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

                          INTERNATIONAL IMPACTS OF THE

                         FEDERAL RESERVE'S QUANTITATIVE

                                 EASING PROGRAM

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

                                    HEARING

                                   BEFORE THE

                            SUBCOMMITTEE ON MONETARY

                                POLICY AND TRADE

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED THIRTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                JANUARY 9, 2014

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 113-57

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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
                   Subcommittee on Monetary Policy and Trade

                      JOHN CAMPBELL, California, Chairman

    BILL HUIZENGA, Michigan, Vice        WM. LACY CLAY, Missouri, Ranking
        Chairman                             Member
    FRANK D. LUCAS, Oklahoma             GWEN MOORE, Wisconsin
    STEVAN PEARCE, New Mexico            GARY C. PETERS, Michigan
    BILL POSEY, Florida                  ED PERLMUTTER, Colorado
    MICHAEL G. GRIMM, New York           BILL FOSTER, Illinois
    STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
    MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
    MICK MULVANEY, South Carolina        DANIEL T. KILDEE, Michigan
    ROBERT PITTENGER, North Carolina     PATRICK MURPHY, Florida
    TOM COTTON, Arkansas

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        January 9, 2014..............................................     1
    Appendix:
        January 9, 2014..............................................    39

                                   WITNESSES
                           Thursday, January 9, 2014

    Lachman, Desmond, Resident Fellow, the American Enterprise
      Institute......................................................     7
    Meltzer, Allan H., the Allan H. Meltzer Professor of Political
      Economy, Tepper School of Business, Carnegie Mellon University.     6
    Steil, Benn, Senior Fellow and Director of International
      Economics, the Council on Foreign Relations....................     3
    Subramanian, Arvind, Dennis Weatherstone Senior Fellow, the
      Peterson Institute for International Economics, and Senior
      Fellow, the Center for Global Development......................     9

                                    APPENDIX

    Prepared statements:
        Waters, Hon. Maxine..........................................    40
        Lachman, Desmond.............................................    42
        Meltzer, Allan H.............................................    53
        Steil, Benn..................................................    55
        Subramanian, Arvind..........................................    61

                          INTERNATIONAL IMPACTS OF THE

                         FEDERAL RESERVE'S QUANTITATIVE

                                 EASING PROGRAM

                                  ----------

                           Thursday, January 9, 2014

                 U.S. House of Representatives,
                               Subcommittee on Monetary
                                      Policy and Trade,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 10:05 a.m., in
    room 2128, Rayburn House Office Building, Hon. John Campbell
    [chairman of the subcommittee] presiding.
        Members present: Representatives Campbell, Huizenga,
    Pearce, Posey, Grimm, Fincher, Stutzman, Mulvaney, Pittenger,
    Cotton; Clay, Peters, Foster, Carney, and Kildee.
        Ex officio present: Representatives Hensarling and Waters.
        Chairman Campbell. The Subcommittee on Monetary Policy and
    Trade will come to order.
        Without objection, the Chair is authorized to declare a
    recess of the subcommittee at any time.
        The Chair now recognizes himself for 5 minutes for the
    purpose of an opening statement. I won't use all 5 minutes, but
    I will simply open to say this is a continuing part of our
    series of hearings examining the Federal Reserve (Fed) at the
    100th anniversary of the Federal Reserve, and examining both
    the history of the Fed and the current activities of the Fed
    and what the future of the Fed might look like.
        The title of this hearing is, ``International Impacts of
    the Federal Reserve's Quantitative Easing Program.'' QE, as we
    have lovingly come to know it, has been the subject of a number
    of hearings or discussions in hearings in this committee since
    it was begun several years ago.
        My opinion on QE in terms of its domestic policy has been
    clear. There are benefits, if you will, to QE, and there are
    clearly risks and negatives to QE. And in my estimation, the
    risks and negatives of QE are currently outweighing the
    benefits thereof, which calls for it being wound down and
    eliminated, in my view. Clearly, the Federal Reserve Board Open
    Market Committee has not agreed with that assessment in the
    past, and we will see what they do in the future.
        But a lot of those discussions have been based upon an
    evaluation of the domestic impacts of quantitative easing, of
    what it is doing for the economy, for interest rates, for the
    money supply, for those sorts of things. That is not what this
    hearing is intended to examine.
        U.S. monetary policy does not happen or exist in a vacuum.
    When the greatest nation on earth makes decisions and makes
    economic moves or moves in the area of monetary policy, other
    nations react, and it affects the international markets and it
    affects international trade and can affect a number of things.
        And we have our distinguished panel here this morning to
    give us their views of what are the international impacts of
    quantitative easing, and how do the actions or reactions of
    what is going on in other countries impact the United States?
    It is another part of quantitative easing that we haven't spent
    a lot of time on, and that this hearing is intended to try and
    understand better, as to what those international impacts are
    that thereby have an impact upon the United States
    domestically, as well.
        So, with that, I believe--okay. The gentleman is recognized
    for 5 minutes for an opening statement.
        Mr. Kildee. Thank you, Mr. Chairman. I don't have any
    formal opening statement. I just want to thank the witnesses
    for their presence.
        Obviously, this is a really important issue. Mr. Peters and
    I both represent the State of Michigan, so we are particularly
    interested in your observations relative to this policy and its
    effect on unemployment.
        But I appreciate your attendance. Thank you.
        I yield back. Thank you.
        Chairman Campbell. The gentleman yields back.
        The other gentleman from Michigan. I just realized I am
    completely--
        Mr. Huizenga. Mr. Chairman, you get--
        Chairman Campbell. --surrounded by Michiganders here.
        Mr. Huizenga. --three of us up here.
        Chairman Campbell. Okay. The other gentleman from Michigan
    is recognized for 5 minutes.
        Mr. Huizenga. Thank you, Mr. Chairman. And for the record,
    I believe that the Federal Reserve Open Market Committee ought
    to have listened to you more often, as well. So, just to get
    that out of the way.
        But, it is interesting, in its 100th year, going back and
    doing some research--I love history. I love doing some reading
    on that. And, obviously, you look at the creation of the Fed
    and why this came about, some of those economic crises in the
    early 20th Century. Having the Fed founded as an independent
    agency, deriving its power from Congress, we have seen a
    certain amount of expansion over the past 100 years, and that
    has been quite significant expansion. And looking at that as it
    was originally created to supervise and monitor banking systems
    here in the United States, it seemed to grow unchecked. I know
    that nature and government abhor vacuums, and they will fill
    them, one way or the other.
        But we are seeing them being really a lender of last resort
    for banking institutions that require additional credit to stay
    afloat, and, obviously, that has an impact on what is happening
    internationally. But given the interconnectedness of the global
    financial system, there is no doubt that their policies have
    significantly impacted international markets and foreign
    economies. And with the implementation of artificial near-zero
    interest rates with QE1, -2, -3, Operation Twist, the Fed has
    made an attempt to stimulate the domestic economy by using an
    unprecedented level of interventionist policies.
        I am curious to get your input as to what you believe that
    this experiment has caused, as we have seen investors really
    make different decisions. I saw a statistic this morning that
    the top 1 percent has seen a, I believe it was a 31 percent
    increase in their wealth over the last few years, and for the
    lower tiers of the economy, it has been fractions of a percent.
        And I think the key to all of this, the income questions
    that we are dealing with, distribution and equality and
    equality of opportunity; it is really about economic activity
    more than anything. So I think we have a common goal. The
    question is, how is it really being handled?
        These emerging-market economies have caused several foreign
    currencies to rise in value. However, rumors--it was
    interesting just seeing the rumors in mid-2013 that the Federal
    Reserve would begin tapering its purchases of government
    securities earlier than expected. Investors began to react very
    quickly. They are not static; they are very dynamic when they
    are making those decisions. They are selling off their stakes
    in foreign currencies across the globe. So, we obviously have
    an impact.
        What we learn today shouldn't only inform our understanding
    of what is happening here domestically, but, increasingly, our
    global and complex macroeconomy that we have here. And I
    appreciate your time today, gentlemen, giving us some insight
    on your take as to what has been happening, as we see this
    100th-anniversary milestone.
        With that, Mr. Chairman, I yield back. Thank you.
        Chairman Campbell. The gentleman yields back.
        Again, thank you all for being here.
        We will now hear from the people who know more about this
    than all of us put together.
        And we will start with Dr. Benn Steil, who is a senior
    fellow and director of international economics at the Council
    on Foreign Relations. He previously served as the non-executive
    director of the virt-x security exchange, which is now part of
    the Swiss Exchange, and formerly directed the International
    Economics Programme at the Royal Institute of International
    Affairs in London.
        Dr. Steil, welcome. Thank you. And you are recognized for 5
    minutes.

        STATEMENT OF BENN STEIL, SENIOR FELLOW AND DIRECTOR OF
       INTERNATIONAL ECONOMICS, THE COUNCIL ON FOREIGN RELATIONS

        Mr. Steil. Thank you, Mr. Chairman.
        Since the financial crisis in 2008, actions taken by the
    Federal Reserve to increase liquidity in the U.S. financial
    system have had a major impact outside the borders of the
    United States. Quantitative easing, through which the Fed
    increases the monetary base by buying longer-term financial
    assets with newly conjured dollars, thereby pushing down their
    yield, was undertaken partly to encourage, and indeed has
    encouraged, investors to shift resources into riskier assets.
        Though wholly unintended by the Fed, however, this shift
    has encompassed securities issued in emerging-market countries.
    Anticipation of the Fed's withdrawal from QE3, though it will
    only begin with a modest tapering of monthly asset purchases
    this month, has already had a substantial impact on the
    currency and bond markets of a number of important emerging-
    market economies.
        The hardest-hit countries have been those running large
    current account deficits--in particular, India, Indonesia,
    Turkey, and Brazil. Economic growth in these countries and the
    investment returns coming with it, reliant as they have been on
    short-term capital flows from abroad, have always been the most
    at risk of a change in the trajectory of Fed policy from
    accommodation to tightening.
        So how can emerging markets protect themselves in advance
    of a tightening of Fed policy? A recent IMF study found that
    countries with a lower share of foreign ownership of domestic
    assets, a trade surplus, and large foreign exchange reserves
    have been more resilient. This has policy implications. In good
    times, developing countries should apply a firm hand to keep
    their imports and currency down and their exports and dollar
    reserves up.
        Unfortunately, such policies are apt to constitute what
    many observers in this country would call ``currency
    manipulation.'' Economists Jared Bernstein and Dean Baker
    recently called for the United States to impose taxes on
    foreign holdings of Treasuries and tariffs on imports precisely
    to counteract them. This is, in my view, a misguided recipe for
    raising global trade tensions and political conflict. But the
    very fact that prominent commentators are calling for such
    action illustrates the importance of considering how the
    functioning or malfunctioning of the global monetary system can
    encourage a spiral of damaging policy actions.
        China's agreements with Brazil, Russia, Turkey, and Japan
    to move away from dollar-based trade, for example, have the
    potential to undermine the multilateral trading system, as
    countries that don't want to stockpile each other's currency
    will use trade discrimination to prevent trade imbalances
    emerging.
        So what can be done? International central bank cooperation
    can help at the margins by mitigating short-term liquidity
    problems, most notably through currency swap arrangements. The
    Fed extended swap lines to Brazil, Mexico, and South Korea in
    October of 2008, although these arrangements were allowed to
    expire in 2010.
        Regarding Federal Reserve monetary policy actions, anything
    that makes them more predictable will, all else being equal,
    attenuate market volatility globally. Over the past 15 months,
    the Fed has tried to do this through the formal use of so-
    called forward guidance. Initially, this was implemented
    through the setting of date-based markers for the raising of
    interest rate targets. These were quickly abandoned, however,
    in favor of data-based markers for both the raising of interest
    rate targets and the tapering of monthly asset purchases.
        Both approaches are challenging to carry out in practice.
    Date-based guidance is problematic in that date markers are
    ultimately justified by the Fed's expectations of economic
    conditions years into the future. And, as I have documented
    elsewhere, the Fed's forecasting record over the past quarter-
    century has been poor. Data-based guidance can also create,
    rather than reduce, market turbulence when the data markers
    themselves are volatile, such as monthly employment figures.
    Asset purchases, in particular, are not a precision tool, so
    trying to calibrate them continuously to volatile economic data
    is fraught with difficulties.
        It is worth recalling that Chairman Bernanke had in June
    suggested that asset purchases would end with the unemployment
    rate at around 7 percent. In fact, tapering is only now just
    starting with unemployment at this level. Assuming the Fed had
    good reason to abandon the Chairman's June guidance, it would
    have been advisable not to issue it in the first place.
        In short, rules, targets, and forward guidance for U.S.
    monetary policy action will not significantly mitigate the
    challenges that emerging markets will face going forward in
    adapting to market perturbations triggered by such action or
    inaction. Broadly speaking, the inevitable inconsistency that
    will open up between the Fed's rules, targets, and guidance on
    the one hand, and unexpected economic developments on the
    other, will lead either to inappropriate policy stances or a
    falling away of the credibility of such rules, targets, and
    guidance as they are abandoned or amended.
        It is therefore in our national interest to accept openly
    that emerging-market governments be able to implement prudent
    controls on short-term portfolio inflows in order to shield
    their economies from sudden, extreme, and unpredictable shocks,
    some of which may be triggered by the decisions of our own
    Federal Reserve, taken in good faith pursuant to the mandates
    assigned to it by Congress.
        Chile, which has been a model of prudent macroeconomic
    management over many years, used modest 1-year unremunerated
    reserve requirements on capital inflows with some apparent
    success during the crisis-marked 1990s. As major serial foreign
    financial crises over the past 4 decades have illustrated, we
    here in the United States also bear real costs when overexposed
    and underprotected banks and governments find themselves, in
    the face of rapid and large-scale shifts in the flows of
    capital internationally, quite suddenly unable to pay their
    bills.
        I thank you again for the opportunity to participate in
    these important discussions.
        [The prepared statement of Dr. Steil can be found on page
    55 of the appendix.]
        Chairman Campbell. Thank you very much, Dr. Steil.
        Dr. Allan Meltzer is professor of political economy at
    Carnegie Mellon University. Dr. Meltzer chaired the
    International Financial Institution Advisory Commission, also
    known as the Meltzer Commission, and was a founding member of
    the Shadow Open Market Committee. Dr. Meltzer served on the
    President's Economic Policy Advisory Board and the Council of
    Economic Advisors.
        And, of course, Dr. Meltzer's main claim to fame is that he
    has a degree from the same university from which I graduated,
    UCLA. He has a doctorate, I had a B.A.--an insignificant
    difference.
        But thank you so much for being here, Dr. Meltzer. And you
    are recognized for 5 minutes.

     STATEMENT OF ALLAN H. MELTZER, THE ALLAN H. MELTZER PROFESSOR
       OF POLITICAL ECONOMY, TEPPER SCHOOL OF BUSINESS, CARNEGIE
                           MELLON UNIVERSITY

        Mr. Meltzer. Chairman Campbell, thank you. It is always a
    pleasure to be here, and I thank you and the members of the
    committee for inviting me.
        I am going to talk about what I think gets lost almost all
    the time in these discussions. That is, how do we get the world
    back to long-term stability? That is really what the major
    objective should be: to find a way, a path that will take us
    back to long-term stability.
        Central banks have two major monetary responsibilities:
    domestic and; international. Most central banks ignore the
    international responsibility and achieve domestic price
    stability, if they do it at all, by acting unilaterally. Having
    made that choice, international stability, enhanced stability
    of exchange rates and capital movements requires some form of
    collective agreement.
        I have long advocated a program that both achieves domestic
    stability and increases exchange rate stability. My proposal
    does not require international conferences, foreign
    intervention in domestic policy, or enforcement by
    international supervisors. It is entirely voluntary and is
    enforced by markets, much as the international gold standard
    was enforced by markets.
        It has a few simple rules.
        First, the United States, the European Central Bank, the
    Bank of Japan, and if China ends its exchange controls, the
    Bank of China, agree to maintain domestic inflation between 0
    and 2 percent a year.
        Second, any other country that chooses to import low
    inflation and maintain a fixed exchange rate can peg at its own
    choice to one or a basket of the major currencies. They gain a
    benefit, price and exchange rate stability, that no country can
    achieve acting alone. The country that chooses this policy is
    responsible for maintaining its exchange rate.
        Third, the major countries benefit by gaining exchange rate
    stability with all countries that peg to one or more of their
    currencies. The major currencies float to permit changes in
    productivity and possibly taste.
        Fourth, no country is required to join the system. It
    remains voluntary. The public good that the system provides
    gives an incentive to join.
        Fifth, the system would introduce discipline that has been
    lacking since the breakdown of the Bretton Woods system. Like
    the old international gold standard, markets would do the
    enforcement. If a country ran large budget deficits, markets
    would devalue the currency and increase expected inflation,
    forcing the country to adjust.
        Sixth, countries could suspend operation of the system, as
    they did under the gold standard. Not permitting temporary
    suspension is a major flaw in the European monetary
    arrangements that prolongs, indeed forever perhaps, crisis.
        I do not claim this proposal would achieve some ideal
    result. I do not believe that is possible for modern democratic
    governments. It offers improvement of increased stability. An
    ideal, like zero instability, is not achievable in an uncertain
    world. If adopted, my proposal would limit the damage that
    governments do, particularly the damage that the Federal
    Reserve System does.
        A current example is the excessive expansion of bank
    reserves that spill over to other countries. Some, like Japan,
    respond by depreciating their currency. Others experience an
    unwanted inflation. Still others, Turkey for example, have
    difficulty adjusting.
        The number of problems that have occurred is small so far
    because the amount of reserves that the Fed has produced are
    almost entirely idle reserves. More than 95 percent of QE2 and
    QE3 have the first round of expansion and then are idle and
    held by the banks.
        It is a question to which I do not find a sensible answer
    if you ask, with $2.5 trillion sitting idle on banks' balance
    sheets, and $2 trillion sitting idle on corporate balance
    sheets, what in the name of goodness can the Federal Reserve do
    that the banks and the corporations can't do by themselves?
        I make two additional--governments do not limit damage or
    prevent it--proposals. First, I would close the World Bank.
    There is little reason for it in the world of economic capital
    flows of the magnitudes that we experience.
        And second, I would put prudential restrictions on
    International Monetary Fund lending, because the International
    Monetary Fund lends to countries such as Ukraine and Romania,
    which will have extreme difficulty in paying back those loans.
    We pay a substantial part of those loans. We should put some
    restrictions on how they are used.
        Thank you.
        [The prepared statement of Dr. Meltzer can be found on page
    53 of the appendix.]
        Chairman Campbell. Thank you, Dr. Meltzer.
        Next, Dr. Desmond Lachman is a resident fellow at the
    American Enterprise Institute. He served as the deputy director
    of policy development review at the aforementioned IMF. He
    worked as managing director and chief emerging-market economic
    strategist at Salomon Smith Barney. And he has previously
    taught at Georgetown and Johns Hopkins Universities.
        Welcome, Dr. Lachman. You are recognized for 5 minutes.

      STATEMENT OF DESMOND LACHMAN, RESIDENT FELLOW, THE AMERICAN
                          ENTERPRISE INSTITUTE

        Mr. Lachman. Thank you, Mr. Chairman. Thank you for
    inviting me to testify before this committee today.
        Let me start by saying that U.S. monetary policy typically
    has significant spillover effects on the rest of the world
    economy. It does so both through the way in which it affects
    the state of the U.S. domestic economy as well as the manner in
    which it influences capital flows from the United States to the
    rest of the world.
        The unusually large degree of U.S. monetary policy
    loosening over the past 5 years has been no exception to the
    rule. Indeed, there is every reason to believe that the very
    large scale and the form of the most recent episode of U.S.
    monetary policy easing has had more than the usual degree of
    spillover to the rest of the world economy.
        Since the end of 2008, the massive easing in monetary
    policy by the Federal Reserve and by the central banks of other
    major advanced countries has resulted in substantial capital
    flows into the emerging markets. According to International
    Monetary Fund estimates, foreign portfolio investments in
    emerging-market country bonds has risen by a cumulative $1.1
    trillion through 2013, and this has amounted to as much as 2
    percent of the recipient countries' gross domestic products.
        These capital flows have compromised the economic
    fundamentals of a number of key emerging-market countries by
    undermining market discipline, and in many cases they have
    resulted in excessive currency appreciation. In particular,
    emerging-market borrowing rates have been reduced to levels
    below those that would be justified by those countries'
    economic fundamentals.
        In a number of notable cases, including Brazil, Indonesia,
    India, South Africa, and Turkey, easy financing has led to the
    postponement of much-needed structural reforms and budget
    adjustment. It has also led to excessive credit expansion and
    to the buildup of financial leverage, making these countries
    vulnerable to any sudden stop in capital flows.
        Of even greater concern for the global economic outlook
    than the emerging markets is the complacency presently
    characterizing European policymakers concerning the European
    sovereign debt crisis. Lower borrowing costs in Europe, which
    has been facilitated in large part by Federal Reserve easing,
    have lulled European policymakers into a false sense of
    security. This has substantially reduced the impetus for much-
    needed policy reform and adjustment in the European economic
    periphery, and it has delayed Europe's move towards banking and
    fiscal union, which would be necessary for the survival of the
    euro.
        In determining the pace at which it unwinds its
    quantitative easing program, the Federal Reserve will need to
    be very mindful of the international spillovers of its
    policies. This would particularly appear to be the case given
    the large impact that the massive expansion of its balance
    sheet over the past several years has had on the economic
    fundamentals of a number of key emerging-market economies and
    on those countries in the European economic periphery. In
    recent years, the emerging-market economies have accounted for
    more than half of world economic growth, which means that any
    significant slowing in those economies could have a material
    bearing on the U.S. economic outlook.
        The key challenge for the Federal Reserve will be to find
    the right balance in the pace at which it exits quantitative
    easing. Too slow a pace of exit could further contribute to the
    undermining of market discipline in emerging-market economies
    and in the eurozone. At the same time, too fast a pace of exit
    runs the risk of a sudden stop in capital flows to the
    emerging-market economies and Europe, which could be disruptive
    to the global economy.
        An indication of the downside risk to the global economy
    that could be posed by an unwinding of quantitative easing was
    provided by the sharp selloff of emerging-market assets in the
    aftermath of Chairman Ben Bernanke's intimation last May that
    the Fed had under consideration the unwinding of its third
    round of quantitative easing.
        In the 6 months following that testimony, the currencies
    and bonds of those emerging-market countries which had
    experienced high rates of credit expansion and had wide
    external current account deficits, including notably Brazil,
    India, Indonesia, South Africa, and Turkey, all came under
    considerable pressure. This pressure has forced those countries
    to substantially tighten their macroeconomic policies, which
    has resulted in a marked slowing in their economic growth and
    which has forced the IMF to downgrade its economic growth
    outlook.
        Thank you, Mr. Chairman.
        [The prepared statement of Dr. Lachman can be found on page
    42 of the appendix.]
        Chairman Campbell. Thank you, Dr. Lachman.
        Next, Dr. Arvind Subramanian--did I get that right?
        Mr. Subramanian. Perfect.
        Chairman Campbell. Dr. Subramanian told me before the
    hearing here that when he was younger, people just called him
    ``Superman.'' So I may just call him--we can all just call him
    ``Dr. Superman'' if you have trouble with ``Subramanian.''
        Dr. Subramanian is a senior fellow with the Peterson
    Institute for International Economics, and a senior fellow with
    the Center for Global Development, and has been assistant
    director for research of the aforementioned IMF, the
    International Monetary Fund, and staff of the General Agreement
    on Tariffs and Trade.
        Welcome, Dr. Superman. You are recognized for 5 minutes.

      STATEMENT OF ARVIND SUBRAMANIAN, DENNIS WEATHERSTONE SENIOR
    FELLOW, THE PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS, AND
            SENIOR FELLOW, THE CENTER FOR GLOBAL DEVELOPMENT

        Mr. Subramanian. Thank you, Chairman Campbell, and members
    of the subcommittee for giving me this opportunity to testify.
    I want to use this opportunity to look back in order to look
    forward. And, in particular, I want to look back on the Fed's
    role over these last few years in order to draw policy lessons
    for the broader and vital issue of American global economic
    leadership. That is a topic dear to my heart, as perhaps one of
    the few non-Americans testifying before you. So, to that end, I
    want to offer three reflections and perhaps two, maybe two and
    a half, policy suggestions.
        So, reflection number one: As the world's largest economy,
    its financial epicenter and the issuer of the prime reserve
    currency, the dollar, actions by the Fed will unavoidably
    affect other countries via trade and exchange rates, capital
    flows, and overall financial conditions. That is unavoidable.
        Reflection number two: Against that background, QE has
    generally and on balance had a positive effect on emerging
    markets and the global economy. To be sure, in some instances
    they have added to pressures and volatilities, complicating
    macro-management, but the broad impact has really depended on
    what the global macroeconomic situation is and the situation in
    individual countries.
        Let me give two examples. QE1 was positive and universally
    seen as so because it saved the world economy from collapse. So
    that was good for the United States and good for the world
    economy.
        Second example: Take QE3 or, actually, the talk of
    withdrawal that Chairman Bernanke started in May of last year.
    Many EMs did face serious problems, as my colleagues have
    noted, but the pressures were not uniform and were felt acutely
    in some countries that were more vulnerable than others.
        To lay all the blame on the Fed is to forget that being
    exposed to U.S. policies is part of the deal of financial
    globalization that emerging markets and others, as consenting
    adults, have voluntarily signed on to. They could have chosen
    to be less financially globalized like China, or they could
    have made their economies more resilient by adopting better
    policies. I am a Hindu and not a Christian, but let me invoke
    scripture: The Fed is not thy brother's keeper.
        That being said, it leads to reflection number three: The
    Fed has been broadly mindful of its international
    responsibilities and, quietly but effectively, has shown
    remarkable international economic leadership. It provided
    dollar swap lines to central banks in emerging markets, and it
    has provided liquidity to Europe and the Bank of Japan. And
    these actions did contribute to calming conditions in these
    crisis-ridden years.
        There is something remarkable that needs to be noted here,
    Mr. Chairman. These emerging-market countries during the crisis
    chose not to go to the IMF, even though the IMF after the Asian
    financial crisis was seen as an instrument of American
    hegemony. Instead, they chose to come straight to the United
    States and deal with the Fed.
        Point number two: It is remarkable because when the Fed
    helped Europe through these swap lines, at that time the rest
    of the U.S. Government was a bystander because of its own
    problems, able to offer counsel but little cash to these
    economies in crisis.
        So, in some ways, what I want to stay is that in some ways
    the Fed has played a very constructive global role, so the
    question is, what can the rest of the U.S. Government, and this
    subcommittee, in particular, do by way of global economic
    leadership?
        So that leads me to policy recommendation number one. Mr.
    Chairman, you are close to this. I think the U.S. Congress
    should work with the Administration to ensure the necessary
    legislation to augment the IMF's resources, to include it in
    the omnibus appropriation bill.
        Why do I say that? As positive as the Fed's role has been
    in relation to crises, I think that job should not be that of
    the Fed; it should be that of the IMF. Congressional passage of
    IMF legislation would be relatively cheap, if not costless. It
    would protect the United States and the world against crises.
    And, above all, it would allow the United States to share the
    burden that, in some ways, it is exclusively taking on via the
    Fed. To me, this would be a sign of reversing U.S. enfeebled
    economic leadership. And it is awkward for me to say this, but
    the United States is the only major country which stands in the
    way of this legislation.
        Which leads me to policy recommendation number two, because
    this subcommittee also deals with trade. And, Mr. Chairman, you
    talked about the feedback effect of QE policies back on the
    system.
        There is some uncertainty now whether U.S. bilateral
    investment and free-trade negotiations limit the ability of
    partner countries to deal with financial stresses. I think the
    negotiations on the TPP offer an excellent opportunity for
    clarifying that the United States does not aim to circumscribe
    or eliminate legitimate policy instruments by its trading
    partners--for example, prudential controls on inflows and
    broader controls on balance-of-payments grounds--to respond to
    the pressures from financial globalization and crises. This
    clarification would also be consistent with the IMF's new
    thinking on capital controls.
        Finally, my half-recommendation: I have argued in my
    testimony that QE has not led to greater manipulation by the
    emerging-market countries. In fact, the era of QE has coincided
    with a reduction in foreign exchange intervention and
    imbalances. But independently of QE, currency manipulation is a
    problem for the world system because it is a trade distortion.
    However, I feel that the best way to address it would be
    multilaterally in the World Trade Organization.
        An alternative, of course, would be to address it in the
    TPP, but this should be done carefully, making sure that the
    issue is not captured by a few constituencies in the United
    States and derails the prospects of broader trade
    liberalization under the TPP.
        Thank you, Mr. Chairman.
        [The prepared statement of Dr. Subramanian can be found on
    page 61 of the appendix.]
        Chairman Campbell. Thank you, Dr. Subramanian.
        The Chair now recognizes himself for 5 minutes for the
    purpose of questioning.
        Thank you all for your testimony.
        I think I heard a resounding agreement, at least, that QE
    does have an impact--QE and the United States has an impact on
    foreign markets and on the international economy generally. I
    heard from a bunch of you things like currency manipulation,
    trade barriers, disruption, current account deficits, capital
    flows, all kinds of different things like that. And Dr.
    Subramanian has a different view as to the efficacy of this
    world impact than the other three of you do.
        What I want to try and do is have you each respond to each
    other's points, if you will. But, also, if we can make this
    sort of at a first-grade level rather than all of the
    ``economic-speak.'' Let's try and say, what is the impact, what
    is the basic fundamental impact?
        So Dr. Steil, Dr. Meltzer, or Dr. Lachman, any of you whom
    I think do not agree with Dr. Subramanian that the impact has
    been positive--Dr. Lachman, you look like you are ready for
    your button--give me the greatest negative impact of QE on
    international economics. And refute, if you believe you can,
    Dr. Subramanian's point.
        Mr. Lachman. I guess if you are looking internationally,
    what one is really wanting to do is to distinguish between the
    short-run impact and the longer-run impact. So while the short-
    run impact might be beneficial as the capital is flowing into
    these countries--it lowers interest rates, it boosts growth,
    and all the rest--what it does is it produces market discipline
    and allows these countries to establish imbalances, so when the
    music stops, when the process is unwound, those countries are
    extremely vulnerable to the slowing of the capital.
        So what I am saying is that, as the capital flows in, it
    drives growth up, everything is okay, but it increases
    vulnerabilities so what we will see now and what we are seeing
    right now is the key countries, known as the ``fragile five,''
    are experiencing great difficulties as this capital is
    withdrawn because they have allowed their currencies to get
    overvalued and they have very large imbalances.
        So that is really the adverse cost. The cost of QE is not
    seen immediately; it is, rather, seen when the process is
    unwound. And that has yet to be seen.
        Chairman Campbell. And what are the risks to the United
    States from those vulnerabilities?
        Mr. Lachman. The risks to the United States are rather
    large, as we have seen in previous crises, the Asian crisis,
    for instance, in 1998, both in terms of, if you have those
    economies slowing, they are an important part of the global
    economy, it means that United States exports get hit, but the
    greater risk is to the global financial system, that if these
    countries run into any kind of payment difficulties, that can
    cause difficulty on the banking system.
        I am not concerned so much about that in terms of the Asian
    countries, but I certainly am concerned about that in terms of
    the European economic periphery.
        Chairman Campbell. And what are the fragile five?
        Mr. Lachman. The fragile five are Brazil, India, Indonesia,
    South Africa, and Turkey. And these fragile five are fairly
    sizeable economies. You just have to think of Brazil and India,
    two of the bricks. And these economies have been accounting for
    most of the global growth over the last 10 years.
        Chairman Campbell. Dr. Subramanian, your response?
        Mr. Subramanian. Yes, Mr. Chairman, I think the point here
    is that, as Dr. Lachman said, there is a short-term and there
    is a long-term impact, but there are two key points to note.
        One is that the capital inflows that go to developing
    countries because of QE, their effect on these countries
    depends very much on how they manage it. If they do things
    right, it is a huge benefit. Similarly, if they have followed
    sound macroeconomic policies, when the capital flows out, the
    risks are minimal.
        And, therefore, the key point here is that--and one example
    of this is that the impact is, in fact, varied. When, in fact,
    the capital started moving out in May after taper talk, the
    fragile five were affected, but they were affected because they
    were very macroeconomically vulnerable. For example, India, my
    own country, was one of the worst hit because it had high
    inflation, fiscal deficits of 10 percent, and current account
    deficits of 4 percent. China, Singapore, and South Korea were
    less affected.
        Chairman Campbell. Okay. My time has expired, so thank you.
    I am sure you will both have plenty more opportunities.
        I will now recognize the gentleman from Illinois, Mr.
    Foster, for 5 minutes.
        Mr. Foster. Thank you all for appearing on this very
    complicated subject. I think after I had a voter-enforced
    vacation a couple of years ago, I spent a while downloading
    various macroeconomic models and playing with them, and being
    frustrated by the difficulty with the multi-country models and
    the number of parameters that you had to deal with. And as a
    physicist, I dream that there might be an actual analysis tool
    here, but I don't think we are anywhere near that.
        But I would like to--in a recent speech, Ben Bernanke
    talked about using mortgage loan-to-value limits as a
    macroeconomic tool. Because one of the themes that is coming
    out here is the fact that actions by the Federal Reserve
    amplify leverage cycles in developing countries.
        And so that one of the lessons from biology is that if you
    want a stable system, you need a number of distributed feedback
    loops. And so that if each country independently would insulate
    itself--again, as many countries have by hand; when they see an
    assert bubble, they turn up, for example, mortgage underwriting
    requirements in order to cool down their real estate markets.
    This is also something that could be unwound when the Fed
    unwinds its own policies.
        I was wondering if you have any comments on the concept
    that individual economies can do a lot to insulate themselves
    from Fed policy? Anyone who has thoughts on that?
        Yes?
        Mr. Steil. I think the data bear that out very strongly,
    that countries can do things to insulate themselves from the
    impact of Federal Reserve policy.
        It has been pointed out that the effect of QE on emerging-
    market economies has not been uniform. The countries that were
    hit the hardest, countries like India, Indonesia, Brazil, and
    Turkey, had certain features--in particular, very large current
    account deficits. Countries that were not hit, say, Singapore,
    China, and South Korea did not have such deficits and also
    tended to have very large foreign exchange reserves.
        My concern is this: If you try to extract policy lessons
    from this experience, they should be a little bit disturbing to
    us, because if everybody in the emerging-market world behaves
    like South Korea, global imbalances are only going to get much
    worse. The lesson we have taught these emerging markets is that
    in the good times, they should apply a firm hand to keep their
    imports and their currency down and their exports and their
    foreign exchange reserves up. As I emphasized in my testimony,
    broadly speaking, that is what many observers in these
    countries refer to as currency manipulation. And so these--
        Mr. Foster. Not all countries can run current accounts
    surpluses simultaneously. There is a--
        Mr. Steil. That is right, but often, as you know, Mr.
    Foster, we wind up being the market of last resort for
    countries around the world that are insistent on pursuing
    policies that result in current account surpluses.
        So I am concerned that the experience of quantitative
    easing in the emerging-market world will lead to the adoption
    of policies that will increase global trade tensions rather
    than reduce them.
        Mr. Foster. Okay.
        Any other comments?
        Mr. Meltzer. Mr. Foster, I like the way you organized your
    thinking about this problem. I want to add a dimension that has
    been not been here heretofore.
        We have seen 98 percent of QE2, QE3 go into idle reserves.
    So, there is a tidal wave there. We don't know how it is going
    to break. But what we are describing so far is the effect of a
    small amount of the QE spilling over into the rest of the
    world. What is going to happen when that other 95 percent comes
    out? Is it going to come out in an orderly way, or is it going
    to come out in a bang? Is it going to create havoc in the rest
    of the world? I don't think anybody can confidently say
    anything about that, but those are the risks which are involved
    here.
        And we can talk about things that countries can do, but if
    we have a tidal wave of this money coming out, $2.5 trillion in
    idle reserves, or more, and growing, and $2 trillion on
    corporate balance sheets, that is a lot of money, and it can
    create a lot of problems. We may be fortunate; we may not.
        The idea that the United States will buffer those problems
    is wrong. We did that because we had a huge import excess
    because of energy. That is going away. The world of the future
    is going to be very different than the world of the past
    because we are going to be in--
        Mr. Foster. I think I am running out of time here, so if
    you could wrap up.
        Chairman Campbell. The gentleman's time has expired.
        And we will now move to Michigan for the next two
    questioners. First, the vice chairman of the subcommittee, Mr.
    Huizenga, is recognized for 5 minutes.
        Mr. Huizenga. Thank you, Mr. Chairman. Again, you are
    bookended by Wolverines on this.
        But I feel like I am honestly drinking--you know the old
    phrase of drinking out of a firehose. I am trying to drink out
    of four Ph.D. firehoses coming at us with information right
    now. So, I appreciate your patience as we are doing this.
        Dr. Subramanian seemed to be indicating and quoting the
    good book as far as should the United States be its brother's
    keeper, and I am hearing various views on that. I am concerned
    a bit about that. If everyone should be basically on their own,
    and as my friend from Illinois was sort of talking about is,
    basically are we going to have every country sort of insulating
    itself?
        I am from Michigan. Right? There is a tremendous amount of
    criticism of the TPP coming out of the automotive industry when
    we are talking about Japan. It seems to me that if we are in
    QE-infinity and maybe see an edge to that cliff here if we are
    starting to dial it back, but we are into these loose money
    policies, how in the world can we be critical of any other
    country that is going to be taking the same defensive actions
    that we have taken?
        And I am not a Ph.D. I was a poli-sci major, not a hard
    science major. I did take some courses in economics and a
    concentration in that. But one of the first laws of economics
    that I ever learned about was the law of diminishing returns.
    And it seems to me, as we are going from QE1 to QE3, I would
    assume that there is, as Dr. Meltzer is pointing out, this
    huge, massive buildup in reserves that has happened in the
    banking system here. Are we really hitting our goals and
    objectives?
        So if you could maybe address those two things. One, how
    can we be critical of any country? Specifically, I think it was
    Dr. Lachman who talked about the Bank of Japan. And then, two,
    what is going to be the effect of these reserves that have been
    built up?
        So, Dr. Meltzer, go ahead.
        Mr. Meltzer. Yes, I like the brother's keeper. The brothers
    don't necessarily want a keeper and are probably not going to
    want that. I have had the experience of the Secretary of the
    Treasury going over to Europe and telling them that they need
    to do fiscal expansion and they laugh at him. That is, they
    think, take care of your own problems; don't try to tell us how
    to take care of ours. When the United States has much better
    policies, it could give advice. It is in a very poor position
    to give advice these days on fiscal and monetary policy.
        I would like to make a slightly different short point. I am
    concerned about the problem that the Congress has in performing
    its oversight duties. The only way I believe that you can
    perform oversight duties effectively is to have a rule, require
    the Federal Reserve to follow a rule, and then if they don't
    follow it, you have a question. It is just not possible for
    members of this committee, however diligent they may be, to
    come and tango, rhetorically, with the Chairman of the Federal
    Reserve. It has never worked.
        Mr. Huizenga. Dr. Meltzer, I know you have brought that
    point up about the rule previously. And I am curious, are we in
    danger of the world dismissing or, worse yet, maybe not even
    believing what we are doing or what we are saying we are going
    to be doing if we are not tapering when we said we would taper
    and some of those dates?
        But, Dr. Subramanian, I wanted you to quickly address that,
    too.
        Mr. Subramanian. Let me first try and address the first of
    your questions, how can we be critical of others when we are
    doing the same thing.
        I think it is important to remember that this tidal wave
    that has gone out, first, is not tidal when compared to what
    happened before QE, and second, it is not all due to QE. A lot,
    in fact a majority of the flows to emerging markets have
    happened because they have grown much faster than the United
    States.
        Mr. Huizenga. Economic activity?
        Mr. Subramanian. Exactly. And so, for investors, it is much
    more attractive to invest in those countries than 2 percent or
    0 percent in the United States.
        Mr. Huizenga. I would love to talk about regulatory reform
    and tax reform to help us get that economic activity, but let's
    move on.
        Mr. Subramanian. But I think the question here is that the
    United States followed QE policies largely to stave off the
    financial collapse and to provide policy support for the
    recession. The impact on the U.S. exchange rate has been
    relatively modest. In fact, because the United States is a
    reserve currency, in the immediate aftermath of the crisis,
    money came pouring into the United States because it was a safe
    haven.
        And, therefore, I think one shouldn't fall into the trap of
    thinking that U.S. QE is equivalent to Japanese QE.
        Mr. Huizenga. Sure, but isn't it fair to say that we are--
        Chairman Campbell. Time has expired.
        Mr. Huizenga. Gulliver among the Lilliputians is my
    observation, so--and, with that, Mr. Chairman, thank you.
        Chairman Campbell. All right. The gentleman's time has
    expired.
        Perhaps if the other Wolverine wants to let him answer that
    question--that is up to you. By the way, how did that ball game
    go against Kansas State?
        Mr. Kildee is recognized for 5 minutes.
        Mr. Kildee. I am a functional Spartan right now.
        Chairman Campbell. Oh, yes. Okay.
        Mr. Kildee. Thank you.
        Sticking with the Michigan theme, I would like to take the
    conversation sort of down to more of a Main Street, local
    economic level, at least from my point of view. I represent
    Flint, Michigan, but a lot of the district that I represent is
    part of an older industrial corridor that has struggled
    mightily in making the transition to the new economy. Michigan
    unemployment currently stands at 8.8 percent, the second or
    third highest, I think, in the country, and it has been a
    condition that we have struggled with mightily.
        And so the question that I have is--and if Dr. Subramanian
    would respond and perhaps others might comment--as many
    Americans continue to struggle with unemployment, and given the
    Fed's mandate, even yet, Congress has failed to extend
    emergency unemployment benefits that could affect--is affecting
    1.3 million, could go up to 2 million people sometime in March.
    And, of course, the effect on many States is disproportionate,
    in my State particularly.
        And I am just curious, if you would comment on--because it
    seems the Fed's use of QE has been critical to help the economy
    recover and put people back to work. And in the context of that
    policy, can you talk about ways that we can balance our
    domestic obligations to grow the economy and create jobs, which
    is absolutely critical in my district and in other parts of the
    State, while still mitigating the negative aspects of policies
    on emerging markets as the Fed decreases its use of QE?
        Mr. Subramanian. That is a great question, and my response
    would be the following: that, as you said, the Fed's primary
    responsibility is to the U.S. economy. And, generally, I think
    it is accepted that certainly early bouts of QE have provided
    very vital policy support for the economy. Now, I would not
    necessarily buy into the view that this has come at the expense
    of other countries, because, as I said, other countries have
    had the policy instruments to deal with that.
        But the Fed has, in fact, addressed the international
    dimension, to the extent it can, by providing this liquidity to
    countries in trouble. Brazil, Mexico, Singapore, and South
    Korea came to the U.S. Fed for help, and that helped calm
    conditions.
        So I would take this one step forward and say the way to
    reconcile the domestic and the international responsibilities
    would be for the Fed to do what it needs to do for the U.S.
    economy, but for the rest of the U.S. Government to ensure that
    other things can be done for other economies.
        And I come back to, the best that Congress can do now is,
    in fact, to support to increase the IMF so that in the future,
    if there are crises, which it is true will come back to the
    United States and haunt the United States, but the way to
    address that is to fund the IMF and provide it with the
    resources to deal with international crises so that the effects
    on the United States is minimized.
        Mr. Kildee. Any other--Dr. Lachman?
        Mr. Meltzer. Let me comment on that.
        Mr. Kildee. I'm sorry. Or Dr. Meltzer, either one.
        Mr. Meltzer. You might want to explain to your constituents
    in Flint why it is in the interests of the United States for
    the United States to finance the IMF to lend money to France,
    Germany, and so on, but especially to France, which refuses to
    make serious adjustments in its policy, why that is a good
    policy for the United States.
        Why don't we just say to the French, ``Look, you have a
    serious problem--and they do--and you have to deal with it. It
    is not our problem, it is your problem.'' Why should the United
    States be lending to Ukraine through the IMF? Ukraine is a
    basket case, in most cases, and is making decisions which are
    not in our interest. Why should we do that?
        Why should the United States be lending money--and I will
    stop there--to Iran through the IMF? It doesn't seem to me to
    be consistent with anything that we could call sensible U.S.
    policy.
        Mr. Kildee. Dr. Lachman?
        Mr. Lachman. If one is talking about the IMF, a point that
    is really very important to bear in mind is that most of the
    IMF lending of the last few years has been to the European
    countries. It is something like 70 or 80 percent of their
    lending.
        The European Central Bank has now set up a mechanism, the
    Outright Monetary Transaction mechanism, that can provide an
    unlimited amount of funding, which really raises questions as
    to does the IMF actually need the amount of money that we
    thought they needed 2 or 3 years ago, when you have the ECB
    that is able to take care of most of those European countries?
        Chairman Campbell. The gentleman's time has expired.
        We will move from Wolverines to Hoosiers. The gentleman
    from Indiana, Mr. Stutzman, is recognized for 5 minutes.
        Mr. Stutzman. Thank you, Mr. Chairman. Unfortunately, I
    can't brag about any big football games this past couple of
    weeks. But, anyway, thank you.
        I appreciate the testimony. This has been a fascinating
    discussion, and obviously one that the United States plays a
    huge role in, in the global economy.
        And I appreciated, Dr. Steil, your comments, and they do
    seem to be--it was a lot of common sense when you said, in good
    times, that developing countries should apply a firm hand to
    keep their imports and currency down and their exports and
    dollars reserves up. But, unfortunately, not many of us follow
    that advice.
        Could you comment on--many of us in Congress have been
    critical of capital controls and some of the other
    restrictions. Experts have suggested using tariffs and other
    countervailing measures to shelter U.S. firms from their
    effects. Doesn't this lead us into a race to the bottom or a
    currency war morphing into a potential trade war?
        Dr. Steil, could you comment on that?
        Mr. Steil. Specifically with regard to the use of capital
    control?
        Mr. Stutzman. Yes, sir.
        Mr. Steil. Yes. I think we should be concerned with the,
    say, arbitrary use of capital control, say, in the midst of
    some sort of domestic crisis when governments take actions that
    are targeted, for example, at certain firms, certain investors,
    to prevent the repatriation of capital. I think these rules
    have to be clearly laid out in advance. They must not be
    arbitrary and be directed at specific individuals or firms or
    interests; they must have general applicability. And the
    purpose must be set out.
        As I emphasized at the end of my presentation, I think
    emerging-market governments should be free to use restrictions
    on short-term portfolio inflows clearly laid down in advance as
    a means of ensuring that they don't, after absorbing such
    inflows, have to face the problem of arbitrary restrictions in
    order to stop the outflows.
        And I use Chile as an example of a country that did, in
    fact, use such modest restrictions very prudently in the 1990s
    and appears to have done so quite successfully.
        Mr. Stutzman. Is there any other country today that you
    would point to that is doing something similar to what Chile
    did back in the 1990s? Is there anyone?
        Mr. Subramanian. Brazil did it in 2009. Not exactly the
    same, but they imposed taxes on certain inflows from abroad.
        Mr. Stutzman. Okay. Thank you.
        Mr. Steil. The difference between Brazil and Chile is that
    Chile implemented this policy during the good times, not
    arbitrarily in order to prevent an imminent crisis from
    unfurling. Brazil has been much more reactionary, and I think
    that is the problem there.
        Mr. Stutzman. Thank you.
        Dr. Meltzer, if you could comment a little bit, you
    mentioned long-term stability, that is what we are all looking
    for. But you also mentioned, go back to your testimony, in a
    couple of different places regarding the international gold
    standard. You mentioned it in your point number five. Like the
    old international gold standards, markets would do the
    enforcement. Could you touch on that a little bit more? Should
    we look back at the ways that we used to do things and maybe
    reconsider how we do support our currencies?
        Mr. Meltzer. Thank you. Way back in the 1970s, I used to
    debate occasionally with a former member of this committee whom
    you all remember, Mr. Paul, and I usually ended up by saying to
    him that the reason we don't have the gold standard is not
    because we don't know about the gold standard; it is because we
    do. So we would like to get some of the benefits of the gold
    standard without getting the costs of the gold standard. And
    the costs of the gold standard are it puts attention on
    something that none of your constituents would really want.
    That is, it says they are going to give priority to maintaining
    the exchange rate. That is not what they want. They want the
    priority to be maintaining good economic conditions at home.
        So I have tried to come up with a system that says, let's
    try to get the virtues of the gold standard, which was market
    enforcement, not meetings of central bankers, but markets
    deciding whether you are doing the right thing or not, that
    sort of thing, to get an enforcement mechanism and to capture
    the public good which has been lost since the breakdown of the
    Bretton Woods system, which is to have countries get the
    benefits of price stability, which is of great virtue, and
    exchange rate stability to the extent possible that we do that
    with price stability. That is the idea.
        Mr. Stutzman. Thank you. I would love to have a longer
    conversation with you about that. But thank you.
        Mr. Meltzer. I would be happy to do so, any time.
        Mr. Stutzman. I will yield back.
        Chairman Campbell. Thank you. The gentleman's time has
    expired.
        The gentleman from Delaware, Mr. Carney, is recognized for
    5 minutes.
        Mr. Carney. Thank you, Mr. Chairman. I didn't think you
    would know who the mascot for the University of Delaware team
    is; it is the Fighting Blue Hens. So you go from the Hoosiers
    to the Fighting Blue Hens over here for future reference.
        Chairman Campbell. I am so pleased that you have filled
    that bit of ignorance in my--
        Mr. Carney. And thank you to the panelists for coming. This
    has been a very interesting, if not difficult, esoteric and
    difficult to understand conversation. My Ph.D. physicist
    colleague, Mr. Foster, I think tried to simplify it a little
    bit, as he looks at the world through biological systems, which
    didn't help me at all. And I would kind of like to go back a
    little bit to have you comment not maybe on a first grade
    level, as the Chair requested, but kind of on the basic level
    that I try to communicate with my constituents, to just answer
    the basic question, why does it matter? Why does it matter to
    the people in my State of Delaware, is really the first
    question I have.
        Dr. Meltzer, you have been kind of touching on that.
        Anybody else? Dr. Subramanian?
        Mr. Meltzer. Your constituents want stability.
        Mr. Carney. Right.
        Mr. Meltzer. One of our major problems is we don't have it.
    And we haven't had it. We have had a lot of ups and downs. In
    the history of the Fed, to go there, in the 100 years, the best
    period, the only long period of relative stability with good
    growth, low inflation, and short and mild recessions was when
    they more or less followed something called the Taylor Rule.
        Now, why did that work well? Because unlike most of what
    they do, the aim was on a longer-term objective. They are
    crowded and pushed by the markets, by the Congress, perhaps by
    economists to do things which are mostly short run in nature.
        Mr. Carney. But my constituents obviously are focused more
    on the unemployment rate in the State, which in Delaware is a
    little bit better than the rest of the country. But they are
    still focused on that as opposed to what the Fed is doing with
    QE1, 2, or 3, or what-have-you. That is the major focus in the
    bulk of the feedback that I get.
        Mr. Meltzer. Yes. I will quote Paul Volcker, whom this
    committee certainly remembers. Mr. Volcker said the way to get
    low unemployment was to have low expected inflation. That is,
    depend on the markets. Don't try to get the unemployment rate
    down by raising the inflation rate and then trying to get the
    inflation rate down by raising the unemployment rate. That just
    gives you a lot of noise and variance in the system. So what
    Mr. Volcker said was what I would call the anti-Phillips curve
    approach, get the expected inflation rate down and anchor it
    down as best as you can. And then, the markets will provide
    jobs and prosperity.
        Mr. Carney. Dr. Subramanian, you had a--
        Mr. Subramanian. I think it is a great question, why it
    matters. I think the way I would think about it is to say that
    if we do something in the United States that affects other
    countries, it can come back to haunt us, because then they buy
    less goods and services from us--
        Mr. Carney. Right.
        Mr. Subramanian. --which contributes to unemployment. Or in
    the case of Delaware they may say, well, we don't want foreign
    financial service providers in our country because they try and
    impose capital controls, and that is going to hurt Delaware.
        So I think that is the reason why one has to impress upon
    our own constituents that we have to make sure what we do
    doesn't negatively impact others, because it could come back to
    haunt us in a globalized, interconnected world.
        Mr. Carney. One last quick question. I have about a minute
    left. We are talking about international impacts here with
    respect to Fed policy. What about if Congress did not raise the
    debt ceiling, what should we be concerned about there? Dr.
    Meltzer, would you like to--
        Mr. Meltzer. That is not a sensible policy. You have to
    raise the debt ceiling. I agree with those who say you have
    incurred the responsibilities. You don't want to concentrate on
    raising or not raising the debt ceiling. You want to
    concentrate on a longer-term policy which says we won't have to
    raise the debt ceiling again in the future, next year or the
    year after. Do that. That is an effective policy. That is
    something you can do.
        Mr. Carney. Any sense of what the negative impacts might be
    if that happened?
        Mr. Meltzer. Yes. It would say that the U.S. debt is highly
    risky. Because you don't know--
        Mr. Carney. Would it endanger our position as having the
    reserve currency?
        Mr. Meltzer. Yes.
        Mr. Carney. So maybe at another time we can have a
    conversation about what impact that would have.
        Mr. Meltzer. Let me amend that by saying if you don't raise
    the debt ceiling for a week or a month, that would be bad, but
    it wouldn't destroy the value of the dollar.
        Mr. Carney. Fair enough. My time is up. Thanks very much. I
    appreciate your time today.
        Chairman Campbell. Thank you. The gentleman's time has
    expired. And I have waded into the battle between Gamecocks and
    Tigers before, so I won't do it. I will just recognize the
    gentleman from South Carolina, Mr. Mulvaney, for 5 minutes.
        Mr. Mulvaney. Thank you, Mr. Chairman.
        And thank you, gentlemen, for doing this today.
        I want to touch on what I think is a related but a little
    bit different topic. We had Dr. Bernanke come not before this
    committee several years ago, but a different committee that I
    was on at the time, to explain to us at that time not a new
    policy, but something the Fed was expanding at the time called
    U.S. dollar liquidity swaps. This is another way that the Fed
    policy involves other countries, other central banks. It was a
    temporary program from its inception. And then I think in late
    October of this year, without much fanfare, it was made
    permanent. And this facility is now a permanent facility
    between the Federal Reserve and three or four other central
    banks. The bank explained why it was doing that. The bank said
    that it wanted to bring some stability and a known quantity or
    a known facility into play. And I understand that.
        Here is my question to you: Should we be concerned about
    this? It got very little attention. When they initially put the
    temporary program into place in 2007 and extended it again in
    2010, it got a lot of attention, it seemed like it did. The Fed
    Chairman came to a committee to tell us about it. But when it
    was made permanent in October of last year, it got very little
    press. There was actually only one commentator I could find who
    raised a red flag. He said permanent liquidity swap agreements
    will subject national monetary policies even more strictly and
    unrelentingly to the dominance of the Fed. Central banks around
    the world will increasingly emulate the Fed's monetary policy.
        So as we sit here and talk about the impact of Fed policy
    on other nations, should we be concerned or not about the fact
    that this swap facility is now permanent? And I will throw that
    open to anybody who wants to talk about it.
        Dr. Steil?
        Mr. Steil. I should emphasize that this facility was only
    made permanent with the five developed market central banks.
        Mr. Mulvaney. True.
        Mr. Steil. The credit risk to the Federal Reserve in the
    United States on these transactions is literally infinitesimal.
    I think it is very--
        Mr. Mulvaney. The credit risk or the interest rate risk? I
    understand the interest rate risk is actually zero. But you
    think the credit risk is zero as well?
        Mr. Steil. Absolutely.
        Mr. Mulvaney. Okay.
        Mr. Steil. We are effectively getting valid collateral for
    these swaps that is not going to collapse in value overnight. I
    want to emphasize that we have only made these facilities
    permanent with five of the most credible central banks in the
    world.
        Mr. Mulvaney. Japan and Canada, the Europeans. Okay. Right.
        Mr. Steil. The Swiss Central Bank, the Bank of England. I
    think it is important that we make it permanent because in a
    crisis, when banks in developed markets are struggling to
    ensure dollar liquidity, you can have a contagion effect where,
    for example, U.S. banks are reluctant to deal with European
    banks because they think that they would have a shortage of
    dollar liquidity. So I think it is very important that the
    developed central banks of the world do cooperate to ensure
    that we don't get into that situation.
        Mr. Mulvaney. Is that the consensus? Dr. Subramanian?
        Mr. Subramanian. I would go one step further. My first
    point is that this has been one of the resounding successes of
    Fed policy, not just in Europe, but also after the Lehman
    crisis when, as I said, emerging market countries wouldn't go
    to the IMF, but came to the Fed because they needed that
    liquidity.
        Point two, it is a technical point that now these swaps are
    two-way swaps. It can happen both ways. It is not just everyone
    coming to the Fed. It is technical, but I think it is important
    to note.
        But what I think the third and most important point is that
    because of the success of this policy, many commentators now
    are saying that this in fact should be generalized, and in fact
    the IMF should become the coordinator of these facilities more
    broadly because it had such a positive impact. And I think that
    shows the Fed has played a very important leadership role in
    this regard.
        Mr. Mulvaney. Okay. And that concerns me just a little bit
    because that would effectively reduce competition, I would
    think, between the various countries.
        Dr. Meltzer, do you want to check in on this?
        Mr. Meltzer. We started this policy way back in 1962, and
    it lasted until sometime in the 1980s, and then it has been
    reinitiated. It was, generally speaking, a two-way policy.
    Mostly we lent to others, but on occasion they lent to us. It
    did good, not much harm. I don't have any particular concern
    about it.
        Mr. Mulvaney. Thank you, gentlemen. I had another question,
    but I only have 20 seconds left, so I will yield back.
        Thank you, Mr. Chairman.
        Chairman Campbell. The gentleman yields back.
        The gentleman from North Carolina, Mr. Pittenger, is
    recognized for 5 minutes.
        Mr. Pittenger. Thank you, Mr. Chairman.
        And thank you, gentlemen, for your service and your input
    today.
        Dr. Meltzer, I have very much appreciated your views
    regarding the long-term stability of the markets and the
    economies. And that needs to be the focus for our solutions.
    But I would say that as Chair of the International Financial
    Institution Advisory Commission, the Meltzer Commission, you
    have taken a hard look, an in-depth look at the international
    financial system. And as such, I guess I would like to have
    just more analysis for my understanding of your view of the
    world economy that is flooded by the U.S. dollars and how that
    impacts the world economies, and as well what happens when the
    Federal Reserve needs to unwind on its balance sheet.
        Mr. Meltzer. That is a tall order, sir.
        Mr. Pittenger. You can handle it.
        Mr. Meltzer. Let me just say, to be brief, I think the
    danger that I see is that we could have a very rough time in
    the future because we have so much liquidity in the system, and
    we don't know where it is going to go, or when it is going to
    go, or if it is going to go. We just don't know. And that is a
    huge uncertainty hanging over the system. We need to rein that
    in. As I said before, we have QE with $2.5 trillion on the
    Fed's balance sheet, on the banks' balance sheet, and $2
    trillion on the corporate balance sheets or more.
        What can adding more liquidity do? Nothing that the banks
    and the others can't do by themselves. So the best thing we
    could do would be to end QE now and have the Fed come up with a
    detailed, clear plan of how, over time, they are going to
    reduce that $2.5 trillion. One of the most foolish things that
    I have seen happen is to say we are going to tie the end of QE
    to the current unemployment rate. First, that is a noisy
    number. Second, it gets revised substantially, as you know.
    Third, it came down mainly because people dropped out of the
    labor force. That is bad, not good, because we are losing a lot
    of skilled labor. So why is that a reason why you want to
    either do or not do QE?
        What you need is to say, look, this is a problem that is
    going to take years to solve. So what we need is a conditional
    strategy. And they should come in here and tell you, this is
    how we plan to do it, and this is the conditional strategy we
    have that is going to last over the next 3 or 4 years.
        Mr. Pittenger. Thank you.
        Would any of the rest of you care to comment on this?
        Mr. Lachman. I think when you are looking at the unwinding
    of QE, you have to look at what is its likely impact going to
    be on long-term bond yields. Basically, what we have seen
    during the period of QE is long-term interest rates in the
    United States were brought down to the lowest level that they
    have been in the postwar period. We were down to something like
    1.6 percent on 10-year bonds. As the Fed unwinds, the
    expectation is that those yields would rise. We are already at
    3 percent on 10-year yields. And that would have a huge impact
    on capital flows back to the United States. And that is really
    what puts pressure on the rest of the world, these emerging
    markets that didn't use the good times to strengthen their
    buffers against such an eventuality. So when the money comes
    back to the United States, you would expect to see disruption
    in a number of key emerging market economies.
        Mr. Pittenger. Dr. Steil?
        Mr. Steil. Two very, very brief points. With regard to the
    unwinding of QE, I am very concerned about the composition of
    the Fed's balance sheet much more than I am with the size of
    it, in particular the $1.5 trillion in mortgage-backed
    securities. Chairman Bernanke has made it clear that he doesn't
    wish to sell these securities, so he is going to have to use
    unconventional means of tightening policy when the time comes.
    Among the tools that he has mentioned are term deposit
    auctions. These have been used in Europe, and they have been
    used unsuccessfully. We have had many failed auctions in
    Europe. And I am concerned about using them here in the United
    States.
        The second concern I have is that the Fed has been sending
    conflicting messages through its forward guidance about when it
    intends to tighten policy. In November of 2012, it laid out a
    date marker. It said that it wouldn't tighten policy, raise
    interest rates until the middle of 2015. One month later it
    changed that guidance and said that it would use a data-based
    marker. It said it wouldn't do so until the unemployment rate
    hit 6.5 percent. It said that those two policies were
    consistent at the time, but they are now inconsistent because
    the Fed is expecting unemployment to hit 6.5 percent this year.
        The market, interestingly enough, is still hanging on the
    Fed's original guidance and believes that the tightening is not
    going to come until the middle of 2015. So, there is a
    potential train wreck here.
        Mr. Pittenger. Thank you.
        Chairman Campbell. The gentleman's time has expired.
        The gentleman from New Mexico, Mr. Pearce, is recognized
    for 5 minutes. And following that, with the panel's indulgence,
    we will do a quick second round of questions. Some of our
    Members have some follow-up questions.
        So, Mr. Pearce is recognized for 5 minutes.
        Mr. Pearce. Thank you, Mr. Chairman.
        I appreciate each of you being here today.
        Dr. Subramanian, in Dr. Steil's testimony he said that one
    of the effects of quantitative easing was encouraging investors
    to shift resources into riskier assets. Is that a problem? In
    other words, you are pretty high on the positive effects of the
    QE. So, if you would address that question.
        Mr. Subramanian. Yes, it does have that effect. Both
    domestically, money becomes very cheap, lower yielding assets,
    so you are moving to higher risking assets. But in some ways
    that is the point of QE, to encourage the private sector to
    move into riskier assets because they are unwilling to take on
    risks otherwise.
        And then on the international front, of course, when QE
    happens, investors also shift into assets in India, Brazil,
    China, et cetera, et cetera. Now, whether you would view that
    as riskier or not, I think all investors make this tradeoff
    between returns and risk. So in that sense, it is a difficult
    evaluation to make. Yes, they go into riskier assets, but these
    are also higher return assets. And that is the way QE works.
        Mr. Pearce. As we take this all the way down to the
    individual level, seniors are the most likely to have
    unsophisticated assets, not risky. All they are wanting to do
    is clip coupons. My mom is 87. She doesn't want to invest in a
    riskier asset in India. Yet, the bank account which she and dad
    took years to set aside is getting one-quarter of 1 percent.
    And so many of those seniors were driven into riskier assets
    without the sophistication or the desire. Can you address that
    possible downside effect?
        Mr. Subramanian. One effect of QE is a kind of implicit tax
    on savers, especially savers of safe assets. But the theory and
    the expectation is that because that encourages more
    investment, consumption, economic activity picks up, and so
    that is broadly on balance therefore whatever costs are
    inflicted to savers are offset by the higher growth, the higher
    employment that would otherwise be the case.
        Mr. Meltzer. Sir, good for you raising the question about
    seniors. If history is any guide, those decisions are going to
    end in tears.
        Mr. Pearce. Those decisions are what?
        Mr. Meltzer. Going to end in tears.
        Mr. Pearce. Yes, they are ending in tears right now,
    because my constituents are telling me, I lived my life
    correctly, meaning I cannot go back and live my life again, and
    you in Washington, meaning I think the Federal Reserve, are
    taking away those things that made it possible for us to live
    in retirement. It is ending in tears. And yet to me the Federal
    Reserve is looking at the effect on our seniors as collateral
    damage. That is an acceptable collateral damage to the Federal
    Reserve. And I just think that to overlook that is really hard.
        I think in the last minute I would like to talk about, if
    quantitative easing is a good policy and has positive effects,
    then all countries should engage in it, which in fact if Japan
    is looked at, they are quantitative easing at double the rate
    percentage-wise we are. And so could you address the question,
    if it is good for one country, is it good for all countries?
    And what effect is Japan's quantitative easing policy going to
    have?
        Dr. Meltzer, if you would take a short stab and it, and
    then I would like Dr. Subramanian to get a chance at it, too.
        Mr. Meltzer. I think that is a definition of disaster.
        Mr. Pearce. Okay. That is close enough. We only have 29
    seconds.
        Mr. Subramanian. I think QE policies are things that people
    have to do--countries have to do because they are in extremely
    dire circumstances. Japan has had deflation for 15 years. So it
    is one of the policy instruments that they are using in order
    to get out of 2 decades of deflation. Now, are there going to
    be collateral costs on outsiders? Yes, there are going to be.
    But that is the calculation that the Bank of Japan makes, just
    as the U.S. Fed makes its own calculation.
        Mr. Pearce. All right. Thank you very much. I yield back,
    Mr. Chairman.
        Mr. Meltzer. Let me say that QE1, I was in favor of QE1,
    that prevented the crisis in 2008. They should have ended the
    policy in 2009.
        Mr. Pearce. Thank you, Mr. Chairman.
        Chairman Campbell. Okay. The gentleman's time has expired.
        Round two, we will go straight to the gentleman from
    Michigan, Mr. Huizenga, for 5 minutes.
        Mr. Huizenga. Thank you, Mr. Chairman.
        Dr. Steil, I touched on this in my first round, and I think
    that you get at it on, I am not sure which page of your
    testimony here, but you are talking about it now, and I think
    it is worth recalling that Chairman Bernanke had in June
    suggested that asset purchases would end with the unemployment
    rate at around 7 percent. In fact, tapering is only now just
    starting with unemployment at this level. And just unpack for
    me a little bit about, my question, are we in danger of the
    world dismissing any of this without Dr. Meltzer's rule that he
    often brings up, whether it is the Taylor Rule or some other
    rule. Unpack that a little bit for me.
        Mr. Steil. Chairman Bernanke, perhaps surprisingly, I would
    agree with Dr. Meltzer that we need to move towards a more
    rule-based environment. He wants there to be targets, for
    example, and forward guidance. The problem is that the Fed has
    been throwing out too many of them. Some of them are
    conflicting. In some cases, the Fed has backtracked from them.
    For example, this 7 percent target that Chairman Bernanke had--
        Mr. Huizenga. Do you believe that is for economic reasons
    or political reasons? Or why are they doing that?
        Mr. Steil. I believe that at the time they set their
    guidance, they believe it is the best thing to do. Then they
    revisit the data, they have more discussions, they hear
    criticism in the market, and then decide that policy can be
    improved upon.
        I was rather struck by the rapidity with which they
    abandoned their original date-based forward guidance. You
    remember in November of 2012 we were told that interest rates
    would not be tightened until the middle of 2015. We were given
    an explicit date. One month later, we were told that we were
    not going to deal with dates anymore, we were going to deal
    with data markers, and that the particular one that the Fed was
    going to rely on was unemployment. There are two problems with
    this. First, too many unemployment targets have been laid out
    for the markets in terms of, for example, when tapering will
    start, when tapering will end.
        Mr. Huizenga. Back to your notion of no predictability and
    stability.
        Mr. Steil. Precisely. Second, the monthly employment
    figures themselves are very volatile. And the Federal Reserve,
    in my view, is encouraging the markets to watch those numbers
    and predictions of the numbers and rumors of the numbers and
    react to them immediately. So this sort of policy of saying we
    are going, for example, to calibrate asset purchases to monthly
    employment figures could very well unintentionally produce more
    volatility in the market rather than less.
        Mr. Huizenga. Okay.
        Dr. Lachman?
        Mr. Lachman. I would just make two points. I thought that
    the Fed was very clear when it mentioned the employment
    figures, the unemployment figures, that these were thresholds
    rather than strict guidelines that would automatically, a rule
    that would guide policy. But I think the second, more important
    point is that one really has to consider from the Fed's point
    of view that they are in totally uncharted territory both in
    terms of the economic conditions that they are dealing with and
    the scale of the policies that they have embarked on. So I
    don't think that you can do anything but guide your policies by
    the economic conditions as they evolve. And there is a great
    deal of uncertainty in the way in which you are running this
    policy.
        Mr. Huizenga. All right. In a minute, how do we untangle
    whether we should eliminate the IMF, as Dr. Meltzer was saying,
    or further utilize the IMF with Dr. Subramanian. Anybody care
    to comment on either IMF or--
        Mr. Meltzer. Let me say that I don't want to eliminate the
    IMF. I want to rein it in. That is our money, to a large
    extent, which is going to the IMF. We are bailing out countries
    in Europe. The countries in Europe are perfectly capable of
    bailing themselves out. Who is going to bail us out? The IMF?
    Hardly likely.
        Mr. Huizenga. I am afraid it is future generations, Dr.
    Meltzer.
        Dr. Subramanian?
        Mr. Meltzer. Yes, future generations, if they are unlucky
    enough.
        Mr. Huizenga. Yes.
        Mr. Subramanian. I think that the U.S. investment in the
    IMF is probably a better return than the bull market of 2013.
    Of very little cost, very safe investment. The dirty secret of
    course which I should bring out is that if you are worried
    about your investment in the IMF, as some are, it is senior
    creditor status always gets repaid regardless of--almost never
    been not repaid. And it has gold backing its credit lines. So
    there is absolutely no prospect that the United States would
    never get its money back. And it is the best insurance against
    future crises for the United States and the rest of the world.
        Chairman Campbell. Even though your time is up, Mr.
    Huizenga, I am going to do chairman's prerogative because Dr.
    Lachman is just about coming out of his chair.
        Mr. Huizenga. I thought his head was going to come off.
        Mr. Lachman. I think that what is being overlooked is to
    whom is the IMF lending money. The IMF has never lent money on
    the scale that it has done to as few countries with as bad of
    credit ratings as the IMF has done. So the exposure of the IMF
    is to countries like Greece, Portugal, Ireland, and Spain,
    countries that are hugely indebted and that are very likely to
    need official debt restructuring. So I don't think that one can
    take much comfort from the fact that in the past the IMF has
    always been repaid. The IMF had never in the past loaned on the
    scale to countries with as bad credit ratings as it has done in
    the past 5 years.
        Mr. Subramanian. Mr. Chairman--
        Mr. Huizenga. Gold-backed or not, it doesn't matter. This
    is the chairman's territory here.
        Chairman Campbell. Okay. Go ahead.
        Mr. Subramanian. I just find it a bit amusing that today,
    in this day and age, Greece and Spain and Portugal and Italy
    are considered higher risks than in the past Zimbabwe, all of
    these what we call the Third World. The notion that those were
    somehow better risks than--
        Mr. Huizenga. I am assuming some of that is scale, though,
    too.
        Mr. Subramanian. But no, Russia, we lent a lot in the Asian
    financial crisis.
        Chairman Campbell. Here is what I am going to do so this
    doesn't--I am going to terminate your long past time, Mr.
    Huizenga, and move to Mr. Stutzman. And perhaps Mr. Stutzman
    would like to at least open and see what Dr. Lachman has to say
    on this.
        Mr. Stutzman, You have 5 minutes.
        Mr. Stutzman. Thank you, Mr. Chairman. I would like to
    follow up on that. But first I would like to say we did have
    exciting football in Indiana when the Colts came back. Second
    greatest comeback to beat the Chiefs on Saturday.
        Chairman Campbell. Since I am a Chiefs fan, you had to
    bring that up.
        Mr. Stutzman. Sorry. I should have done my background.
        Chairman Campbell. Your time has been shortened to 30
    seconds.
        Mr. Stutzman. But, Dr. Lachman, looking at your testimony,
    and you talked about European policy complacency, I would like
    for you to talk a little bit more about that. In one of the
    statements towards the bottom of the one page, you say,
    ``Meanwhile, the stepped-up pace of quantitative easing by both
    the Federal Reserve and the BOJ since September 2012 has
    contributed to further spread narrowing in Europe as investors
    stretch for yield.'' Could you elaborate on that a little bit
    more?
        Mr. Lachman. Right. Basically, what we have seen over the
    past year is we have seen a marked deterioration in the
    economic and political fundamentals of a bunch of countries in
    the European periphery. Mainly, I am thinking of countries like
    Greece, Portugal, Italy, and Spain. Yet you have seen enormous
    amount of interest rate reductions, so that these countries now
    are borrowing at very low rates. The way in which you explain
    that is the activity by the ECB through its outright monetary
    transaction program, saying that it would buy the bonds of
    these countries in the eventuality that they came under great
    stress, but there was also the printing of money in the United
    States and in Japan has led to a lot of purchases of that
    money.
        My concern is that these low interest rates now are lulling
    these countries into a false sense of security because what we
    are seeing is as their debt levels continue to rise, the budget
    deficits aren't coming down as programmed. These countries now
    could be going into a deflationary period. So when the music
    stops, when the money isn't being printed in the United States
    and Japan, those countries are going to be very vulnerable
    because they are not doing the kind of things that they should
    to ensure that the euro survives.
        Mr. Stutzman. In your chart here, in figure 5, you have the
    eurozone 10-year government bond yields, and Greece obviously
    spikes dramatically.
        Mr. Lachman. Correct.
        Mr. Stutzman. Explain to us, why did that happen when you
    have Spain's and Italy's remaining relatively flat.
        Mr. Lachman. I am not sure exactly what year are you
    referring to?
        Mr. Stutzman. Is the spike for Greece--
        Mr. Lachman. Basically, what occurred in Greece is that
    Greece eventually defaulted on its debt, it defaulted on its
    private sector debt. The write-down of that debt, the present
    value was written down by as much as 75 percent. So once the
    country goes through a debt structuring it looks a better
    credit to the private markets. That is supportive of the bond
    yield going forward. But prior to that, what this was
    reflecting was that there was going to be a very big debt
    restructuring, which is in fact what occurred.
        Mr. Stutzman. I can't remember which gentleman it was who
    was talking with Mr. Carney about the debt ceiling. And I don't
    think there is anyone that I have discussed here in Congress
    who doesn't want to take the responsibility for our
    liabilities, short term and long term. But what do you suggest,
    when the conversations here--maybe this is just our problem to
    deal with--but the conversations never seem to be what I think
    Dr. Steil said about not necessarily concerned about the debt
    ceiling, but the long-term liability that this country has will
    then take care of our current debt problems. And we have tried
    to explain that through restructuring of long-term liabilities.
        Any advice? We obviously have political arguments to make,
    and also responsibilities that we have to fulfill. But I get
    very frustrated when we only seem to look short term around
    here rather than looking long term. Any comments? Would all of
    you agree with that?
        Mr. Steil. This Congress, broadly speaking, I think is very
    good at dealing with crises, as we saw back in 2008. But the
    long-term debt trajectory in this country is not yet seen in
    Washington as being a crisis precisely because we are able to
    borrow at such low interest rates. There are many reasons for
    that. Obviously, the Federal Reserve buying up Treasury debt is
    one way in which those interest rates are held down. Foreigners
    such as China buying up U.S. debt voraciously is another way.
        Now, I would very much hope that we would be able to
    address our long-term challenges well in advance, without
    having to have the discussion triggered by a crisis caused by a
    spike in interest rates.
        Mr. Stutzman. Is QE, though, exacerbating that?
        Chairman Campbell. The gentleman's time has expired. I have
    to move on to the gentleman from South Carolina, Mr. Mulvaney,
    who can ask that question or whatever questions he would like.
        Mr. Mulvaney. I do want to continue, because you mentioned
    something that Mr. Stutzman and I were talking about during the
    questioning, which is that other countries--folks are willing
    to lend to us at fairly low rates, but we have a Federal
    Reserve that is effectively printing about $75 billion a month.
    That is, if my math is right, $900 billion a year. That is
    actually going to be more than the deficit this year. So is
    anybody actually lending us any money or are we just printing
    it all?
        Dr. Steil?
        Mr. Steil. This money, as Dr. Meltzer has emphasized, has
    been to a great degree locked up in excess reserves.
        Mr. Mulvaney. I understand where it is going. The question
    is where it is coming from. If the Federal Reserve is printing
    $900 billion a year and our debt is--
        Mr. Steil. Literally being conjured as computer blips.
        Mr. Mulvaney. Correct.
        Mr. Steil. That is the way money is printed in the modern
    economy.
        Mr. Mulvaney. I am glad that Dr. Bernanke, before he left,
    decided to back down from his comment that they don't print
    money, because I think everybody recognizes that is not being
    entirely straightforward.
        Here is the question I had before that I didn't get a
    chance to ask. A couple of you, I can't remember who it was at
    this point, mentioned currency manipulation during your opening
    statements. But my question is this. If I were--and if it makes
    a difference between being a developed country and an emerging
    market, let me know--but if I was a country that was interested
    in manipulating my currency, I assume you would do that mostly
    to lower the value of the currency. I guess there could be
    circumstances where you would manipulate it the other way. But
    generally we talk about lowering the value. Dr. Subramanian,
    how I would go about doing that? What are the traditional tools
    that a country can use to manipulate its currency downward?
        Mr. Subramanian. I think China is the best example, because
    it uses three ways, reinforcing ways of doing it. First, it
    keeps its country relatively closed to capital inflows. So the
    pressure that comes from dollars flooding the market and
    putting upward pressure on the currency, that is mitigated
    because China is relatively closed.
        Second, what it does is, when the money does come in, and
    in the case of China only some of it comes in via capital, most
    of it comes in because of the current account surplus, what
    they do is the central bank goes in and buys dollars to prevent
    the currency from going up. That is the second way in which
    they do it.
        Third, that is a problem because when you buy dollars you
    inject domestic currency back into the market and that can
    create inflation. So to prevent that, they do a third thing,
    which is to buy back some of the renminbi they have injected
    into the market by issuing interest-bearing assets.
        Now, the reason why they get away with it is that normally
    when you do that interest rates would tend to rise and impose
    some costs either on the budget or on the central bank. But
    because their financial system is repressed, interest rates are
    very low. So often in fact the Chinese central bank makes a
    profit on these activities which would generally be loss making
    because it has to pay very low interest rates.
        Mr. Mulvaney. And let me cut you off because I think you
    are right, in fact I know that you are right, I believe that
    you are right, but you have used China, which is an example
    that I am a little concerned about because of what you have
    just mentioned, which is it is a controlled economy or semi-
    closed economy. Now, when Japan was going through what they
    went through when Prime Minister Abe was put in place, they
    didn't do anybody of those things, right? Dr. Lachman, you
    looked like you were getting ready to go down that road.
        Mr. Lachman. No, precisely, Japan is the prime case that I
    would take of a country that is deliberately cheapening its
    currency through printing a huge amount of money. What we have
    seen since they started this process at the beginning of 2013,
    is we have seen a 20 percent depreciation of the yen, which is
    the way in which they are getting inflation to reemerge in
    Japan, and they are getting the economy to grow through
    increasing their exports. So this is a country that is
    deliberately using monetary policy; they are not going to say
    that is the objective, but that is basically what they are
    doing.
        Mr. Mulvaney. Okay. Then let me ask this--
        Mr. Meltzer. Let me defend the Japanese for just a moment.
        Mr. Mulvaney. Yes, sir.
        Mr. Meltzer. I spent 17 years as something called the
    honorary adviser to the Bank of Japan, so I learned a little
    bit about their economy. When I went there originally, there
    were 360 yen to the dollar. Eventually, because of the U.S.
    policy in recent years, it floated down to 70 yen to the
    dollar. At that point, because of U.S. policy, the Japanese yen
    appreciated to 70 yen to the dollar. They couldn't continue to
    exist at that point. That is why they adopted this policy. That
    was a direct reaction to what we were doing.
        Mr. Mulvaney. I understand that. And that ties in because
    along with my opening questions to Dr. Steil about what we are
    doing in terms of printing money--
        Mr. Meltzer. Absolutely.
        Mr. Mulvaney. --Dr. Lachman, if one of the ways that you
    manipulate your currency down in a developed economy is to
    print a bunch of money, aren't we doing that in this country?
        Mr. Meltzer. Yes.
        Mr. Lachman. Absolutely. And what this is doing is it is
    inducing other countries to emulate us. I would totally agree
    with Dr. Meltzer that the United States, by cheapening its
    country, makes Japan's life impossible, so the Japanese respond
    by printing their currency. The one central bank that is not
    printing its currency that should be printing its currency to
    respond to all of that is the European Central Bank, which has
    the weakest economy in the globe right now.
        Mr. Mulvaney. And I would love to give Dr. Subramanian the
    opportunity, but it is now the chairman's prerogative.
        Chairman Campbell. Yes. Again, if Mr. Pittenger would like
    to let you jump in, I will let him do that. But it will be his
    time starting now.
        Mr. Pittenger. Sure. Please continue.
        Mr. Subramanian. No. I think with Japan we have to get the
    facts a little bit right. The depreciation of the yen began
    well before the announcement of the implementation of QE by
    Japan. Almost all the depreciation happened before Abenomics
    was actually implemented. That is I think very important to
    remember.
        Mr. Meltzer. When it was announced.
        Mr. Subramanian. When it was announced, yes, but a lot else
    was going on. The Japanese current account deficit was
    actually--the surplus was declining rapidly, and that also
    contributed after the Fukushima disaster.
        I am not saying that QE has not helped lower the Japanese
    currency. But I think we have to be a little bit careful
    because the truth is the movement in the Japanese yen is a bit
    of a puzzle for most analysts.
        Mr. Pittenger. Thank you. I would like to just get your
    thoughts regarding Chair Janet Yellen, who was confirmed this
    week, and if you believe that the tapering process will
    continue or will the Fed have other policies? And, frankly,
    your views on what the Fed will be doing over the next year.
        If you would like to begin, Mr. Steil, and go down the row
    very quickly.
        Mr. Steil. The FOMC minutes would appear to indicate that
    there is a general consensus to move forward with the tapering
    process and that she is not about to make any sort of a sudden
    change in that process. As long as circumstances remain roughly
    what they are today, we can expect the process to continue
    throughout this year.
        Mr. Pittenger. Thank you. And if you want to recommend any
    additional advice for Ms. Yellen, that would be welcome.
        Dr. Meltzer?
        Mr. Meltzer. My advice would be to stop it now and come up
    with a plan for getting rid of the excess before it does
    damage.
        Mr. Pittenger. Yes, sir. Thank you.
        Dr. Lachman?
        Mr. Lachman. I would agree with Mr. Steil that basically we
    will get continuation of the policies that we have already
    seen. I think that it has to be condition-based. I am not sure
    that I would agree with Dr. Meltzer that one really wants to
    unwind too abruptly. I think one really has to be doing this by
    seeing what are the effects, how does this impact the economy.
    One really has to be conditioning one's policy on the way in
    which the financial markets evolve and the way in which the
    economy works. And I think that being in totally uncharted
    waters, we really don't know what the impact of the unwinding
    is going to be.
        Mr. Pittenger. Dr. Subramanian?
        Mr. Subramanian. I have nothing to add. She knows far more
    about monetary policy than I do.
        Mr. Pittenger. Thank you. I yield back my time.
        Chairman Campbell. All right. The gentleman yields back.
        And so now onto the gentleman from New Mexico, Mr. Pearce,
    for 5 minutes.
        Mr. Pearce. Thank you, Mr. Chairman.
        Dr. Lachman, you got into a little bit of a discussion some
    time ago about the long-term interest rates. And so my question
    has to do with, I may be mixing the concepts, I am not that
    articulate on it, but the maturity extension program has been
    driving down the long-term interest. And that long-term
    interest is going to go up as our economy improves. And so the
    Federal Reserve at that time is going to be faced with
    increasing costs because they pay banks. So their costs are
    going up at a time that their yields are going down because the
    bond prices are ultimately going to go up. And so this program
    of exchanging long-term for short term and driving long-term
    rates down looks like it has the potential to create great
    havoc in the Federal Reserve. In 2012, we got $88 billion in
    profits in exchanges and sale of assets and all that junk they
    did back in 2008. So what potential do we have for absolute
    disruption of the Federal Reserve's balance sheet as the
    economy improves?
        Mr. Lachman. I think that if the Federal Reserve balance
    sheet is marked to market, the Federal Reserve would have an
    enormous negative position. The Federal Reserve is holding $4
    trillion of long-dated assets that they bought at very low
    interest rates. Obviously, as the interest rate goes up, the
    value of their bonds goes down. They only have something like
    $50 billion in capital. So they are going to really be in a
    hole were they were to mark to market. But as Dr. Meltzer is
    telling me right now, they are very unlikely to mark it to
    market.
        Mr. Meltzer. They have already said that the mortgage
    portfolio is going to be held as if it were going to be held to
    maturity. So they don't have to mark it to market under the
    rules, and that way they won't. Now, there is a slippery
    question there. The markets will mark it to market whether the
    Federal Reserve does it on its balance sheet or not.
        Mr. Pearce. Any observation, Mr. Subramanian? You don't
    want to touch that? You have no time for anything like that?
    Okay.
        I think one of the questions that comes to me, and I am
    again not sure there is a relationship, but we saw significant
    collapses in Iceland and Ireland. And it appeared to be because
    cheap money was coming in, and they were lending far more money
    than they could pay from a fish economy. And so both
    experienced tremendous difficulties, even to the point that
    Ireland took on the debt of the banks who were all in the
    process of failing. So now they owe 9 times their GDP and will
    never be able to pay that off. And that appears to be a result
    of loose money policy, easy money policies. And Mr. Subramanian
    has said that is one of the great benefits of QE3, that
    emerging economies can get access to capital pretty freely. Is
    that a correct observation or am I linking things that
    shouldn't be linked here?
        Mr. Steil, would you care to--
        Mr. Steil. In the case of Ireland, they experienced a major
    property and housing boom.
        Mr. Pearce. Which was caused by easy money, wasn't it?
        Mr. Steil. Sure. Nobody questions the fact that monetary
    policy in Ireland, which is set in Frankfurt by the ECB, was
    too loose. But the ECB sets monetary policy for the entire
    eurozone. So the Irish Government was going to have to use
    other tools to prevent overleveraging.
        Mr. Pearce. Which might cause those days of tears that Mr.
    Meltzer was talking about. Those other tools always strike fear
    into my heart because the people in the know are going to
    benefit from those other tools and the poor schmucks out there
    on the street who save money and put it in the banks hoping
    that the stability that Mr. Meltzer has talked about would
    actually be there, and as we use those other tools I worry
    about what the effect on the consumers is going to be.
        Mr. Lachman, do you have any comments on any of this?
        Mr. Lachman. I just think that the two examples that you
    used, Iceland and Ireland, are the most egregious cases of
    market discipline breaking down because there was easy money.
        Mr. Pearce. Yes, unless we use the example of Zimbabwe,
    which began to print their own money and took one of the most
    stable economies in Africa, and now they print trillion dollar
    notes there. So the end result of printing money is not always
    a good outcome. I question whether it is ever a good outcome.
        Thank you, Mr. Chairman. I yield back.
        Chairman Campbell. The gentleman's time has expired. So I
    will yield myself 5 minutes just for kind of a wrap-up thing
    here. Although the IMF was not the specific purpose directly of
    this hearing, the interchange between two alumnae of the IMF
    there I thought was most--sorry?
        Mr. Subramanian. A loyal one and a disloyal one.
        Chairman Campbell. A loyal? Okay. I thought it was rather
    fascinating. And given that this is a topic of some very much
    current import, I thought I would let the two of you continue
    this. So where we left off, I believe Dr. Lachman's head was
    coming off at one of Dr. Subramanian's comments rather than the
    other way around, and saying that what have we come to where
    money to Greece is less stable than Zimbabwe.
        By the way, and Mr. Pearce was talking about it, I do have
    $20 billion here from the Reserve Bank of Zimbabwe. So I do
    have a $30 trillion note as well, but it is not with me at the
    moment because I don't want to carry that much cash around. I
    figure carrying $20 billion should be enough. But anyway, since
    we brought up Zimbabwe, I always have this. And by the way,
    people always wonder why. I have used this in speeches many
    times to point out back during the financial crisis in 2008
    that our financial system, the value of money is all based on
    trust and what stands behind it. And when that trust goes away,
    the value goes away, and that as it happened with this, it can
    happen with any currency if not properly managed.
        So with that, Dr. Lachman?
        Mr. Lachman. I think where I would agree with Dr.
    Subramanian is that the IMF in the past has loaned to countries
    with as bad a credit standing as the countries in the European
    economic periphery. Where I disagree is that the IMF, in the
    case of Russia or Argentina or all the other countries that
    they might have lent to in the past, they never lent to those
    countries on the scale that they are lending now to the
    European countries.
        So if you look, for instance, at Greece right now, Greece
    has debt that is 175 percent of its gross domestic product.
    That is huge. Most of that debt is owed to the official sector.
    And the chances are is that debt is going to have to be written
    down.
        Somebody is going to have to take a hit. It is going to be
    either the ECB or the IMF or the European Commission. But that
    debt in the end is not going to be repaid, or it is going to be
    termed out or very low interest rate. So the basic point that I
    am making is that the lending that we have seen to the European
    periphery has never been on that scale before either in terms
    of the IMF's quotas, in terms of the amount of GDP this
    represents, or in terms of the amount of fiscal revenues. So
    the IMF is really taking very high risks that it hasn't taken
    before.
        Chairman Campbell. Dr. Subramanian?
        Mr. Subramanian. I agree with Dr. Lachman that the scale is
    different now. But I am far more sanguine about the prospects
    of this being repaid, one. And two, even in the extreme case
    were it not to be paid, it would not make a dent in the IMF
    because, for example, I think the IMF has senior creditor
    status. It would be paid off first before anyone else. And
    second, again, if things go really bad, the IMF has $130
    billion of gold against which it can fill any hole of any
    magnitude that we can currently imagine. So, investing in the
    IMF is not a risky proposition.
        Mr. Meltzer. May I add to that? One of the things that the
    IMF did, was famous for, was it imposed very strict conditions
    on the countries to which it lent. It isn't doing that anymore.
    The so-called austerity which creates such excitement in the
    European press is a farce. There hasn't been any big
    expenditure cuts. The expenditure cuts have almost all been
    investment, which is a short-run strategy, or tax increases,
    which is a very bad strategy in a recession. They haven't cut
    spending.
        Chairman Campbell. If I can cut you off, Doctor, because
    Dr. Steil wanted to jump in, and I want to give him the last 30
    seconds.
        Mr. Steil. Historically countries have tended to default
    right as they begin to achieve what is called a primary budget
    surplus. That is when they no longer need to borrow money from
    the markets in order to fund current expenditure. Greece is
    precisely entering into that position this year. They will
    achieve a primary budget surplus, at which point they have
    every incentive to default because they no longer need the
    markets to fund their current expenditures. So you can expect
    more conflict this year between Greece and its official sector
    lenders.
        Chairman Campbell. Thank you. My time has expired. And we
    have been joined by the ranking member of the full committee,
    the gentlelady from California, Ms. Waters. And Ms. Waters is
    recognized for 5 minutes.
        Ms. Waters. Thank you very much, Mr. Campbell, for sitting
    here and doing this work without the help of this side of the
    aisle this morning.
        I, unfortunately, could not be here early to join with my
    colleagues and Mr. Clay, who is our ranking member, but this is
    a most important subject matter, and I certainly wanted to see
    if I could catch up.
        I certainly have an opening statement that I would like to
    present for the record, so if you would accept that.
        Chairman Campbell. Without objection, it is so ordered.
        Ms. Waters. Let me raise a question. This is for Dr.
    Subramanian. Is that your name?
        Mr. Subramanian. That is my name, yes.
        Ms. Waters. Okay. Given the unique role of the dollar as
    the world's reserve currency and the fact that the United
    States is the world's largest economy, how much responsibility
    does the Fed have to consider the spillover effects associated
    with these policies? How should we reconcile or rationalize
    actions that create benefits to the United States but risks
    abroad?
        Mr. Subramanian. I think, as the world's biggest economy,
    the financial epicenter and the issuer of the dollar, it has to
    be mindful of its international consequences. Its primary
    responsibility is to the U.S. economy, but it has to be mindful
    of its international consequences.
        And, in fact, the Fed has tried to do precisely that, as I
    said in my written testimony. And the way it has tried to do
    that is of course by following policies which it considers
    important for its own economy but taking actions, for example,
    like providing these dollar liquidity swaps to countries in
    trouble to forestall the risks associated with crises. For
    example, it has lent money to the central bank swap lines for
    emerging-market countries and most recently in Europe, as well.
    And this lending, in fact, has had a positive impact on the
    economy.
        So it is a delicate task because no one will say the Fed is
    responsible for running the economies or creating incentives
    for good behavior elsewhere, but, equally, it has to be
    mindful. And I think it has done a pretty good job of balancing
    these twin responsibilities.
        Ms. Waters. Thank you very much.
        Upon entering here today, my staff was anxious to share
    with me Mr. Meltzer's recommendation to close the World Bank.
    And I guess the reason that was given is there is little reason
    for it in a world of enormous capital flows. Is that correct?
        Mr. Meltzer. Correct.
        Ms. Waters. This brings up an important question with
    regard to the legitimacy of development finance as distinct
    from commercial finance.
        In our view, development finance has not been rendered
    obsolete by the emergence of the financial markets. In fact, it
    is just the opposite. We have had over 30 years of experience
    with the financial markets which has given us the debt crisis
    of the 1980s in Latin America, the 1997 East Asia crisis, the
    1998 Brazil and Russian crisis, and the 2008 financial crisis.
        The accessibility of countries to private capital can be
    cut off very, very rapidly. As soon as a crisis arises, the
    money dries up.
        So can you expound a little bit, or can any of the other
    witnesses share their views on the role of development finance
    as distinct?
        Mr. Meltzer. Yes. You just described why it is that I
    wanted to end the World Bank but not the IMF. If there is a
    crisis, that is the responsibility of the IMF. Long-term
    lending, that is the responsibility of the World Bank.
        We don't need the World Bank to do long-term lending. We
    did back in 1945 when we started because there was very little
    international capital, practically none. But we now have
    trillions of dollars floating from country to country, so it is
    just--so we have succeeded with the policy that we had. It is
    time to say that, in terms of our domestic policy, we have
    many, many more urgent problems at home than we do in Argentina
    or Zimbabwe.
        Ms. Waters. Of course, we would all agree that what we do
    domestically must come first. But we also must agree that we
    live in a world where it is very connected and we have to be
    concerned about what goes on around the world, and we are
    considered the leaders, and that we cannot absence ourselves
    from that leadership role.
        And so, do you see us absolutely not being involved at all
    with the World Bank?
        Mr. Meltzer. I think the World Bank has succeeded in doing
    a lot of things around the world, many of them very good--
        Ms. Waters. Will it help to avoid crises?
        Mr. Meltzer. They are not supposed to be involved in
    avoiding crises. The Congress appointed me the chairman of a
    commission to look into what they do. They don't work on
    crises; they work on longer-term development. Longer-term
    development is financed by longer-term capital, and we have
    lots of that around. So we just--we should declare success.
        Mr. Subramanian. Can I say--
        Ms. Waters. Mr. Chairman?
        Chairman Campbell. Yes. Without objection, I will yield the
    gentlelady from California another 5 minutes, since she just
    got here.
        Ms. Waters. Thank you.
        Chairman Campbell. Please proceed.
        Ms. Waters. Yes. Let me just say to Mr. Meltzer that when I
    referred to the avoidance of crises, I was not talking about a
    crisis occurring and then jumping in. I was talking about long-
    term development helps to avoid crises.
        I want to now go to Mr. Subramanian.
        Mr. Subramanian. Thank you.
        I think one way to think about development finance and to
    kind of bring the two of you closer together, between outright
    abolition and continuation with the status quo is to think of
    it in the following way: that I think where Professor Meltzer
    is correct is that, as countries have grown, as commercial
    finance has become more important, the reliance on development
    finance should naturally--
        Ms. Waters. Sure.
        Mr. Subramanian. --decline over time. It hasn't disappeared
    altogether because there are still places in the world which
    require development finance, so you need the World Bank for
    that.
        But I think the other very important point that we have to
    remember, where I disagree with Professor Meltzer, is that
    there are some forms of development finance, especially which
    go towards global public goods, which markets will never
    finance. So the World Bank still will have to finance a lot of
    global public goods: one, research and development on diseases,
    on climate change, and on agriculture, one.
        And so, there are lots of global public goods that still
    need to be funded, and development finance has an important
    role to play there.
        Ms. Waters. That is interesting.
        Would Mr. Meltzer agree with that?
        Mr. Meltzer. They don't do it. That is not what they do.
        We had malaria. Malaria is a wonderful example, because for
    years--and there is a lot of literature on this--they wouldn't
    even provide bed nets. Now, how did we finally make some
    progress against malaria? The Gates Foundation and various
    other entities supplied the public goods, spent money to do
    drug research on malaria drugs. That is private-sector work,
    which is much more effective. The World Bank didn't do that.
    Unfortunately, it didn't do that.
        The World Bank has--our ideal should be to try to improve
    the allocation of capital. As I look at the United States, it
    needs a lot more capital.
        Ms. Waters. Since we have such a good debate going on, we
    should just continue it.
        Mr. Subramanian just made a good case for the private
    sector's involvement and what they have been able to do in
    areas that were not done by the World Bank.
        Mr. Subramanian. I heard Professor Meltzer saying that the
    problem was not that the objective of financing public goods
    was unimportant, in fact he stressed importance, just that the
    World Bank should be doing more of that.
        Ms. Waters. Yes.
        Mr. Subramanian. And I think that is where we need reforms
    of the World Bank to push the World Bank much more in that
    direction and do perhaps a little less of the old-style,
    conventional development financing and do more of the global
    public good. But that is something that Congress and other
    countries around the world should push the World Bank in that
    direction.
        Ms. Waters. So what you are basically saying is, rather
    than getting rid of the World Bank and thinking that we don't
    need it anymore, we should be using whatever public policy
    influence we have to direct it toward doing the kinds of things
    that make good sense at this point in time.
        Mr. Subramanian. Exactly.
        Ms. Waters. I am not going to ask Mr. Meltzer if he agrees
    with that. I am simply going to thank both of you for your
    insight and your wisdom.
        And I yield back the balance of my time.
        Chairman Campbell. I thank the ranking member.
        And I would like to thank all of the witnesses for your
    testimony today. I hope everyone found this as valuable as I
    did.
        Without objection, your written statements will be made a
    part of the record.
        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.
        And, with that, without objection, this hearing is now
    adjourned. Thank you.
        [Whereupon, at 12:10 p.m., the hearing was adjourned.]

                                A P P E N D I X

                               January 9, 2014

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