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Rep. Royce Questions Fed Chair Powell on Housing Finance Reform and Money Market Funds
WASHINGTON, D.C. — This week, Representative Ed Royce (R-CA) participated in a House Financial Services Committee Hearing Entitled “Monetary Policy and the State of the Economy.” During the hearing, Rep. Royce questioned Jerome Powell, Chairman, Board of Governors of the Federal Reserve System, about housing finance reform as well as proposed changes to the $2.8 trillion money market mutual fund industry.
Rep. Royce: Chairman Powell, housing finance reform remains the great undone work of the financial crisis.You have previously called for reform stating that “we need to move to a system that attracts ample amounts of private capital to stand between housing sector credit risk and taxpayers. A nationalized mortgage market is an unsustainable status quo. Sadly, the situation we find ourselves in today was a predictable one. In 2003, I introduced legislation, and again in 2005, in the form of an amendment, which would have reigned in the GSEs, allowing them to be regulated for systemic risk. Then Fed Chairman Greenspan backed the amendment. But it was not enough to overcome the outsized political pressure brought by the GSEs themselves. To be fair, you said, last summer, that this is not a normal issue on which the Fed would comment, but that we are in a “now or never moment” for reform as there is “not a current risk” with a healthy economy and housing system. How long will this “now or never moment” last and what are the consequences of inaction?
Chairman Powell: I think now continues to be a good time to move forward on this [being] one of the big pieces of unfinished business from the crisis. It is unsustainable to have the U.S. housing finance system on the government’s books for the long run. It’s not healthy. We are going to need to address this. I assume we will at some point, the sooner the better.
Rep. Royce: Let me ask you another question on this front. Chairman Greenspan often commented on the role of the GSEs in our economy. In 2004, in testimony before the Senate he said: “…Concerns about systemic risk are appropriately focused on large, highly leveraged financial institutions such as the GSEs… to fend off possible future systemic difficulties, which we assess as likely if GSE expansion continues unabated, preventive actions are required sooner rather than later.” Ominous words, no doubt. Today, pressure is being brought on the Administration to release the GSEs out of conservatorship. Although I oppose this move, absent Congressional action – I am hopeful that if this were to occur, there is no doubt, today, that Fannie & Freddie, given their size and role in the housing market, would be regulated as systemically important. Do you share this view?
Rep. Royce: Let me move to another question Chairman Powell. Earlier this year, this Committee passed legislation that would reverse a previous SEC rule requiring that certain money market funds float the NAV. I certainly remember when the Reserve Fund “broke the buck” in 2008 – and the massive backstop the U.S. taxpayers provided to restart the entire market. The fact is that the value of the underlying assets of these products fluctuate. They go up and down. As I said in opposition to the bill at the time, if we learned anything from the financial crisis, it should be that price should reflect risk. While understanding this is the primary jurisdiction of the SEC, and Chairman Clayton has already expressed his concerns. I was hoping, as a member of the FSOC and someone uniquely positioned to comment on macro financial stability, that you could comment on any concerns with this potential move?