[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                    PROMOTING ECONOMIC RECOVERY AND

                     JOB CREATION: THE ROAD FORWARD

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                            JANUARY 26, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 112-1

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
KENNY MARCHANT, Texas                BRAD MILLER, North Carolina
THADDEUS G. McCOTTER, Michigan       DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JOE DONNELLY, Indiana
BLAINE LUETKEMEYER, Missouri         ANDRE CARSON, Indiana
BILL HUIZENGA, Michigan              JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin             GARY C. PETERS, Michigan
NAN A. S. HAYWORTH, New York         JOHN C. CARNEY, Jr., Delaware
JAMES B. RENACCI, Ohio
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO R. CANSECO, Texas
STEVE STIVERS, Ohio

                   Larry C. Lavender, Chief of Staff
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    January 26, 2011.............................................     1
Appendix:
    January 26, 2011.............................................    61

                               WITNESSES
                      Wednesday, January 26, 2011

Brody, Kenneth D., Partner, Taconic Capital......................    54
Bursky, Andrew M., Chairman, Atlas Holdings, LLC.................    52
Hoffman, Eric, Executive Vice President and Chief Operations 
  Officer, Hoffman Media, LLC....................................    48
Kohn, Dr. Donald, Senior Fellow, The Brookings Institution.......    12
Maddy, H. Charles III, President and Chief Executive Officer, 
  Summit Financial Group.........................................    50
Poole, Dr. William, Senior Fellow, Cato Institute, and 
  Distinguished Scholar in Residence, Alfred Lerner College of 
  Business and Economics, University of Delaware.................     9
Scott, Hal S., Nomura Professor of International Financial 
  Systems, Harvard Law School....................................    14
Taylor, John B., Mary and Robert Raymond Professor of Economics, 
  Stanford University............................................    11

                                APPENDIX

Prepared statements:
    Huizenga, Hon. Bill..........................................    62
    Brody, Kenneth D.............................................    64
    Bursky, Andrew M.............................................    65
    Hoffman, Eric................................................    72
    Kohn, Dr. Donald.............................................    76
    Maddy, H. Charles III........................................    88
    Poole, Dr. William...........................................    95
    Scott, Hal S.................................................    98
    Taylor, John B...............................................   117

              Additional Material Submitted for the Record

Bachus, Hon. Spencer:
    Written statement of Associated Builders and Contractors 
      (ABC)......................................................   123
    Written statement of the Manufactured Housing Association for 
      Regulatory Reform (MHARR)..................................   125
    Written statement of the National Association of Federal 
      Credit Unions (NAFCU)......................................   146
Waters, Hon. Maxine:
    Written statement of the Credit Union National Association 
      (CUNA).....................................................   147
    Written statement of the National Low Income Housing 
      Coalition (NLIHC)..........................................   148


                    PROMOTING ECONOMIC RECOVERY AND


                     JOB CREATION: THE ROAD FORWARD

                              ----------                              


                      Wednesday, January 26, 2011

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Spencer Bachus 
[chairman of the committee] presiding.
    Members present: Representatives Bachus, Hensarling, Royce, 
Lucas, Paul, Manzullo, Biggert, Miller of California, Capito, 
Garrett, Neugebauer, McHenry, Campbell, Bachmann, McCotter, 
Pearce, Posey, Fitzpatrick, Luetkemeyer, Huizenga, Duffy, 
Hayworth, Renacci, Hurt, Dold, Schweikert, Grimm, Canseco, 
Stivers; Waters, Maloney, Velazquez, Watt, Clay, McCarthy of 
New York, Baca, Miller of North Carolina, Scott, Green, 
Cleaver, Perlmutter, Donnelly, Carson, Himes, and Peters.
    Chairman Bachus. This hearing of the Financial Services 
Committee will come to order. Without objection, all members' 
opening statements will be made a part of the record.
    The gentleman from California, Mr. Royce, is recognized for 
1 minute.
    Mr. Royce. Thank you, Mr. Chairman. While the President 
touted the strength of our economy last night, significant 
obstacles stand between where we are today and real economic 
growth. The housing market continues to sputter, small 
businesses are burdened with a massive new health care law, and 
there are real questions about addressing our national debt. 
Firms are bracing for hundreds of new regulations coming from 
Dodd-Frank.
    Despite what some may say, repairing a fundamentally flawed 
law does not add to the uncertainty in the market. Rather, 
healthy capital markets require sound regulations. Dodd-Frank 
failed in this endeavor. It is now up to us to correct the 
mistakes of the past, truly end ``too-big-to-fail,'' wind down 
the GSEs, and ensure safety and soundness regulation is the 
primary focus throughout our regulatory structure.
    I yield back, Mr. Chairman.
    Chairman Bachus. Thank you. Ms. Waters is recognized for 4 
minutes.
    Ms. Waters. Thank you very much, Mr. Chairman. As you know, 
Barney Frank, our ranking member, is not here this morning.
    I want to thank you for holding this hearing on ``Promoting 
Economic Recovery and Job Creation: The Road Forward.'' While 
the economy has shown some signs of recovery, it is clear that 
more aggressive action is needed from Congress in order to put 
our country back on the right track. In spite of a slight 
decrease, unemployment remains unacceptably high. At 9.4 
percent, the economy shows no sign of regaining the 8.45 
million jobs that have been lost since 2008, and foreclosures 
will be 20 percent higher in 2011.
    The Federal Reserve has acted because Congress failed to 
provide an adequately large stimulus given the magnitude of 
this crisis. The Fed's recently implemented qualitative easing 
policy is consistent with the Fed's dual mandate of fostering 
maximum unemployment and stabilizing prices. It is clear to me 
that since interest rates can can't get much lower, buying 
long-term securities is one of a handful of options left to the 
Fed to stimulate the economy.
    While reasonable people can have differing opinions about 
the manner in which the Fed has chosen to stimulate the 
economy, ending the Fed's dual mandate to both reduce 
unemployment and keep inflation low, as some on the other side 
of the aisle have suggested, is not the answer.
    I think what we must remember and what has been lost on 
some of my colleagues on the other side of the aisle is that 
this unemployment is a result of the financial crisis of 2008. 
This crisis, which represents the biggest challenge to the 
Nation's economy since the Great Depression, led to less credit 
for small businesses, prospective home buyers, and other groups 
who traditionally drive local economies. While they played no 
role in creating this crisis, they, like everyone else, are now 
suffering the consequences of the systemic risk caused by the 
risky behavior of a few reckless institutions, behavior which 
culminated in a bailout of Wall Street. The logical response to 
this systemic collapse of the financial market was for Congress 
to fill in the regulatory gaps so that this never happens 
again.
    The Dodd-Frank Act reforms the derivatives market, 
establishes a Financial Stability Oversight Council to monitor 
for systemic risk, bans proprietary trading, and makes other 
fundamental changes to a financial industry that we can't 
afford to bail out again.
    Unfortunately, instead of focusing on solutions to create 
jobs, today's hearing seems to be aimed at criticizing the Fed 
for acting in a manner consistent with this dual mandate and 
criticizing the legislation that will prevent another bailout. 
I am interested in working on solutions to create more jobs. 
However, I believe we must protect the reforms in Dodd-Frank 
because by preventing another bailout we are preventing another 
financial collapse that will result in the loss of millions 
more jobs.
    Thank you, Mr. Chairman, and I yield back the balance of my 
time.
    Chairman Bachus. Thank you, Ms. Waters.
    Let me explain to the witnesses and the audience that we 
are having 10 minutes on each side; we have restricted the time 
for opening statements because we want to hear from our 
witnesses. Mrs. Capito and I have both surrendered our time to 
allow some of our other members to make statements.
    At this time, I recognize Mr. Hensarling for 1 minute.
    Mr. Hensarling. Thank you, Mr. Chairman. Last night in the 
State of the Union Address, the President said, ``To reduce 
barriers to growth in investment, I have ordered a review of 
government regulations. When we find rules that put an 
unnecessary burden on business, we will fix them.''
    Mr. Chairman, we found one. It is called Dodd-Frank. 
Unfortunately, in the President's announcement he seems to 
exempt from the ambit of regulatory review both Dodd-Frank and 
ObamaCare, which if you talk to any job creators in our Nation 
is about 90 percent of the challenge that they face. Whether it 
be fiscal policy, monetary policy, or regulatory policy, too 
many job creators in America feel they are either facing 
uncertainty or they are facing hostility. It is one of the 
reasons that, unfortunately, under this President's 
Administration, with the exception of 2 or 3 months, 
unemployment has hovered around 10 percent.
    I understand that Dodd-Frank is the law of the land. Not 
all aspects of it are bad. But we were looking at no fewer than 
243 new formal rulemakings--and, by the way, there is even 
uncertainty about how many rulemakings. It will be the job of 
this committee to ensure that although the rulemaking is 
approached deliberatively, it is better to get it right than to 
do it quick.
    With that, Mr. Chairman, I yield back.
    Chairman Bachus. Thank you, Mr. Hensarling.
    Mr. Baca is recognized for 2 minutes.
    Mr. Baca. Thank you very much, Mr. Chairman. We all heard 
the President last night state that the future is ours to win--
and that means that we all need to work together and create 
jobs. That is why I am looking forward to this session, and I 
hope that my colleagues in this committee are committed to 
working in a bipartisan fashion over the next 2 years, and that 
is important for us if we are to progress and go forward.
    We have a lot of work to do. The American people are still 
not satisfied with the state of our economy. Unemployment is 
still at an unacceptable level, and in my district it is about 
14 percent. We still are one of the highest in foreclosure. 
Middle-class families are still dealing with the harsh reality 
of not being able to make their mortgage payments. Over the 
last 2 years, I believe this body and the Administration has 
made some progress, but our work is far from being done.
    I hope that we will be able to analyze--and I state 
analyze--the positive actions we took over the last 2 years and 
see how we can build on it. I think that is important for us in 
this committee, to find out how we can build on it.
    With that, Mr. Chairman, I yield back the balance of my 
time and I look forward to this hearing.
    Chairman Bachus. Thank you. Mr. Paul is recognized for 1 
minute.
    Dr. Paul. Thank you, Mr. Chairman. I appreciate you holding 
these hearings because the subject of unemployment certainly is 
one issue on which everybody in the Congress agrees. We are 
worried about it. We need more jobs. Democrats, Republicans, 
everybody wants to do something with it. But the big problem 
seems to be that everybody has a different answer. Some people 
want to increase the spending. Others want to decrease the 
spending. Some people want to increase taxes. Other people want 
to decrease taxes. Then it comes to some saying there are not 
enough regulations and some saying there is too much 
regulation. Some people think we can print our way out of it, 
and that is where the problem comes from.
    But I think the problem really is that we fail to ask the 
right questions. Why do we have unemployment? It might have to 
do with the fact that we have a recession. Why do we have a 
recession? We can't have recessions unless we understand that 
there has been a boom period and there is a cycle. So it is 
really dealing with the business cycle, why we have boom times, 
and what we do about that. Rather than just dealing with the 
symptom, I think we have to look at the overall cause of why we 
have these boom periods and then we have the inevitable 
corrections. And that brings us unemployment.
    So by tinkering around the edges and saying that we can 
change taxes or that regulations will solve our problem, I 
think we will be missing the boat.
    I yield back.
    Chairman Bachus. Thank you. Mrs. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman. Thank you for 
holding today's hearing. Nearly 1 year ago in his State of the 
Union Address, President Obama said jobs must be the number one 
focus in 2010. Sadly for businesses, for the last 2 years 
Washington leaders set aside the jobs agenda and instead chose 
the path of uncertainty. Last night we heard the President 
again offering a number of encouraging words about the need to 
focus on job creation, but I have to say I am skeptical of the 
rhetoric.
    The President also called for review and reform of Federal 
rules and regulations that stifle job growth. Meanwhile, 
according to the Wall Street Journal last week, ``Business 
leaders say an explosion in new regulations stemming from the 
President's health care and financial regulatory overhaul has, 
along with a sluggish economy, made them reluctant to spend on 
expanding and hiring. Companies are sitting on nearly $2 
trillion in cash and liquid assets, the most since World War 
II.''
    Authorized by the Dodd-Frank Act, Federal agencies and 
bureaucrats are lining up to issue to businesses across the 
country new and costly rules, regulations, and data collecting 
requests. It is fueling uncertainty; it is stifling job growth; 
and where are the jobs? To create jobs, the Administration 
needs to get serious about finalizing trade agreements, 
reforming the Tax Code, and fostering regulatory certainty for 
business so they can invest, expand, and grow.
    I yield back.
    Chairman Bachus. Thank you.
    Mr. Garrett, for 1 minute.
    Mr. Garrett. Thank you, Mr. Chairman. The issue of 
potential systemic risk has been something that this committee 
has been looking at now for the last couple of years, and I 
have said throughout that entire time that if you think about 
it, the most critical and obvious systemic risk that faces our 
economy really is our massive national debt that hangs over all 
of us and our future generations as well. So addressing that 
risk, we can do so by reducing the size and scope of the 
Federal Government is, of course, job one, as has been said. 
One of the primary benefits of doing so, of course, will be to 
help the economy start growing again.
    But beyond that, beyond addressing the budget and spending 
crisis facing our country, those of us here in this committee 
have the opportunity to remove and review regulations, just as 
the President said, those outdated regulations that stifle job 
creation and make our economy less effective.
    But as Jeb has pointed out, the President tends to exempt 
some new regulations called for under Dodd-Frank as well as 
those independent agencies. At least one of those agencies, 
however, is doing the right thing, and that is the SEC. Under 
the leadership of Mary Schapiro, she intends to proceed as if 
they are subject to the President's order. So I look forward to 
working with her and with the SEC and with other agencies that 
continue to do what the President has asked for to eliminate 
those unnecessary regulations of all variety to help incent job 
creation and get our economy back on the move.
    Chairman Bachus. Thank you, Mr. Garrett.
    Mr. Scott, for 2 minutes.
    Mr. Scott of Georgia. Thank you, Mr. Chairman. Jobs is 
certainly the priority of our Nation. There are currently 14.5 
million Americans out of work. Currently, the national 
unemployment rate stands at 9.4 percent. And in my home State 
of Georgia, the unemployment rate is a staggering 10.2 percent, 
with over 500,000 Georgians unemployed. Our country did see a 
modest gain in economic recovery in 2010, but unemployment 
remained high. An estimated 7 million Americans, referred to as 
``99ers,'' exhausted all unemployment benefits, and 16.7 
percent of workers either could not find a job or have simply 
given up looking for work.
    However, despite these discouraging numbers, our job market 
is showing some signs of improvements. The progress is, in 
part, due to the policies guided by this very Financial 
Services Committee in the last Congress. Economic experts are 
anticipating faster growth in 2011, with more firms expressing 
positive hiring plans than in over a decade. A recent survey 
from the National Association for Business Economics found that 
82 percent of the economists expected the Nation's economy to 
grow by 2 to 4 percent in 2011. These are promising sentiments, 
and along with my colleagues on this committee, I look forward 
to taking advantage of every single opportunity to further 
increase economic growth in the 112th Congress.
    We must make sure that the United States has the most 
competitive and innovative workforce and economy in the world. 
This is the only way that the American people will be able to 
face the future with confidence and with boldness the way we 
need to.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you. Mr. Pearce. Mr. McHenry is not 
here.
    Mr. Pearce. When we are talking about jobs, we ought to 
take just a second to ask, what does it take to create a job? 
Bill Sweatt over in Artesia, New Mexico, said it best: ``It 
takes me $340,000to create a job. I run bulldozers.'' He said 
that is what a new bulldozer costs. Any time we tax away his 
capital, then we take away his right to create a job; any time 
we create regulatory uncertainty where he is afraid to invest 
in that bulldozer, we kill a job. We have systematically killed 
jobs in the timber industry, we have killed jobs in the oil and 
gas industry, we have killed jobs in the mining industry, and 
we wonder why we are at 9.5 employment. It is a specious 
question that we are asking.
    We know what is wrong with the economy. We know where the 
jobs are. We are not willing to take the steps that are there. 
I do not think that we can cut spending enough to create the 
solutions to our economy. We must rebuild our jobs. Let's put 
the capital to give them certainty and give them tax advantages 
and they will begin to invest again. That is what it will take 
to create jobs.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you, Mr. Pearce.
    Mr. Watt, for 2 minutes.
    Mr. Watt. Thank you, Mr. Chairman. If I thought this 
hearing was really about jobs and job creation, I wouldn't be 
so worried. What I am really concerned about is the content of 
some of these witness statements, which really get us into 
exactly this issue of the independence of the Federal Reserve 
and the appropriateness of the Federal Reserve's dual mandate.
    So I am kind of like President Reagan. Here we go. We have 
had this debate. If we are going to have a Fed, we need to 
allow it to be an independent Fed. If we want to go at whether 
the Fed should exist or not, then we can have that debate in 
Mr. Paul's subcommittee. But to do it under the guise of 
talking about creation of jobs, I think, is just disingenuous.
    We are here politicizing the Fed. We are going at their 
independent status, and that is a debate that we ought to have 
in a clear-cut, unadulterated manner. If you don't want the 
Fed, then come on and say you don't want the Fed. But don't 
come in and try to impact its independence circuitously by 
going at the mandate it has. We gave them that mandate and we 
gave them the independence to exercise that mandate. And if we 
want to take it back, we ought to do it directly rather than 
trying to do it by chipping away and talking as if we are 
talking about creating jobs or not creating jobs.
    Everybody wants to create jobs. I don't think this hearing 
is about creating jobs. It is about the independence of the Fed 
and whether we are going to politicize the decisions that they 
are making.
    I yield back, Mr. Chairman.
    Chairman Bachus. Thank you, Mr. Watt.
    Mr. Fitzpatrick for 30 seconds. All the other remaining 
opening statements will be for 30 seconds.
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    It is entirely fitting and appropriate that at our first 
hearing we discuss job creation and economic recovery, and I 
appreciate the chairman's leadership on these issues. Americans 
are hurting, and certainly my constituents in the Eighth 
District of Pennsylvania are among them.
    This committee is in a unique position to assist in our 
country's economic recovery. It can be said that the financial 
sector was one source of the great recession, but with 
responsible rules and safeguards and leadership from this 
committee, our Nation's markets will continue to lead the world 
and be a source of American prosperity. We all look forward to 
getting to work and listening to today's testimony.
    Thank you, Mr. Chairman. I yield back.
    Chairman Bachus. Thank you.
    Mr. Huizenga.
    Mr. Huizenga. In the interest of time, I have a longer 
statement for the record that I would like to submit, if that 
is all right with you. But I want to thank the chairman.
    Chairman Bachus. This won't take away from his time, but 
anyone who has an opening statement can submit it for the 
record. We have already had an unanimous consent for that.
    So we will start the time again.
    Thank you.
    Mr. Huizenga. Thank you, Mr. Chairman. I appreciate the 
opportunity, and Ranking Member Frank, for holding this 
important hearing today. I am a small business owner from 
Michigan involved in real estate and construction trades, and I 
can tell you that Michigan has been hit like no other State. I 
see some heads nodding already.
    In recent years, the unemployment rate has been well above 
the national average. There are areas in my district in the 
Second District in Michigan that I represent which actually 
have seen the official unemployment rate double the national 
average, and that is not including the hundreds of thousands in 
Michigan who have stopped looking. We need to turn this around.
    Last evening, we heard the President declare that the 
actions of this Administration and Congress had ``broken the 
back of this recession.'' I am not convinced that we are out of 
the woods. I can tell you the people on the ground back in 
Michigan don't believe that. And that is my main concern.
    There are some small business principles that I live by and 
run my businesses by. One, don't spend more than you take in. I 
think, clearly, we are violating that. Two, do what is 
necessary to create an atmosphere for success. I am concerned 
that while well-meaning--as well-meaning as our current law is 
here under Dodd-Frank, we don't achieve that goal through that.
    Chairman Bachus. I thank the gentleman from Michigan.
    Mr. Huizenga. Thank you, sir.
    Chairman Bachus. Mr. Dold.
    Mr. Dold. Thank you, Mr. Chairman.
    I certainly want to take this opportunity to thank the 
witnesses for joining us today, and we look forward to your 
insight. What we are talking about today is jobs and the 
economy, how do we improve those things. We must improve the 
climate for business. I am a small business owner. I am a job 
creator. And one thing that I can tell you is that back in my 
district, the unemployment rate in certain areas is well above 
20 percent.
    We need to create an environment that allows businesses--
small businesses, medium-sized businesses, and large 
businesses--to invest back in their businesses. Right now, they 
are unwilling to do so because there is no certainty. We need 
to create more of a certainty in terms of the environment and 
cut down on the onerous regulations to make them more 
competitive and even the playing field in a global marketplace.
    So I look forward to your comments today, and I yield back.
    Chairman Bachus. I thank the gentleman from Illinois.
    At this time, Mr. Schweikert, the gentleman from Arizona.
    Mr. Schweikert. Thank you, Mr. Chairman. I truly appreciate 
you putting together this hearing. Being from Arizona, we are 
basically foreclosure central. The devastation that I have seen 
in my real estate market; the number of families who have been 
just crushed by home prices, but also banking, Fannie Mae, 
Freddie Mac, policy. And, Mr. Chairman, I truly hope you have 
some real talent on this panel. If there is a moment where I 
can also reach out to each of you because I have some very 
technical and very specific questions I need some data on. I 
would really appreciate that opportunity.
    So, thank you, Mr. Chairman.
    Chairman Bachus. I thank the gentleman from Arizona.
    At this time, the gentleman from New York, Mr. Grimm.
    Mr. Grimm. Thank you, Mr. Chairman. I would like to thank 
you for calling this hearing on job creation. We all know it is 
a top concern for America, and in just about every kitchen 
table in Staten Island and Brooklyn, that is the number one 
discussion.
    What I would like to hear today is a discussion on how this 
recent legislation is creating uncertainty for small 
businesses. Specifically, I would like to discuss how Dodd-
Frank regulatory reform may affect the flow of credit to small 
businesses that are looking to expand, create jobs, but they 
are finding that their ability to do so and their access to 
funds in a cost-effective way have been restricted.
    With that, I yield back.
    Chairman Bachus. I thank the gentleman from New York.
    Our final opening statement will be from Mr. Stivers, the 
gentleman from Ohio.
    Mr. Stivers. Thank you, Mr. Chairman. I appreciate you 
calling this hearing. Obviously, jobs is the number one issue. 
In Ohio, where I am from, we have over 10 percent unemployment 
in some parts. Obviously, jobs is the number one issue in Ohio, 
and we have small business and business people sitting on 
capital unwilling to invest in their businesses to create jobs.
    And so I would like to hear today from the panel a little 
information about the unintended consequences of our current 
regulatory scheme, including Dodd-Frank, and how it is adding 
to the uncertainty and keeping business from having access to 
capital.
    Thank you, Mr. Chairman. I look forward to hearing that.
    I yield back.
    Chairman Bachus. Thank you. I thank the gentleman.
    At this time, I would like to introduce our very 
distinguished first panel for today's hearing, which is 
entitled, ``Promoting Economic Recovery and Job Creation: The 
Road Forward'': Dr. William Poole, Distinguished Scholar in 
Residence, Alfred Lerner College of Business and Economics at 
the University of Delaware; Professor John B. Taylor, the Mary 
and Robert Raymond Professor of Economics at Stanford 
University; Dr. Donald Kohn, Senior Fellow at the Brookings 
Institution; and Professor Hal S. Scott, Nomura Professor of 
International Financial Systems at Harvard Law School.
    We welcome your testimony, gentlemen. We will start with 
Dr. Poole.

STATEMENT OF DR. WILLIAM POOLE, SENIOR FELLOW, CATO INSTITUTE, 
 AND DISTINGUISHED SCHOLAR IN RESIDENCE, ALFRED LERNER COLLEGE 
       OF BUSINESS AND ECONOMICS, UNIVERSITY OF DELAWARE

    Mr. Poole. Mr. Chairman, and members of the committee, I am 
very pleased to be here today to discuss issues with regard to 
promoting economic recovery. The topic is obviously an enormous 
one. But what aspect of Federal policy deserves to be at the 
very top of the list of concerns? The Federal deficit is my 
answer. However well the economy may perform this year, growth 
over an extended period will require that the Federal budget be 
put in order. There must be no higher priority.
    Before I get to budget issues, a few brief comments on 
regulation. There are scores of disquieting anecdotes 
circulating about the depressing effects of regulation. One 
that I heard recently from a friend concerned a company that 
had for many years hired summer interns. Not this past summer, 
however. Following an examination of the effects of the 
Affordable Care Act and increasing insurance costs and risks, 
the company decided to forego its usual summer intern program. 
I find the anecdotes persuasive, but whether regulation adds up 
to a significant impediment to growth is yet to be determined.
    Now let me go to the very most serious issue, the budget.
    Chairman Bachus. Excuse me, Professor.
    Let's give respect to the witnesses. I know some of you all 
are sort of talking and reacting, but let's try to have respect 
and preserve our decorum.
    Thank you.
    Mr. Poole. The general public does not understand the 
enormity of the budget challenge. The Congressional Budget 
Office has said clearly that the current budget is not 
sustainable. It is natural, and often appropriate, to view the 
task of repairing a budget problem as involving some 
combination of tax increases and spending cuts. It would be 
useful if Congress would ask the CBO to clarify this issue by 
projecting the tax rates that would be necessary to finance 
spending in current policy projected over the next 30 years. 
What will be immediately apparent, I believe, is that there are 
no rates--no tax rates--consistent with the functioning of a 
market economy that could finance the projected spending. If 
tax increases cannot fix the budget problem, Congress will have 
to cut outlays. Above all, Congress will have to scale back 
entitlement spending. That means Social Security, Medicare, and 
Medicaid. And I will be blunt: We cannot save Medicare in its 
current form.
    I emphasize that the issue is spending in current policy, 
not spending in current law. As the CBO states in its important 
study, long-term budget outlook, released this past August, the 
Administration and Congress have systematically set current law 
to understate likely outlays and overstate likely revenues. 
This is a problem with the current Administration and prior 
ones and is how the Nation, for example, ended up with the Bush 
Administration tax cuts that expired at the end of 2010.
    And here I will be blunt again: Current law budget 
projections for future years have become so distorted that they 
are hardly worth looking at. The problem of inaccurate and 
distorted budget projections is especially acute with regard to 
Medicare. The chief actuary said this in the appendix to the 
Medicare Trustees Report released this past August. And this 
will be a quote from the appendix: ``The financial projections 
shown in this report for Medicare do not represent a reasonable 
expectation for actual program operations in either the short 
range as a result of unsustainable reductions in physician 
payment rates, or the long range, because of the strong 
likelihood that the statutory reductions and price updates for 
most categories of Medicare provider services will not be 
viable.''
    Everyone agrees that tough decisions are needed but many 
say not yet, because of the importance of nurturing the 
recovery. I doubt that Federal spending is as important to 
recovery as many believe. But suppose I accept that argument--
the argument that Congress should go slow in cutting spending. 
Many things could and should be done now that would have a 
minor effect on current spending, but a major long-run effect.
    The President's Deficit Commission contains many useful 
recommendations. Modifying Social Security to place the program 
on a sound basis need not involve any changes to current 
benefits or taxes. Following the Commission's recommendations 
would demonstrate that the Federal Government can get serious 
about fixing the budget problem.
    There are scores of outlays and tax expenditures that ought 
to be phased out. Along with many others, and probably a clear 
majority of citizens, unfortunately, I have low expectations. 
People are losing confidence in the Federal Government. 
Something must be done to resolve the situation with Fannie Mae 
and Freddie Mac. They should not be permitted to remain alive 
on government life support. If Congress sets Fannie and Freddie 
on a shrinking path, I am confident that private firms could 
pick up the slack quickly.
    For those who are less optimistic, a cautious plan is 
feasible but would do the job. The two companies should stop 
their purchase of new mortgages and permit their existing 
mortgage portfolios to run off as homeowners pay down mortgages 
in the normal course of business. The companies should announce 
a gradual increase in securitization fees, which would create 
room for private firms to enter the business over time. How can 
Congress permit these two firms to survive? After all, with 
their proven record of failure, costing taxpayers $150 billion 
and counting, they are not shining success stories.
    I began my study of economics using the justly renowned 
textbook by Paul Samuelson. Early in the text is a subheading: 
``The Law of Scarcity.'' Samuelson points out that, ``In the 
world as it is, even children learn in growing up that `both' 
is not an admissible answer to a choice of which one.'' When 
will American voters and Congress learn that ``both'' is not an 
admissible answer when it comes to Federal spending?
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Poole can be found on page 
95 of the appendix.]
    Chairman Bachus. Thank you, Dr. Poole.
    Professor Taylor.

STATEMENT OF PROFESSOR JOHN B. TAYLOR, MARY AND ROBERT RAYMOND 
          PROFESSOR OF ECONOMICS, STANFORD UNIVERSITY

    Mr. Taylor. Thank you, Mr. Chairman, and other members of 
the committee. Thank you for inviting me to testify at this 
important time.
    It has been over 3 years since the crisis flared up and the 
recession began and we still have unemployment well over 9 
percent. It has been over 9 percent for 20 consecutive months.
    In my view, many discretionary Federal interventions which 
really deviated from basic economic principles were largely 
responsible for the crisis with the slow growth and indeed for 
the current high rate of unemployment. Many of these 
interventions occurred before the panic in 2008, but they have 
been doubled down in the last couple of years. When you look at 
each of them, as I have tried to do, you find that they had 
very little effect in stimulating the economy or affecting 
unemployment.
    The one-time payments to individuals did not jump start 
consumption. The sending of grants to the States did not 
increase infrastructure spending. The Cash-for-Clunkers program 
merely moved spending a few months up. The purchases of 
mortgages under Quantitative Easing II did not, in my view, 
have a material impact on mortgage rates when other risks are 
taken into account. So, at best, these actions had a small 
temporary effect, which dissipated quickly with no lasting 
effect on growth or job creation.
    Indeed, the legacy is higher debt, monetary overhang, and 
uncertainty about new regulations that have likely been a drag 
on the economy. In my view, none of this should be surprising. 
Basic economics says this would happen. But we have had this 
painful experience over the last few years that seems to me 
point very clearly to the need to restore sound fiscal policy, 
restore sound monetary policy, in order to reduce unemployment 
and create jobs.
    In the fiscal area, I think it is very important to lay out 
a plan, a long-term plan, to reduce spending and stop the 
exploding debt. What I would like to see is a plan put together 
fast enough that this summer the Congressional Budget Office 
can make a projection, a long-term projection, that brings debt 
down rather than exploding. On page 3 of my written testimony, 
I have included a chart. It has the projections of CBO of the 
debt to GDP ratio, the forecast they made last summer, the 
forecast they made the summer before that. A plan should be 
scored to reverse this disturbing explosion of the debt as soon 
as possible, and I believe the uncertainty that would generate 
would directly affect jobs.
    Some say we should wait, postpone the reductions in 
spending that are required. I don't see the evidence for that. 
In fact, what I see--and I have included a chart in my 
testimony on this as well on page 4--what I see is the 
importance of private investment in creating jobs. It is just 
an amazing correlation between this high unemployment rate and 
the low level of private investment we have. There is no such 
correlation with respect to government purchases or spending. 
We really need to take that into account and address the real 
problem.
    But just as Congress and the President needs to lay out a 
plan for reducing the debt, I think the Federal Reserve should 
lay out a plan for reducing the size of its extraordinarily 
large balance sheet. In addition, I think in order to generate 
more predictable, certain policy, bolster the Fed's 
independence in the monetary policy area, we should amend 
section 2 of the Federal Reserve Act; amend it in a way that 
clarifies the objectives of the Fed and restores reporting 
requirements which were removed in 2000.
    It would be better, in my view, for economic growth and job 
creation if the Fed focused on the goal of long-run price 
stability within a clear framework of economic stability. Such 
a reform would not prevent the Fed from providing liquidity, 
serving as lender of last resort, or cutting interest rates in 
a financial crisis or a recession.
    In addition, it seems to me the reporting requirements 
could be amended. The Federal Reserve Act, I think, should 
require the Fed to report its strategy that it plans to use for 
setting interest rates in order to achieve this goal of price 
stability. The Fed, of course, should establish its own 
strategy. It shouldn't be dictated by the Congress. And the Fed 
should have the discretion to deviate from the strategy in a 
crisis or other unanticipated circumstances. However, if it 
does deviate, it should and must report in writing and in a 
public hearing the reasons for such deviations.
    This requirement provides a degree of accountability that I 
think is needed for an independent agency of government. I 
think such a reform will reverse the short-term focus of policy 
and help achieve strong growth and job creation now and in the 
years ahead.
    Thank you very much for the opportunity to testify. I am 
happy to answer any questions.
    [The prepared statement of Professor Taylor can be found on 
page 117 of the appendix.]
    Chairman Bachus. Thank you.
    Dr. Kohn.

  STATEMENT OF DR. DONALD KOHN, SENIOR FELLOW, THE BROOKINGS 
                          INSTITUTION

    Mr. Kohn. Thank you, Mr. Chairman. Mr. Chairman, members of 
the committee, I appreciate this opportunity to address the 
topic of promoting recovery and job creation. I can think of no 
more important economic topic facing the Nation today, as many 
of you have remarked.
    A slow economic recovery is a predictable consequence of a 
financial crisis that impairs lenders and destroys wealth. The 
headwinds seem to be abating and many economists, myself 
included, expect the pace of growth will pick up some this year 
and the job market will improve somewhat. The natural healing 
powers of a market economy are being complemented by very 
accommodative monetary policy and by the boost to spending that 
will come from the fiscal package the Congress and the 
President agreed to in late 2010. To a considerable extent, 
patience may be the most potent weapon we have now to promote 
economic recovery and job creation. And if the economy follows 
the expected path, that patience should extend to withdrawing 
stimulus in the near term as well as trying to create new jobs 
through major new initiatives. Patience on both sides is 
required.
    That said, I think there are few broad areas in which 
policymakers can constructively contribute to faster recovery. 
The challenge for monetary policy will be to promote expansion 
without allowing fears of deflationary or inflationary spirals 
to take hold. Longer-run inflation expectations must continue 
to be well-anchored for economic performance to improve.
    The Federal Reserve should continue to emphasize its 
willingness to adjust its policy based on the changing outlook 
for growth and inflation and its determination to return 
consumer inflation to the range of 2 percent, or a little 
below, that forms the central tendency of the FOMC members' 
expectations for inflation over the longer run, and then to 
keep it there. To keep inflation from rising above 2 percent, 
the Federal Reserve will need to exit its extraordinary 
policies in a timely way.
    In the end, it will not be technical factors that determine 
whether the Federal Reserve makes progress toward the 
objectives it has been given. Rather, it will be judgment and, 
critically, a continued high degree of independence from short-
term political pressures so that it can exercise that judgment, 
and that will be what determines its success.
    In fiscal policy, the lack of a clear and committed path to 
fiscal and debt sustainability is an important source of 
uncertainty for households and businesses and a risk to 
stability in financial markets. As the recovery gathers 
momentum, the public and private sectors will come increasingly 
into competition for scarce saving, causing interest rates to 
rise. The pressures on rates will be greatly intensified if the 
investors come to doubt the willingness of the Congress and the 
Administration to confront and make very difficult choices on 
spending and taxes that are required. You must determine and 
commit to a path to longer-run fiscal sustainability.
    Regulatory policy, including uncertainty about regulations, 
has probably been one of the factors holding back spending, 
though in my view it is probably not one of the main factors. 
To some extent, both greater regulation and uncertainty about 
that regulation have been byproducts of efforts to achieve 
important societal goals. That is certainly the case for 
financial regulation. In the writing and implementation of 
Dodd-Frank legislation, the near-term costs of greater 
regulation--and there are costs--are being weighed against the 
promise of a more stable and resilient financial system that 
will be able to avoid the types of systemic problems that have 
proven so disruptive and costly for jobs and incomes over the 
past several years. Its net effect will depend importantly on 
how it is implemented.
    I believe that, on balance, the new legislation will make 
our financial system stronger and more resilient to unexpected 
developments, will reduce the moral hazard effects of ``too-
big-to-fail,'' and will increase transparency for better 
monitoring by both supervisors and the private sector. I hope 
that implementation of the legislation is not materially 
slowed. In many cases, putting in place some rules, even if 
they are adjusted later, will do more to relieve uncertainty 
and allow the private sector to adapt and move forward than 
would a generalized slowing of most implementation.
    Of course, the Congress must continue to evaluate whether 
the benefits of specific requirements of the law, and the law's 
implementation more generally, are likely to exceed their 
costs. As our economy recovers from this painful episode, it 
must be reoriented from excessive dependence on debt, and 
especially from dependence on foreign saving and capital 
inflows to finance spending in excess of production.
    Fiscal and regulatory policies must be structured to reduce 
government borrowing over time and to encourage private saving 
and business capital spending. Monetary policy must contribute 
to a macroeconomic environment characterized by stable prices 
and moderate fluctuations in economic activity to facilitate 
longer term planning by governments, households, and 
businesses. None of this will come easily or quickly, but it is 
essential to promoting longer term economic growth and job 
creation.
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Kohn can be found on page 76 
of the appendix.]
    Chairman Bachus. Thank you, Dr. Kohn.
    Professor Scott.

   STATEMENT OF PROFESSOR HAL S. SCOTT, NOMURA PROFESSOR OF 
      INTERNATIONAL FINANCIAL SYSTEMS, HARVARD LAW SCHOOL

    Mr. Scott. Thank you, Chairman Bachus, and members of the 
committee for permitting me to testify before you today. I want 
to make clear I am testifying in my own capacity and do not 
purport to represent the views of the Committee on Capital 
Markets Regulation, which I direct, although much of the 
testimony I am giving to you is based on the committee's 
reports and statements.
    My testimony today is focused on the implementation of the 
Dodd-Frank Act. The rules that are now being written to 
implement Dodd-Frank will have a profound impact on our 
financial system and economy. These rules--the count is 
questionable--240, 230--of which are being promulgated by the 
SEC, the FDIC, the CFTC, the Fed, and the Financial Stability 
Oversight Council, all of these rules will substantially revise 
how we regulate financial institutions and markets in this 
country.
    President Obama, keenly aware of the danger to economic 
growth of poorly formulated rules, is now focusing his 
attention on the general regulatory process and its burden on 
American competitiveness. But the independent financial 
regulators are exempt from his new initiatives. As a result, 
they will not be subject to review by the Office of Information 
and Regulatory Affairs within OMB of their cost-benefit 
analysis, nor required to provide 60-day comment periods, as 
generally applicable in his executive order. Indeed, under 
current law, only the CFTC has a formal cost-benefit 
requirement.
    Meanwhile, these agencies give on average only 45 days for 
public comment on the Dodd-Frank rules, down from an average of 
more than 60 days for rules issued in 2005 and 2006, and these 
rules are extremely complicated and being issued at a frenetic 
pace. In revising our regulatory structure, the most important 
objective should be to get the rules right, not to act quickly. 
And let me be clear. I am not urging delay to avoid or 
unnecessarily defer regulation. I am simply advocating taking 
the time we need to get it right.
    I have four recommendations that may improve this process. 
First, all the financial regulators, including the independent 
agencies, should be required by Congress to evaluate their 
rules, the costs, and benefits. In addition, OIRA should have 
the obligation to file comments on the adequacy of their 
analysis. The agencies would not be bound by such comments, but 
they would be given the comments--not be bound in order to 
preserve their independence.
    I should say that the current head of OIRA, Cass Sunstein, 
a former colleague of mine, has argued in various law review 
articles that the independent agencies should be fully subject 
to OIRA review. My proposal stops short of that.
    Second, Congress should encourage the financial regulators 
to report on their progress toward meeting statutory deadlines. 
The CFTC has already missed a deadline, and more are likely to 
follow. But this is understandable, and Congress should let 
these agencies know that it will give them more time if such 
time is truly needed.
    Third, it can typically take days and sometimes weeks for 
agencies to make available the full text of proposed and even 
final rules. Congress should urge the regulators to make the 
full text of regulations publicly available as soon as possible 
so people can comment on them and react to them.
    Fourth, it would be unwise, in my view, for Congress to cut 
the budgets of the financial regulatory agencies in an attempt 
to control or derail the regulatory reforms prompted by Dodd-
Frank. Tightening the purse strings will not stop the 
rulemaking process. It will only make it worse. Agencies should 
be given the resources they legitimately need to implement this 
new legislation. If Congress wants to change the legislation, 
it should do so directly.
    I would like to take this opportunity also to highlight two 
areas where the Dodd-Frank Act could be improved. Others are in 
my written testimony. First, under Dodd-Frank, the newly 
created Bureau of Consumer Financial Protection is funded from 
the profits of the Federal Reserve. It should be funded like 
other agencies through the ordinary appropriations process. In 
addition, the Bureau needs a permanent director. Treasury's 
temporary powers to guide the Bureau will be significantly 
limited in July when the Bureau becomes a functioning agency. 
The Congress should call for the President to tender such a 
nomination as soon as possible.
    Second, Dodd-Frank requires Federal agencies to purge 
credit ratings from their regulations. Yet there is no clear 
solution as to how to replace them; for instance, capital 
requirements are heavily dependent now on ratings. In my view, 
this legislation needs to be relaxed. In the short term, the 
statute should be revised to prohibit undue reliance on the 
ratings, not to ban the use of the ratings entirely. And other 
options should be explored for the longer term.
    Thank you, and I look forward to your questions.
    [The prepared statement of Professor Scott can be found on 
page 98 of the appendix.]
    Chairman Bachus. Thank you. We have probably about an hour 
before the first votes on the Floor. I am going to forego 
questioning so more of our members can ask questions.
    At this time I recognize the gentleman from Texas, Mr. 
Hensarling, for 5 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Dr. Poole, in your testimony--not to put words in your 
mouth--I think you had your greatest angst with respect to the 
spending trajectory in the future that creates the deficit and 
the Federal debt that we are contending with now, is that 
correct?
    Mr. Poole. Yes. I am pointing particularly to the 
entitlements, the outlays that are on autopilot.
    Mr. Hensarling. I am not sure if you are aware of this, but 
less than an hour ago you were referencing that the 
Congressional Budget Office should project, I believe, future 
tax increases necessary to finance the spending trajectory. The 
CBO just issued its current baseline this morning, and they 
project a $1.48 trillion deficit for Fiscal Year 2011, which 
will be the single largest deficit in American history, 
following the two previous $1 trillion-plus deficits that 
occurred under this Administration. That is roughly 10 percent 
of GDP, according to the Congressional Budget Office. According 
to the Congressional Budget Office, debt held by the public is 
estimated over the 10-year budget window to essentially double 
from roughly $8.8 trillion in Fiscal Year 2011 to $18.2 
trillion. I know that is not comforting to either of us.
    You reference the President's Fiscal Responsibility 
Commission. I was one of the House appointees to that 
Commission. You said it would be useful to ask CBO to clarify 
the issues of projecting the tax rates necessary to finance 
spending under current policy. I think we both know the answer 
to that. We had testimony from a number of different academics 
from GAO, I think, including CBO. Frankly, to fund current 
policy, as you know, is going to require a doubling of the tax 
burden on future generations, crushing economic growth as we 
know it.
    In your testimony you say, ``I want to be blunt: Current 
law projections versus current policy projections for future 
years have become so distorted they are hardly worth looking 
at.''
    Can you expound on that view, please?
    Mr. Poole. Yes. It is a point that is extremely important. 
Let me just give two examples that everybody has heard of and 
understands. For quite some time, we have had the annual so-
called ``doc fix.'' What the doc fix does is to delay the 
scheduled, in the law, reductions in payments to physicians 
under Medicare. Everybody knows that if those scheduled 
reductions go into force, then many doctors will simply drop 
out. My own ophthalmologist told me this: ``I'm 62 years old. 
If those payments go in that schedule, I'm just going to 
retire.''
    And so what has happened is year by year by year there has 
been the 1 year at a time doc fix, but the projections forward 
for the outlays include the assumption that the reimbursements 
will decline.
    Mr. Hensarling. Dr. Poole, another way of saying that is--
and the Congressional Budget Office scores or estimates 
essentially what Congress says as opposed to what Congress 
does. Is that a fair assessment?
    Mr. Poole. The CBO has done a fine job in distinguishing 
between estimates based on current law, which would include 
things like the decline in physician payments. Another good 
example is---
    Mr. Hensarling. I am sorry, Dr. Poole; I have a limited 
amount of time here. I am going to have to move on.
    Dr. Taylor, in your testimony you speak about rules-based 
monetary policy. I know there was some angst on the other side 
of the aisle that I share about having Members of Congress 
interfere with conducting monetary policy. But when we look at 
the actions the Fed has taken under 13-3, when we look at what 
is happening to the Feds' balance sheet under QE II, when we 
look at a Federal Reserve setting interchange fees, when we 
look at a Federal Reserve setting credit card terms, this isn't 
exactly your father's Federal Reserve.
    So what is it--with Chairman Bernanke essentially seeming 
to move us towards inflation targeting, does that seem to be 
moving towards a rules-based monetary policy? Could you expound 
on your views and what you see the Fed doing?
    Mr. Taylor. I think the kinds of things you mentioned the 
Fed doing are moving away from what I would call classic 
traditional monetary policy, focusing on inflation and price 
stability and overall stability, getting involved in fiscal 
policy issues, getting involved in credit allocation. I don't 
think you need to have an independent agency of government for 
that. Professor Scott just mentioned the idea of the Fed 
seigniorage paying for the new Consumer Financial Protection 
Bureau. That is an example of this.
    So I think with respect to the Fed, we need an independent 
Fed to conduct monetary policy. And the more that can be more 
rule-like, more predictable, as it was for many years in the 
1980s and 1990s when we had long expansions and short 
recessions, the better we will be. The more it becomes erratic, 
more discretionary, more interventionist--you gave many 
examples--the less desirable the policy is and the worse the 
outcomes. I think we saw that in the 1970s, and we are seeing 
that in last 3 or 4 years as well.
    Mr. Hensarling. Thank you, my time has expired.
    Chairman Bachus. For the record, would you clarify what was 
the budget projection, the deficit for this fiscal year?
    Mr. Hensarling. This is from news reports on my Blackberry, 
so I certainly--members may have a differing opinion, but the 
Congressional Budget Office estimates a $1.48 trillion deficit 
for Fiscal Year 2011 at roughly 10 percent of GDP.
    Chairman Bachus. That is approximately $1.5 trillion, but 
of course, the President proposed $10 billion worth of savings 
in 2014. So that would bring it down to $15 or $14.9 billion 
from $1.5 trillion. He would bring that down a few billion 
dollars.
    Ms. Waters.
    Ms. Waters. Thank you very much, Mr. Chairman. Mr. Kohn, 
there seems to be some consternation among your colleagues on 
this panel as to whether or not the Federal Reserve's dual 
mandate makes it difficult to do its job. And we all heard what 
Mr. Watt said when he came in about some of the attacks on the 
Fed. So I ask you, given your background as a former Vice Chair 
of the Federal Reserve, do you think that the dual mandate 
presents a conflict for the Fed in carrying out its mission?
    Mr. Kohn. I don't think the dual mandate has presented such 
a conflict nor does it right now. I think right now we see both 
inflation running below the long-run objective of 2 percent or 
a little below, and unemployment running well above, as all the 
members have said, well above where it ought to be over the 
long run. So there is no conflict right now.
    I think this is a discussion that the Congress should have. 
Is there a reason to clarify the Federal Reserve Act? I do 
think the last three Chairmen--Volcker, Greenspan, and 
Bernanke--have all said that they recognize that price 
stability is uniquely the responsibility of the Central Bank, 
and really the first responsibility of the Central Bank. And 
establishing a stable price environment is the way the Federal 
Reserve, over long periods of time, helps to encourage maximum 
employment.
    I think it is also the case that not only variations in 
inflation, but also variations in output interfere with the 
ability of businesses--small and large--to plan, create 
uncertainty, and are inimical to economic growth. So I do think 
the Federal Reserve can do both. It can seek price stability as 
it has and it can lean against business cycles in a perfectly 
consistent way.
    I would urge the Congress that if you decide to clarify the 
objective, that you make sure there are two things: First, 
considerable flexibility in pursuing these objectives over the 
longer run; and second, that you do nothing to impair the 
independence of the Federal Reserve in carrying out the 
objectives you give it.
    Ms. Waters. Thank you very much. I am going to move to Mr. 
Poole. This hearing is not about Fannie and Freddie, but you 
interjected your thoughts about Fannie and Freddie in your 
testimony. As you know, it emerges as a huge issue in this 
Congress. And as a ranking member of the Capital Markets 
Subcommitte, it is one of those issues that I am going to be 
very much involved in. While I have always supported the 
mission of Fannie and Freddie, we recognize that they failed 
us. They got into trouble, and we have to straighten it out. 
And one of the things that I want to do is I want to work very 
closely with the opposite side of the aisle and take the 
politics out of dealing with this issue so that we can reform, 
we do what we have to do to make sure that we don't have to get 
in the kind of situation we were in before.
    You talked about how easy it is going to be for private 
firms to pick up the slack quickly. What private firms are you 
talking about? Are you talking about Bank of America? Are you 
talking about JPMorgan? Are you talking about Citi? Are you 
talking about Goldman Sachs? Are these the firms that have no 
problems? That didn't need a bailout? That could pick up the 
slack quickly? Who are you talking about?
    Mr. Poole. Yes, those it would be among the private firms.
    Ms. Waters. I can't hear you. Speak right into your 
microphone.
    Mr. Poole. Do you want me to expand at all?
    Ms. Waters. No, I want you to speak into your microphone so 
I can learn which of the private firms can take up the slack 
quickly.
    Mr. Poole. I didn't say for sure that they would pick up 
the slack quickly. I happen to believe that they would. Other 
countries, high-income countries operate mortgage markets 
without intermediaries of this kind and they work just fine. 
There is no evidence that those intermediaries are necessary 
for the mortgage market to operate satisfactorily. And if you 
are worried about how quickly private competitors could come 
in, if you think I am too optimistic, then there is a plan. I 
have outlined it to phase it out slowly and allow time for the 
private competitors to build their business plans and to come 
into the market.
    Ms. Waters. Did some of the private firms that you are 
thinking about like Bank of America, whom we are working with 
now dealing with serious problems with robo-signing in this 
loan modification effort we are trying to do, or JPMorgan or 
Citi or Goldman Sachs, all of whom we bailed out, having the 
same kinds of problems, or potentially having those problems, 
do you think these are the kinds of firms that can pick up the 
slack?
    Mr. Poole. There is no question that those firms have 
created some problems for--
    Ms. Waters. Just like Fannie and Freddie, wouldn't you say?
    Mr. Poole. I would like to emphasize that some years ago, 
both Fannie Mae and Freddie Mac had serious internal problems 
with their accounting systems. They did not file reports as 
required for the New York Stock Exchange, for example, for a 
couple of years. So the issue here is not whether the private 
firms sometimes make mistakes, and indeed, very serious 
mistakes. It is a question of the relative effectiveness of the 
government firms and the private firms and their cost and risk 
to the taxpayer.
    Chairman Bachus. Thank you. Mr. Royce.
    Mr. Royce. Yes. Mr. Poole, you were president of the 
Federal Reserve Bank of St. Louis for 10 years. I happen to 
agree with Dr. Paul's thesis here, and many economists, 
including the Economist Magazine laid out the case that the 
Federal Reserve, from 2002 to 2006, had set a negative real 
interest rate in the United States. And as a consequence of 
that, we were going to create a boom bust cycle in housing 
because we were flooding the housing market with credit, and 
that was a mistake of the Fed. That was one of our errors.
    But the second error, I think, was the government guarantee 
implied that we had over with Fannie and Freddie, in a 
situation at which Congress intervened in the market in a very 
big way, in 1992, with the GSE Act in which we allowed them to 
go into arbitrage; we allowed them to overleverage 100 to 1; 
run up a mortgage portfolio of $1.7 trillion. A lot of it junk, 
countrywide. And a lot of this was under a mandate from 
Congress because we were muscling, Congress here was muscling 
the market. The market wanted 20 percent down, we got that down 
to 3 percent and then down to 0 percent. So what did we think 
was going to happen?
    Economists at the time--I remember John Taylor here, 
Professor Taylor had a solution to both problems; he wanted the 
Taylor rule first of all applied so that we would have a stable 
monetary policy, we wouldn't have the boom bust that would come 
about as a result of the flood of credit because we would keep 
the monetary units stable. We wouldn't have a negative real 
interest rate. And at the same time he and others, Dr. Poole, 
yourself included, I think, warned about some of the 
consequences with respect to this government guarantee.
    We did not have a higher homeownership rate in the United 
States than other developed nations. What we had instead was a 
higher profit to the shareholders of Fannie and Freddie. Study 
after study showed they were the beneficiary, and management 
was the beneficiary. So you had managed earnings, you had all 
the problems we went through.
    Okay, going forward, what you argued for today was we 
slowly bring the private market back in as we reduce the 
conforming loan limits, as I understand basically your argument 
there and we phase out.
    Now this is the thing I want to ask you: Others are saying 
well, we had that problem with the government guarantee with 
Fannie and Freddie, but now why don't we bring back a 
government guarantee. Do you think that brings back the same 
problems with regard to moral hazard, the same problems with 
regard to risk pricing that we had with Fannie and Freddie if 
we bring in a government guarantee? Yes or no, Dr. Poole?
    Mr. Poole. I would not have government guarantees for 
mortgages at all. We don't have government guarantees for auto 
loans, or for all sorts of loans in the marketplace. Why do we 
need government guarantees for mortgages? It doesn't make any 
sense to me.
    Mr. Royce. I appreciate your response to that question. I 
am also going to just ask--give Professor Taylor a chance for a 
minute of explaining a little bit of foresight in terms of 
keeping the monetary policies stable might help offset the boom 
bust cycle that we experienced more in the United States than 
anywhere else in terms of the way it hit our real estate.
    Mr. Taylor. I think you need to just go back and look at 
what happened in the 1980s and 1990s. We got that inflation 
down, created price stability, kept to a reasonably predictable 
rules-based approach, and we had two long expansions. And 
certainly compared to what has happened recently, a small 
recession. So it is clearly in the history. I also think it is 
clearly in the--
    Mr. Royce. Let me ask Mr. Scott a question, because this 
goes to the Bureau of Consumer Financial Protection. For the 
first time, safety and soundness regulation takes a back seat 
to consumer protection. We saw this with the GSEs. We had 
bifurcated regulation. And for those of us who carried the 
legislation as I did some years ago to try to regulate the GSEs 
for systemic risk, to try to bring down that risk, we had the 
support of the regulatory community. What we didn't have was 
HUD, right? And we didn't have Fannie and Freddie because they 
were on the other side of that argument. Fannie had the biggest 
lobby up here, they did not want to be regulated for safety and 
soundness. They were going to carry out their mission because 
it led to more profits for the shareholders, and especially for 
management.
    What do we do now to rein in the BCFP and ensure our 
regulatory structure focuses on solvency regulation so we don't 
run back into the type of situation we had with bifurcated 
regulation we had before?
    Mr. Scott. Do you want me to comment on that?
    Mr. Royce. Yes.
    Mr. Scott. I think the balance struck between safety and 
soundness and consumer regulation is a question here because 
FSOC, as you know, can override the new bureau by a two-thirds 
vote. How practical is that? Even if you look at the 
composition of FSOC, there's not really a true majority of bank 
regulators on that group because it includes the CFTC, the SEC, 
etc. So I think we need to look at that balance. I think it is 
a question of different voting rules.
    Mr. Royce. I think you should have to have a sign-off with 
a prudential regulator in advance and that is what my amendment 
was. I yield back, Mr. Chairman.
    Chairman Bachus. Thank you. What we are going to do--there 
is a vote on the Floor, so we will entertain questions from Ms. 
Velazquez and Dr. Paul, then we well recess for 15 minutes. Can 
the panelists all come back? So we will recess at the end of 
Dr. Paul's questions. Ms. Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman. If I may, I would 
like to ask each of the panelists the following question, and I 
just need a yes or no answer. Do you believe that passage of 
the Dodd-Frank Act is responsible for lenders constricting 
their small business lending?
    Mr. Poole. I don't think that is the major reason that 
small business lending is restricted at this time.
    Ms. Velazquez. Okay.
    Mr. Taylor. I think the uncertainty caused by the 
additional regulations is causing people to be more cautious in 
businesses in general to stop doing what they would do.
    Ms. Velazquez. I am asking because when I was listening to 
the opening remarks made by our colleagues here, they were 
basically saying that small businesses who are the ones 
creating jobs in this country are not--they are limited by 
access to credit. And that limitation is created by the fact 
that financial institutions are constricting their lending due 
to regulations.
    Mr. Taylor. I think the uncertainty caused by all the new 
regulations is making lenders more cautious, absolutely. So I 
would agree with--
    Mr. Kohn. No, I don't think Dodd-Frank is the major reason 
for the reluctance to make loans to small business. I think the 
reluctance to make loans to small business preceded Dodd-Frank 
by quite some time and reflected uncertainty in the--
    Ms. Velazquez. Will you say, if you excuse me, by the 
collapse of the capital markets created by the lack of 
regulation or lack of oversight?
    Mr. Kohn. I am not sure ``created by,'' but I would say the 
collapse of the financial systems and the deep recession 
certainly made lenders very much more cautious, as is 
understandable.
    Ms. Velazquez. Yes.
    Mr. Scott. Congresswoman, I think that actually the Basel 
capital rules have much more of an impact on lending decisions 
of banks than anything, particularly in Dodd-Frank. I think 
that Congress should take a look at these rules in more depth. 
So in a sense, Dodd-Frank permits this Basel process to 
continue, but I think Congress should look at it.
    Ms. Velazquez. And I would like for the record to reflect 
that the last Federal Reserve survey that they conducted with 
senior loan officers this past January showed how small 
business lending is going up.
    Today, in one of the news articles, we have here that the 
equipment listing and finance association said business 
originated $9 billion in loans, December. They doubled compared 
to November. So they are accessing credit. I don't think that 
the role of this committee is to rewrite history because the 
Federal Reserve survey shows otherwise, and lending is going up 
and small businesses are expanding.
    Mr. Kohn, thus far, most of the efforts to splurge up 
creation, particularly among small businesses, have centered 
around providing credit for established businesses through 
banks. Should more be done to support the growth of new 
businesses, particularly since this is where the greater job 
creation occurs?
    Mr. Kohn. That was addressed to me?
    Ms. Velazquez. Mr. Kohn.
    Mr. Kohn. I think the Congress last year passed a law 
trying to encourage banks to make loans to small businesses, I 
think that was a constructive step. I think the regulators, 
supervisors need to continue to make sure that they are not 
discouraging loans to creditworthy businesses. I don't know of 
any new steps that need to be taken, but I think the steps that 
already have been taken need to be reinforced and that 
encouragement given.
    Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
    Chairman Bachus. Dr. Paul.
    Dr. Paul. Thank you, Mr. Chairman.
    I would like to, first, say that I was very pleased with 
Congressman Royce's remarks. I do want to follow up with Dr. 
Poole, especially because you had a lot of emphasis on the debt 
and the deficit that we are running up, and of course, many 
people have been talking about that lately. But I became 
fascinated with that subject as far back as the early 1970s 
with a significant change in our monetary policy, because it 
was very clear to me and many others that this is what it would 
lead to. It would lead to massive spending, massive deficits, 
and a massive increase in the size of government and that is 
where we are. We are at a point of no return and no solutions. 
So I am not a bit surprised that this has happened.
    I don't like to separate the two, have the deficit problem 
here and the monetary problem over here because I think they 
are connected, and this is what I want to ask you about. Now 
if--I know this is not on the horizon, it is not likely to 
happen, I know some of the downside arguments from this, but 
just dealing with the question I am going to ask, dealing with 
the deficit: What if the Fed couldn't buy government debt, what 
kind of pressure would that put on the Congress to act 
differently?
    Mr. Poole. Congressman, let me address it in two pieces. It 
has been known since the late 1970s that the demographics were 
moving in a direction, and starting in 2010, there would be the 
beginning of the retirement of the Baby Boom generation, and 
that the entitlements, in effect, would become untenable with 
the very large change in the demographic structure of the labor 
force. That was known in the late 1970s, and economists and 
others have been preaching about that without any effect.
    When we talk about a monetary policy adjustment, whatever 
you want to call it, of the type that you have in mind, it is 
critical to know what the alternative is. My teacher and 
mentor, Milton Friedman, always used to say, you can't enter a 
horse race without a horse. So you may not like the horses that 
are in the horse race, but you have to have a horse to enter 
that race.
    Dr. Paul. But Milton Friedman also suggested very strongly 
that he would replace the Fed with a computer, and that is the 
way he would regulate the money supply. But my suggestion here 
is that if the Fed didn't buy the debt, interest rates would go 
up, and the burden would fall on the Congress because they 
would have to cut back because they were consuming all the 
savings. Of course now today we don't say, we just create our 
so-called capital out of thin air.
    But another question to follow up on this is, with an 
individual, when they get into trouble, if they have too many 
credit cards, and too much debt, and they get new credit cards 
and on and on, but finally it has to come to an end, and they 
have to make a decision, they declare bankruptcy and liquidate 
that debt and maybe get a chance to start over again, or they 
might decide, I have to pay my debt down, I have to work 
harder, get an extra job, my wife has to work, but cut 
spending. And they do that, and they can get their house in 
order again and then their standard of living might grow again. 
I don't know why those rules can't apply to government as well.
    But isn't it true that in recent decades, we don't do 
anything to allow liquidation of debt, as a matter of fact, 
that is the greatest sin of all, is to allow the liquidation of 
debt. And it is the liquidation of debt that allows the growth 
to come back. So how do we get growth if we don't liquidate 
debt? All we do is transfer the debt. The people who make a lot 
of money on Wall Street and the Fannie Maes and Freddie Macs, 
and then they get in trouble and we buy out this illiquid debt, 
the worthless debt and put it into the hands of the taxpayer, 
and the problem still exists.
    How in the world can we get growth again if we don't 
liquidate the debt? Or do you buy into the school that says 
that is not important, we don't need to, we can just build debt 
and debt and keep it going forever. How would you rationalize 
and how would you solve this dilemma?
    Mr. Poole. I tried to be very clear that we will have a 
crisis ahead of us if the Federal budget is not fixed in very 
significant ways, and that the fix has to focus on spending. I 
thought I was very clear about that. We will follow the course 
of Greece, of Ireland, and of the other countries in Europe, 
Portugal, that are under the greatest pressure right now. We 
will get there if this problem is not fixed.
    We won't get there quite that way--because the ``solution'' 
that results will be a rip-roaring inflation. See every 
inflation in the history of the world has come about because 
of--great inflation because of fiscal imbalance.
    Dr. Paul. I agree with that, but I think there is a much 
closer connection. I think the Federal Reserve allows Congress 
to be irresponsible. And if they didn't facilitate the debt, 
the Fed is the great facilitator of big government and debt. If 
they weren't there to buy up this debt, believe me, we would be 
much more responsible about how we manage our affairs. I yield 
back.
    Chairman Bachus. I thank you. At this time, the committee 
is going to recess for approximately 15 minutes. We understand 
the second vote may actually be by voice, so we will be back in 
approximately 15 minutes.
    [recess]
    Chairman Bachus. This hearing of the Committee on Financial 
Services will come to order.
    At this time, I recognize the gentleman from North 
Carolina, Mr. Watt, for 5 minutes.
    Mr. Watt. Thank you, Mr. Chairman. Perhaps it is an 
indication that you have been around an institution too long 
when you look at the title to a hearing, and you instinctively 
sense that the hearing is probably going to be about something 
other than what the title is about. And then you look at the 
testimony and you find that it probably is about something 
other than the title, what the title indicates the hearing is 
going to be about.
    And then you predict in your opening statement that the 
hearing is going to be about something different than what the 
title indicates that the hearing was going to be about. And 
then you find that your prediction was correct.
    Everybody's talking about bashing the Fed and the decisions 
it has made in the past. I suspect the second panel will be 
bashing Fannie and Freddie and the decisions that they have 
made rather than about promoting economic recovery and job 
creation, which we have had little discussion about.
    I do want to thank my colleagues on both sides of the aisle 
for at least getting this topic on the table, on top of the 
table, rather than trying to hide it under the subterfuge of 
promoting job creation. And I want to thank, particularly Dr. 
Taylor, for putting it front and center in his paper. I am 
looking at the--clarify the objectives of the Fed and it says, 
in order to achieve a more predictable rules-based policy and 
bolster the Fed's independence.
    I guess everybody says we believe in the independence of 
the Fed. Section 2 of the Federal Reserve Act, which lays out 
the objectives and reporting requirements for the Fed should be 
amended. That is very transparent. And it is quite apparent 
that he disagrees with Mr. Kohn that price stability and 
inflation control and job creation should be equal pillars of 
our dual mandate here. One should be subordinated to the other, 
although I am sure he will make a case to the contrary.
    I think we have to deal with this. We have to deal with it 
forthrightly if we don't think the Fed ought to exist or if we 
think the Fed's mandate should be changed, we should change it, 
not have scholars come and tell us that they believe that it 
ought to be something else, which is your right to do, Dr. 
Taylor. You are at least forthright about it. You say, I think 
the Fed's mandate ought to be changed, it ought to be amended. 
Congress ought to be forthright enough to deal with that, if we 
believe that. And we ought to be forthright enough to know, 
which I may argue a little bit with Dr. Taylor about, that if 
we don't do one or the other, you can't have it both 
independent and be constantly second-guessing and first-
guessing and making it cater to you all the time.
    So anyway, back to the subject at hand, that is my little 
prediction; I made the prediction in my opening statement. 
Unfortunately my prediction came true that this is more about 
the Fed and its policies.
    But the hearing title says promoting economic recovery and 
job creation. Nobody on this panel has really told us what they 
think we should do to create jobs and promote economic 
recovery. So Mr. Poole, if you could direct yourself to that 
specific thing and then go right down the line, I would 
appreciate it. We got a lot from you about how some intern 
didn't get hired because of health care reform, which I thought 
was an insult to us, but you didn't tell us how you how you 
think we ought to be creating jobs and promoting economic 
recovery which is the subject of this hearing, I thought.
    Mr. Poole. I am eager to talk about that subject. I want to 
emphasize that every business decision is based on some sort of 
calculation as to whether the investments, the costs that you 
put into it can be recovered by the revenue that you get out of 
the market.
    Mr. Watt. That is economic theory. I want to know what you 
would have us do to create jobs.
    Mr. Poole. What that means is that the government needs to 
do everything it can to make sure that the conditions under 
which businesses have to make those decisions are as 
predictable and stable as possible. Now we have extreme 
examples of--okay.
    Mr. Watt. Dr. Taylor?
    Mr. Poole. Would you let me finish?
    Mr. Watt. Dr. Taylor, would you give us your estimate of--I 
just want one sentence from each one of you on the subject of 
the hearing.
    Mr. Poole. That is the subject.
    Chairman Bachus. The gentleman's time has expired, so if 
you will just--
    Mr. Watt. And I was trying to expedite getting a response 
from each one of these gentleman rather than a lecture from Mr. 
Poole.
    Chairman Bachus. That was a 4\1/2\ minute question. So, the 
question was 4\1/2\ minutes long.
    Mr. Taylor. I believe my testimony, both written and oral, 
did address the job issue. I think the most important thing to 
do now, based on experience and economics, is to create a 
stable fiscal policy, a sound fiscal policy which people can 
rely on, remove all that uncertainty about the debt, and the 
same goes for monetary policy. I sincerely believe that is the 
most constructive thing you can do. Thank you.
    Mr. Kohn. In my testimony, I noted that there may not be a 
lot of things we can do; patience may be one of the things that 
is required here. But I do think policy, on several fronts, can 
reduce uncertainty, both the monetary policy needs to be--
monetary authorities need to be clear what their objectives are 
for inflation and the fiscal authorities need to get their arms 
around tax and spending policy so the people know what to plan 
for tax rates and government support. The regulatory 
authorities need to weigh the costs and benefits of their 
regulations carefully. And the last thing I would say, that is 
not in my testimony, is we need to educate our workforce so 
that when the jobs are created, they can take them. That is 
critical.
    Mr. Scott. Congressman, I think we need a strong and well-
functioning financial system to create jobs, because the 
financial system is sort of the life blood of our economy. If 
loans are not made to small businesses, that affects jobs. So 
we have to be, overall, concerned that we are not doing things 
that lead the financial institutions not to do what they 
otherwise might do by making loans.
    Now that can be as clear as capital requirements which 
might be too onerous so that the banks will not make loans. We 
have to be careful with safety and soundness, but at the same 
time, we should not overdo it. It can be as indirect as 
derivatives regulation. So a very big issue in derivative 
regulation has been, how are end users going to be treated? Are 
they going to be exempt from a lot of these margin requirements 
in central clearing? That was an issue in the consideration of 
Dodd-Frank. If they aren't, and they are burdened by 
regulation, they may not be able to hedge as well, their 
business may suffer, and they might hire, therefore, fewer 
people.
    So I think all of these regulations have a way of 
ultimately affecting jobs. If they are too burdensome on the 
financial system, they will produce less jobs.
    Mr. Watt. Thank you, Mr. Chairman.
    Chairman Bachus. Let me say this: The question and answers 
were almost 9 minutes. So what we will do at the end of the 5 
minutes, is we will let a witness who is answering a question 
continue to answer that question. But if each of you can make 
your questions a little more concise, I think we will have an 
opportunity for everybody to ask questions.
    Mrs. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Professor Scott, in your testimony, you talked about--you 
gave observations on the Volcker Rule and its implementation. 
And I am concerned that Europe, other countries will not adopt 
the Volcker Rule which leaves U.S. financial institutions to go 
it alone and making our financial sector less competitive and 
forcing, perhaps, businesses and jobs to leave the United 
States for Europe. Could the Volcker Rule be implemented so it 
makes our financial system more stable without needlessly 
making our financial system less competitive?
    Mr. Scott. I think we need to be very careful how we 
implement the Volcker Rule. I was not one who supported the 
Volcker Rule in the very first place, let me be very clear on 
it. But if we keep it in place, I think we should interpret it 
narrowly not broadly. And I have offered a definition in my 
testimony as how that can be done.
    If we don't do that, Congresswoman, we are going to be 
doing two bad things, in my view. First of all, we are going to 
suffer a lack of competitiveness because of competitive 
institutions abroad all do this proprietary trading.
    Indeed, if you go back to the Glass-Steagall reform, it was 
to put us on an even competitive balance, in part, that we 
liberalized Glass-Steagall and now here we are going in the 
other direction, but we have done it. All I am saying is, let's 
be conservative in how we implement it.
    Secondly, actually a very broad Volcker Rule, in my mind, 
can impact the safety and soundness of our institutions. These 
activities, in some ways, were diversification from typical 
lending, and therefore, over a long period of time made these 
institutions more stable. And this was not the cause of the 
financial crisis. Goldman Sachs profited a lot by its 
proprietary trading activities during the financial crisis. If 
they had all been making loans, they would have been worse off. 
So I think we should be very conservative in the way we 
implement the Volcker Rule.
    Mrs. Biggert. I haven't been really happy with it either. 
Do you think it would be better not to have it at all or does 
it provide the stability that is needed?
    Mr. Scott. Could you repeat that? It is my hearing; it's 
not you.
    Mrs. Biggert. I just wanted to know, would it be better not 
to have the Volcker Rule at all, or does it provide the 
stability if it is narrowly defined?
    Mr. Scott. Yes, I am on record as saying we shouldn't have 
a Volcker Rule. I testified in the Senate on that. I think we 
would be better off without a Volcker Rule. But having gotten 
the Volcker Rule, I think we should be conservative in how we 
implement it.
    Mrs. Biggert. All right. Thank you.
    Professor Taylor, in your testimony you commented about the 
fact that the unemployment rate is inversely correlated with 
private investment. Could you comment further on the ways that 
we can help spur the private investment and create jobs? I am 
also on the Housing Subcommittee, so if that relates at all, it 
would be helpful to me.
    Mr. Taylor. Sure. It is correct, it is both housing 
residential investment and business fixed investment. They are 
both highly correlated. And you can just see in the residential 
much more clearly where the pockets of high unemployment are 
right where we had the biggest boom bust in housing. Nevada is 
the classic extreme. But it is also business fixed investment.
    Here it seems to me the most important thing to do is not 
raise taxes on businesses, period. Try to find ways to reduce 
them where you can, or corporate rates are still very high. I 
think it is very important to think about these regulatory 
issues which some of you have raised in your opening remarks, 
both on the financial side, but also on the health care side, 
that really restricts the incentives for businesses to start 
up, whether it is small or big. And these start-ups, or these 
expansions, is what investment is. And so investment grows, and 
you hire people to build the equipment or construct the 
structure, and that is the most important thing, in my view.
    I think there tends to be too much emphasis on the short-
term things. Short-term stimulus to investment, and that maybe 
works a little bit, but then it peters out, and then we are 
stuck in the same situation. So I would think more long-term 
sustainable type of things.
    Mrs. Biggert. And can you give an example of that that?
    Mr. Taylor. Say the short-term incentives for businesses to 
write off for a period of time, they sound good, but then they 
go away and it is reversed. So if you can keep--I think keep 
the tax rates stable and certain so that a business, or you 
build a structure or a new plant the returns are going to be 
coming out for many years, not just 1 year.
    Mrs. Biggert. Everything seems to depend on uncertainty; it 
seems like that we have right now, thank you.
    Chairman Bachus. The gentlelady from New York.
    Mrs. Maloney. Thank you, Mr. Chairman, and I thank all the 
panelists. We did get some good news today; the Dow crossed 
12,000 for the first time since June 2008. And that shows that 
we have some liquidity going, which is a good sign of recovery.
    During this financial crisis, which was so painful, and it 
was difficult at times to get Congress to act. And at one 
point, we did not pass the TARP program, which put the banks 
and the money markets, some of them in my district, into a run 
on the markets. There were some that were calling me screaming, 
they could see it crashing. And when we finally passed it, they 
stabilized the markets, and I just came from a hearing with 
Treasury where they are saying that we literally made money on 
it by all accounts. Specifically, a report by a Democratic 
economist, Blinder, and a Republican, Zandi, that is probably 
the best thing I have read on it where they go into great 
detail on how this program helps salvage the markets.
    My question really is to Mr. Taylor, in your very 
thoughtful testimony, about the Federal Reserve and going to a 
rules-based policy. Some economists have given the Federal 
Reserve a great deal of credit for being flexible, reacting, 
taking risks that, in many cases, worked out for helping to 
stabilize the economy.
    So my question, Mr. Taylor, or Dr. Taylor, is would the 
rules-based policy that you are proposing rule out the ability 
for the Fed to act as they did in this last crisis with great 
flexibility and great courage and great innovation?
    Mr. Taylor. I think what it would have done, in my view, is 
prevent us from getting into the crisis, if the rules-based 
policy had been followed in advance. So you have to go back and 
say, if rates had not gotten so low, or if the rules on the 
books of the regulatory agencies had been enforced properly, 
rules-based regulation, then I think we could have avoided this 
crisis.
    With respect to, when the crisis came, and especially in 
the panic, at the time we are talking about with the TARP, I 
did give the Fed substantial credit for establishing the 
commercial paper, funding facility, the money market mutual 
fund interventions.
    Those seemed to me quite constructive. But the most 
important thing at that point was to reduce the uncertainty 
caused by the TARP. After the TARP was put into action, then 
you had the crash of the markets. That is when the S&P 500 
dropped by 30 percent. It wasn't until how that money would be 
used that the market stabilized. So there are lots of things 
going on at that point in time, but I would say, in my view, no 
better evidence that rules-based policy worked than going back 
to periods where it was followed and seeing how good 
performance was and looking at other periods where it wasn't 
and seeing how poor performance was.
    Mrs. Maloney. And so you are saying going to rules-based 
policy, if I understand you correctly, it would give us the 
format, but in cases of a crisis such as that to have some 
flexibility for the commercial paper and other things that they 
did?
    Mr. Taylor. Absolutely. In fact, my proposal to go back to 
the kind of reporting that existed before the year 2000 is just 
that. That reporting was that the Federal Reserve Chairman 
would come and report on the plans for money growth, and if 
there were deviations, the Chair would be required to say why. 
It is the same idea. I would like to suggest that kind of 
reporting requirement be reinserted, but it focused more 
generally on the strategy for the Federal Reserve. And if they 
decide to deviate from their own strategy, then they should be 
required to come here and tell you why.
    Mrs. Maloney. Dr. Kohn, would you like to comment in my 
remaining seconds?
    Mr. Kohn. Yes, Congresswoman, I would. I don't think that 
our interest rate policy was the main cause of the housing 
bubble. I think that the main cause was a breakdown in 
supervision in regulation, as well as a breakdown in the 
private markets ability to supervise and regulate itself. And 
that is what caused all this financial innovation, the CDOs, 
etc. that people didn't understand, the huge amount of 
leveraging, etc.
    We had in the 1980s and 1990s, a number of business cycles 
and a number of asset cycles--think about the S&L problem at 
the end of the 1980s, and the early 1990s that the Congress had 
to legislate taxpayer money to shore up the insurance fund--
that happened when Professor Taylor says we were following a 
rules-based policy. But it was a failure of supervision and 
regulation.
    Think about the dot.com boom and bust when we were 
following a rules-based policy according to Professor Taylor. 
So I think, following John's formula, that wouldn't have 
prevented what happened, maybe made a small difference around 
the edges. In the end, inflation was lower; inflation in 2006, 
2007 was 2\1/2\ percent. It is not that we had such an easy 
policy that CPI inflation got way high. I don't agree with 
that.
    I do think that the reporting of the Federal Reserve to the 
Congress could and should be strengthened. From my years of 
sitting behind this row, right behind Alan Greenspan and 
consulting with Chairman Bernanke, I think the dialogue between 
the Congress and the Federal Reserve is in vast need of 
improvement. And it is from both sdes. You don't need to pass a 
law for you folks to ask the chairman better questions.
    And I think too often the dialogue between the Congress and 
the Chairman of the Fed gets off on all kinds of directions 
where--I am going to regret some of these things I say, I 
think, but where Congressmen are trying to enlist his help in 
endorsing their particular ideas. I think the Federal Reserve 
should be required to say what its strategy is, not necessarily 
on a numerical basis, but how it will react to changes in the 
outlook for inflation and employment, what it expects the 
outlook for inflation and employment to be, and how its 
strategy is consistent with achieving the objectives that 
Congress has given it.
    And I think you guys need to ask really tough questions of 
the chairman about that. So I think that dialogue definitely 
needs improving. Whether you need to pass a new law to do that, 
I am open.
    Chairman Bachus. Thank you. At this time, the gentleman 
from New Jersey.
    Mr. Garrett. I thank the Chair. Just off the top, the name 
of the hearing that we are having today is, ``Promoting 
Economic Recovery and Job Creation, the Road Forward.'' I think 
what you are testifying to is right on the mark to describe 
basically where we are, what regulations are in place and 
whether it is Fed policy, as you were just--Dr. Kohn was just 
talking about or otherwise. These all go to the point of what 
do we need to do in order to get our economy back on track and 
create jobs.
    Let me go a little afield on the first question here, and I 
guess I will throw it out to Dr. Poole, but anyone else can 
just chime in real quickly on this. There was a piece on CNBC 
just this weekend with regard to Fed accounting, that is why I 
throw it out to you. It said in accounting methodology was just 
recently reported in their weekly report, which is argued that 
a change in the Central Bank to allow the Fed to incur losses, 
even substantial losses without eroding capital. Any future 
losses that are made, the Fed may have occurred said will now 
show up as a negative liability as opposed to a reduction in 
Fed capital, thereby making a negative capital situation 
technically impossible. That was a comment of Brian Smedley, a 
former New York Fed staffer.
    Are you familiar with the recent change they have on their 
accounting policy?
    Mr. Poole. I am not familiar with that, but I would like to 
emphasize the following very simple point, the Central Bank is 
not in business to make a profit; it is in business to make the 
economy work better. And if the Federal Reserve has to take 
losses to make the economy work better, to help create jobs, 
then so be it.
    Mr. Garrett. Right, but don't you want to have--I 
understand, but don't you want the transparency there to make 
sure--the argument goes, right now we saw what is going on in 
Greece and what have you, and the question is can our Federal 
Reserve basically ever go broke? This accounting change 
basically--I guess, the Fed, anybody else can chime in on this, 
the Fed does their own accounting methodology, we are not 
setting the accounting rules for the Fed, is that correct?
    Mr. Kohn. The Federal Reserve does its own accounting, but 
it is audited by Deloitte & Touche, I think it is D&T these 
days.
    Mr. Garrett. But the audit goes against the rules that they 
establish for themselves, right?
    Mr. Kohn. To a considerable extent, but the Federal Reserve 
follows GAAP accounting in most respects. I think the point is 
that this will be completely transparent, Congressman. If you 
want to take this account and subtract it from another account, 
in fact, transparency, if anything, will be increased, because 
that number will be right there published on a weekly basis. So 
it is not about transparency.
    To Professor Poole's point, this isn't about profitability. 
The viability of the institution is absolutely unassailable. 
You, the Congress, have given it the seignorage privilege. We--
the Federal Reserve--I am still doing that a little bit, I am 
sorry. The Federal Reserve issues the currency on behalf of the 
country and realizes the returns, and returns $30 or $40 
billion a year to the Treasury from doing that. And the capital 
on the books of the Federal Reserve is not, in any way, related 
to the present value of future stream of earnings.
    Mr. Garrett. Anyway, I don't want to spend a lot of time. 
But this puts it, as I understand it, as a liability to the 
Treasury as opposed to a liability of the Fed's balance sheet, 
which it has been up until this point in time.
    Mr. Kohn. This situation hasn't really arisen in a 
significant way before. But there have been a few occasions 
where the Federal Reserve delayed sending money to the Treasury 
in order to replenish the capital account. This is a little bit 
like a deferred tax asset on the books of a private 
corporation, I think.
    Mr. Garrett. Okay. Professor Scott, you talked about the 
issue of cost benefit analysis that you did there. So have you 
all--I am running out of time already. You have all the Dodd-
Frank rules where you are not going to have cost benefit 
analysis. Do you just want to elaborate quickly as to the need 
for those there and across-the-board in general, is that a good 
thing or a bad thing, and what should we be doing?
    Mr. Scott. I think if we are concerned about the impact on 
the economy when we are promulgating regulations, it behooves 
us to look at the costs and benefits of the regulation, pretty 
simple.
    Mr. Garrett. The Administration doesn't think so because 
they said they want to scrub all the regulations. There are 195 
regulations that are not here, 195 regulations that are just in 
the formal process, they won't be scrubbed. There are about 300 
regulations coming out of Dodd-Frank that won't be scrubbed. So 
on the one hand last night, they said let's scrub everything, 
but let's not scrub these 495 regulations and do the cost 
benefit analysis of it.
    Mr. Scott. We, at least, Congressman, should require that 
any regulations now in process be subject to cost benefit 
analysis. So not everything is done. They are in the process of 
asking for comments on the regulations. They haven't 
implemented very much regulation. If the Congress were to act 
now to require this, I think it would have a major impact.
    Mr. Garrett. Okay, thank you.
    Chairman Bachus. The gentleman from Georgia.
    Mr. Scott of Georgia. Thank you, Mr. Chairman. This is very 
frustrating to me, and I think very frustrating to the American 
people when we are trying to talk about jobs. The American 
people are suffering out here. And I think that this discussion 
from the title and moving from the title, not focusing, and I 
think it points to a kind of a schizophrenic approach we have 
to this whole issue of jobs and the Federal Government and the 
spending. It is kind of double-minded. How can we talk about 
spending money to invest in the economy to create jobs, and at 
the same time, we are talking about cutting the budgets, 
cutting deficits.
    There are those in this Congress who want to see the 
Federal budget cut by 25 percent, but there has been no thought 
as to what that means for employment and jobs. Eighty percent 
of that cut means putting people in the Federal Government on 
the unemployment rolls. There probably would even be a greater, 
if we follow a pattern of impact on jobs from the Federal 
Government, of adding to the jobless rate.
    And so how do we do both? How do we handle this tug of war, 
this confliction here? And what spending cuts from the Federal 
budget would amount to the least reduction in jobs? There has 
been no talk. Everybody wants to cut, cut, cut, but nobody is 
stopping to realize the impact that has and will have on the 
jobless rate. What do we do with that? How do we handle this? 
And might the Federal Government be playing a more damaging 
role as far as jobs, not only not being able to create jobs, 
but the biggest impact we may make is adding to the 
unemployment that is already out there with these Federal 
workers who will be cut from the budget. Can you respond to 
that? How do we do fit this round hole in to a square peg?
    Mr. Poole. Let me dive in very quickly. We have to remember 
that, of course, our aim is to improve jobs in the entire 
economy. Hiring more people into the Federal Government does 
not necessarily improve jobs in the entire economy. It may well 
displace people from private employment and that is exactly 
what I think has often happened. You get the surface appearance 
of more jobs because they are on the Federal payroll, or State 
and local government payroll, but in fact, they are being 
displaced from private sector job growth.
    Mr. Scott of Georgia. All right.
    Mr. Taylor. Actually, I don't think it is a square, circle 
issue. It seems to me there is a consistency here between 
reducing the growth of spending, reducing the share of GDP, if 
you would like, that goes to government spending and reducing 
joblessness. We have had huge increase in government spending 
as a shared GDP in the last 3 years. And unemployment has gone 
up. I am not saying that is the cause, but you should just 
think about that for a minute. If you look at some of the 
charts in my testimony, you see private investment is driving 
this unemployment rate. I think a closer correlation than you 
really can understand. But you have to think the best thing may 
be to get this budget under control, that may be the best thing 
to reduce unemployment.
    Mr. Scott of Georgia. Let me ask you this, what spending 
could be cut, in your opinion, from the Federal budget that 
would result in the least amount of job loss?
    Mr. Kohn. I think what the Congress needs to do is to think 
about the path of spending over time. So my personal view would 
be that cutting a lot of spending now would probably cost jobs, 
not necessarily whether it is Federal Government jobs or other. 
We do have a 9.5 percent unemployment rate, there are 
underutilized resources out there. It is not a case of trying 
to have both under these circumstances, but there is a huge 
amount of uncertainty about what the path to fiscal sanity 
looks like. And I think the Congress and the Administration 
need to get together and figure out that path, even if it 
doesn't involve cuts today, it will involve some adjustments in 
entitlements. There is just no way that the path to fiscal 
sanity, as Professor Poole pointed out in his testimony, can 
avoid doing something about Social Security and Medicare 
spending in the future, but there needs to be a commitment to 
doing something in the future to relieve the uncertainty about 
tax rates and spending.
    Chairman Bachus. Thank you. The gentleman from Texas.
    Mr. Miller of California. California.
    I love this conversation, fiscal sanity with a $1.5 
trillion budget deficit. Government has increased spending 
every year through this recession when businesses and the 
private sector have had to reduce spending. Husbands and wives 
sit at home determining how they will feed their families, pay 
their rents, pay the mortgage for the next month, and manage 
their finances through the next year. And we say, what impact 
will these cuts have on the Federal Government? Woe is us. If 
you look at the States, and counties and cities, public employ 
retirements is bankrupting this country. And we are more 
concerned about how these impacts might impact the Federal 
Government--these cuts might, is a ridiculous argument.
    We need to be competitive globally. And for us to do that, 
we have to stop mandating the private sector. We have to let 
the business community know and understand that we are not 
going to continue to mandate them tomorrow and steal the money 
from them tomorrow to make us be able to do what we want to do 
today.
    We are trying to compete with India and China. They have 
great ideas. They are going to grow jobs in their country. And 
we have the EPA closing down the harbor in Long Beach and LA, 
and the Mexicans building one in Mexico because regulation in 
California is driving them out of California. And we worry 
about what these impacts will have on the Federal Government.
    We need to start saying, What can we do to grow the 
economy? And just based on the basic money multiplier, every 
time we take a dollar out of the private sector, that is going 
to impact the growth of this economy. We cannot continue to 
take from the government and think we are creating jobs. No. We 
are hiring government employees. And what are we producing in 
the economy? More paperwork.
    And you ask businesses, Why are you not expanding? Because 
bureaucrats in local, State, and Federal agencies are mandating 
us to a degree, putting us through a process that is so 
protracted, we don't know what to do.
    I got a call from a dairy 2 weeks ago. They use a product 
on their floor that says, ``If you use a product, just notify 
everybody.'' You can use up to 10 pounds if you want to without 
any notification. You can use 500 pounds if you want to and 
just notify everybody. They used 30 pounds. It didn't impact 
police, fire. But they forgot to notify one agency. So they 
were fined by EPA $182,000 because they forgot to send a 
letter.
    Now what does that do to grow the economy? Nothing. And 
some of our witnesses today have talked about reducing 
spending, controlling regulation, reducing regulatory 
uncertainty. Basically, Dodd-Frank creates a tremendous amount 
of that. Reducing the size of the Federal balance sheet and 
keeping inflation in check; those are great. None of that has 
to do with the impact on the Federal Government because we 
don't tax enough.
    But what we are doing, based on the testimony I have heard 
today, is ruining this economy. We cannot continue to spend 
money we don't have. And then the President gives a speech 
saying, ``the top 2 percent are just going to have to pay more 
of their fair share.'' Look at how much they are paying. And 
every time we take more of their fair share, we hurt jobs in 
this country, because those are the people providing the jobs.
    So if we are going to be globally competitive, we need to 
make sure regulations are in check and not burdening the 
American companies that have to compete with China and India.
    We say China; you can't even own property in China. If you 
want to build a building, the government is going to own your 
property. You are going to build a building, and they are going 
to be joint partners with you. I have had three people from my 
community who have been held in China and had their passports 
taken from them because they owed a business in China some 
money. And it was a contractual dispute, did not go to court, 
but the Chinese Government said, ``Until you pay the money, you 
are not leaving our country.'' Now that is a great democracy. 
And we are having to compete with them. They are also fixing 
their currency based on ours so we cannot be competitive.
    We need to change the direction of this country. We need to 
stop looking to get into people's pockets and start protecting 
the American people. We need to say, ``We are not going to 
regulate you to death; we are not going to tax you death. We 
are going to create an environment where we cannot guarantee 
success, but you have an opportunity to succeed.'' And we are 
doing quite the opposite.
    So would you like to answer my question?
    I think we are headed in the wrong direction. I think if we 
keep talking the way we have talked in the last 2 years, this 
country is in dire straits. We are going to be in real trouble. 
We need to start talking from the perspective of the American 
out there who knows what they are facing in the economy. They 
are losing their jobs. The ones who have lost it are having to 
compete with 8 million illegals here who have taken their jobs. 
And we are talking in a presidential speech of making everybody 
legalized in this country and not protecting the American 
worker.
    We need to be on the side of the American workers. People 
who are in this country just trying to survive, are losing 
their homes. We need to change the direction of this government 
and make it responsive to them. This is supposed to be a 
democracy of laws established by the people to govern 
themselves. And we have become so heavy-handed, that does not 
work any more.
    I yield back. Thank you, Mr. Chairman.
    Chairman Bachus. Thank you.
    Mr. Green.
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Chairman, I think that if we are going to properly 
resolve or solve a problem, we at least ought to define the 
problem and know what the problem is. One can conclude that the 
elimination of a finger is appropriate for a hangnail, but I am 
not sure that is the best way to resolve the problem.
    Those who contend that Fannie and Freddie are the problem 
have to ask themselves: Did Fannie and Freddie mandate 3/27s 
and 2/28s? Did Fannie and Freddie mandate loans without proper 
documentation? Did Fannie and Freddie create an environment 
such that loans were made and those who made the loans were not 
responsible for them; they would simply pass them on to others? 
Did Fannie and Freddie create prepayment penalties that 
coincided with teaser rates? Did Fannie and Freddie conclude 
that the persons who created loans could have a yield spread 
premium that would allow them to force consumers who had good 
credit into subprime loans?
    All of these things can be traced back to the Alternative 
Mortgages Transaction Act. And those of you who would like to, 
you may check that and you will find that I am close. I may not 
have the title exactly right. But we deregulated. We decided 
that we would allow for greater products in the marketplace. 
And when we decided to deregulate and allow these greater 
products in the marketplace, we didn't consider the unintended 
consequences all of these products in the marketplace going on 
and being securitized and passed around the world, in fact; not 
just in the United States of America.
    So we really ought to properly define the problem before we 
decide we are going to eliminate Fannie and Freddie. Fannie and 
Freddie by any name will do the same thing. So those of you who 
want to give us another name--Annie and Teddie, Rough and 
Ready--you are still going to have the same circumstance to 
contend with. And at some point, we have to have a serious 
discussion about how are we going to continue to allow an 
individual with good credit to get a loan and allow that loan 
to move from the portfolio of the bank to a secondary market? 
That is really what we are going to have to at a some point 
have a look at.
    Next point: There is a lot of talk about uncertainty. Why 
do we focus solely on the uncertainty that businesses have? 
Consumers have uncertainty, too. Multiple uncertainty is what 
we are dealing with. And the notion that millionaires create 
jobs ought to be dispelled today. Millionaires don't create 
jobs. Demand creates jobs. Give a millionaire another million 
dollars, and if there is no demand, the millionaire pockets the 
million dollars, and he goes on or she goes on her way. If 
there is demand, then jobs will be created, because people 
respond to demand. No demand, no job creation.
    So we have to find a way to not only allow those who would 
facilitate the production of jobs by virtue of having capital 
to do so, but we also have to understand that there has to be a 
means by which this uncertainty that the consumer has can be 
overcome such that the consumer is willing to go back into the 
marketplace. Without the consumer in the marketplace, without 
the demand, the jobs don't get created.
    Dr. Kohn, do we have jobs created when there is not demand?
    Mr. Kohn. At the current time, there is an insufficiency of 
demand, I agree.
    Mr. Green. Let me just ask you, if I may, because time is 
of the essence. I am under the yellow light. You agree that you 
have to have demand to create jobs, true?
    Mr. Kohn. Yes.
    Mr. Green. Do you also agree, Dr. Kohn, that these exotic 
products were not mandated by Fannie and Freddie; that the 
genesis for them was a lack of regulation brought on by 
deregulation?
    Mr. Kohn. I think there is a lot of blame to go around. In 
the private sector--
    Mr. Green. But do we want to overlook that blame, is the 
question.
    Chairman Bachus. Let me--
    Mr. Green. My time was not up. It was on yellow.
    Chairman Bachus. Let me say this. Let's just pause for a 
second. The last vote is now going to be at 12:30. We have a 
second panel. After this question, and then Mr. Neugebauer, if 
we could go to the second panel, is everybody in agreement?
    Mr. Pearce, too?
    We will go two on each side. And then you can all question 
the second panel. Would you rather have your time on this 
panel?
    This panel? The second panel?
    We will reserve two for the second panel, and you all will 
go first on the second panel.
    Mr. Green. Mr. Chairman, may I just restate that question?
    Mr. Kohn. Fannie and Freddie did not create those CDOs and 
those exotic mortgages. And they came to the party kind of 
late. I do think that Fannie and Freddie were a systemically 
risky operation where the losses were socialized; the gains 
were privatized. And they need to be reformed. It is a position 
that--
    Mr. Green. And if I may say so--my time is up--I absolutely 
concur with you, but let's not overlook how the products got 
into the marketplace.
    Mr. Kohn. The private sector bears plenty of responsibility 
for what happened.
    Mr. Green. Thank you, sir.
    Chairman Bachus. Thank you.
    Thank you, Mr. Green. And the last vote is now going to be 
at 1:30. They have announced they are going to close the 
offices sometime before 4:00.
    Mr. Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    This is a great panel, and I wish we were going to have 
more time and could focus in more specifically on some of these 
issues.
    But, Professor Scott, one of the things that I heard you 
say a while ago was about the regulatory agencies doing some 
kind of cost-benefit analysis kind of before they get into the 
rulemaking process. And I think I heard you also say that you 
thought that they ought to have possibly a comment period on 
the analysis before they moved into the rulemaking process. I 
think that is a good idea, and I think that is, in the future, 
one of the things that may be something we may want to embed 
into the legislation. Would you agree that that would be 
beneficial?
    Mr. Scott. Yes, I do agree with that. The way the process 
works is when an agency proposes a rule, if it were to work 
correctly, they would do a cost-benefit analysis to justify the 
proposal that they were putting forward. We do build into our 
system comment periods on proposals. So insofar as cost-benefit 
was part of that, there would be an opportunity to comment.
    I think a key part of what I am saying is we should have an 
expert comment on that, which is OIRA. It is part of OMB. It is 
their duty to comment on cost-benefit analysis done by the non-
independent agencies under current executive order. I think 
that should be expanded. They should comment on the independent 
agency's cost-benefit analysis, but with a difference from the 
non-independent agencies, that comment would not be binding. So 
we would preserve the independence of the agency to take those 
views into account, do with them what they might.
    Mr. Neugebauer. I think one of the things that many of us 
are concerned with is we had a CBO estimate of what it was 
going to cost to stand up Dodd-Frank. Chairman Bachus and I are 
going to send a letter today to all these agencies that were 
impacted by Dodd-Frank to actually get them to furnish us a 
financial model of what they think implementation costs are 
going to be and continuing costs are going to be for this 
pretty massive blanket of new regulation. And I think that is 
appropriate. I wish maybe we would have done that in a little 
bit more detail before we got here.
    And when we talk about jobs, we need to get back to that. 
But when I look at Dodd-Frank, and I am going to ask the panel 
to respond, can you point to a provision in any of Dodd-Frank 
that made capital more available, that it made it more 
accessible, and that it lowered the cost of capital for 
companies and people who access capital? Can you point to me 
where in Dodd-Frank we actually maybe accomplish something that 
is important to job creation in this country, and that is 
capital access and cost?
    One of the things that I believe we have created in this 
country--back when people were making lending decisions and 
investment decisions, they were looking at credit risk, 
interest rate risk. I will tell you that Congress has created a 
new risk, and I think we need to start measuring it, and it is 
called regulatory risk. That entities lose their propensity for 
innovation or providing certain kind of products with some 
concern that they are going to somehow--either there will be a 
regulation down the road that will prevent them from continuing 
that business model or, even worse, that whatever road they 
have gone down, somehow somebody interprets a regulation that 
that is not appropriate.
    So, Dr. Poole, I will start with you.
    Mr. Poole. I do not believe that Dodd-Frank was 
constructive legislation--and that it missed the biggest 
problem--two biggest problems; one is obviously Fannie and 
Freddie, and the other is a frontal attack on ``too-big-to-
fail.''
    Mr. Taylor. I agree with those two points, plus it does 
things that really have nothing to do with the financial 
crisis. I would mention the new Financial Consumer Protection 
Bureau on that last.
    Mr. Kohn. I think Dodd-Frank is not a perfect piece of 
legislation; I don't think there has ever been such a thing. 
But it, combined with the capital requirements--higher capital 
requirements and better supervision--will make this financial 
system safer and more resilient. So will it increase credit 
tomorrow or next year? No, probably not. But will it help to 
prevent the kind of squeeze in credit that we had last year and 
the year before and the year before that? I think it reduces 
the odds on that.
    Mr. Scott. I am less sanguine about our capital rules than 
my colleague, Dr. Kohn. This is again, as I said before, not so 
much Dodd-Frank, but the Basel process over in Switzerland that 
is overburdening the financial system. And I think that 
Congress needs to get into the weeds on this. We can't let 
Basel go on without supervision. I think it is irresponsible.
    I think there are two examples where I think actually Dodd-
Frank may have improved things. First of all, I think in the 
securitization process, there was a lack of disclosure as to 
what the risks were on the underlying loans. And I think that 
actually impeded the process, made it worse. I think Dodd-Frank 
has corrected that.
    I think the provision in Dodd-Frank for central clearing of 
derivatives is going to reduce risk and make capital more 
available. I think what would be a very good idea, Congressman, 
is to do an inventory like this in a systematic way, which has 
not been done. And I think your question is very well taken.
    Chairman Bachus. The gentleman from New Mexico.
    Mr. Pearce. Thank you, Mr. Chairman.
    Again, we have 5 minutes. I don't want to cut you short, 
but I am going to ask about five questions. First of all, just 
in response to how many jobs we can cut or how much spending we 
can cut without hurting the economy, New Zealand tried this 
back some years ago, and they cut 63,000 jobs out of one 
department, from 63,000 down to 1, and their economy jumped 
from the bottom third of the world's economies to the top 
third.
    So, on the questions, first of all, I think, Mr. Taylor, 
the Federal Reserve started in 2008, October of 2008, paying 
interest on reserves, IORs. To me, that looks like that is one 
of the regulations that is somewhat impeding growth because it 
is causing banks, giving banks reasons that they would not to 
lend money; instead, they would hold it in the safe harbor of 
reserves. Is that a correct viewpoint? Is that the one that is 
incorrect? Should we reconsider that policy?
    Mr. Taylor. The rate is quite low at this point. I would be 
more concerned when rates get higher, what is going to happen 
with that--at this point--but now it seems to me that would be 
something to focus on as a problem.
    Mr. Pearce. We are losing the entire multiplier effect when 
we hold those bank reserves drawing interest.
    Mr. Taylor. When the Federal Reserve does begin to have to 
raise rates, I think it is important for them to go back to the 
strategy they used to have, which does not necessarily entail 
paying interest on reserves.
    Mr. Pearce. Mr. Poole, you talked about Medicare as being a 
problem. Has anyone to your knowledge ever done a study--I have 
talked to doctors who tell me for their time, they get maybe 
$15, $20 for seeing a patient. Is there anyone who has ever 
taken a look per transaction in the medical doctor's office how 
much the bureaucracy in Washington actually charges and 
receives? If we are paying the doctors $15, I would guess we 
are paying close to $100 a visit. Is there anyone who has 
actually quantified that?
    Mr. Poole. I am not an expert on health care--
    Mr. Pearce. You mentioned it. I am not asking you to be an 
expert. Is there someone who has quantified anything like that? 
You go into great detail, is the reason I am asking you. You go 
into great detail about Medicare.
    Mr. Poole. I don't know the answer to that.
    Mr. Pearce. You don't the answer to that. If you find that, 
I would appreciate knowing. I suspect we pay the bureaucrats 
far more per transaction than they pay the doctors, which, to 
me, is upside-down.
    Mr. Kohn, with the printing of money that the Federal 
Reserve has done, is there a risk in your opinion of inflation 
or hyperinflation in the near future?
    Mr. Kohn. No, not of inflation or hyperinflation in the 
near future. There is an inflation risk over the longer run.
    Mr. Pearce. You said no. I am willing to take no. They are 
seeing extraordinary inflation in China and other countries in 
food right now. The price of gold has skyrocketed in the last 
year. The price of silver has almost doubled in the last year. 
Are those not signs that the dollar is losing confidence?
    Mr. Kohn. I don't think so.
    Mr. Pearce. Okay. That is fine. You don't think so. I am 
really pressed for time. You don't think so, that is fine.
    Mr. Scott, you mentioned on page 14 that you believe the 
Federal Reserve has the expertise for making such decisions as 
blah, blah, blah, whatever is in your report, and yet when I 
look at the Federal Reserve, I asked Mr. Greenspan in this room 
before he left, and I asked Mr. Bernanke, ``Don't you think the 
hedge funds are causing us great uncertainty, maybe the 
instability of our entire economy?'' Both dismissed that. So we 
had long-term capital as a pre-warner, and then we had the 
collapse of the rating institutions and the insuring 
institutions before the major collapse.
    With all the expertise that you have put in the Federal 
Reserve, why do you think that they decided not to do anything? 
You declared that you believe in them. You declared that they 
do it. Why do you believe they ignored the warning signs?
    Long-term capital collapse, are you familiar with that 
collapse?
    Mr. Scott. Yes.
    Mr. Pearce. And the collapse of the rating institutions, we 
had four insuring institutions that collapsed about a year 
before we took those TARP votes, which I opposed. So any idea, 
as you place a great amount of faith in the Federal Reserve, 
any ideas why they may be, with all the expertise you attribute 
to them, they didn't get the thing right?
    Mr. Scott. I can't answer that.
    Mr. Pearce. You can't answer that. Would you speculate that 
Dodd-Frank is really dealing--there are many things that deal 
with derivatives and the hedge funds in Dodd-Frank. If we 
created a stable currency by stopping the printing of money, 
don't you think that many of the things that we need to 
regulate--and your presentation deals greatly with the 
regulatory process--don't you think those regulatory 
requirements disappear, to an extent, if we create a stable 
currency, one with value that is stable over a long period?
    Mr. Scott. No.
    Mr. Pearce. No. So hedge funds--you would be required to 
need a hedge fund if you had a stable currency. I think maybe a 
little bit differently.
    Mr. Chairman, thanks for the time.
    Chairman Bachus. Thank you.
    The gentleman from Connecticut.
    Mr. Himes. Thank you, Mr. Chairman.
    I have been sitting here listening a little incredulously 
to the discussion on debt, which is not unimportant, but of 
course, there is nothing about this committee that has 
jurisdiction over either the revenue side of that or the 
appropriation side of that.
    Nonetheless, I take very seriously what I might call the 
consensus at the table that this is a very serious issue. We 
heard it from the President last night. We are, I think, 
developing a consensus in this Chamber that we need to address 
it in a serious way.
    Though I do have questions that are germane to the activity 
of this committee, I do want to take a minute or two to pursue 
the future of debt. Looking back, we pursued Keynesian policies 
in the last couple of years.
    Professor Taylor, if we had more time I would ask you why 
you considered those deviant as opposed to orthodox. Of course, 
10 years prior, we added entitlements in Medicare, fought wars, 
and cut taxes in ways that led to where we are today.
    But I want to look forward and just ask questions here, yes 
or no questions. I have been watching the policies proposed by 
the Minority. And let's just take the two landmark policies, if 
you will. One is an extension of the 2001 and 2003 tax cuts 
which the Congressional Budget Office, which is nonpartisan, 
tells us is probably $4 trillion in deficit over 10 years. Now 
I understand that they may be off. They may be off by some. But 
does anybody on the panel here fundamentally think that the CBO 
is dead wrong about the $4 trillion over 10 years?
    Okay, I don't see anybody saying that.
    The Republican Study Committee has said and proposed $2.5 
trillion in cuts over 10 years. And we will talk about that. 
That is going to be a difficult thing. We do need to cut. I 
applaud their effort. I am sure I am going to disagree with 
things. But let's just accept that they can get $2.5 trillion.
    Now here is where I need the economists: Help me with my 
math; 10 years, $4 trillion minus $2.5 trillion. Can I conclude 
that the two hallmark proposals of the Majority will add, over 
10, years $1.5 trillion to the Federal debt? Anybody disagree 
with that math? No.
    Does anybody support--and I heard you, Dr. Poole and 
Professor Taylor in particular, on the urgency of addressing 
this--does anybody support those two policies in combination as 
things that this Congress should do?
    Mr. Taylor. The policy, it seems to me, is consistent with 
Professor Poole, is to get this deficit down and have CBO score 
a reduction in the debt rather than an explosion. And I think 
you can do that without any tax increases. I think it is very 
possible to get spending back to where it was in 2008, as is 
being proposed. And, moreover, I think as a share of GDP, there 
is no reason why we can't--
    Mr. Himes. But, Professor Taylor, time is short. You didn't 
disagree with the CBO estimate. And you--we are all accepting 
that there can be $2.5 trillion. We are stipulating that, not 
accepting it. So we are all agreeing that we are going to see 
an expansion of the deficit by $1.5 trillion. My question was: 
If those two policies in isolation were the two things we got 
done, would you be supportive of those two things?
    Mr. Taylor. When you say expansion, our current tax rates--
we have--just been extended for 2 years. I think it would be 
good to just continue that permanently.
    Mr. Himes. And accept the--
    Mr. Taylor. When you say what are revenues going to be, 
revenues are not the problem. Those are the same revenues we 
are getting now. Where is the loss of revenues relative to some 
hypothetical of tax increases?
    Mr. Himes. So, over 10 years, if we extend beyond the 2-
year period in which we have extended the 2001 and 2003 tax 
cuts, there is a revenue effect that the CBO has estimated over 
10 years. Granted, we have already taken a trillion of that, 
which is $4 trillion. That is my logic. You didn't disagree 
with me that $1.5 trillion is added to the deficit if those are 
the two policies that we enact.
    I want to come back because I actually have--this is not 
germane to this committee. I actually have a few questions that 
are germane.
    Dr. Poole, I am very interested in something you said about 
the possibility that the private market could fully substitute 
for the activities of Fannie Mae and Freddie Mac. The people I 
have talked to suggest that the 30-year fix, the refundable, 
long-term piece of paper, probably doesn't exist in the market, 
or, if it does, it exists at a very substantial premium to what 
it exists today. No government guarantee on the 30-year fix. Do 
you agree with that? And if so, do you have an estimate for how 
much more expensive the 30-year fixed mortgage is if there is 
no government guarantee or implicit subsidy?
    Mr. Poole. I don't have that estimate, but I will tell you 
this: If it is dramatically more expensive and you want to 
propose that it be guaranteed by the Federal Government, then 
it is the taxpayers who are picking up that cost.
    Mr. Himes. Agreed. But we could take the policy decision 
to, if you will, implicitly subsidize, as we have, the 
existence of a 30-year fixed piece of paper. I am just curious 
about what the effect is on the availability of the 30-year 
fix, which, let's face it, it is mom, apple pie, and core to 
American families. What is the pricing effect if we take away 
all government subsidy and intervention in that market?
    Mr. Poole. The mortgage market works just fine in other 
countries that do not have GSE-type institutions. And I don't 
know why you should conclude that the mortgage market can't 
work here; that there is something special about the United 
States' mortgage market.
    Mr. Himes. Does the 30-year fixed mortgage exist in those 
countries?
    Dr. Kohn, you are nodding ``no.''
    Mr. Poole. Probably not as extensive as the United States.
    Mr. Himes. My time has expired.
    Mr. Poole. The 30-year mortgage is actually typically not 
outstanding for anything close to 30 years. Most people are 
repaying them in about 7 years, anyway.
    Mr. Himes. Thank you.
    Mr. Chairman, I yield back.
    Chairman Bachus. Thank you.
    Mr. Duffy.
    Mr. Duffy. Thank you, Mr. Chairman. I just need to follow 
up on a few points that my colleague from Connecticut made. He 
is talking about increasing taxes, and he is looking at the 
amount of money that, if we increase taxes, would come into 
Federal coffers, I believe. Is there a correlation between the 
amount of taxes an investor may pay and the decisions they make 
to invest in their businesses or ideas? And I guess I will 
throw that to you, Dr. Poole.
    Mr. Poole. The answer is, of course. That is a no-brainer. 
Of course there is, because taxes affect the rate of return on 
an investment.
    Mr. Duffy. So it is fair to say that we aren't going to 
look at the same GDP pie and say, if we raise taxes by 4 
percent on a certain segment, we are going to be drawing from 
the same size of GDP. That very well may shrink because there 
is not enough--there is not as much investment, there are not 
as many jobs. There is not as much economic activity.
    Mr. Himes. Will the gentleman yield for 5 seconds?
    Mr. Duffy. No.
    Mr. Poole. I am not in favor of tax increases as--following 
my colleague here, John Taylor. But my emphasis above all is 
that tax increases cannot solve the problem. If we do not go 
full-bore on the spending side, we can't solve the problem. I 
would be willing, if you had a grand compromise, possibly, 
depending on the nature of it, to accept some tax increases. 
But if Congress keeps coming back to tax increases to solve our 
problem, that solution will not work. It will fail.
    Mr. Duffy. I would agree with you. Did you hear the State 
of the Union speech last night?
    Mr. Poole. Yes.
    Mr. Duffy. The President had proposed we cap spending at 
current levels as a way to get our budget under control. Do you 
think that is a sound plan to get our budget under control?
    Mr. Poole. I do not because I think that--it depends on 
what spending you are talking about. I suppose that he is 
talking only about so-called discretionary spending.
    Mr. Duffy. I think he was, yes.
    Mr. Poole. There are essential functions of government that 
are financed that way, such as the work of Congress, the court 
system, national defense, the maintenance of domestic law and 
order, and if we do not tackle the entitlements, then we are 
going to fail.
    Mr. Duffy. Yes. I am going to pivot here quickly. I think 
most of the folks in America here when they looked at this 
finance reform bill, or Dodd-Frank, they were concerned that it 
didn't address Fannie and Freddie. There was some outcry in 
northern Wisconsin especially. And I think folks are concerned 
about having a government backstop to these organizations.
    I have also heard, though, if we privatize Fannie and 
Freddie, there is a concern for what happens to our 30-year 
fixed rates, our mortgage rates, and also what that does to our 
housing market. Would any of the panel members speak to whether 
you favor privatizing Fannie and Freddie and what that would do 
to 30-year fixed rates?
    Mr. Poole. I am absolutely opposed to privatizing them, 
because it would put them back--after all, they were private 
companies before they were ``conserved.'' But they had such 
strong political ties that they ended up costing the American 
taxpayer a huge amount of money. And I would not want to risk 
that happening again.
    Mr. Duffy. Okay. Anyone else?
    Mr. Taylor. I like this idea of gradually phasing them out 
through changing the conforming loan limits. I think that is a 
good way to proceed. Otherwise, you could slow it down a little 
bit if you are worried about some of the particular mortgages, 
but I think we should do that.
    Mr. Kohn. I think we should constrain the role of Fannie 
and Freddie. I don't think they should be allowed to be 
portfolio lenders, for example. I think the Congress needs to 
think carefully about whether it wants to encourage home 
ownership among certain classes of folks, and a new, smaller 
Fannie and Freddie that was funded by insurance charges, for 
example, on the users might be part of that thing. I do also 
think we need to separate concerns about affordable housing 
from these entities. I think conflating those is part of what 
led to things. So address affordable housing separately.
    Mr. Duffy. Is there a correlation now with 30-year fixed 
rates and the implicit belief that government is backing up 
these loans?
    Mr. Poole. Not necessarily. That wouldn't have to be the 
case.
    And, incidentally, locking people into 30-year mortgages is 
not necessarily a good idea because it may reduce their job 
mobility. So I would let people make that choice themselves. I 
don't understand why the government should subsidize it and 
encourage people to go one direction or another.
    Mr. Duffy. Very well. Thank you very much. I appreciate it.
    I yield back.
    Chairman Bachus. Thank you. Our final questions will come 
from--no, we have two more members.
    Mr. Canseco.
    Mr. Canseco. Thank you very much, Mr. Speaker.
    These questions are directed to Professor Scott regarding 
Dodd-Frank. Dodd-Frank hands over even more regulatory power to 
the SEC and to the FDIC and to the Federal Reserve. These are 
the same agencies who were in charge during the last 10 years. 
Yet, during that timeframe, we have seen gigantic accounting 
scandals, such as Enron and Worldcom; billion-dollar Ponzi 
schemes, Madoff and Stanford; and a mortgage meltdown that has 
left millions of Americans unemployed and wondering if they 
will be able to pay their bills.
    The regulation was there. The money was there. But 
regulation failed. And now we have given even more power to a 
lot of these same agencies that failed the American people this 
last decade. Do we have any reason to think, in your opinion, 
that more rules and more money will produce a different outcome 
this time?
    Mr. Scott. I would like to think we learn by experience, 
Congressman. I think many of these agencies have learned 
lessons from these crises, and hopefully things will be 
improved.
    But I believe fundamentally that what has been lacking in 
the rulemaking process of these agencies is any serious cost-
benefit analysis. And I think it is incumbent upon the Congress 
to charge them with doing this.
    Mr. Canseco. Has recent legislation really altered the 
underlying structure of our regulatory agencies, which is what 
really needed to be changed?
    Mr. Scott. Structure?
    Mr. Canseco. Yes.
    Mr. Scott. Yes, absolutely. I commented on this in my 
written testimony. FSOC is not the answer to our structural 
problem. The President talked last night about reforming the 
Federal Government structure. Part of that Federal Government 
is the financial regulators. And since Secretary Paulson issued 
his Blueprint, our committee has issued recommendations for 
serious consolidation.
    I don't think--if you have the best policies in the world 
and you don't have a good way of implementing them, they are 
not going to work. And I think we failed on that. Dodd-Frank 
did not accomplish a real fundamental change in the regulatory 
structure our financial system has desperately needed.
    Mr. Canseco. Let me move into a little different area of 
Dodd-Frank.
    I come from Texas, and I have a huge swath of a lot of 
small towns, hamlets, and villages all through West Texas. In 
November of 2007, one month before the recession began, the 
unemployment rate in the United States was 4.7 percent. Today, 
it has actually doubled to 9.4 percent. Small businesses have 
been hit the hardest. According to the Small Business 
Administration, firms that employ fewer than 100 workers 
account for about 35 percent of the workers in our economy.
    In my district, which is the 23rd District of Texas, these 
companies are often financed by small community banks. And, 
unfortunately, it is these small community banks so vital to 
our economy that will suffer the most from overregulation, such 
as Pecos County State bank in Fort Stockton, Texas. It takes in 
over 50 percent of its deposits in the Fort Stockton area. 
Before the passage of Dodd-Frank, their annual audit cost them 
$30,000 to complete. And they have informed me that now it 
costs them over $112,000 to perform the same audit because of 
all these new regulations.
    Regulators have continually said small banks should not be 
overburdened, yet they are. Do you believe the supposed 
benefits that have come from Dodd-Frank, aside from what you 
have just alluded to, outweigh these costs to small banks that 
have resulted from this regulation--legislation?
    Mr. Scott. Congressman, I haven't done the analysis, but I 
would doubt it. There is a parallel here with SOX's 404 and its 
application to small business. And we went through a long 
period where everybody wanted to fully apply SOX 404 to all 
businesses. But to small businesses, it was a big deal. They 
had these costs, the small businesses; they couldn't afford 
them. So, finally, one good feature of Dodd-Frank for sure is a 
permanent exemption of the small business from part of 404.
    So I think we need to take a serious look at how all these 
regulations are, as part of our cost-benefit analysis, 
impacting small business. Because that is where our economy 
starts, with small business.
    Mr. Canseco. Ergo, a bad regulation.
    Mr. Scott. Yes.
    Mr. Canseco. I yield back the balance of my time.
    Chairman Bachus. Thank you.
    The gentleman from Ohio, Mr. Stivers.
    Mr. Stivers. Thank you, Mr. Chairman.
    I just want to follow up on a question from the gentleman 
from Texas and something that Professor Scott has been talking 
about all day. Does anybody on the panel have any reason why 
all these independent agencies should not perform a basic cost-
benefit analysis?
    Thank you.
    The second question I have is for Dr. Taylor.
    Dr. Taylor, you talked about how private investment--and 
you had the graph about how private investment drives our 
economy. And with businesses sitting on more retained earnings 
than any time in the last 50 years, is there a prescription to 
help them take that cash they are sitting on that obviously has 
the potential to create jobs and help them do that?
    And please try to be brief.
    Mr. Taylor. This uncertainty out there, which is continuing 
partly just because the economy is still--recovering is still 
somewhat still fragile, but in addition, I think all these 
regulatory issues, the uncertainty about what is going to 
happen with the debt, uncertainty about what is going to happen 
with taxes, uncertainty about regulations, uncertainty about 
monetary policy, I think those are all factors that could be 
addressed and would lead to a more healthy attitude about 
investing.
    Mr. Stivers. Thank you.
    Something Dr. Kohn said earlier I want to kind of address 
to the whole panel. Doesn't innovation help encourage demand? 
In fact, it is the psychology of demand. I would use the iPad 
as an example. I don't know if any of you own an iPad, but that 
is something that was just an idea a year and a half ago, and 
now everybody owns one.
    I guess I will put it to Dr. Poole--or Dr. Kohn, since you 
have said it before, does innovation help create demand?
    Mr. Kohn. Of course it does. New products, new innovations, 
new ways of doing things help increase productivity, and over 
time, productivity increases demand and living standards.
    Mr. Stivers. Thank you.
    To Professor Scott, you talked a little bit about--your 
third or fourth point was about regulatory reform. And I can 
count seven agencies if you are a big financial institution: 
the SOC, the SEC, the FDIC, the Federal Reserve, the new Bureau 
of Financial Protection; and the OCC. I don't know if I missed 
anybody. I think that is seven. And with the 200 new 
regulations that are coming in Dodd-Frank, if any of them are 
in conflict, how do these companies deal with this?
    Mr. Scott. The answer is, not well. FSOC has limited 
authority in some instances to try to reconcile differences 
between the age-old fight between the SEC, and the CFTC was 
granted some kind of muscle. But apart from that, we have seen 
the FDIC, for instance, disagree with the SEC on securitization 
issues, retention questions. This is going to go on.
    Mr. Stivers. Doesn't that actually reduce the ability to 
get capital to businesses and create jobs?
    Mr. Scott. Absolutely. Dysfunctional regulators are not 
helping our economy.
    Mr. Stivers. Thank you. One other question that I had was, 
I talked to a banker, a small community banker from First 
Community Bank, Roger Blair, in my area. He told me a story 
about a regulator. He has a gentleman who borrowed money for a 
commercial building 5 years ago. He has never been a day late 
on a payment. The cash flows are exactly the same. The building 
is leased the way it was at the beginning. The appraised value 
has gone down, obviously, by about 50 percent. And the 
regulators came in and made him write that loan down by 50 
percent. So every month when the man makes his payment, Roger 
has to basically find profit against a bad debt. Doesn't that 
reduce the amount that First Community Bank that Roger Blair is 
the CEO of has available to lend.
    Dr. Poole?
    Mr. Poole. The answer is yes. But we do need to be careful 
about picking out particular cases, because you need to look at 
regulation--
    Mr. Stivers. Let me ask you a follow-up question. I totally 
understand. Do bankers make loans on cash flow, or do the 
bankers make loans on loan-to-value? Because my grandfather was 
a banker. He made it on loan-to-value. My father was a banker. 
He made it on cash flow. And I am pretty sure the bankers today 
make it on cash flow.
    How do bankers make loans today?
    Mr. Poole. The problem with doing it only on cash flow is 
that if you have good reason to believe that the cash flow is 
going to stop, then the loan may be in trouble.
    Mr. Stivers. I understand. But what really determines 
whether a loan can be paid back?
    Mr. Poole. Obviously, the cash flow.
    Mr. Stivers. Thank you. I have just one last question. This 
is for the entire panel. Do we have a revenue problem in this 
country, or do we have a spending problem?
    Mr. Poole. I have said over and over again, spending.
    Mr. Taylor. Spending.
    Mr. Kohn. Entitlements.
    Mr. Stivers. That is a good point.
    Mr. Scott. I plead ignorance. I am not the economist on the 
panel.
    Mr. Stivers. Thank you.
    I yield back.
    Chairman Bachus. Thank you.
    Mr. Schweikert.
    Mr. Schweikert. Thank you, Mr. Chairman.
    I don't want this to come across as too esoteric. When we 
look at the debt overhang, whether it be nonperforming 
mortgages or the nonperforming assets, how much of a hindrance, 
in your opinions, is that to economic growth and job creation? 
I have been spending a lot of time looking at the amount of MBS 
out there, other assets that are not performing but are still 
sitting on our books. What is that doing to us growth wise?
    Mr. Kohn. On the books of banks, for example?
    Mr. Schweikert. Banks, or even within the secondary 
markets.
    Mr. Kohn. So I think certainly the increase in 
nonperforming loans and problem loans took capital away from 
banks. They needed to reserve for it, and it probably made them 
much more cautious in lending. I think there is some sense now 
that things are beginning to peak out and that, as the economy 
recovers, nonperforming loans would go down. And as I think one 
of your colleagues pointed out before, some of the more recent 
information from the Federal Reserve is that banks are becoming 
a little more aggressive in making those loans. Certainly, the 
increase in bad loans was a problem for banks that they needed 
to address. And that probably impinged on their ability to make 
loans for a while.
    Mr. Schweikert. Mr. Chairman, where I am partially heading 
with that is I am still stunned how much is still sitting on 
the books or is in the process of still moving into, 
particularly for myself, who focuses often on the real estate 
market, the amount that is delinquent but not actually 
technically in foreclosure.
    Just in my county, Maricopa County in Arizona, I have 
50,000 residential units that have been notified of 
foreclosure, and it is often said there may be 2, 2\1/2\ times 
that many that should have been notified.
    Mr. Kohn. I think moving through this problem quickly is 
one of the things that will help to reduce uncertainty, but it 
is a very difficult problem, given all the servicing that is 
scattered, the second mortgages, etc. But I agree that this 
overhang, the so-called shadow inventory of homes that might be 
foreclosed against or probably will be foreclosed against, is 
hanging over the housing market and impeding the recovery of 
that market.
    Mr. Poole. And will likely for some years to come. It is 
just a very big problem we dug for ourselves.
    Mr. Schweikert. Mr. Chairman, the last part.
    Does anyone have a brilliant suggestion on how we push this 
nonperforming overhang through the system; how we incentivize 
both lenders, secondary holders, whoever it may be, to help us 
chew this up? Because we are turning what appears to be a few-
year real estate depression and we are going to make it last 
well over a decade unless we get this off our books.
    Mr. Poole. I will just take a quick stab at that. I think 
we need to let that be done primarily in the private sector. I 
think the efforts of government to get into that business have 
simply not been very successful. And as I look at the numbers, 
the number of foreclosures that are assisted in some way by the 
Federal programs is simply not going to the heart of the 
problem.
    Mr. Kohn. I don't have any suggestions. It is a very 
difficult problem. The private sector is bringing more 
resources to bear on this issue. I think they are concerned 
about litigation, obviously. I don't have any quick answers to 
this very difficult problem.
    Mr. Schweikert. Mr. Chairman, thank you very much. Many of 
us believe, unless we can push through much of this 
nonperforming inventory, we are never going to hit our true 
bottom and never going to start to work our way back up.
    Chairman Bachus. Thank you.
    The first panel is dismissed. We appreciate your testimony.
    The Chair notes for the hearing record that members will 
have 30 days to submit additional questions to this panel.
    At this time, I will recognize Ms. Waters for an unanimous 
consent request.
    Ms. Waters. Mr. Chairman, I have an unanimous consent 
request to enter two statements in the record, one from the 
National Low Income Housing Coalition and the other from the 
Credit Union National Association.
    Chairman Bachus. Thank you.
    I also have an unanimous consent request that we introduce 
a letter from the Associated Builders and Contractors.
    If there is no objection to either request, they are so 
granted.
    We welcome the second panel. Thank you.
    I would like to take this opportunity to introduce one of 
the witnesses today who is a former intern of mine, a 
congressional intern, Eric Hoffman. His mother, back in, what 
was it, 1998--
    Mr. Hoffman. That is correct.
    Chairman Bachus. --mortgaged her house and started a small 
business, which today is Hoffman Media, and has a staff of 135 
and net sales or revenue of $42 million and publishes several 
magazines. Eric, once he graduated from the university, joined 
that office. He had, about a month and a half ago, called 
concerning some of the regulations that we had passed and how 
he was afraid that it would affect their funding going forward. 
So, we will listen to his testimony.
    One of our other witnesses, Mr. Charles Maddy, is president 
and executive officer of Summit Financial Group. Located in--is 
that in Kansas?
    Mr. Maddy. West Virginia.
    Chairman Bachus. Mr. Andrew Bursky, managing partner of 
Atlas Holdings. Where is that located?
    Mr. Bursky. In Greenwich, Connecticut.
    Chairman Bachus. Mr. Ken Brody, partner, Taconic Capital. 
Where is that located?
    Mr. Brody. New York City.
    We welcome all four of you gentlemen. Somebody had a flight 
at 4 o'clock, or was that the first panel? So we will be 
through by that time.
    So we will start, Mr. Hoffman, with your testimony.

STATEMENTS OF ERIC HOFFMAN, EXECUTIVE VICE PRESIDENT AND CHIEF 
             OPERATIONS OFFICER, HOFFMAN MEDIA, LLC

    Mr. Hoffman. Great.
    I want to begin by thanking Chairman Bachus and the members 
of the Committee on Financial Services for the invitation to 
speak today.
    I have had the privilege to work at our family business, 
Hoffman Media, and be part of an incredible growth story. As I 
strategize about both our company's continued growth as well as 
small business growth across the United States, I am concerned 
by recent changes in financial regulation, health care, and 
taxes.
    In this testimony, I will share with you the history of 
Hoffman Media; the concerns that I have on the Volcker Rule and 
long-term negative effects on small business and growth; and 
concerns of future burdens caused by health care reform and 
higher taxes.
    Overall, I am concerned that the significant changes we are 
seeing will hurt our future ability to grow, as uncertainty is 
the worst headwind we face. I remember President Obama said 
last night that we can do big things. It is possible to do big 
things, but uncertainty prevents that.
    Hoffman Media was founded in 1998 by my mother, Phyllis 
Hoffman, who currently serves as chairman and CEO. After 
successfully working for 5 years at a large publicly-traded 
company, she left the business. She acquired two magazines and 
financed the startup by mortgaging her house, a true sign of an 
entrepreneur.
    From 1998 to 2003, the company ran on an extremely tight 
budget, whereby all operating profits were reinvested in the 
business to fund continued growth through the launching of new 
magazine brands. In 2003, the company had approximately 20 
employees and generated approximately $4 million of sales. It 
was during this period that Phyllis decided in order to 
properly fund growth and scale the company both through organic 
growth and acquisition, that Hoffman Media would need to raise 
capital.
    Since Hoffman Media was not producing net income, it 
prevented the company from accessing traditional commercial 
lending from a bank. And after a 24-month search, interviewing 
private equity funds, Hoffman Media successfully raised $5 
million from BIA Digital Partners and Frontier Capital. This 
capital raised allowed Hoffman Media to complete a strategic 
acquisition of a complementary business and fund additional 
marketing and hiring needs.
    From the period of 2004 to 2010, the company has scaled, 
growing revenue from approximately $10 million to $40 million, 
while also growing our employee count from 20 to 135. The 
capital raised is worth explaining further. BIA Digital 
Partners provided mezzanine debt with warrants to the company, 
which Hoffman Media successfully paid back in 2009. The outcome 
was a win for all parties involved: it was a win for Hoffman 
Media; it was a win for the private equity firm; and it was a 
win for the LPs.
    I want to point out that half of the fund's LPs are banks, 
large national banks, some of the best institutions in the 
land. And I will go as far as saying that Hoffman Media would 
not be where we are today had it not been for the support of 
both BIA and also their LP support, which included banks.
    The Volcker Rule's proposed limitation on banks being 
owners in or holding equity in hedge funds and private equity 
firms concerns me in that if it is done away with altogether or 
it is limited to roughly 3 percent of tier 1 capital, which I 
believe is proposed, I fear this could lead to a substantial 
decrease in the funding that supports private equity, in 
particular, those covering the lower middle market.
    If the pie gets smaller and banks can only invest a small 
portion of their capital, my fear is that it will only reach 
the larger buyout funds and not the lower middle market. The 
total economics of those relationships with the larger buyout 
funds are obviously more important. However, the value created 
in larger private equity is generally done through leverage, 
dividending out excess cash, cutting costs, taking companies 
private, and then returning them to the public market later.
    Firms like Hoffman Media can obviously show that a private 
equity investment works. It works for us. We have grown a real 
sustainable business. We are now producing substantial sales 
tax that impacts the local sales levels. We generate taxable 
income. We have 135 people who are impacting our local economy 
every day by paying their mortgages, buying groceries, etc.
    My biggest concern is that if companies like Hoffman Media 
have additional hurdles that are put in place to prevent us 
from growing, it is going to slow down this economic recovery, 
I have no doubt. This recovery will come from small business. 
And it is businesses like ours. We have entrepreneurs who take 
risks, go after their dreams. And then when they scale and need 
that capital, if they can't get it from a traditional bank, 
which is incredibly difficult to do--we have tried, and it took 
us years to finally work with a traditional bank--it will have 
big negative impact on the recovery.
    In passing, I will say health care reform and higher taxes 
are also hurdles that can potentially slow down the economy. I 
know that as we produce profits, if the cost of our profit goes 
up by tax rates or our costs of operating goes up with health 
care costs, that directly steals money off the bottom line. And 
one of the Congressmen earlier said that millionaires don't 
produce jobs. The fact of the matter is if a millionaire is 
given another million dollars, they reinvest it. They don't put 
it in their pocket. And we are an example of that.
    So, in closing, I believe that the story of Hoffman Media 
is compelling. I urge the Members of Congress to pay close 
attention to our story because there are thousands of companies 
just like Hoffman Media out there. We don't want to put 
limitations on our banks. The fact of the matter is if they 
want to invest in smaller private equity firms or large buyout 
funds, it is their choice, but let's not limit the capital that 
is flowing down the lower middle market because that is where a 
significant amount of jobs will be created. Thank you very 
much.
    [The prepared statement of Mr. Hoffman can be found on page 
72 of the appendix.]
    Chairman Bachus. Mr. Maddy.

    STATEMENT OF H. CHARLES MADDY, III, PRESIDENT AND CHIEF 
           EXECUTIVE OFFICER, SUMMIT FINANCIAL GROUP

    Mr. Maddy. Chairman Bachus, members of the committee, my 
name is Charlie Maddy. I am president and CEO of Summit 
Financial Group. My bank serves communities located in south 
central and the eastern panhandle of West Virginia, as well as 
in the Shenandoah Valley and northern regions of Virginia.
    Summit Community Bank has more than a half billion dollars 
in small business loans. We contribute a quarter million 
dollars to our schools and nonprofit and community 
organizations annually, and our employees volunteer thousands 
of hours to support our schools, nonprofit organizations, and 
charities. We are very proud of the relationships that we have 
with our customers and community. They are our friends and 
neighbors, and our success is linked to their success.
    We now have the benefit of history, which clearly shows 
that community banks were not responsible for the great 
recession we are currently experiencing. However, banks like 
mine continue to be subjected to intense regulatory scrutiny. 
Calls for expensive and scarce capital and pressure to add 
compliance staff to deal with all the new regulations are 
currently plaguing us.
    How can I be out in my community helping someone improve 
their quality of life or helping a small business grow if all I 
do is deal with the aftermath of problems that I did not 
create?
    Let me give you a bit of perspective on this. We used to 
all know where we stood with capital rules. We could plan for 
growth and make new loans without being criticized for having 
too little capital. This has all changed. Banks are being asked 
to raise capital, in some cases, even if they are well managed 
and have no significant asset quality problems.
    Most importantly, there is no clarity on how much capital 
is required. It has clearly become a moving target. This 
uncertainty, combined with pressure to raise new capital, makes 
it hard to grow and seek new lending opportunities. Please keep 
in mind that the most efficient way to raise the capital ratio 
in one's financial institution is to simply shrink the size of 
your assets, including your loan balances.
    Another disturbing trend is that the new standards are 
being applied to banks without having a clear understanding of 
what they are. Banks should at least be told what ratios 
examiners are using as standards. Moreover, what used to be 
guidance is now being enforced as if there were hard and fast 
rules. In our case, the bright-line test currently being 
applied will reduce our ability to make new commercial real 
estate loans by over $100 million.
    The regulators in Washington seem intent on twisting the 
screws tighter and tighter. After all, regulators do not lose 
their jobs for being too tough. The time to be tough is before 
an economic turndown, not after. In fact, being tough makes 
things worse at this stage in the recovery. It is like adding 
fertilizer to your lawn in the heat of the summer; it is only 
going to kill the grass, not help it.
    Regarding the Dodd-Frank Act, it will have an enormous and 
negative impact on my bank. Already, there are over 1,000 pages 
of new proposed rules and there will be many thousands more, 
many of which will come from the Bureau of Consumer Financial 
Protection. We have already added one new full time member to 
our compliance staff and this may not be enough. These are 
resources that won't help us make new loans in our communities.
    We are also bracing for the loss of revenue from 
interchange. The so-called carve-out under Dodd-Frank for 
community banks won't work. Revenue from interchange is 
important to my bank, as it helps offset some of the cost of 
providing checking accounts to my customers. We cannot afford 
to offer financial services if we cannot cover the cost of 
doing so.
    The people who get hurt most by these changes are the 
hardworking men and women in West Virginia who earn just enough 
to make ends meet. They are currently able to get most of their 
basic banking services free of charge. If we lose fees like 
interchange revenue, free checking and similar services are 
likely to disappear for everyone. I think this is bad public 
policy.
    Summit Community Bank will survive these changes, but many 
other community banks may not. In fact, regulators have told 
some banks that if you are under $500 billion in assets, you 
may want to consider merging, as you may be simply too small to 
survive. This would translate to over 90 percent of all banks 
headquartered in my home State of West Virginia. Higher costs, 
restrictions on income, limits on new sources of capital, and 
regulatory pressure to limit lending in certain sectors all 
make it harder to meet the needs of our communities.
    Madam Chairwoman, I truly appreciate the opportunity to be 
here today and I will be happy to answer any questions that you 
may have.
    [The prepared statement of Mr. Maddy can be found on page 
88 of the appendix.]
    Mrs. Capito. [presiding] Thank you, Mr. Maddy. And I 
apologize for not being here to formally introduce Charles 
Maddy. I know he was introduced, but he is one of my 
constituents and has been a longtime and very active banker in 
our State. I thank you for your service to our State and your 
community. He lives in Moorefield. He is also an executive of 
the Federal Home Loan Bank of Pittsburgh, has been active with 
that as well and has been a great resource for me in terms of 
trying to unwind all of these issues, besides inviting me to 
his bank to meet all the great folks who work in Moorefield, 
which I said was not really named after me, but I will claim 
the ``Moore'' part of Moorefield. So thank you, Charles.
    Mr. Maddy. Thank you.
    Mrs. Capito. Where we are right now is we are voting. And 
so Chairman Bachus went to vote, so we can keep the hearing 
going. He is going to come back and relieve me, and then I will 
have to slip back out again.
    So I would like to recognize our next witness, Mr. Andrew 
Bursky, who is the managing partner of Atlas Holdings LLC. 
Welcome.

    STATEMENT OF ANDREW M. BURSKY, MANAGING PARTNER, ATLAS 
                         HOLDINGS, LLC

    Mr. Bursky. Thank you, Madam Chairwoman, and distinguished 
ladies and gentlemen of the committee. I appreciate the 
opportunity to address you today. I am Andrew Bursky. I started 
my first business in my hometown of Indianapolis when I was 11 
years old.
    Today, at Atlas Holdings, I employ 5,000 individuals 
directly or through the portfolio companies of my private 
equity fund. These jobs are the result of three kinds of 
private equity activity. We acquire struggling businesses and 
rehabilitate them by investing our own capital and extensive 
managerial resources. We grow businesses whose expansion had 
been stunted by capital or managerial constraints, and on 
occasion we will start a business and partnership with 
experienced operating partners.
    Our work is quite similar to that of other small to mid-
sized private equity firms, of which there are more than a 
thousand in the United States. Our collective activity has been 
a well documented, if not well publicized engine of growth for 
the U.S. economy for more than 2 decades.
    A recent study by Ernst & Young stated that 80 percent of 
private equity owned businesses increased employment during the 
period of PE ownership, even though most of these companies 
were in mature industries or had been stress companies when 
purchased.
    Another study for the Center for Economic Studies found 
that prior to investment private equity portfolio companies 
were losing jobs at a rate of 1 to 3 percentage points faster 
than their competitors. After PE investment, companies 
initially experienced a dip in employment that saw employment 
growth rates rise above industry averages within 4 years.
    Let me briefly share with you an example of our activities 
which occurred in Michigan, the State with the Nation's second 
highest unemployment rate. In 2002, we became aware of a 
shuttered specialty steel mill in South Lyon, Michigan. The 
mill, Michigan Seamless Tube, had been profitable for 75 years, 
but had fallen upon hard times as a result of problems at a 
sister division and a series of management blunders.
    The banks had taken over, dismissed the workforce, and were 
planning on a full liquidation. In these settings, rarely will 
an industry buyer appear. What is required is a private equity 
investor with the experience to work through a complicated 
bankruptcy and the operational skills to shepherd the business 
through the process.
    Working closely with the U.S. steelworkers in the State of 
Michigan, we crafted a plan to restart the facility. We 
committed $10 million of our own capital, enormous time, and 18 
months of sleepless nights. By 2004, the business was operating 
profitably and today MST employs 250 in high-paying 
manufacturing jobs in a State where every job counts. As an 
aside, MST ships about 20 percent of its production into highly 
competitive export markets, demonstrating that well positioned 
U.S. manufacturers can in fact compete globally.
    In 2010, two of our three transactions were similar to 
Michigan Seamless, our acquisitions of Bridgewell Resources, a 
Portland Oregon-based global trading company that was being 
liquidated through a Federal receivership, and Detroit 
Renewable Power, a shuttered green energy from waste business 
in downtown Detroit. All that kept these businesses from final 
liquidation was our willingness to invest our time and money, 
work cooperatively with affected parties to seek resolution to 
seemingly intractable problems, and bet on our conviction that 
we could undertake these challenges profitably. These two 
acquisitions in 2010 have already put more than 350 people back 
to work.
    Occasionally, we hear of a PE-owned overleveraged business 
failing or being forced to reduce employment, just as 
businesses not owned by private equity firms sometimes fail. 
But the work of the many small to mid-sized PE firms like mine 
is focused on saving and growing businesses.
    It is worth noting that a study by the private Equity 
Growth Council credits private equity with preserving 185,000 
jobs since January of 2008 through investments in 137 bankrupt 
businesses, to say nothing for the hundreds of thousands of new 
jobs created by providing capital to growing businesses.
    Unfortunately, this engine of economic growth is about to 
have its wings clipped as an unintended consequence of Dodd-
Frank. Harvey Pitt, former SEC Chairman, stated just last 
Thursday that, ``My own belief is that private equity firms are 
the engine of economic growth and we are now imposing 
restrictions on them simply for the sake of restrictions.''
    Shame on all of us, business people, financiers, and 
legislators if we fail to learn the lessons of Madoff and the 
financial crisis. So I applaud your efforts to create balanced 
legislation that addresses real problems of the past. But one 
important lesson of the financial meltdown is that private 
equity did not contribute to systemic risk. No investors were 
harmed, nor was there any lack of transparency or fraud 
perpetrated on investors by any private equity fund.
    We have asked the SEC to delay implementation of the Dodd-
Frank requirements on PE firms until the issues involved are 
thoughtfully reassessed. No public purpose is served by 
implementation but the costs are very real. We will spend 
hundreds of thousands of dollars and, far more damaging, we 
will reallocate our resources to registration, regulatory, and 
compliance matters and away from our highly productive focus, 
which has consistently created jobs for America.
    Thank you very much.
    [The prepared statement of Mr. Bursky can be found on page 
65 of the appendix.]
    Mrs. Capito. Thank you.
    Next, we have Mr. Ken Brody of Taconic Capital, and where 
are you located, Mr. Brody?
    Mr. Brody. New York City.
    Mrs. Capito. New York City. Thank you.

    STATEMENT OF KENNETH D. BRODY, PARTNER, TACONIC CAPITAL

    Mr. Brody. The last time I appeared before this committee 
was about 3 years ago when I was a lone ranger among a whole 
slew of hedge funds calling for mandatory regulation by the SEC 
of all hedge funds.
    Mrs. Capito. Mr. Brody, I'm sorry. I hate to do this but 
since I am the only one left, and we have a vote going, could I 
ask you to suspend and we will be right back?
    Mr. Brody. In mid-sentence, I will. We will see you when 
you come back.
    Mrs. Capito. The committee will stand in recess.
    [recess]
    Chairman Bachus. You started your statement, you may 
resume.
    Mr. Brody. This is better. Here we go.
    As I started out before, the last time I appeared before 
this committee was 3 years ago when I was the lone ranger among 
a slew of hedge funds that were asking for some upgraded 
regulation of hedge funds, and specifically asking for you all 
to make mandatory hedge funds registering with the SEC and then 
the SEC getting better with their oversight at what they do. So 
it is good to be back here again, on a different topic. I have 
a few comments. They will all be focused on Dodd-Frank, but I 
am open to any questions that you might have of me.
    Dodd-Frank is obviously not perfect legislation. It has 
flaws, but it is a step in the right direction. It is but a 
part of international regulation of the financial system, 
particularly Basel III, that is aimed at creating more equity 
in the financial system. The goal is to have safer and duller 
banks. And, so far so good, we are heading in that direction.
    In the United States, lending has picked up and most 
borrowers, not all, but most borrowers are getting the money 
that they need. To the extent that banks are still cautious in 
their lending, it is more a function of their recent history 
and current economic uncertainty than Dodd-Frank.
    Where certain companies can't borrow, particularly those 
seeking loans based on cash flows, help is on the way. Our free 
market economy works well, and there are a number of firms 
looking to plug that hole because they can make money by doing 
so. So I am not very concerned about the effects that Dodd-
Frank is having on the lending market in the near term.
    Of course, the bureaucracy involved in writing the rules 
and overseeing the rules for Dodd-Frank creates uncertainty, 
but the uncertainty involved with the writing of the rules will 
pass and we will end up with a sounder financial system. We 
should not look to go back to where we are. It was too loose, 
too liberal, and helped us land in disaster. So that is not the 
right standard to say, geez, we used to do that and now we 
can't do that anymore. We do need a safer banking system, and 
we are well on the way to creating it.
    Thank you.
    [The prepared statement of Mr. Brody can be found on page 
64 of the appendix.]
    Chairman Bachus. Do you have any questions, Mr. Green?
    Mr. Green. I will be very brief if you are going to pass, 
Mr. Chairman. You are going to pass?
    Chairman Bachus. I will let you go.
    Mr. Green. Okay, thank you very much. And I thank the 
witnesses for testifying today. As you know, we have votes and 
I did miss some of your testimony, but you did submit your 
testimony for the record.
    Let me start by asking a very basic question. What happens 
to a business that attempts to serve a clientele that doesn't 
exist or tries to cater to a demand that doesn't exist?
    Mr. Hoffman, would you quickly tell me what happens to such 
a business? If you try to serve a demand that there is no 
demand for the product, what happens to the business?
    Mr. Hoffman. I think that you know there is R&D that 
companies do to sort of figure that out.
    Mr. Green. Let me just say this to you, Mr. Hoffman, to 
help you along. It goes out of business. You can't cater to a 
clientele that doesn't exist and stay in business. Businesses 
stay in business because they have a demand that they satisfy. 
And my point that I was making earlier that I appreciate your 
addressing had to do with the fact that businesses are not 
going to invest when there is not a demand or at least the 
potential demand for them to meet. Innovation is a great thing. 
When companies innovate, they do so in anticipation of a demand 
that will be there. Demand drives these things. You don't just 
do it because you have money to invest, good business people 
don't.
    Moving to my next point.
    Mr. Hoffman. Can I respond to that?
    Mr. Green. Excuse me, sir, I control the time.
    Mr. Brody, is that correct?
    Mr. Brody. Yes.
    Mr. Green. Mr. Brody, I want to thank you for your comments 
because I think that Dodd-Frank has served a meaningful purpose 
as well. I am of the opinion that ``too-big-to-fail,'' nobody 
wanted it, but we did have to have a means by which we could 
wind down these huge institutions that were creating systemic 
failure. Dodd-Frank addressed the question of systemic failure. 
Is it perfect? My suspicion is, it is not, but we have at least 
made an attempt to move in a positive direction with Dodd-
Frank. Just as we wind down banks when they have problems, we 
go in on a Friday, shut them down and open them up on Monday, 
the FDIC has a means by which this can be done. This is another 
means by which we take on large institutions that can create 
systemic failure. So I think that there is a lot of merit to 
Dodd-Frank.
    The Volcker Rule quickly, before I left, there was an 
indication that someone was disenchanted with the Paul Volcker 
Rule. The Rule keeps banks from using taxpayer money in 
proprietary trading. Am I incorrect on that; anybody want to 
differ? Okay.
    Is there anything wrong with being concerned about how 
taxpayers may have to bail out institutions that engage in 
proprietary trading with taxpayer dollars and moving to some 
means by which we try to protect taxpayer dollars? What would 
we do if we had no such rule and a large institution 
overextends itself and is about to fail? Mr. Hoffman, what 
should we do?
    Mr. Hoffman. First of all, there is a big difference in--
and you have a difference between proprietary trading and also 
private equity investing. Those are two unique differences 
and--
    Mr. Green. I understand the difference between private 
equity investing, but do you not believe that we should in some 
way protect taxpayers who end up bailing out these companies?
    Mr. Hoffman. I think that private companies or corporations 
that are using their own capital to invest on their own 
account, they use it for more than just getting risky return 
rates, they do it for business development, they do it to allow 
companies like Hoffman Media and thousands of examples like 
ours. It gives us a chance to prove creditworthiness. So these 
alternative investments help them gauge how they build their 
business downstream.
    Mr. Green. I understand.
    Mr. Hoffman. Explain to me taxpayer dollars.
    Mr. Green. Excuse me if I may, sir, since I have the 
questioning time. Thank you. Should banks invest in private 
equity funds?
    Mr. Hoffman. Absolutely.
    Mr. Green. Should there be any limit on how much they can 
invest? And when they fail, what should happen, if that 
happens?
    Mr. Hoffman. The bank should go under.
    Mr. Green. And if the bank goes under and that failure is 
systemic and it impacts the entire economy, what should happen? 
The economy should go under?
    Mr. Hoffman. Is that what you believe?
    Mr. Green. I am asking you.
    Mr. Hoffman. I believe the bank should go under.
    Mr. Green. Okay, the bank goes under, banks go under. The 
entire economy is impacted.
    Mr. Hoffman. Right.
    Mr. Green. It is your opinion that is just the risk the 
economy takes by letting this do this?
    Mr. Hoffman. Correct.
    Mr. Green. Okay. Thank you. My time is up.
    Chairman Bachus. Thank you.
    Mr. Maddy, you are a community banker and you kind of have 
a unique view of ``too-big-to-fail'' because probably one out 
of every thousand businesses is deemed ``too-small-to-save'' 
when you have ``too-big-to-fail.'' How does that strike you as 
a banker of a smaller institution? Do you think there is any 
fairness in the ``too-big-to-fail'' doctrine?
    Mr. Maddy. As a small banker, and I speak for myself here 
of course, not the industry, I do think that we should have 
limits in place that keep institutions from being so large that 
they create risks that endanger our entire economy. I don't 
think that is sound policy, and I think it should be dealt 
with. And I think that we can do that, we can keep these 
institutions from being so large, and then we can allow them to 
invest in some of these private equity situations. Then, if 
they do go under, the whole process works, because it is true 
capitalism, and that is my opinion.
    Chairman Bachus. I think it would be true capitalism. If 
you are ``too-big-to-fail,'' you are ``too-big-to-exist.''
    Mr. Maddy. Right.
    Chairman Bachus. And I think actually Mr. Volcker and many 
of us in Congress say if our only choice is we either bail them 
out or they will bring down the economy if we don't bail them 
out, then they are just too big. The new report by the overseer 
of the TARP has said that Dodd-Frank actually institutionalizes 
``too-big-to-fail.'' So you have these institutions that are 
just--``you can't let me fail, I am too big, I'll bring down 
the economy.'' I think our choices are, are we going to bail 
them out or we are not going to allow them to exist in that 
form.
    I heard your testimony and had read part of it and it is 
the same conversation I have had with small banks and even 
regional banks all over the country, before Dodd-Frank, even 
before that, they were micromanaging your loans and second-
guessing your loan decisions. Do you believe that you are best 
able to make decisions on who to loan money to and under what 
terms or that a bank examiner or a regulator in Washington is 
best able to do that?
    Mr. Maddy. Clearly, I think that the community bankers are 
in the best position to make those decisions. I would even go a 
step further and point out, at least in my own experience, the 
examiners who have come onsite, the people who know the area 
and who have worked in those areas for years actually have been 
pretty reasonable throughout this entire process. Most of the 
stringent and overzealous actions have come from somewhere 
above. We don't know exactly where, but it is certainly 
somewhere outside of their hands, and in candid conversations 
to the degree they feel comfortable even admit that, that in 
some cases they don't really agree with this but this is just 
how it is.
    Chairman Bachus. I heard Paul Ryan use the same term I used 
last week when I was appearing before the--I was on a panel 
with Sheila Bair and Ben Bernanke--and that is ``American 
exceptionalism.'' We in America--the whole country was founded 
on the premise that we all have the freedom to succeed or fail 
and we don't look to the government to direct that or to pick 
winners or losers or to be there as a safety valve for a ``too-
big-to-fail'' company, that really the people are entrusted 
with the ability to make choices. And then they should live 
with those choices.
    If you are talking about the FDIC and insurance, deposit 
insurance, obviously if your underwriting standards as a whole 
bring risk to that, that is one thing. This idea, and I have 
talked to a community banker in Alabama, who a regulator, 
examiner, and he was new, had been on the job about a year, 
looked at an $8,000 car loan to an 82-year old woman whose son 
owned the biggest business in the county and said the car is 
not worth $8,000 and made him write it down to $6,000. Even 
though the loan was current, she owned her own house, and as 
the banker--and this is relationship banking. I think that 
examiners and regulators ought to appreciate those 
relationships and they should not violate those relationships. 
And when he said to this family--I have dealt with this lady 
for 30 years, her son is a customer of the bank, he is good for 
it, an examiner ought to trust the business, they ought to 
trust that you are in business to make a profit, not to go 
broke. I think what they are doing, I hear this, that they were 
too lax in the good times and you mentioned and now they want 
to kind of make it up.
    Mr. Maddy. Right.
    Chairman Bachus. The time to be tough, I think in your 
testimony, is before when there is--you were doing something 
before an economic turndown, and I think that is going to be 
one of our challenges, but I am not sure that we can all of a 
sudden start--you can't have capitalism without capital. And 
whether you reserve it under Dodd-Frank to telling end-users or 
derivatives, none of which still haven't seen a case where it 
caused any harm to our financial system or to those industries, 
by end-users like a Southwest Airlines or a John Deere hedging 
gasoline or fuel or currency. We have never seen an incident 
where they did anything that caused the financial system any 
concern or even that wasn't profitable to them, yet under this 
new bill, they have to reserve capital for that. They will be 
going into job creation. I will say there is a bipartisan 
consensus building that we need to change that. I have said 
before there are good things about Dodd-Frank, there are bad 
things and there are ugly things, and that is one of the ugly 
things.
    Mr. Green. Would the Chair yield for just 30 seconds, if I 
may?
    Chairman Bachus. I will. You have 2\1/2\ minutes.
    Mr. Green. Thank you, Mr. Chairman. I concur with you that 
there is a consensus building that we can tweak and we can mend 
the bill. I don't think that it is perfect. I do want to just 
make note of this. In a free market economy, it is very 
difficult to limit the size of private enterprise when the 
businesses are desiring to grow. I don't know how we in a free 
market economy will decide you are only as big as you can get 
now and if you get any larger we are going to find a way to 
downsize you. This is why you have to have some means by which 
you can deal with those, just as a matter of fact, who are so 
large that they can create systemic failure. There is no desire 
to have ``too-big-to-fail.'' I don't think any business is 
``too-big-to-fail.'' That is why we want to have a means by 
which they can wind down when they get in a position that they 
are about to fail. We don't want them to bring the economy 
down, and let's let them pay for their own failure. That is 
what Dodd-Frank proposes do, to put them in a position where 
they have to cover their own failure.
    And I am with the chairman, all businesses count. Small 
banks didn't create the crisis and we ought not have them pay a 
price that is unacceptable given that they were not a part of 
the problem. I stand with community bankers, but we also have 
to understand as a reality we had these huge conglomerates that 
were so large that they were impacting the entire economy. What 
do you do with them? That is what we--and we have tried to do 
something with them. And Mr. Chairman, thank you. You have been 
very generous with the time.
    Chairman Bachus. Actually, we have additional time, and we 
have a little time on the Floor. So if you want to ask an 
additional question, I think I will follow up.
    Mr. Green. I will go to Mr. Brody and I am going to ask 
that we make those names a little bit larger just for those of 
us who are still trying to read without our glasses. I think it 
is Brody, I can't quite see it.
    Mr. Brody, would you do this, in the absence of the 
mechanics in Dodd-Frank, what will we do in the future when we 
have these huge companies that may create systemic failure?
    Mr. Brody. The first thing that we do is what we are 
starting to do. First of all, it is the financial system that 
is the key to systemic failure. Most other companies can fail 
and don't have the interrelationships that causes systemic 
problems.
    With the big financial companies, the thing that you all 
are doing with Dodd-Frank and which Basel III will do is it is 
making these banks safer, basically safer and duller, by having 
them have more equity and engage in fewer volatile operations. 
So that is a big part, is to make it much more difficult for 
them to fail, and that is the direction that we are headed in 
and that is a good thing. That has other consequences but the 
world is about a tradeoff, and that is probably the key thing 
to look at going forward.
    With respect to--in spite of everything, what happens if 
there is a big systemic failure, you need to have a system in 
place which allows for a gentle, not-disturbing-the-rest-of-
the-world system that can help unwind it. One of the things you 
can do short of unwinding it is to attack the capital issues by 
having various forms of debt take hits, to basically have the 
institution save itself by being able to increase its equity by 
moving debt into equity, and there are bunches of efforts on 
that score going on around the world and that will probably end 
up being a big solution to the problem.
    Chairman Bachus. Thank you. Let me follow up with one 
question to our community bank representative. Interchange 
fees, how will that affect your bottom line and that of most 
community banks?
    Mr. Maddy. I think as a practical matter, when all is said 
and done, and I guess that is my biggest point, we can't allow 
it to affect our bottom line. We will have to make up for those 
fees in some other way, but it costs hundreds of thousands of 
dollars to offer free checking, free Internet banking, free 
debit cards, free services to so many of the folks out there 
who are balancing their checkbooks accurately and taking care 
of things and not incurring any fees whatsoever. And one of the 
ways we do that, frankly, is from the fees that we collect on 
some of these other products. And so what will happen is there 
will simply be a transfer of those fees. Either the lenders--
the borrowers will have to pay for it, other deposit services 
will end up making it up. In the end, somebody is going to have 
to pay the price because we have to continue to have a profit 
that makes it worthwhile for investors to want to buy our 
stock.
    Chairman Bachus. All right. Thank you.
    I appreciate the testimony, and I do think one thing that 
we highlighted here is that private equity companies and hedge 
funds as well as community banks can be part of the solution 
and that none of them I think were part of the problem. They 
didn't create a problem, they created jobs and they have 
sustained jobs, and we should be very careful in the level of 
regulation.
    Thank you very much for your testimony.
    The Chair notes that some members may have additional 
questions for this panel that they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses and to place their responses in the record.
    Also, we have an unanimous consent request to enter into 
the record letters from the National Association of Federal 
Credit Unions and the Manufactured Housing Association for 
Regulatory Reform. Without objection, that is so ordered, and 
this hearing is adjourned, thank you.

    [Whereupon, at 2:00 p.m., the hearing was adjourned.]


                            A P P E N D I X



                            January 26, 2011


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