SEN. TOOMEY: Thank you, Mr. Chairman, and thank you Chairman Bernanke for being here.
I just want to touch briefly on monetary policy before moving on to the LIBOR scandal. And Mr. Chairman, you acknowledged that there's a range of views about the efficacy of the policy that you've been pursuing. I'm sure you'd also acknowledge that there's a range of views about the risks that are associated with the policies you've been pursuing.
And I will - I will acknowledge that I'm sympathetic to the fact that we've given you a dual mandate which I think intrinsically creates the risk that you'll be put in a - a position where you have to deal with a conflict over two conflicting goals.
But I just want to stress, and I know you and I disagree on this, we've had this conversation. But I just feel strongly that the problems facing our economy are not monetary in nature. It's - they - they result from this ongoing de-leveraging process that we're suffering through, a regulatory avalanche, completely unsustainable fiscal policy which you've acknowledged, and the threat of huge tax increases, I - I - and so to address this with ever-easier monetary policy, I worry very much about the unintended consequences, including the fact that it has the effect of masking the true cost of these deficits and making it easier for us to continue this very imprudent fiscal policy.
So I just want to reiterate that point. But what I'd like to ask you about, if I could, is this LIBOR scandal. And I will tell you, I am - I'm very disturbed about this. I'm disturbed about the destruction of what little confidence might remain in our financial system.
I'm very concerned about the direct impact to American citizens, including my constituents. Among many, I think of the city of Bethlehem that engaged in interest-rate swaps where they were paying a fixed rate, receiving floating rates based on LIBOR. And I wonder whether they were systematically receiving payments that were lower than what they should have gotten because of this.
You had mentioned in your testimony, or perhaps in answer to a question, that Fed officials became aware of Barclays manipulating this index in April of 2008. The Wall Street Journal has an editorial today in which they recount an e-mail exchange that occurred in August of 2007 between, or perhaps it was a phone conversation, between a Barclays employee and a Fed official.
I - I just wonder, when did you become aware that there was some lack of integrity in the reporting of LIBOR rates?
CHAIRMAN BERNANKE: So let me, first, on your first point, let me just say there's not as much disagreement as you imply. Monetary policy is not a panacea. It is not the ideal tool in many cases, and we look forward to having partnerships with other parts of economic policy.
On the - on the telephone contacts, just note that these - these were phone calls. And these were calls made by junior employees whose job was to call and get market - so-called 'market color,' get information about what was happening in the markets. And I think in one of those calls, it was clear to the person calling - the Fed employee, not an official - the Fed employee did not know what LIBOR was or how it was constructed. And so there were some issues about what - how that was communicated.
In any case, I learned about it, to my recollection, in - at the time when it became covered in the media, which would have been, I guess, in April of 2008.
SEN. TOOMEY: OK. Here's what I don't understand. I know you fully appreciate the importance of this index, how widely used it is for all kinds of transactions and how the American financial system, I don't want to say it's dependent on it, but it's totally integrated into this. And you and many other regulators understood that there were serious questions about the integrity of this, perhaps even systemic problems with the integrity of this. And yet everybody allowed these transactions to continue.
Did it not occur to somebody to bring the financial institutions together and say, 'Hey, you probably ought to consider a different way of establishing your floating rate re-sets because there's this integrity problem?' Did that conversation happen with any financial institutions or the public?
BERNANKE: Well, financial institutions don't, you know, aren't the only participants in this LIBOR-based market.
SEN. TOOMEY: OK. Yeah, how about making it more broad?
BERNANKE: So I think the best way to address the problem, and given all the issues that were occurring during the crisis at that point in time, the best way to address the problem, at least in the near term, would be to reform the way that those numbers were collected so that the LIBOR rate that was set would be in fact an accurate representation.
SEN. TOOMEY: I agree. My question, though, and you mentioned observable market transactions would seem like a better way of doing it than a survey of banks. That sounds sensible to me. The question is, why have we allowed it go on the old way when we knew it was flawed for the last four years, with trillions of dollars of transactions?
BERNANKE: Because the Federal Reserve has no ability to change it.
SEN. TOOMEY: You have enormous influence over the institutions engaging in this.
BERNANKE: We have been in communication with the - the British Bankers Association. They made some changes, but not as much as we would like. It is, in fact, it is, you know, it's not that market participants don't understand how this thing is collected. It is a freely chosen rate. We're uncomfortable with it.
SEN. TOOMEY: But I'm not -
BERNANKE: We've talked to the Bank of England. We've talked to the -
SEN. TOOMEY: But I'm not sure that market participants were aware of the problem with the integrity of the mechanism by which it's established. And as you point out, there are other ways you could establish a perfectly viable floating rate that wouldn't have these - these problems. I'm just very surprised that this was allowed to continue for so long when the problem with the inegrity was known.
BERNANKE: Well, again, senator, the New York Fed took the lead in - in making I think some very good suggestions about how to clean up the LIBOR process.
SEN. TOOMEY: Thank you.