Sarah Raskin

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.)

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've always tried to uphold in my career and that, to my mind, are exemplified by the work of {the Senate Banking} committee.

Even in the case of a servicer who has every best intention of doing "the right thing," the bottom-line incentives are largely misaligned with everyone else involved in the transaction, and most certainly the homeowners themselves.

As we have learned all too well, a financial system dominated by a handful of large institutions is unlikely to be resilient in the face of a crisis. My view is that a diffuse financial system--one with a diverse range of institutions of varying size and complexity--is preferable to a system that is highly concentrated.

In fact, the need for diversification is one of the great lessons of the crisis.omplexity--is preferable to a system that is highly concentrated.

The trend across various measures definitely suggests that economic disparity has increased over the past 30 years and has accelerated in the past decade.

This phenomenon appears to be driven primarily by the rapid growth in income and assets for those in the top 1 percent of the distribution, while most everyone else has experienced stagnation. This inequality is destabilizing and undermines the ability of the economy to grow sustainably and efficiently.

There are millions of Americans stuck in unemployment lines desperate to find a way back into the productive economy.

Even if the usual effectiveness of monetary policy is being attenuated by the factors that I have mentioned, that conclusion should not be taken as implying that additional monetary accommodation would be unhelpful. Indeed, the opposite conclusion might well be the case--namely, that additional policy accommodation is warranted under present circumstances.

Since my kids now love describing everyone as a hawk or a dove or some other kind of bird, I have taken to reminding them of this conviction I have: When my colleagues and I are doing our job correctly, we are neither hawks nor doves but owls--that is, we are trying to be as wise as possible in deploying all the tools we have to fulfill our legal mandate.

It is imperative to reconsider the compensation structure so that servicers have adequate incentives to perform payment processing efficiently on performing mortgages, and to perform effective loss mitigation on delinquent loans.

In my judgment, our deployment of unconventional policy tools has been completely appropriate to help promote the Federal Reserve's statutory mandate of maximum employment and price stability. Ideally, monetary policy decisions would be informed by precise quantitative information about the effects of each tool. We do our best in this regard, and I can certainly attest that the FOMC reviews an enormous amount of information and analysis in reaching its decisions. That said, even in normal times, uncertainty is intrinsic to real-world monetary policymaking. Uncertainty about the effects of policy is particularly relevant under current circumstances where the scope for conventional monetary policy is constrained by the zero lower bound on the federal funds rate, leaving unconventional tools as the only means of providing further monetary accommodation.

While the ability of businesses to access credit is a function of many factors, it is my view that the examination and supervision of the lender should not hinder the ability of creditworthy businesses to access credit. To be clear, I do not think this is occurring in any significant way, but it is an issue that we at the Federal Reserve focus on continually.

Speaking before the Maryland Bankers Association, Fed Governor Raskin said "being a Governor in the post-financial-crisis era has made me much more sensitive to the importance of making sure we conduct examination and supervision in a way that helps ensure we think through potential consequences, such as unnecessarily hindering lending to creditworthy borrowers. Access to credit, after all, is a critical factor supporting recovery in our economy."

[L]ending by community banks plays an important role in the ongoing economic recovery, especially by providing credit to small businesses. And it is absolutely critical that examination and supervision do not produce outcomes that are barriers to small business expansion.

Whether the increase in gasoline prices, and energy prices more broadly, turns into a persistent inflation problem depends critically on the evolution of inflation expectations. Last year, as actual inflation accelerated and decelerated, survey measures and financial market indicators of inflation expectations remained relatively stable, which limited the influence of the price shocks we saw a year ago. If, as I expect, inflation expectations remain stable in response to the recent run-up in gasoline prices, their influence on overall inflation should be limited as well.

How surprising is the texture and pace of this economic recovery? Perhaps it's not so surprising given the nature of the downturn that preceded it. Economic studies have found that the aftermath of a financial crisis is usually associated with substantial declines in output and employment and that it takes much longer to return to pre-crisis levels of economic activity. This unusually weak recovery can be at least partly explained by the large drop in house prices and severe slump in housing activity that played such a major role in the recent recession. Even though, technically speaking, the housing market contraction preceded the financial crisis, the financial crisis undoubtedly magnified the depth of the housing bust as the erosion in the net worth of households and the severely strained balance sheets of financial institutions led to a sharp tightening of mortgage credit.

I view proprietary trading as an activity of low or no real economic value that should not be part of any banking model that has an implicit government backstop.

First and foremost, it is traditional banking of the sort engaged in by community banks that promotes true liquidity in regions and within sectors, through deposit-taking and lending. Sure, liquidity in opaque financial markets may have increased in recent years by virtue of proprietary trading, but how has this market liquidity benefited consumers, retail investors, small business owners, and homeowners? Second, the Volcker Rule does not prohibit proprietary trading by all entities. Rather, it focuses solely on government-backstopped banks and their affiliates. Thus, even if federally insured banks are precluded from making markets, these markets can continue to be supported by conventional investment banks, hedge funds, and other financial market participants. Thus, any supposed impact by the Volcker Rule on overall market liquidity or credit spreads is, to me, questionable.

Moreover, much of this so-called liquidity, especially in opaque over-the-counter markets, is potentially illusory and destabilizing, especially during adverse market conditions, which does not benefit the public. Indeed, proprietary trading involves buying and selling purely for speculative purposes that have little to do with a true assessment of a financial position's underlying value. Price discovery actually is impeded by this hyper-liquidity that is introduced by such speculation. This hyper-liquidity, motivated by nothing more than expectations of short-term price movements, creates inefficient subsidies to buyers and sellers with no compelling public benefit.

I think that certain markets should feature large credit spreads because they involve truly risky products. Thus, a reduction in proprietary trading may have the effect of increasing spreads, but that is actually a public benefit, not a cost, because those wider spreads will more accurately reflect the risk involved in those positions.

All of this is to say that liquidity is not an inherent public benefit that justifies the expenditure of significant compliance, oversight, examination, and enforcement costs. In other words, certain capital market activities for federally insured banks should not be supported by vast amounts of public and private expenditure.

“I have seen a disturbing uptick in what we call operational risk,” Raskin said on a panel today in Boston, referring to errors stemming from substandard bank management.

Many employers are looking to make the employment relationship more flexible, and so are increasingly relying on part-time work and a variety of arrangements popularly known as "contingent work." This trend toward a more flexible workforce will likely continue. For example, while temporary work accounted for 10 percent of job losses during the recession, these jobs have accounted for more than 25 percent of net employment gains since the reces­sion ended. In fact, tempo­rary help is rapidly approaching a new record, and businesses' use of staffing services continues to increase.

Contingent employment is arguably a sensible response to today's competitive marketplace. Contingent arrangements allow firms to maximize workforce flexibility in the face of seasonal and cyclical forces. The flexibility may be beneficial for workers who want or need time to address their family needs. However, workers in these jobs often receive less pay and fewer benefits than traditional full-time or "permanent" workers, are much less likely to benefit from the protections of labor and employment laws, and often have no real pathway to upward mobility in the workplace.

I believe that the accommodative policies of the FOMC and the concerted effort we have made to ease conditions in the mortgage markets will help the economy continue to gain traction.

 I am very pleased to be here among an audience of professional economists, which is certainly preferable to appearing before an audience of unprofessional economists. I like your kind! 

Given its statutory mandate, the FOMC's policy actions and communications have naturally sought to lower interest rates as a means of strengthening aggregate demand, promoting the pace of recovery in the labor market, and keeping inflation from falling further below the rate preferred by the Committee over the longer run. We will continue to calibrate monetary policy--including both the ongoing pace of asset purchases and communications about the likely path of the federal funds rate--in light of our interpretations of the latest data and the implications of those interpretations for the outlook for economic activity, labor market conditions, and inflation.

...[M]ost members of the FOMC project a modest improvement in the pace of the recovery this year and next, and, accordingly, a modest decline in the unemployment rate. The Federal Reserve will continue to conduct monetary policy so as to promote a stronger economic recovery in the context of price stability.

Regulatory policies can lean against emerging asset bubbles and the vulnerabilities that attend them by restraining financial institutions from excessively extending credit. In addition, such policies can build resilience in the financial system, enhancing its ability to absorb and shrug off unexpected losses from any source, including sharp asset price declines.

Of course, monetary policy also has the power to lean against the growth of asset bubbles. While there could be situations in which monetary policy might be needed to try to limit the growth of a bubble, in my opinion such use would represent a failure of regulatory policy, which represents a more tailored response than the flattening out of aggregate demand that would likely result from contractionary monetary policy.

The U.S. regulatory system is fragmented, and, hence, it takes time to choose and implement policies and calibrate them appropriately. It takes time to cooperate, coordinate, and harmonize responses. But such is today's imperative. We must complete in a timely fashion the post-Basel III and Dodd-Frank requirements. It is particularly important to increase the amount, and improve the quality, of required minimum capital; to continue stress testing and capital planning; and to reduce overreliance on unstable short-term wholesale funding. These reforms will build resilience to whatever shocks may come, and will reduce the potential for asset bubbles and excessive credit growth, leverage, maturity transformation, reliance on unstable short-term wholesale funding, and, thus, the potential for future financial crises.

Still, if regulators become fixated on the tools at the expense of compliance and enforcement, the tools themselves will be meaningless. Only when such tools--be they capital-focused, liquidity-focused, margin--and haircut-focused, or underwriting-focused--are fully embedded into a comprehensive system of prudential regulation will they reach their potential in mitigating the growth of asset bubbles and providing resiliency against the awful consequences attendant to their destruction.

"Should there a be point at which these type of costs exceed the benefits that the low-interest rate environment is providing generally to the economy, then I would argue it needs to be reevaluated,” Ms. Raskin said. The future course of Fed policymakers’ decision making is “highly data dependent,” and will vary based on how the economy performs.

As reported by The Wall Street Journal.