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Shelby Says that Federal Reserve has Engaged in “A Backdoor Stimulus Program through Monetary Policy”

By Brandon Moseley
Alabama Political Reporter

U.S. Senator Richard Shelby of Alabama voted on Monday against the nomination of Dr. Janet Yellen for Chairman of the Board of Governors of the Federal Reserve System, because he disagreed with Yellen’s weak record on bank regulation and strong support for easy money policies.

Senator Shelby said on the floor of the Senate, “I believe that we need a Federal Reserve Chairman with the record and resolve to navigate our economy through this incredibly delicate situation.  In my judgment, Dr. Yellen is not that person.”  “I also voted against Dr. Yellen’s nomination to serve as Vice Chairman of the Federal Reserve.  At that time, I stated my deep concerns about Dr. Yellen’s Keynesian bias toward inflation as a member of the Federal Open Market Committee and her poor record of bank regulation as President of the San Francisco Fed.  Those concerns have not faded.  Rather, they are magnified in light of the importance of the position to which Dr. Yellen has now been confirmed.”

Sen. Shelby said of the policies of outgoing Federal Reserve Chairman Ben Bernanke (a monetary policy enthusiastically supported by Yellen), “Let’s call this what it is: A backdoor stimulus program through monetary policy.” “The Federal Reserve is aiding and abetting the failed policies and reckless spending of the Obama administration.”

On Monday, the U.S. Senate voted 56-26 on Monday to confirm Janet Yellen as the next Chairman of the Board of Governors of the Federal Reserve System.

Sen. Shelby voiced his concern over the direction of the Federal Reserve as an institution.  Shelby said that it took 95 years for the Federal Reserve to accumulate a balance sheet of $1 trillion.  In just a few subsequent years, the Fed added another $3 trillion.

Sen. Shelby emphasized the Obama Administration’s fiscal stimulus in proportion to the Fed’s monetary policy stimulus (shown below). The Fed’s stimulus package is nearly four times larger than even President Obama’s massive $787 billion stimulus.

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Shelby, citing reporting by Bloomberg said, “Four trillion dollars is equivalent to 24% of U.S. GDP.  That’s greater than the GDP of the world’s fourth largest economy, Germany.  Four trillion dollars is twice the total amount of all student and auto debt in this country.”

Sen. Shelby said, “It’s not just that the Chairman of the Fed is perhaps the most powerful individual in the global economy.  It’s that the institution itself is in utterly uncharted waters.”

Shelby said, “Many hold the misconception that China is the world’s largest owner of U.S. debt.  In fact, M. President, the Fed’s balance sheet shows that the institution itself is by far the largest holder of U.S. Treasury bonds.  With $2.2 trillion in Treasury debt, the Fed holds nearly $900 billion more than China does. Indeed, M. President, the Fed holds more in Treasury bonds than do China and most of the Eurozone combined.”

Shelby said that the rate of acceleration with which the Fed is purchasing Treasuries is also alarming:

“On the day of President Obama’s first inauguration, the Fed held $475 billion in Treasuries,” a 363% increase…It’s no coincidence that President Obama has greatly accelerated our national debt over that same period of time.  When he took office, the national debt stood at $10.6 trillion.  Today, it stands at $17.3 trillion.”

Shelby said that the Fed’s portfolio is also loaded with nearly $1.5 trillion of mortgage-backed securities. “I have long been concerned that this aggressive and extraordinary purchasing program is artificially propping up home prices. This is especially pertinent since an over-heated housing market greatly contributed to the financial crisis that caused this situation in the first place.”

The Senior Senator from Alabama warned, “This highly unconventional monetary policy poses huge risks to our economy, namely inflation and the devaluation of our currency.”

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“Should inflation expectations become unmoored, prices could increase uncontrollably.”

Sen. Shelby said,

“How large will the Fed’s balance sheet ultimately grow?  We don’t know.  Will the Fed be able to contain inflation if it does begin to rise?  We don’t know.  When will the Fed actually begin to unwind the balance sheet?  We don’t know.  How exactly does the Fed plan to unwind the balance sheet?  Again, Mr. President, we don’t know.  Mr. President, I raise these points because I met with Dr. Yellen in my office and attended her confirmation hearing in the Banking Committee.  I received no meaningful answers to any of these questions, only the usual platitudes that so often mark such meetings.”

Sen. Shelby continued, “I now turn briefly to the subject of bank regulation, a primary and critical function of the Federal Reserve. I have been a member of the Banking Committee since I first came to the Senate in 1987.  I served on the committee through many difficult times in the financial markets, including the S&L crisis and the 2008 financial crisis. In all of my experience, I’ve never seen a financial institution fail that was well-managed, well-capitalized, and well-regulated.”

“So many financial institutions failed in 2008 and 2009 in no small part because the Federal Reserve failed so spectacularly in its role as their regulator.  As President of the San Francisco Fed from 2004-2010, Dr. Yellen presided over a regional housing bubble and failed to restrain the excesses in the market.  Yet despite this record of failure, she now runs the most powerful bank regulatory institution in the world.”

The “War on Poverty” celebrated its 50 year anniversary this week.  “Great Society” programs have grown and been expanded to include: Medicare, Medicaid, Food Stamps, disability insurance, federal unemployment benefits, welfare, Obamacare insurance subsidies, earned income tax credits, etc. This amount of money far dwarfs what the Federal government spends on defense (the largest part of that in veterans benefit), roads, courts, prisons, and the actual government functions.  In fact spending on these programs now exceeds all the personal income taxes that are paid to the Federal government.  Since taxes haven’t kept up with this expansion of entitlement spending the Obama administration has borrowed over a $trillion a year to keep spending increasing.  As the national debt grows to $20 trillion and beyond, how does the federal government begin to pay down the debt, when does it begin, and what are the economic ramifications when it does happen?

Sen. Shelby has served the people of Alabama in the U.S. Senate since 1987.  Prior to that he served in the U.S. House of Representatives and the state legislature.

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Brandon Moseley is a former reporter at the Alabama Political Reporter.

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