House panel challenger Royce warns on QE2

WASHINGTON Tue Nov 9, 2010 5:22pm EST

Federal Reserve Board Chairman Ben Bernanke testifies on Capitol Hill, July 21, 2010. REUTERS/Molly Riley

Federal Reserve Board Chairman Ben Bernanke testifies on Capitol Hill, July 21, 2010.

Credit: Reuters/Molly Riley

WASHINGTON (Reuters) - The Republican challenger to the chairmanship of a key congressional financial oversight panel on Tuesday questioned the Federal Reserve's decision to buy $600 billion in government debt.

The Fed move, known as quantitative easing, was unlikely to diminish uncertainty in the business world or do much to boost lending, Representative Ed Royce told Reuters in an interview.

"I don't think that lower interest rates on long-term bonds is likely to do much to diminish the fear and uncertainty that is out there in the market," Royce said.

"That needs to be addressed by a long-term strategy to bring us to a glide-path to a balanced budget. I think that QE2, as they call it, has the potential of reinflating a bubble in the bond and commodity markets ...

"The concern many of us have is that, given the large excess reserves in the banking system, it is likely that much of the monetary stimulus provided by QE2 will simply be added to bank reserves, which would correspondingly not have that much impact on either lending or interest rates."

Royce has openly challenged fellow Republican Spencer Bachus for the chair of the House of Representatives Financial Services Committee, which will come under the control of Republicans in the next Congress since they captured a House majority in last week's elections.

The committee oversees financial markets, banks and the Federal Reserve, the U.S. central bank. It is presently chaired by Democrat Barney Frank, co-author of the sweeping Dodd-Frank Wall Street reforms approved earlier this year.

The sharp-witted, short-tempered Frank, a frequent sparring partner with both Bachus and Royce in debates about financial issues, will lose the chairmanship of the influential committee to the Republicans in the next Congress.

ROYCE, BACHUS BOTH VETERAN POLS

Royce, 59, is a former corporate tax manager from California. Bachus, 62, is a lawyer from Alabama. Both men were first elected to political office at the state level in 1982.

Both are conservatives and both opposed the Dodd-Frank bill, which President Barack Obama signed into law in July.

Royce said he expects to make his case for the committee chairmanship to Republican leaders in the first week of December. "What would be helpful would be to have someone with a business background," he said. "I'm getting a lot of encouragement from other members that I serve with."

Some Congressional aides have claimed that his challenge to Bachus is really about laying claim to the chairmanship in 2012, when Bachus will have to step down under Republican Party term-limit rules, but Royce said "is not the case,"

"I expect to be chairman of the financial services committee," Royce said. "I do have a different approach than Spencer with respect to dealing with Barney Frank ... We have gone toe to toe for many years."

He said the Dodd-Frank bill supports systemically significant institutions as 'too big to fail' and gives them an unfair cost-of-capital advantage over rivals.

ROYCE TARGETS CFPB

Touching on a hot topic for banks, Royce said "the way in which the Consumer Financial Protection Bureau operates" should be changed to give the Federal Reserve and the Federal Deposit Insurance Corp more power over it. The watchdog is being set up under Dodd-Frank to regulate credit cards and mortgages.

In addition to adjusting Dodd-Frank, Royce said another top committee priority must be fixing the nation's housing finance system and the mortgage giants at the heart of it, Fannie Mae (FNMA.OB) and Freddie Mac (FNMA.OB). Both companies are known as government-sponsored enterprises, or GSEs.

"This is a very difficult issue that's going to take some time to resolve," he said. "Given the depressed state of the housing market you do not want to create a vacuum in the mortgage finance system. But over the long run we need to move away from this GSE model of privatized profits and taxpayer losses and we also need to get politics out of the process.

"We're going to need to bring private capital back into mortgage finance. That is not going to happen right away ... There is not a magic bullet," he said.