[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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