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Shelby Speech on Yellen and $4 Trillion Fed Balance Sheet

WASHINGTON, D.C., Tuesday, January 7, 2014 – 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. U.S. Senator Richard Shelby (R-Ala.), firmly opposed the nomination, citing Yellen’s weak record on bank regulation and strong support for easy money policies. Tuesday, Senator Shelby took to the Senate floor to explain his opposition to Yellen’s confirmation and voice his concern over the direction of the Federal Reserve as an institution.

Shelby used two simple charts to illustrate the magnitude of the Fed’s recent actions. The first demonstrates the drastic increase in the size of the Federal Reserve’s balance sheet to its current level of four trillion dollars. It took 95 years for the Fed’s balance sheet to reach $1 trillion. In just a few subsequent years, the Fed added another $3 trillion.

Shelby also emphasized the Obama Administration’s fiscal stimulus in proportion to the Fed’s monetary policy stimulus.The Fed’s stimulus package is nearly four times larger than even President Obama’s massive $787 billion stimulus.
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Thank you, M. President.

Last night, the Senate confirmed Janet Yellen to be the next Chairman of the Board of Governors of the Federal Reserve System.

I firmly opposed her confirmation.

In 2010, 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.

However, M. President, 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.

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.

M. President, the Fed’s balance sheet currently stands at four trillion dollars. I ask unanimous consent to place in the record a copy of the balance sheet as of January first of this year.

A recent Bloomberg analysis contains figures that help put this staggering number into perspective. I also ask unanimous consent to place this article in the record.

The article contains the following three comparisons that I found particularly interesting:

Four trillion dollars is equivalent to 24 percent 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.

Four trillion dollars far surpasses even the amount of money that the federal government spends in an entire year.

M. President, this brings me to my next point. 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.

M. President, 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.

Today it holds $2.2 trillion.

That represents a 363 percent increase, M. President.

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.

M. President, the Federal Reserve is aiding and abetting the failed policies and reckless spending of the Obama administration.

But the Fed’s binge on Treasuries alone doesn’t tell the full story of its exploding balance sheet, M. President.

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.

Taken altogether, M. President, the Fed has added more than three trillion dollars to its balance sheet since early 2008, just before the investment bank Bear Stearns failed and the Fed stepped in.

I realize that sometimes it’s easy to become lost in all of these huge figures.

I’ve brought a simple chart that illustrates the magnitude of the Fed’s recent actions.

It shows the size of the Fed’s balance sheet, by decade, from its creation in 1913 – a century ago – to the present day.

As you can see, it took 95 years for the Fed’s balance sheet to reach $1 trillion.

But look at the incredible spike in just the few years since.

And here we are today just five years later at $4 trillion.

M. President, let’s call this what it is: A backdoor stimulus program through monetary policy.

It dwarfs even the fiscal stimulus package that President Obama rammed through Congress during his first days in office.

President Obama’s fiscal stimulus package totaled $787 billion. As I’ve just described, the Fed’s monetary stimulus package is nearly four times larger – and growing.

M. President, this highly unconventional monetary policy poses huge risks to our economy, namely inflation and the devaluation of our currency.

I realize that current inflation expectations are relatively low and anchored.

Again, however, we are in completely uncharted territory.

Should inflation expectations become unmoored, prices could increase uncontrollably.

There is simply no playbook on how to deal with such a situation successfully.

And yes, M. President, I also understand that the Fed has recently announced that it will modestly scale back its so-called quantitative easing program.

Nevertheless, the Fed will still purchase tens of billions of dollars of securities each month.

Make no mistake, M. President, the Fed’s balance sheet will continue to expand rapidly.

How long will this continue, M. President?

We don’t know.

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, M. President, we don’t know.

M. 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.

M. President, 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.

The fact is, M. President, 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.

Failure begets promotion, in President Obama’s view. We’ve seen it time and again, M. President.

This is all the more important considering that the Fed gained even greater power under the Dodd-Frank financial regulation law, despite the fact that the Fed’s own failures contributed to the need for financial reform in the first place.

M. President, in light of Dr. Yellen’s weak touch as a bank regulator and her strong inclination to print more and more money, I firmly opposed her nomination.

Only time will tell, but I believe that a vote in the affirmative is one that many of my colleagues will come to regret.

Thank you, M. President. I yield the floor.


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