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Yellen Dodges Questions on Interest Rates and Political Motives

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On Wednesday, Federal Reserve Chairwoman Janet Yellen testified before the House Financial Services Committee on financial regulation. The Fed Chair took criticism from both sides, with Democrats and Republicans criticizing the regulatory body for doing too much and for doing too little. Among the topics was the over-reach of Dodd-Frank, breaking up “too big to fail” firms, and the recent Wells Fargo phony account scandal. However, one important topic side stepped was the impact of low interest rates on any of the problems brought up at the hearing.

Janet Yellen testifies to Congress

The need for more bank regulation was championed by many Democratic representatives on the committee. Rep Stephen Lynch (D-Massachusetts) seemed to sum up the pro-regulation side of the argument, telling Yellen she should take a no-holds barred approach to banks like Wells Fargo. “Go after them. I’d like to see someone held accountable for that. Make their life hell,” Lynch said.

A few members speculated on what motivated Wells Fargo employees and mangers; however, their assumption was simply greed, and the panacea was more regulation. No one took the more realistic position that banks were struggling not only with Dodd-Frank regulations, but with low revenues from artificially reduced interest rates, which, itself, is a form of regulation of the financial markets.

Keeping interest rates low is resulting in less bank revenue while the cost of meeting regulations is being passed on to firms. Both are helping create a stressful atmosphere within struggling institutions to grow revenue at any cost, even to the point of creating phony accounts of their own customers.

The Wells Fargo discussion came just after the bank was fined $185 million for the scandal while Chief Executive John Stumpf forfeited $45 million in compensation and stock options.

Rep Scott Garrett, (R-New Jersey) questioned the Fed’s political motives when making monetary policy, stating “Less and less people believe that the Fed is unbiased.” Garrett questioned whether Fed members like Lael Brainard hadn’t already shown conflict of interests by donating to Hillary Clinton’s campaign. The New Jersey Representative fired away at Yellen asking, “Has Governor Brainard recused herself?” and “Have you ever asked Governor Brainard to recuse herself?”

When asked if a Federal Reserve Governor should be able to donate to a political campaign, Yellen answered she would “need to check with her council” on the answer.

Yellen smartly evades questions of propriety and conflicts of interest for a simple reason: she knows they exist. What also exists is the fallout from a failed monetary policy and over-regulation that’s driven financial institutions to desperate measures.

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