    [House Hearing, 113 Congress]
    [From the U.S. Government Publishing Office]

                        RETHINKING THE FEDERAL RESERVE'S
                              MANY MANDATES ON ITS
                              100-YEAR ANNIVERSARY

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

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED THIRTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               DECEMBER 12, 2013

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 113-56

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking
        Chairman                             Member
    SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
        Emeritus                         NYDIA M. VELAZQUEZ, New York
    PETER T. KING, New York              MELVIN L. WATT, North Carolina
    EDWARD R. ROYCE, California          BRAD SHERMAN, California
    FRANK D. LUCAS, Oklahoma             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            STEPHEN F. LYNCH, Massachusetts
    MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
    KEVIN McCARTHY, California           AL GREEN, Texas
    STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
    BILL POSEY, Florida                  GWEN MOORE, Wisconsin
    MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
        Pennsylvania                     ED PERLMUTTER, Colorado
    LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
    BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
    BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
    SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
    ROBERT HURT, Virginia                BILL FOSTER, Illinois
    MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
    STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
    STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
    MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
    MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
    RANDY HULTGREN, Illinois             DENNY HECK, Washington
    DENNIS A. ROSS, Florida
    ROBERT PITTENGER, North Carolina
    ANN WAGNER, Missouri
    ANDY BARR, Kentucky
    TOM COTTON, Arkansas
    KEITH J. ROTHFUS, Pennsylvania

                         Shannon McGahn, Staff Director
                        James H. Clinger, Chief Counsel

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        December 12, 2013............................................     1
    Appendix:
        December 12, 2013............................................    37

                                   WITNESSES
                          Thursday, December 12, 2013

    Goodfriend, Marvin, Friends of Allan Meltzer Professor of
      Economics, Tepper School of Business, Carnegie-Mellon
      University.....................................................    11
    Holtz-Eakin, Douglas, President, the American Action Forum.......    10
    Peirce, Hester, Senior Research Fellow, Mercatus Center, George
      Mason University...............................................    15
    Rivlin, Hon. Alice M., Senior Fellow, Brookings Institution......    13

                                    APPENDIX

    Prepared statements:
        Goodfriend, Marvin...........................................    38
        Holtz-Eakin, Douglas.........................................    48
        Peirce, Hester...............................................    59
        Rivlin, Hon. Alice M.........................................    65

                  Additional Material Submitted for the Record

    Hensarling, Hon. Jeb:
        Written statement of Alex J. Pollock, Resident Fellow, the
          American Enterprise Institute..............................    68

                        RETHINKING THE FEDERAL RESERVE'S
                              MANY MANDATES ON ITS
                              100-YEAR ANNIVERSARY

                                  ----------

                          Thursday, December 12, 2013

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 3:08 p.m., in
    room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
    [chairman of the committee] presiding.
        Members present: Representatives Hensarling, Garrett,
    McHenry, Campbell, Posey, Luetkemeyer, Huizenga, Stivers,
    Stutzman, Mulvaney, Hultgren, Pittenger, Barr, Cotton, Rothfus;
    Waters, Maloney, Watt, Sherman, Capuano, Clay, Scott, Green,
    Himes, Carney, and Sinema.
        Chairman Hensarling. The committee will come to order.
    Without objection, the Chair is authorized to declare a recess
    of the committee at any time.
        I, first, want to thank the panelists for their patience
    and indulgence on our rescheduling. The committee is most
    appreciative.
        Before getting to our opening statements and testimony, I
    am going to recognized myself to speak out of order for 1
    minute. I am going to recognize the ranking member and one
    other member, and then the rest of you are out of luck.
        On Tuesday night, Mel Watt, the Congressman of the 12th
    Congressional District of North Carolina, and an 11-term Member
    of the United States House of Representatives, was confirmed by
    the United States Senate to be the next Director of the Federal
    Housing Finance Administration (FHFA). Since coming to this
    committee, I have known Mel Watt to be a man of honor. A senior
    leader on this committee, he has served with distinction and
    led on many critical issues.
        At the time that he was confirmed, I sent out a release,
    and somebody Twittered to the committee that they were
    surprised I was saying something nice about Mel Watt. And I am
    still trying to figure out if that was a comment upon me or Mr.
    Watt.
        [laughter]
        It is a long journey from Mecklenburg County, North
    Carolina, to Yale, and a long journey from Mecklenburg County
    to Congress. Fortunately, it is a short distance from Congress
    to the FHFA; I am told it is 5/8th of one mile. Thank you,
    MapQuest.
        I do not know the exact timing of our colleague's
    departure. This may be his last hearing as inquisitor. I will
    assure the gentleman from North Carolina that it will not be
    your last hearing as inquisitee.
        But on behalf of the Republican side of the aisle, and on
    behalf of the entire committee, I wish to congratulate you, and
    we look forward to continuing to work with you.
        And for all the other members, I have spoken to the ranking
    member, and after we return from our Christmas break, we will
    have a reception so that our colleague can be sufficiently
    hosted, toasted, and roasted.
        With that, I am happy to recognize the ranking member for 1
    minute out of order.
        Ms. Waters. Thank you very much, Mr. Chairman.
        I certainly appreciate your comments. And I would like the
    committee to know that you have been supportive in your own way
    and in your own style, and that your offer to have a bipartisan
    reception, with all of us participating, in order to wish our
    friend and colleague a farewell to this committee and to
    congratulate him is something that you initiated. And I
    appreciate that. I appreciate that very much.
        As a matter of fact, we have been talking about more
    bipartisan receptions. We talked about it for perhaps
    Christmas. I said, ``Oh, I don't know if we want to do that.''
    But when you said for Mel, right away I said yes.
        And so, Mr. Chairman, it is with a heavy heart and a strong
    sense of pride that I congratulate my dear friend, Mel Watt, on
    his confirmation as Director of the Federal Housing Finance
    Agency.
        For more than 2 decades, I have served alongside Mel on
    this committee, and I have watched him use his knowledge and
    experience on real estate issues and housing issues to earn the
    respect of colleagues on both sides of the aisle. And I am very
    pleased to say that Mel Watt understood what was going on with
    predatory lending and securitizing and packaging and all of
    that long before most Members really got in touch with those
    issues.
        Because of his leadership, we were able to follow and to
    build on what he had initiated so that we could get to the
    issues of understanding what was happening in the housing
    market and how we should address some of those issues. So his
    experience that he brought to this committee was considerable,
    again, working on real estate issues and housing issues.
        Mel is a thoughtful, well-informed, principled, and fair
    human being. These qualities, and his well-known temperament,
    will serve him well as he works to address some of the most
    important challenges facing our economy and our housing market.
        His reputation as a legislator focused on openness,
    collaboration, and good public policy is second to none. Over
    his distinguished career, he has demonstrated an unwavering
    commitment to protecting consumers, expanding affordable rental
    housing, and providing prudent oversight of financial
    institutions. I know these values will be embodied in Director
    Watt's leadership of the FHFA.
        Today, I am sad to say goodbye to a long-time friend and
    collaborator, but I am heartened to know that in Director Mel
    Watt, this committee and this Nation will have a strong partner
    in one of its most important government agencies.
        Let me just say that I learned from Barney Frank that when
    you have difficult issues which require that someone who is
    smart, who is patient, and who is not only knowledgeable, but
    willing to listen to both sides, when you have someone like
    that you can go and ask to put both sides together and work out
    a solution, then you should certainly avail yourself of that
    person's expertise.
        That is what Barney Frank did with Mel Watt. He often asked
    Mel Watt to get in the middle of some of the toughest issues
    and work with both sides, all sides of those issues, and bring
    us back a solution.
        And so, we are going to miss those qualities in Mel, but we
    look forward to working with him, because I sincerely believe
    that in this new position he will help us to understand where
    we need to go and what we need to do on the great issues
    confronting us on housing in particular today.
        So with that, Mel, congratulations.
        [applause]
        Chairman Hensarling. The Chair now recognizes the gentleman
    from North Carolina for one of the last times, for 1 minute of
    rebuttal.
        [laughter]
        Mr. Watt. Thank you. Thank you.
        Thank you, Mr. Chairman, and thanks to you and Ranking
    Member Waters, both friends and colleagues on this committee.
        I will be very brief because I am delighted to know you all
    are inviting me back to host me and roast me before I get to
    sit on the other side of the table and you really get to go
    after me. So, I am sure today is a lot more pleasant than it
    will be sitting on the other side of the table when I come
    back.
        I would just make one comment to put this in perspective,
    because one of the things you have to recognize about our
    country and be reminded of quite often is that only in America
    could somebody be confirmed to this position that has the
    regulatory authority over the bulk of housing in this country,
    only in America could somebody come from a beginning, being
    born in a house with no running water, no electricity, a tin
    roof where you could look up through it and see the sky at
    night, and look down through the wooden floor and see the
    ground, and have the opportunity to get an education, to
    practice law, and gain experience in some of the most complex
    real estate issues that the country faces, to come to Congress
    and serve on this committee, and serve with wonderful people
    like my colleagues on this committee have been over the years.
        Only in America can that happen. That is the great thing
    about our country, and we have to keep faith in that process.
    So, I thank you for your kind comments, and I look forward to
    coming back to visit with you. And I hope you all will be as
    kind to me when I come back as you have been today.
        Chairman Hensarling. Don't count on it.
        [laughter]
        And the gentleman yields back.
        [applause]
        I thank the panelists yet again for their continued
    indulgence.
        Now returning to regular order, I recognize myself for 5
    minutes to give an opening statement.
        This month marks the 100th anniversary of the Federal
    Reserve Act. It is on this occasion that I announce the House
    Committee on Financial Service's Federal Reserve Centennial
    Oversight Project. Our committee will overtake the most
    rigorous examination of the Fed's purposes, policies, and track
    record in its history. At the end of the project, scheduled for
    next fall, the committee stands prepared to mark up legislation
    to reform the Federal Reserve, based upon its findings.
        The Fed was created in response to the financial panic of
    1907. An American Banker article argued at the time, ``The
    financial disorders that have marked the history of the past
    generation will pass away forever.'' The Comptroller of the
    Currency at the time said, ``Financial and commercial crises or
    panics seem to be mathematically impossible.''
        Clearly, these predictions proved to be somewhat overly
    optimistic, as well-established by economists Milton Friedman
    and Anna Schwartz, and economist Chairman Ben Bernanke, that
    the Fed played a significant role in bringing about the Great
    Depression. Loose monetary policy, coordinated with fiscal
    deficits, helped cause the great inflation of 1965 to 1986, in
    which inflation rates exceeded 13 percent.
        Most economists will argue that loose monetary policy
    between 2003 and 2005 contributed to the housing bubble in our
    most recent financial crisis. This history is not meant to be
    an indictment of the Fed, but is intended in the spirit of
    looking behind the curtain, not unlike the Wizard of Oz, to
    discover a human face, a human face capable of making mistakes,
    mistakes sometimes with dire consequences for the lives of
    millions of Americans.
        Not only were the authors of the Federal Reserve Act wrong
    about its effectiveness, I do not believe they would recognize
    today's central bank. Classic central bankers followed
    Bagehot's dictum to lend freely during panics to solvent banks
    at a penalty rate and against good collateral. Recently, the
    Fed has lent freely to insolvent non-banks at subpenalty rates
    against questionable collateral. To paraphrase an old
    automobile advertising phrase, ``This is not your father's
    Fed.''
        The Fed's foray into credit allocation policy, distinct
    from monetary policy, was not confined to the immediate events
    of 2008, but continues to this day in the Fed's unprecedented
    purchase of mortgage-backed securities. The Fed's additional
    extraordinary purchases of Treasury bonds have supported the
    Obama Administration's trillion-dollar deficits, a threat to
    the Fed's independence, and one that in prior decades has been
    a harbinger of runaway inflation.
        These extraordinary powers rest with a creature of
    government that the founders of our republic, who have vested
    the authority to coin money with the Congress, would not have
    envisioned: a public-private entity exempt from budgetary
    appropriation with effective control over much of the economy.
        Our first hearing will consider many mandates of the
    Federal Reserve, including classic monetary policy, prudential
    regulatory policy, full employment, systemic risk regulator,
    lender of last resort, and effective financier of our
    unsustainable debt.
        We will also consider the Fed's role in credit allocation,
    arguably picking winners and losers, particularly the burdens
    this has placed--low interest rates have placed on fixed-income
    seniors.
        We will ask questions again about the Fed's role in our
    unsustainable debt. While most of us maintain our commitment to
    permit the U.S. Government Accountability Office (GAO) to audit
    the Fed's operations, we will explore the issues of
    independence, accountability, and transparency, since rarely
    has an agency of government been given or assumed greater
    discretionary power over the economy than the Federal Reserve.
        We will consider how other financial market regulators
    operate under a statutory requirement to measure the cost of
    the new rules on the economy against the benefits, so we will
    help ensure that new rules do not violate the Hippocratic Oath
    principle to first do no harm.
        The Fed's role as lender of last resort has expanded over
    the last few decades and remains ill-defined. We will consider
    the appropriate boundaries of that emergency power. We will
    certainly consider the classic debate in monetary policy
    between rules and discretion in monetary policy. Many would
    argue that in successful periods in the Fed's history, like the
    great moderation of 1987 to 2003, the Fed appears to follow a
    clear rule. In 1995, then-Fed Governor Janet Yellen described
    the Taylor Rule as ``what sensible central banks do.''
        Milton Friedman once said that, ``Money is much too serious
    a matter to be left to central bankers. None of us are
    infallible.'' I respect the dedicated men and women who lead
    the Federal Reserve, but we have a responsibility to ensure
    that the Federal Reserve effectively meets whatever mandates it
    may have.
        The Chair now recognizes the ranking member for 5 minutes.
        Ms. Waters. Thank you, Chairman Hensarling, for holding
    today's hearing to discuss the mandates of the Federal Reserve
    on its 100th anniversary.
        At a critical inflection point such as this, it is
    important to take stock of the lessons of the past and reflect
    on whether the Fed has been effective in meeting its charge to
    keep inflation in check, financial markets stable, and maximize
    employment.
        Although there have been ups and downs in its history, the
    Federal Reserve has learned from the lessons of the past.
    Today, it plays an important role in fostering the conditions
    necessary for both stability and growth in the American
    economy.
        One of the many truths over the last century that holds
    today is the interdependency between a stable economy and a
    stable financial system and, in this sense, the Fed's mandate
    to reduce systemic risk and promote financial stability
    complements its monetary objectives.
        The Fed's regulatory shortcomings in the years prior to the
    most recent financial crisis were significant. But since the
    crisis began, the Federal Reserve has been one of the most
    effective policymaking bodies in stabilizing the financial
    sector and continuing to support the recovery.
        When the first signs of this crisis emerged in 2007, the
    Fed responded swiftly to address the weak economy. It cut the
    discount rate, extended credit to banks, and brought the
    Federal funds rate to its lower bound. When this wasn't enough,
    the Fed took extraordinary steps to provide emergency liquidity
    directly to institutions and foreign central banks around the
    globe.
        However, the severe nature of the crisis forced the Fed to
    enter uncharted territory, recognizing the need to act. It took
    unprecedented steps by engaging in large-scale asset
    purchases--a policy known as quantitative easing--which lowered
    long-term interest rates and has provided a needed boost to our
    recovery.
        As a result of the Fed's stimulus, economists estimate that
    the economy is 3 million jobs stronger than it would have been
    without the Fed's courageous efforts. Further, the drop in
    interest rates triggered by quantitative easing has spurred
    improvements in the housing sector and, by extension, the
    larger economy.
        This housing recovery has been accompanied by a rise in
    home prices that has reduced the number of borrowers who are
    underwater on their mortgages, and expanded the pool of
    homeowners who are eligible to refinance. While the economic
    outlook for our Nation continues to improve, we still have a
    long way to go until we can say that maximum employment has
    been achieved and the economy has fully recovered from the
    trauma of the financial crisis.
        With close to 11 million Americans still out of work, it is
    astonishing to me that members of this body would even consider
    striking the employment aspect of the Fed's dual mandate. What
    kind of signal does this send to hardworking Americans across
    the country?
        Of course, Congress should do its part, too. I am hopeful
    that Members will come together to pass a budget that moves
    away from the antigrowth austerity policies enshrined by the
    sequester in favor of a responsible budget that puts our long-
    term spending on a sustainable path.
        Mr. Chairman, I believe it is worth noting that before we
    contemplate legislative changes to the Fed or its mandate,
    Congress should allow the Fed to finalize the important reforms
    included in the Dodd-Frank Act that reduce the likelihood of
    future financial crisis.
        The Fed is making important progress on this front. Just
    this week, the Fed approved the final Volcker Rule, a critical
    rule which will make our financial system safer. We should not
    rush into reform merely for the sake of doing so.
        So I look forward to the discussion, and again, this
    hearing, and I thank the chairman for scheduling today's
    hearing. I yield back.
        Chairman Hensarling. The gentlelady yields back.
        The Chair now recognizes the gentleman from California, Mr.
    Campbell, the chairman of our Monetary Policy and Trade
    Subcommittee, for 3 minutes.
        Mr. Campbell. That is fine. Thank you, Mr. Chairman.
        So we are talking about the many mandates of the Federal
    Reserve today. And those mandates have not ever been thus, as
    we are doing a little history lesson here. The original
    architects of the Fed had simple goals, like managing an
    elastic currency and serving as a lender of last resort. It
    wasn't until 1977, many decades after the creation of the Fed,
    that it received the additional mandates of maximum employment,
    stable prices, and moderate long-term interest rates. The first
    two are commonly referred to as the ``dual mandate,'' although
    there are more than that.
        But since then, other responsibilities have been added or
    increased. The Federal Reserve now has explicit
    responsibilities in regulating commercial banking activity,
    conducting macroeconomic surveillance, even serving as the
    funding source for the Consumer Financial Protection Bureau
    (CFPB).
        It has served other implicit roles, as well, such as
    providing indirect support to mortgage finance markets and
    lowering borrowing costs for the Federal Government, which have
    had direct impacts on house prices and have enabled deficit
    spending.
        So with all of these mandates and responsibilities, whether
    they are implicit or explicit, that have been piled onto the
    Federal Reserve in the last few decades, the question we are
    asking here, that we must ask ourselves is, can the Federal
    Reserve do as much as it is being asked to do, as well as we
    expect it to do it?
        The primary job of a central bank--to monitor the money
    supply and monetary policy--is tough enough and has enough
    impacts on the economy. When we have all of these other things
    out there, and mandates for this and mandates for that, are we
    giving the Fed more than it can handle effectively, or are we
    not?
        These are some of the questions that, over the period of
    the next few months, as we do this--what did you call it, Mr.
    Chairman, centennial review of the Fed--we want to get to, but
    we certainly are starting today, right now, with you all in
    trying to understand your different views on the mandates that
    are there, whether they are correct, whether they are implicit
    or explicit, and whether they should be revised.
        The Federal Reserve, as I have said several times in the
    last few days and will continue to say, is independent, but it
    is not unaccountable. And part of what we are talking about
    here is accountability for the Fed and its functions and its
    actions.
        And with that, I yield back, Mr. Chairman.
        Chairman Hensarling. The gentleman yields back.
        The Chair now recognizes the gentleman from Missouri, Mr.
    Clay, the ranking member of the Monetary Policy and Trade
    Subcommittee, for 3 minutes.
        Mr. Clay. Thank you, Mr. Chairman, especially for holding
    this hearing regarding the Federal Reserve's mandate. As we
    know, in 1913 Congress enacted the Federal Reserve Act to
    provide for the establishment of the Federal Reserve Bank.
        In 1977, Congress amended the Federal Reserve Act to
    promote price stability and full employment. This amendment is
    better known as the Humphrey-Hawkins Act. Price stability is
    viewed as stable with low inflation, and full employment is
    viewed as maximum sustainable employment.
        The Federal Reserve's dual mandate is in contrast to the
    European Central Bank's (ECB's) single mandate. The ECB's
    single mandate of price stability is a primary objective of
    their monetary policy.
        The Consumer Price Index (CPI) produces monthly data on
    changes in the prices paid by consumers for goods and services.
    Currently, the U.S. CPI decreased 0.1 percent in October on a
    seasonally-adjusted basis.
        For the past year, all-items index increased 1 percent
    before seasonal adjustment. Gasoline fell 2.9 percent in
    October, and that led to a decline in the entire index. The
    electricity index rose, but the indexes for fuel oil and
    natural gas declined.
        From the mid-1960s to the mid-1980s, the CPI showed major
    swings in inflation from low to high to low, and an
    unemployment rate reaching 11 percent. The economy went through
    many recessions during that time, with both high inflation and
    high unemployment.
        Currently, the U.S. unemployment rate stands at 7 percent.
    In Europe, the unemployment rate in several nations is as high
    as 27 percent. In other nations, the unemployment rate is 15
    percent and above. The euro area is around 12 percent and E.U.-
    27 is around 11 percent.
        Still, there are some people who believe that the United
    States would be better off with a single mandate as opposed to
    a dual mandate. They believe that monetary policy can achieve
    the same outcomes with a single mandate as it can with a dual
    mandate, and I certainly do not agree with that analysis.
        Mr. Chairman, thank you. I look forward to the witnesses'
    comments. I yield back.
        Chairman Hensarling. The gentleman yields back.
        The Chair now recognizes the gentleman from Michigan, Mr.
    Huizenga, the vice chairman of the Monetary Policy and Trade
    Subcommittee, for 2 minutes.
        Mr. Huizenga. Thank you, Mr. Chairman. And I appreciate
    that. I, too, much like my previous colleagues have talked
    about, the Humphrey-Hawkins Act, the dual or multiple mandate
    that has been laid out, I think it is worthy to explore to what
    goal and what end we are utilizing that.
        I have an economist friend back in Michigan who is from
    Chicago, Dr. Robert Genetski, who--he and I have had some
    interesting conversations about the Fed. He has pointed out
    that over the last 5 years, there has been about $2.3 trillion
    of reserves that have been built up in the Fed over the last 5
    years. He points to the fact that the Fed is offering 0.25
    percent of interest, while Treasuries are at basically zero. It
    is not a hard decision for some of these banks as they are
    going in there. He believes that it has destroyed liquidity, as
    well. And I am inclined to agree with him. I would love to hear
    that from you all.
        But as we are looking at quantitative easing, QE1,-2,-3,-
    infinity, whatever may be happening, Operation Twist, it
    certainly seems to me that we are outside the bounds of not
    only where traditionally the Fed had been, but maybe where it
    should be and legally should be. And how you put that
    toothpaste back in the tube is something that has not been
    clear, and it is all theoretical, as Mr. Bernanke had pointed
    out here in this committee room.
        Earlier today, we had a hearing with Treasury Secretary
    Lew, where a couple of my colleagues, fellow colleagues from
    Michigan, talked about the effects of Japan, and their
    quantitative easing, and their ``currency manipulation'' they
    are under.
        They believe that should exclude Japan from the Trans
    Pacific Partnership (TPP) discussions that are going on because
    of, literally, the quantitative easing that Japan has been
    doing to make the yen cheaper, and therefore, Japanese products
    cheaper. I would like some reflections on how that shouldn't
    apply to us, and what our own Fed has been doing.
        So, thank you, Mr. Chairman.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from California, Mr.
    Sherman, for 2 minutes.
        Mr. Sherman. This comatose economy still needs stimulus.
    Monetary stimulus reduces the Federal deficit by reducing
    borrowing costs of the Federal Government. Fiscal stimulus,
    which is, in many ways, the alternative, increases the Federal
    deficit. A 2 percent target inflation rate is reasonable,
    especially given the disaster that can occur to our economy if
    we have deflation. Look at Japan or look at our own Great
    Depression.
        Another part of the dual mandate is the dual function that
    the Fed has: on the one hand, it is a bank regulator; and on
    the other hand, it is a monetary policy-setting body. I hope
    our witnesses address that part of the dual mandate dealing
    with both unemployment and inflation.
        We also have the Fed dual governance, where, on the one
    hand, it is a Federal Government agency, appointed through a
    democratic government. And on the other hand, its regional
    executives are appointed, in part, by banks. One bank, one
    voter, actually, $1 billion of banking, one vote, which is not
    democracy. And given the tremendous governmental power the Fed
    has, should all of its Board Members be Presidentially
    appointed for whatever terms are reasonable?
        I hope we look at Section 13(3), which remains the most
    dangerous economic provision in our statute books. It allows
    unlimited lending by the Fed, trillions of dollars at times.
    And we at least ought to make sure that those loans are
    default-risk-free, or as close to that as they can achieve.
        And finally, when it comes to auditing the Fed, as an old
    CPA, I will just say that given our limited auditing resources,
    we would normally want to direct them, first, to whichever
    agency a Federal Government is working hardest to avoid being
    audited.
        So I look forward to these hearings, looking not at just
    one controversial issue of inflation versus unemployment, as a
    focus of the Fed's policy, but a broader range of issues, as
    well.
        I yield back.
        Chairman Hensarling. Today, we welcome four witnesses to
    our panel.
        Dr. Douglas Holtz-Eakin is the president of the American
    Action Forum. Dr. Holtz-Eakin has a distinguished career in the
    economics field in academia and, like another one of our
    witnesses, Dr. Rivlin, also served as a former Director of the
    Congressional Budget Office. He earned his Ph.D. from
    Princeton, and his undergraduate degree from Denison
    University.
        Dr. Marvin Goodfriend holds the Friends of Allan Meltzer
    Professorship as a professor of economics at Carnegie Mellon's
    Tepper School of Business in Pittsburgh. He has previously
    served on the Economic Advisory and Monetary Policy panels of
    the New York Fed. He received his Ph.D. from Brown University,
    and his undergraduate degree from Union College.
        Dr. Alice Rivlin is currently a senior fellow in economic
    studies at the Brookings Institution, a visiting professor at
    the Public Policy Institute at Georgetown, and the director of
    the Engelberg Center for Health Care Reform. As most of us
    know, she, too, has a distinguished public service career,
    including service, along with myself, on the President's debt
    commission, also known as Simpson-Bowles. Somehow, she managed
    to dodge the bullet on the super-committee; I did not.
        She also served as the Founding Director of the
    Congressional Budget Office, OMB Director, and as Vice Chair of
    the Federal Reserve Board. She earned her Ph.D. at Harvard, and
    her undergraduate degree at Bryn Mawr College.
        Last, but not least, Hester Peirce is a senior research
    fellow at the Mercatus Center at George Mason University. Her
    primary research interests relate to the regulation of
    financial markets. We welcome her back to the Hill. Ms. Peirce
    formerly served on the Senate Banking Committee. She earned her
    law degree at Yale, and her undergraduate degree from Case
    Western Reserve University.
        I think each and every one of you have testified before, so
    you know that you will each be recognized for 5 minutes. And,
    no doubt, you know the lighting system. Without objection, each
    of your written statements will be made a part of the record.
        Dr. Holtz-Eakin, you are now recognized for 5 minutes.

       STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, THE AMERICAN
                              ACTION FORUM

        Mr. Holtz-Eakin. Thank you, Mr. Chairman, Ranking Member,
    and members of the committee. It is a privilege to be here
    today.
        Certainly, I want to applaud the chairman and the committee
    for holding this series of hearings. The 100th anniversary of
    the Federal Reserve is an appropriate time for a comprehensive
    review. And it is especially timely, because since 2007, the
    Fed has navigated unprecedented and extraordinary events and
    undertaken unprecedented and extraordinary measures in response
    to those events. It would be useful to have a systematic
    evaluation of their efficacy and their desirability as future
    tools for the Federal Reserve under the purview of the
    Congress.
        My written testimony points out four major functions for
    the Federal Reserve: the conduct of monetary policy; acting as
    a lender of last resort; microprudential regulation, the
    oversight of bank-holding companies, in particular; and
    macroprudential regulation, the management of systemic risks.
    And I think there is fruitful area of inquiry for all four.
        Probably the most familiar is the debate over the conduct
    of monetary policy, rule-based monetary policy versus
    discretion, the desirability of a single mandate versus a dual
    mandate. I won't belabor those here. I simply encourage the
    committee to look into that.
        I do think that the lender-of-last-resort function needs
    some examination. I was privileged to serve under appointment
    from the Congress on the Financial Crisis Inquiry Commission.
    That experience left me with the very strong belief that the
    Federal Reserve was the single best policy response to the
    crisis and deserves the lion's share of the credit for the
    relatively quick turnaround that the United States experienced
    in response to the downturn in financial markets.
        And that involves a traditional and large-scale lending of
    liquidity against collateral. I am not a big fan of the things
    they have done since. I will go into that later, but I think in
    that moment, it did an extraordinary job for the United States.
        But it left behind as a legacy some serious questions about
    the transparency of their actions. It left behind an
    extraordinary expansion of the balance sheet, which is exposed
    to interest rate risks, and may constrain further Federal
    Reserve policy. And I think it is a useful thing for the
    committee to look at where the limits should be on the lending
    of last resort and what serves as useful collateral. I will
    confess that I don't have a firm answer to that question, but I
    think it is something that is certainly worth investigating and
    thinking hard about.
        In the area of microprudential regulations, the Fed has a
    very extensive supervision of regime. It had one leading into
    the crisis, and it missed some material weaknesses in the bank
    holding companies under its supervision. And I think it has,
    since that time, been given even greater supervision
    obligations.
        For example, the Volcker Rule that was just announced looks
    to me to be an extraordinary undertaking, one that is
    ambiguous, at best, and is going to strain the abilities of
    supervisors. I think it really is a good question as to whether
    we are asking too much of the Fed in that area.
        And then finally, on the macroprudential, the systemic risk
    issue--with the finance--the FSOC and the Fed's role in the
    FSOC, and worrying about systemic risk, I worry about whether
    we have gone too far. I look at the FSOC's designation of life
    insurance companies, for example, as systemically important
    financial institutions (SIFIs), when they have little or
    nothing to do with the crisis that we experienced, and I think
    perhaps we have drawn the boundaries too widely and it might be
    time to rein in the macroprudential regulatory obligations and
    authorities of the Fed and others.
        I look forward to answering your questions. I, again,
    applaud the committee for deciding to take on this task and
    think about these issues. They are perhaps among the most
    pressing public policy issues we face today. Thank you.
        [The prepared statement of Dr. Holtz-Eakin can be found on
    page 48 of the appendix.]
        Chairman Hensarling. Dr. Goodfriend, you are now recognized
    for 5 minutes.

       STATEMENT OF MARVIN GOODFRIEND, FRIENDS OF ALLAN MELTZER
      PROFESSOR OF ECONOMICS, TEPPER SCHOOL OF BUSINESS, CARNEGIE-
                           MELLON UNIVERSITY

        Mr. Goodfriend. Thank you, Mr. Chairman, and Ranking Member
    Waters.
        My testimony today will talk about lessons from the
    financial crisis for Fed credit policy. I am going to
    reconsider the Fed's performance in meeting its financial
    stability and employment mandates in the 2008-2009 financial
    crisis and Great Recession. I am going to emphasize three
    points, and then I am going to make one recommendation.
        First, Fed credit policy employed without bound, and not
    conventional monetary policy, played the preeminent role in
    stabilizing financial markets in the fall of 2008 and 2009.
        Second, Fed credit policy involves fiscal policy
    initiatives that are ordinarily the prerogative of Congress,
    but are not part of conventional monetary policy.
        And third, the financial panic and Great Recession were
    triggered in September 2008 in large part when prominent
    Members of Congress openly condemned expansive Fed credit
    support for AIG, and the public became frightened that neither
    the Fed nor Congress would offer further effective support for
    the financial system. I will elaborate on that as we go
    forward.
        Let's see if I can turn the page. On the basis of that
    experience, I would recommend that the Fed's credit policy
    responsibilities, vis-a-vis the fiscal authorities, be
    clarified explicitly and narrowed so as to avert a mishandling
    of the boundary in the future.
        Fed credit policy worked successfully on a massive scale,
    as Doug said, in the fall of 2008 by reintermediating banking
    and money markets. The Fed sold Treasury Securities from its
    portfolio, and it is no longer willing to lend to money
    markets. And the Fed loaned the proceeds from its sale of
    Treasuries to entities no longer able to borrow at reasonable
    rates, if at all, in money markets.
        While quickly reducing short-term interest rates to near
    zero, the Fed employed its monetary policy powers mainly to
    create reserves with which to fund credit policy.
        Crucially, the reintermediation powers of Fed credit policy
    involve fiscal policy, lending to particular private entities,
    whether financed by sales of Treasuries against future taxes or
    financed by the creation of reserve money.
        Unfortunately, the Fed's very independence, the ambiguous
    boundary of expansive Fed credit policy, would help trigger the
    financial crisis of September 2008 and produce the Great
    Recession, a story that I will tell in the remaining time I
    have.
        Paul Volcker alluded to the problem in an April 2008 speech
    to the Economic Club of New York, where he described the Fed as
    having acted at the very edge of its lawful and implied powers
    when, in March, the Fed employed credit policy to facilitate
    the acquisition of Bear Stearns by JPMorgan Chase (JPMC).
        In retrospect, Volcker's remarks can be seen as a life
    preserver to help the Fed persuade Congress at that point to
    make fiscal resources available, if need be, to stabilize
    financial markets. Instead, the fiscal authorities were not
    then so involved, and the Fed remained exposed to having its
    balance sheet utilized, in my term, as an off-budget arm of
    fiscal policy without formal authorization by Congress.
        The problem is this: The Fed credit policy cannot be the
    front line of fiscal support for the financial system. A Fed
    credit policy decision that commits taxpayer resources in
    support or one that denies taxpayer resources is an inherently
    highly charged political fiscal policy matter.
        Initiatives that extend the Fed's credit reach in scale,
    maturity, eligible collateral, or to unsupervised or
    potentially insolvent institutions inevitably carry credit
    risks, incite questions of fairness, and potentially threaten
    conflict between the Fed and the fiscal authorities, with the
    potential to destabilize financial markets and employment.
        Worse, an ambiguous boundary of expansive Fed credit policy
    initiatives creates expectations of Fed accommodation in
    financial crises, which blunts the incentive of private
    entities to take preventive measures beforehand to shrink their
    counterparty risk or their reliance on short-term finance and
    build up financial capital. Events surrounding the Fed's rescue
    of AIG in the fall of 2008 illustrate the problem.
        On September 16th, the Fed chose to lend $85 billion on
    equity collateral to rescue AIG in order to make AIG's
    counterparties whole rather than risk worldwide collapse. The
    politics were such that prominent Members of Congress
    criticized the Fed's credit policy as overreach and a
    questionable commitment of taxpayer funds. And the Fed, under
    Chairman Bernanke, replied the next day that it was stretched
    and could do no more.
        The U.S. Government appeared paralyzed. A run on money
    market funds was abated only after the U.S. Treasury, on
    September 19th, guaranteed all money mutual fund assets.
        The best evidence of how severe the crisis became was that
    high-yield spreads over Treasuries then jumped to 16 percentage
    points and remained elevated for months, well above the 6
    percentage point spread that had been their peak since the
    credit turmoil began.
        How did all this result in the Great Recession? Well, the
    ensuing chaos got the public's attention. The paralysis of
    government, the conflict between the Fed and the Congress, on
    the boundary of fiscal policy, frightened the public.
        Prudence demanded more saving. Households around the
    country, on average, saved 5 cents more of every dollar they
    would have spent in the next 3 months. The national household
    saving rate jumped by 5 percentage points. In macroeconomics,
    that is a disaster. It rarely, if ever, has happened in so
    short a time period.
        The collapse in demand pushed unemployment up sharply from
    6 percent to 10 percent in a matter of months. And the
    relatively mild contraction that had begun in December 2007
    became the Great Recession.
        [The prepared statement of Dr. Goodfriend can be found on
    page 38 of the appendix.]
        Chairman Hensarling. The Chair now recognizes Dr. Rivlin
    for 5 minutes.

      STATEMENT OF THE HONORABLE ALICE M. RIVLIN, SENIOR FELLOW,
                         BROOKINGS INSTITUTION

        Ms. Rivlin. Thank you, Mr. Chairman, Mr. Sherman, and
    members of the committee.
        I am really pleased to be here to testify on this very
    important question, which I interpret as, what economic goals
    should Americans expect of their central bank?
        I don't believe there is a simple answer to this question.
    We can't tell the Federal Reserve, just control inflation or
    just maximize employment or just keep the financial system
    stable.
        Americans, quite rightly, have multiple objectives for the
    performance of their economy, including high employment, low
    inflation, and financial stability. The job of the Fed and
    other policymakers is to balance those multiple objectives as
    well as they can.
        And that is not an easy task. It requires analysis and
    judgment in the face of necessarily uncertain forecasts. But
    focusing on any single objective would lead to less
    satisfactory outcomes than we have.
        First, we do want the economy to create jobs, preferably
    good jobs, for almost everyone who wants to work.
        Second, we want low inflation, or a fairly stable price
    level. We should not aim for zero inflation, because that makes
    it harder for resources to move out of falling demand sectors
    and risks tipping the economy into deflation. But persistent
    inflation above moderate rates is really dangerous.
        Third, we want to avoid financial crises with the potential
    to endanger economic activity in a major way. And the recent
    crisis illustrates how bad that can be.
        In general, these goals reinforce each other, but sometimes
    balancing is necessary. For example, reducing the risk of
    inflation or financial instability may require slowing growth
    and job creation.
        The economy is extremely complicated, and it is impossible
    to predict accurately. As my colleagues have pointed out, the
    Fed's past track record is clearly mixed. Skillful monetary
    policy deserves some of the credit for the fact that inflation
    has been quiescent for more than 3 decades, although partial
    credit goes to fiscal policy, for example, the restrictive
    fiscal policy of much of the 1990s and an increasingly flexible
    and competitive economy.
        The Fed certainly bears some of the blame, along with many
    other culprits, public and private, for its failure to spot the
    dangers of the deteriorating lending standards that contributed
    to the housing bubble and inaction in the face of the
    overleveraged pyramid of housing-related derivatives whose
    crash brought the world economy to its knees.
        This was a house of cards that would have come down
    somehow. I am not sure that the AIG actions--although I wasn't
    very enthusiastic about those either--were actually the
    triggering event.
        Once the unnecessary crisis happened, the Fed moved
    aggressively and imaginatively, in cooperation with the
    Treasury, to mitigate the economic damage. The Fed and other
    regulators had inadequate tools at that time. They now have
    more, thanks to this committee and your counterpart in the
    Senate, which, if used courageously and intelligently, can
    reduce the chances of a similar catastrophe.
        I believe that the Fed's policy of aggressive and
    continuous monetary easing, keeping short-term interest rates
    close to zero and announcing its intention not to raise them
    without strong signs of recovery, plus substantial ongoing
    purchases of Treasury and mortgage-backed securities has
    contributed substantially to recovery from the Great Recession.
        The question now is, how much accommodation is enough?
    There are downsides to extremely low interest rates, which
    discourage saving and may encourage unproductive trading and
    risk-taking. Moreover, the Fed should not go on increasing its
    portfolio indefinitely.
        So the question is, does the recovery have enough momentum
    to absorb a gradual tapering of the Fed's asset purchases,
    followed by a slow reduction of the Fed's portfolio as the
    assets mature? This is a judgment call, and people will differ.
        But to come back to the mandate, it seems to me that the
    drafters of the multiple statutes that define the Fed's
    responsibilities did a good job of encapsulating the major
    objectives which Fed policymakers should have in mind as they
    decide on specific policy moves.
        I think it would be risky and unfortunate to change the
    basic mandates under which the Fed operates, although there is
    plenty to talk about in your series of hearings.
        Thank you.
        [The prepared statement of Dr. Rivlin can be found on page
    65 of the appendix.]
        Chairman Hensarling. The Chair now recognizes Ms. Peirce
    for 5 minutes.

     STATEMENT OF HESTER PEIRCE, SENIOR RESEARCH FELLOW, MERCATUS
                    CENTER, GEORGE MASON UNIVERSITY

        Ms. Peirce. Chairman Hensarling, Congressman Sherman, and
    members of the committee, thanks for the opportunity to be part
    of your centennial look at the Fed. Although the Federal
    Reserve is turning 100, it has the regulatory appetite of a
    teenager, and that is what I am here to talk about today. So I
    would like to talk specifically about some of the new
    regulatory authorities they have, a little bit about the
    Volcker Rule, and then, finally, about economic analysis.
        Coming out of the crisis, it was not clear that the Fed
    would get more regulatory power. In fact, there was talk about
    taking some of their powers away.
        But persistent presence during deliberations paid off for
    the Fed, and they came out with new powers. That included
    getting new entities that they would oversee. Savings and loan
    holding companies are one example, certain designated financial
    market utilities, which are the plumbing of the financial
    system are another example, and then, of course, systemically
    important financial institutions.
        So we have seen already some of the non-bank systemically
    important financial institutions have been named and handed
    over to the Fed for regulation, and that is definitely an area
    to keep an eye on. The Fed tends to look at the world through a
    bank-centric lens. It is not clear whether they will be able to
    realize that these entities are not banks and really can't be
    regulated as if they were.
        Another area in which the Fed got new powers is a little
    more subtle. They now have a regulatory mandate to consider
    financial stability. That is really a very nebulous term, and
    it gives the Fed quite a bit of discretion in how they will
    interpret it.
        The Fed does not seem satisfied with the regulatory power
    it has. It has been making noises, Fed Governors and officials
    have been talking about unregulated areas, or areas they
    perceive not to be regulated enough in the market, and sort of
    implicit in that is, they are saying, hey, if you are looking
    for a regulator, you can look at us.
        And so, that includes money market funds. They have been
    very active in the debate, and quite critical of the Securities
    and Exchange Commission and its proposals for reforming money
    market funds. They are also very interested in the short-term
    financing market.
        As was mentioned this week, the Fed, along with four other
    regulators, finalized the Volcker Rule. The motive for this
    rule was certainly a good one: protecting taxpayers. It is
    being done through limiting proprietary trading and
    relationships with private funds like hedge funds.
        Unfortunately, the implementation is quite difficult, and
    we don't know the full ramifications. A thousand new pages of
    regulatory text came out this week, and so that will take some
    time to absorb and figure out what was done.
        But there are a couple of things that are really clear. One
    is that by setting up this massive compliance operation--and it
    is a massive compliance operation not only for the banking
    entities that are affected, but also for regulators--we are
    going to be having folks concentrate on this ambiguous line
    that the regulation sets up about prohibited proprietary
    trading versus hedging and market-making, which are allowed to
    some degree.
        And so, you are going to have people spending a lot of
    resources trying to make sure they are on the right side of
    that line. Meanwhile, we could have risks over here that are
    real risks to the banks and financial systems that are
    completely not paid attention to because so much effort and
    energy is being spent on Volcker Rule compliance.
        Banks will be limited in their ability to hedge their own
    risks, so that is another area of concern. And then there is
    very much uncertainty about the effect on market-making, which
    is really an important function in our markets. It is a
    function that makes securities trade, ensures that there is a
    buyer for every seller and a seller for every buyer. So, it is
    really an area that we want to be careful to protect.
        One of the reasons that the Volcker Rule was so poorly done
    is because of the lack of analysis. There was no thorough,
    comprehensive economic analysis. And I think this was an area
    where the Fed really could have taken a leadership position. It
    is an agency that is rare in the sense that it is not run by
    lawyers like me. It is run by economists. And so, they didn't
    take that opportunity, and actually that is not that rare for
    the Fed. It has a really spotty record on economic analysis.
        It is an independent regulatory agency, which means that it
    is not covered by Presidential Executive Orders requiring
    economic analysis. But interestingly, in 1979 the Fed put out a
    policy statement which was basically an endorsement of good
    regulation. And included in that was really the importance of
    bringing in public participation, but also required for every
    rulemaking a regulatory impact analysis, which would include a
    look at what is the problem we are trying to solve, what are
    the options for solving it, and then what are the costs and
    benefits of those different options, trying to make sure that
    the costs are proportional to the benefit. Unfortunately, we
    ended up with a Fed that has this policy, but doesn't actually
    abide by it.
        So just in closing, I think there are a number of things
    you should consider in your 100-year look: first, does the Fed
    need a statutory mandate to do economic analysis to make sure
    that it is disciplined about that; second, you should hold its
    feet to the fire in the way it exercises its new regulatory
    authority to make sure that they are doing that in an
    accountable fashion and a transparent fashion; and third, I
    think it is important to look at whether the Fed has too much
    regulatory authority, especially because its main job is
    monetary policy, and is all this regulatory authority
    distracting it from that?
        Thank you very much.
        [The prepared statement of Ms. Peirce can be found on page
    59 of the appendix.]
        Chairman Hensarling. Thank you to the panelists for their
    testimony.
        Due to the rescheduling of this hearing, one of our
    original witnesses, Alex Pollock of the American Enterprise
    Institute, could not be here today. I ask unanimous consent to
    make his written statement a part of the record. Without
    objection, it is so ordered.
        [The prepared statement of Mr. Pollock can be found on page
    68 of the appendix.]
        The Chair now yields himself 5 minutes for questioning.
        I believe it was last year, Dr. Rivlin, you appeared before
    our Monetary Policy Subcommittee, and you testified in that
    hearing that you believed the dual mandate is ``consistent with
    the principles enshrined in Dr. Taylor's famous rule.'' Do you
    still believe that? And if so, could you elaborate?
        Ms. Rivlin. Yes, definitely. I think the dual mandate is
    nicely illustrated by the Taylor Rule, which actually says if
    the economy is growing faster than its potential, the Fed
    should look to raising interest rates. And if it is growing
    below potential, it shouldn't. That is a very loose
    translation, but that is what I get out of the Taylor Rule. And
    John Taylor himself, who was at that hearing, has been critical
    of the Fed for not raising rates faster early in the last
    decade.
        Chairman Hensarling. Some argue that the multiple mandates
    of the Fed should be narrowed. Others, I believe, perhaps
    believe there are others that should be expanded. So
    hypothetically, what if the Fed had another mandate in the
    conduct of monetary policy, and in some form or fashion, some
    iteration was mandated to abide by the Taylor Rule? How would
    you see that implemented? Would you advocate that policy? Would
    you not advocate that policy?
        Ms. Rivlin. No, I am not a rules person. In the first
    place, there are quite a few versions of the Taylor Rule. And
    when I was at the Fed, the staff used to provide us with
    multiple versions for our edification. But my general point is
    I think that you can't encapsulate anything as complicated as
    the economy in a simple equation.
        Chairman Hensarling. Let me follow up on a comment Ms.
    Peirce had, and if we are looking at potentially increasing
    mandates on the Fed, you said, Dr. Rivlin, in your testimony--I
    am not sure if this is an exact quote--that the Fed has to
    balance multiple objectives as best they can. I know that the
    SEC and the CFTC as they are balancing multiple objectives, and
    they are subject to statutory cost-benefit analysis. The Fed is
    not. Should they be?
        Ms. Rivlin. Oh, I agree with Ms. Peirce that they ought to
    do more analysis of almost anything. Economists think that way.
    But, no, I wouldn't put--it depends what you mean. I would
    encourage them to do analysis, but I wouldn't say that there is
    any way to quantify exactly the costs and benefits of any
    particular monetary policy. And trying to do that would be more
    trouble than it is worth.
        Chairman Hensarling. I think I will go in a different
    direction now. In viewing the multiple mandates of the Fed,
    looking at the Humphrey-Hawkins mandate, specifically the full
    employment mandate, which obviously should be the objective of
    the government as a whole, as most economists would define full
    employment still being commensurate with roughly 4 percent to 5
    percent unemployment as people transition through.
        But if the Federal Reserve's--I believe everybody still
    believes its principal mandate is that of classic monetary
    policy--full employment mandate is that critical, should the
    FDIC have a full employment mandate? Should the CFPB have a
    full employment mandate? Should the FSOC or the SEC have a full
    employment mandate? And in the seconds I have remaining, I
    would be happy to--
        Ms. Rivlin. No, I don't think so. I don't think--the FDIC
    is a very valuable agency, but I don't think it does anything
    that influences aggregate employment directly. And the Fed
    does. So I think it is quite different.
        Chairman Hensarling. I only have 13 seconds left, so I will
    set a good example and yield back the balance of my time.
        The Chair now recognizes the gentleman from California, Mr.
    Sherman, for 5 minutes.
        Mr. Sherman. I will point out that the FDIC can discourage,
    in effect, loans to small business. All of us here are besieged
    by people who want to start or expand a business and aren't
    able to get a loan. And all of those arguments are made on the
    basis of employment.
        I think the chairman illustrated well an odd paradox. And
    that is in every other area, to be a really staunch Republican
    means you have to be in favor of cost-benefit analysis. We have
    had at least a dozen votes on the Floor about whether to
    require cost-benefit analysis for this agency or that agency.
    They are anxious to say an environmental regulator shouldn't
    just look at how much cleaner the air can be, but what effect
    is that going to have on the cost to the economy?
        And the dual mandate of the Fed is, in effect, a required
    cost-benefit analysis. The benefit or hoped for benefit of any
    easing is to provide additional employment. The cost is an
    increase at least in the risk of some undesirable inflation.
    Likewise, tightening the risk is the possibility that
    unemployment will go up and the benefit is, hopefully, a
    reduction in the risk of inflation.
        So I think what we should do with the dual mandate is
    rephrase it as a cost-benefit analysis. That is to say, every
    time you are seeking to reduce inflation, look also at the cost
    to employment and vice versa. And I think that a 100-year-old
    agency should modify its lingo to meet current political needs,
    which is to say I think we should have a dual mandate, and I am
    happy to rename it a cost-benefit analysis or a trip to
    Disneyland or whatever other name we want to put on it.
        Mr. Goodfriend, you spoke of the AIG bailout in such
    glowing terms that you disparage those who would even criticize
    it. That was done, I believe, under Section 13(3) of the
    Federal Reserve Act, which allows--at that time, allowed
    unlimited loans by the Fed. Now, there is a provision that we
    added in Dodd-Frank which says you can do that for general
    economic effect, but you cannot make loans under Section 13(3)
    for the purpose of propping up, say, a company named AIG.
        Should the Federal Reserve have unlimited authority to use
    unlimited funds, well above $85 billion perhaps, for the
    purpose of bailing out the creditors of a particular financial
    actor?
        Mr. Goodfriend. No, clearly not. My point there was that
    those--that giving the Fed the latitude, the independent
    latitude to use its balance sheet to make credit available to
    private entities by any means is not a good policy, because the
    boundaries are not clarified between what the Fed can do and
    what the Congress can do. Ultimately--and I said this long
    before--the Fed will be drawn into situations where it will
    overreach, and the Congress for political reasons will have to
    say, ``No, no, that is a mistake.''
        And when the public sees the Congress and the Fed at odds
    in crisis, that creates an increase in the saving rate, which
    is a disaster for employment. So my point was about--
        Mr. Sherman. I want to sneak in one more question for the
    panel, and that is, nobody is proposing to put the Open Market
    Committee on C-SPAN. Thank God the Democratic caucus is not on
    C-SPAN. But what harm would be done to have an audit and
    continuing audits by the GAO of the Fed? Does anybody have an
    answer? Ms. Rivlin?
        Ms. Rivlin. In the first place, in the usual sense of
    audit, the Fed's books are audited. That is clear, and I don't
    think the public always understands that.
        What this other use of the term audit is--I think sort of
    an independent study to second-guess them on monetary policy.
    And there are lots of those, actually, that are done. I am not
    sure commissioning the GAO to be the official kibitzer on Fed
    policy is particularly useful.
        Mr. Sherman. And should we somehow exclude the
    international transactions of the Fed or are those the ones we
    most want to report about?
        Ms. Rivlin. We should know about international transactions
    as we should know about all kinds of transactions.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from California, Mr.
    Campbell, the chairman of the Monetary Policy and Trade
    Subcommittee.
        Mr. Campbell. Thank you, Mr. Chairman.
        I am going to kind of follow up where the chairman left
    off, but do so in a very open-ended manner. We talked about the
    three mandates, if you will--the maximum employment, stable
    prices, and moderate long-term interest rates. So, I am going
    to ask each of you, and we can start with you, Dr. Holtz-Eakin,
    about those mandates.
        Would you support, or if you were king of the forest, would
    you add to those mandates, reduce from those mandates, or make
    a modification or amendment or rule or whatever with any of
    those mandates?
        Mr. Holtz-Eakin. I would not add; I would subtract.
    Certainly, I would like to see far more of a rules-based
    approach by the Federal Reserve. That doesn't rule out
    discretion, because they can pick the rule they want to
    operate.
        But if they can provide it to the Congress, and the
    American people will know what they are up to, they themselves
    have said forward guidance is crucial. We need to know what
    they are going to do. Rules provide that.
        So, I think there is a much stronger case to be made for
    that. And then the question becomes, what do you put in such a
    rule of monetary policy. And I think there is a case to be made
    for a single mandate focusing on price stability. It has been
    done in the other central banks.
        There is a lot of research to suggest that it produces good
    employment outcomes, and that is what we want, in the end. And
    so, I think those are all issues that are very, very sensible
    things to discuss.
        Mr. Campbell. I am going to change my order just a little
    bit because you advocate a rule. Dr. Rivlin said she is not a
    rules person. She said that--and I am putting words in her
    mouth--that you can't simplify or boil this down to a single
    rule or rules. How do you respond to that? And then, I will ask
    Dr. Rivlin to respond to his suggestion.
        Mr. Holtz-Eakin. Rules can be very complicated. And they
    don't have to be simple. You don't have to simplify the
    economy. You can have very complex decision-making.
        But you can be clear about it. And I think, for example, a
    way that the Fed could avoid this issue of auditing is it could
    say, ``Here are the benefits and costs of what we are trying to
    do.'' It could do the economic analysis and essentially provide
    an evaluation of its rule so that you can see what it is trying
    to do. That is very valuable.
        Mr. Campbell. Okay, Dr. Rivlin, I probably butchered what
    you said, but this is your chance to respond, agree, disagree.
        Ms. Rivlin. I think the Fed should be very clear about its
    objectives. It should be clear about how it is trying to get
    there, and if it wants to have a mandate--have a rule like we
    are trying to keep inflation around 2 percent, that is just
    fine.
        But what I meant was I just don't think that you can put
    into a single equation and keep following it. An exact rule for
    anything is complicated, as is the U.S. economy.
        Mr. Campbell. So what about the three mandates as they
    stand?
        Ms. Rivlin. I would leave the three mandates as loosely
    stated as they are, but urge the Fed to be more specific about
    its objectives and its policies.
        Mr. Campbell. Okay. Professor Goodfriend?
        Mr. Goodfriend. Two of the three mandates actually are
    achieved with one stone. Low inflation keeps long-term interest
    rates low. High inflation is probably the most important factor
    in raising long-term interest rates.
        Fear of inflation, even without actual inflation, is
    probably the most important in moving long-term rates up. So I
    will take--low inflation should be a priority because it
    achieves the first mandate and the third mandate.
        What I would say about the second one, employment, is that
    inflation should get the priority even in the short run. And
    only if employment proves to be something that the Fed can deal
    with in the short run in a way that is commensurate with
    confident, stable inflation, should monetary actions be
    undertaken to stimulate employment.
        The Taylor Rule is a pretty good compromise, I would say.
    And I think the Taylor Rule would, in any case, serve as a
    great benchmark against which the Fed should be judged.
        Mr. Campbell. Ms. Peirce?
        Ms. Peirce. As a non-economist, I try to stay pretty far
    away from monetary policy. But I do think, just as a general
    matter, it is good to have people concentrate on the thing that
    they are really able to achieve. And I don't think that is
    employment for the Fed.
        Mr. Campbell. Okay. I will set a good example, and I will
    yield back the balance of my time, as well.
        Chairman Hensarling. The Chair now recognizes the gentleman
    from Connecticut, Mr. Himes, for 5 minutes.
        Mr. Himes. Thank you, Mr. Chairman. I really do want to
    thank you for holding these hearings. I think the hearings that
    we have had, these are some of the more intellectually and
    analytically interesting. They are not necessarily partisan, as
    the discussion is playing out today, but they really are
    critical.
        One of the panelists--and, by the way, thank you all for
    being here and for your patience--explicitly said that the
    Federal Reserve's activities in the face of the financial
    crisis were essential. And I got the sense from, at least most
    of the panel, that there is general agreement on that.
        Those authorities, of course, then, were I think looked on
    somewhat askance by this Congress. And there are all sorts of
    proposals to limit those authorities, even though I think most
    of us would agree that they were, in fact, essential to helping
    pull us out of the nosedive of 2008, very, very interesting
    issues.
        For what it is worth, Mr. Chairman, my own view is that we
    as a Congress have a responsibility to conduct oversight. But
    history would show, and country after country would show, that
    if we compromised the independence of the monetary authorities,
    we would be eroding one of the real cornerstones of American
    economic stability and growth. The prospect of monetary policy
    subjected to the tender mercies of the House of Representatives
    horrifies me, frankly.
        I would like to actually take up Dr. Peirce on some of her
    comments on the Volcker Rule. I have been thinking about it and
    following the Volcker Rule very closely for some time now. You
    are very critical of the Volcker Rule. I am not, not because I
    necessarily think it is a great rule, but simply just that I
    have never been able to quite figure out an alternative.
        You suggest that perhaps better market discipline would
    work, by which I assume you mean incentives, supply-demand,
    clear price signals, and that if shareholders and creditors
    could evaluate proprietary risks taken, that perhaps that would
    be a better alternative to the Volcker Rule. That is sort of
    the core of your argument.
        I would really like to explore that with you, because it is
    not at all clear that in a system where a bank comes to believe
    that they can take big bets, and that if those bets go wrong,
    they will be able to go to the window, they will be able to
    rely on Federal support, that the incentives are anything other
    than to take large and irresponsible bets.
        I would also point out that, having worked in a financial
    institution, credit and exposure changes hour by hour, and it
    is reported to shareholders, at best, quarter by quarter, and
    frankly, even on an annual basis, the information is pretty
    opaque. So I am wondering if you really think that given all of
    those limitations and incentives, there is a market-based
    approach to reducing proprietary risk in contrast to the
    Volcker Rule?
        Ms. Peirce. I do. I agree with you that we need to make
    some changes to get there, but I think that the market is
    actually more capable of monitoring these types of things than
    regulators who are limited in the amount of information they
    have.
        Mr. Himes. But surely the market gets a lot less
    information on day to day and quarter to quarter and even
    annual risk positions than the regulators do and can.
        Ms. Peirce. Yes, but I think if you have a market where the
    incentives are correct so that the shareholders and the
    creditors know that not only are they going to lose money when
    something bad happens, but potentially even--in the case of
    shareholders--be asked to fork over more money, I think then
    they have a real incentive. And I think incentives are what
    make people good monitors.
        That doesn't mean that they are going to be able to be in
    the institution and know moment by moment how the credit risks
    are changing. What it does mean is that they have to put people
    in place managing those institutions who are going to be on top
    of that. And when they see a failure, they have to make the
    call of whether they want to get rid of those people.
        Mr. Himes. Okay. Long topic, but I have one other question,
    and I hope you can help me with this. I have thought a lot
    about cost-benefit analysis--economic analysis as well, too. As
    we think about the costs of regulation, they are pretty clear.
    And the cost of compliance with the Volcker Rule will be
    meaningful. We can get pretty close on what those costs are,
    pretty specific.
        The benefits, of course, have to include the avoidance of
    the kind of catastrophe that we saw in 2008, $17 trillion in
    eliminated asset value at its trough, I guess. And we didn't
    know if it was going to be $34 trillion or a hundred--who knew?
    Who knew?
        How do we factor in the benefits, which I assume are mainly
    the avoidance of that sort of catastrophe. How do we factor in
    the timing and magnitude and probability of those costs
    avoided, i.e., benefits?
        Ms. Peirce. You do have to take that into account. But
    unfortunately, what usually happens when people have these
    discussions is they say, ``Look, the financial crisis was
    terrible, and so, any rule we put in place is good.'' But then
    you have to link it back and say, ``Okay, would this rule
    actually have helped?'' And in the case of the Volcker Rule,
    proprietary trading really wasn't at the root of the last
    crisis.
        Now, it could be at the root of a future crisis. But the
    question that you have to ask is, what will this rule actually
    prohibit? And it may not be that it would prohibit something
    really terrible. It may be that there is an option that would
    be cheaper but that would achieve a better result and do it
    more effectively.
        Mr. Himes. Thank you.
        Thank you, Mr. Chairman. I did not set a good example.
        Chairman Hensarling. No, the gentleman from Connecticut did
    not.
        The Chair now recognizes the gentleman from Michigan, Mr.
    Huizenga, the vice chairman of the Monetary Policy and Trade
    Subcommittee.
        Mr. Huizenga. Thank you, Mr. Chairman. And I don't have a
    track record of setting a good example either, but I am trying
    to work through that.
        Sort of continuing on where my friend, Mr. Himes, was
    going, Ms. Peirce, you had said that accountability with the
    new responsibility was one of the things that you believe ought
    to be held up for the Fed by us.
        And I guess the question, sort of a rhetorical question
    is--maybe not a rhetorical question, but the question you kind
    of posed--does it have too much regulatory responsibility, is
    sort of what I heard. I just want to confirm that is sort of
    where you are at, and then I would like the rest to sort of
    comment on that. Are we in waters that the Fed should be in,
    and has the capability to handle?
        Ms. Peirce. I absolutely believe they have too much
    regulatory responsibility right now.
        Mr. Huizenga. Okay. Dr. Rivlin?
        Ms. Rivlin. I was very skeptical of giving the Fed as much
    microprudential regulatory authority as it has, because I
    thought that would detract from the concentration on these
    other mandates, which I believe are really important, including
    the financial stability. I actually favored the Dodd version of
    Dodd-Frank, which would have--
        Mr. Huizenga. He is looking down at--
        Ms. Rivlin. --created a central regulatory agency, not the
    Fed. But we didn't do that.
        Mr. Huizenga. Didn't they attempt to do that basically with
    the CFPB?
        Ms. Rivlin. Pardon me?
        Mr. Huizenga. Didn't they basically try to do that with the
    CFPB, at least in some part, and then fund it through the Fed?
        Ms. Rivlin. No, that is only consumer regulation, which I
    also thought was a good thing to do. I wouldn't have funded it
    through the Fed. But we needed an agency directed to consumer
    product regulation.
        Mr. Huizenga. Professor Goodfriend?
        Mr. Goodfriend. I feel that the Fed's problem is the
    problem of regulation in general in the finance area.
    Regulation is trying to do the impossible. It is trying to
    compensate for inordinately low capital minimums.
        I would be happiest if capital minimums were raised by
    Congress so as to remove some of the regulatory burden for
    safety and soundness in the first place. I feel like trying to
    substitute for excessively low capital minimums with regulation
    policy is not going to work, and it is a dead end.
        And I think the Fed should ultimately be doing less
    regulatory policy and enforcing through Congress' will higher,
    much higher capital requirements on banks.
        Mr. Huizenga. Dr. Holtz-Eakin?
        Mr. Holtz-Eakin. I want to echo my colleague, Alice
    Rivlin's, thought. I think that it was a mistake to have more
    of the microprudential regulation.
        I am even less enthusiastic about the Volcker Rule than is
    Ms. Peirce. I think it is a big misstep.
        And I want to echo what I said in my opening remarks. I do
    not believe the Fed should be involved, and I don't believe the
    Financial Stability Oversight Council will be successful, in
    this macroprudential effort to control systemic risks. And I
    would take it out of that exercise, as well.
        Mr. Huizenga. Okay. In my last minute-and-a-half,
    quantitative easing and the necessity of it. Do you all agree
    that it was a necessary step? Does anybody not agree?
        Mr. Holtz-Eakin. It depends which one you are talking
    about. I believe--
        Mr. Huizenga. One, two, three, or--
        Mr. Holtz-Eakin. No, I think the Fed, its initial response
    is to be applauded. It moved from a very mistaken institution-
    by-institution approach to opening liquidity to vast pieces of
    the financial markets. That was exactly the right thing to do.
    Since then, everything else has been a policy error.
        Mr. Huizenga. It seems to me we might be caught in a catch-
    22 at this point, because markets are going to react as they
    have somewhat. But moving on, how do others around the world
    view our QE stance, positively, negatively?
        Mr. Goodfriend. So I think what you see around the world is
    countries feel like they are kind of being whipsawed back and
    forth by the talk of QE or not QE in the United States. And I
    regard that as simply what markets are saying, the Fed is
    trying to run an excessively discretionary policy with respect
    to QE.
        And so it is impossible--whether it is foreign governments
    to plan, or U.S. businesses or financial participants to plan,
    because the Fed refuses to specify anything about the glide
    path where QE is going. Again, it comes back to the benefit of
    rules from the Fed. But one of the benefits is letting other
    countries, letting other businesses, plan for the future.
        Mr. Huizenga. And can we possibly be critical of other
    countries trying to essentially do the same thing? I see a
    shaking of a head, but--
        Mr. Holtz-Eakin. No.
        Mr. Huizenga. I assume there is consensus on that?
        Mr. Goodfriend. If you are talking about Japan, there is a
    difference. Japan has deflation. I am for price stability. If a
    country has outright deflation, then I think you can make a
    case for stimulative monetary policy. The United States does
    not and is nowhere near that.
        Mr. Huizenga. Thank you. I yield back.
        Chairman Hensarling. The nodding of a head goes with the
    tapping of a gavel.
        The Chair now recognizes the gentleman from Delaware, Mr.
    Carney, for 5 minutes.
        Mr. Carney. Thank you, Mr. Chairman. I want to second the
    comments of my colleague from Connecticut, Mr. Himes, and thank
    you for having these hearings, and for this, I think you said
    year-long process. I find it very educational, and very good
    for me as a relatively new Member. I want to thank all the
    panelists for being here and bringing your expertise.
        I have a lot of questions and very little time. So maybe
    what I should do is go kind of to the end. The chairman, in his
    opening remarks, envisioned a process where we would have these
    reviews. We have actually had another hearing where it was the
    international central bankers' perspective. And we heard a lot
    from that panel, a very good panel, very good information, what
    we are hearing today.
        And they basically said that Congress should set the
    mandate, set the goals, kind of get out of the way, monitor the
    Fed's actions to those goals, and make adjustments
    periodically. The chairman envisions the legislation.
        How would you change the mandate that the Fed has now? You
    have addressed this, each of you, I think a little bit. But
    could you say it simply stated as well for me?
        Mr. Holtz-Eakin. I personally would narrow its scope toward
    a greater focus on monetary policy. I think some of these other
    activities are a distraction to the Fed, and it is not going to
    do them very well. And within monetary policy, I want to echo
    the--you get two of those mandates with one by taking care of
    inflation. I, for one, believe that inflation should be the
    primary objective of the Fed. As I said, you can make a case
    for a single mandate, a price stability mandate. I am not
    religious about it, but I certainly think that the more clarity
    the Fed gives to how it is pursuing its mandate, the better off
    everyone will be.
        Mr. Goodfriend. I would follow up on that by reiterating
    the point that you get two goals for the price of one by
    putting inflation first. I want to add something to that, also.
        You not only get low interest rates in the long term, you
    not only get stable inflation, but if you look back at the
    history of unemployment fluctuations in the post-World War II
    period, before Paul Volcker stabilized inflation, they were
    literally the result of the Fed putting a priority on
    unemployment first, and then allowing the inflation rate to get
    out of control, and then creating recessions, one after the
    other. This was called go-and-stop policy. So you get even
    benefits for unemployment by putting a focus on--you get three-
    for-one, actually.
        Mr. Carney. So--right, so does the Taylor Rule mitigate
    against that effect?
        Mr. Goodfriend. Pardon me?
        Mr. Carney. The Taylor Rule?
        Mr. Goodfriend. The Taylor Rule is a way to simplify,
    putting a priority on inflation, but allowing some room for
    responding to fluctuations in output relative to--
        Mr. Carney. So it does give some nod, if you will, to
    employment? And you said--I think you said earlier that you
    thought it was a good compromise?
        Mr. Goodfriend. Yes. The Taylor Rule is a very good
    benchmark against which central bankers should judge their own
    actions and against which they should be judged by legislative
    oversight.
        Mr. Carney. Ms. Rivlin?
        Ms. Rivlin. I would leave the mandates alone, at least the
    three we have been talking about: low inflation; maximum
    employment; and financial stability. It is certainly possible
    to fold the employment goal into an inflation target, if you
    recognize the deflation is a bad thing and the Fed should move
    in both directions.
        But right now, when inflation is not anywhere on the
    horizon, and unemployment is high, for the Congress to suddenly
    say, ``We don't want you to care about unemployment. We want
    you only to concentrate on inflation,'' I think the average
    citizen would say, ``Huh? What are they thinking?''
        Mr. Carney. I think that is part of the problem. In some
    ways, it is a political problem. Most people understand what
    employment is. They don't always understand what inflation is,
    and what causes it, and the relationship.
        So if you are talking about just inflation, deflation,
    price stability, you get--but if you talk about employment, and
    at least as part of the conversation, then from our
    perspective, representing the constituents that we do, there is
    a balance there.
        Dr. Holtz-Eakin, you are jumping out of your chair.
        Mr. Holtz-Eakin. I agree with everything you said, but I
    just want to point out something, that if you are very clear
    about how this would work, it would be about inflation
    expectations. What are people expecting in inflation?
        And in the current situation, the fear of deflation,
    expectations of price falling, would cause people to move
    aggressively in exactly the way that Dr. Rivlin wants them to.
        Mr. Carney. Thanks very much. If I had more time, Ms.
    Peirce, I would ask you about the alternative to the Volcker
    Rule. But I don't. Thank you.
        Ms. Peirce. We can talk offline, if you like.
        Mr. Carney. I yield back. Thank you.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Ohio, Mr.
    Stivers, for 5 minutes.
        Mr. Stivers. Thank you, Mr. Chairman. I would like to thank
    all of the witnesses for being here. And I am going to go ahead
    and continue on with the line of questioning from the gentleman
    from Delaware.
        What do folks on the panel think would be an alternative
    approach to the Volcker Rule that would work better, or is
    there one?
        Mr. Holtz-Eakin. I first want to say that I do not believe
    that proprietary trading had anything to do with the crisis.
    And for that reason, I would not have pursued something of the
    type of the Volcker rule. So I think it is a misguided
    enterprise at the outset.
        If you are deeply concerned about the notion that
    depositors' funds, which are backed by taxpayers' deposit
    insurance, are being used for an inappropriate purpose, then
    the answer is to create narrow banks that have the sole
    function of taking deposits and then use them to invest only in
    something like Treasuries. Those entities thus are very safe
    and are not going to cost the taxpayer anything. And the
    remainder of the financial institutions, labeled whatever you
    want, are not narrow banks, and they can go do what they want.
        Mr. Stivers. Let's go ahead and let everybody opine on that
    if you have an opinion.
        Mr. Goodfriend. To go back to my testimony, I don't believe
    that the crisis had, at its core, the issues that proprietary
    trading had to do with, so I completely agree with Doug.
        I think what we should be focusing on is, as I said in my
    testimony, excessive expansiveness of the Fed's willingness to
    supply credit in crises, which I think had much to do with
    exacerbating the crisis as it occurred in 2008, especially when
    the Fed ran into conflict with the Treasury.
        Once the government looked paralyzed, we really, in my
    opinion, got the worst of it. Before that time, the Fed had
    been handling things, and we were in a mild recession with some
    difficult deflation of house prices. But once the public saw
    that the government was at odds with itself, that, in my
    opinion, caused the great panic, the rise in the saving rate
    and so forth. And that is, above all, what we should avoid
    going forward.
        So rather than focusing on the Volcker Rule, I would focus
    on the boundary of the Fed's credit policy powers vis-a-vis the
    fiscal authorities, so that there can be some prearranged
    agreement on how to handle crises.
        Ms. Rivlin. I don't think the Volcker Rule is a
    particularly promising avenue for controlling the real problem,
    which is excessive risk-taking and bubbles of the sort that we
    had.
        The things that are actually prominent in the Dodd-Frank
    Act, allowing the Fed together with other regulators to raise
    the capital requirements and to control excessive leverage, are
    much more important as general tools, as is the resolution
    authority to avoid having to have a big institution fail in a
    disruptive way. So, I would concentrate on those.
        Ms. Peirce. I think it is important to recognize that
    lending also can be quite risky, so it is not proprietary
    trading that should be the target specifically. But it should
    be putting in measures to make sure the market is watching.
        And you can do that through contingent capital. You can do
    it through having shareholders face--taking away their limited
    liability, so that they actually have to pay in if there is a
    problem. There are some creative ways to do that. And, of
    course, higher capital requirements would be effective at this,
    too.
        Mr. Stivers. Do any of you--and several of you volunteered
    in your answers--believe that proprietary trading in any way
    caused the financial crisis in 2008 and 2009?
        Ms. Rivlin. No, but I think it can be a problem for
    commercial banks, if it gets out of hand.
        Mr. Stivers. If it got out of hand. That is fair. And I
    would want to follow up on a couple of things that folks said,
    because, Dr. Holtz-Eakin, you talked about Treasuries. And
    under the current Volcker Rule, Treasuries and GSEs are exempt
    from--they are allowed investments.
        But given our mounting national debt and record low
    interest rates, is it really fair to say--you said they were
    kind of risk-free. I don't think it is fair to say they are
    risk-free anymore. They are a lower risk, certainly, than
    equities.
        Mr. Holtz-Eakin. They are. That was just an example of, if
    you want to have entities that have insured deposits, you can
    control their portfolios very tightly. And if you are not going
    to provide insurance, let people trade and invest as they see
    fit.
        Mr. Stivers. I will yield back the balance of my time. And
    actually--
        Chairman Hensarling. The gentleman yields back his 2
    seconds.
        [laughter]
        The Chair now recognizes the gentlelady from New York, Mrs.
    Maloney, for 5 minutes.
        Mrs. Maloney. I thank the chairman, the ranking member, and
    the panelists for being here today.
        Although some of you say that proprietary trading was not
    part of the financial crisis, it has been documented to have
    been the cause of the London Whale, which caused a loss of $6
    billion. That is unquestionable. And some allege, or believe,
    that the subprime proprietary trading in CDOs, or
    collateralized debt obligations, was a severe cause of the
    financial crisis.
        But instead of debating it back and forth, we could call
    for a GAO report on the role that proprietary trading played in
    the financial crisis and have a legitimate report that comes
    back to us. I would sponsor such a request. If any Republican
    would like to join with me, then we could have an independent
    analysis and research project which would document that.
        One of the things I feel we don't have from the financial
    crisis is what we had after 9/11, and that is a commission that
    really went in and analyzed in depth and reported on what
    caused 9/11, with examples, with funding, with staff. That was
    never done, really, with the financial crisis. It has been many
    different looks and perspectives, but I think that is worth
    doing, if my colleagues would like to join in making such a
    request.
        I want to ask--Dr. Rivlin, it is good to see you again. And
    thank you for your public service. And I thank all of you for
    your hard work. In your testimony, you said that it is entirely
    appropriate for the Fed to have multiple mandates, and I agree.
        You also said that it is possible but not certain that the
    Fed's low interest rates in 2003 and 2004 contributed to the
    bubble that led to the financial crisis. Could you elaborate a
    little bit on that?
        Ms. Rivlin. Yes. I think there were multiple causes of the
    financial crisis, and that the principal one was allowing the
    decline of lending standards, an egregious decline. And I fault
    all the regulators in not stopping that. But, unquestionably--
        Mrs. Maloney. And then the trading of those, proprietary
    trading--
        Ms. Rivlin. Later.
        Mrs. Maloney. --of those subprimes--
        Ms. Rivlin. Certainly, there was a whole pyramid of
    derivatives erected on top of the American housing mortgages,
    and it was the very overleveraged pyramid that came crashing
    down. But I think low interest rates always contribute to a
    bubble. If you can borrow money--
        Mrs. Maloney. I am curious if you would elaborate on how
    you think the Fed should have balanced its mandates in that
    situation.
        Ms. Rivlin. I am not--
        Mrs. Maloney. Should they have kept interest rates low to
    maximize employment, but then adopted stronger bank regulations
    to protect financial stability? Should they have raised
    interest rates earlier than they did?
        Some are arguing, and in one editorial, even, in The New
    York Times today, that if you raised interest rates to 3
    percent to 4 percent, that would help us in the recovery. And
    what is your comment on that?
        Ms. Rivlin. I don't think raising interest rates would help
    the recovery. But to go back to the 2003-2004 period, I think
    the Fed was in a box then, because it did not have appropriate
    tools to deal with an asset price bubble, as it did not in the
    1990s, when we had the stock market bubble, which was clearly a
    bubble. I was at the Fed at the time, and we didn't really have
    the right tools for dealing with that, because raising interest
    rates at that moment would have damaged--would have slowed the
    economy drastically. You would have had to raise them very high
    to affect the bubble. And we didn't do it, and I think we were
    right.
        Mrs. Maloney. The Fed's unconventional monetary policies
    during and after the crisis have been extensively debated and
    commented on today, too. And, obviously, when the Fed adopted
    many of these policies, they were in clearly uncharted waters.
        We can debate whether they should use these policies in a
    crisis, but do you think the Fed should use unconventional
    policies only in a crisis? Or should they be willing to adopt
    new unconventional policies in good times, too?
        Ms. Rivlin. Good times don't challenge the Fed the way a
    crisis does, so I am not sure exactly what unconventional
    policies would be appropriate. The main thing is to avoid the
    crisis. But once you have it, then you have to do everything
    you can think of to stabilize the situation.
        Chairman Hensarling. The time of the gentlelady has
    expired.
        The Chair now recognizes the gentleman from New Jersey, Mr.
    Garrett, the chairman of our Capital Markets and GSE
    Subcommittee.
        Mr. Garrett. Thank you, Mr. Chairman.
        And to the gentlelady of New York, that is an interesting
    idea, as far as a study. So let's just think about--we should
    probably get together and think about that some more, doing
    something like that.
        Maybe couple it with Ms. Rivlin's comment about the--you
    were just talking about underwriting standards and the problems
    in those areas, so there might be--if we are going to ask for
    something, we might as well ask for a couple of points in--as
    far as the study goes.
        Mrs. Maloney. I would welcome any opportunity to work in a
    bipartisan way on this committee. Thank you.
        Mr. Garrett. Great. Thanks.
        Earlier today, the committee heard from Secretary Lew to
    get some answers, or at least we were attempting to get some
    answers from him. And during that time, I expressed to him my
    concerns regarding the lack of accountability and transparency
    that has been part and parcel of, I said, this Administration.
        So I want to carry that through here with this discussion
    and the theme of accountability and transparency, as we examine
    the broader theme of the Fed.
        The gentleman from California has already sort of laid this
    out, and we agree that the Fed has an awful lot on its plate,
    and I would argue it has--just as he does, I think--it has too
    much on its plate. On the monetary side, the Fed must contend,
    as he said, with the dual mandates. The Fed also maintains
    responsibility--I will get into those in a minute--on
    supervising and regulating bank holding companies, providing
    bank services to deposit institutions and so on. And Dodd-Frank
    has just added to all that.
        Now, with such vast powers, including an independent
    funding stream outside of the appropriation process, its role
    as lender of last resort, the Fed, then, should be held to a
    very, very high bar in terms of accountability and transparency
    to not only Congress, but also to the American people.
        And I am really concerned that the level or lack of level
    of accountability and transparency at the Fed is
    disproportionate at this point to its power.
        I just have a couple of questions. I am not sure which
    order I will go in; maybe I will just run down the list this
    way.
        Ms. Peirce, by our count, the Federal Reserve has had only
    5 meetings over the last 2 years, 5 open, public meetings over
    the last 2 years. Considering this expansive power that they
    have, and it is now as regulator as well, do you think that is
    an appropriate amount of openness and public meetings?
        Ms. Peirce. I think that is a really important concern that
    you raised. They do a lot of their rulemaking behind closed
    doors.
        And as we saw this week with the Volcker open meeting, some
    really valuable things come out of those open meetings. You get
    the dialogue between the staff and the Chairman and the other
    Governors, and that is very helpful.
        Mr. Garrett. I don't have a lot of time. Can I ask you--and
    anyone else from the panel--after we are done here, to send me
    any recommendations that you might have on that area, if you
    would, please?
        I will swing down to the other end of the table, and say,
    you are probably aware that earlier this year, the House passed
    the SEC Regulatory Accountability Act. This legislation
    enhances the SEC's existing economic analysis requirements,
    requiring that it first clearly identify the nature of the
    problem that would be addressed before issuing any new
    regulations, and also require economic analysis to be performed
    by the SEC's Chief Economist.
        Under current law, the Fed is not obligated to perform such
    a cost-benefit analysis. Given its role as--central role in
    Dodd-Frank, do you think this is appropriate? And if not, what
    would you recommend?
        Mr. Holtz-Eakin. I think the Fed should be required to
    provide such an analysis. I am cognizant of how difficult this
    is to do sometimes. This came up earlier in the discussion
    about quantifying the benefit, but that doesn't mean you
    shouldn't do it. It tells you, then, if you can quantify the
    costs exactly, that the benefits have to be at least that big,
    or it is not worth doing, and you need to know that. So I would
    ask the Fed to do that on a regular basis.
        Mr. Garrett. Great. We have heard from a lot of community
    banks that all the regulations under Dodd-Frank are creating a
    huge problem for them. I will get right to the point here. Over
    at the OCC, there is something called the community bank
    ombudsman located within the OCC. In light of all the extra
    powers now that the Fed has, should we have something akin to a
    community bank ombudsman within the Fed?
        Mr. Holtz-Eakin. I think I would like to have the
    opportunity to think about that and get back to you. I worry
    about creating favored constituencies who have their own
    representative inside the Fed.
        Mr. Garrett. Okay. Yes, sure?
        Mr. Goodfriend. On cost-benefit, I would like to point out
    something. The Fed's so-called QE policies today are really
    what we call in finance a carry trade. Carry trade means you
    are borrowing very short term to hold long-term securities.
    That is not a monetary policy. A carry trade is a pure fiscal
    policy.
        So where I would start, if you want to argue that the Fed
    should be undertaking cost-benefit analyses, I would ask them,
    well, what do you think are the potential costs or value at
    risk, so to speak, in the banking business, of a carry trade of
    the nature that you are carrying on? Then, we can talk about
    the benefits that you think there are.
        Mr. Garrett. We have tried to get that number from them,
    yes, but thank you. That is a good point.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from North Carolina,
    Mr. Pittenger, for 5 minutes.
        Mr. Pittenger. Thank you, Mr. Chairman.
        And thank you, panelists, for being here today. It is very
    good to have heard your responses.
        I would like to ask each of you--Chairman Hensarling has
    shown this debt clock running on either side of the room. I
    really wanted to get your thoughts on how the policies of the
    Fed could lead to compounding the problem when it comes to
    interest rates on the debt. Do you believe when interest rates
    rise over the coming years, and the spinning trajectory we are
    on towards the close of this decade, the interest rate
    payments, along with the annual deficits, will push America's
    debt to unsustainable levels, perhaps close to what we are
    seeing in Europe?
        Would you like to start, Mr. Holtz-Eakin?
        Mr. Holtz-Eakin. I am already so troubled by the trajectory
    of the U.S. debt that it will not take higher interest rates to
    trouble me further. Certainly, we are on an unsustainable
    trajectory. If we were to get a normalization of interest
    rates, either quicker or something above what people like the
    CBO forecast, it is going to put enormous pressures further on
    the Federal budget. So we are in a dangerous position as a
    nation, and it should be fixed.
        Mr. Pittenger. How would you fix it? How would you mitigate
    it?
        Mr. Holtz-Eakin. It would be up to the Members of Congress
    and the Administration to fix the spending problem that
    emanates from the mandatory spending programs in the budget.
    That is our problem. That is what we haven't touched. That is
    what needs to be fixed.
        Mr. Pittenger. As it relates to the interest rates?
        Mr. Holtz-Eakin. In the end, we want to pray for higher
    interest rates. They will, in fact, reveal that the economy is
    recovering. And so, at all costs, we don't want to avoid higher
    interest rates. We want them to normalize. And we want the
    fiscal policies to be put in place that allow us to sustain
    those higher interest rates without a threat to the stability
    of the Federal budget.
        Mr. Pittenger. Very good. Thank you.
        Mr. Goodfriend?
        Mr. Goodfriend. I completely agree. I have nothing to add
    to Doug's comments.
        Mr. Pittenger. Ms. Rivlin?
        Ms. Rivlin. I believe that the trajectory of debt is very
    worrisome. That doesn't mean that I think we need more
    austerity now. I think, actually, we need less. But I was very
    disappointed that the budget deal--which admittedly is a lot
    better than no budget deal--did not come to grips with the
    longer-run problem of the debt rising faster than the GDP.
        I think that means two big, difficult things. It means
    entitlement reform, and it means tax reform that will raise
    more revenues in the long run through a more pro-growth tax
    system. I served on two commissions, one of them along with the
    chairman, that explored those issues. I think we can get to a
    bipartisan agreement on it, and we ought to do it as fast as
    the Congress can.
        Ms. Peirce. Again, I am not an economist, but I know we are
    spending too much.
        [laughter]
        Mr. Pittenger. Well said. I concur with that.
        Professor Goodfriend, recently I introduced some
    legislation, H.R. 3240, and it deals with Regulation D as a
    Study Act. This bill calls for the GAO to take a look at Reg D
    as it relates to the number of transfers allowed for a given
    individual, that being six. And working with the Fed, I just
    wanted to get your take on this bill. If Congress were to
    eliminate or modify the six-limit transfer under Reg D, would
    that cause concerns to the Fed?
        Mr. Goodfriend. I am not aware of what is in the bill. If
    you can explain it to me a little bit--
        Mr. Pittenger. It is a bill for credit unions. It is really
    outdated. It is a bill that was--the policy was developed out
    in the 1980s. And I think through the electronic transfers and
    other forms of payment, there is a limit to how many transfers
    can be made. And so, it is a simple bill, and I just wanted to
    know if you--
        Mr. Goodfriend. It sounds like there had been a limit on
    transfers made by credit unions on behalf of their customers--
        Mr. Pittenger. Yes. Yes, there is now.
        Mr. Goodfriend. Credit unions started out as relatively
    small collections of people who were allowed to set up banking
    facilities independent of being commercial banks. And since
    then, credit unions have gotten huge. They have become very
    important banking centers.
        I think it is time to treat them like banks under the law,
    and it sounds like your bill would do that. There are different
    sides of this debate that I am aware of, but I think that
    credit unions have long since become more and more like banks,
    and I don't see any reason why they should be treated
    differently, if that is what this bill is about.
        Mr. Pittenger. Yes, sir. Thank you.
        I yield back.
        Chairman Hensarling. The gentleman yields back.
        The Chair now recognizes the gentleman from Kentucky, Mr.
    Barr, for 5 minutes.
        Mr. Barr. Thank you, Mr. Chairman. And thanks to the
    witnesses for being here.
        I want to start with Ms. Rivlin, and thank you for your
    service to the country in many different capacities. I was
    struck by your testimony just a few minutes ago about your
    wanting the Congress to resist austerity measures. And just for
    clarification purposes, the Federal budget, we spent presently,
    what, $3.7 trillion, is that right?
        Ms. Rivlin. Something like that.
        Mr. Barr. And so for the last 5 years, we have had--we have
    run deficits in excess of $1 trillion for 4 years and close to
    $700 billion this past year. You are not suggesting that those
    policy results in any way resemble austerity?
        Ms. Rivlin. I am suggesting now that the deficit has come
    down quite rapidly, and that puts a drag on the economy, and
    that cutting discretionary spending as much as the Congress did
    has retarded recovery. I am glad that part of the sequester was
    set aside in this agreement. But, yes, I think we do have
    austerity now.
        Mr. Barr. And I noted your favorable comments related to
    the budget agreement that the Congress will be taking up--the
    House will be taking up this afternoon. Do I take your
    testimony to mean that you generally agree with the concept
    that I think Dr. Holtz-Eakin has advocated pretty vociferously
    in the past, that replacing, or at least focusing the attention
    on mandatory spending reforms is where our focus needs to be?
    And to the extent that the budget agreement today does that, to
    the extent that we replace some of the sequester with a focus
    on mandatory spending reforms, are we heading in the right
    direction, as modestly as we may be?
        Ms. Rivlin. It is modest, but it did not come to grips with
    the major entitlements or mandatory programs, very modestly
    with Medicare. But it is the health entitlements over the long
    run, not immediately, but over the long run, and Social
    Security, which are driving Federal spending in the future.
        Mr. Barr. Thank you.
        Dr. Holtz-Eakin, in your testimony, when you talked about
    the core functions of the Fed--monetary policy, lender of last
    resort, bank holding supervision and systemic risk management--
    one thing that the Fed is doing as a result of Dodd-Frank now,
    which is somewhat unusual, I would argue, is providing the
    funding for a new agency, the Consumer Financial Protection
    Bureau. Where in those core functions is--where does this fit?
        Mr. Holtz-Eakin. It doesn't. And I don't support that at
    all. I think that is something that should go through the
    congressional appropriation and oversight process.
        Mr. Barr. Okay. And for all the witnesses, a final
    question. I have about 2 minutes left in my time.
        I wanted you all to comment on the testimony of Chairman
    Bernanke before this committee earlier this year. And I asked
    the question about the exit strategy. Obviously, Chairman
    Bernanke has pursued a very aggressive quantitative easing and
    accommodative policy. It appears that Ms. Yellen is going to
    pursue that and continue that policy into the future.
        And one thing that we heard from the Fed earlier this
    summer, and from Chairman Bernanke, was a hint of possible
    tapering in the event that unemployment comes down to a certain
    level. And the mere suggestion of tapering resulted in a pretty
    significant revolt from the market. We saw the 30-year fixed-
    rate mortgage jump by 42 basis points. The Dow suffered back-
    to-back declines of more than 200 points. Billions of dollars
    fled the credit funds after just the hinting of the possibility
    of tapering.
        So my question is--and I asked this question then--how is
    the Fed going to avoid a catastrophic spike in rates when
    tapering actually starts? And the chairman's response was, we
    just have to communicate, we have to be effective in telling
    the markets what we are doing.
        Do you think that is a satisfactory answer? Do you think,
    given the fact that the Fed's balance sheet is where it is
    today, is tapering inevitably going to lead to a kind of
    catastrophic spike in rates that will be very, very damaging to
    GDP?
        Mr. Goodfriend. I think that what happened in May was a
    pulling back on the Fed's tapering to the degree that a lot of
    the damage has already been done. There might be some reaction
    in rates. But I think the sooner the better they get on with
    it. I think there will be a relatively muted reaction. They
    should just not throw good money after bad, so to speak. And I
    would start it as soon as possible, especially if the budget
    deal is done in Congress.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Pennsylvania,
    Mr. Rothfus, for 5 minutes.
        Mr. Rothfus. Thank you, Mr. Chairman. And thank you, panel.
    This has been a very informative discussion this afternoon.
        I would like to first talk to Professor Goodfriend. It is
    always nice to see somebody from Western Pennsylvania, too, and
    see somebody from the fantastic university up there, Carnegie
    Mellon University.
        Professor, in what ways, if any, do you think the Fed's
    interventions in financial markets have impaired the efficiency
    of banking in capital markets?
        Mr. Goodfriend. I don't want to go over my testimony again,
    but I think there was a big negative effect in the way the Fed
    handled its interventions in the crisis. But even now, by
    intervening in mortgage markets to the tune of $40 billion a
    month in an ongoing way as part of this QE3, what the Fed is
    doing is making it very hard for private parties, for private
    entities to step back into the mortgage market, because what
    the Fed is doing is keeping the spreads low.
        One of the transitions that has to be made at some point is
    the markets have to become confident that the spreads will be
    allowed to rise to make it profitable to re-enter. And that is
    the way the Fed ultimately has to hand off Federal Reserve
    heavy intervention in these markets back to banking.
        And unless the Fed specifies its taper, specifies the
    extent to which it will go, get out, in a clear way, the
    markets can't prepare to step in. So, I think the Fed has to
    come first in this chicken-and-egg problem.
        Mr. Rothfus. Thank you.
        Dr. Holtz-Eakin, Chairman Bernanke has argued that the
    Federal Reserve's participation in the oversight of banks of
    all sizes significantly improves its ability to carry out its
    central banking functions, including making monetary policy. Do
    you agree with this sentiment?
        Mr. Holtz-Eakin. Not entirely. We see other configurations
    around the world, for example, where we have the central bank
    not as the primary regulator, and those central banks are able
    to conduct monetary policy very effectively, so England can do
    this. And so I am unconvinced that as a matter of structure, it
    needs to be that way.
        The second thing that the Fed argues is that it gives them
    information that is useful for the conduct of monetary policy.
    I don't see why that information couldn't be conveyed in an
    interagency fashion. And so I am certainly open to doing
    business in other ways, because I think the Fed is
    overstretched.
        Mr. Rothfus. Where we sit today, we have an interventionist
    Fed on the monetary policy side and an interventionist Fed on
    the regulatory policy side. What are the potential implications
    and risks for the health of the financial system and the
    broader economy because of that?
        Mr. Holtz-Eakin. My concern with aggressive monetary
    policies has been essentially that they flunk a benefit-cost
    test. I am utterly convinced that the Fed can drive investors
    to riskier asset classes. I am utterly convinced that it has
    enormous ability to change relative returns to financial
    markets.
        I don't think it has produced any real economic growth. And
    so I think--or not enough to merit the potential costs in terms
    of inflated asset classes and/or bubbles, and some of them
    appear to be in the making.
        And I worry, as this is all about financial instability
    coming out of those asset classes, to the larger financial
    system. I think those costs outweigh the benefits of the
    policy.
        Mr. Rothfus. Ms. Rivlin, when asked in October 2008 if
    Gramm-Leach-Bliley was a mistake, you testified, ``I don't
    think so. I don't think we can go back to a world in which we
    separate different kinds of financial services and say these
    lines cannot be crossed. That wasn't working very well. We
    can't go back to those days. We have to figure out how to go
    forward.''
        This week, as you know, the Volcker Rule was promulgated,
    which does precisely that, a rule that asked some 1,300
    questions in the initial proposal, making it effectively a
    concept release. As a result, the final rule skirted around the
    notice and comment process.
        Given this history and your thoughts back in 2008, wasn't
    the Volcker Rule misguided and, at a minimum, shouldn't it have
    been reproposed before final adoption?
        Ms. Rivlin. I don't equate the Volcker Rule with repeal of
    Gramm-Leach-Bliley or going back to Glass-Steagall, and I still
    agree with what I said, that we can't do that. We have to
    figure out how to regulate this complicated situation that we
    have without reversing it.
        As I said earlier, I am not a big enthusiast of the
    importance of the Volcker Rule. I think other things, such as
    capital requirements and leverage ratios and other things, are
    much more important.
        Mr. Rothfus. I thank the Chair, and I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
    There are no other Members standing in the queue for questions,
    so at this point, I would like to thank all of the witnesses
    for your testimony today, and especially thank you for your
    patience with rescheduling challenges.
        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 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        This hearing stands adjourned.
        [Whereupon, at 5:06 p.m., the hearing was adjourned.]

                                A P P E N D I X

                               December 12, 2013

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