It's not unusual for Janet Yellen's regular monetary policy reports to focus on issues that have nothing to do with monetary policy. And going into her Tuesday appearance before the Senate Banking Committee, it seemed like the conservative "audit the Fed" movement would be a key subject of the hearing. But the harshest questioning was related to something else entirely — and came from Elizabeth Warren.
The senator unexpectedly took aim at Scott Alvarez, the Fed's general counsel — a powerful job that he's held since 2004, when Alan Greenspan was chair. Alvarez has criticized Dodd-Frank rules in the past, and his comments often seem to agree with Greenspan's famously pro-deregulation views. Warren is both one of Congress's strongest bank regulation advocates and one of its most clever political entrepreneurs — and it seems she's found her next big cause.
What exactly is Elizabeth Warren upset about?
Warren offered three major lines of attack on Alvarez, focused mostly on the idea that he is too weak on bank regulation.
- Swaps pushout: Warren asked Yellen about Alvarez's criticism of the swaps pushout rule that was repealed in Congress' December government funding bill (also known as the "cromnibus") over Warren's strong objections. Alvarez had previously said of that rule, "You can tell that was written at 2:30 in the morning," as reported by Bloomberg News. "That needs to be, I think, revisited, just to make sense of it."
- Rating agencies: Warren also took aim at Alvarez's views on restricting credit rating agencies, the ones that gave inflated ratings to bad mortgage-backed securities in the run-up to the financial crisis. Alvarez at one point said he thought Dodd-Frank's restrictions were "more constraining than I think is helpful," as The Week reported. Opponents, meanwhile, have said the rules weren't nearly tight enough.
- Fed leaks: Warren pressed Yellen on a leak from the September 2012 Fed meeting, in which the Fed's monetary policy committee decided to undertake its QE3 program. Before the minutes came out, as ProPublica writes, an economic consulting firm, Medley Global Advisers, sent out a note saying the minutes would show disagreement among the committee members about QE3. The note also had "uncommon detail" about how the minutes were put together, as ProPublica writes. The minutes did betray disagreement, and Bernanke also afterward expressed worries about a leak. Alvarez was in charge of investigating the leak, but the results aren't public yet, and Warren expressed frustration at her difficulty in getting a briefing from Alvarez about the status of the investigation.
Warren wanted to know if his viewpoints on regulation reflected those of the Board of Governors — and if they didn't, she wondered whether it was appropriate for him to be publicly undermining the Fed's views. She also implied that Alvarez had a hand in delaying the effective date of the swaps pushout rule until 2016 — meaning it was repealed before it could ever go into effect.
What did Janet Yellen say?
Warren pushed Yellen for straight yes-or-no answers, even interrupting her several times, but didn't always get them.
Yellen said she's "not seeking to alter Dodd-Frank in any way at this time." As for Alvarez's role in delaying the pushout rule, Yellen said she didn't know.
Yellen answered patiently, but she betrayed a hint of exasperation at the end of the line of questioning.
Were these criticisms totally out of the blue?
Yellen certainly didn't seem to have come prepared to answer questions about Alvarez. But his positions and views have been the subject of simmering controversy for some time, including critical takes from a few news outlets. One, Jesse Eisinger’s 2013 article in the New York Times, focuses on the policymaking power Alvarez can wield, even if he’s not technically a policymaker himself. But the general counsel continues to pop up in articles dissecting efforts to weaken Dodd-Frank. The Week’s Matt Stoller in November called Alvarez the Fed’s "main ideological roadblock to better policy," pointing to Alvarez’s efforts to make the Fed go easy on insurance companies and other Wall Street firms. Alvarez's November comments about the swaps pushout rule have been widely reported. In December, the New Republic’s David Dayen noted that one Democratic aide blamed him for delays on the Volcker Rule, one of Dodd-Frank’s best-known (and most controversial) provisions.
The broader context is that Dodd-Frank’s proponents (like Warren) have grown increasingly frustrated as the law has slowly been weakened since its 2010 passage — not only through Congressional actions like the swaps pushout repeal, but by court actions, regulatory lobbying, and delays.
Why does this matter?
This all matters for a couple of reasons. One is that the general counsel of the Fed, while not a direct policymaker, is a strong voice at the central bank. It undercuts the Fed's authority if he is voicing opinions that oppose his agency's duties as a regulator.
Eisinger gives an excellent example of how Alvarez's influence can also show up in Fed policy:
The problem is that the Fed often confuses protecting its power with protecting the banks. Take disclosure. In fighting against having to divulge more about its extraordinary lending during the crisis, the central bank wrapped its arguments in legal justifications, which Mr. Alvarez oversees. They just happened to be arguments that would also prevent the release of information the banks didn't want revealed.
But this is also an example of how politicians use these hearings not so much to get information, but to advance their own views. Warren is known for taking to these hearings to ask more about bank regulation than monetary policy. She has opposed the "audit the Fed" bill, but with her questions, she once again made it clear she's not fully friendly to the central bank and wants it to go further in clamping down on Wall Street.