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




 
                 IMPROVING THE FEDERAL RESERVE SYSTEM:
                EXAMINING LEGISLATION TO REFORM THE FED
                         AND OTHER ALTERNATIVES

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

                                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

                             SECOND SESSION

                               __________

                              MAY 8, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-121


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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

           James H. Clinger, Staff Director and Chief Counsel
        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

                              ----------                              
                                                                   Page
Hearing held on:
    May 8, 2012..................................................     1
Appendix:
    May 8, 2012..................................................    45

                               WITNESSES
                          Tuesday, May 8, 2012

Brady, Hon. Kevin, a Representative in Congress from the State of 
  Texas..........................................................     5
Frank, Hon. Barney, Ranking Member of the Financial Services 
  Committee, and a Representative in Congress from the State of 
  Massachusetts..................................................     7
Galbraith, James K., Lloyd M. Bentsen, Jr. Chair in Government/
  Business Relations, Lyndon B. Johnson School of Public Affairs, 
  The University of Texas at Austin..............................    27
Herbener, Jeffrey M., Professor of Economics, Grove City College.    22
Klein, Peter G., Associate Professor, Applied Social Sciences, 
  and Director, McQuinn Center for Entrepreneurial Leadership, 
  University of Missouri.........................................    24
Rivlin, Alice M., Senior Fellow, Economic Studies, Brookings 
  Institution, and former Vice Chair, Board of Governors of the 
  Federal Reserve System.........................................    29
Taylor, John B., Mary and Robert Raymond Professor of Economics, 
  Stanford University, and George P. Schultz Senior Fellow in 
  Economics, Stanford's Hoover Institution.......................    26

                                APPENDIX

Prepared statements:
    Paul, Hon. Ron (with attachments)............................    46
    Brady, Hon. Kevin (with attachments).........................   176
    Galbraith, James K...........................................   230
    Herbener, Jeffrey M..........................................   240
    Klein, Peter G...............................................   256
    Rivlin, Alice M..............................................   272
    Taylor, John B...............................................   275

              Additional Material Submitted for the Record

Paul, Hon. Ron:
    Written statement of Hon. Dennis J. Kucinich, a 
      Representative in Congress from the State of Ohio..........   279
    Written statement of Hon. Mike Pence, a Representative in 
      Congress from the State of Indiana.........................   293


                     IMPROVING THE FEDERAL RESERVE
                     SYSTEM: EXAMINING LEGISLATION
                         TO REFORM THE FED AND
                           OTHER ALTERNATIVES

                              ----------                              


                          Tuesday, May 8, 2012

             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 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Ron Paul 
[chairman of the subcommittee] presiding.
    Members present: Representatives Paul, Luetkemeyer, 
Huizenga, Hayworth, Schweikert; Clay, Maloney, and Green.
    Also present: Representatives Garrett and Ellison.
    Chairman Paul. This hearing will come to order.
    Without objection, I ask unanimous consent that those 
nonsubcommittee members who are present be recognized if they 
wish to give opening statements or ask questions.
    I now recognize myself for 5 minutes for an opening 
statement.
    First, I want to thank our two colleagues for being here 
today, and they will be recognized shortly.
    But as many Members know, the subject of the Federal 
Reserve (the Fed) and monetary policy is something I have been 
interested in for a long time, believing that it has a great 
deal of significance with regards to a healthy economy. Today, 
we will be discussing the various proposals to address the 
subject of some of the shortcomings of the monetary system.
    I think what has happened here in these last 5 years is 
that it has been recognized by many that monetary policy and 
the Federal Reserve has a lot to do with the creation of some 
of our problems and their shortcomings when it comes to solving 
these problems. The Federal Reserve has been around for almost 
100 years--100 years next year--and, of course, it has gone 
generally under the radar. Not too many people have talked 
precisely, because it was always said that it should not be 
interfered with by the Executive Branch or the Legislative 
Branch.
    But lately, there has been more concern. With the help of 
Congressman Frank, we were able to get some transparency of the 
Fed, and he was obviously quite helpful in moving that along. 
From my viewpoint, we still have more to do on that, but it is 
very clear whether we decide exactly what constitutional money 
is and how it comes about. I don't think many people reject the 
idea that the Congress does have responsibility of oversight 
and figuring out exactly how to handle that.
    So with the crisis that came about in the last 5 years ago, 
I think an attitude changed dramatically. I think this is the 
reason that we had strong support in the last session for 
auditing the Fed and more information has come out because of 
the lawsuits.
    But the way I see the monetary policy, and I think it is 
generally neglected, is most people realize how big the economy 
is and they know by supply and demand of all products and goods 
and services and labor--but, generally, they don't talk a whole 
lot about the other half of the equation, and that is the 
monetary issue. The monetary issues are one half of all the 
transactions. So to duck the issue and pretend it is not 
important, I think, has been a mistake.
    I personally believe that over these many decades, the 
Federal Reserve has gotten a free pass because if we had good 
times, if they were able to stimulate the economy and have easy 
credit, and we had good times, they got the credit. Then if the 
predictable slumps would arrive and something had to be done, 
Congress would generally act and the Federal Reserve would act, 
and they would get the credit for getting us out of this slump.
    But I think that has changed in the last 5 years because of 
the seriousness of the crisis, how global it is, and how--one 
of the consequences has been this excessive debt, and then the 
bailing out that occurred.
    And so what the Congress did on the bailouts was 
significant but minor compared to how much the Federal Reserve 
was able to do. For this reason, so many people want to know a 
lot more about what is going on.
    Not only do we want to know about policy--and a lot will be 
discussed today about the particular policies and how to guide 
that policy--but one thing we should not forget about is the 
nature of money. If we are trying to describe how we manage a 
monetary system, it seems to be most difficult, in my view--you 
have to be able to define money, and define the dollar, which 
has not been done for a long, long time. We use the Federal 
Reserve note as the unit of account, but there is no legal 
definition of a Federal Reserve note, and that is a pledge to 
pay something.
    So a note being something precise, and then you have to 
have management and it doesn't work well, then we think, we 
just need more regulations and everything will work out 
smoothly. I have a lot of reservations about that because I 
think we have a lot of inflation, we have a lot of instability 
in prices. And even when the reports come out that the prices 
are rather stable, they seem to ignore the fact that the cost 
of living for many is going up significantly. The price of 
energy goes up, the price of medical care goes up, the price of 
education goes up.
    So even when the CPI and the PPI might not be revealing 
what is happening, there still is a lot of destruction of the 
value of money. For this reason, now, we have been in a decade 
or so where the real wages have not been able to keep up, which 
really is the bottom line, I believe--the unemployment factor 
and keeping up with the cost of living and keeping up with real 
wages.
    So I am very pleased to have the various Members here 
today, as well as the second panel of witnesses to discuss what 
I consider to be a very, very important issue.
    Now, I would like to yield 5 minutes to Mr. Clay.
    Mr. Clay. Thank you, Chairman Paul, especially for holding 
this hearing on improving the Federal Reserve System and 
examining today six pieces of legislation to reform the Federal 
Reserve System. One piece to abolish the Federal Reserve, 
sponsored by our chairman, Mr. Paul, and another one, as 
sponsored by Mr. Kucinich, would make the Federal Reserve an 
arm of the Treasury.
    The other bills would make various changes either to the 
mandate or to the Federal Open Market Committee's governance. 
As ranking member of this subcommittee, I want to focus on the 
Federal Reserve's dual mandate of maintaining stable prices and 
full employment for monetary policy.
    The Full Employment and Balanced Growth Act of 1978, better 
known as the Humphrey-Hawkins Act, set four benchmarks for the 
economy: full employment; growth and production; price 
stability; and the balance of trade and budget.
    To monitor progress towards these goals, the Full 
Employment and Balanced Growth Act of 1978 mandated that the 
Board of Governors of the Federal Reserve System present 
semiannual reports to Congress on the state of the U.S. economy 
and the Nation's financial welfare. The Humphrey-Hawkins Act 
charges the Federal Reserve with a dual mandate, both 
maintaining stable prices and full employment.
    Currently, the unemployment rate is 8.1 percent. Since 
President Obama took office in January of 2009, the 
unemployment rate has gone from 7.8 percent around the 
Inauguration, to 10 percent as the impact of the financial 
crisis spread, to 8.1 percent today. I do believe that the U.S. 
economy is heading in the right direction. With the proper 
nudge, it could probably improve even more.
    As of March, the consumer price index was 2.7 percent over 
the past year, a decline from February of this year of 2.9 
percent. During the same period, the energy index had risen 4.6 
percent, and the food index had increased 3.3 percent.
    Both increases are smaller than last month. In contrast, 
the year change in the index for all items, less food and 
energy, which was 2.2 percent in February, edged up to 2.3 
percent in March.
    All of these factors play a very important role in getting 
America back to economic growth and prosperity, and I look 
forward to the witnesses' testimony.
    Mr. Chairman, I yield back.
    Chairman Paul. I thank the gentleman.
    Now, I yield 5 minutes to Dr. Hayworth.
    Dr. Hayworth. Thank you, Mr. Chairman. It is with great 
pleasure that I anticipate the testimony from our distinguished 
colleagues, and we have a great challenge before us because 
obviously a central bank--our central bank, the Federal 
Reserve, has--we have cherished its independence in 
implementing monetary policy and yet at the same time, 
obviously the Congress has to establish monetary goals and hold 
the Federal Reserve responsible, and we have obviously, as a 
Congress, the express power to coin money and regulate the 
value thereof.
    There is this dynamic tension, obviously, between the 
independence of the Fed and its accountability to us. So it is 
going to be very interesting to hear your proposals as to how 
we make that--reach that balance.
    But in specific, with regard to the dual mandate, Chairman 
Bernanke has said many times that he does not perceive--in 
effect, he said he does not perceive an inherent conflict, if 
you will, in the dual mandate because, as I have understood 
him, serving the goal of price stability clearly works 
favorably toward having an economy that will work and that will 
enhance the employment prospects for all those who need work.
    Yet we see that his warning, which he has expressed very 
diplomatically regarding our fiscal policy, having implications 
for monetary policy that it cannot overcome forever and ever by 
accommodation, we see that his warnings seem to be borne out in 
the fact that several years of accommodating monetary policy 
have not resulted in the kind of enhancement in our economic 
statistics that we would like to see.
    So I look forward to your testimony and thank you for all 
the work that you have done on this very crucial topic. Thank 
you, Mr. Chairman. I yield back.
    Chairman Paul. I thank the gentlelady.
    Mr. Clay. Mr. Chairman, if I may, I would like to ask 
unanimous consent that the gentleman from Minnesota, Mr. 
Ellison, be allowed to sit in.
    Chairman Paul. We already asked for that unanimous consent, 
but without objection, it is so ordered.
    Now, if the gentleman from Minnesota would like to make an 
opening statement, he can do that right now.
    Mr. Clay. Thank you.
    Mr. Ellison. Very briefly, Mr. Chairman, thank you for your 
chance to make an opening statement and to address this really 
important topic.
    I really don't have so much of a statement as I have some 
questions that I would like to just put out on the table for 
discussion, and I hope we can resolve them during the course of 
our afternoon.
    Is the dual mandate the problem? The fact is, to the degree 
that we have had challenges to monetary policy, has the dual 
mandate been responsible? If not, why the focus? I am curious, 
if anybody could point to an instance in the last 30, 40 years 
when the dual mandate required the Fed to downplay their 
preferred anti-inflation approach to concern about 
unemployment?
    It seems to me that these are perfect. The dual mandate has 
been working. If it hasn't, I would be curious to know when it 
has let us down and when the dual mandate has been the cause of 
flawed monetary policy.
    I am also curious to know, how have we have been doing with 
the dual mandate? Have we really been pursuing both, and to the 
degree that the statute would call for? Has unemployment gotten 
a short shrift?
    I am concerned that we live in a time when we are getting 
used to an unemployment rate of about 8 percent, and that might 
be all we can ever aspire to get down to. I think this is a 
national disgrace and an outrage, and I think our country needs 
to do much more to pursue both prongs of the dual mandate. I am 
concerned that unemployment has not been getting its full due.
    So these are some questions that I have, some concerns that 
I would like to see addressed. And even though I am not on the 
subcommittee, I am grateful to be allowed to be on it today, 
and I hope that we can explore these important topics. Thank 
you, Mr. Chairman. I yield back.
    Chairman Paul. I thank the gentleman.
    I now yield time to Mr. Schweikert from Arizona for an 
opening statement.
    Mr. Schweikert. Thank you, Mr. Chairman, I will try to do 
this very quickly.
    Since being placed on your subcommittee, this has actually 
become an area of great interest to me. One of the sides you 
are trying to get your head around--and as we walk through the 
pieces of legislation--is what the Fed does in regard to 
monetary policy. Has this, as part of unintended or intended 
consequences, allowed those of us here in Congress to engage in 
really bad fiscal policy? In many ways, is it an institution 
through its actions that allows us to get away with bad acts?
    And secondly, even though this is one off, but in the 
discussions--the Fed is heading, their holdings are heading 
towards what, $2.9 trillion? What is the plan? At some point, 
when do they move back to normalization of their portfolio, and 
what are the potential cascade effects when moving back to a 
normalized portfolio?
    With that, I yield back.
    Thank you, Mr. Chairman.
    Chairman Paul. I thank the gentleman. Now, I want to move 
to our first panel. First, I want to introduce Representative 
Kevin Brady from Texas, an 8-term Republican Congressman 
representing the Eighth District. He is the sponsor of H.R. 
4180, the Sound Dollar Act of 2012. He is also the vice 
chairman of the Joint Economic Committee.
    Also with us today is the ranking member of the Financial 
Services Committee, Representative Barney Frank, a 16-term 
Democratic Congressman representing the Fourth District of 
Massachusetts. He is the sponsor of H.R. 3428.
    I will now recognize Congressman Brady for his opening 
statement.

  STATEMENT OF THE HONORABLE KEVIN BRADY, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF TEXAS

    Mr. Brady. Thank you, Chairman Paul, Ranking Member Clay, 
and members of the subcommittee. Before discussing the Sound 
Dollar Act, I would like to acknowledge the work that Dr. Paul 
has done on this subcommittee. He is a long-time former member 
of the Joint Economic Committee who has worked to bring sound 
dollars to the forefront of the public debate.
    Inflation has been called many things, a hidden tax, a 
government-sponsored reduction in workers' paychecks or, as Dr. 
Paul often says, theft, and more and more Americans understand 
the absurdity of a monetary policy that ultimately devalues our 
own currency.
    We agree on three key points: preserving the value of the 
dollar is essential to economic growth and prosperity in 
America; the Federal Government must not be allowed to monetize 
its debt; and our financial system should serve the interests 
of all Americans, not just the interests of Washington and Wall 
Street.
    Again, I would like to thank the chairman for your 
steadfast commitment to bringing those issues to the forefront 
of the public debate.
    I am pleased to testify on behalf of the Sound Dollar Act. 
I want to thank the members of this subcommittee who have 
already cosponsored this important legislation: Mr. Jones; Mr. 
Lucas; Mr. Luetkemeyer; Mr. Huizenga; and Mr. Garrett.
    The problem today is that according to some, the 1800s was 
the British century, the 1900s was the American century, and 
the 2000s, the 21st Century, may well be China's century. Well, 
not so fast. But, for America to continue its preeminence in 
the global economy, it is important that we get the role of the 
Federal Reserve right.
    As we know, the Federal Reserve veered from the successful 
rules-based policies that brought the great moderation of the 
1980s and the 1990s and instead, adopted an interventionist 
approach and helped to inflate the unsustainable housing bubble 
and led ultimately to a global economic crisis during the last 
decade. This interventionist approach, justified by the 
unemployment half of the dual mandate, continues today, and I 
believe it is a contributing factor to this anemic recovery.
    The Federal Reserve's interventionist policies are felt by 
the single mom who goes to the grocery store and finds her 
paycheck doesn't go as far because inflation is robbing her of 
the value of the hard-earned dollar, and she also finds the 
same thing as she fills her gas tank.
    These interventionist policies are also felt by the 
unemployed. The uncertainty generated by the Fed's 
unprecedented intervention is discouraging business investment 
in new buildings, equipment, and software, which drives job 
creation in America.
    If you look at the fact of the numbers, government spending 
is where it was before the recession, and consumer spending is 
where it was before the recession, but business investment is 
not and the Fed has played a role in that.
    For America to remain the world's leading economy in the 
21st Century, Congress must give the Fed a single mandate for 
price stability, ensure that it is independent from political 
pressure, and hold it accountable for results.
    Critics charge that focusing on a sound dollar implies the 
Fed will ignore the unemployment needs of America. They are 
wrong. America can only maximize our real output in employment 
with long-term price stability. Protecting the purchasing power 
of the dollar over time provides the strongest foundation for 
lasting economic growth and job creation.
    Critics also react as if a single mandate is a shocking 
proposal, because we know the United States won World War II, 
enjoyed 3 decades of prosperity, and put a man on the moon 
without the dual mandate. It is not a fundamental part of our 
constitutional fabric. It is a 1977 policy directive based on 
discredited Phillips curves and Congress can change it.
    While it may be politically appealing, the current dual 
mandate asks the Fed to do something that it simply cannot do. 
Chairman Ben Bernanke has testified before JEC that in the long 
run, the only thing the Fed can control is inflation. In the 
long run, low inflation is the best thing we can do for growth. 
In a Federal Open Market Committee statement, he said basically 
the same thing, that the maximum level of employment is largely 
determined by nonmonetary factors. Further, using monetary 
policy as a short-term tool--the speed growth may actually harm 
the economy in the long term.
    Let me skip to the end and make the point here that among 
other provisions in the Sound Dollar Act, we grant a permanent 
vote to all the regional Federal Reserve bank presidents. 
Because as important as important as New York and Washington 
are, there is much more to America's economy, and therefore, 
FMC should better reflect our geographic diversity.
    We require the Fed for the first time to articulate this 
lender of last resort policy in order to reduce uncertainty and 
instance of moral hazard and speed the release of the 
transcripts from 5 years to 3 years to create more timely 
information and transparency, and we make sure the new Consumer 
Financial Protection Bureau is accountable to hardworking 
Americans by funding it the same way as other agencies do 
during Congress.
    Mr. Chairman, I have included my full testimony for the 
record as well.
    [The prepared statement of Representative Brady can be 
found on page 176 of the appendix.]
    Chairman Paul. I thank the gentleman.
    Now, Mr. Frank is recognized.

STATEMENT OF THE HONORABLE BARNEY FRANK, RANKING MEMBER OF THE 
FINANCIAL SERVICES COMMITTEE, AND A REPRESENTATIVE IN CONGRESS 
                FROM THE STATE OF MASSACHUSETTS

    Mr. Frank. Thank you, Mr. Chairman. I appreciate your 
acknowledgment of the work we did together. It actually was 
work, as you know, that began with one of your Texas 
colleagues, Mr. Gonzalez, who works down with us who was a 
pioneer in forcing the Federal Reserve to be open. He made them 
release information that they claimed didn't exist. It was kind 
of a magical feat.
    But one of the things that ought to be noted, in every 
instance, beginning with Mr. Gonzalez and maybe before I was 
here and the work we did, as the information flow has 
increased, it has been beneficial. There have been none of the 
negative effects on people they are worried about.
    At the same time, it ought to be clear that the release of 
all this information has, I think, helped dispel the notion 
that there were nefarious things going on. We have gotten a lot 
of information out under the legislation we have. There will be 
no transactions the Federal Reserve engages in with private 
companies that won't, at some point, be made public. I think 
that has reflected well on what they have done and again, 
suggestions that there was something untoward going on haven't 
been proven true.
    I filed legislation to remove the regional presidents from 
the voting power that they have. It was pointed out to me that 
that would have a problem of diminishing geographic 
representation. So I submitted an amended version that would 
have appointees to the board wanted by the President, confirmed 
by the Senate from the various regions.
    The problem you have now is this: The regional Federal bank 
presidents are picked by bankers. It is an extraordinary power 
that the FOMC has, and I think everyone agrees. And I cannot 
think of another element in American government where there is 
formal, binding, legal power given to the representatives of 
the industry that is in question.
    I don't think the American people are unaware of the 
undemocratic nature of this, to have bankers pick the regional 
president, who, in turn, picks boards which are primarily from 
industry and with the financial industry dominate them. The 
statistics show that. To have them setting the policy seems to 
me to be greatly mistaken. So I think you can get to a 
presidential set of appointments without diminishing geographic 
diversity, and that is what we have done.
    Beyond that, I do feel somewhat compelled to come to the 
defense of the Bush Administration. The single most important 
economic appointment made by President Bush was, of course, 
Chairman Bernanke.
    Mr. Bernanke was his economic adviser, chairman, and then 
he became head of the Fed. And frankly, I think people have 
been unfairly critical of Mr. Bernanke. He obviously has been 
reappointed and reconfirmed by the Senate.
    But once again, there have been predictions that haven't 
been borne out. The interventions by the Fed to deal with the 
problems that we had from the financial crisis have not led to 
inflation. Inflation is not at the point where it has become a 
serious problem for people.
    The loans that they have made, the intervention they have 
made, have actually made money for the Federal Government; they 
have not added to the deficit. And as I said, the openness 
shows they haven't caused problems in terms of any kind of 
conflict of interest.
    Now, we did make some changes in the legislation that was 
passed. We mandated much more openness. We repealed that part 
of the law which said the Fed could give money whenever it 
thought it was important to do so if they thought they might 
get paid back, and of course, the best example of that was AIG, 
a unilateral intervention by the Federal Reserve in 2008. We 
still are owed some money. We have replaced that with some 
other ways to go.
    Finally, I think it would be a grave error to repeal the 
dual mandate. Yes, it is true that in the long run, monetary 
policy means what people have said. But as we know, the fact 
that something means something in the long run does not mean 
that is the only run, that there are not times in the shorter 
run and the intermediate run when a balance is necessary.
    And I would say this: I can make a procedural point. I have 
a bill dealing with the presidents. I would be content to see 
that put aside because I think we have a central issue here in 
the bill that my colleague from Texas has put forward, and I 
will agree with him on one point, when he said that the dual 
mandate is not in the Constitution. I agree, even with the 
Federal Reserve.
    We made up, in about 1912--it wasn't in the Constitution. 
In fact, Alexander Hamilton tried to put it in there, and got 
his brains beat out a couple of time.
    But the question is this: There are very big differences, 
and to some extent, they are partisan. Partisan differences can 
be carried too far and they can become embittering, but they 
are also at the heart of democracy. It is entirely legitimate 
to have contending groups with different views, and there is 
clearly a major party difference in that those of us on the 
Democratic side think that unemployment is a very serious 
problem that deserves being addressed explicitly.
    And so I would urge you, Mr. Chairman, let's take the bill 
of the gentleman from Texas. Let's put it out there, let's have 
a committee markup. Let's bring it out, and let's debate that 
one before the election. Let's have it be a stealth presence to 
the American people to take away the concern with employment 
after the election.
    Chairman Paul. I thank the gentleman.
    I thank both Members for their opening statements.
    I ask unanimous consent to include in the record written 
statements from the sponsors of the legislation being 
considered by the subcommittee today. Without objection, it is 
so ordered.
    I will now yield myself 5 minutes for questions. The first 
question I have is for Congressman Brady, and I love the title 
of your bill, the Sound Dollar Act. That is something I think 
is so important, but it seems to get a sound dollar, we need to 
have something we can define. Do you have a definition in order 
to give us an idea what our goals are, divorced, maybe, from 
the policy? How do we define the unit of account, because it 
was precisely defined for a good many years.
    As a matter of fact, up until 1971 in a relative way it 
always had a precise definition. So do you have, in your own 
mind, a definition for a sound dollar?
    Mr. Brady. I do, in my mind. We didn't include it in the 
legislation. Right now, the Fed has identified a 2 percent 
inflation, split inflation target, which seems reasonable over 
time. But the truth of the matter is we want a rules-based 
inflation targeting.
    We want the Fed to stop, the go-stop policies, the 
interventionist policies and to focus on staying within the 
lines, both on inflation and deflation. Your point, that is the 
strongest foundation for economic growth.
    Mr. Frank likes to point out this is an either/or. It is 
not. The Fed does not do and cannot do a good job at job 
creation, as the chairman and the members agree. But over time, 
in fact, preserving the purchasing power of the dollar does 
create the strongest economy for the United States, or at least 
the opportunity for it, the strongest job creation so, no, 
there is not an explicit target in the bill itself.
    Chairman Paul. So in a way, you defined the dollar by 
achieving a price level or price stability?
    Mr. Brady. We don't choose a strong dollar or a weak 
dollar, a sound one.
    Chairman Paul. Consider that there are many free market 
economists who don't concentrate on that. They, as a matter of 
fact, want a flexible pricing level, not a fixed pricing level.
    For instance, how would this have been interpreted, or how 
would the monetary policy have been altered, say, in the 1920s 
because a lot of people say that there is no inflation because 
prices are relatively stable because productivity goes up. So 
if prices are relatively stable and due to productivity, but 
then there still are distortions in the stock market, say the 
stock market that, of course, led to the 1930s, can't you be 
deceived if you concentrate on prices rather than looking at 
the total picture of the amount of investment?
    I know you did mention about not monetizing debt, so how 
would you adjust for the fact that the price level doesn't give 
you the information because even today, a lot of prices, in 
spite of the monetary inflation, some prices are going down 
like in electronics. At the same time, the cost of an education 
skyrockets. So how would you adjust for that?
    Mr. Brady. Thank you. One, I have, long ago, learned never 
to discuss Fed history with you, Dr. Paul, since you are as 
knowledgeable as anyone on the planet about it.
    But looking a little closer in history the last 40 years, 
what we saw in the 1970s was a great lesson. We were told we 
couldn't have high unemployment and high inflation at the same 
time; it couldn't happen. As we know, not only did it happen, 
but the Fed's intervention go-stop, go-stop actually created a 
very volatile economy with very deep and frequent recessions.
    When the Fed focused back on a single mandate of price 
stability in 1979, that changed. And for almost 20 years, we 
had not only strong economic growth, but we had very short, 
very shallow recessions. So we saw the benefits of that focus 
on price stability.
    In the 2000s, we saw the Fed keep interest rates too low 
for too long. It helped to inflate a credit-fueled housing 
bubble and helped create a global financial crisis; and, to 
sort of wrap that up to your immediate question, within the 
Sound Dollar Act, not only do we focus on rules-based inflation 
targeting, but we require the Fed to monitor and report back on 
these potential asset bubbles, to monitor the price of gold, 
other commodities, equities, bonds, commercial real estate, 
agriculture, real estate industrial, real estate as well--and 
we don't force them to act on that because that circumstance 
will vary.
    But we want to ensure to your point that not just the price 
index of the goods and services, but those potential asset 
bubbles would not only be monitored but reported to you and to 
me and to the public as well.
    Chairman Paul. I have a question for Mr. Frank, but I am 
out of time. I think there is going to be a second round, so 
hopefully I can get my question asked. I now yield to Mr. Clay.
    Mr. Clay. Thank you so much, Mr. Chairman.
    Let me ask both witnesses, currently, the unemployment 
rate, according to the Labor Department, is 8.1 percent. What 
can the Federal Reserve and Congress do to put Americans back 
to work? Mr. Brady, do you have any thoughts or views on that?
    Mr. Brady. I do. One, I think the Fed is trying to do too 
much. They are trying to make up for, I think, some failed 
economic policies, in my view, from the White House. And I also 
believe they are sort of like the doctor who gives you a pill 
every 5 minutes and say how are you feeling? Take another one. 
How are you feeling? Take another one, as a result of actually 
creating uncertainty.
    I believe the more the Fed does, the less responsibility 
Congress and the White House are taking for getting the right 
fiscal decisions, getting the right tax policy, to balance 
regulations, ensuring the right spending levels and entitlement 
reforms that actually create that uncertainty.
    So I really believe as the Fed does more, Congress is doing 
less, and in the long term, that slows our recovery.
    Mr. Clay. Don't you think that Congress could be doing 
something now as far as passing a transportation bill, which 
would be a job starter?
    Mr. Brady. Mr. Chairman, Ranking Member Clay, I think it is 
important, especially long term to get our transportation 
policy right. I think that would be helpful. I also think 
taking off the table this discussion of higher taxes, just a 
tsunami of regulations hitting these businesses.
    The President's health care plan, in my view, is right now 
a real deterrent to new job creation in America. So, yes, there 
are a lot of things Congress can do right. And there is a 
reason the Fed said in the end, we are not setting an 
employment target, because in the end we can't control 
employment.
    Mr. Clay. Mr. Frank, what do you think the Federal Reserve 
and Congress could do to put Americans--
    Mr. Frank. The Federal Reserve cannot do a great deal more. 
I think they have been very helpful, and the policy that I 
think Mr. Brady still would prohibit in the future, we would 
have been worse off if it hadn't have been for them.
    I think the interventions the Fed has taken in two levels 
have been helpful to us, first of all in helping to provide the 
funding that has helped our economy. Secondly, and I think this 
is a real point of difference between the parties, I was 
surprised by it, I think the role of the Federal Government, is 
the Federal Reserve has been working with the European Central 
Bank, has been helpful in avoiding the kind of serious 
downturns in Europe which will have negative effects on us.
    I think the Federal Reserve--
    Chairman Paul. Check your microphone.
    Mr. Frank. Thank you, Mr. Chairman. With the European 
Central Bank, have been very helpful and to have prevented the 
Federal Reserve from that kind of cooperation, increasing the 
chances of trouble in Europe would have been, I think, a very 
grave error.
    Secondly, as far as Congress is concerned, we have the 
major activity. We should be following a two-step procedure, 
long-term deficit reduction with some shorter-term stimulus. 
The fact is that the employment rate is higher than it would 
have been if we had not forced, by a variety of fiscal 
policies, State and local governments to fire 600,000-plus 
teachers and firefighters and public works employees and police 
officers.
    I think that has been a very, very grave error. They have 
been hurt because many of them are financed primarily by 
property taxes. Property values went down. I think forcing 
those reductions by inappropriate Federal policy is a great 
mistake. Yes, it is important for us to reduce a deficit long 
term.
    Unlike many of my Republican colleagues who think the 
President wants to get out of Afghanistan too quickly, I think 
he wants to stay there too long. I think there is a great deal 
of room for reduction in the military budget.
    I think that we should be--and we will be fighting about 
this in the budget. Do we cut the military or restrain the 
military or do we cut our Medicare and Medicaid? So I would be 
for a short-term increase in spending and stimulus at the 
Federal level here, including primarily to the States. You give 
money to the States, and they are going to hire some people 
who, in turn, will be spending money.
    As for taxes, I heard the argument that higher taxes were 
going to kill the economy in 1993 when I voted for the tax 
proposal put forward by President Clinton. And in the years 
afterward, we had a very good economy. I don't have to claim 
that the higher taxes, and marginal rate increase, a fairly 
small amount, caused that good economy, but it clearly didn't 
interfere with it.
    I think if you talk about people who are making more than a 
million dollars a year, that for every thousand dollars they 
make over that, tax them $56, it is inconceivable to me, and I 
think it has been proven by economic history, that it has no 
negative effect and it allows us to do a long-term deficit 
reduction with some short-term help for the economy.
    Mr. Clay. Thank you so much.
    Chairman Paul. I yield 5 minutes to Mr. Schweikert from 
Arizona.
    Mr. Schweikert. Mr. Chairman, would you like me to yield 
you a couple of minutes to finish your previous question?
    Chairman Paul. Pardon me?
    Mr. Schweikert. Would you like me to yield you a couple of 
minutes to finish where you are at?
    Chairman Paul. Oh, thank you, yes, absolutely, thank you 
very much.
    Mr. Brady. Mr. Chairman, I would rather be grilled by Mr. 
Schweikert than yourself, if that is okay.
    Chairman Paul. No, I saved this one for the ranking member.
    Mr. Brady. Okay, go ahead.
    Chairman Paul. The big argument is, dual mandate or one 
mandate. I am pretty much of a skeptic on what we get from the 
Fed, and I think they generally can find an excuse to do 
whatever they want to do, so I know that is an important 
argument, and it is going to go on for a while. But I am not 
hopeful that, in itself, will solve the problem, because I 
think they are rather independent in what they do.
    And I want to ask--I asked you a question, Mr. Frank, about 
the appointees, whether they are approved by the Senate or not, 
because a lot of people that I talked to are very interested in 
this subject. They are very concerned about the fact that this 
isn't a government operation. This is a private operation and 
they don't like the private.
    Now, do you think you fully answer that, or do you 
partially answer the questions by saying people have to be 
approved by the Senate? Does this become less private and less 
sinister? Or how would you, frankly--
    Mr. Frank. Actually, I wouldn't say that, sir. I wouldn't 
say ``sinister.'' I don't think the people on the Federal 
Reserve regional boards who are predominantly from the 
financial industry in terms of influence, when they pick a 
president, who in turn picks the new people, it is not 
sinister. They are people of good will, but it has an obvious 
bias.
    Yes, I diminish the sector, which is the private sector, by 
not having a vote.
    There is another thing we can do, Mr. Chairman. You were 
absent--understandably, you had a couple of other things on 
your mind when we voted here during the reconciliation markup 
on whether or not to subject the Federal Reserve to the 
appropriations process, not monetary policy.
    But there was a proposal, as you know, to subject the 
Consumer Financial Protection Bureau to the appropriations 
process. It would seem to be another step that could be taken. 
I am not for it myself, but for those who are worried, I would 
think consistency would say, why not subject the Federal 
Reserve, including the regional entities to the appropriations 
process?
    So I think that if you said that--now, there is an 
alternative in terms of the regional presidents, which would 
have them Senate-confirmed, I think that might be worse. So, 
yes, I think I partially--I diminish the private sector 
element. I think except for people who are concerned about it 
more than me, would subject them to appropriations.
    Chairman Paul. I am sorry, I don't want to use all of 
Congressman Schweikert's time. I yield back my time to David.
    Mr. Frank. You aren't going to comment on the 
appropriations process, Mr. Chairman?
    Chairman Paul. Tomorrow.
    Mr. Schweikert. He is just sorry he wasn't here. Thank you, 
Mr. Chairman.
    One of the things I have been trying to get my head around 
is with the dual mandate, and this is for both of our honored 
Members here, does it ultimately, do you think, because--okay, 
here we are chasing inflation, here we are chasing 
unemployment, but through the back door, does that also allow 
us, as Members of Congress, often to avoid tough decisions, 
whether they be on, particularly on fiscal policy?
    Mr. Frank. I don't see how it does. First of all, I reject 
the notion that we, as elected officials, should be blaming the 
Fed, oh, it is the Fed's fault. No, it is our fault if we don't 
step up.
    To be honest, I don't think, in fairness to us, that we are 
avoiding those. The problem is we have very different views 
about how to do it. That is democracy. Some people want to 
raise taxes on the wealthy and restrain the military and make 
some domestic restraints. Others want to do other things. I 
literally don't know anybody who doesn't have views on this. 
But, no, I don't see the fact that there is a responsibility 
somewhere else in any way allows us to avoid anything. Our 
responsibility is the same.
    Mr. Schweikert. Ranking Member Frank, thank you. I did say 
one truism and that is ultimately, it is our responsibility.
    Mr. Frank. Yes.
    Mr. Schweikert. And in my, what, 16 months here, I find 
policy-wise, we do lots of trying to push it off to regulators 
and others. You do the work and that way we have sort of this 
plausible deniability.
    Mr. Frank. But let me just say, I think that is especially 
the case with regard to military activity. In my 32 years here, 
when I have seen, I said, get involved in military activity 
without congressional authorization, it has been not been so 
much executive overreach as congressional ducking.
    Mr. Schweikert. Okay. I am going actually agree with you on 
that one.
    Mr. Brady. The answer is yes, absolutely. As the Fed tries 
to do more, Congress, frankly, is using that and the White 
House as an excuse not to take the key steps necessary to 
create the business climate for recovery.
    If, in fact, the dual mandate is the right answer, and the 
Fed is in charge of the economy, it is certainly not doing a 
good job--the weakest recovery since the Great Depression, 
lowest number of workers in the workforce, we, despite the 
stimulus, the bailouts, auto bailout, housing bailout, stimulus 
to Cash for Clunkers, there are actually fewer Americans 
working today than when President Obama took office. At the end 
of the day, it is our responsibility.
    Mr. Schweikert. Mr. Chairman, thank you for yielding back 
to me.
    Chairman Paul. I thank the gentleman.
    I now yield 5 minutes to Congresswoman Maloney from New 
York.
    Mrs. Maloney. Thank you very much, and thank you for 
calling this hearing.
    I would like to ask Mr. Brady to respond to a statement 
from Alan Blinder and Mark Zandi. In their paper of 2010, they 
argued that the Federal Reserve's actions in the area of 
monetary policy during the economic crisis were more powerful 
and effective than anything that Congress did fiscally through 
the stimulus, and I would argue that the Fed's pursuit of the 
dual mandate contributed to avoiding an all-out economic 
collapse and helped fuel our economy.
    So I would specifically like to ask my colleague, can you 
cite any example of how the dual mandate in any way hindered 
the recovery? Most economists believe that it was helpful in 
the recovery.
    Mr. Brady. I think that there are a couple of key issues 
here. One, the Fed's actions in the mid-2000s, keeping interest 
rates too low for too long helped bring about the crisis in 
which they later intervened.
    Secondly, I do think--
    Mrs. Maloney. But that happened during Chairman Greenspan's 
days.
    Mr. Brady. We are talking the Fed as it is today and its 
actions over the last 4 decades, truly.
    Secondly, I think the Fed--
    Mrs. Maloney. But we are discussing it, just because I want 
to make sure you are answering the question. On this point, if 
I could make it clear, what we are looking at now is the 
recovery, the actions that took place by Chairman Bernanke and 
others in response, and you were saying the interest rates were 
too low. Would keeping interest rates high to avoid inflation 
have been a sensible policy during the crisis when we were 
looking for recovery in 2008 and 2009?
    That is the time that we are looking at, how the dual 
mandate responded to the economic crisis, and I would argue 
that it was helpful.
    But my question specifically--
    Mr. Brady. I actually wanted to give you a ``yes'' answer 
to your question.
    Mrs. Maloney. Oh, really.
    Mr. Brady. During the financial crisis, I think the Fed 
frankly helped fuel it. Some of the actions they took during 
the financial crisis truly did calm those waters, but stop 
there and look at the economic recovery since. In my view, you 
were pursuing the dual mandate, in some ways for the first 
time, identifying it as a way to not only intervene, for 
example, in the housing market and then continuing to intervene 
as well rather than allowing exiting of that market, continuing 
to allocate credit around the United States, creating this 
uncertainty on what will the Fed do next has actually, in my 
view, hindered the recovery.
    So if you look at three points: Did they help fuel the 
financial crisis? Yes. Were they helpful during it? Yes. Is the 
recovery on in truth? No.
    In my view, we are not at the job levels we should be, in 
part, because it is Congress' role to set the fiscal policy to 
create the business climate so recovery can occur.
    Mrs. Maloney. If the Fed had been constrained because they 
did not have the dual mandate in moderating inflation only, and 
would the recovery be what we are experiencing now, they were 
able to keep the--if all they had to do was look at inflation, 
they would have been raising interest rates.
    They lowered them in 2008 and 2009, which was very 
important because they had the dual mandate. And if they were 
constrained and moderating only inflation, if that was the only 
thing they could have looked at, then they wouldn't have been 
lowering the rates. Having the dual mandate, most economists 
are arguing, gave them the flexibility to react quickly to the 
marketplace.
    I would also like to hear from the ranking member, Mr. 
Frank.
    Mr. Brady. At some point, I would like to respond to that, 
because I think I can shed a little light on it.
    Mr. Frank. First, I want to talk about the comment about 
the Fed's role in inflating things during the Greenspan years. 
I agree, but not by keeping interest rates in general down, but 
by explicitly refusing to follow the mandate this Congress gave 
the Federal Reserve in 1994 in the Home Ownership and Equity 
Protection Act. And in subsequent efforts, many of us did 
believe that loans were being made imprudently to people who 
couldn't pay them back.
    There were two ways to deal with that. One was, some 
argued, to deflate the economy as a whole. I think that would 
have been a mistake. There was an option. It was to use the 
authority the Fed was given to ban imprudent loans to people 
who couldn't afford them, and Mr. Greenspan flatly refused to 
do that, and lately acknowledged that was an error in front of 
Mr. Waxman's committee. And then in that period, in 2004 and 
2005, some of us on this committee--myself, Mr. Watt, and Mr. 
Miller--tried to re-legislate that.
    So, yes, I do think that there was a problem from the Fed, 
but it wasn't for not causing a deflation in the economy or 
less economic activity in general. It was refusing to use a 
specific tool they were given to stop the bad loans from being 
made.
    Mrs. Maloney. My time has expired. Thank you.
    Chairman Paul. I thank the gentlewoman.
    I now recognize Mr. Luetkemeyer from Missouri for his 5 
minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Congressman Brady, thank you for your efforts on this Sound 
Dollar Act. I really like some of the things that you have in 
there.
    I am just kind of curious, do you believe that we need the 
Federal Reserve as a lender of last resort? Do we need a lender 
like that, some entity that can be the entity that puts the 
finger in the dike when something starts to happen?
    Mr. Brady. The answer is yes, and your question, in some 
regards, addresses Mrs. Maloney's question, which is under a 
single mandate, focused on the purchase power of the dollar, 
could the Fed intervene in times of emergency? The answer is 
absolutely yes. They would still be the lender of last resort, 
still provide liquidity to those banks that just have a 
liquidity problem but are solvent. And, of course, they have 
the ability to increase or decrease the interest rates to 
tighten or loosen the money supply.
    So they would still be under a single mandate, and have the 
ability to intervene in very unusual and exigent situations. 
What they would not be allowed to do is to continue to 
intervene far beyond that financial crisis which, again, is 
contributing to the uncertainty today.
    Mr. Luetkemeyer. It would seem that, looking at the last 
20, 30 years, their ability to impact our economy is greatly 
exaggerated on both ends. It would seem to me that they can 
nibble around the edges on these things, but if they actually 
had the ability to control unemployment, we wouldn't have the 
situation we have today.
    If they control inflation, I don't think that we would have 
had some of those situations we have had over the last several 
years. As long as we have an economy that is rolling along very 
stable, it seemed like they can tweak it around the edges, but 
it doesn't appear they can do much more than that. So I really 
liked your approach here.
    One of the questions that I had with regards to title 4 of 
your bill, with regard to exchange rate responsibility, can you 
explain just a little bit about that section and why you put it 
in here and what you want to try to accomplish with that?
    Mr. Brady. Is this dealing with the special drawing rights 
ending that that slush fund?
    Mr. Luetkemeyer. Yes, the exchange rate policy, bringing in 
the exchange, to exchange stabilization fund.
    Mr. Brady. We have, unfortunately, over time created, in 
effect, a slush fund within the Federal Reserve, both from 
historical--about $100 billion in there, half of that about 
from historical dollars here and the other half, more recent. 
And unfortunately, Mr. Luetkemeyer, what has happened is that 
both Republican and Democrat Administrations related to the Fed 
have used that, in effect, to circumvent the power of Congress.
    The Clinton Administration used those dollars to provide a 
bailout to Mexico after Congress rejected it. The current Fed 
uses the guaranteed money market funds. Those may have been the 
appropriate efforts, but those decisions should have been made 
by Congress, not by the Federal Reserve.
    So under this bill, we end that as a slush fund. We apply 
the $50 billion to reduce the deficit and we, in effect, return 
the Fed to what the Fed should do and retain for Congress, our 
constitutional role, to act in those matters of emergency.
    Mr. Luetkemeyer. So what you are trying to do is rein them 
in and go back to establish principles or mission of what they 
originally should have been and get it more in line with what 
most people think the Fed's mission should be?
    Mr. Brady. Yes, sir.
    Mr. Luetkemeyer. Thank you. Congressman Frank, just quickly 
with regard to the bill that you have, why do you believe that 
it is important to have--I am kind of curious, all of the Fed 
members, the appointees versus the Fed regional president is 
going to replace those with appointees. Why do you think that 
is important?
    Mr. Frank. First, let me just say one thing in response to 
your previous question, the biggest power the Federal Reserve 
had to intervene freely with Section 13.3 of the Federal 
Reserve Act, which actually came from the early 1930s under the 
Hoover Administration, and we repealed that in the financial 
reform bill. So they can no longer do what they did with AIG on 
an entity-by-entity basis.
    Secondly, the chairman asked me did I think it should be 
less privatized? Yes. I understand the importance of 
geographical representation. I think we should have people who 
live in the regions be the appointees, but I can't think of a 
comparable case of formal governmental power, the right to set 
interest rates, and the impact they can have on regulation 
where the entity primarily concerned picks its own people.
    Mr. Luetkemeyer. Yes, but you are assuming from your 
comment there that this is a government entity when it really 
is a quasi-government--
    Mr. Frank. Oh, I think it should be a government entity.
    Mr. Luetkemeyer. --and has a lot of private implications 
from its independence. Don't you think it should be more 
independent in its structure as well?
    Mr. Frank. Independence, independence from the--I think you 
get independence with 7-year terms and 14-year terms, but I 
don't think that the financial industry, which really dominates 
the selection of the regional presidents, should be independent 
from the whole society in setting the policy which governs it. 
And, no, I think when you talk about setting interest rates, 
that is a governmental function, yes.
    And I didn't say, by the way, that they don't exist to the 
extent that they have some local economic functions; they would 
still be there. I specifically say they shouldn't be voting to 
set interest rates to the Federal Open Market Committee, and I 
would be very surprised if someone thought that was not a 
governmental function.
    Mr. Luetkemeyer. I see my time is up. Thank you, Mr. 
Chairman.
    Chairman Paul. Thank you. I now recognize Mr. Ellison from 
Minnesota for his 5 minutes.
    Mr. Ellison. Thank you, Mr. Chairman.
    Congressman Frank, could you describe--and you already have 
alluded to it a little bit--but could you elaborate further on 
what benefit you see from ensuring greater representation of 
people of diverse experience on the Federal Reserve's Open 
Market Committee?
    Mr. Frank. I have a fundamental belief in the electorate 
ultimately making the decisions, and it is very anomalous. 
There is nothing comparable.
    As a matter of fact, today, with there being some vacancies 
on the Board of Governors, half the votes, I think, on the Open 
Market Committee are cast by people, and we did a check of who 
are the members of the boards? It is a kind of a closed system.
    The board members are selected to--with a great input from 
the presidents--they, in turn, pick the regional presidents, 
and it is private sector governance of an important part of 
what we do. And, again, I am not talking about what they do in 
their regions and their economic activity.
    The bill says they should not vote on monetary policy, and 
I just don't understand what the rationale is for letting 
private sector people with the financial industry generally, 
not in every case, being the predominant influence, pick the 
people who come to Washington and vote on one of the most 
important governmental policies. That has been the whole 
premise of much of what we have been talking about.
    Mr. Ellison. Congressman Frank?
    Mr. Frank. Yes.
    Mr. Ellison. I have some information on the board, by 
profession.
    Mr. Frank. The regional boards?
    Mr. Ellison. Yes. One person from labor. You have four 
academics, you have 41 people from banks, and 47 people from 
other for-profit corporations.
    Mr. Frank. I think that is just a mistake, and it is not 
that bankers are bad people or others. It is that we generally 
don't say it is kind of a corporatism. It is kind of let the 
profession govern itself, and I think that is a mistake when 
you have a large number from the financial industry, and they 
tend to be very influential in all of this. There ought to be a 
broader representation.
    Again, in voting on monetary policy, not what is done in 
terms of regional economic activity. These people come to 
Washington. Now I understand people want some geographic 
diversity. We should do that, but it is very surprising to me, 
we don't do that for any other Federal agency.
    We don't say that the people in the energy industry, or we 
don't say that votes on labor policy are set by boards where 
unions are the predominant influence. The President appoints 
people to the NLRB. A Republican President will appoint people 
differently than a Democratic President, but they are 
Presidential appointees subject to Senate confirmation.
    And I have picked--half the notes on the NLRB don't come 
from groups that are dominated by labor unions. That is the 
analog to the FOMC votes from the presidents.
    Mr. Ellison. Mr. Frank, I have a little time left.
    On this issue of more diversity on the board, you just 
talked about professional diversity, but also, it seems like 
there has been some lack of ethnic and racial diversity too.
    Do you think that including more voices from consumers who 
are from urban areas, rural areas, people who have dealt with 
hard-hit neighbors, neighborhoods with foreclosure, do you 
think some, these kinds of experiences are--
    Mr. Frank. I think that would be good on the boards. But 
even with that, even if I picked the boards personally, I 
wouldn't want them voting on Federal Government policy. I do 
not think that private citizens should pick other private 
citizens with no intervention from any electoral process. There 
is no appointment by someone who was elected. There is no 
confirmation by the Senate. It is really, as I said, anomalous 
for people who believe in democratic self-governance. And, yes, 
I would like to have more--better representation on these local 
boards, but even with that, I would not want them--and by the 
way, they tend to be sort of self-selected. I wouldn't want 
them, again, voting to set important national policy. Everybody 
acknowledges the monetary policy is very important. Some people 
think it has been too loose. I don't understand the 
justification for that.
    I would say, and I would say again to the chairman, I know 
he wasn't here when we were voting on it, but you also have 
this situation about whether or not they should be subject to 
appropriation.
    I think if you had all Presidential appointees and Senate 
confirmation, that would be okay. But I think others might say, 
well, gee, shouldn't they be subjected to the appropriations 
process? But in any case, as I said, I cannot think of a 
comparable situation where the people in the industry most 
affected by public policy get to pick a significant number of 
the formal official policymakers with no intervention by 
anybody who is elected to anything.
    Mr. Ellison. I yield back
    Chairman Paul. Thank you.
    I now recognize the gentleman from New Jersey, Mr. Garrett.
    Mr. Garrett. Thank you, and I will just run down a series 
of questions. Start at the very beginning.
    Mr. Brady, the question I'm not sure I heard the answer to, 
in my mind, your definition under the bill--I am the 
cosponsor--of a sound dollar, is that just the language of 
saying that if we hit our 2 percent inflationary, as opposed to 
anything else?
    Mr. Brady. It doesn't set an explicit target of 2 percent. 
It does not.
    Mr. Garrett. Is that something that should be looked at and 
clarified in the bill before it goes forward?
    Mr. Brady. I am very open to that. I would like to see 
Congress set that type of target in a rules-based system.
    Mr. Garrett. Does the ranking member have a comment on that 
point by any chance?
    Mr. Frank. No. You mean to define what is the sound--I 
don't know how--I would be concerned about how you would do 
that statutorily. We are in a world where the dollar has 
several roles. It has a domestic role and an international 
role. The international role of the dollar is very significant, 
especially since we are confronting competitors in the world, 
the People's Republic of China primarily, who use the currency.
    Mr. Garrett. For other purposes.
    Mr. Frank. And I would not want to disable ourselves from 
dealing with that aspect.
    Mr. Garrett. So that goes to the next question, I guess, 
for both of you. If you did pass legislation similar to this, 
how do we know whether they are meeting the standard if we 
don't set a standard?
    And then, secondly, is there a consequence of not meeting 
the standard we haven't set?
    Mr. Frank. That is a very good question and proves why we 
shouldn't pass the bill.
    Mr. Garrett. Now, the rest of the story.
    Mr. Brady. Yes, for the rest of the story. I think setting 
a clear mandate, whether we set the explicit target or not and 
it is certainly open to that and then holding them accountable 
to that, I think, is key.
    And, Mr. Garrett, one point I would like to make, that 
going forward, and I think it is a terrible mistake to require 
all of the Federal Reserve Bank presidents to be appointed and 
confirmed by the Senate. One, it will further politicize the 
Federal Reserve Board, including leading to vacancies as we 
have today, and it will concentrate more power on Wall Street 
and Washington.
    I think it will be less independent as a Fed, because as 
you know, the regional bank presidents have an independent 
staff so they can actually not rely just on the chairman's 
staff, but on their own to assess economic policy.
    And then, as you know, finally, the Board of Governors 
actually approves these regional reserve bank presidents. So we 
already have accountability within the system.
    Mr. Garrett. I guess I could sit here and wonder, maybe as 
the chairman does, what our role is under either one of your 
scenarios. You are saying the reason you don't have that 
appointment--under the ranking member's position, it would go 
through Presidential appointment. I can see some benefit to 
that. But then I can also see we in Congress if that is all up 
in the Senate as far as monetary policy, we are sort of left 
out, except to hear the chairman occasionally come and testify 
and say, this is what they are doing and we have no standing--
    Mr. Frank. I understand that, but I assume that is what you 
wanted when you voted not to subject them to the appropriations 
process--may I respond?
    Mr. Garrett. Reclaiming my time. On that, I just wanted to 
delve into a little bit more than what we just did in the few 
minutes that we had there.
    Mr. Frank. I did offer an amendment--which I wasn't for 
because I wasn't concerned, but you voted against subjecting it 
to the appropriations process that would seemingly to have 
dealt with the issue you just raised--
    Mr. Garrett. I am open to the idea.
    Mr. Frank. Open to the idea in the sense that the roof is 
off. I mean, open to the idea, I think there is going to be 
very much openness for a very long time.
    Mr. Garrett. We are just trying to do things a little bit 
differently from the last session where we moved hundreds of 
pages at a time of a piece of legislation--
    Mr. Frank. I move, Mr. Chairman--
    Mr. Garrett. Reclaiming my time, Ranking Member Frank, you 
did raise one other question that I thought the chairman would 
raise in here. You said with regard to the process, and that is 
the constitutionality of it. And you had made, I think, a good 
point saying that it would make it perhaps more constitutional 
if we had the Presidential appointment here that it becomes not 
in the private sector but more public sector. But it raises the 
fundamental question that I thought the chairman would raise, 
which is where is the constitutionality for either one of the 
proposals that are before here?
    Mr. Frank. First, Mr. Garrett, the suggestion that we 
rushed things through 2 years ago, I think we had dozens of 
roll calls, a lot of meetings. I gather you have some concerns 
about your own vote. But I don't think you should ever be 
concerned about the process.
    Mr. Garrett. I was never concerned about my own vote, but 
rather I was concerned about legislation being dropped in at 3 
a.m. in a conference committee that we obviously did not have 
any hearings on. That is not the debate we are having here--
    Mr. Frank. I understand you don't want to talk about your 
vote against subjecting it to appropriations. Let me say this 
to the constitutionality--
    Mr. Garrett. I only want to discuss what we are supposed to 
be discussing here and not the way that things were held in the 
past. That is part of the reason why we are here today.
    Mr. Frank. I will answer your question. The 
constitutionality of my provision is what it says in the 
Constitution, that important government officers should be 
appointed by the President, subject to confirmation by the 
Senate. And I think that voting on monetary policy is 
indisputably an important public policy and ought to be 
executed by public officers in the constitutional manner.
    Mr. Garrett. Mr. Brady, for the last word, do you care to 
chime in?
    Mr. Brady. Congress holds the constitutional responsibility 
for monetary policy. We have, through history, contracted that 
out to the Federal Reserve Bank with a clear mandate, now, 
lately, a more muddled mandate. And to make the point, first, I 
don't think we want to envision a day where 535 Members of 
Congress are setting monetary policy in America. Second, 
America is really an outlier here. Of the 47 central banks and 
monetary authorities around the world, only two give equal 
weight to unemployment, only two have, in effect, a muddled 
mandate. The others have set price stability as either the 
primary or the hierarchically the single mandate for their 
central authority.
    Mr. Frank. Mr. Chairman, may I have one sentence?
    I thought my Republican colleagues were in favor of 
American exceptionalism.
    Mr. Brady. And I wish we would have dealt with that on 
Fannie Mae and Freddie Mac years ago. And I do thank Chairman 
Garrett for his efforts to actually solve the problem--
    Mr. Frank. Would the gentleman yield?
    Mr. Brady. To this crisis--
    Mr. Frank. If the gentleman would yield--
    Mr. Brady. --in history--
    Mr. Frank. The Republicans have been in power since January 
2011 and have done zero on Fannie and Freddie. What is holding 
you back?
    Chairman Paul. I would like to reclaim the Chair's time.
    Mr. Brady. You have been in power.
    Mr. Garrett. I wish that you wouldn't.
    Chairman Paul. But I do. This will conclude the first 
panel, and I do want to thank our two colleagues for a lively 
discussion. I appreciate you very much for being here. I now 
ask the second panel to be seated.
    I would like to introduce the witnesses on our second 
panel: Dr. Jeffrey Herbener is the chairman of the Department 
of Economics at Grove City College; Dr. Peter Klein is 
associate professor of applied social sciences, and director of 
the McQuinn Center for Entrepreneurial Leadership at the 
University of Missouri; Dr. John Taylor is the Mary and Robert 
Raymond Professor of Economics at Stanford University, and the 
George P. Schultz Senior Fellow in Economics at the Hoover 
Institution; Dr. James Galbraith is the Lloyd M. Bentsen, Jr. 
Chair in Government/Business Relations, and professor of 
government at the Lyndon B. Johnson School of Public Affairs at 
the University of Texas at Austin; and Dr. Alice Rivlin is the 
senior fellow in economic studies at the Brookings Institution 
and is a former Vice Chair of the Federal Reserve Board of 
Governors.
    Without objection, your written statements will be made a 
part of the record. You will now each be recognized for a 5-
minute summary of your testimony.
    And we will begin with Dr. Herbener.

STATEMENT OF JEFFREY M. HERBENER, PROFESSOR OF ECONOMICS, GROVE 
                          CITY COLLEGE

    Mr. Herbener. Chairman Paul, Ranking Member Clay, and 
distinguished members of the subcommittee, it is an honor to 
appear before you.
    Left to the market, the production of all goods, including 
money, passes the profit and loss test of socially beneficial 
production. Like all private enterprises, a gold mining company 
produces if the revenue from the sale of its output exceeds the 
cost of buying its inputs. Its production is socially 
beneficial because the value of inputs in producing the output 
to satisfy its customers exceeds the value of those inputs in 
producing other goods to satisfy other customers.
    In the market, money production is regulated by profit and 
loss. Changes in demands bring forth more production. If the 
demand for money increases, making the value of gold coins 
rise, then minting companies would increase production to 
capture the profit. As the supply of gold coins increase, their 
value would decline, and as the demands for resources increase, 
their prices would rise. The profit would dissipate and 
resource allocation into and production of money would be 
optimal for society at large.
    The production of fiat paper money and fiduciary media 
cannot be regulated by profit and loss. It is always profitable 
for a central bank to produce more fiat paper money since 
larger denomination bills have the same production cost as 
smaller denomination bills. It is always profitable for a 
commercial bank to issue more fiduciary media through credit 
creation since the interest it earns on the loan made always 
exceeds the nominal cost of issuing fiduciary media. Although 
the production of fiat money and fiduciary media cannot be 
justified by passing the market test of optimal production, it 
is claimed that an elastic currency will render an outcome 
superior to that of a monetary system of commodity money and 
100 percent reserve money substitutes.
    Let me address three such claims for an elastic currency. 
First, that it can keep the price level stable. There is no 
social benefit from a stable price level. Entrepreneurs earn 
profits and avoid losses by anticipating changes in prices of 
all goods, including money, and elastic currency makes the 
entrepreneurial task more difficult by adding another dimension 
of uncertainty to the purchasing power of money.
    Second, it is claimed that an elastic currency can prevent 
price deflation. There is no social benefit from preventing 
price deflation. Faced with lower prices for their outputs, 
entrepreneurs reduce their demands for inputs, and their prices 
fall also. This leaves profit production and real incomes 
intact.
    Looking at the evidence across 17 countries over 100 years, 
Andrew Atkinson and Patrick Kehoe in a 2004 American Economic 
Review article demonstrated that there is no correlation 
between price deflation and economic downturns.
    The third claim for an elastic currency is that it can 
accelerate economic growth. There is no social benefit from 
attempting to accelerate economic growth beyond the rate people 
prefer. Instead of building up the capital structure of the 
economy more fully, monetary inflation through credit expansion 
generates the boom-bust cycle. In the research on the 
performance of the Fed published in Cato Working Papers in 
2010, George Selgin, William Lastrapes, and Lawrence White 
concluded that under the Fed, the economy has suffered more 
instability than in the decades before the Fed's establishment, 
and that even its post-World War II performance has not clearly 
surpassed that of its predecessor, the National Banking System. 
Economic theory and historical evidence demonstrate that an 
elastic currency system confers no benefit on society at large. 
Instead, it causes financial instability and business cycles.
    The Fed should be abolished, and a market monetary system 
of commodity money and money certificates should be 
established. A direct route to achieve this end is to convert 
Federal Reserve Notes into redemption claims for gold with a 
100 percent reserve of gold and to redeem the portion of 
reserve deposits banks hold at the Fed into cash so that banks 
hold 100 percent cash reserves against their checkable 
deposits. At that point, production of money and money 
substitutes should be done by private enterprises under the 
general laws of commerce. Thank you.
    [The prepared statement of Dr. Herbener can be found on 
page 240 of the appendix.]
    Chairman Paul. I thank the gentleman.
    I now recognize Dr. Klein for his 5-minute opening 
statement.

   STATEMENT OF PETER G. KLEIN, ASSOCIATE PROFESSOR, APPLIED 
       SOCIAL SCIENCES, AND DIRECTOR, MCQUINN CENTER FOR 
       ENTREPRENEURIAL LEADERSHIP, UNIVERSITY OF MISSOURI

    Mr. Klein. Thank you, Mr. Chairman, and members of the 
subcommittee for the opportunity to discuss such an important 
topic.
    My testimony analyzes the Fed and the reforms considered 
today from the perspective of an organizational economist. How 
does the Federal Reserve system measure up as an organization? 
Are its objectives, as mandated by current law, achievable and 
appropriate for a government agency? Are these objectives 
consistent with a healthy and growing economy? Is the Fed 
effectively structured, managed, and governed? Do key 
decisionmakers have the information and the incentives to make 
good decisions? Are they penalized for making mistakes?
    My answers to these questions are very strongly negative. 
The Fed has been given a task, managing and stabilizing the 
U.S. economy, that is impossible for any government planning 
board. The Fed has vast authority and very little 
accountability. The Fed can take actions that do enormous harm 
to the U.S. economy.
    Since 2008, the Fed has done exactly that. It has pumped 
money into the financial system at unprecedented rates. It has 
kept interest rates near zero, thus discouraging prudent 
behavior among consumers, entrepreneurs, and government actors, 
while encouraging reckless spending and the accumulation of 
vast public and private debts.
    The Fed has done everything it can to prevent the market 
adjustments needed for recovery from the financial crisis. All 
of this has happened without oversight, without external checks 
and balances, and without public discussion and debate. This 
kind of set-up is a recipe for disaster.
    Everything we know about organizations with vast authority 
and without external checks and balances tells us that they 
cannot possibly work well.
    Industrial planning fails because planners cannot, and 
should not, pick winners and losers among firms and industries. 
Likewise, monetary planners lack the incentives and information 
to make efficient decisions about open market operations, the 
discount rate, and reserve requirements. The Fed simply does 
not know the optimal supply of money or the optimal 
intervention in the banking system. No one does.
    Add the problems facing any public bureaucracy--
inefficiency, waste, mission creep--and it is increasingly hard 
to justify giving so much discretion to a single unaccountable 
independent entity.
    Mismanagement of the money supply not only affects the 
general price level, it also distorts the relative prices of 
goods and services. This makes it more difficult for 
entrepreneurs to weigh the costs and benefits of alternative 
actions, encouraging them to invest in the wrong activities, 
that is, to make investments that are not consistent with what 
consumers are willing and able to buy.
    Devaluing the currency and raising prices by injecting 
liquidity into the financial system rewards debtors while 
punishing savers, just as artificially low interest rates 
reward some market participants at the expense of others. 
Instead of winner-picking, we should allow market forces to 
determine the value of money, the price of loans, the levels of 
borrowing and saving, and the direction of investment.
    I do support eliminating the dual mandate, getting the Fed 
out of the full employment business. But I would drop the price 
stability requirement also.
    The belief that we need a central bank to fight inflation 
is based on a misunderstanding of the nature and causes of 
inflation. Price levels rise because the central bank has 
created too much money, not because the economy is somehow 
overheating, needing the government to cool it off. Central 
banks don't fight inflation; they create it.
    Nor do we need a lender of last resort, which protects not 
mom-and-pop savers and investors but incompetent bank 
executives and their financial partners.
    I agree with Mr. Brady that a discretionary bailout policy 
encourages moral hazard. But an explicit, transparent, and 
evenhanded lender-of-last-resort policy has the same result. If 
you know the government stands ready to bail you out, you will 
take risks you should not take. Instead, we should allow banks 
to compete with each other and succeed or fail based on their 
ability to satisfy their customers.
    Reforms such as increasing the number of Fed Governors, 
shortening their terms, or changing how they are selected are 
fine but do not get at the root of the problem. Instead, we 
should replace the old-fashioned central bank with a modern, 
progressive, market-based alternative, such as a commodity 
standard or competition among currencies. A market-based system 
would free entrepreneurs from the unpredictable and seemingly 
arbitrary whims of government planners, unleashing 
entrepreneurs to invest, innovate, and grow the economy, not 
only in the long run, but now when we so desperately need it. 
Thank you.
    [The prepared statement of Dr. Klein can be found on page 
256 of the appendix.]
    Chairman Paul. Thank you.
    I recognize Dr. Taylor for 5 minutes.

STATEMENT OF JOHN B. TAYLOR, MARY AND ROBERT RAYMOND PROFESSOR 
OF ECONOMICS, STANFORD UNIVERSITY, AND GEORGE P. SCHULTZ SENIOR 
       FELLOW IN ECONOMICS, STANFORD'S HOOVER INSTITUTION

    Mr. Taylor. Thank you, Mr. Chairman, and Ranking Member 
Clay for the opportunity and thanks for bringing these 
important issues for public discussion.
    In your opening remarks, Mr. Chairman, you mentioned that 
we have nearly 100 years of Federal Reserve history to learn 
from, and it seems to me the lesson is very clear. Highly 
discretionary policy leads to problems and poor performance. 
More systematic, rules-based policies, steady-as-you-go policy, 
leads to far superior performance.
    In the Great Depression, the Federal Reserve cut the growth 
rate of the money supply. That raised unemployment to 
unprecedented levels.
    In the 1970s, a discretionary go-stop policy led to double-
digit unemployment, eventually double-digit inflation, low 
economic growth, and double-digit interest rates.
    In the 1980s and 1990s, a more focused policy, more 
systematic, more rules-based, in my view, led to long 
expansions, low inflation, declining unemployment, and 
eventually, higher economic growth.
    And, unfortunately, more recently, we have moved back to a 
more interventionist, discretionary policy, much less 
systematic, and the results have been a major financial crisis, 
a major recession and now an abysmally low-growth recovery.
    So you can look at the details, but it seems to me the 
evidence is pretty clear that we need to improve the degree to 
which monetary policy is rules-based rather than discretion.
    I think the legislation to change the dual mandate and 
focus on price stability, which is in Congressman Brady's bill, 
and also in Congressman Pence's bill, would help in this 
regard. So many of these interventions have been based on an 
effort to address unemployment, and the result has been exactly 
the opposite. It created these discretionary actions, which has 
been harmful.
    So for those who are worried that removing the dual mandate 
will actually increase unemployment, I think the historical 
evidence is exactly the opposite. You can look at the 1970s: 
This highly interventionist policy, very little systematic 
behavior, led to very high unemployment.
    You looked at the period in the 1980s and 1990s was less 
interventions, less focus, and the Chairman of the Federal 
Reserve, at that point Paul Volcker, explicitly tried to 
interpret the dual mandate in a way that focused more on price 
stability. The results were dramatically better unemployment.
    And of course, now you have the Federal Reserve citing the 
dual mandate more than it has ever had before to justify these 
interventions.
    So I think the evidence is clear, and the idea is this 
unemployment rate is unacceptable. It is way too high, and I 
think part of the reason for that is monetary policy.
    Now I agree, Mr. Chairman, that the dual mandate is not the 
whole answer. So I would also encourage the Congress to require 
that the Federal Reserve go back to the reporting requirements 
that were removed in 2000. There were requirements that the Fed 
had explicitly to report its goals for money growth and credit 
growth. And those were removed for whatever reason. But things 
like that could be replaced, a requirement that the Federal 
Reserve explicitly report its strategy for setting the 
instruments of policy, whether it is money growth or interest 
rates, whatever they want to do.
    It is their job to determine that strategy, of course, not 
yours. And in fact, if there is an emergency, and they want to 
deviate from it, that is their business. But they need to 
explain why. They need to come back here and say why we 
deviated from the strategy which we told you we would follow 
earlier.
    There seem to be these kinds of changes in addition to the 
restrictions that the Federal Reserve not purchase vast 
quantities of private securities, or the idea that we balance 
the voting responsibility among all the presidents, not just 
give special voting responsibility to some of the presidents, I 
think those reforms in Congressman Brady's bill would also help 
a lot.
    And in general, it seems to me these kinds of reforms go a 
long way to having the Congress exercise its responsibility for 
oversight of an independent agency and at the same time not get 
involved in the day-to-day operations, micromanaging that 
agency.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Dr. Taylor can be found on page 
275 of the appendix.]
    Chairman Paul. I thank you.
    And I now recognize Dr. Galbraith for his statement.

STATEMENT OF JAMES K. GALBRAITH, LLOYD M. BENTSEN, JR. CHAIR IN 
  GOVERNMENT/BUSINESS RELATIONS, LYNDON B. JOHNSON SCHOOL OF 
       PUBLIC AFFAIRS, THE UNIVERSITY OF TEXAS AT AUSTIN

    Mr. Galbraith. Chairman Paul, Ranking Member Clay, it is an 
honor to be here, especially given that I am a former member of 
the staff of this committee and I served on the team who 
drafted the Humphrey-Hawkins Full Employment and Balanced 
Growth Act.
    I wish to speak mainly today in defense of the dual 
mandate, the plural mandate, the flexible and practical 
language of present law. That law was drafted at a time of 
acute theoretical conflict in economics.
    And on the staff. I was a young full employment liberal. 
One of our colleagues, James Pierce, former Federal Reserve 
Research Director, was a mainstream Keynesian at the time. Two 
other colleagues, Robert Auerbach and Robert Weintraub, were 
Chicago monetarists trained by Milton Friedman.
    We compromised on language that gave clear reporting 
transparency and accountability requirements to the Federal 
Reserve in the presence of ultimate objectives but that did not 
impose anyone's theoretical views. Had we done so, I fear the 
oversight process would have failed long ago, perhaps when 
mainstream economics adopted the concept of a natural rate of 
unemployment in the early 1980s, perhaps when classical 
monetarism and the relationship between money and prices fell 
apart shortly after that.
    Instead, being flexible, the process has survived for over 
35 years, even though the theories come and go.
    Now price stability is written into current law as an 
objective of monetary policy. It is the presence of the maximum 
employment objective, alongside price stability, in my view, 
that gives the Federal Reserve leeway to pursue inflation 
targeting at some rate other than zero if it chooses to do 
that.
    Similarly, if in some alternate universe, the Federal 
Reserve were to pursue a full employment strategy at all costs, 
the presence of the price stability language would give you 
legitimate cause to question its policy and the reasoning 
behind it.
    Having price stability alone in the charter would put the 
Federal Reserve in the position presently occupied by the 
European Central Bank, a very difficult position, obliged to 
pretend to ignore unemployment, even as that issue becomes 
increasingly important in the politics of the region that it is 
responsible for; obliged to pretend to respect its charter when 
circumstances dictate that, in fact, it deviate from it; and it 
would put the Federal Reserve in a perpetually difficult, I 
think false, position before Congress, really make it very 
difficult for the Federal Reserve to report forthrightly on 
what it is doing; and I think it would equally put the Congress 
in an extremely difficult position as, unlike the European 
Central Bank, which is an independent entity, the Federal 
Reserve is not and cannot be independent of Congress. It is a 
creature of Congress under the Constitution.
    I think also that creating a single rigid price stability 
mandate would bring back the technical difficulties that we 
experienced in the 1970s and 1980s over the definition of 
money. The definition of price stability would become similarly 
problematic. If one looked at the notional definitions of 
inflation presently in use, I think you would find that the 
Federal Reserve did not, in fact, violate its price stability 
mandate in the run up to the great crisis. It would be very 
hard to know before the fact when it was doing something that 
was not consonant with that mandate.
    Finally, this is a time of ferment in economics, once 
again, as the 1970s were. The profession fell into complacency 
before the great crisis, and the crisis delivered a shock from 
which economics has not recovered. Issues of the cost of 
resources, of the as yet I think unfinished project of 
financial reform, remain unresolved. Unemployment is not going 
away as many prominent forecasters believed it would have by 
now. And there are limits to what the Federal Reserve can 
achieve.
    Reasonable price stability, which was the language in the 
Humphrey-Hawkins preamble, as I recall, is an important 
objective, but so is full or maximum employment. And I think 
Congress would be well advised not to commit to either one at 
the sacrifice of the other.
    I do urge Congress to continue to pursue the goals of 
oversight, accountability, and to probe deeply what the Federal 
Reserve is doing but within the framework of present law. Thank 
you very much.
    [The prepared statement of Dr. Galbraith can be found on 
page 230 of the appendix.]
    Chairman Paul. I thank you.
    Now, I recognize Dr. Rivlin.

STATEMENT OF ALICE M. RIVLIN, SENIOR FELLOW, ECONOMIC STUDIES, 
    BROOKINGS INSTITUTION, AND FORMER VICE CHAIR, BOARD OF 
            GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Ms. Rivlin. Thank you, Mr. Chairman.
    I am happy to have this opportunity to testify before this 
subcommittee as you consider the diverse set of bills about the 
Federal Reserve.
    I will concentrate my remarks on the dual mandate. I 
believe that the dual mandate has served the United States well 
and that it would be a mistake to restrict the Fed's policy 
actions to fostering stable prices alone.
    I would like to make clear at the outset, Mr. Chairman, 
that I believe in a strong, independent central bank. Without a 
strong, independent central bank functioning to mitigate 
economic and financial instability, I believe the United States 
would have a weaker, far more chaotic economy, and would lose 
its leadership position in the global economy.
    The objective of economic policy, including monetary 
policy, should be a rising standard of living for most people 
over the long run. Controlling inflation is a crucial element 
of the larger objective because high and especially rising 
inflation is a serious threat to sustained growth.
    I believe the dual mandate is simply a reflection of what 
average citizens ought to expect their central bank to do: Let 
the economy create as many jobs as possible, but don't let 
inflation interfere with that job growth.
    Economists translate that commonsense exhortation into a 
monetary policy aimed at keeping the economy as close as 
possible to its long-run potential growth without seriously 
overshooting in either direction. This concept is enshrined in 
Professor Taylor's famous rule.
    The problem for the Federal Reserve decisionmakers is that 
the potential growth is not observable because it depends on 
trends and productivity growth, which can shift unexpectedly. 
In the stagflation of the 1970s, hindsight indicates that 
monetary policymakers overestimated potential growth and did 
not tighten soon enough to avoid the acceleration of inflation 
at the end of the decade.
    In the 1990s, when I was at the Fed, we faced a happier 
version of the same uncertainty. We had unemployment that was 
very low but no inflation. We held off tightening the 
presumption, which proved correct, that accelerating 
productivity growth had raised potential growth and reduced the 
risk of inflation.
    Partly thanks to the Fed, we had a very good decade in the 
1990s. We also balanced the budget. The sooner we get back to 
those conditions, the better.
    But the late 1990s also illustrated the inadequacy of the 
Fed's tool kit in response to asset price bubbles. The dot-com 
bubble, if the Fed had raised interest rates to deal with the 
dot-com bubble, I think it would have tipped the economy into 
recession, punishing workers and companies across the country 
for no good reason.
    Influencing the Federal funds rate through open market 
operations is simply not an effective way of calming an asset 
price bubble. We learned that lesson again in the early 2000s.
    While we should not have needed a catastrophe to learn this 
lesson, the Dodd-Frank Act gives the Fed and the Financial 
Stability Oversight Council responsibility for financial 
stability and new tools with which to help achieve it.
    The dual mandate is not inconsistent with strong emphasis 
on controlling inflation when appropriate and even with an 
explicit target for inflation. Indeed, last January, the Fed 
confirmed a long-run inflation goal of 2 percent.
    Operating under the dual mandate, the Fed has successfully 
controlled inflation for 3 decades. To change the language of 
the law to imply that the Fed's only concern should be 
inflation would send a misleading signal to a public rightly 
concerned with jobs and growth as well as inflation. It would 
imply that inflation is a serious current threat to American 
prosperity, which seems to me unwarranted.
    What we need now is a continuation of accommodative 
monetary policy plus fiscal policy that combines additional 
investment in long-run growth in jobs with credible long-run 
action to stabilize the debt.
    In short, monetary policy, as executed by the Fed under the 
dual mandate, has a positive track record and is currently 
appropriate. I would urge the Congress not to tamper with 
legislative language that has served us well. Thank you.
    [The prepared statement of Dr. Rivlin can be found on page 
272 of the appendix.]
    Chairman Paul. I thank the panel, and I now yield myself 5 
minutes for questioning.
    First off, I would like to address my question to Dr. 
Herbener and Dr. Klein.
    Today, with our previous panel and this panel, we have 
heard a lot about the dual mandate, and it seems like that is 
what we have spent most of our time on today.
    Could you put that in perspective? How crucial is that? How 
much difference would it make? I know you have a different 
opinion about the overall picture and the monetary system, but 
if we are--we are not on the verge of having a commodity 
standard and restraint on the authorities, but how crucial do 
you think this debate is, and how much difference does it make 
whether there is a single or a dual mandate?
    Dr. Herbener?
    Mr. Herbener. I don't see too much evidence--
    Chairman Paul. Make sure I can hear you.
    Mr. Herbener. I don't see too much evidence that in the 
performance of the Fed, the concentration on one wing of the 
mandate or another has changed their actual performance. So the 
Fed was in the 1980s concentrating on price stability more than 
the unemployment mandate, and yet they inflated to the extent 
of creating the bubble, the stock market bubble of 1987 that 
burst and gave us a recession in 1990, 1991.
    In other eras where they have concentrated more on 
unemployment, their performance likewise has not been 
spectacular. It has been somewhat similar, I think. And so, I 
don't think in practice that the dual mandate has been 
effective in restraining the Fed's monetary policy or improving 
it one way or the other.
    Chairman Paul. Dr. Klein, do you have anything to add on 
that?
    Mr. Klein. I agree with that.
    I would add that if you look at the incentives of the 
central bank, the central bank always has a stronger incentive 
to increase, to be accommodative and increase credit rather 
than to be contractionary. So I would be more concerned about 
an emphasis on full employment, which sort of encourages the 
Fed to go in the direction that it wants to go anyway, and I 
would be less concerned about it, relatively speaking, on an 
emphasis on price stability, which would tend to constrain the 
Fed and go against the direction that it naturally wants to go.
    Chairman Paul. Of course, the argument that it didn't 
restrain them is precisely the reason they like the mandate 
because it allows them to expand money at will and of course we 
see this as a problem.
    Quick question for Dr. Taylor, you are emphasizing some of 
these monetary rules, and even more monetary statistics, would 
you be in favor of the Fed once again issuing a report on the 
size and growth of M3?
    Mr. Taylor. I would be in favor of the Fed doing that. I 
think the more emphasis on money statistics, the better, in my 
view. They didn't pay enough attention to that.
    But I would say from the point of view of the Congress, it 
seems to me you want the Fed to report on its strategy, not to 
dictate exactly what the strategy should be. So that is the 
Fed's job. You come to this hearing and report the strategy 
explicitly like they did about the M3, which was I think 
constructive. But it also requires the Congress, this 
committee, to ask the questions about the strategy. I think 
that dialogue is very important. I wish we would go back to 
that.
    Chairman Paul. Dr. Galbraith, I tend to agree with you 
about the constitutionality of appointments to the Federal 
Reserve Board. We always have a different opinion about what we 
should be doing, monetary policy and the Federal Reserve. But 
where does this authority come from, constitutional authority, 
since you addressed the Constitution, the constitutional 
authority to actually emit the bills of credit, which is 
prohibited by the Constitution, the creation of a fiat monetary 
system. Where does that authority come from exactly?
    Mr. Galbraith. I believe, Mr. Chairman, and I would be 
cautious about tangling with you on this, but the authority for 
the Federal Reserve Act simply comes from the authority given 
to Congress to coin money and regulate the value thereof and 
that the Federal Reserve Act has been a functional piece of 
American law for over a century now, so it would be a surprise 
to me if it were, per se, unconstitutional on that ground.
    Chairman Paul. Of course, if there is a prohibition in the 
Constitution, you can't change the Constitution by the Federal 
Reserve Act.
    But Dr. Rivlin, I think the removal of the report on M3 
came after you left the Fed, I am not sure. But why was that 
dropped? What would it have harmed us to know a little bit 
about the broad money supply? It seemed like it emphasizes a 
point of money growth and many believe still that the true 
price inflation is a consequence of money growth. Is there any 
reason that we shouldn't have that figure presented to us? Why 
was it canceled out?
    Ms. Rivlin. I don't know. I believe that was after I left. 
But I am always in favor of more information rather than less.
    But the emphasis on the monetary aggregates was declining, 
for a good reason. They weren't stable with respect to 
anything, and we have had all sorts of different kinds of money 
created in the last few decades, and the idea that it was 
mostly checking accounts and savings accounts has just 
disappeared.
    Chairman Paul. I, of course, would like to see more 
attention given to the stableness or the definition or 
explanation or defining what the monetary unit is rather than 
trying to concentrate on the consequences of an unstable 
currency. But we don't have much time to get into that, so now 
I am going to yield 5 minutes to Mr. Clay.
    Mr. Clay. Thank you, Mr. Chairman.
    Welcome back, Dr. Rivlin.
    Dr. Rivlin, at any time during your tenure on the Board of 
Governors, did the dual mandate interfere with the Board's 
ability to set monetary policy?
    Ms. Rivlin. No, I don't believe it did, Mr. Clay.
    Setting monetary policy is really difficult. And you are 
always weighing different considerations. But we were very 
focused, when I was there, on what was happening to 
productivity growth, which was something of a mystery. We 
weren't very worried about inflation because it was falling, 
and so we continued, I think, thinking we were in conjunction 
with both mandates to keep interest rates relatively low.
    Mr. Clay. And inflation was falling because the economy was 
robust. It was growing jobs, and that was because the 
Administration was working with Congress to help the economy 
along. Is that correct?
    Ms. Rivlin. We had strong growth in the economy. We had a 
restrictive fiscal policy in that period. We were trying to get 
back to a balanced budget, which sounds like a fantasy now, and 
we did it. So the Fed's job was easier at that moment because 
the fiscal policy was quite restrictive.
    Mr. Clay. Thank you for that response.
    And Dr. Galbraith, as an architect of the dual mandate, can 
you share with this committee the vision and the need that the 
two legislative authors had for the dual mandate then, back 
then, Senator Humphrey and Congressman Hawkins?
    Mr. Galbraith. Yes, Congressman. I had the privilege of 
working directly with Congressman Hawkins at that time. Of 
course, an economic policy mandate was not a new thing for the 
United States. We had the Full Employment Act of 1945, which 
stipulated maximum employment production and purchasing power 
as the goals of United States economic policy for the whole of 
the government.
    The Humphrey-Hawkins Full Employment and Balanced Growth 
Act sought to modernize and to make a little more ambitious and 
a little clearer the objective, particularly with respect to 
employment. And it also ended up clarifying what was meant by 
purchasing power, that is where the reasonable price stability 
came into the preamble. So it was a way of broadly specifying 
economic policy objectives for the entire government. But also 
with respect to the Federal Reserve, this was the moment that 
codified what we had set up through H. Con. Res. 133, in 1975, 
a process of dialogue with the Federal Reserve, regular 
oversight hearings, which goes on. And the Humphrey-Hawkins Act 
Federal Reserve provisions placed those into law and set a 
regular procedure, and that included, of course, as Professor 
Taylor said, goals for the growth of various monetary 
aggregates, which over time, as Dr. Rivlin has just said, 
became less useful because the relationship between those 
objectives or those statistics and anything you ultimately 
cared about became much noisier and less reliable.
    Mr. Clay. Thank you for that response.
    Dr. Klein, being from Missouri, my home State, let me ask 
you about something that Americans are concerned about, and 
that is the rise in gasoline prices at the pump, especially the 
working class.
    What measures could the Federal Reserve take to stabilize 
the recent rise in gas prices? Any suggestions?
    Mr. Klein. The price of gasoline and the price of oil fall 
a little bit outside the mandate of the monetary authority. So 
certainly rising energy prices is one manifestation of a 
monetary policy that is overly accommodative. But on the whole, 
energy prices, especially for oil, gas, and so forth are set 
primarily in global energy markets over which U.S. policymakers 
have relatively little control. There are measures about 
increasing supply and so on that might be within the purview of 
Congress or the Executive Branch, but in my view, there is not 
much that the Federal Reserve System can or should be doing 
about that.
    Mr. Clay. Thanks for your response.
    I yield back.
    Chairman Paul. I now recognize the gentlelady from New 
York, Dr. Hayworth.
    Dr. Hayworth. Thank you, Mr. Chairman, and thank you again 
for holding this hearing and for your leadership on this 
crucial question.
    I would like to ask this question of the panel: Is it fair 
to say that we probably would not have to debate as vigorously 
and as urgently as we do, and legitimately so, under these 
circumstances, the role of the Fed were it not for the fact 
that the Fed has, as our central bank, had to contend over the 
decades with an increasingly incontinent Federal fisc? To me, 
it strikes me that we talk about the mandates for the Fed and 
the way in which it operates, and again thinking about our 
conversations with Chairman Bernanke, that so much of what the 
Fed has felt compelled to do, if you will, I realize I am using 
a somewhat loose interpretation, has been in response to the 
fact that we have a Federal Government that fundamentally has 
continued, and at an accelerating rate over the past few years, 
to mismanage, if you will, large segments of the economy.
    Dr. Klein, perhaps you could start with that, please?
    Mr. Klein. I certainly think it is the case that the job 
that is given to the Fed becomes more difficult under the 
circumstances that you describe. But I am not sure it is right 
to think of other branches of the Federal Government, the 
Treasury, Congress and so on, and the Fed as being sort of 
antagonists, competing against each other or playing off each 
other.
    One of the major functions performed by, in open market 
operations, is, as has already been discussed earlier this 
morning, monetizing the debt, so the Fed facilitates government 
expenditures and government borrowing that otherwise would not 
be politically feasible if the Fed were not there to monetize 
the debt.
    I think the Fed and the rest of the Federal Government are 
much more likely to be seen as working hand-in-hand than 
opposing each other.
    Dr. Hayworth. Which actually, is exactly what I meant. The 
Fed has been the government's enabler to a certain extent, the 
Federal Government's enabler, and that is part of our problem. 
It is very difficult to use monetary policy to endlessly 
accommodate what we have taken on.
    Mr. Klein. Yes, I agree with that.
    Dr. Hayworth. Thank you sir. Dr. Herbener?
    Mr. Herbener. Yes, I agree, as well. It creates a certain 
type of moral hazard to be able to appeal directly to a 
printing press or to some agency that would monetize debts that 
are issued. I would be profligate as well, anyone would, 
relative to not having that kind of accommodation.
    Dr. Hayworth. Absolutely.
    Dr. Taylor. Thank you.
    Mr. Taylor. Yes. I think, if you hold out your shingle and 
say you are open for business, then people will come. I think 
that is what basically has happened. The Federal Reserve has 
provided what you describe as an alternative to some actions. 
It bought 77 percent last fiscal year of the debt issued by the 
government. That is a big, big intervention.
    I think monetary policy is itself part of the problem now, 
given what it has done, but fiscal policy obviously is a 
problem, as is regulatory policy. So there is a whole gamut of 
policies. I think each of those should be addressed separately. 
Monetary policy can be improved and so can fiscal policy and 
regulatory policy. But the idea of working hand-in-hand, I 
think, leads to the kind of problems we have seen already. That 
is why I think questions about the mandate are important.
    Dr. Hayworth. That indeed is why I myself have become a 
cosponsor of Representative Pence's bill, because of that moral 
hazard issue.
    I am eager to hear from Dr. Galbraith and Dr. Rivlin.
    Mr. Galbraith. I think many of our problems now are due to 
a disastrous deregulation and desupervision of the financial 
sector which led to a catastrophic meltdown of that industry 
and of the solvency of much of the American middle class, and 
the consequences, the effects that we see in the Federal budget 
are largely a consequence, not a cause, of that phenomena--tax 
revenues fall. Unemployment payments go up. Other kinds of 
stabilizing payments go up. We are much better off actually for 
having a large Federal Government, a Federal budget that can 
stabilize the economy in this situation than we would be if we 
didn't have it.
    We didn't have it in the 1930s, and our output fell by 
about one-third. The overall decline was much less this time 
around, and that was because incomes were substantially 
stabilized by the fiscal actions of the government.
    Dr. Hayworth. Wow, we have a lot of food for thought there, 
Dr. Galbraith. You have defined the crux of the contrast 
between the two sides of this dais, and I realize we are out of 
time.
    Thank you, Mr. Chairman, very much. I yield back.
    Chairman Paul. I now recognize the gentleman from Arizona, 
Mr. Schweikert.
    Mr. Schweikert. Thank you, Mr. Chairman.
    First, forgive me, but this is sort of an esoteric 
question, and no pointing and laughing, particularly for all of 
you with Ph.D.s. We take a look back over the last 30 years at 
many of the different asset bubbles, whether it be real estate 
or even certain commercial bubbles, whether it be the Internet 
bubble, where it was often large amounts of resources going in 
and inflating value beyond.
    Is it theoretically possible to have a bubble on the Fed's 
balance sheet by acquiring so much U.S. sovereign paper, so 
much mortgage backed, MBS? At some point, does it create a type 
of distortion in the market, either by creating dramatically 
artificially low interest rates over here, and at some point, 
that is a bond bubble--it is a cascade effect--or actually on 
their own holdings itself? And is that just as--right now, we 
have the discussion about, are we heading towards a student 
loan bubble because we are $1 trillion there? We are heading to 
$3 trillion on the Federal balance sheet. It is a little 
esoteric, and it is not as--but is it one off?
    Dr. Herbener, please, share with me, is my concern just 
sort of unfounded?
    Mr. Herbener. I think the Fed balance sheet, of course, 
exhibits the source of the bubbles that manifest in the 
economy. So when we see the Fed's balance sheet, they engage in 
open market operations, or they buy mortgage-backed securities 
from the banks and so on and generate reserves in the banking 
system, then it creates the possibility of the banks just 
creating credit on the basis of these reserves and channeling 
this credit into particular lines of activity where the bubbles 
arise. And so this is the very process by which the asset-
priced bubbles are generated in the economy. We can't always 
tell exactly what lines they will be generated in just by 
looking at the Fed's balance sheet because the banks, of 
course, can generate credit in different lines.
    Mr. Schweikert. Dr. Rivlin, I owe you--you will not 
remember, but many years ago, I ran into you walking down the 
street and you were very, very kind to me. You spent literally 
10, 15 minutes just talking to me on the street about a couple 
of esoteric issues, so I have always been very appreciative of 
your time.
    Ms. Rivlin. Thank you. I am glad you have that memory.
    I think asset bubbles are a real problem for the Fed, but 
not because of the balance sheet effect. Because monetary 
policy is not a good tool for dealing with asset price bubbles. 
It is a good tool for dealing with general price inflation.
    So the Fed needs different tools, credit, specific credit 
controls and controls on excessive leverage to deal with 
bubbles. And the Dodd-Frank Act does put them in that business, 
and I think that is good.
    Mr. Schweikert. Could current Fed action, and I would like 
Dr. Galbraith's opinion, could the current Fed sheet balance 
sheet, the mechanics there, could it also be leading to a bond 
bubble right now if we start to move toward more normalized 
interest rates, have we created so much paper that that is in 
many ways artificial rates? Does it create a cascade when we 
start to move?
    Ms. Rivlin. I don't think it has to. I think the Fed can 
get its balance sheet down quickly. It is always much easier 
for the Fed to be less accommodative than more. And I am not 
worried about this astonishing balance sheet. It is very big, 
but right now, the reason to worry would be to, that we had 
general inflation, and we don't.
    Mr. Galbraith. I think it would be very hard for the 
Federal Reserve to raise interest rates rapidly. And I don't 
think it is likely to do so. One way to interpret your question 
is to ask whether there is a situation in which the markets 
might sell off U.S. bonds rapidly without that being 
controllable by monetary policy action. I think that is also 
unlikely under present conditions.
    What the markets have shown us is that in adversity, people 
want to hold U.S. bonds. They want to hold U.S. bonds over 
practically any other asset because we are the largest, most 
liquid, and completely reliable market in the world for safe 
liquid asserts.
    Mr. Schweikert. I am sorry, but how much more capacity do 
you believe is pragmatic for the Fed to continue to grow at? Do 
they go to $4 trillion, $5 trillion? How big do these balance 
sheets get?
    Mr. Galbraith. That is a very interesting question for 
which, Congressman, I have to tell you, I don't have an answer.
    Mr. Schweikert. Thank you for yielding to me, Mr. Chairman.
    Chairman Paul. We are going to have a brief second round if 
you are able to stay.
    But I have a question for Dr. Rivlin and also for Dr. 
Klein. I don't want to get into so much on the cause, but I am 
trying to get an assessment of how serious you think the world 
financial crisis is? A lot of us put a lot of blame on monetary 
policy and the Federal Reserve and the dollar reserve standard 
and excessive debt and these issues. We are not going to 
resolve that today, who is to blame.
    But do you consider the world financial situation to be a 
mess or just something that will be taken care of soon and 
there is not that much to worry about?
    Ms. Rivlin. I am very worried about Europe. I think the 
austerity policies are the wrong policies at the moment, that 
they--and they will make the situation worse, and that could be 
bad for us. The long-run debt situation in Europe is serious, 
but at the moment, I would focus attention on their getting out 
of the recession.
    For us, I think we have to get out of this recession too, 
but we have to get our long-run debt under control. I think we 
can, but we haven't.
    Chairman Paul. Could you follow up, Dr. Klein, give me your 
assessment?
    Mr. Klein. I think it is a huge crisis, both in Europe and 
in the United States, with tremendous consequences, not only 
the crisis itself but in my view, the response to the crisis by 
the monetary authority. The hugely accommodative policy, the 
zero interest rates and so on have taken a bad situation and 
sown the seeds for making that situation much, much worse. Of 
course, we haven't seen substantial rises in the overall price 
level since 2008. But if you look at the amount of money that 
has been pumped into the system, the increase in bank reserves 
and so on, there is simply no theoretical model of which I am 
aware, no empirical study that I can cite, in which those kinds 
of actions do not have very serious, long-run consequences on 
price inflation. So I think we haven't seen the worst of the 
results that our current policy is bringing about.
    Chairman Paul. Thank you, and I yield to Mr. Clay.
    Mr. Clay. Thank you, Mr. Chairman. I would like to start 
with a panel-wide question. Perhaps you can briefly try to 
answer it, starting with Dr. Herbener, do you think the Federal 
Reserve's monetary policy execution would be more effective if 
it set explicit inflation targets and was held accountable to 
those targets?
    Mr. Herbener. Not really. I think when the Fed engages in 
any kind of expansionary monetary policy, they always generate 
the same ill effect in the economy. They always generate some 
kind of credit expansion, which leads to a pattern of 
malinvestments, even when they keep overall price levels 
stable. They generate asset price inflation within the general 
price level, and these lines of malinvestment is the sort of 
thing that we saw in the 1920s, very similarly also in the 
1980s.
    So even if there were stable price-level targets that the 
Fed could hit, they would still generate the same kind of 
financial instability and patterns of malinvestments and then 
the necessary liquidation that we see in the bus.
    Mr. Clay. How about, Dr. Klein, your opinion?
    Mr. Klein. Yes, sir, I think posing the problem as a trade-
off between, say, inflation targeting as opposed to targeting 
nominal income is sort of a false dichotomy. Something that 
Representative Paul mentioned in the first round was the idea 
of increased productivity resulting in decreases in prices as, 
of course, we see in many industries, computers, information 
technology and so on.
    There is no reason that we should expect or desire, 
``stable price level'' of 2 percent a year or whatever. In a 
growing economy, we might easily expect the price level to 
fall. That is exactly what happened during the 19th Century in 
the United States, which is the period of the strongest 
sustained economic growth in U.S. history, that increased 
growth, which was driven by productivity improvements resulted 
in a decreasing, and decreasing average price levels. There is 
no reason for policy to try to prevent that.
    Mr. Clay. Thank you, Dr. Taylor.
    Mr. Taylor. We already have an inflation target that is 
announced, 2 percent. But in the meantime we continue to do 
this highly interventionist policy, so it seems to me that is 
not enough, and that is why people are talking about the dual 
mandate. That is why I am talking about returning to reporting 
about the strategy of the Fed. So I think you need more than 
that to get out of the terrible situation we are in now.
    Mr. Clay. Thank you. Dr. Galbraith?
    Mr. Galbraith. I think explicit targets can be useful. In 
the Humphrey-Hawkins law, there was an interim target for 4 
percent unemployment, 3 percent inflation to be achieved after 
4 years. It took 22 years until Alice Rivlin was running things 
and it actually happened. But the difficulty, I think, was in 
setting too ambitious a target and allowing too long a 
timeframe for there to be real accountability.
    If you are going to set targets, it should be on an 
interactive basis and something where you can come back in a 
year and say, look, how did you do in relation to those 
targets, and what have you learned about the world from your 
experience? That would make a useful contribution, it seems to 
me.
    Mr. Clay. Dr. Rivlin, your opinion?
    Ms. Rivlin. I would agree with that. I think that the 2 
percent target is about right. I wasn't a big enthusiast of 
setting an explicit target, but 2 percent is about right as 
long as you don't take it too seriously, because there might be 
reasons to deviate in one direction or another.
    Mr. Clay. Thank you so much.
    Mr. Chairman, I yield back.
    Chairman Paul. I now recognize the gentleman from Arizona 
for a follow-up.
    Mr. Schweikert. Thank you. We were sort of heading on the 
question, I was going to start with Dr. Taylor and then move to 
Dr. Klein. How big can the balance sheet get?
    Mr. Taylor. I already think it is too big. I think the 
quantitative easings, QE-1 and QE-2, are not appropriate, and 
that is why the balance sheet is as big as it is. If we had 
just done the interventions during the panic period, the 
balance sheet would already be back to normal.
    I don't think see any evidence that those have been 
helpful, I have done research on QE-1, and I think that it is 
already too big. I do worry about the size of it already 
because it has to be pulled out, or there will be a bubble. In 
fact, right now we are already running the risk of a bubble 
because of the commitment to hold rates so low for so long.
    I think, when you talk about bubbles, and we talk about the 
Fed's efforts to stop bubbles, I think the problem really is 
more is the Fed causing bubbles rather than the responsibility 
to deal with them.
    So that, I see that concern in the housing bubble, I see 
some other bubbles in the past, and when you think about 
bubbles, let's not forget the fact that the Fed itself can and, 
in fact, has in the past caused bubbles and it may be doing 
that again right now.
    Mr. Schweikert. Dr. Klein?
    Mr. Klein. Yes. I agree strongly with what Dr. Taylor has 
said about the Fed being the cause of bubbles and the idea that 
the Fed needs additional tools to be able to pop bubbles when 
they emerge is taking the wrong view of the nature and sources 
of those bubbles. But as to your question about the balance 
sheet, I agree with Dr. Taylor, but would add that it isn't 
just the overall size of the balance sheet that matters, it is 
the composition of the balance sheet.
    And my concern, as a microeconomist in looking at 
quantitative easing and other interventions by the Fed, is not 
so much their effect on the Fed's overall balance sheet, but 
the effect on particular firms and industries. The winner 
picking, preventing restructurings that are needed to get the 
economy back on the right track is just as important as looking 
at the overall size of the balance sheet.
    Mr. Schweikert. Dr. Galbraith, and then we are going to 
bounce back. Do you have a comment on, first, how big the 
balance sheets can get, and second, does the mix or the size or 
both create a distortive effect on the allocation of capital?
    Mr. Galbraith. As I said earlier, I don't have a clear view 
on how big the balance sheet might get. I do think that as one 
looks at the composition of the balance sheet, what is in the 
portfolio, one has to evaluate the quality of the assets. And 
that is a process which has ramifications for the financial 
structure going forward. There comes a point when you do need 
to address those questions.
    Mr. Schweikert. Okay. Dr. Herbener?
    Mr. Herbener. I would just add one thing. I think most of 
us would agree that the real problem is how exactly is the Fed 
going to unwind the balance sheet, not how big is it going to 
get, but what will be the process by which they take these 
assets off of their books, and what will the repercussions be 
in the markets when they begin this process seriously of 
unwinding things?
    Mr. Schweikert. There goes my bond bubble concern. That is, 
what do I know. Dr. Rivlin, you also have been outspoken both 
on fiscal policy and that has always been appreciated to have 
other voices out there saying we are--we have some great 
difficulties.
    Has the fact that the Fed has been able to grow its balance 
sheets to such extraordinary levels, has, in many ways, has 
that been a way to help Congress avoid fiscal policy?
    Ms. Rivlin. I don't think so. I think the Congress has not 
wanted to face up to the hard choices.
    Mr. Schweikert. It is the same thing.
    Ms. Rivlin. And the Fed's buying bonds is a small part of 
the whole world buying bonds. As Dr. Galbraith said, counter to 
reality, the world believes that we are a very safe investment.
    Mr. Schweikert. But in U.S. sovereign debt issues over the 
last 24 months, hasn't the Fed represented close to half?
    Ms. Rivlin. I don't know exactly what the figure is, but 
right now, we can't have a rapid reduction in our national 
borrowing because it would derail the recovery.
    So I don't think the Fed has much of a choice. I would be 
cautious about increasing the balance sheet much further. I 
don't think there is an answer to your very good question about 
how big can it get, but right now, I think we need a double 
kind of fiscal policy.
    It shouldn't be too severe in the short run, but we have to 
get the long run debt under control.
    Mr. Schweikert. Mr. Chairman, thank you so kindly.
    Chairman Paul. I now recognize Mr. Green from Texas.
    Mr. Green. Thank you, Mr. Chairman. I thank you and the 
ranking member for calling this hearing today, and I thank the 
witnesses for being in attendance.
    Mr. Chairman, I also want to thank you because I am one of 
the Members who signed the letter requesting such a hearing, 
and I thank you for honoring the request to the witnesses.
    Let's start with something very basic.
    The bills that we have range from tweaking to the 
abolishing of the Fed, and I am curious as to how many of you 
are of the opinion that we should totally eliminate the Fed? Is 
there anyone who thinks that it should be abolished, one, two 
persons think we should abolish the Fed. And, if you could, 
just give me a quick, if you can, summary of why you think the 
Fed should be abolished. And then I would like to hear from 
your colleagues as to why you think we should maintain it, just 
quickly, because obviously time is of the essence.
    And I will start with you, Dr. Herbener.
    Mr. Herbener. The Fed should be abolished because the 
conduct of monetary policy under the Fed can bring no benefit 
to society at large, as I mentioned in my previous remarks.
    Mr. Green. The Fed will make bad decisions every time? 
There will be no good decisions made? It just can't have the 
positive impact on the economy?
    Mr. Herbener. Yes. I would say that there is no other 
instance where the government has completely monopolized the 
production of something on the market to impact society at 
large.
    Mr. Green. All right. I am going to take that as your 
answer and move on to the next person. Dr. Klein?
    Mr. Klein. Yes. We can talk about the Federal Reserve 
System per se as an example of the central bank or the 
institution of central banking more generally. And in my 
written testimony, I give some reasons why the institution of 
central banking is not only unneeded, but is also harmful to a 
market economy.
    Mr. Green. But in your opinion, there should not be a 
central bank in the United States of America?
    Mr. Klein. Yes, sir, we don't have a central automobile 
manufacturer or a central dairy or a central computer company.
    Mr. Green. How do you juxtapose that with the central banks 
around the world, where major countries in the world all have 
central banks?
    Mr. Klein. What I am expounding is certainly not the 
majority view among policymakers, but that hardly makes it 
incorrect.
    Mr. Green. I think that is a fair statement. Dr. Taylor?
    Mr. Taylor. Continuing, I think we should reform the Fed. I 
think the evidence, especially in the last few years, is that 
the policy is not working. I look back in history, and I see 
the 1980s and 1990s, a part of the time where Alice Rivlin was 
on the Fed and things worked pretty well.
    They had--it wasn't intervening like it is doing now. It 
had a more steady-as-you-go policy. It had a lot of focus on 
the overall stance of policy, and it worked.
    So I think we need to get back to that. I call it a rules-
based policy, not a more systematic policy, and I think some of 
the reforms we are discussing today will help us get back to 
that.
    Mr. Green. Dr. Galbraith?
    Mr. Galbraith. I think on the whole, Congressman, that the 
20th Century was better than the 19th Century, and that having 
a central bank was a modest, useful part of the institutional 
structure that gave us a very successful century.
    I am very cautious about taking radical institutional steps 
when there is very little going on in the world that would give 
us confidence that they would be stabilizing rather than 
destabilizing.
    Mr. Green. Dr. Rivlin?
    Ms. Rivlin. I feel strongly that we need a strong and 
independent central bank. I think the evidence of the 19th 
Century is not as encouraging as some would think, and the idea 
that the world's greatest economy could make due without a 
central bank, without a lender of last resort, without a 
monetary policy seems to me quite bizarre.
    Mr. Green. Thank you. Let me go back now in reverse order. 
I will start with you, Dr. Rivlin, first.
    The question is, would we be at a disadvantage if we had no 
central bank and other major economic powers have central 
banks?
    Ms. Rivlin. I think we would be, and I think we would lose 
our preeminence as a great--
    Mr. Green. Currency supremacy. The dollar, as you know, is 
a fairly well-accepted currency around the world. Would it have 
an impact on the dollar?
    Ms. Rivlin. Yes. I think it would.
    Mr. Green. Okay. Let me go to the next person please.
    Mr. Galbraith. Yes, I think it would clearly have an 
impact. It would make the dollar, U.S. Treasury bonds much 
riskier.
    Mr. Green. Mr. Taylor, and then I am going to go quickly 
because my time is about up.
    Mr. Taylor. I don't recommend abolishing the Fed, I would 
recommend reforming the Fed.
    Mr. Green. Would we be at a disadvantage, sir, Mr. Klein, 
if we had no central bank and other countries did?
    Mr. Klein. Of course, it would depend on how such a reform 
would be implemented but, look, right now people are fleeing 
from the dollar and heading toward hard assets, like precious 
metals.
    Mr. Green. Dr. Herbener?
    Mr. Herbener. If the dollar was backed by gold, I don't see 
how that could harm our--
    Mr. Green. But you would back the dollar with gold?
    Mr. Herbener. Yes, sir.
    Mr. Green. Thank you, Mr. Chairman.
    Chairman Paul. Thank you.
    I now recognize the gentlelady from New York.
    Dr. Hayworth. Thank you, Mr. Chairman.
    I have a thought for us as we conclude, and I thank you so 
much for your insights, each of you. It strikes me that the 
size of the Fed's balance sheet is going to be largely 
determined given the structure of our representative democracy 
by the will of the American people to take in hand what we have 
created for ourselves at this juncture in our history.
    Is there any sense that it is really going to take a lot of 
political will, if you will, to get our fisc in order for us 
really to, unless there is some significant change in the role 
of the Fed or the structure of the Fed. I think so much of it 
is going to lie in how we manage our Federal budget going 
forward.
    Dr. Rivlin, since I missed you last time?
    Ms. Rivlin. I strongly agree with that. I served on the 
Simpson-Bowles Commission and the Domenici-Rivlin Commission 
and there have been other groups that have all come to the 
conclusion that we really need to get our fiscal house in order 
so that the debt is not rising faster than our economy can 
grow, and that is going to take hard decisions, but we have to 
do it.
    Dr. Hayworth. Thank you, Dr. Rivlin. Thank you for your 
service. It is much appreciated.
    Dr. Klein, I will flip back around.
    Mr. Klein. Of course, I agree, this is a tremendous 
political challenge. Whether it takes a major crisis to bring, 
call forth the political will to make the necessary changes, I 
don't know, but I would hope that this body and others would be 
able to push things in the right direction without waiting for 
the bottom to fall out.
    Dr. Hayworth. Right. Now, Dr. Herbener, do you think what 
we are viewing in Europe, we should take as a portent of things 
to come if we don't do something?
    Mr. Herbener. I think our situation is perhaps even more 
precarious than theirs, given what the Fed has done in the wake 
of the crisis to bail out the banking system. So, again, it is 
going to take strong action against some of the political 
interests that exist here to turn things around before. As Dr. 
Klein said, there is a crisis, and then we have to do 
something.
    Dr. Hayworth. All right. Dr. Taylor, your thoughts?
    Mr. Taylor. Fiscal policy is certainly a mess right now, 
and it has to be fixed, or we will be like Europe. But please 
don't forget about monetary policy. It tends to be arcane, it 
tends to be too narrow, it is difficult, but it is essential 
right now to get it right.
    I don't want to see a future where quantitative easing 
becomes the new monetary policy. When the economy slows down, 
we do gigantic quantitative easings. We don't even know their 
effect. We don't even know how large it should be; it is very 
dangerous. I think it will take some oversight exercise by 
Congress to prevent that in the future.
    Dr. Hayworth. In view of what you have said, Dr. Taylor, 
regarding the Fed's purchase of Treasuries and the proportion 
of Treasuries that have gone to the Fed, is there a certain 
crowding-out effect that we might also be witnessing.
    Mr. Taylor. Eventually, of course, but in the meantime, 
actually, the figure is 77 percent.
    Dr. Hayworth. Yes.
    Mr. Taylor. The amount of debt increase in Fiscal Year 
2011, 77 percent of that was the Fed and that is a gigantic 
amount. And so crowding out, I believe there is crowding out 
about that, even though the economy is weak. Yes, crowding out 
in a weak economy.
    Dr. Hayworth. So there are Federal budget concerns and the 
Federal investments are crowding out the private markets.
    Mr. Taylor. Crowding out occurs because of the deficits and 
the borrowing. And even in a weak economy, I believe it occurs, 
but as the economy picks up, it will be even more of a concern.
    Dr. Hayworth. And more so artificially, if you will, in a 
sense because of what the Fed is endeavoring to do or 
artificially making the picture for Treasuries look perhaps a 
bit rosier than it would be if we had a real marketplace for 
them.
    Mr. Taylor. Actually, the way I think about what the Fed is 
doing now with respect to oversized balance sheets and 
effectively dictating what the short-term interest rate will 
be, it doesn't set it in the market. It dictates by telling 
what the Reserve's interest rates will be on reserves.
    So it is effectively, as the Fed has replaced the entire 
money market with itself, and I tell you, we just don't know 
all the implications of that. Nobody on this panel knows the 
implications of that.
    So the sooner we get back to normal where the supply and 
demand for money is dependent to determine that interest rate, 
and the interest rate is set according to reasonable 
methodology and reported to the Congress, the strategy for 
doing that, the better off we will be.
    Dr. Hayworth. It is not really a central bank, it becomes 
an uber bank in a sense.
    Mr. Taylor. Yes.
    Dr. Hayworth. Thank you. Thank you all. Thank you again, 
Mr. Chairman.
    Chairman Paul. Thank you very much. I want to thank the 
panel today for your time and your testimony. I found the 
hearing very fascinating because even though we might not agree 
on the cause and exactly what we have to do, it seemed like 
there was a general consensus that we do have a problem and we 
have to deal with it. It is not just the United States; it is 
worldwide.
    And my guess is that someday we will seriously not only 
look at the management of a central bank or whether or not we 
really need a central bank, but ultimately I think what we will 
have to do is talk about the nature of money, the definition of 
money, because it is pretty hard to manage something you can't 
even define. But, once again, thank you very much for coming 
today.
    The Chair notes that some Members may have additional 
questions for this panel, 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 these 
witnesses and to place their responses in the record.
    [Whereupon, at 12:30 p.m., the hearing was adjourned.]



                            A P P E N D I X



                              May 8, 2012


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