• French Exchequer Club

Rep. French Hill (AR-02) spoke at the Exchequer Club about Basel III Endgame, government spending in Washington, and an update on the House Financial Services Committee.

Rep. Hill's remarks as delivered:

Thank you Laricke. It’s a pleasure to once again be before this assembly. It’s hard to believe that my last opportunity to visit with you was long before the pandemic.

Today, I would like to bring you up to date on the activities of the House Financial Services Committee, comment on the current fiscal crisis facing the United States and conclude by addressing recent proposals to increase bank capital with their concomitant impact on credit availability and economic growth.

An Update on HFSC

When Patrick McHenry and his leadership team came together for this House Session of the 118th Congress, he had really bold ideas.

He wanted to, first of all, after 4 years of the Chairmanship by Mrs. Waters, wanted to go back to a capital formation agenda, focus on that, and secondly, give our households more control over their data, personal financial data, online data ownership - that is a foundational building block of the digital space. You can’t go from analog to digital without strong cyber and identification protection, but also data ownership in theory. That’s where you have to begin. So, he wanted to have that as a principal point. And then, be a leader, put the United States back in a leadership role in digital assets.

And I think under Chairman McHenry, we did all that in the first seven months of his Chairmanship and now, as Speaker Pro Tempore, he is eager, I know, to get back to that work.

With Democrats, we worked on bipartisan capital formation bills - some small, some significant - but we made progress there and we definitely returned that to the agenda. We passed Patrick’s data privacy bill - that was really the first bill we passed.

There is so much that’s happened here recently that we don’t even remember we did that, but we passed the data privacy bill. This is important because if we value data privacy in the GOP and the Gramm–Leach–Bliley approach to the financial services industry, we want to extend that privacy and disclosure and approach across the economy in general, we gotta start somewhere.

We got California, we got GDPR, we’ve got this wandering of Roger Wicker in the Senate and in the House, over in Energy and Commerce Committees, but we need to get on the same page so, if you’re interested in privacy, I hope you’ll engage with us in trying to drive that message. But that was a big deal.

We explored ways to perform the proxy voting system and promote accountability with regard to proxy advisory firms and, under Bill Huizenga’s leadership, in the general subject of ESG disclosures for public issue, listed companies, we’ve insisted on material market principles, not unsubstantiated academic ivory tower mandates, demanded by the federal government.

And after the bank failures that we saw this past spring, we did due diligence and oversight both on the Fed’s roles, state of California’s roles, the state of New York, and the failures of those managing in those particular institutions. We’ve pushed forward on our views on multilateral organizations, like the IMF and the World Bank, that they return to their core mission in order to be ready to help less developed countries to achieve their objectives in short-term and long-term challenges and not see mission creep in those organizations where they’re not built - they’re not a climate regulator, they’re a short-term financial source or a long-term development source.

We worked with the Foreign Affairs Committee to assert Financial Services Committee leadership on the subject about the relationship with China and worked with them collectively with our expertise on economic sanctions, export controls, and other national security priorities. In sum, McHenry’s marked up 57 standalone bills, plus these bigger packages in digital assets and capital formation, and I think it goes without saying - we’ve marked up more bills and had more bills ready for the suspension calendar, if we ever have a suspension calendar, than any other year in Congress.

Now I reiterate, Mr. McHenry can’t wait to get back to that work.

The Broken Washington Consensus

I want to touch on what I see as such a dangerous situation now, and it allows me to just reflect on the fact that 41 years ago this year, I went to work on the Senate Banking Committee staff for Senator John Tower of Texas and was running the Housing Subcommittee with a guy some of you know, John Collins.

We had a great time together, you know, we really did, we actually created the secondary mortgage market through the CMBS product while we were trying to privatize Fannie Mae and Freddie Mac - we haven’t made a lick of progress on that topic since.

That letter from President Reagan hangs in my office in Little Rock, and I just go “Man, we haven’t done anything since October of 1984. Thanks to the Heritage Foundation which helped us achieve that.” Tower was a budget hawk and a defense hawk, but you know, I looked back over the weekend and the deficit in 1983, 5.9% of GDP, set a record that year - debt to GDP was only 35%. Our deficit four decades later is $1.5 trillion. It’s running 7% of GDP, so over that record setting year of 1983, and now our debt to GDP is the highest it’s been since WWII. That’s not a good thing. And to me, it’s stunning that this town, whether you are on K Street, Capitol Hill, or Main Street - somewhere out there in America - think that’s ok.

But we watched people die during the pandemic, we watched our kids suffer through lack of learning and life engagement. We saw the workplace change in insane sort of ways that make no sense to me, but we also saw people lose their fiscal minds during the pandemic.

John Yarmuth, the distinguished former Chairman of the House Budget Committee from Louisville, Kentucky, gives a speech that embraces Modern Monetary Theory. We can borrow as much money as we want to in this country, there are no calls for that, if we have a little inflation, we know how to handle it.

He doesn’t talk about the long-term ramifications of crowding out of interest expenses, he doesn’t talk about the long-term ramifications of exporting inflation to the third world, bankrupting probably 80 countries in the world because of that sort of greedy, self-centered point of view, and where is the consensus that small deficits are the best deficits and that we are trying to find out how to balance the budget, not extend it? Both parties are to blame. I am not arguing that point, I am saying that that was the consensus in 1983. That consensus is gone. To me, that is nonsense, it is financial illiteracy, and it’s creating a catastrophic situation.

In fact, to the pandemic, to add misery to it, Andrew’s boss, Larry Kudlow said we’re going to have a short “V-shaped” recovery. In fact, that was the case. There was BRIEFLY a 9% output gap. Do you know what the combination of the Fed and fiscal offset was as a percent of our GDP? 59%. The only people who beat us were Japan - famous for overdoing it. Famous for being the kind that you don’t want to deal with. So, we have really crippled ourselves this time and we have to have that consensus to go back to that sensible world and if you look at what Moody’s been saying, if you’re looking at the 10-year treasury rate, you’re looking at interest on the debt at $633 billion that is more than what we spent on veterans and transportation.

That’s going to lead to crowding out of fiscal priorities of this group of people in this room and the country at large. We’re at 15% interest cost to the budget, and the IMF, if we were another country, we would be on a list for an intervention. But unfortunately, we don’t get that.

So, what should we do about this?

I think first, we consolidate the wins of the McCarthy-Biden deal, which is to reduce spending 24 over 23. Cap spending at 1% a year six years. Call back unnecessary spending, and then fight like cats and dogs for what we’re spending in the I.

Next, we need to adopt a Greenspan-type commission, used in ‘83, for Social Security, but this is talking about all mandatory spending programs and get an up or down vote, get bipartisan consensus on that, and treat it like it is, which is a crisis. We need to adopt Womack’s budget reform package that he and Yarmuth actually worked on and Nancy Pelosi put the kibosh on, which would be controversial, but it would lead to some 1974 budget reforms like 2-year budgets with annual appropriations, which people don’t want to do, I got it, but the ‘74 act is not functioning, and so the Womack-Yarmuth approach was to try to do something to improve.

Unauthorized programs - everybody rails against unauthorized programs - show me the authorizing chairman that has reauthorized unauthorized programs. Congress is not functioning in regular order. We’re all chasing shiny objects instead of doing that hardcore work. When I was the Ranking Member of the Housing Subcommittee with Emanuel Cleaver as Chairman, I begged him – hey, there’s not a single program in HUD that’s been reauthorized. Let’s do that. Couldn’t do it.

We need to pass Senator Lankford’s Prevent Government Shutdowns Act, which puts Congress on the vote for this risk of shutdowns and get that addressed so we can get our work done. But those are things, if they were easy to do, they would have been done. So, I’m not saying they’re easy to do, but when you have the statistics I’ve pitched to you, somebody needs to take some action.

I told all three of my recent Speaker candidates - if there isn’t a debt commission in this year and spending pressure, that’s a mistake. You will have me voting the rule down personally if you don’t do that. We need action, we need people taking action here in Congress, and all three, of course, support that. We need the Senate. Those of you who are in the Exchequer Club, I think you are former Senate staffers. You need to put pressure on the guys and gals over in the senior corridors of the Capitol to get with the program on the debt service commission.

Basel III Endgame

Let me conclude with Basel III.  I’m concerned about the avalanche of the regulatory proposals that are coming out – the SEC, the CFBP, the DOL, because many, many of them are what I call pro-cyclical. You’re going into a weaker economy - they’re going to make that weaker economy worse. As opposed to being a counter-cyclical approach. I don’t think there’s anything that’s more concerning to me than the approach that’s being taken in public, I’ll say that, by the Federal Reserve with Vice-Chairman Barr on Basel III.

So Mnuchin, in 2017, said, “The reforms standardize the approach, improve the quality and consistency of bank capital requirements, and will help level the playing field for U.S. firms internationally.” That’s not what I see being proposed. “Finalizing Basel III was meant to create a level playing field”, I agree, “and make the system more resilient and competitive”, but I don’t think that’s what I read.

Further, the intent on the committee, was that they were to be “capital neutral”, and Mario Draghi, nobody I like to quote, former President, then, of the European Central Bank said, “The focus of the exercise was not to increase capital.”

Mark Carney, another person who I don’t like to quote, said, “We … had agreement of all the members of the G20 and the steering committee of the Basel Group, that there would be no significant increase in overall capital requirements as a consequence of finishing this process of Basel III.” Again, not the rhetoric coming out of the administration.

So, if this new proposal abandons capital neutrality and doubles down on gold-plating more capital for U.S. banks, despite Congress not authorizing that or directing it, we’ve got a problem with that and we’ve made that comment known to Chairman Powell and Vice-Chairman Barr. And Chairman Jerome Powell even acknowledged that in his comments of moving the proposal forward in his own personal comments he had. That’s like saying well, this loan isn’t ready for loan committee. I wouldn’t really vote for it if it was actually in the capital commitment committee, but I’m not going to block Andrew for bringing this bad loan to the committee and it’ll go up to the next committee if everyone has turned out happy. Why would you advance a bad idea? Let’s fix it on the front end. 

U.S. banks are already, as Chairman Powell said to the committee, “At the top of the league table now.” And so why would we want to do that? When I was in Europe over the summer, every banker I talked to said, “No! We’re not doing that.” So, I think we’ve got something wrong and U.S. banks have worked mightily since the financial crisis to do well.

Chris Waller thinks this will put us in a competitive disadvantage. I agree.

Michelle Bowman says it “perpetuates differences in implementation across international jurisdiction.” I agree with that.

So, the bottom line is, I think this is not in our interest, and I think it’s not in interest to claim that tailoring is bad either, which is another assertion post-Silicon Valley.

Our banks, our diverse banks, our diverse number, our diverse style, our diverse strategy, in this country is an economic advantage. It’s a competitive advantage over every other country in the world that now has a concentrated, utility-like, microscopic number of institutions that you have to make an appointment to go see someone.

We want to have that diversity maintained and tailoring was a key strategy that was supported by Democrats and Republicans on the Hill, and it is not about weakening anything - it is about tailoring according to business strategy, or in some cases, size. And if we fail here, and I think Basel III’s proposal as written is a failure, we’re going to increase complexity, increase concentration in the financial sector in our country, and I don’t think that’s in our economic interest. That actually goes against the populist left and the populist right. I think they don’t want that.

So, Alexander Hamilton told us 250 years ago, “Our banking systems are the nurseries of our national wealth.” And that’s exactly the way we need to be thinking about the financial sector. So, I’m going to stop there and say that this is a preview of my talking points for my meeting at 3:15 this afternoon with Vice-Chairman Barr. This will save me a therapy appointment or two and I’d be more than happy to answer questions now. Thanks for having me.

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