[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
IMPACT OF MONETARY POLICY ON
THE ECONOMY: A REGIONAL FED
PERSPECTIVE ON INFLATION,
UNEMPLOYMENT, AND QE3
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
DOMESTIC MONETARY POLICY
AND TECHNOLOGY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
JULY 26, 2011
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-50
----------
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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
THADDEUS G. McCOTTER, Michigan BRAD MILLER, North Carolina
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK, GWEN MOORE, Wisconsin
Pennsylvania KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO R. CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
Larry C. Lavender, Chief of Staff
Subcommittee on Domestic Monetary Policy and Technology
RON PAUL, Texas, Chairman
WALTER B. JONES, North Carolina, WM. LACY CLAY, Missouri, Ranking
Vice Chairman Member
FRANK D. LUCAS, Oklahoma CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina GREGORY W. MEEKS, New York
BLAINE LUETKEMEYER, Missouri AL GREEN, Texas
BILL HUIZENGA, Michigan EMANUEL CLEAVER, Missouri
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
DAVID SCHWEIKERT, Arizona
C O N T E N T S
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Page
Hearing held on:
July 26, 2011................................................ 1
Appendix:
July 26, 2011................................................ 29
WITNESSES
Tuesday, July 26, 2011
Hoenig, Dr. Thomas M., President, Federal Reserve Bank of Kansas
City........................................................... 6
APPENDIX
Prepared statements:
Paul, Hon. Ron............................................... 30
Hoenig, Dr. Thomas M......................................... 32
IMPACT OF MONETARY POLICY ON
THE ECONOMY: A REGIONAL FED
PERSPECTIVE ON INFLATION,
UNEMPLOYMENT, AND QE3
----------
Tuesday, July 26, 2011
U.S. House of Representatives,
Subcommittee on Domestic Monetary
Policy and Technology,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:12 p.m., in
room 2128, Rayburn House Office Building, Hon. Ron Paul
[chairman of the subcommittee] presiding.
Members present: Representatives Paul, Jones, Lucas,
Luetkemeyer, Huizenga, Schweikert; Clay, Maloney, and Green.
Ex officio present: Representative Bachus.
Chairman Paul. This hearing will come to order. Without
objection, all members' opening statements will be made a part
of the record.
I want to welcome our witness today, President Hoenig.
And I will begin the hearing with my opening statement.
Over the years, I have been interested in the transparency
of the Federal Reserve (the Fed), and the Fed has been
interested in the independence of the Fed. But since I know
what Mr. Hoenig is interested in, I think he truly represents
the right kind of independence that I like, because he is a
rare individual to be at the Fed, or on occasion to be a member
of the FOMC.
But I want to note that last year when virtually everybody
was endorsing and welcoming QE2, he was dissenting against this
position, I believe, about 8 times. So that to me is truly
remarkable and shows that he is, obviously, an independent
thinker.
My interest, of course, in the monetary system has been
related to the accumulation of debt. I believe they are related
and that the size of government is indirectly affected by
monetary policy as well. If debt can be easily monetized, the
temptation for Congress to spend money is always there. And I
think that is a big, big distortion.
Mr. Hoenig has made his points made very clear, that maybe
interest rates of 0 to 0.5 percent might be too much, and he
actually has made statements about part of our problem prior to
the crash of 2008 was the fact that interest rates were too low
for too long.
And I often think about and like to clarify and expand as
much as possible the relationship of the problems that we have
today to our privilege of issuing the reserve currency of the
world.
Obviously, nobody has quite that same benefit. And,
therefore, our debt and our bubbles can get far more
exaggerated than if you are an independent country and your
debt is numbered in a currency that the world doesn't accept
like they accept our dollars.
So though that might be a very positive thing in the short
run, and give us some benefits, it also may be misleading to
us, because it is deceiving us into thinking that this process
can go on forever.
Today, we are in the middle of a default crisis. We are
worrying about whether the national debt is going to be
increased.
And I have an opinion that once the debt gets so big,
default is virtually impossible to stop and that the default
that we are worrying about right now is not strange and brand
new, because in many ways, our country has already defaulted.
If you look at our inability to follow up on the promises
to pay a gold certificate in the 1930s, that was a form of
default. And then, we promised to pay foreigners gold for $35,
and we eventually had to quit doing that.
We promised to pay the American citizens a dollar for a
silver certificate, and we defaulted on that. And eventually,
those silver certificates were not worth a silver dollar, but
they were then worth a Federal Reserve Note.
And even in 1978, we met a major crisis. It was a dollar
crisis, and we were not able to maintain the value of the
dollar. And we went hat in hand to the IMF and actually got
approximately $25 billion to $30 billion of boost to prop up
our dollar at that time.
So for me, that is a form of default, and I believe we have
embarked on a system where default is going to come. And I
think the argument and the impasse is because nobody wants to
really admit that the default is here, and we have to face up
to it.
The argument is, how do we default? Are we going to quit
sending the checks out, or are we going to do the ordinary
thing that countries have done for years and that we
continually do, and that is, we pay off our debt with money
with a lot less value.
To me, that is a default, but I see that as being unfair,
because some people suffer more than others. And, therefore, we
will eventually be pushed into some serious talks about
monetary reform, which I believe are actually occurring already
in international circles.
But my 5 minutes has expired.
And now, I will yield 5 minutes to Mr. Clay.
Mr. Clay. Thank you, Mr. Chairman. And thank you for
conducting this hearing on the impact of monetary policy and
the state of the economy.
The Full Employment and Balanced Growth Act of 1978, better
known as Humphrey-Hawkins, set four benchmarks for the economy:
full employment; growth in production; price stability; and the
balance of trade and budget.
The Humphrey-Hawkins Act also charges the Federal Reserve
with a dual mandate: maintaining stable prices; and promoting
full employment.
According to the Department of Labor, in June, the Nation's
unemployment rate was 9.2 percent. Over 14 million Americans
are looking for work. Another 5 million are underemployed at
jobs that pay much less than they previously earned, and offer
few benefits.
And in urban areas like the district that I represent in
St. Louis, the unemployment rate among African Americans and
other minorities is over 16 percent.
The Majority party has been in power in this House for over
200 days, and yet we have not seen one jobs bill, and America
is still waiting.
I am eager to hear what additional steps the Federal
Reserve is willing to take to free up the flow of credit to
small businesses and to encourage major banks to finally invest
in this recovery, instead of sitting on the sidelines with
trillions of dollars that could be creating millions of jobs.
I also look forward to the witness' comments regarding what
other urgent steps Congress can take to spur private sector job
growth and restore confidence in our economic future.
And with that, Mr. Chairman, I yield back.
Chairman Paul. I thank the gentleman.
Now, I yield to Mr. Luetkemeyer.
Mr. Luetkemeyer. Thank you, Mr. Chairman. Thank you, Mr.
Chairman, for holding this hearing today and for continuing the
dialogue.
I first want to recognize today's witness. President Tom
Hoenig has been a voice for reasons and fiscal conservatism
during a time when many of our economic policies have been
weak.
Tom has often been a lone dissenter who has encouraged
sound economic principles over politically expedient ones. Our
Nation is grateful for his service.
President Hoenig has expressed concern over Federal Reserve
monetary policies. Personally, I remain troubled by the
expansionary role the Fed seems to have been championing over
the last several years. What is more upsetting is the fact that
we don't seem to be any closer to changing course and
abandoning these policies, even though they don't seem to have
worked.
While a Federal program of quantitative easing looms, our
economy remains stagnant. Our jobless rate continues to hover
above 9 percent. Bank lending is still constrained. And we have
seen little evidence of a long-term economic growth.
Abroad, the credit markets have indicated that austere
measures are being taken by troubled governments. We are headed
down an identical path.
Since 2008, the Fed has purchased several trillion dollars
of U.S. treasuries, many of which are still held by the bank.
We have been warned time and time again that unless we get our
fiscal house in order, our credit rating is likely to be
downgraded. Considering the amount of treasuries held by the
Fed, the solvency of our central bank will undoubtedly be
affected by this downgrade, should it occur.
The current state of our economy, combined with the
problems we could face in the near future, results in a recipe
for economic distress. The Fed must begin to seriously examine
the policies in place and plan for worst-case scenarios that
could overwhelm our Nation in the coming months.
Congress rarely hears from the 12 regional Fed Presidents.
This is unfortunate, given their role as a financial regulator
in our communities and as an independent voting member on the
Federal Open Market Committee.
I appreciate President Hoenig's willingness to be here
today, and I look forward to his testimony.
With that, Mr. Chairman, I yield back.
Chairman Paul. I thank the gentleman.
I now yield to Mr. Green from Texas.
Mr. Green. Thank you, Mr. Chairman.
And Dr. Hoenig, thank you for appearing today, sir. I trust
that you will find our committee hospitable.
I think that we have many concerns that we can address.
And, of course, I am concerned about inflation, concerned about
unemployment, concerned about the quantitative easing and the
possibility of another round of quantitative easing.
But I must also say to you, I still believe in America. I
really don't want this to come across as, we have lost faith in
the country that has produced so much for so many. America is
still a pretty good place to live. A pretty good place to have
your dreams, your hopes, and your aspirations fulfilled.
So as I--I will speak for myself--make my queries and make
my inquiries known, I don't want to give the impression that I
no longer have faith and belief in this, the greatest country
in the world.
I am concerned, sir, about the widening gap, and I am not
sure that you can address this, but if you have some
intelligence that you will share, I would appreciate it, but
the widening gap between what we commonly call the haves and
the have-nots.
That is a real concern. I have seen some information
published indicating that Latinos, African Americans and Asians
have had a great widening in the gap between these groups and
some others. That concerns me.
I am also concerned about this crisis that you have very
little control over--you may be able to influence it, but
little control--and that is the raising of the debt ceiling, as
we call it. This ceiling is something that has become a crisis,
but it really is a political problem that has somehow evolved
into a crisis, a political problem that has evolved into an
economic crisis, if you will, only because the politics have
not come together appropriately.
And I still believe that we will get it right. I think that
there is still time for us to raise the debt ceiling.
But these are some of the concerns that I hope you will be
able to address today from your regional perch. I think highly
of you, and I am interested in hearing your views. I have a lot
of respect for you, and I thank you for appearing.
I yield back the balance of my time, Mr. Chairman.
Chairman Paul. I thank the gentleman.
Now, I yield to the full committee's chairman, Mr. Bachus.
Chairman Bachus. Thank you, Chairman Paul.
I commend you for holding this hearing to examine the state
of the economy from the perspective of a regional Federal
Reserve Bank President, and I thank you for inviting Governor
Hoenig, whom I consider to be a superb regional President.
Tom Hoenig, or Dr. Hoenig, is the longest-serving of the 12
Presidents of the regional Federal Reserve Banks. Perhaps
happily for him, but sadly for many of us who admire his
wisdom, he is soon to retire from that post.
You will be missed.
Dr. Hoenig has been a steadfast, independent voice among
those in the inner circle of Federal Reserve Chairman Ben
Bernanke, and before that, Chairman Alan Greenspan. He has been
particularly outspoken recently in cautioning against the
overly stimulative efforts of the Fed, including the so-called
QE2, quantitative easing program that ended last month after
adding an additional $600 billion in bonds onto the Fed's
balance sheet.
The New York Times said that Dr. Hoenig's cautious views
were clearly shaped by having worked at the Kansas City Fed
during the runaway inflation of the 1970s and the bank failures
of the 1980s, and ``seem rooted in an agrarian and populist
tradition that is mistrustful of concentrations of power.''
I think that is a healthy fear. It is not surprising, then,
that Dr. Hoenig has spoken forcefully on the subject of
downsizing the biggest of the country's large banks, including
a 2009 speech he titled, ``Too Big Has Failed.'' I can tell you
that on this side of the aisle, many of us are in wholehearted
agreement with you. And we have looked on with alarm as there
has been a greater and greater concentration of ``too-big-to-
fail'' institutions.
I mention all this not only to salute you, Dr. Hoenig, for
your career and your, I guess, bravery in speaking out, but
also to make a comparison between your views and the view that
is held by some in Washington that regional Fed Presidents
should not be allowed to vote on monetary policy moves made by
the Federal Open Market Committee.
Somehow, this view holds that regional Fed Presidents are
captive of big business and the industry, and I can tell that
you are a very good exhibit against that. In fact, I think that
more often than not our regional banks are more attuned to Main
Street.
And of course, you are not the only independent thinker
among the regional Bank Presidents, but your appearance here
today will serve as a good rebuttal to the view that the
Federal Reserve Bank Board of Governors in Washington, D.C.,
need less input from the regional Feds and the rest of the
country. Actually, they need more.
So thank you, Doctor.
And I yield back the balance of my time.
Chairman Paul. I thank the chairman.
And if there are no other opening statements, we will go to
the introduction of the witness.
I want to welcome Dr. Thomas Hoenig, who has been the
President of the Federal Reserve Bank of Kansas City for the
past 20 years and is the longest-serving policymaker at the
Fed. While a voting member of the Federal Open Market Committee
in 2010, he voted against keeping interest rates at zero,
casting the only ``no'' vote at all 8 FOMC meetings.
He has been a vocal critic of the Fed's zero interest rate
policy and QE2. He will be retiring in October, having reached
the Fed's required retirement age of 65.
Mr. Hoenig, you are recognized.
STATEMENT OF DR. THOMAS M. HOENIG, PRESIDENT, FEDERAL RESERVE
BANK OF KANSAS CITY
Mr. Hoenig. Thank you, Chairman Paul, and members of the
subcommittee. I want to thank you for this opportunity to
discuss my views on the economy from the perspective of a
President of the Federal Reserve Bank of Kansas City, and, as
you said, a 20-year member of the Federal Open Market Committee
(FOMC).
The Federal Reserve's mandate reads: ``The Board of
Governors of the Federal Reserve System and the Federal Open
Market Committee shall maintain long-run growth of the monetary
and credit aggregates commensurate with the economy's long-run
potential to increase production, so as to promote effectively
the goals of maximum employment, stable prices, and moderate
long-term interest rates.''
Within the context, then, of ``long-run,'' the role of the
central bank is in fact to provide liquidity in a crisis and to
create and foster an environment that supports long-run
economic health. For that reason, as the financial crisis took
hold in 2008, I supported the FOMC's cuts to the Federal funds
rate that pushed the target range to 0 percent to 0.25 percent,
as well as the other emergency liquidity actions taken to
stanch the crisis. However, though I would support a generally
accommodative monetary policy today, I have raised questions
regarding the advisability of keeping the emergency monetary
policy in place for 32 months with the promise of keeping it
there for an extended period.
I have several concerns with zero rates. First, a guarantee
of zero rates affects the allocation of resources. It is
generally accepted that no good, service or transaction trades
efficiently at the price of zero. Credit is no exception.
Rather, a zero-rate policy increases the risk of misallocating
real resources, creating a new set of imbalances or possibly a
new set of bubbles.
For example, in the Tenth Federal Reserve District, fertile
farmland was selling for $6,000 an acre just 2 years ago. That
land today is selling for as much as $12,000 an acre,
reflecting high commodity prices but also the fact that
farmland loans increasingly carry an interest rate of far less
than the 7.5 percent historic average for such loans. And with
such low rates of return on financial assets, investors are
quickly bidding up the price of farmland in search of a
marginally better return.
I was in the banking supervision area during the banking
crisis of the 1980s, when the collapse of a speculative bubble
dramatically and negatively affected the agriculture, real
estate, and energy industries, almost simultaneously. Because
of this bubble, in the Federal Reserve Bank of Kansas City's
district alone, I was involved in the closing of nearly 350
regional and community banks. Farms were lost, communities were
devastated, and thousands of jobs were lost in the energy and
real estate sectors. I am confident that the highly
accommodative monetary policy of the decade of the 1970s
contributed to this crisis.
Another important effect of zero rates is that it
redistributes wealth in this country from the saver to the
debtor by pushing interest rates on deposits and other types of
assets below what they would otherwise be. This requires savers
and those on fixed incomes to subsidize borrowers. This may be
necessary during a crisis in order to avoid even more dire
outcomes, but the longer it continues, the more dramatic the
redistribution of wealth.
In addition, historically low rates affect the incentives
of how the largest banks allocate assets. They can borrow for
essentially a quarter-point and lend it back to the Federal
Government by purchasing bonds and notes that pay about 3
percent. It provides them a means to generate earnings and
restore capital but it also reflects a subsidy to their
operations. It is not the Federal Reserve's job to pave the
yield curve with guaranteed returns for any sector of the
economy, and we should not be guaranteeing a return for Wall
Street or any special interest groups.
Finally, my view is that unemployment is too high today, in
part because interest rates were held to an artificially low
level during the period of the early 2000s. In 2003,
unemployment at 6.5 percent was thought to be too high. The
Federal funds rate was continuously lowered to a level of 1
percent in an effort to avoid deflation and to lower
unemployment. The policy worked, but only in the short run.
The full effect, however, was that the United States
experienced a credit boom with consumers increasing their debt
from 80 percent of disposable income to 125 percent. Banks
increased their leverage ratios--asset to equity capital--from
15-to-1 to 30-to-1. This very active credit environment
persisted over time and contributed to the bubble in the
housing market. In just 5 years, the housing bubble collapsed
and asset values have fallen dramatically. The debt levels,
however, remain, impeding our ability to recover from this
recession. I would argue that the result of our short-run focus
in 2003 was to contribute to 10 percent unemployment 5 years
later.
That said, I am not advocating for tight monetary policy. I
am advocating that the FOMC carefully move to non-zero rates.
This will allow the market to begin to read credit conditions
and allocate resources according to their best use rather than
a response to artificial incentives.
More than a year ago, I advocated removing the ``extended
period'' language to prepare the markets for a move to 1
percent by the fall of 2010. Then, depending on how the economy
performed, I would move rates back towards more historic
levels.
I want to see people back to work, but I want them back to
work with some assurance of stability. I want to see our
economy grow in a manner that encourages stable economic
growth, stable prices, and long-run full employment. If zero
rates could accomplish this goal, then I would support interest
rates at zero.
Monetary policy, though, cannot solve every problem. I
believe we put the economy at greater risk by attempting to do
so.
Thank you, Mr. Chairman, and I do look forward to the
committee's questions.
[The prepared statement of Dr. Hoenig can be found on page
32 of the appendix.]
Chairman Paul. I thank you for your statement, and I would
note that without objection, your written statement will be
made a part of the record as well.
Mr. Hoenig. Thank you.
Chairman Paul. I would like now to yield to Mr. Bachus for
any questions he would like to ask.
Chairman Bachus. I thank the chairman.
Dr. Hoenig, as I said in my opening statement, you have
been firmly outspoken about monetary policy decisions.
The Fed recently issued guidelines on how and when Federal
Open Market Committee members should discuss or could discuss
monetary policy decisions. Do you view this as an attempt to
control the message or to stifle dissenting voices?
And probably more importantly, Chairman Bernanke has
promised a more open Fed, a more transparent Federal Reserve.
And these guidelines, at least to me, seem a little
inconsistent with restrictions on your ability to speak out.
But I would like to know your views on that.
Mr. Hoenig. I hope not. I think part of the reason for the
guidelines are that there were instances, frankly, where I
would wake up on a Thursday morning and find what the future
policy might be in the Wall Street Journal, not having known
about it. And I think I raise objections to those kind of leaks
and ask that they be vigorously pursued, to be quite frank. So
I hope that is the reason.
Secondly, my approach is that I speak publicly, on the
record. I try not to speak off the record, so that there isn't
any confusion. And so when I come here, or wherever I go, I
speak my views. I don't consult with the Board of Governors. I
don't ask permission. I have until October, I realize, but I
have never done so, and if I were staying on, I wouldn't do so
in the future.
So I think it is a matter of personal choice. I don't think
any of the members should disclose confidential information or
leak to the media in advance. I strongly object to that, and I
would have every intention to speak on the record my views
publicly, regardless of what that statement might otherwise
say. And I don't think that statement prevents me from doing
so.
Chairman Bachus. Good, so the guidelines are more designed
to keep unauthorized releases and releases that aren't a part
of the public record?
Mr. Hoenig. That is the context in which they came up.
The fact that they are there, I think could have the effect
of stifling some, but I think that is a matter of someone
saying, ``I have spoken to this. This is my view,'' and show
the leadership to speak their views.
Chairman Bachus. Okay, good. And I am glad to hear that. I
think that affirmation--I think Chairman Bernanke has tried to
have a more open Fed, and I think he has been very candid with
our committee.
In your testimony, you used the rapid increase in farmland
value as an example of, maybe, credit misallocation resulting
from what you see as a too-low Federal funds rate. Do you see
any other bubbles building?
Mr. Hoenig. I don't--in fact, when people have asked me
about the land, I have not said it is a bubble, but I--
Chairman Bachus. Oh, yes.
Mr. Hoenig. But I do say that we have conditions. We have
created conditions. Zero interest rates, QE1, QE2 create
conditions that are amenable to bubbles.
And where we see asset values moving quickly, one example
is in the farmland. I think you can see it in other areas, some
of the bond markets and so forth. And so you have to be aware
of that.
I think my issue is that, when you create conditions for
certain outcomes, they will eventually arrive unless you
withdraw those conditions in a timely fashion. And I think that
is really the issue at hand.
Chairman Bachus. Okay. The Fed used to say it specifically
did not want to use monetary policy to reduce froth in the
markets. Chairman Greenspan said it in front of this committee
any number of times, or made that statement.
But is it appropriate for the Fed to avoid dealing with the
buildup of asset bubbles but, on the other hand, conduct
monetary policy aimed at reflating a market?
Mr. Hoenig. I think my view is that monetary policy should
be conducted with a long-term focus, with, if you will,
boundaries around its discretion, and therefore should not be
in a position of creating froth in the market any more than it
should try and somehow pinpoint some sector of the economy that
it thinks is too frothy, and try and adjust that.
So, really, what you have to do is conduct monetary policy
towards the long run. It is when you try and fine-tune monetary
policy, direct it towards particular sectors, or to offset
every short-term decline in the economy with extensive easing
of monetary policy, that you create instability, as likely as
deal with it.
Chairman Bachus. Thank you. I will come back in the second
round and ask other--I do want to say this, and I am just
throwing it out for thought and not asking for a reply now. I
have actually believed that QE2 gave the Congress an
opportunity to--some time to move to make some long-term
structural changes in our entitlement programs.
It is an opportunity that, whether it was intended for that
purpose or not, it certainly gave us an opportunity, and kept
financing the debt at a low rate, or lower rate, maybe. But the
Congress has squandered that opportunity, at least at this
time.
So I do believe that Chairman Bernanke's job has been made
harder by the inability of this Congress to make the tough
decisions and particularly to make needed structural changes in
our entitlement programs. And I think we will continue to make
problems for the Fed and probably result in inflation
ourselves, some of our actions.
So, thank you.
Chairman Paul. I thank the gentleman. I yield 5 minutes to
Mr. Green.
Mr. Green. Thank you.
Again, I thank you for appearing today, sir.
Let us start with the debt ceiling. And if you could, be as
terse as possible, because I have a couple of other questions.
Can you give your opinion as to the consequences of our failure
to raise the debt ceiling?
And if you can be brief, I would appreciate it, although I
know it is impossible on this question.
Mr. Hoenig. The failure to address your budget issues is an
action. It is a choice. And the consequences of doing that are
to add to the uncertainty in the economy. So the effects will
be, I think, in that sense, adverse.
I think the economy would do well with addressing the
budget crisis and the budget problems and providing more
stability and more certainty.
Mr. Green. In your opinion, would it be better to not raise
the debt ceiling or to raise it and have it done in what we
call a clean fashion--if it were those two choices?
I know there are many others, but is it better to raise it
and have a clean raising of the debt ceiling, as opposed to not
raise it at all?
Mr. Hoenig. The only answer I can give you to that is you
really need--that is the Congress' area of responsibility--
Mr. Green. But I am talking about the consequences.
Mr. Hoenig. But you need to deal with it as forthrightly as
possible.
Mr. Green. I understand, but are the consequences more
severe if we don't raise it than if we raise it with a clean
ceiling?
Mr. Hoenig. I think the consequences are there regardless.
It is a matter of the timing of the consequences and how you
want to accept those--
Mr. Green. So in your opinion, it could be just as bad to
raise the debt ceiling as we have done in the past, just have a
clean raising of the debt ceiling. That would be just as bad as
not raising it at all?
Mr. Hoenig. I don't know what the consequences will be any
more than anyone else does.
Mr. Green. I know, but you are in the business of
prognosticating, because that is what you do to decide whether
you should raise it the 1 percent that you are talking about
here.
Mr. Hoenig. If you want my prognosis, honestly, I think
what you need to do is address the budget crisis.
Mr. Green. I understand, but I am not ready to go there,
you see. I am giving you a set of circumstances and I am asking
you, if you would, to address this set of circumstances.
I know what you would like to do. I have been reading a
little bit, here, and I understand your point of view. But I am
taking you out of your comfort zone and--from time to time--
Mr. Hoenig. But it is not mine to decide. It is yours.
Mr. Green. I don't want you to decide. I just want you to
tell me about consequences of not deciding.
Mr. Hoenig. If you don't raise the ceiling immediately,
then the Congress and whomever else has to prioritize its
future cash flows. If you do raise it, you also will have to
prioritize it over time. In either case, you have--
Mr. Green. Let us go to another area, because--
Mr. Hoenig. --you have to make choices.
Mr. Green. I understand. My time is about up. Let me go to
another area quickly.
You wanted to prepare the market for a 1 percent increase
by the fall of 2010. Is that a fair statement?
Mr. Hoenig. Yes. And that was in an earlier part of 2010.
Mr. Green. Okay. All right, I understand the circumstances
were different than now. But if we had done this, we had
prepared the market, as you had hoped we would, what were your
thoughts in terms of what would occur?
Mr. Hoenig. Interest rates would still be at historic low
levels. Monetary policy would continue to be highly
accommodative, but yet you would be off of zero. You would be
no longer pumping enormous amounts of liquidity into the
market.
And the market would know. Right now, the market--what you
are doing is you are at zero. So you are creating--the market
is adjusting to zero, in all its allocations, in its
investments, in its bond funds, in its land, around an
equilibrium of zero.
I think most people acknowledge that zero is not
sustainable. So the longer you allow that to continue, the
longer you allow that allocation of credit and assets around
zero, the more fragile the equilibrium and the sharper the
consequences when you finally do remove that zero.
And I think, the more--
Mr. Green. I wanted to have a quick follow up, because I
only have 30-plus seconds.
You do agree that we don't have as much lending now as we
need for the economy to recover. And if we don't have that
lending at zero, what would be the circumstance at 1 percent?
Mr. Hoenig. I don't think that the issue around lending is
related to the immediate policy of the Fed funds rate being
zero. It is around the issues of the fiscal uncertainty. It is
around the issues of whether we have a resurgence of
manufacturing in this country that is sustainable. It is around
the issues of how we create goods, because it is the creation
of goods and services that brings jobs in.
And I don't think that the marginal choice for most
businesses around whether they would do this of zero or a half
a percentage point or 1 percentage point is the deciding factor
in that instance.
Mr. Green. My time is up.
And you have been very generous, Mr. Chairman. I thank you.
And I will wait for a second round.
Chairman Paul. Thank you.
Mr. Green. And I will follow up.
Chairman Paul. I thank the gentleman.
I will now take my 5 minutes.
I want to talk about the relationship of Federal Reserve
policy and monetary policy with the debt increase. We all know
that the Federal Reserve is the lender of last resort. The
economy gets into trouble, liquidity dries up, the Fed is
supposed to be there to help out.
But could it be that this concept of lender of last resort
contributes to the deficit problem? And what I am thinking
about here is that politicians, we in the Congress, get
pressure from a lot of areas to spend money. And sometimes
spending money helps us get reelected.
So, there are a lot of domestic needs, needs in our
districts. And also, there is a lot of activity around the
world, both violent and non-violent, that requires a lot of
money.
And in the inflationary part of the cycle when things seem
to be going well, it is very tempting for Congress to spend a
lot of money.
But if the Fed is always there to keep interest rates low,
doesn't that just encourage us? Congress generally is
undisciplined, but doesn't the policy feed into this? Because
if the Fed didn't do this, if they weren't our lender of last
resort and interest rates started bumping up, we couldn't blame
the Fed for our problems, we would have to blame ourselves--
high interest rates--because we are sucking up all the credit.
Do you see a relationship between Fed policy and the
encouragement or allowing Congress to spend more than they
should be?
Mr. Hoenig. I think there is always the danger that the
central bank can be put in the position of buying the
government's debt. That is why you have an independent central
bank and why the independent central bank has to pursue long-
run monetary policy geared towards what the basic money-based
requirements and needs are for the growth of that economy.
And it does require not only that the Congress be
disciplined, but that the central bank be disciplined as well
and not allow themselves to get drawn into that, yes.
Chairman Paul. But in a way, doesn't your testimony verify
that maybe the Fed didn't do their job because they kept
interest rates too low for too long, and we were part of the
problem. So how do you protect against that, if the Fed is as
fallible as the Congress?
Mr. Hoenig. There is no system that is infallible. Whether
it is the central bank doing this or the Congress doing it,
there is no system that is infallible.
Yes, I think that in the early part of the decade of the
2000s--as I have said many times--the policy was kept too
accommodative for too long. The consequence of that was to
create a credit bubble. It affected not only the Congress, but,
of course, the credit markets generally became very active.
That is why we had the tremendous expansion in credit in
housing and later the consequence. That is an area that we have
to learn from and go forward from. I don't think it is directly
related in terms of the Congress and the debt, but it is
related to the economic conditions broadly and the expansion of
monetary policy during that period. And I think we have to be
careful and mindful of that as a central bank.
Chairman Paul. I would agree that no system is infallible,
but it seems like we might get better information from the
marketplace, dealing with interest rates. Prices are very
important in the economy, and nobody is out there advocating
wage and price controls. We have tried it and, hopefully, they
never bring that back again.
But in a way, aren't we dealing with a price control and
you are looking for the price of money, the cost of money? I
think you talk about that, that the cost was too low. And it
causes a misallocation of resources. So how do you know what
the right price is?
Mr. Hoenig. I agree that you need to have a disciplined
monetary policy that has a range. Our long-term growth over
this decade has been about 3 percent real growth. Our policy
should be mindful of that as we conduct monetary policy going
forward.
And when we do go to zero and leave it there for an
extended period, in reaction to a crisis, that is one thing. If
we leave it there on a continuing basis, we do increase the
risk that we misprice credit and misallocate resources, yes.
Chairman Paul. It seems like it is a contest between
confidence in the market setting the price or the interest
rates versus somebody dealing with monetary policy. And some of
us have come to the conclusion that we like the market to set
that. We would like to see maybe the retirees get more for
their CDs.
Mr. Hoenig. Right, and I understand, but the market makes
terrible mistakes as well. And the market is responsible
because it gets, if you will, euphoric in a direction, creates
its own bubble around credit, because we are a fractional
reserve system. It crashes. The market itself isn't prefect
either. It causes--
Chairman Paul. My time is up, but we are going to have a
second round, and I want to ask about the fractional reserve
system.
Mr. Hoenig. Okay.
Chairman Paul. And now, I yield 5 minutes to Mr.
Luetkemeyer.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
And welcome to my fellow Missourian.
Mr. Hoenig. Thank you.
Mr. Luetkemeyer. Dr. Hoenig, it is good to have you here.
Mr. Hoenig. Thank you.
Mr. Luetkemeyer. Since 2008, the Fed has purchased several
trillion dollars worth of U.S. securities, treasury bills. And
as we have seen over in Europe, over there the countries, in
order to get their debt sold, have had to go to some very
austere measures, sometimes go back 2 or 3 times to review
their plans. Every time their interest rates have gone up in
order to be able to accommodate them.
We are being told by the credit markets that if we don't do
something within the next couple of weeks here, we are going to
have our securities downgraded. How does that affect the
solvency of the Federal Reserve to have all of those securities
that they are holding all be downgraded suddenly?
Mr. Hoenig. It depends on how the markets view this
downgrade. If it is downgraded and it doesn't affect the market
pricing on those securities, because they have confidence that
the Congress of the United States will come to a correct
solution on that, I don't think it will have much effect at all
on our solvency.
If the Congress fails to act, it will have a more lasting
effect. But they are anticipating that the Congress will act.
Mr. Luetkemeyer. As a former examiner, I am sure you--it
would be interesting to have the Fed on the problem list,
wouldn't it?
Mr. Hoenig. Yes.
Mr. Luetkemeyer. Along that line, though, the same thing is
happening with the rest of the banks in this country. If, for
instance, we did get downgraded, suddenly now those banks--so
your local community banks got a whole fistful of U.S.
treasuries. And now they are being downgraded, and suddenly
that affects their capital. It affects their rating.
How would you view that situation then--again, as a former
examiner--the calamity that would happen to our local community
banks?
Mr. Hoenig. If there was a serious effect from the
downgrade on the pricing of the bonds to where there was
capital loss in the bank, then of course it would have negative
effects. I think the question is whether it would be a pricing
effect, and I think that depends very much on the actions of
the Congress.
Mr. Luetkemeyer. It is an action that could happen on the
part of the credit markets to where it could be an increase in
risk that would have to be assumed there.
Mr. Hoenig. The failure to act is an action.
Mr. Luetkemeyer. Okay. Thank you.
With regards to--you mentioned a while ago--my time is
running out here--let me get to QE3.
We had Chairman Bernanke in here not too long ago, and he
wouldn't say anything about QE3. But since he has been here, he
certainly has not denied thinking about QE3. And to me, this is
a devastating situation.
We have had a number of economists in here since he has
been here, and every one of them I have asked the same
question, ``Do you see interest rates going up this fall as
soon as QE2 stops here?'' And every one of them said ``Yes,
unless you do a QE3, in which case you will probably have
inflation.''
Would you concur with that or do you have a different
opinion on that?
Mr. Hoenig. First of all, I am not a supporter of QE3. I
wasn't a supporter of QE2.
I think, by ceasing QE2, I don't know that interest rates
necessarily will go up significantly. It depends on a whole
host of factors in terms of how the economy is doing. It is not
just whether you stop QE2 over time. I don't think we should
mainly try and manage interest rates down. That is kind of the
point of my testimony. I think there are consequences of doing
that, that misallocate resources, and we have to be mindful of
that.
Mr. Luetkemeyer. Obviously, I agree with that. I am just
going along that line of thought, that among other things, the
Fed's job is to look long term with regards to interest rates,
with regards to unemployment.
And to me, this would seem to fit into a QE2, QE3. Where do
we stop this? At some point, we have to get control of--at some
point, the economy has to be resilient enough to stand on its
own two feet. We have to wean them off this.
If we are going to absorb all the debt that we are
incurring--and every budget whether it is Democrat, Republican
or whomever, we have debt out there. Everybody is agreeing we
are going to have more debt. So we are going to have to have
somebody to purchase it. And if the Fed doesn't purchase it,
somebody else is going to have to.
Mr. Hoenig. Correct.
Mr. Luetkemeyer. And if we get our securities downgraded,
risk is there, interest rates are going to necessarily go up.
So long term, how do you manage those monies to see that you
can minimize that? What would be your idea or a solution?
Mr. Hoenig. I think that the mandate is a long-term
mandate, and we need to keep that in mind. And if we do and if
we pursue a policy that is long-run oriented towards price
stability, then the economy--a market economy adjusts on its
own.
The market is not particularly brilliant, but it is harsh.
It corrects itself when there is a misallocation. And so that
is why monetary policy has to look to the long run, provide
sufficient liquidity, but not try and fine-tune or manage the
economy so that markets can in fact discipline themselves.
So we should not be doing QE3. This is my view. There are
plenty of excess reserves out there on the order of $2
trillion. I think that is plenty. Let the markets begin to
heal, and let this market of ours allocate resources in our
economy. And we should not try and fine-tune that.
I think when we do that, we inject instability as well,
more likely than we do stability. So we have to be very mindful
of that. In the short run, we can really inject instability. We
have to have a long-run focus. And that is hard, I realize, but
necessary.
Mr. Luetkemeyer. Thank you for your comments.
And thank you for your indulgence, Mr. Chairman.
Chairman Paul. I thank the gentleman.
I recognize Mr. Lucas for 5 minutes.
Mr. Lucas. Thank you, Mr. Chairman.
Doctor, as you are well aware, of course, I live in the
great Kansas City district in western Oklahoma. And about the
time you were out doing all that hard work in the early 1980s,
I was a senior at Oklahoma State. And I will always think of my
father's lecture in the spring of 1982 when I would
occasionally go to land sales with my grandfather: ``Keep your
hands in your pockets and your mouth shut.''
It was wonderful advice in 1982. The reason I bring that up
is we are now dealing with a set of circumstances here that you
have discussed and touched around the edges that in some ways
is reminiscent of those early 1980s. You remember, and
sometimes there is an occasional view here that nothing is
interconnected, that we are all little islands in the world.
You remember when Penn Square Bank went down, an energy-
concentrated banking establishment, which then took down,
directly or indirectly, Continental Illinois in Chicago, took
down Seafirst in Seattle, took down two major, historic long-
term players.
Partly that, in my opinion, and you can offer yours and I
would be pleased to hear it, as a result of perhaps misguided
fiscal policy by Congress and perhaps misguided monetary policy
by the Fed in that late 1970s and early 1980s period. But it
had a devastating consequence, and it wasn't just Oklahoma that
imploded. We sucked people under with us.
I guess that brings me to my real question, and whatever
comments you would care to offer. As my colleagues have alluded
to, with the Fed balance sheet at a little under $3 trillion
now, and even by a Texan's definitions, Mr. Chairman, that is a
lot of money.
It took us 15 years to recover from the agriculture and the
energy sector hangover from credit that started in 1982. In my
opinion, in my quadrant, it was 1997 before the ship righted
itself.
Three trillion dollars is a whole lot more credit than Penn
Square was manipulating. When the right policy decisions are
made, how long is it going to take this credit hangover to
clear?
Mr. Hoenig. Let me first comment. I was on the discount
window on Penn Square and was part of the group that
recommended against lending against Penn Square. And I think it
was the right decision there, although the consequences, as you
said, were very harsh.
Mr. Lucas. And for the record, a few officers of Penn
Square did go to the Federal penitentiary. It was more than
just a few bad decisions.
Mr. Hoenig. They did. Absolutely.
To your question of the degree of liquidity, the amount of
time it will take to bring the liquidity off our balance sheet,
the $3 trillion, I think, is reasonably a period of years.
Because we have brought this on, I think if you bring it
out too sharply, you will shock the economy. And in our last
minutes, the Open Market Committee talked about how they would
go about doing it in terms of rates and no longer renewing
their debt instruments.
But even under those, it will take years. How many years?
It depends on how the economy does. It depends on what the
roll-off of these instruments, the speed of the roll-off of
these instruments and whether we choose to sell those. I don't
know how long, other than I know it will take years, and there
are risks to doing that.
And that is my point about zero interest rates and creating
what I call ``fragile equilibriums'' around this very liquid
policy that when you finally do begin to move has a negative
effect, a negative consequence on the economy, both nationally
and regionally. And that does get my attention.
Mr. Lucas. Is it a fair statement to say, Doctor, that, of
course, we will make a decision at some point. We will, at some
point, I hope, achieve a consensus. We have legitimate
disagreements within the ranks of the House over what the right
policy is.
Mr. Hoenig. Right.
Mr. Lucas. That is the nature of the body. But at some
point, we will arrive at something. If we make the wrong
decision, whatever decision we come to, are the consequences as
frightening as I suspect they are?
Mr. Hoenig. Any time--
Mr. Lucas. Without commenting on any particular decision.
Mr. Hoenig. Right, anytime you make a wrong decision, there
are usually negative consequences. And if you make the wrong
decision, there will be negative consequences, whatever that
is.
Mr. Lucas. And the financial markets are sophisticated
enough that they will respond moment by moment with whatever
policy decisions we make, and will, as prudent money managers,
use what I would define from an Oklahoma perspective as
``defensive policies'' if they need to. And that will ripple,
too.
Mr. Hoenig. The greater the uncertainty you create, the
more defensive the actions will be. That much we can be sure
of.
Mr. Lucas. Thank you, Mr. President.
Thank you, Mr. Chairman. I yield back the time that I have
left.
Chairman Paul. I thank the gentleman.
We will go ahead and start a second round of questioning.
If we look at the markets in the last couple of weeks, in
light of all the conversation about whether or not the debt
limit will be raised, my estimation or my observation is that
the markets aren't that worried. Would you agree with that? Or
do you think the markets are showing problems, or at least
potential problems?
Mr. Hoenig. To this point, I think the markets at least
strike me as having the view that there will be a solution. And
as long as that view is in place, they will tend to stay calm.
If they lose that or if they begin to see more instability,
more uncertainty around it, and therefore actions, then they
would--as I said earlier--take more defensive actions.
But right now, I think they have confidence in you, the
Congress, and the President to come to some kind of agreement.
Chairman Paul. In monetary history, it has been said that
when countries get to a certain level of debt, they have a lot
of trouble, and the debt eventually has to be liquidated. I
personally think we are at that point, so there will be
liquidation of debt.
As a matter of fact, free market individuals recognize that
whether it is government debt or whether it is private debt,
liquidation actually serves a purpose in order to get back to
square one and have economic growth again.
When we liquidate debt, I believe I mentioned in my opening
statement, you can do it in two different ways. You can just
default, which great nations don't do. Small nations will. But
we are nowhere close, I believe, to doing that. I don't believe
that for a minute.
But I do worry about the other part. I worry about the
liquidation of debt, because if it is inevitable that the debt
will be liquidated and what we do may be prolonging the agony,
that is what I worry about, that instead of allowing the
liquidation and rapidly getting back to square one like we did
in 1921, that we prolong this, such as Japan did and such as we
did in the 1930s.
Do you agree with that? Do you have concerns that
liquidation will come in the form of inflation? And if you want
to prevent that, what are your other options, if we are not
going to default on our payments, which of course, I don't
believe we will?
Mr. Hoenig. First of all, I agree with you. I don't think
great nations default on their debt. Second of all, I will say
that I agree with you also, that we have leveraged our economy.
As I mentioned in my remarks, the consumer has raised their
debt-to-disposable income from 80 percent to 90 percent to 125
percent. The Federal Government has raised its debt to in gross
numbers 100 percent of GDP. So we have increased our debt.
My concern is that, maybe back to your earlier point,
perhaps, but when you have that kind of debt, over time there
is increased pressure on the central banks to help relieve that
debt pressure by helping finance that debt.
That puts pressure on the central bank. If they do that, it
does risk inflationary outbreak, and then you basically repay
your debt in cheaper dollars.
Chairman Paul. But isn't that--
Mr. Hoenig. That is a risk, so how do you avoid that? The
way you avoid that is you take, either through the Congress,
through special committees, whatever, and develop a long-run
plan that shows the American people how we are going to deal
with our debt, Federal and otherwise, but in the Congress,
Federal debt, and how the debt-to-GDP ratio is going to be
brought back down.
And if it does that in a systematic fashion, with a strong
binding point, then you will take care of the debt in a
responsible way.
Chairman Paul. But it seems to me in that attempt, the Fed
came in and they propped up banks and corporations, that they
were the ones that have been benefiting from this, and now they
have been able to get back on their feet again.
At the same time, it really didn't help the people. The
jobs didn't come back and the people lost their houses. So it
seems like it is a failed policy to me.
Mr. Hoenig. I understand your point. My concern is that we
have in this country allowed to develop ``too-big-to-fail''
institutions, the largest financial institutions, who bulked
their assets, and became so important to the economy that any
one of them that failed would bring down and risk the economy.
The market understood that and therefore gave them an
advantage in terms of their position in the market, lowered
their cost of capital, and allowed them unfettered access. And
when we allowed that part, the safety net portion of that to
get in with the high-risk portion, the investment bank, it only
increased that by factors.
So we do need to address the issue of ``too-big-to-fail.''
We do need to think about how we separate out the safety net
from the high risk so that the economy can function under a
market discipline, or at least more under market discipline,
and we would all benefit from that.
Chairman Paul. My 5 minutes are up, and I now yield to Mr.
Green.
Mr. Green. Thank you, Mr. Chairman. I will be honored to
let you have 30 seconds of my 5 minutes, if you need it.
Let us talk for a moment about lowering the debt-to-GDP
ratio. Do you agree that there is more than one way to do it?
Mr. Hoenig. Of course.
Mr. Green. Do you agree that cutting is a way to do it?
Mr. Hoenig. You can grow your economy--
Mr. Green. Grow the economy. You could also increase
revenue.
Mr. Hoenig. Of course. That is up to the Congress, how
they--
Mr. Green. I understand. But I just want you to be on the
record indicating that we have more than one way to do it.
Mr. Hoenig. Right. And every choice has a consequence.
Mr. Green. Every choice has consequences. And not making a
choice at all has its consequences as well.
Mr. Hoenig. That is a choice.
Mr. Green. Yes, sir.
Let us move to another area. You talked about markets and
the market being calm. You do agree that the markets, generally
speaking, don't like big surprises. When you give the market a
big surprise, it has a reaction to a surprise. If you lead the
market to believe that you are going in one direction, and if
you go in another direction, then the market responds.
Mr. Hoenig. Correct.
Mr. Green. I think one of the best examples of this
occurred when we had the $700 billion TARP vote, and the market
anticipated one thing, and when the vote went another way, we
saw the market spiral downward. You recall that, I am sure.
Mr. Hoenig. Sure.
Mr. Green. So you agree that markets don't, generally
speaking, want to be shocked with surprises.
Mr. Hoenig. Correct.
Mr. Green. Okay. If this is true, and you have indicated
that the market currently believes that we are going to resolve
this--and, by the way, I pray that we will--but you agree that
failure to bring about the resolution that the market
anticipates will create a reaction in the market.
Mr. Hoenig. Sure. It certainly will. If the market is
thinking one thing and you do something else, there will be a
reaction.
Mr. Green. One final question--
Mr. Hoenig. And that also happens on Main Street.
Mr. Green. Yes. And Home Street as well.
Mr. Hoenig. As well.
Mr. Green. Yes. But let us go back now to your support for
the 0 to 0.25 target.
Mr. Hoenig. I do not support it.
Mr. Green. You do not support it. But in 2008, you
supported the cut in the Federal funds rate that pushed us to
this target range, did you not?
Mr. Hoenig. I wasn't voting, but I am sure I would have
supported it. Yes.
Mr. Green. Okay. And, by the way, reasonable people can
have opinions that differ--
Mr. Hoenig. Absolutely.
Mr. Green. --even on the things that you supported, true?
Mr. Hoenig. Absolutely.
Mr. Green. And Mr. Bernanke, whom I happen to think highly
of and I have a great deal of respect for, and he has opinions
that are very well-respected, and there are other members of
the board with opinions, and you meet and you confer and you
vote, and then you come to conclusions.
Mr. Hoenig. Correct.
Mr. Green. So at the time what you were trying to do was
provide what I am going to call a soft landing. Is that a fair
statement, that we didn't want the economy to just crash?
Mr. Hoenig. Well--
Mr. Green. We wanted it to land a little bit softer than if
we had done nothing at all.
Mr. Hoenig. ``Soft landing'' is a generous term. I think we
did want to avoid a crash and depression, yes.
Mr. Green. Yes, a crash and a depression.
And if you say that you wanted to avoid it, it says to me
that you are of the opinion that had we not acted, there could
have been a crash and a depression.
Mr. Hoenig. Counterfactuals are always there, and that is a
possibility, yes.
Mr. Green. And counterfactuals are hard to prove.
Mr. Hoenig. Right.
Mr. Green. But the reason you acted the way you did was
because there was this concern--and I am being kind by saying
``concern,'' because there are a lot of other ways to connote
what was happening--but there were these concerns that we were
headed for something close to a crash or a depression.
And your actions, probably if you were to write a book, you
would say that your actions helped to avert this, would you
not?
Mr. Hoenig. If you are speaking of our movement to zero
interest rates and the liquidity we provided, yes, sir.
Mr. Green. Yes. Yes, that liquidity was helpful.
Mr. Hoenig. Yes.
Mr. Green. And just as it is difficult to prove a
counterfactual as it relates to what you did, it is equally as
difficult to prove it with reference to what Congress has done.
Do you agree?
Mr. Hoenig. I assume so, yes.
Mr. Green. Okay. All right. What I am trying to do is
establish this, sir. People of good will, and I consider you a
person of good will, acted at a time of crisis--
Mr. Hoenig. Correct.
Mr. Green. --a time when it appeared as though we were
about to go over the edge into an abyss unlike many of us had
seen in our lifetimes.
And many of these things that we did, we won't be able to
prove that we averted a great cataclysm, but we can surely
conclude that what we did probably helped to avoid a rougher
landing, a harder landing than we had.
Mr. Hoenig. Right.
Mr. Green. I want to thank you, Mr. Chairman. I will yield
back the balance of my time.
Chairman Paul. Thank you. I thank the gentleman.
I will yield to Mr. Luetkemeyer.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Dr. Hoenig, I have been watching what is going on over in
Europe very carefully, and it is very concerning to me. And I
know that in discussing this issue with a couple of other Fed
members--board members--they don't seem to be quite as
concerned about it as I am, so maybe I am an alarmist here. I
don't know.
But I certainly see a contagion there that could easily
spread to this country, especially whenever you look at our
banks having about $1.3 trillion loaned to the various
governments, invested in bonds of the various governments over
there as well as, now, Dodd-Frank tying all those big banks
together with ``too big to fail.''
It looks like there is a lot of connectivity between all of
these things here. And you look at a line of dominoes, and it
looks like we are in that line of dominoes.
So I know that the Fed has a swap line with the European
central bank and perhaps some other reserve banks over there as
well. And I am just wondering what your view is of that
situation, how concerned are you?
Mr. Hoenig. I am concerned--do you mean about the European
situation?
Mr. Luetkemeyer. Yes, the European situation and how it
will affect us or what kind of exposure we might have, our
monetary policy, how it interacts. It is kind of a big
question, but--
Mr. Hoenig. I understand your concern. The issues around
those countries that keep coming up are also really around the
banks, the European banks, because they, obviously, have
exposure there. And that is a big part of the efforts we are
trying to do to resolve this.
And like the United States, as I read it--and I only know
from what I read in the paper--they are working toward some
kind of solution, resolution around that.
But I think it proves to me not only in the United States,
but internationally that we have institutions that are ``too
big to fail.'' And that is what this is really about. We have
taken the market discipline away. We are now working with
institutions globally that are extremely important to those
economies, to our economy.
And to me, the whole issue continues to be around
institutions that are so large that their own difficulties have
broad effects on the economy, and that makes them ``too big to
fail'' and therefore forces, if you will, governments to come
in and bail them out.
And that is really what, I think, is going on in Europe and
that is really what has gone on in our crisis in the United
States.
Until we change that formula, until we break those
institutions up into those that are under the safety net and
those that are allowed to engage in high-risk activities, we
will have these crises periodically into the future--not right
away, perhaps, but in years to come.
Mr. Luetkemeyer. And the pitfall there is that we have our
taxpayer dollars at risk, because we are backing these ``too-
big-to-fail'' folks. Is that right?
Mr. Hoenig. When you put a safety net over them and put the
government's implied or explicit guarantee, the taxpayer is the
backstop, yes.
Mr. Luetkemeyer. In your position--and you are an
economist, and having dealt with all of the financial things
over the last several years, what do you see as the biggest
concern to our economy today, whether it is international
problems here we just discussed or oil prices or our monetary
policy, our wars or--
What do you see as the biggest concern and how we can go to
it from a financial aspect there?
Mr. Hoenig. That is a pretty important question.
Number one, I think that as far as our financial system
goes, I continue to believe that ``too big to fail'' is an area
that needs to be further addressed, and these institutions need
to have their risk better divided between what is under the
safety net and what is not.
Number two, I think that the budget crisis in the United
States is important because it is drawing all of our attention
into that. And yet the economy is in difficulty and we should
be thinking about our policies, do we want to see if we can
bring greater manufacturing onshore?
In 1960, 25 percent of our GDP was contributed by
manufacturing. Today, it is 12.5 percent. We have 14 million
people out of work. So what is our attitude towards
manufacturing? What is our attitude towards creating businesses
that create things then that hire people?
By not being able to pay attention to that in the Congress
and elsewhere, I think we are handicapping ourselves in an
international, global, competitive market, and we need to pay
more attention to it so we have a brighter future. I think that
is essential.
Mr. Luetkemeyer. I appreciate your comments. My time is up.
Thank you again for visiting with us today. I always enjoy
discussing things with you. I really appreciate your
perspective and all your hard work as well. I thank you again
for your service, sir.
Mr. Hoenig. Thank you, Congressman.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Chairman Paul. I thank the gentleman.
I have another additional question. If you care to stick
around, you may.
But I am not going to let you go so easily. I need to find
some answers. But I am very glad you are here and willing to
take our questions.
In your introductory statement, you mentioned that one of
the responsibilities of the Federal Reserve was to have maximum
employment, which sounds like a good idea, and stable prices.
I would look around and I would say, results aren't all
that good. When you look at stable prices of housing, you even
brought up the subject of unstable prices in farmland. That
quite possibly could be a bubble.
I would think that if you looked at bonds in prices, they
are very unstable. And who knows where that is going. If the
market overrides, which I believe is possible, markets are
very, very powerful. I know the Fed is very powerful, but I
also know markets are very powerful.
But also in your statement, I want to get back to it, we
talked a little bit about this, and you said, ``I have several
concerns with zero rates. First, a guarantee of zero rates
affects the allocation of resources.''
To me, I think that is very key and very important, because
it really brings up the subject that the free market economists
are very attuned to.
Ludwig von Mises, in his ``Human Action,'' talks about this
as the misallocations and of malinvestment, excessive debt,
money going into the wrong sectors, like farmland maybe or
NASDAQ bubbles and houses.
But he took that and carried it much further. It seems like
you have part of that philosophy, but not the full philosophy,
but you are, I am sure, aware of what von Mises says about the
Austrian theory of the business cycle.
Mr. Hoenig. Sure.
Chairman Paul. How do you look at that? Can you say
something favorable about his approach to it? Or can you draw a
sharp line where interest rates are harmful and know how to
divide the two? And what is your opinion of the Austrian
business cycle theory?
Mr. Hoenig. I have read ``Human Action.'' I have a lot of
respect for von Mises and I have a lot of respect for the
Austrian school of thinking. I think it has value.
I understand that when you overinvest, when you leave
things artificially low and you overinvest you create a
correction by doing that. There is an action with that.
My view is that is why central banks have to be mindful. No
matter what the system is, if you have markets and capitalism,
you are going to have cycles and you are going to have crises.
And what you want the central bank to do is address the crises
and provide over a long period of time a base liquidity of
money that allows your economy to grow.
When you move beyond that, when you find the central bank
focusing on short-term issues, trying to manage the economy,
trying to fine-tune it, then you create, if you will, impulses
of instability, because you are trying to take care of short-
run issues instead of looking to the long run.
That is why when I say the duty of a central banker is to
think long run, and that I think I am in agreement with the
Austrian school, but I do think there is a role for central
banks, as I have said.
Chairman Paul. I certainly agree with your point. Once they
overextend, they are into central economic planning, except
many have accepted the notion that you get into central
economic planning earlier than that, at the initial stages of
believing that you can know what the interest rates should be.
Maybe you can give me a quick comment on this. Do you think
the problems in the world today--try to put that in
perspective. I think it is a very big problem, because I don't
think we have faced it quite the same way, because we have a
fiat dollar standard, and we are the issuers of the reserve
currency of the world.
Do you think that has had an effect on what we are facing,
the fact that we are issuing the reserve currency in the world,
and it is much different than anything we faced before?
Mr. Hoenig. What I think is that the fact that we are the
reserve currency is a consequence of decades of very good
economic policy, the fact that we have had an economy that has
grown, become very important to the world, and therefore, its
currency has become very important.
I think that is a consequence, something you, as someone
also said, you have earned. With that is carried a
responsibility to look to long-run policy.
And to your point, if you have a gold standard, that is a
legitimate alternative monetary base for your economy. But it
does not eliminate crises. There is gold hoarding, there is
positioning, there is mercantile practices. You will have
crises.
So it doesn't matter if it is Congress, it doesn't matter
if it is the central bank, it doesn't matter what the standard
is. Good policy leads to good outcomes. Bad policy leads to bad
outcomes. That is what you have to keep in mind.
Chairman Paul. I would question whether we earned it or
not. In some ways I think it was defaulted, because we were the
standard. At least we pretended to be a good reserve standard,
even though we weren't allowed to own gold. It was an
international gold standard.
And then the confidence continued, surprisingly to some
people. So that is just a matter of an understanding or
semantics about whether it was earned or we defaulted into it.
But I have one more question. Because I have been
interested in the monetary issues, I am delighted that you are
here and so willing to visit with us.
But last week, I learned that gold was not money. So I have
been able to put that out of my mind. Gold is not money, so I
am still trying to figure out what money is. And I have asked
these questions a lot of times, I have asked the Federal
Reserve Board Chairmen over the years. And if I asked about
dollar policy, they would say, ``We are not in charge of dollar
policy.''
They are in charge of creating all this money and
regulating interest rates, but they are not in charge of the
dollar. The Secretary of the Treasury does that. But the
Secretary of the Treasury doesn't give me any straight answers.
What I need to know from you to further my education is,
tell me what a dollar is and where can I find the definition in
our code?
Mr. Hoenig. The denomination is, I think--or the title was
given back at just about the founding of our country. It was
based on a gold standard at that time.
But money is, as you know, a medium of exchange, deferred
means of payment and stored value. And as long as the public
and the world understands that the dollar that is produced by
the central bank of the United States, the base money, and then
credit goes on beyond that, it is money.
As long as they take it as a medium of exchange, deferred
payment and stored value. When that is lost, then it will no
longer be money.
Chairman Paul. But it is a note, it is a promise to pay.
Actually, you are right about it being--
Mr. Hoenig. But it fills the three functions of money.
Gold can do the same thing. And if Congress designated that
gold was the medium of exchange--
Chairman Paul. This is why I am looking through the code,
because the code, when I understand it, actually in the early
years they wrote a dollar into the Constitution like they would
write a yard, because everybody knew what it was, they didn't
even define it, it was so well known. It was 371 grains of
silver.
But that has never been changed, as best as I can tell, and
all of a sudden now we have a Federal Reserve Note, a promise
to pay nothing, is now the dollar standard and we can create
them at will out of thin air. And then sometimes people wonder
why we have a shaky, rocky economy.
I will keep looking for the definition of a dollar. But as
best as I can tell, we have never said a dollar is a Federal
Reserve Note. And the dollar under the code still says it is
371 grains of silver.
I yield to Mr. Luetkemeyer.
Mr. Luetkemeyer. I just have one follow-up question on
something the chairman asked a minute ago with regards to the
role of currency.
Because I think one of the consequences of us not doing
something to resolve our debt crisis here and then be
downgraded, it would seem to me to be a step down the path
toward allowing ourselves to be no longer the world's reserve
currency.
With China sitting over on the sidelines watching us
twiddle our thumbs and waiting for an opportunity to get in the
game, this is an opportunity. We are stumbling here and
allowing them to do that.
What would be your thoughts on that comment?
Mr. Hoenig. I do think it is a serious matter. I think the
U.S. currency, the dollar, is the reserve currency of the world
and will remain so for some time.
And part of it is, what are your alternatives? You always
have to ask the question. And the United States, for all of our
issues and all the debate going on right now, it still has the
deepest markets, is a market economy, has all the advantages.
It has open capital markets. China doesn't have that. Europe
has its issues.
So we still are the dominant economy. However, there is
nothing guaranteed about that. That can change based upon the
policies we choose going forward from here, both from a fiscal
side and from a monetary side and from basically how we choose
to have our economy operate in terms of the private sector and
markets.
Those will all define the future of us as an economy and
therefore the future of us as a nation as a reserve currency.
It will be what we choose to do.
Mr. Luetkemeyer. You just made the case from the standpoint
that almost by default, we are the reserve currency, because
China doesn't have all its ducks in a row yet to be that
currency. Europe has its own set of problems. And so you look
for the safest harbor, you look for the strongest economy. We
are still there.
But if we keep twiddling our thumbs here, it could be
endangered from the standpoint of the world sort of looking at
us and saying, ``Those guys can't get their act together--
Mr. Hoenig. I agree with that.
Mr. Luetkemeyer. --and their economy is stumbling along.
They don't have a manufacturing base anymore, and they are
going to import almost all the oil, which means they are going
to be at the mercy of the oil companies and the oil cartels
around the world.''
And all of a sudden our economy is looked at as kind of a
shaky thing versus a very stable thing. And now, we have those
other folks coming in there to fill the void.
And to me this debt debate, one of the sidelights and one
of the side consequences is that we are going down this road,
and nobody is thinking about allowing China to get their foot
in the door on the world currency side.
It is not going to happen today or tomorrow, but I have
heard some people project that in 5 or 10 years, if we don't
get our fiscal house in order, by that time they will be in a
position economically where they will have resolved a lot of
the issues that you talked about, and they may be knocking on
the door.
Mr. Hoenig. I agree.
Mr. Luetkemeyer. So what do you see on the horizon for
that?
Mr. Hoenig. I think that the debates that are going on
right now are about the long-run future of this country--how we
choose to deal with our debt, how we choose to deal with our
economy going forward. Those are the debates that are in place
right now.
My point is that monetary policy cannot manage the short
run, it has to have a long-run focus also. And the Congress and
how we choose to have our markets operate are choices that lie
ahead of us. If we don't choose well, in a generation, I think
the answer to that question could be different.
So it is in our power to change this or to keep us on the
right path, but you have to choose to do it. And these debates
are about the long run. There is no question about it.
Mr. Luetkemeyer. I certainly appreciate your common sense
and intellectual approach to all of our problems, Dr. Hoenig,
and I hope that you stay engaged in some aspect--
Mr. Hoenig. I hope so, too.
Mr. Luetkemeyer. --of monetary and fiscal and economic
policy here. You are too much of a prized jewel to walk away
from this. So thank you again for your service.
Thank you, Mr. Chairman.
Chairman Paul. Thank you very much.
We are about to close, but I do have one more short
question I think you can answer rather quickly. What would be
the ramifications if they stripped away the voting rights of
the regional Fed Presidents from the FOMC?
Mr. Hoenig. The ramifications would be you would lose an
important set of voices in the Federal Open Market Committee.
And I think it would be a mistake.
Right now in my region, as I deal with our board, a rancher
from Wyoming, a bookseller in Oklahoma, a labor leader in
Omaha--that is all input that comes into the process. I think
you would lose that voice, and you would lose that input.
And you can say, make them advisers. But let me just tell
you, voting and advising are two different things, and they are
not even close to one another.
I would just say, since you have asked, I have been there.
It is not democratic. It is not part of the political process.
And my answer has been the selection of my successor will be a
process that relies on our board, who represent, like I said, a
grain dealer in Kansas City, an entrepreneur in Denver, a labor
leader, a bookseller, a manufacturer, and a rancher from all
over our region, six of our seven States.
And they very carefully go through a search, and then it
has to be approved by the Board of Governors, the political
appointees.
So, to me, that is a very democratic process. And it is in
contrast to, if you select a Secretary of the Treasury who
happens--if you are a Democrat and you select a former chairman
of Goldman Sachs and you are a Republican and you select a
chairman from Goldman Sachs, that is political, but I don't
know that it is any more democratic than our process, and I
don't recommend it.
Chairman Paul. I thank you. I thank you for being here.
The Chair notes that some members may have additional
questions for this witness, which 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 this
witness and to place his responses in the record.
This hearing is now adjourned.
[Whereupon, at 3:37 p.m., the hearing was adjourned.]
A P P E N D I X
July 26, 2011
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