March 25, 2010

WASHINGTON - House Financial Services Committee Ranking Member Spencer Bachus made the following statement during a full Committee hearing titled "Unwinding Emergency Federal Reserve Liquidity Programs and Implications for Economic Recovery."

"Thank you, Mr. Chairman, for holding this hearing, and thank you, Chairman Bernanke, for your testimony. 

"The Federal Reserve, with a trillion and a half dollars of additional liquidity in the system, is faced with a very difficult problem: how to vacuum that money out fast enough to avoid hyper-inflation, but do so without stalling a recovery.  Unfortunately, the Fed appears to be utilizing unconventional tools that do not have sufficient track record to indicate whether they will be effective.

"Mr. Chairman, an exit strategy is made necessary in the first place due partially to a series of interventions by the Fed that were both unprecedented and highly controversial, the most questionable of which was the use of its 13(3) authorities to rescue individual firms and their creditors under the doctrine of ‘too big to fail'.  Now is time for the federal government and the Fed to get out of the bailout business.  

"As I have said previously, the term ‘intervention' implies that the government is interfering with economic and market forces.  An intervention creates an artificial condition in which the system becomes increasingly dependent on government action, and we see that with the GSEs.  As with any addiction, an altered state is created where the only choices are permanent addiction or a sometimes painful withdrawal.

"That is why a centerpiece of the Republican regulatory reform solution is to end ‘too big to fail' and that includes reining in the Fed's 13(3) authorities. 

"To his credit, Chairman Frank incorporated several of these ideas in the regulatory reform bill that passed the House in December.  While there was much that we disagreed on in that bill, the need for limitations on the Fed's authority to conduct large-scale bailouts of individual firms was one area in which there was bipartisan consensus.

"Withdrawing the excess liquidity and returning the Fed to its more traditional monetary policy role will be difficult.  If done incorrectly, it may negatively impact the economic recovery and result in higher borrowing costs for individuals, corporations, and the US government.  But this transition must take place.

"Mr. Chairman, I look forward to hearing an update on the Fed's exit strategy."