[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.]








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