely, the timely removal of the extraordinary monetary 
accommodation currently in place as the economy recovers--are 
necessary to guard against threats to price stability.

Q.6. Would you describe your view, that big Government deficits 
do not cause high inflation in advanced economies with 
independent central banks, as mainstream?

A.6. Yes, I consider it mainstream. It is commonly recognized 
that large and chronic Government budget deficits generate high 
inflation, or even hyperinflation, when a country turns to its 
central bank to print money on an ongoing basis to finance 
them. The temptation of a government to use seignorage as a 
source of finance arises when deficits and/or debt become so 
large that the Government faces exceptionally high borrowing 
costs in domestic or international markets. In extreme cases, 
the Government may find itself unable to float debt entirely. 
Examples include the hyperinflations experienced in Germany and 
Hungary in the aftermath of World War I, and prolonged episodes 
of high inflation in many Latin American countries in the 
aftermath of the debt crises of the 1980s. An independent 
central bank, especially one that has established a credible 
commitment to price stability, is best positioned to resist the 
political pressure to monetize budget deficits. This 
independence explains why there is no correlation between 
inflation and budget deficits in advanced countries and is a 
primary rationale for central bank independence.

Q.7. In a speech this March, Dr. Yellen, you said, ``so I'm not 
alarmed by the current enormous deficits. I see them as 
transitory and recession-related.'' Let us say in the future we 
reach a point that we are truly out of this recession in a 
meaningful way and the national deficits are where they are 
projected, 4 to 7 percent, versus 2 \1/2\ percent. Would you 
then become concerned with the enormous deficits? How quickly 
would those deficits become a major problem in terms of the 
economy? What would those problems be?

A.7. I am very concerned about the economic consequences of 
sustained structural budget deficits in the United States. 
While the U.S. debt/GDP ratio is currently not out of the range 
of experience of many industrial countries, it is at its 
highest level since the aftermath of World War II, and absent 
material changes in current policies, it is projected to rise 
considerably in the years ahead. Thus, it is important for the 
Congress and the Administration to have an intermediate-term 
strategy for fiscal consolidation and stabilization of the 
ratio of debt to GDP at a sustainable level in order to avoid 
the long-term costs and risks associated with a rapidly rising 
debt-primarily, an increase in long-term interest rates that 
crowds out private investment spending, weakening productivity 
growth and harming long-run living standards, as well as 
possible further increases in the U.S. trade deficit and our 
net international indebtedness.

Q.8. In your role as a voting member of the FOMC, how many 
times have you cast a dissenting vote from the Chairman? What 
were the circumstances?

A.8. Never. Although I have voted with the Chairman, I have 
consistently arrived at policy positions independently, based 
on my own analysis and best judgment.

Q.9. A lot of thought has been put into how and when to remove 
the excess liquidity that the Federal Reserve has pumped into 
the economy since 2008. Do you think we have reached a point 
where the Federal Reserve can begin withdrawing that liquidity? 
If not, what metrics will you look at to make that 
determination?

A.9. I do not think that we have reached the point where the 
Federal Reserve should begin to withdraw monetary 
accommodation. As the Federal Open Market Committee noted in 
its most recent statement, it anticipates that economic 
conditions, including low rates of resource utilization, 
subdued inflation trends, and stable inflation expectations, 
are likely to warrant exceptionally low levels of the Federal 
funds rate for an extended period. I agree with this 
assessment. At the same time, the Committee has prepared itself 
to remove monetary accommodation in a timely fashion as the 
economy recovers in order to avoid future threats to price 
stability. To determine when to begin the process of removing 
accommodation, I will be carefully monitoring economic and 
financial developments, including evidence bearing on the 
strength and durability of the recovery, the degree of slack in 
the economy, and the evolution of inflation and inflation 
expectations.

Q.10. The United States monetary policy is often described as 
mixed policy, which indicates that the Fed funds rate responds 
to shocks in inflation and output. However, many other well 
developed economies such as the United Kingdom, Switzerland, 
Canada, Australia, and countless others utilize an inflation 
targeting approach. What do you think are the benefits of mixed 
policy as opposed to inflation targeting.

A.10. In textbook descriptions of inflation targeting, the 
central bank's only goal is to bring inflation back to its 
target rate, regardless of the effects on employment. A key 
component of that strategy is the clear articulation of a long-
run inflation goal. I think it is more accurate to describe the 
listed countries as practicing ``flexible'' inflation 
targeting, in which they aim for a balanced approach of 
limiting movements of both inflation and employment (or GDP) 
from their desired levels. The Fed's approach, based on the 
dual mandate, does not differ fundamentally from that of 
flexible inflation targeting, except that the Fed does not have 
a specified numerical inflation objective. The Fed has taken 
steps over the past few years to improve transparency of 
monetary policy, including providing greater clarity on our 
longer-run inflation goals.

Q.11. Economist Lawrence Mishel of the Economic Policy 
Institute stated ``I think these are all great choices, and 
ones that will move Fed policy in the needed direction--
responsive to the needs of middle-class and working families.'' 
Would you agree that this is the direction in which you plan to 
take the Federal Reserve?

A.11. The Federal Reserve's dual mandate from Congress is to 
foster price stability and promote maximum employment. I think 
the Federal Reserve should remain focused on implementing 
policies to attain these objectives, which are essential to the 
well-being of middle-class and working families, and indeed all 
Americans. A well-functioning labor market is necessary for 
families to obtain the work they need for their support; and 
price stability promotes economic growth and facilitates sound 
economic decisions and financial and retirement planning. The 
Federal Reserve must also identify and act to mitigate systemic 
risks that threaten the financial system. As we have seen, 
financial crises exact a heavy toll on middle-class and working 
families in the form of lost jobs, homes, businesses and 
wealth.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM PETER A. 
                            DIAMOND

Q.1. Professor Diamond, in an interview with Macroeconomic 
Dynamics in 2007, you stated that `` . . . it's not the case 
that I stay abreast of macro developments.'' Yet the position 
for which you have been nominated requires someone who stays 
abreast of those developments. In material you submitted, you 
identified that `` . . . I have considerable awareness of the 
development of economic analyses of monetary policy and its 
impacts on both inflation and employment.'' Has something 
changed for you with respect to the attention you give to macro 
events since 2007?

A.1. As an academic doing basic research and policy research on 
public finance questions, staying abreast of day-to-day 
developments in the economy and the latest macro research would 
not have been germane to my research, although I naturally did 
follow economic developments from a variety of sources and some 
analyses of causes and consequences of macro developments in 
seminars and discussions with colleagues. Since the start of 
the possibility of my being appointed to the Fed, I have begun 
focusing even more attention to such developments. If 
confirmed, I will need to pay attention to macro developments 
in great detail to perform my duties, and I will do so.

Q.2. Professor Diamond, in an interview with Macroeconomic 
Dynamics in 2007, you stated the following: ``I think nominal 
stuff really matters.'' Please clarify what you mean and how it 
applies to monetary policy. To the extent you believe that 
nominal stuff mattering means that the Fed can engineer real 
effects from nominal changes, what are the transmission 
mechanisms that are most important?

A.2. The quote in the question was the start of my answering 
the question: ``Since we are interviewing for Macroeconomic 
Dynamics, maybe the readers would like to hear your comments on 
the state of macroeconomics, past, present, and future.'' There 
has been a great deal of research using what are called ``real 
business cycle'' models. As the name suggests these models, in 
their pure form, do not have any role for ``nominal stuff.'' 
Yet the evidence is clear that prices and wages do not adjust 
to the money supply in a simple market-clearing way. In other 
words, prices and wages are ``sticky.'' As a result I believe 
there are real effects from nominal changes. For example, if 
the economy were to experience deflation, as Japan did, that 
would be harmful to the level of employment, and monetary 
policy to prevent deflation would have real effects. There are 
multiple transmission mechanisms beyond the stickiness of 
prices and wages through expectations about future 
opportunities and through the credit channel.

Q.3. Professor Diamond, you have a long and impressive list of 
published papers and books covering a variety of topics. 
However, a very small fraction of the work you have done 
directly involves monetary economics or monetary policy. Why 
are you interested in serving on the Federal Reserve Board?

A.3. I have done considerable research, both basic and policy-
related, on the role of Government in helping markets to 
improve the bearing of risks in the economy. The current crisis 
has made us aware of systemic risks arising from behavior of 
financial institutions and their interactions with other 
financial institutions and markets more generally. Analysis of 
systemic risks will draw on the type of analyses I have done 
throughout my career.

Q.4. Professor Diamond, do you believe that there are tradeoffs 
between inflation and unemployment? Do you believe that the Fed 
should engage in active aggregate demand management to exploit 
the tradeoff?

A.4. When Samuelson and Solow wrote their famous paper on the 
Phillips curve, the paper included the warning that the 
presence of the historic pattern did not imply that the pattern 
would remain if there was a systematic attempt to exploit it; 
that is, they warned that there might not be an exploitable 
tradeoff. It is common in empirical work in macroeconomics to 
assume that there is no long-run tradeoff between inflation and 
unemployment as part of the assumptions underlying the 
empirical work. Most economists believe that an attempt to 
increase employment by steadily ratcheting up inflation is a 
bad policy that will harm the economy in the long run, and I 
agree. The widespread view, which I share, is that it is 
advantageous to have a relatively low and stable inflation 
rate, with policy responses to macroeconomic shocks built 
around returning to the target range of inflation rates over 
time. Thus I see the two parts of the Federal Reserve's dual 
mandate of stable inflation and maximum employment as generally 
complementary, because price stability adds to the economy's 
employment prospects over the longer run. However, not all 
stable inflation rates have the same impact on employment. I 
believe an economy will function better with a stable 2 per 
cent inflation rate than with a stable 10 per cent inflation 
rate or a stable 2 per cent deflation rate. Moreover, the 
economy is subject to periodic shocks and the ability to 
respond to shocks is better with a 2 per cent inflation target 
than with zero percent inflation or a 2 per cent deflation. In 
these two senses, both long run efficiency and the ability to 
respond to shocks, there is a tradeoff between the level of a 
stable long run inflation target and the unemployment rate. 
This does not contradict the absence of an exploitable tradeoff 
that would make worthwhile a policy of steadily ratcheting up 
inflation.

Q.5. Professor Diamond, what is your impression of views by 
some within the Federal Reserve system that monetary policy is 
too loose, and that if we continue with the monetary ease, we 
risk the creation of new financial bubbles?

A.5. There is a long history of asset bubbles. It appears that 
some investors base their decisions unduly on extrapolations of 
recent asset price trends, which can encourage a bubble, in 
part as other investors, even some aware that it is a bubble, 
try to take advantage of what appears to be a favorable short-
term investment opportunity, hoping to get out before the 
bubble bursts. Experimental economics has shown that bubbles 
can happen in controlled environments where they could not 
happen if all people were behaving in accord with the standard 
rational model of economic behavior. Bubbles, once started, can 
be fueled by borrowed funds, with lower borrowing rates making 
investing during a bubble seem more attractive, and so adding 
to the bubble. While there is this possible link between loose 
monetary policy and the risks of bubbles, monetary policy is 
not the best tool for addressing the risk of bubbles, as 
regulatory policies can be more targeted and even tax policies 
can influence the incentive to invest in such circumstances. In 
current circumstances of very high unemployment and sluggish 
growth, monetary ease is essential for economic growth, which 
appears to be a more important issue right now than the risk of 
a new widespread bubble. Nevertheless, our recent experience 
makes it incumbent on policymakers to be attentive to the risk 
of bubbles.

Q.6. Professor Diamond, it has been reported that you were a 
mentor to Fed Chairman Bernanke when he was in graduate school. 
What grade would you assign to Chairman Bernanke's Fed 
Chairmanship, and where do you see room for improvement?

A.6. In the run up to the financial crisis, the Federal Reserve 
did not address the mortgage origination issues and did not 
consider regulatory tools to limit the housing price bubble, 
although many of these developments were already in motion 
before Bernanke became chair of the Fed. These are issues the 
Fed should have pursued for consumer protection as well as for 
trying to head off what became a financial crisis. While it 
would have been good if the Fed had limited more tightly the 
leverage of the financial institutions it regulated and the 
degree of concentration of assets in particular classes of 
assets (mortgage based and commercial real estate) the 
widespread (although not universal) failure to recognize the 
degree of risk and systemic implications imply less of a 
downgrade than if these issues were ignored in a context of 
widespread awareness of them. In part, failure of regulators to 
keep up with the complexity coming from financial engineering 
went along with failures of the financial institutions to 
realize the risk characteristics of their own actions.
    Since the start of the crisis I think Chairman Bernanke has 
deserved high marks for recognizing the seriousness of the 
situation, being willing to use the full range of powers of the 
Fed (and to cooperate with the Treasury in use of its powers) 
to limit the impact of the crisis on the economy. I also 
applaud his willingness to try unusual approaches, since we 
were in an unprecedented situation for which one could not 
simply rely on the history of the use of past polices.
    In his remarks at various times, Chairman Bernanke has 
acknowledged the earlier failures of the Fed relative to the 
housing market and indicated a heightened attention to 
interactions of financial institutions and systemic risk. The 
intended addressing of these issues, already begun, will mark 
an improvement at the Fed going forward.

Q.7. Professor Diamond, do you believe that inflation or 
deflation is the larger threat currently? Given your belief, 
what do you intend to advocate in terms of the evolution of 
monetary policy: further ease in policy; maintenance of the 
existing amount of ease; or movement to begin firming policy?

A.7. Currently, I think deflation is the greater risk. While I 
do not think that significant deflation is a likely outcome, 
the risk from inflation rising beyond the desired range in the 
near future appears even smaller. At present I favor 
maintenance of the current level of ease, with vigilance to 
circumstances that might call for a change in either direction.

Q.8. Professor Diamond, do you believe that the Federal Reserve 
effectively used its lending power to channel equity into 
subsidiaries of the American International Group by setting up 
Maiden Lane II?

A.8. I played no role in the Fed's decisions (either directly 
or as a commentator) that led to that transaction, and I have 
no knowledge of the structure or details of Maiden Lane II.

Q.9. Professor Diamond, you describe yourself as a ``card 
carrying'' behavioral economist. What discipline is there in 
behavioral models to restrict bureaucrats from, let us say, 
taking the results of a survey, extrapolating to national and 
global markets, and unleashing rules to guide the behavior of 
Americans to protect them from themselves?

A.9. In all of economics, and not just behavioral economics, to 
extrapolate a single survey to national and global markets and 
base policies on that alone would be unwise. The economy is a 
complex system with great heterogeneity in behavior. Policy 
needs to draw on a wide range of analyses to understand both 
the workings of the economy and the possible effects (intended 
and undesired) that might follow from a policy. As Alfred 
Marshall put it:

        it [is] necessary for man with his limited powers to go step by 
        step; breaking up a complex question, studying one bit at a 
        time, and at last combining his partial solutions into a more 
        or less complete solution of the whole riddle . . . The more 
        the issue is thus narrowed, the more exactly can it be handled: 
        but also the less closely does it correspond to real life. Each 
        exact and firm handling of a narrow issue, however, helps 
        toward treating broader issues, in which that narrow issue is 
        contained, more exactly than would otherwise have been 
        possible. With each step . . . exact discussions can be made 
        less abstract, realistic discussions can be made less inexact 
        than was possible at an earlier stage. [Alfred Marshall, 
        Principles of Economics, eighth edition. New York: The 
        Macmillan Company. 1948, page 366.]

I consider reliance on a narrow viewing of the economy to be 
bad methodology for policy analyses. The discipline to base 
policy on good analyses with good methodology must come from 
the policy process, it does not come from basic research per 
se, whether behavioral or not.

Q.10. Professor Diamond, you describe yourself as a ``card 
carrying'' behavioral economist. An Assistant Secretary for 
Financial Institutions at Treasury has written a so-called 
``behavioral'' paper to inform financial regulation. One of his 
proposals is to allow banks to charge late fees to discourage 
such bad behavior. He suggests the banks be allowed to keep 
some of those fees, but put the bulk of the fees into a 
national trust for use in funding things like financial 
literacy and other consumer initiatives. As a behavioral 
economist, what is your assessment of such a proposal?

A.10. The policy referred to is to levy an implicit tax on late 
fees, with the revenue dedicated to financial education and 
assistance to troubled borrowers. I expect the new Consumer 
Financial Protection Bureau to explore the appropriateness of 
the current setting of late fees. The inability of consumers to 
negotiate a credit card contract with a different fee structure 
and the complexity of exploring across credit cards to find a 
combination with different fees suggest the appropriateness of 
such an exploration. Such an exploration would need to develop 
far more information and modeling of the range of implications 
of having different fees than the paper presents. Without such 
study, it is difficult to see what pattern of fees across 
different cards would best serve the public in general. And it 
is difficult to see whether a tax would move the fee structure 
in a desired direction. Indeed, the paper itself recognizes 
that it is exploring ideas and approaches, not making concrete 
recommendations: ``The purpose of this paper is not to champion 
policies, but to illustrate how a behaviorally informed 
regulatory analysis would lead to a deeper understanding of the 
costs and benefits of specific policies.'' My preliminary view 
is that this approach to addressing questions about fees is too 
convoluted, that more straightforward approaches would do 
better if significant problems are found in a more detailed 
empirical study of equilibrium fee setting in the credit card 
market. I do think that a proper study of the effects of fees 
does need to consider actual behavior of cardholders, and not 
just an idealized picture of optimal use of credit cards.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER FROM PETER A. 
                            DIAMOND

Q.1. Mr. Diamond, you are a well respected expert on social 
security and pensions and a professor of economics at MIT. How 
do you plan to influence monetary policy decisions in a way 
which would make you more than a rubber stamp for Chairman 
Bernanke?

A.1. If confirmed, as a member of the FOMC, I will scrutinize 
analyses of the state of the economy and the policy 
implications of the picture of the economy that emerges. I will 
express myself at meetings based on my evaluation of the 
evidence and its implications. As my colleagues and others can 
attest, I have a long history of thinking for myself and 
expressing my own views.

Q.2. Do you believe that a Federal Reserve Board of Governors 
that is comprised of only two experts in monetary policy will 
provide enough balance and expertise on the Board to make 
crucial monetary policy decisions like when and how to withdraw 
the excess liquidity the Federal Reserve has flooded into the 
economy?

A.2. The Federal Reserve has several important functions, 
including regulation of financial institutions as well as 
monetary policy. In addition, the Fed will play an important 
role in monitoring systemic risks and developing policies to 
address such risks. If my fellow nominees and I are confirmed 
by the Senate, the Board of Governors will have a set of 
individuals with a broad range of backgrounds and expertise 
that should do well in addressing the various responsibilities 
of the Board. Also, as you are aware, many significant monetary 
policy decisions are made by the Federal Open Market Committee 
(FOMC) rather than the Board. The FOMC also includes five of 
the Federal Reserve Bank presidents, with all of the Reserve 
Bank presidents participating in FOMC discussions. Some of the 
Federal Reserve Bank presidents have substantial backgrounds in 
macroeconomics or monetary economics.

Q.3. The Federal Reserve, as specified by the Federal Reserve 
Act of 1913 and later the Federal Reserve Act of 1977, is 
required to ``promote effectively the goals of maximum 
employment, stable prices, and moderate long-term interest 
rates.'' This is often referred to as the dual mandate because 
the Federal Reserve is required to pursue maximum employment 
and stable prices equally. Do you think it is efficient to 
pursue one at a time?

A.3. I believe that, in general, the objectives of maximum 
employment and stable prices are mutually reinforcing and that 
both are very important objectives. High unemployment reflects 
inadequate and inefficient output in the economy as a whole and 
has very painful consequences for individual workers and their 
families. Low and stable inflation contributes to the 
efficiency in the economy and supports the attainment of 
maximum employment. Pursuit of a single goal would not 
adequately address the economic concerns that monetary policy 
can address.

Q.4. Currently, we are responding to the high unemployment in 
the country. Later, we will respond to inflation. In the 1970s 
that approach produced higher inflation and higher 
unemployment. Why should we believe that won't happen again?

A.4. The 1970s were marked by oil price shocks that boosted 
inflation and also contributed to unemployment as the economy 
adapted to the shocks and the policies followed by the 
Government at the time. The current situation is very 
different, with painfully high unemployment and very low 
inflation, recently running below the 2 percent level widely 
accepted as a good objective for the medium-to-long run. I 
believe that at present monetary ease is appropriate for this 
combination of high unemployment and low inflation. 
Nonetheless, policymakers will need to be vigilant and respond 
promptly and appropriately to changes in economic conditions 
and expectations.

Q.5. Paul Volcker and Alan Greenspan have concluded that the 
Phillips curve was a misleading guide. Do you agree or disagree 
and why?

A.5. When Samuelson and Solow wrote their famous paper on the 
Phillips curve, the paper included the warning that the 
presence of the historic pattern did not imply that the pattern 
would remain if there was a systematic attempt to exploit it; 
that is, they warned that there might not be an exploitable 
tradeoff. Most economists believe that an attempt to increase 
employment by steadily ratcheting up inflation is a bad policy 
that will harm the economy in the long run, and I agree. The 
widespread view, which I share, is that it is advantageous to 
have a relatively stable inflation rate, with policy responses 
to macroeconomic shocks built around returning to the target 
range of inflation rates over time.

Q.6. The financial reform bill, Dodd-Frank, creates a consumer 
regulator inside the Fed that is administered separately. How 
will the Federal Reserve prevent conflict?

A.6. The Consumer Financial Protection Bureau created by the 
Dodd-Frank bill is to be an independent agency, within the 
Federal Reserve Board. The independence includes autonomy in 
hiring, operations, and policymaking activities. The Board 
continues to have a consumer protection role in the small bank 
sector of the economy. I anticipate that the Bureau and the 
Board will develop a good working relationship, on the order of 
the ones that currently exist between the Board and the other 
Federal banking regulatory agencies. The relationship is likely 
to include a mutually beneficial framework for sharing 
information on consumer protection and safety and soundness 
matters. As the Bureau will become a member of the FFIEC, that 
will provide another source of collaboration with the Board.

Q.7. Earlier this year the N.Y. Times reported that the Triple-
A credit rating of the United States ``may be at risk in the 
coming years as the Nation copes with its growing debts.'' 
Since 2007 the national has increased from $8.67 trillion to 
$12.6 trillion-an increase of $3.93 trillion or 45.3 percent, 
the debt limit has increased six times and the deficit has 
increased from $161 billion in FY 2007 to $1.42 trillion in FY 
2009. The FY 2010 deficit is projected to come in at another 
$1.5 trillion. Do these deficits pose any harm to the economy 
or economic growth?

A.7. Projections of the long-term fiscal position of the 
Federal Government, for example, by the CBO, show an 
unsustainable track. At some point, if Government debt follows 
that projected path, the Triple-A credit rating would be at 
risk. However, I think that that point is not imminent. Recent 
large deficits have reflected both the effects of the deep 
recession, which automatically reduces tax revenues and 
increases outlays for income support programs, and 
discretionary fiscal policy actions taken to directly counter 
the recession and stabilize financial markets. I think the 
fiscal stimulus has been important in limiting the size of the 
current contraction as well as supporting some valuable public 
programs. And I think that near-term deficit reduction would 
not be helpful for supporting economic growth that can bring 
down the painfully high unemployment rate. It is important, 
however, to address the causes of the deficit's long-term 
unsustainable path.

Q.8. Let us say in the future we reach a point that we are 
truly out of this recession in a meaningful way and the 
national deficits are where they are projected, 4 to 7 percent, 
versus 2 \1/2\ percent. How quickly would that become a major 
problem in terms of the economy? What would those problems be?

A.8. At some point, steady increases in the debt to GDP ratio, 
together with expectations of a path of continuing increases 
become a major problem for an economy. However, there is no 
clear guide from either the experience of different countries 
or from economic theory to clearly indicate at what point the 
size of the U.S. Federal debt relative to GDP poses significant 
risks of instability in financial markets and costs to the 
functioning of the economy. A central concern is that the 
expectation of future growth of the debt plays a key role in 
how capital markets respond to any given level of debt. Since 
the U.S. debt is denoted in our own currency, unlike many 
countries which have had financial crises from too much debt, 
and since U.S. Government debt has been viewed as the safest 
place to invest during the recent crisis, it is difficult to 
draw inferences from the experiences of other countries. Once 
we are truly out of this recession, persistent budget deficits 
that push up the debt to GDP ratio represent shifts of 
financial burdens onto future generations, which, at some 
point, do not represent good policy. Moreover, the reaction of 
the capital market to a belief that the trend in debt will not 
be reversed can be abrupt. For both reasons it would be good to 
legislate policies that support projections of a stable debt to 
GDP ratio and that do not hurt the process of getting truly out 
of this recession.

Q.9. A lot of thought has been put into how to remove the 
excess liquidity that the Federal Reserve has pumped into the 
economy since 2008. Do you think we have reached a point where 
the Federal Reserve can begin withdrawing that liquidity? If 
not, what metrics will you look at to make that determination?

A.9. Much of the liquidity provided by the Federal Reserve 
during the crisis has been withdrawn already, as nearly all of 
the special liquidity facilities that were established have 
expired. A key remaining legacy of addressing the financial 
crisis is the large volume of agency mortgage-backed securities 
and direct agency obligations held on the Fed's balance sheet, 
and large reserves in the banking system as a consequence of 
their purchases. At present the Fed is following a policy of 
gradual decline in these holdings as assets mature or prepay. 
In addition, it appears that the intention is to have gradual 
and pre-announced sales of agency MBS at some point to speed 
the return to a Treasury-securities-only portfolio. I think it 
would be premature to begin such sales now given the high 
unemployment and the low inflation (with low inflation 
expectations) that we currently have and the ongoing potential 
risks to the economy. A decision to begin such asset sales 
needs to be made in the context of the overall policy 
addressing price stability and maximum employment. Since I have 
not participated in FOMC discussions of this topic, and since 
the future track of the economy is uncertain, I am reserving 
judgment at this point regarding when such asset sales should 
begin.

Q.10. The United States monetary policy is often described as 
mixed policy, which indicates that the Fed funds rate responds 
to shocks in inflation and output. However, many other well 
developed economies such as the United Kingdom, Switzerland, 
Canada, Australia, and countless others utilize an inflation 
targeting approach. What do you think are the benefits of mixed 
policy as opposed to inflation targeting.

A.10. The objectives of price stability and maximum sustainable 
employment are mutually supportive in that price stability 
helps maintain economic conditions that are conducive to 
maximum employment and employment at its maximum sustainable 
level supports price stability, as fluctuations, both up and 
down, of the rate of price increases can be harmful. I think it 
could be harmful for a central bank to focus exclusively on 
price stability. A financial crisis can be harmful to the 
economy even if the inflation rate does not change and can be 
usefully addressed by policies available to central banks. 
Moreover, I think that in practice, some central banks with a 
single objective of price stability will want to take economic 
activity into account as well, and the recent crisis has seen 
wide awareness of the need for addressing the crisis. Indeed, 
central banks of all stripes have pursued broadly similar 
policies in response to the global financial crisis and 
recession.
    Moreover, the Federal Reserve's congressionally mandated 
dual objectives of price stability and maximum sustainable 
employment reaffirm that the ultimate measure of prosperity for 
Americans is ample employment and rising real incomes and that 
long-run stability of price increases is necessary to foster 
such outcomes.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM SARAH 
                          BLOOM RASKIN

Q.1. The Federal Reserve has ballooned its balance sheet from a 
pre-crisis level of around $850 billion to over $2.3 trillion 
in reserve liabilities. There are differing views within the 
Fed about how and when it should shrink the size of its balance 
sheet, including possible asset sales. Commissioner Raskin, how 
would you shrink the Fed's balance sheet, and when do you think 
that sales of mortgage-related holdings should begin?

A.1. I believe that it is important to normalize the size and 
composition of the Federal Reserve's balance sheet, but it 
should be done in a way that does not endanger the recovery. 
Given current conditions in the housing market, I would wait 
for stabilization before selling mortgage-backed securities. I 
also do not believe that active sales are necessary until after 
the Federal funds rate is raised. After that, I believe it 
would be appropriate to reduce the size of and shorten the 
maturity of the Federal Reserve's holdings of Treasuries. When 
the time has come for both normalizing the holding of 
Treasuries and selling mortgage-backed securities, the process 
the Federal Reserve follows should be announced in advance and 
fully transparent.

Q.2. The European Central Bank, the Bank of England, and 
central banks in Australia, Canada, and New Zealand use 
versions of a ``corridor'' or ``channel'' method for setting 
policy rates. The Fed has contemplated using such a system. 
Commissioner Raskin, are you aware of any impediments to the 
Fed's use of a corridor to help control variation in the 
Federal funds rate by bracketing it between the discount rate 
and the rate paid on reserves?

A.2. The corridor method has been successful at other central 
banks and believe that it could work in the United States. 
However, there are some technical problems--both with the 
interest rate on reserves acting as a lower bound to the 
corridor and with the discount rate acting as an upper bound to 
the corridor. The technical problem at the lower bound has to 
do with the Government-sponsored enterprises. The GSE's are 
participants in the Federal funds market but are not eligible 
to earn interest on the balances they hold at the Federal 
Reserve. Consequently, they have an incentive to lend funds at 
interest rates below the rate paid on reserves. Because of this 
incentive, the Federal funds rate could be lower than the 
interest rate paid on reserves. The technical problem at the 
ceiling arises because the discount rate may not always cap the 
Federal fund rate. Banks sometimes view borrowing from the 
discount window as stigmatizing, and have at times been quite 
reluctant to borrow there. Given this reluctance, the Federal 
funds rate may need to rise somewhat above the discount rate 
for banks to have sufficient incentive to use the window. 
Despite these potential issues with the effectiveness of the 
upper and lower bounds of a corridor system in the United 
States, I believe that such a system could work here. However, 
I have not seen much evidence that the Federal Reserve is 
having difficulty being able to continue to keep the Federal 
fund rates close to the target rate established by the FOMC.

Q.3. Commissioner Raskin, do you believe that the Fed should 
follow some variant of the Taylor rule in setting monetary 
policy?

A.3. The Taylor rule and its variants can provide a useful 
diagnostic check to establish that monetary policy is 
consistent with its two goals--maximum employment and stable 
prices. As a matter of policymaking, however, the Federal 
Reserve should attempt to use all information that it has at 
its disposal to meet the dual mandate. Therefore, it is my view 
at this point that it would not be prudent to set the conduct 
of monetary policy on ``automatic pilot'' through rigid 
adherence to a single rule. The Taylor rule and its variants 
are best used as a check to the policy decisions that the 
Federal Reserve makes after it takes into account the wide 
range of indicators that are relevant to maximum employment and 
stable prices.

Q.4. Commissioner Raskin, some forecasters in the Fed explain 
that they look at core measures of inflation that exclude 
volatile energy and food prices because they have better 
forecasting properties than headline inflation numbers. 
Alternative measures of core inflation consider growth in so-
called trimmed mean price indexes. Do you favor any of these 
measures in formulating forecasts of future inflation?

A.4. I do not view either measure as superior in all 
circumstances and think that it is not appropriate to ignore 
any particular set of inflation measures in gauging current 
inflation trends for the purposes of setting policy. For 
example, while economists often focus on core inflation 
measures that exclude food and energy prices because these 
items sometimes exhibit sharp but temporary fluctuations, it is 
also important to recognize that food and energy are important 
components of a household's expenses. Thus, changes in these 
prices must also be taken into account when considering 
monetary policy actions.

Q.5. Commissioner Raskin, you have been a vocal advocate of a 
Federal financial consumer protection bureau that sets a 
``floor,'' not ceiling, for such protections. You have appeared 
before Congress to urge adoption of a recommendation made by 
Elizabeth Warren's Congressional Oversight Panel to, in your 
words, ``eliminate Federal preemption of the application of 
State consumer protection laws to national banks.'' That is, 
you strongly favor a patchwork of State-by-State rules and 
limited Federal preemption. In making your argument, you seem 
to rely almost exclusively on the SAFE Act as a model for how 
the States and the Federal regulators could interact. Is there 
anything aside from your experience with the SAFE Act to 
support your views on preemption?

A.5. In addition to my experience with the State and Federal 
process around the SAFE Act, my work with the FFIEC, my work on 
mortgage servicing and loss mitigation and my day-to-day work 
with Federal regulators in the supervision of Maryland state-
chartered banks, has consistently highlighted that if Congress 
establishes laws and regulatory structures that encourage State 
and Federal cooperation the outcome leads to greater 
consistency and uniformity without sacrificing the benefit of 
local decisionmaking where it makes the greatest difference. 
Those differences can mean survival for small to medium banks 
and businesses and responsiveness and accountability to the 
consumer. To be clear, I do not support difference for the sake 
of difference, but rather a State-Federal dialogue that 
balances the goals of uniformity with the need for flexibility 
and responsiveness.
    And as the chairman of the Conference of State Bank 
Supervisors' Legislative Committee, I became sensitized to the 
experiences of my colleague State bank commissioners and 
realized that the issue of finding the appropriate State/
Federal balance is of critical importance to all State 
regulators across the country. I witnessed the virtues of 
American federalism which gives to the States the front-line 
authority to respond to local conditions on behalf of the 
public interest of their own communities. The State regulators 
that I work with have been continuously dealing with an 
extraordinary array of problems in their State and local 
economies. For example, certain States have been confronting 
the problem of capital flight; others have been dealing with 
elevated rates of mortgage fraud; others have been working with 
mortgage servicers that are unable to respond to requests for 
modifications; others have been responding to changes in the 
demand for agricultural loans or for energy loans.
    I believe in the capacity of State governments to respond 
to local conditions, often in a way that is far more effective 
and nimble than what can be done from Washington. For this 
reason, while the Supremacy Clause provides that Federal law 
clearly trumps State law, I believe that, as a matter of public 
policy, Federal policymakers should give the States their 
proper due and permit them to act with administrative 
dexterity, alacrity and precision to deal with problems that 
arise at the local level. This is why I generally--though not 
categorically and never blindly--favor Federal laws that create 
floors rather than ceilings and leave room for some play in the 
joints of our federalism.
    There has always been a tension in American history between 
those who favor more centralized power and Government and those 
who want to make sure that the States and the people continue 
to enjoy a measure of sovereign democratic freedom to advance 
and protect local interests. I confess I find myself often in 
the latter camp. What others sometimes describe critically as a 
``patchwork'' of laws, I actually see as the decentralized 
``laboratories of democracy'' that are the essence of American 
constitutional federalism. In the case of the current crisis, I 
have seen how several effective and independent State efforts 
to deal with our problems have become the basis for successful 
national efforts.
    Federal preemption is not, and should not be an ``up or 
down'' issue but an ongoing dialog to balance national 
interests with local interests in pursuit of the more perfect 
solutions.

Q.6. Commissioner Raskin, the New York Times labels you ``an 
ally of consumer advocacy groups,'' and I notice that you 
received the 2009 Maryland Consumer Rights Coalition Consumer 
Advocate of the Year Award. Nothing I can see provides comfort 
to me that you have the knowledge of monetary economics and 
monetary policy to sit at the Board making decisions that 
influence interest rates and economies globally. What can you 
tell me to provide comfort that you will not focus simply on 
consumer advocacy and activist issues, and will not serve 
simply as a rubber stamp on monetary policy, deferring to 
whatever are the whims of the Chairman?

A.6. Both my academic and professional background have provided 
me with the knowledge of monetary economics and monetary policy 
to ``sit at the Board making decisions that influence interest 
rates and economies globally.'' From my undergraduate studies, 
through my graduate years in law school, and in my 25 years of 
experience in the private and public sectors, I have 
experienced, written about, and taught both the theoretical and 
practical aspects of monetary economics and policy.
    My interest and work in monetary macroeconomics and 
monetary policy began during my undergraduate years at Amherst 
College, where I graduated Phi Beta Kappa and magna cum laude 
in economics and wrote my senior thesis on the Federal Reserve 
Board's experience with intermediate targeting of monetary 
policy. This senior thesis was anchored in econometric analysis 
but also discussed strategic issues related to central banking. 
It earned me the James R. Nelson Prize in Economics which is 
awarded to the top economics student in the graduating class. 
Much of the analysis for that thesis was inspired by work I had 
done during college at the Joint Economic Committee of 
Congress.
    Although I chose to go to Harvard Law School rather than 
pursue a doctorate in economics, I was invited to teach 
Economics 10 as a teaching fellow with Professors Martin 
Feldstein and Lawrence Lindsey while I was a law student. This 
course covered macroeconomic subjects, including monetary 
policy and monetary macroeconomics. Then, the summer after my 
second year of law school, I worked at the Federal Reserve Bank 
of New York and continued to participate in projects related to 
the Federal Reserve's role in monetary policy, regulation and 
payments systems. I worked with a team of lawyers and 
economists that summer to restructure the Brazilian debt escrow 
accounts which are maintained by the Federal Reserve Bank of 
New York. I prepared an analysis of interest rate swaps that 
evolved into a paper when I returned to Harvard on the subject 
of their structural implications.
    My career trajectory has given me ample opportunity to 
apply this academic immersion in monetary policy to concrete 
problems in both the private and public sectors. I spent more 
than a decade in the private sector as a banking attorney with 
Mayer Brown and with Arnold and Porter. Subsequent to my work 
at those law firms, I became a managing director of Promontory 
Financial Group. In all of these positions, I have worked with 
and represented a variety of banks and financial institutions 
facing regulatory and transactional issues. I also served as an 
adjunct professor at American University, where I have taught 
International Economic Law.
    My years as counsel to the Senate Banking Committee gave me 
further opportunities to grapple with issues of monetary 
macroeconomic policy and Federal Reserve System oversight. And, 
as Maryland's Commissioner of Financial Regulation, I have been 
steeped in all facets of economic policy and have paid close 
and careful attention to actions and policies of the Federal 
Reserve Board.
    Both my academic background and my professional background 
have thus provided me with the knowledge of monetary economics 
and monetary policy. The Board's responsibilities also include 
regulation and supervision and oversight of the payments 
system. I believe that my background and expertise as a 
regulator prepare me well to participate effectively in the 
full breadth of Board responsibilities.
    I have throughout my career, including as Maryland's 
Commissioner for Financial Regulation, sought to independently 
and critically analyze each decision I confront. I will 
continue that practice, if confirmed by the Senate, as a 
Governor of the Federal Reserve Board and member of the FOMC.

Q.7. Commissioner Raskin, there is little for us to go on 
regarding your views on monetary policy, macroeconomics, or the 
recent financial crisis. In testimony before the Congressional 
Oversight Panel for the TARP, you stated that ``Housing 
policies may have enabled this crisis, but they did not cause 
it.'' It is difficult to imagine witnessing the recent crisis 
and not finding that housing policies that promote over-
consumption of housing and increasingly speculative financing 
mechanisms were, if at least not directly causal, quite 
important. Please elaborate on your statement, because I fail 
to grasp what distinguishes something that enables a crisis 
from something that causes a crisis.

A.7. I agree that housing-related risks were an important 
feature of the financial crisis. My statement that housing 
policies did not by themselves cause the crisis reflects my 
belief that the causes of the financial crisis were complex and 
multi-faceted. In my view, there was excessive risk-taking 
across a wide range of assets and financial institutions, both 
here and abroad. There was also a failure by regulators to 
understand the escalating dangers associated with weak mortgage 
broker regulation, weak or nonexistent underwriting standards, 
the absence of due diligence incentives in the securitization 
process, the creation and trading of complex derivatives based 
on mortgage backed assets, and absent or useless disclosures 
that collectively helped to inflate the housing bubble. In 
other words, the failure was not one merely of housing policy 
but also one of regulatory policy and excessive private risk-
taking with the absence of sufficient internal controls.

Q.8. Commissioner Raskin, in testimony before the Congressional 
Oversight Panel for the TARP, you identify that ``...the 
Federal Government has so far proved itself incapable of 
managing systemic risk.'' If you are appointed to the Board of 
Governors and a new Financial System Oversight Council is 
constructed, you will have input into the manner in which the 
Federal Government manages systemic risk. How confident are you 
that you, the Fed, or a new Council will be able to spot 
growing systemic risks and deal with them before they turn into 
the next new bubble?

A.8. The identification of systemic risk will be a challenging 
endeavor. The financial crisis has highlighted shortcomings in 
policymakers' abilities to identify and to respond to buildups 
of risk. Financial reform legislation gives regulators new 
tools and a more extensive framework of information with which 
to monitor risk. These additions are intended to lay a 
foundation for better performance by regulators going forward. 
Members of the Board of Governors and the Financial System 
Oversight Council will need to build on this foundation by not 
forgetting the economic cost of the crisis, by maintaining the 
needed focus on system-wide risk, and by exhibiting a 
willingness to use the tools at their disposal when they 
perceive that systemic risk is building.

Q.9. Commissioner Raskin, in testimony before the Congressional 
Oversight Panel for the TARP, you cite your disagreement with 
what you call an unstated assumption in a GAO report `` . . . 
that Federal regulatory reforms can address the systemic risk 
posed by our largest and most complex institutions.'' You 
further argue that `` . . . there may be some institutions 
whose size or complexity make their risks too large to 
effectively manage or regulate. Regulators and Congress should 
contemplate whether breaking up these institutions is in the 
best interest of the marketplace and the public.'' Do you 
believe that the Fed could and should take actions to break up 
large institutions right now?

A.9. I believe that the systemic risk posed by our largest and 
most complex institutions is not easy to control. The Federal 
legislation attempts to address potential threats that these 
institutions pose to financial stability, including subjecting 
them to heightened capital and liquidity requirements and more 
intensive supervision. In addition, the Federal Reserve will 
have the authority to force a major financial firm to terminate 
activities or sell businesses if the firm's operations pose a 
grave threat to financial stability. I believe the Federal 
Reserve should act upon these mandates if warranted by the 
riskiness in the growth presented by these institutions. In 
addition, I believe that it is important that the Federal 
Reserve attend to potential systemic risks generated by growing 
concentrations in the financial sector before they reach levels 
that are dangerous.

Q.10. Fed Chairman Bernanke has argued in the past that a 
global savings glut had, before the crisis, put downward 
pressure on real interest rates globally and in the United 
States despite large U.S. current account deficits. Do you 
agree or disagree with Chairman Bernanke's global savings glut 
hypothesis? Please cite supporting evidence for your view.

A.10. Chairman Bernanke's hypothesis makes sense. The large 
current account surpluses in emerging economies did put 
downward pressure on U.S. interest rates and required demand 
from the United States to maintain high employment globally. An 
excess of saving over investment in a number of foreign 
countries--particularly the emerging Asian economies and 
commodity exporters--appears to have put downward pressure on 
U.S. and global interest rates. During the years preceding the 
crisis, bond yields in the advanced economies, including the 
United States, appeared to decline by more than could be 
explained by movements in inflation, economic activity, 
Government budget positions, and other factors. The substantial 
inflows of funds coming into the United States at that time, 
especially from China and other emerging Asian economies, to 
purchase U.S. Treasury and Agency debt seem to have boosted the 
demand for these securities and thus lowered their yields.

Q.11. Commissioner Raskin, we saw that ``repo'' activity was 
important in the recent crisis. If you constructed a measure of 
money in the economy that included repos, you may have detected 
rapid growth, which would have signaled you, as a monetary 
policymaker, that there were growing risks. Yet, with 
abandonment of consideration of broad monetary aggregates like 
M3, the Fed has potentially blinded itself to developments in 
those aggregates. Do you believe that the Fed should begin, 
again, to publish and monitor broad monetary aggregates such as 
M3 or so-called ``Divisia'' indexes?

A.11. The buildup of risk in repo markets and other securities 
financing markets played an important role in turning the loss 
in confidence in the credit markets into a liquidity crisis. 
This buildup was an important aspect of the financial crisis. 
Fundamentally, investors were able to acquire a range of 
longer-term assets with substantial credit and interest-rate 
risk and fund those securities in short-term financing markets. 
Much of this activity occurred outside of the traditional 
banking sector in funding vehicles such as asset-backed 
commercial paper conduits, collateralized debt obligations, 
collateralized loan obligations, and structured investment 
vehicles. The ready availability of credit in short-term 
financing markets allowed investors to buildup very substantial 
leverage in these securities financing transactions. In 
addition, the types of securities financed in these 
transactions became increasingly risky over time.
    However, it is unlikely that data on M3 would have been 
helpful in providing an advance warning of the nature and 
extent of risks developing in securities financing markets 
prior to the crisis. Measures of the money stock are based 
largely on the obligations of depository institutions and, as 
noted above, much of the expansion of risk and leverage in the 
financial system occurred outside of the banking sector.

Q.12. Commissioner Raskin, do you have any views on the Special 
Purpose Vehicle called Maiden Lane II that the Fed created to 
make loans to AIG and that looked dangerously close to equity 
injections into AIG by the Fed?

A.12. I was not involved in the Federal Reserve Board's 
consideration of that transaction. Going forward, Congress has 
determined that the Federal Reserve should not be permitted to 
make such loans pursuant to its emergency lending authority.

Q.13. Commissioner Raskin, some of your expertise is in 
financial supervision and regulation, and you seem to be 
labeled often as a consumer advocate. As you know, there is 
legislation afoot to set up a new consumer financial protection 
bureaucracy. It is supposed to have the Fed's name on it but, 
from what I can tell, only so that it can tap the Fed's 
printing presses for undisciplined funding. Proponents of the 
new bureaucracy speak of creating the right ``culture.'' Could 
you explain what that means to you?

A.13. The basic framework that all of us, as public officials, 
operate in is the culture of the rule of law. Our foremost 
responsibility is to enforce the law and organize resources in 
such a way that assures that we are adhering tightly to Federal 
statutes and Congress's intent in passing laws. Accordingly, 
the new Consumer Financial Protection Bureau should strive at 
all times to operate squarely within the legal constraints and 
mandates established for it by Congress.
    In an operational sense, we should seek as public officials 
to create a culture of professional ethics and excellence. In 
the regulatory agency I lead in Maryland, I have consciously 
attempted to raise the standards of professional performance in 
such a way that we may be able to better execute the laws that 
the State legislature enacted. Similarly, I would hope that the 
leaders of the Consumer Financial Protection Bureau, which is a 
creation of Congress, would establish expectations of 
professional excellence in training employees to engage in the 
appropriate rulemaking, examination and enforcement 
responsibilities set forth by Congress.
    The culture of the rule of law and the culture of 
professional ethics and excellence imply also a culture of 
accountability and transparency, values I have always striven 
to uphold. Thus, I trust that the Consumer Financial Protection 
Bureau would report to Congress periodically and maintain a 
policy of accessibility, transparency and accountability.

Q.14. Commissioner Raskin, some of your expertise is in 
financial supervision and regulation, and you seem to be 
labeled often as a consumer advocate. Another consumer advocate 
and an activist lawyer from Harvard has spoken of a need for a 
consumer financial protection bureaucracy in an environment in 
which, in her mind, it is banks against families. Do you share 
the view that our financial markets can be characterized as 
banks against the people?

A.14. No. The reason that our financial markets have inspired 
confidence for most of our history and have been a catalyst for 
extraordinary growth is because we have acted to regulate their 
excesses and abuses when they become manifest and to conform 
market behavior to the rule of law under our system of 
constitutional Government.
    Banks can be engines of local economic growth for our 
communities. Small businesses depend on community banks for 
credit, and their ability to access loans is necessary for 
employment and economic growth. I have encouraged banks to 
fulfill their lending role as Commissioner for Financial 
Regulation in Maryland and will continue that effort, if 
confirmed, at the Board of Governors.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER FROM SARAH 
                          BLOOM RASKIN

Q.1. Please describe your background in monetary policy and how 
you hope to impact the Board's discussions on the subject.

A.1. Both my academic and professional background have provided 
me with the knowledge of monetary economics and monetary 
policy. From my undergraduate studies, through my graduate 
years in law school, and in my 25 years of experience in the 
private and public sectors, I have experienced, written about, 
and taught both the theoretical and practical aspects of 
monetary economics and policy.
    My interest and work in monetary macroeconomics and 
monetary policy began during my undergraduate years at Amherst 
College, where I graduated Phi Beta Kappa and magna cum laude 
in economics and wrote my senior thesis on the Federal Reserve 
Board's experience with intermediate targeting of monetary 
policy. This senior thesis was anchored in econometric analysis 
but also discussed strategic issues related to central banking. 
It earned me the James R. Nelson Prize in Economics which is 
awarded to the top economics student in the graduating class. 
Much of the analysis for that thesis was inspired by work I had 
done during college at the Joint Economic Committee of 
Congress.
    Although I chose to go to Harvard Law School rather than 
pursue a doctorate in economics, I was invited to teach 
Economics 10 as a teaching fellow with Professors Martin 
Feldstein and Lawrence Lindsey while I was a law student. This 
course covered macroeconomic subjects, including monetary 
policy and monetary macroeconomics. Then, the summer after my 
second year of law school, I worked at the Federal Reserve Bank 
of New York and continued to participate in projects related to 
the Federal Reserve's role in monetary policy, regulation and 
payment systems. I worked with a team of lawyers and economists 
that summer to restructure the Brazilian debt escrow accounts 
which are maintained by the Federal Reserve Bank of New York. I 
prepared an analysis of interest rate swaps that evolved into a 
paper when I returned to Harvard on the subject of their 
structural implications.
    My career trajectory has given me ample opportunity to 
apply this academic immersion in monetary policy to concrete 
problems in both the private and public sectors. I spent more 
than a decade in the private sector as a banking attorney with 
Mayer Brown and with Arnold and Porter. Subsequent to my work 
at those law firms, I became a managing director of Promontory 
Financial Group. In all of these positions, I have worked with 
and represented a variety of banks and financial institutions 
facing regulatory and transactional issues. I also served as an 
adjunct professor at American University, where I have taught 
International Economic Law.
    My years as counsel to the Senate Banking Committee gave me 
further opportunities to grapple with issues of monetary 
macroeconomic policy and Federal Reserve System oversight. And, 
as Maryland's Commissioner of Financial Regulation, I have been 
steeped in all facets of economic policy and have paid close 
and careful attention to actions and policies of the Federal 
Reserve Board.
    Both my academic background and my professional background 
have thus provided me with the knowledge of monetary economics 
and monetary policy. The Board's responsibilities also include 
regulation and supervision and oversight to the payment system. 
I believe that my background and expertise as a regulator 
prepare me well to participate effectively in the full breadth 
of Board responsibilities.

Q.2. Commissioner Raskin you have a very well established 
reputation as a ``consumer advocate,'' having worked at the 
Federal Reserve Bank of New York and the Senate Banking 
Committee before your current job as Maryland's Commissioner of 
Financial Regulation, how do you plan to influence monetary 
policy decisions in a way which would make you more than a 
rubber stamp for Chairman Bernanke?

A.2. I view all American households and businesses as consumers 
of financial products and services. As citizens, we become 
consumers whenever we enter the marketplace to purchases goods 
and services and businesses obviously do the same. Therefore, I 
have been proud of the recognition I have received on behalf of 
my work protecting consumers because this is work in service of 
the public interest and the soundness of the economy generally. 
I have been equally proud of the strong support my nomination 
has received from banks and banking leaders, including the 
Independent Community Bankers Association and the Maryland 
Bankers Association. I believe that my work in Maryland has 
produced marked improvements in the environment for banking and 
financial services and that the banks in my State view me and 
my agency as an honest broker with the interest of economic 
progress and business investment constantly in mind. I have 
always rejected the implication that the interests of citizens 
as consumers must be adversarial to the interests of 
profitable, safe and sound banks. On the contrary, it has been 
a hallmark of my leadership in Maryland that my agency does not 
see the public interest as structurally adverse in any way to a 
sound and thriving banking sector; rather, they stand best when 
they stand together.
    I have throughout my career, including as Maryland's 
Commissioner for Financial Regulation, sought to independently 
and critically analyze each decision I confront. I will 
continue that practice, if confirmed by the Senate, as a 
Governor of the Federal Reserve Board and member of the FOMC.

Q.3. Do you believe that a Federal Reserve Board of Governors 
that is comprised of only two experts in monetary policy will 
provide enough balance and expertise on the Board to make 
crucial monetary policy decisions like when and how to withdraw 
the excess liquidity the Federal Reserve has flooded into the 
economy?

A.3. The Board of Governors has had a long tradition of broad 
representation from the business and financial community. One 
prominent example is Marriner Eccles, the Chairman of the 
Federal Reserve Board from 1934 to 1948. While Eccles is viewed 
by many as one of the most successful chairmen, he was not a 
trained economist.
    I believe that, if my fellow nominees and I are confirmed 
by the Senate, the Board of Governors will be comprised of 
individuals who possess the broad range of backgrounds and 
expertise necessary to carry out, in responsible and effective 
fashion, the various monetary policy, regulatory, supervisory 
and payments system responsibilities with which the Congress 
has charged the Board.

Q.4. The Federal Reserve, as specified by the Federal Reserve 
Act of 1913 and later the Federal Reserve Act of 1977, is 
required to ``promote effectively the goals of maximum 
employment, stable prices, and moderate long-term interest 
rates.'' This is often referred to as the dual mandate because 
the Federal Reserve is required to pursue maximum employment 
and stable prices equally. Do you think it is efficient to 
pursue one at a time?

A.4. Both goals of the dual mandate must be pursued 
simultaneously. Currently, for example, we have both 
unacceptably high unemployment and a falling rate of inflation. 
The stimulative polices that the Federal Reserve and Congress 
have pursued should help to lower the unemployment rate as well 
as prevent further declines in inflation and the possibility of 
deflation.
    There are times, and the 1970s are an example of such 
times, when the two goals for the dual mandate can conflict in 
the short run. In those situations, it is still the case that 
the Federal Reserve must focus on both goals simultaneously and 
make clear that short-term increases in inflation will not be 
tolerated in the longer term. In this way, the Federal Reserve 
can stabilize inflationary expectations and thereby minimize 
volatility in both inflation and unemployment.

Q.5. Currently, we are responding to the high unemployment in 
the country. Later, we will respond to inflation. In the 1970s 
that approach produced higher inflation and higher 
unemployment. Why should we believe that won't happen again?

A.5. Those results will not happen again because over the last 
30 years the Federal Reserve has earned a strong reputation for 
its commitment to price stability. We can and must reinforce 
this reputation by removing the extraordinary monetary stimulus 
in a transparent and consistent manner when the time is 
appropriate.

Q.6. Paul Volcker and Alan Greenspan have concluded that the 
Phillips curve was a misleading guide. Do you agree or disagree 
and why?

A.6. I believe that current and expected resource slack, as 
measured by the unemployment rate or an output gap, is one 
factor that influences inflation, in part through its effects 
on the costs of production. However, it is not the only factor. 
Movements in the prices of oil and other commodities, exchange 
rates, and productivity all can influence inflation as well. In 
addition, stable inflationary expectations and confidence in 
the Federal Reserve's commitment to price stability play a key 
role in keeping actual inflation in check. As a result, I will 
be looking at many factors in assessing inflation and monetary 
policy.

Q.7. The financial reform bill, Dodd-Frank, creates a consumer 
regulator inside the Fed that is administered separately. How 
will the Federal Reserve prevent conflict?

A.7. The financial reform bill establishes a Consumer Financial 
Protection Bureau, as an independent agency, within the Federal 
Reserve Board. The bill provides the Bureau with independent 
operational and rulemaking authority. However, even with those 
guideposts, the Board anticipates a close working relationship 
with the Bureau, much as it has with other banking agencies. 
The Bureau's membership on the Federal Financial Institutions 
Examination Council will also give it contact with other 
regulators and State supervisors.

Q.8. Earlier this year the N.Y. Times reported that the Triple-
A credit rating of the United States ``may be at risk in the 
coming years as the Nation copes with its growing debts.'' 
Since 2007 the national has increased from $8.67 trillion to 
$12.6 trillion-an increase of $3.93 trillion or 45.3 percent, 
the debt limit has increased six times and the deficit has 
increased from $161 billion in FY 2007 to $1.42 trillion in FY 
2009. The FY 2010 deficit is projected to come in at another 
$1.5 trillion. Do these deficits pose any harm to the economy 
or economic growth?

A.8. The increase in the budget deficit over the last 2 years 
in large part reflects both the effects of the deep recession 
(which automatically reduces tax revenues and increases outlays 
for support programs), and the effects of discretionary fiscal 
policy actions taken to counteract the recession and stabilize 
financial markets. In the near term, these stimulative fiscal 
policies have helped support the recovery in the economy. As 
the economy continues to recover and stimulus policies wind 
down, the budget deficit should narrow over the next few years.
    Over the longer term, the retirement of the baby boom 
generation and fast-rising health care costs will put 
significant pressure on the Federal budget. Large and 
persistent increases in Federal debt would lead to higher 
interest rates that restrain capital formation and productivity 
growth, and, in turn, slow the rate of growth in real aggregate 
economic activity. The ideal way to deal with this longer term 
unsustainability is to adopt a credible long-term plan that 
reduces the deficit and stabilizes the ratio of Federal debt to 
gross domestic product.

Q.9. Let us say in the future we reach a point that we are 
truly out of this recession in a meaningful way and the 
national deficits are where they are projected, 4 to 7 percent, 
versus 2 \1/2\ percent. How quickly would that become a major 
problem in terms of the economy? What would those problems be?

A.9. It is difficult to know how soon an unsustainable fiscal 
policy would adversely affect the economy. At the moment, 
credit markets are viewing U.S. debt as extremely safe. If, 
however, we do not get our house in order, this will not 
continue indefinitely. In addition, as is illustrated in 
Greece, when confidence disappears, it disappears quickly with 
obviously devastating consequences. As noted above, 
unsustainable budget deficits lead to higher interest rates 
that restrain capital formation and productivity growth, and, 
in turn, slow the rate of growth in the economy. Also, to the 
extent that higher debt increases the reliance of United States 
on foreign borrowing, an ever larger share of future income 
would be devoted to interest payments on Federal debt held 
outside of the United States, which would reduce the income 
available for domestic consumption and investment.

Q.10. A lot of thought has been put into how to remove the 
excess liquidity that the Federal Reserve has pumped into the 
economy since 2008. Do you think we have reached a point where 
the Federal Reserve can begin withdrawing that liquidity? If 
not, what metrics will you look at to make that determination?

A.10. A substantial portion of the liquidity provided by the 
Federal Reserve during the crisis has been withdrawn at this 
point. Nearly all of the special liquidity facilities that were 
established to address pressures in short-term funding markets 
have expired. Moreover, the terms for the Federal Reserve's 
regular lending program for depository institutions are now 
similar to those prevailing prior to the crisis, and the amount 
of credit outstanding to depository institutions is very low.
    However, the Federal Reserve did purchase a large volume of 
agency mortgage-backed securities and direct agency 
obligations, and reserves in the banking system have increased 
considerably as a result of these purchases. Accordingly, 
gradual sales of these securities should be undertaken at some 
point to speed the return to a Treasury-securities-only 
portfolio. A decision to begin sales of assets or use other 
tools to further drain liquidity needs to be made in the 
context of the overarching goals of the Federal Reserve to 
foster price stability and maximum employment.

Q.11. When asked how you would have handled monetary policy 
differently in regards to the financial crisis by Senator 
Shelby, you cited lapses in regulation and oversight. While 
this is an important aspect of the Federal Reserve's duties, 
you still did not inform us whether tighter or looser monetary 
policy may have been in order leading up to the crisis. Do you 
think loose monetary policy may have played a role in the 
crisis, what would you do to correct this issue to avoid a 
future crisis and in what timeframe should that be done?

A.11. It appears to me that in 2003-2004 there were prudent 
reasons for keeping interest rates low. There was weakness in 
the economy and a threat of excessive disinflation, and so the 
considerable monetary accommodation put in place at that time, 
and its subsequent gradual removal by the Federal Reserve, 
appeared to be appropriate to promote the dual mandate of 
maximum employment and stable prices.
    I believe that the Federal Reserve should remain vigilant 
in watching for the development of asset price bubbles, and 
while monetary policy may not be the most effective method for 
pricking such bubbles, I do believe that the Federal Reserve 
should consider whether its regulatory and supervisory powers 
permit it to address such bubbles in a manner that does not 
have sudden and dramatic effects on the economy.

Q.12. The United States monetary policy is often described as 
mixed policy, which indicates that the Fed funds rate responds 
to shocks in inflation and output. However, many other well 
developed economies such as the United Kingdom, Switzerland, 
Canada, Australia, and countless others utilize an inflation 
targeting approach. What do you think are the benefits of mixed 
policy as opposed to inflation targeting.

A.12. I believe that the difference between the mixed policy 
and inflation targeting is small. Most of the countries that 
have adopted an inflation target follow what is called 
``flexible inflation targeting.'' These countries pursue a 
target for inflation in a flexible manner so as to provide 
price stability and high employment. Inflation targeting 
countries have found that the numerical target for inflation 
helps in making monetary policy actions more transparent and 
increasing accountability. In addition, an inflation target has 
generally been useful in anchoring long-term inflationary 
expectations in the targeting countries.
    Given the Federal Reserve's well-earned reputation for its 
commitment to price stability, a numerical target would provide 
little added benefit and it is possible that it could even 
create uncertainty about the Federal Reserve's commitment to 
aid the recovery. In addition, the Federal Reserve has adopted 
a number of measures to increase transparency that make an 
inflation target less important.

 RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER FROM OSVALDO 
                      LUIS GRATACOS MUNET

Q.1. Mr. Gratacos, over the past year a number of schemes to 
defraud the Ex-Im Bank have been discovered. These schemes 
would have cost Ex-Im Bank millions of dollars. According to 
your last semiannual report, your office presently has 35 
ongoing investigations involving claims of more than $300 
million. What accounts for the apparent increase in the number 
of frauds being committed in Ex-Im Bank's loan guarantee 
programs? Does the Ex-Im Bank have sufficient controls to 
detect and prevent the fraudulent use of its loan guarantees?

A.1. Historically, Ex-Im Bank's fraud exposure (based upon what 
has been uncovered by the AIG as of today) is concentrated in 
the medium-term program. During the mid 2000s, Ex-Im Bank 
reacted to market capacity related to medium-term financing and 
aggressively promoted its medium-term program to lenders, 
exporters and buyers. The medium-term program traditionally 
provides financing to small to medium-sized businesses in 
markets where accurate and reliable financial information is 
not readily available, requiring more emphasis on Ex-Im Bank's 
underwriting capacity. The increase in medium-term 
participation was met with inappropriate internal allocation of 
resources, lack of staff, and a culture of transaction 
promotion incentivized to produce deals. Also, a number of 
conditions affecting Ex-Im Bank and the medium-term program 
increased its inherent fraud risk. These include:

  (i)  LEx-Im Bank's mission to extend credit in more than 160 
        countries and the resulting wide variations in business 
        and credit practices and legal systems between those 
        countries;

  (ii) LEx-Im Bank's mission to accept risks that the private 
        sector cannot or will not accept;

  (iii) LEx-Im Bank's public disclosure of its underwriting 
        standards, which can guide borrowers in misrepresenting 
        their financial statements;

  (iv) Lthe limited resources of many medium-term program 
        lenders to verify the veracity of borrowers and conduct 
        thorough due diligence;

  (v)  Lthe limited resources available to Ex-Im Bank to fully 
        scrutinize every transaction within a reasonable time 
        after an application is submitted;

  (vi) Lthe ``moral hazard'' resulting from the 100 percent 
        guarantee provided to medium-term program lenders 
        creates a disincentive for private sector participants 
        to conduct thorough due diligence inquiries that would 
        be more likely to identify potentially fraudulent 
        transactions; and

  (vii) Lthe inexperience of many of the exporters, lenders and 
        buyer/borrowers supported by the medium-term program.

Since 2008, Ex-Im Bank has taken a number of steps in order to 
improve its medium-term program. Some of the most visible steps 
are: Know Your Customer guidance (providing guidance to lenders 
in order to increase turn around time); enhancing due diligence 
efforts in certain transactions; creating a Credit Review and 
Compliance Division; utilizing different payment frequencies in 
certain transactions; enhancing quality assurance efforts; and 
implementing of a pilot program involving cross-functional 
groups in order to scrutinize transactions submitted to Ex-Im 
Bank.
    Nonetheless, Ex-Im Bank still lacks adequate internal 
controls to prevent and detect fraud. Ex-Im Bank management has 
not implemented important OIG recommendations and suggestions 
relevant to its ability to combat waste and fraud. These 
recommendations and suggestions can only mitigate, but not 
eliminate, the challenges present in the performance of the 
medium-term and other guarantee programs. Specifically, the 
following OIG recommendations and suggestions have not been 
implemented:

  a) LCreate a formal lender oversight function to actively 
        manage and monitor performance of transactions on a 
        lender-by-lender basis and to assess the quality of 
        lender due diligence performed;

     i.) LThis lender oversight function should report to a 
        division, such as Credit Review and Compliance, 
        independent of front-office originations.

  b) LRestructure the exposure fee pricing structure for non-
        sovereign medium-term program transactions to more 
        effectively account for transaction-level risk;

  c) LObtain, or require that parties to MT program 
        transactions provide Ex-Im Bank, documentary evidence 
        of the completed export transaction in the form of 
        shipping documents and U.S. and foreign customs 
        documents, promptly after the exported goods are 
        received.

  d) LImplement more rigorous due diligence and underwriting 
        practices in transactions when complex or high-risk 
        markets, risky industries and products are being 
        considered.

  e) LRequire participating lenders to undergo more rigorous 
        due diligence efforts and require such lenders to 
        highlight the transactional or credit risks identified.

  f) LDevelop a more comprehensive strategic plan for Ex-Im 
        Bank products, specifically the medium-term program.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM STEVE A. 
                             LINICK

Q.1. Mr. Linick, to date, the GSE's have received one of the 
largest taxpayer-funded bailouts in our history. Unfortunately, 
the taxpayer remains exposed to considerable losses going 
forward. To properly review the FHFA's conservatorship of these 
entities, it seems that one would need direct access to examine 
Fannie and Freddie, especially since the Director of the FHFA 
acts with all the powers of the shareholders, directors, and 
officers of the regulated entity. Do you believe that the FHFA 
IG can credibly determine if FHFA is acting properly as 
conservator without having direct access to the institutions 
themselves?

A.1. In order for the FHFA IG to credibly determine if FHFA is 
acting properly as both conservator and regulator of Fannie and 
Freddie, I believe that the FHFA IG will require direct access 
to the institutions themselves.

Q.2. Mr. Linick, Federal law allows the FHFA to ``take such 
action as may be: 1) necessary to put the regulated entity in a 
sound and solvent condition; and 2) appropriate to carry on the 
business of the regulated entity and preserve and conserve the 
assets and property of the regulated entity.'' The FHFA, acting 
as conservator of Fannie or Freddie, executes any directives 
given to those institutions, whether those directives originate 
within the FHFA or another entity. Given these facts, would you 
agree that the FHFA IG has a duty to examine those directives 
and to report on any impact that these directives may have on 
the ability of the FHFA to properly execute its duties as 
conservator or receiver? If so, how would you plan to fulfill 
this duty?

A.2. The FHFA IG has responsibility for, among other things, 
overseeing the manner in which FHFA carries out its management 
of the conservatorship, including its actions to ensure that 
Fannie and Freddie operate in a safe and sound manner and 
preserve and conserve the assets of Fannie and Freddie. To the 
extent that FHFA executes any directives (regardless of their 
origination) that impact FHFA's ability to carry out its 
management of the conservatorship, I believe the IG has a duty 
to report on the impact of those directives. If confirmed as 
IG, I intend to fulfill this duty by providing reports to 
Congress as required by the Inspector General Act, and by 
working closely with Congressional members and staff through 
regular and open communication.

Q.3. Mr. Linick, in addition to the multiple challenges that 
any IG would face, there is not currently, nor has there ever 
been, an IG for the FHFA. As such, should you be confirmed, you 
will be starting from scratch. As an unconfirmed nominee, I 
certainly understand that you have not been able to undertake 
the analysis necessary to determine the resources required to 
properly perform your duties, and hence I won't ask you to 
speculate on specifics today. Due to the importance of this 
office having adequate resources to complete its mission, 
however, it is vital that both the FHFA and Congress quickly 
know what will be necessary. If you are confirmed, would you, 
within a realistic timeframe, provide the Committee with an 
estimate regarding the budgetary needs of your office?

A.3. The FHFA is a relatively new agency, whose regulatory role 
has never been tested. In 2008, FHFA placed Fannie Mae and 
Freddie Mac in conservatorship out of concern that their 
deteriorating financial condition threatened the stability of 
the financial markets. Since then, the Department of Treasury 
has provided billions of dollars to the enterprises. Under 
these circumstances, the FHFA IG will play a critical role in 
safeguarding taxpayer dollars, ensuring transparency, and 
preventing fraud, waste, and abuse. In addition, the FHFA IG 
will carry significant management responsibility in having to 
establish a new office and quickly hire a staff of highly 
qualified individuals. Given the scope of the IG's mission, 
substantial resources will be essential. If confirmed as IG, I 
will commit to working expeditiously to provide this Committee 
with an estimate regarding the budgetary needs of the office.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER FROM STEVE A. 
                             LINICK

Q.1. In your testimony you say that you intend to be proactive 
in overseeing the conservatorship of Fannie Mae and Freddie 
Mac. I believe it is important for you to aggressively and 
regularly, more often than annually, report to Congress on how 
the conservatorship is being managed and how the two 
institutions are being run in order to understand the impacts 
of their business practices on the taxpayer. Did HERA, the law 
which created the FHFA and the position of the IG for which you 
are nominated, place any constraints on your ability to examine 
these institutions as aggressively as Congress intends?

A.1. If confirmed as IG, I will work closely with Congressional 
members and staff and regularly report on how FHFA is 
fulfilling its mission as conservator and regulator. At this 
time, I am not aware of anything in HERA that would constrain 
the IG's ability to aggressively and proactively perform 
oversight responsibilities.

Q.2. It is important that your office, as inspector general for 
the agency running the conservatorship of Fannie Mae and 
Freddie Mac and charged with overseeing the Federal Home Loan 
Bank System, has enough resources and staff to aggressively do 
your job. You may be aware that the Special Inspector General 
for TARP's budget was 23 million in 2010, and 50 million in 
2011. The SEC Inspector General budget is closer to 15 million. 
Have you given any thought to the size of your budget given the 
magnitude of the undertaking Congress is asking the FHFA IG 
office to undertake?

A.2. The FHFA is a relatively new agency, whose regulatory role 
has never been tested. In 2008, FHFA placed Fannie Mae and 
Freddie Mac in conservatorship out of concern that their 
deteriorating financial condition threatened the stability of 
the financial markets. Since then, the Department of Treasury 
has provided billions of dollars to the enterprises. Under 
these circumstances, the FHFA IG will play a critical role in 
safeguarding taxpayer dollars, ensuring transparency, and 
preventing fraud, waste, and abuse. In addition, the FHFA IG 
will carry significant management responsibility in having to 
establish a new office and quickly hire a staff of highly 
qualified individuals. Given the scope of the IG's mission, 
substantial resources will be essential. If confirmed as IG, I 
will commit to working expeditiously to provide this Committee 
with an estimate regarding the budgetary needs of the office.

Q.3. Are you aware that the FHFA recently released a report to 
Congress that stated that the condition and performance of 6 of 
12 FHLBanks are less than adequate, four FHLBanks have negative 
accumulated other comprehensive income and that Seattle FHLBank 
has been designated ``undercapitalized''? Do you plan on 
looking into the activities that lead these banks into such a 
perilous position or are there legal impediments that would 
prevent you from doing so?

A.3. One of FHFA's primary goals as regulator is to ensure that 
the Government-sponsored enterprises, including the FHLBanks, 
operate in a safe and sound manner, are adequately capitalized, 
and comply with legal requirements. I am aware of FHFA's recent 
report to Congress describing the poor condition and 
performance of the FHLBanks referenced above. I believe it is 
well within the IG's authority to review FHFA's oversight in 
this area and the activities that led these banks into their 
current condition. If confirmed as IG, I will develop a 
proactive agenda to oversee the programs and operations of FHFA 
with this and other important issues in mind.

Q.4. Is it within your ability as inspector general of the FHFA 
to examine the impact of the affordable housing goals on Fannie 
Mae and Freddie Mac and do you intend to use that authority to 
help paint an accurate picture for Congress on the impacts of 
all of its housing policies on the GSEs?

A.4. In addition to ensuring that Fannie and Freddie operate in 
a safe and sound manner and conserving and preserving their 
assets, FHFA is charged with promoting homeownership and 
affordable housing and supporting an efficient secondary 
market. I believe it is well within the authority of the IG to 
evaluate the impact of the affordable housing goals on Fannie 
and Freddie and FHFA's ability to operate them in a safe and 
sound manner and conserve and preserve their assets. If 
confirmed as IG, I will develop a proactive agenda to oversee 
the programs and operations of FHFA with this and other 
important issues in mind.
              ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

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