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




                       LEGISLATION TO REFORM THE

                         FEDERAL RESERVE ON ITS

                         100 YEAR ANNIVERSARY

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



                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 10, 2014

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-89
                           
                           
                                  ______
                                  
                    U.S. GOVERNMENT PUBLISHING OFFICE 

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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. VELAAZQUEZ, New York
PETER T. KING, New York              BRAD SHERMAN, California
EDWARD R. ROYCE, California          GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma             MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia  RUBEEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey            WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas              CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina   STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California            DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota          AL GREEN, Texas
KEVIN McCARTHY, California           EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin
BILL POSEY, Florida                  KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK,              ED PERLMUTTER, Colorado
    Pennsylvania                     JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia        GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri         JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan              TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin             BILL FOSTER, Illinois
ROBERT HURT, Virginia                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              STEVEN HORSFORD, Nevada
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
LUKE MESSER, Indiana

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
                    
                    
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 10, 2014................................................     1
Appendix:
    July 10, 2014................................................    57

                               WITNESSES
                        Thursday, July 10, 2014

Calabria, Mark A., Director, Financial Regulation Studies, the 
  Cato Institute.................................................    10
Johnson, Simon, Ronald Kurtz Professor of Entrepreneurship, Sloan 
  School of Management, Massachusetts Institute of Technology....    14
Peirce, Hester, Senior Research Fellow, the Mercatus Center, 
  George Mason University........................................    12
Taylor, John B., Mary and Robert Raymond Professor of Economics, 
  Stanford University............................................     9

                                APPENDIX

Prepared statements:
    Beatty, Hon. Joyce...........................................    58
    Calabria, Mark A.............................................    61
    Johnson, Simon...............................................    75
    Peirce, Hester...............................................    84
    Taylor, John B...............................................    89

              Additional Material Submitted for the Record

Maloney, Hon. Carolyn:
    Excerpt of testimony of Federal Reserve Chairman Ben Bernanke 
      from a Financial Services Committee hearing held on July 
      18, 2012...................................................    93
Mulvaney, Hon. Mick:
    Letter to Representative Scott Garrett from Hon. Sheila C. 
      Bair, dated June 30, 2014..................................    96
Sherman, Hon. Brad:
    Executive Order 12866 of September 30, 1993..................    99

 
                       LEGISLATION TO REFORM THE

                         FEDERAL RESERVE ON ITS

                         100-YEAR ANNIVERSARY

                              ----------                              


                        Thursday, July 10, 2014

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Members present: Representatives Hensarling, Capito, 
Garrett, Neugebauer, McHenry, Campbell, Bachmann, Pearce, 
Posey, Fitzpatrick, Luetkemeyer, Huizenga, Duffy, Stivers, 
Stutzman, Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr, 
Cotton, Rothfus, Messer; Waters, Maloney, Velazquez, Sherman, 
Green, Cleaver, Himes, Sewell, Foster, Kildee, Delaney, Beatty, 
Heck, and Horsford.
    Chairman Hensarling. The committee will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the committee at any time.
    This is a legislative hearing to examine a bill put forth 
by the vice chairman of our Monetary Policy and Trade 
Subcommittee, Mr. Huizenga, to make certain reforms to the 
Federal Reserve System.
    I now recognize myself for 5 minutes to give an opening 
statement.
    When this committee first embarked on the Federal Reserve 
Centennial Oversight Project last year, we promised a thorough 
review of America's central bank. Today's hearing is this 
committee's 11th hearing on the Federal Reserve in the 113th 
Congress. Certainly, our understanding of the Fed has been 
enriched through discussion and debate among our colleagues and 
complemented by the knowledge and perspective of many 
distinguished witnesses and scholars, including those who are 
here today.
    As the hearing schedule for the 113th Congress begins to 
wind down, I do wish to thank all of our colleagues and 
witnesses for their contribution to this project and the risk 
they undertook to provide such contribution. I say ``risk'' 
because I am reminded that Senator Nelson Aldrich, one of the 
legislators behind the Federal Reserve Act, noted that, ``The 
study of monetary questions is one of the great causes of 
insanity.'' Hopefully, we can avoid that fate. Regardless, we 
do expect to issue a full report on our findings from the 
Centennial Oversight Project in the fall.
    Today, we consider the first piece of legislation to arise 
from this process, legislation to begin to reinvigorate the Fed 
with the type of accountability to Congress and the people that 
the Founders expected of all Federal agencies when they drafted 
the Constitution. I, again, say the ``first'' piece of 
legislation because reforming an institution as old, 
entrenched, important, and as powerful as the Federal Reserve 
will be a work in progress. But it is work we must not ignore.
    There are many excellent, capable public servants at the 
Fed who have served our Nation well and are currently serving 
our Nation well. But I believe a critical examination of the 
last 100 years of the Fed's actions reveals a mixed bag at 
best. And, most recently, we have seen a radical departure from 
the historic norms of monetary policy conduct, from an 
unprecedented use of Section 13(3) exigent powers to select 
intervention in distinct credit markets, to the facilitation of 
our unsustainable national debt, to a blurring of the lines 
between fiscal and monetary policy, all of which presents large 
and unwarranted risk to our economy.
    Clearly, our work must be thoughtful, it must be careful, 
and it must be deliberate, but much is at stake, so we must not 
ignore it. Thus, I fully expect the legislative effort to 
continue in this Congress and the next.
    A recurring theme throughout our hearings has been that 
monetary policy is at its best in maintaining stable, healthy 
economic growth when it follows a clear, predictable rule or 
path free from political micromanagement, as it did in the 
Great Moderation of 1987 to 2002.
    Earlier in her career, Chair Yellen said at an FOMC meeting 
that following one type of rule, specifically the Taylor Rule, 
is ``what sensible central banks do.'' I agree.
    Let me make one thing clear at the outset. We do not 
suggest for a moment that Congress, much less the White House 
or Treasury, should conduct monetary policy operations. We 
continue to respect the Federal Reserve's independence in 
monetary policy.
    But that independence and discretion must be paired with 
appropriate transparency and accountability. What we require 
today in this legislation is that the Fed use a clear map of 
its own choosing to set the course for monetary policy and 
share that map with the rest of us.
    Additionally, the case for Federal Reserve independence 
when it sets monetary policy does not hold up when we consider 
the Fed's new powers under the Dodd-Frank Act to regulate an 
ever-increasing share of the American economy. The Fed should 
not be permitted to hide its prudential regulatory actions 
behind its monetary policy independence cloak.
    So today, we consider a requirement, among others, that the 
Federal Reserve conduct cost-benefit analysis as it adopts new 
regulations. Even President Obama has issued two Executive 
Orders reaffirming the importance of thorough cost-benefit 
analysis by both Executive Branch and independent regulatory 
agencies.
    Today's legislation includes a number of other additional 
transparency and accountability provisions which are badly 
needed for the Federal Reserve. It is clearly time to hold the 
Fed to the same openness and transparency that we demand of 
other Federal agencies.
    In closing, two final points.
    First, I want to thank Chairman Campbell and his 
subcommittee for all the great work they have done and will 
continue to do on the Federal Reserve Centennial Oversight 
Project. I want to thank Chairman Garrett, whose ideas have 
formed the bulk of the bill that will be before us today. And I 
want to thank Vice Chairman Huizenga for his work on this bill, 
as well.
    Second, I want to emphasize again that I expect further 
pieces of legislation to follow. For example, we continue to 
examine the Fed's Section 13(3) powers as modified by Dodd-
Frank. Also, many in the public have inquired about H.R. 24, 
the ``Audit the Fed'' bill. Counterintuitively, that bill falls 
under the jurisdiction of the House Oversight Committee, not 
our own. And we look forward to Chairman Issa bringing that 
bill to the Floor.
    And I would note that today's bill contains a provision 
requiring the GAO to ensure that the Fed complies with our 
statute by auditing the monetary rule they submit to Congress 
and, thus, complements the ``Audit the Fed'' bill.
    Again, our goal today is to begin the process of developing 
legislation that will ultimately strengthen the Federal Reserve 
in fulfilling its mission to maintain stable prices and job 
growth and ensure that the Fed's rulemaking process is 
transparent and predictable.
    I appreciate our panel today for coming to the hearing.
    I now yield 5 minutes to the ranking member.
    Ms. Waters. Thank you very much, Mr. Chairman.
    Today, under the guise of reform, my colleagues on the 
other side of the aisle have put forth legislation that will 
cripple the Federal Reserve's ability to promote growth, 
stabilize the economy, and, in times of extraordinary crisis, 
take decisive action to avoid an economic collapse.
    This legislation is a concession to the opponents of the 
Dodd-Frank Wall Street Reform Act by making the Fed's 
rulemaking more tedious, more expensive, and subject to endless 
legal challenges by those who do not agree with its decisions.
    Unfortunately, this proposal follows a Republican roadmap 
we have seen too often on this committee: First, find a 
regulator charged with withholding Wall Street accountable or 
routing out the risky behavior that led to the worst economic 
crisis in 80 years. Next, claim that regulator lacks 
transparency or accountability and, therefore, must be 
reformed. Finally, push legislation purported to address these 
issues through unnecessary obstacles like cost-benefit 
analyses, new rules, and GAO audits, all of which are carefully 
designed to gut the agency's ability to do its job.
    We have seen this play out with legislation impacting the 
Consumer Financial Protection Bureau, the Securities and 
Exchange Commission, and the Commodity Futures Trading 
Commission--cops on the beat that protect average Americans and 
our economy from bad actors in the financial system.
    Today, Republicans take aim at the Federal Reserve, which 
played an integral role in stabilizing the economy at a time of 
intense crisis and which has continued to play an essential 
role in growing our economy and promoting full employment.
    When the crisis hit, the Federal Reserve challenged 
conventional thinking on the limits of monetary policy and 
appropriately took quick and decisive action that kept our 
Nation from slipping into a depression. But the legislation we 
consider today seeks to prevent the Federal Reserve from taking 
such innovative action in the future, creating rules that would 
prescribe monetary policy based on a rigid set of circumstances 
and factors, ignoring the best judgment of experts.
    Mr. Chairman, the Fed's Federal Open Market Committee 
(FOMC) contains many of the Nation's most respected economists 
from across the Nation. Its Governors of the Board are subject 
to democratic accountability through the process of Senate 
confirmation, and the overwhelming majority were confirmed by 
the Senate with bipartisan support. But this legislation would 
discount the experience, judgment, and discretion of these 
experts, instead putting decisions related to inflation and 
employment on autopilot based on a set of abstract factors.
    If the Federal Open Market Committee did deviate from the 
rule, the legislation requires the Government Accountability 
Office to conduct a costly and time-consuming audit, one that 
would undermine the independence of the Fed, shake public 
confidence in its decision-making, and create unnecessary 
uncertainty in monetary policy.
    Such a process needlessly politicizes the Fed's decision-
making process, compromises its role as a pillar of the global 
financial system, and, ironically, creates more market 
volatility, not less.
    Recently, Donald Kohn, 40-year veteran of the Fed, formerly 
Vice Chairman and a George W. Bush appointee, expressed his 
concern with this approach, stating, ``I don't think this is a 
good idea. I am highly skeptical that adhering to a 
preconceived rule will be appropriate to achieving the Fed's 
objectives under many circumstances.''
    In addition, this legislation brings back the time-honored 
Republican tactic of cost-benefit analysis, imposing heavy 
administrative hurdles and new litigation risk that will 
significantly impair the Fed's ability to do its job in a 
timely manner. Like efforts with other regulators, this 
provision allows Wall Street to tie up the Fed's rulemaking in 
endless litigation, draining resources and impeding its ability 
to guard against risk to our financial system.
    Mr. Chairman, this legislation does nothing to promote 
economic growth, create jobs, or ensure a more stable financial 
system. In fact, it enshrines a regulatory policy that lets bad 
actors run amok while regulators waste time dithering with 
audits and frivolous lawsuits. And it does so at a time when, 
post-Dodd-Frank, we have asked and need the Fed to do more than 
ever before.
    I thank you, and I look forward to the witnesses' 
testimony.
    And I yield back the balance of my time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Michigan, Mr. Huizenga, the vice chairman of our Monetary 
Policy and Trade Subcommittee, and coauthor of the legislation 
before us, for 1\1/2\ minutes.
    Mr. Huizenga. Thank you, Mr. Chairman.
    And this is a special day, not just because we are talking 
about this piece of legislation, but because I get to share it 
with a family member.
    And sorry, buddy, this is what dads live for, embarrassing 
their kids.
    My oldest son, Garrett, is here with us today, and I am 
thrilled that we could have him here.
    [applause].
    Chairman Hensarling. Without objection, add another 10 
seconds to the gentleman's time.
    Mr. Huizenga. Thank you, Mr. Chairman.
    And, Garrett, don't worry about it. There are a lot of 
other people who are going to be hanging on, trying to follow 
all this, as well, because it is very complicated.
    But I appreciate this hearing today because, over the past 
several years, the Federal Reserve has gained unprecedented 
power, influence, and control over the financial system while 
remaining shrouded in mystery to the American people. This 
standard operating procedure cannot continue. We must lift this 
veil of secrecy and ensure that the Fed is accountable to the 
people's representatives.
    That is why, along with Capital Markets Subcommittee 
Chairman Scott Garrett and my own chairman, Chairman Campbell, 
I introduced H.R. 5018, the Federal Reserve Accountability and 
Transparency Act, pulling back the curtain of the Fed by 
increasing accountability and transparency by limiting Fed 
officials' blackout periods to discuss policy with Congress, 
opening the rulemaking process, and requiring the Fed to 
provide a cost-benefit analysis for every regulation that it 
issues.
    Additionally, this legislation urges the Fed to adopt a 
rules-based approach to monetary policy, as Dr. Taylor had 
talked about for a number of times, instead of the continued 
improvisation strategy currently being employed. Should the Fed 
fail to adopt a rules-based approach, it would then trigger an 
audit of the Fed's books.
    I think it is important to note that our bill is 
complementary to H.R. 24, the Federal Reserve Transparency Act, 
which is before the Oversight Committee. It was introduced by 
our colleague, Paul Broun, and I am a cosponsor of it.
    But Mr. Chairman, again, I appreciate you calling attention 
to this important issue. And I am looking forward to hearing 
comments from the distinguished panel on my legislation to rein 
in the Federal Reserve.
    With that, I yield back.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from New York, Ms. Maloney, the ranking member of 
our Capital Markets Subcommittee, for 2\1/2\ minutes.
    Mrs. Maloney. I thank the chairman and all the panelists.
    Oversight of the Federal Reserve is important, but the 
Federal Reserve Accountability and Transparency Act goes far 
beyond oversight. It attempts to blatantly influence the Fed's 
monetary policy, undermining the independence that economists 
believe is vital to a central bank's success. This bill also 
goes far beyond the ``Audit the Fed'' bill that this House 
voted on last Congress. As one newspaper described it, it is 
``Audit the Fed'' on steroids.
    Under this bill, every time the Fed deviated from the 
Republicans' desired monetary policy formula, the Fed Chair 
would be hauled up in front of Congress to explain herself. 
And, even more troubling, the Fed would be subject to a GAO 
audit and report of the monetary policy decisions, with 
Congress setting the parameters of the audit.
    As previous Fed Chairman Ben Bernanke said, allowing the 
GAO to audit the Fed's monetary policy decisions would create a 
chilling effect and ``would prevent the Fed from operating on 
the apolitical, independent basis that experience shows has 
been so successful in lowering inflation and promoting a strong 
economy for our country.''
    I would like to place in the record his statement before 
this committee on the prior bill, on ``Audit the Fed.'' This 
goes far beyond that. But he explains the chilling, terrible 
effect it would have on the independence and the ability of the 
Fed to make economic decisions that are separate from politics 
but are good for the overall economy of this country.
    The Fed's independence is very important and crucial. Its 
credibility with the markets as an independent operator that is 
committed to achieving the goals of price stability regardless 
of political consequences would be compromised.
    So, while it is true that this bill doesn't force by law 
the Fed to follow a particular formula for interest rates, it 
does attempt to bully the Fed into following the Republicans' 
preferred monetary policy. This inappropriately interferes with 
the Fed's independence on monetary policy matters, and I find 
it deeply, deeply troubling.
    I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from New Jersey, Mr. Garrett, the chairman of our Capital 
Markets Subcommittee, and coauthor of the legislation before 
us, for 1\1/2\ minutes.
    Mr. Garrett. Thank you.
    And I begin by thanking the chairman for holding this 
hearing to consider the legislation to reform the Federal 
Reserve as it passes its 100-year anniversary.
    I want to thank the witnesses for appearing before the 
committee, as well.
    I would also like to recognize the gentleman from Michigan, 
the vice chairman of our Monetary Policy and Trade 
Subcommittee, for taking the lead and working on this 
legislation to reform the Federal Reserve. And I thank you very 
much for taking that effort.
    As the Fed passes its centennial mark, Dodd-Frank will soon 
mark its own 4-year anniversary. It is timely that this 
committee is currently considering how the Fed and Dodd-Frank 
have transformed our financial regulatory environment. I would 
submit that an already-muscular Federal Reserve bolstered by a 
3,000-page financial reform law has resulted in a central bank 
that is on steroids.
    Since Dodd-Frank's passage, the Fed has adopted a new 
mission of ensuring financial stability and serving as a macro-
prudential regulator over our Nation's entire financial system. 
And while some raise a question about the appropriateness of 
granting such vast authority to a single regulatory body, 
especially an authority charged with the conduct of monetary 
policy, everyone should agree that great power must be 
accompanied by robust oversight.
    Unfortunately, there has not been a corresponding increase 
of much-needed transparency at the Fed. The Fed's regulatory 
activities have taken place behind a fraternity-like veil of 
secrecy, obstructing openness and preventing proper 
accountability.
    For this reason, today we will consider legislation that 
would take a step forward to establishing an appropriate level 
of transparency considering the bank's monetary, prudential, 
and supervisory functions. In particular, the FRAT Act would 
require the Fed to increase its responsiveness to Congress, 
increase the transparency of its regulatory activities, and 
foster accountability in its international negotiations.
    And I would just add, Mr. Chairman, that in light of the 
fact that Fed Chair Yellen testified before the committee back 
in February, it has taken 4 months for her to respond to us, as 
we have just now received her responses at this period in 
time--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from Ohio, Ms. 
Beatty, for 2 minutes.
    Mrs. Beatty. Thank you, Mr. Chairman, and Ranking Member 
Waters.
    And thank you to our witnesses.
    In addition to the comments, Mr. Chairman, that my 
colleagues have made in their opening statements, I must add 
that I am a little disappointed this morning, as I sit here 
wondering why we aren't working to improve our Nation's 
economy, rather than trying to find ways to hamstring the 
primary regulator responsible for overseeing the operations of 
our Nation's financial markets.
    While I always welcome witnesses, I am disappointed that we 
continue to hold hearings on issues which are not at all time-
sensitive to this committee. For example, with only 23 
legislative days before the expiration of the Export-Import 
Bank, it seems a little shortsighted to hold a legislative 
hearing on a bill to reform one of the most effective agencies 
in the Federal Government, when what we should be doing is 
holding legislative hearings on H.R. 4950, a bill to 
reauthorize the Export-Import Bank, which would protect and 
create American jobs, help lower Americans' trade deficit, and, 
importantly for my conservative colleagues, reduce the Federal 
deficit.
    I therefore encourage the chairman to strive to advance 
consensus-built legislation that can drive forward economic 
growth in a meaningful, policy-oriented way that helps, not 
harms, our Nation.
    Thank you, and I yield back.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from Minnesota, Ms. Bachmann, for 1 minute.
    Mrs. Bachmann. Thank you, Mr. Chairman.
    Tragically, the Federal Reserve's policies have facilitated 
deficit spending, encouraged the accumulation of $17.6 trillion 
in national debt, caused market volatility, failed to 
reinvigorate the sluggish American economy, and will cause 
inflation that will harm American families and businesses.
    Fortunately, our colleagues, Mr. Huizenga and Mr. Garrett, 
have introduced bills to encourage the Fed to use a rules-based 
monetary policy, opening the Fed's decisions on international 
regulatory negotiations to public comment, bringing 
transparency to the Dodd-Frank stress test, clarifying the 
Federal Open Market Committee blackout period, and requiring 
cost-benefit analysis for all Fed regulations. I am pleased to 
cosponsor these bills.
    The ``Audit the Fed'' bill will provide Congress with 
necessary tools to provide additional oversight to the Fed's 
ever-growing powers.
    It is high time and long overdue for us to pass these bills 
and get this done. I congratulate my colleagues on getting this 
done.
    And I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Indiana, Mr. Stutzman, for 1 minute.
    Mr. Stutzman. Thank you, Mr. Chairman.
    And thank you also to our witnesses today.
    Mr. Chairman, you and I and our House Republican colleagues 
have a long history of pushing tax and regulatory relief for 
families and small businesses. We do so in pursuit of long-term 
economic growth but also in the pursuit of fairness.
    The question is whether monetary policy reflects our goals. 
The Fed's massive and growing impact on everyday Americans' 
lives and its $4-trillion balance sheet is at least as 
impactful as tax and regulatory policy.
    Consider that the typical legislation in front of Congress 
is judged by a score from the CBO. The Fed, on the other hand, 
regularly weighs policies that can be judged by their impact on 
GDP.
    It is critical that we preserve Americans' confidence in 
the objectivity of their central bank for the 21st Century and 
beyond. That is why the Fed must adopt a rules-based approach 
to monetary policy and focus on the long term.
    I look forward to today's discussion and again thank the 
chairman for calling this hearing.
    I yield back.
    Chairman Hensarling. We will now turn to our panel of 
witnesses, each of whom, I believe, has testified before this 
committee in the past, so I will provide very brief 
introductions.
    First, we welcome Professor John Taylor, the Mary and 
Robert Raymond Professor of Economics at Stanford University 
and author of the ``Taylor Rule.''
    Second, we welcome Dr. Mark Calabria, the director of 
financial regulation studies at the Cato Institute.
    Third, we welcome Ms. Hester Peirce, a senior research 
fellow at the Mercatus Center at George Mason University.
    And finally, we welcome Professor Simon Johnson, professor 
of economics at MIT.
    Without objection, each of your written statements will be 
made a part of the record. Again, since I think you all have 
testified before, you will be familiar with our lighting 
system.
    Dr. Taylor, you are now recognized for your testimony.

STATEMENT OF JOHN B. TAYLOR, MARY AND ROBERT RAYMOND PROFESSOR 
               OF ECONOMICS, STANFORD UNIVERSITY

    Mr. Taylor. Thank you very much, Mr. Chairman, Ranking 
Member Waters, and members of the committee, for inviting me to 
testify.
    I would like to compliment Congressman Huizenga for 
bringing his son to this hearing. I always like to bring family 
members to my classes at Stanford. It really helps illustrate 
things. I was thinking of bringing my grandchildren today, but 
they are only 5 and 3. But, to tell you the truth, it is their 
future we are talking about here, so it is very important.
    I want to focus my remarks on Section 2 of the Act, which 
is the requirements for policy rules for the FOMC.
    Many people for many years have shown that when monetary 
policy is conducted in a rule-like way, economic performance is 
better. There is price stability, unemployment comes down, 
growth is stronger, and productivity growth is stronger.
    That research is continuing. Just a few weeks ago, there 
was a conference at Stanford, where a whole slew of experts, 
some currently on the Federal Open Market Committee, spoke in 
favor of a rules-based policy because they know, they have seen 
that it works better.
    And there is experience that shows that. As Chairman 
Hensarling mentioned, when policy has been rules-based, the 
economy has performed well. And the example of that is the 
1980s and 1990s until recently. When it has not been rules-
based, the economy has floundered and we have had higher 
unemployment. The 1970s are an example of that, and, quite 
frankly, roughly the last decade is another example.
    So, the stakes are huge. I don't think this should be a 
partisan issue in any way.
    Central-bank independence is very important, but it doesn't 
seem to have been enough to prevent these swings towards more 
interventionist discretionary policy compared to a rules-based 
policy. So that is why I think that some legislation that goes 
beyond central-bank independence is important, and that is why 
I welcome especially Section 2 of this Act.
    Section 2 would simply require that the Federal Reserve 
stipulate its policy rule or its strategy for setting the 
instruments of policy. The Congress would not tell the Federal 
Reserve what policies to follow. That is the job of the Federal 
Reserve.
    The Congress, of course, has responsibility of oversight. 
And so the idea of this legislation is, when the Fed deviated 
from its own rule, it would be required to explain why. It 
seems to me to be the essence of transparency and 
accountability. How could someone object to that?
    I think the legislation is quite well-balanced, well-
crafted, and well-designed. It definitely takes into account 
all the research I know about. And I have been doing this for 
40 years, as you can tell by the color of my hair.
    I think it reflects the fact there are differences of 
opinion of how monetary policy works. But, in that context, it 
puts limits on the degree of excessive intervention that takes 
place in, I think, a transparent and accountable way.
    It certainly allows enough flexibility for the Federal 
Reserve to react during a panic like in 2008 the way they did. 
There is nothing in here that restricts the Federal Reserve's 
lender-of-last-resort responsibilities. Don't let people tell 
you that.
    It also provides flexibility in the sense that the 
instruments of the Fed don't have to be fixed. They move 
around, but they do it in a predictable, understandable, rule-
like fashion.
    Moreover, the legislation is written in a way that if the 
Fed finds itself in a predicament because the world has changed 
or there is a special event, it can actually deviate from its 
own rule, as long as it explains why to the Congress and to the 
American people. It just seems so reasonable to require that.
    The legislation builds on experience of previous attempts 
of requiring the Fed to report. Actions that were removed from 
the Federal Reserve Act in 2000, this essentially replaces 
them.
    So I think it provides the appropriate degree of 
Congressional oversight without in any way restricting the 
independence of the Federal Reserve.
    Of course, some will object. I have already heard some of 
the objections right here. But if you look at the transcripts 
of the Fed, if you look at the speeches of Federal Reserve 
Members, if you look at what they have written, there is almost 
universal support for the concept of a rules-based policy. It 
is hard to find exceptions to that.
    Of course, they will say, well, maybe not now, we are not 
quite ready. But that is a difference of timing, really, not a 
difference of whether or not we should do it.
    I believe the Fed could really improve this legislation if 
it had constructive comments to make. But even as it exists 
now, I believe this legislation could be made to work by the 
Fed, it would improve economic performance, and they would make 
it work.
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Taylor can be found on page 
89 of the appendix.]
    Chairman Hensarling. Dr. Calabria, you are now recognized 
for a summary of your testimony.

 STATEMENT OF MARK A. CALABRIA, DIRECTOR, FINANCIAL REGULATION 
                  STUDIES, THE CATO INSTITUTE

    Mr. Calabria. Thank you. Chairman Hensarling, Ranking 
Member Waters, and distinguished members of the committee, it 
is a pleasure to be back here. I hope I haven't started to wear 
out my welcome yet.
    Let me first say that neither Cato nor I actually endorse 
specific pieces of legislation, but, with that in mind, I do 
think the general principles behind the Act are laudable.
    I am going to try to touch on each section, but I am going 
to just quickly say about Section 2, Professor Taylor has 
literally written the book on the topic. There is not really a 
lot I could add. I will just say that I would associate my 
remarks and very much support pretty much 95 percent of what he 
said in Section 2.
    So, with that, let me go to the other sections very 
quickly.
    I think Section 3's changes on the blackout period are very 
reasonable. It certainly would help Congress do its oversight 
in terms of nonmonetary policy.
    Let me say that Section 4 that covers the stress tests, I 
am worried because, since the stress tests are becoming such a 
core of bank prudential regulation, that they deserve scrutiny. 
I think they have repeatedly rested upon questionable 
assumptions. I would go so far as to say that I don't actually 
think they have been all that stressful, and so I do think they 
need more transparency. I am worried they are becoming a 
substitute for sound risk management and regulation rather than 
a complement.
    More importantly, I am worried that the stress tests are 
encouraging greater uniformity across bank balance sheets. We 
saw this with the Basel Capital Accords, where they nudged 
banks into herding into similar assets, such as mortgage-backed 
securities and sovereign debt. Now, when everybody--that is, 
all banks--hold the same assets, then nobody is really a buyer. 
When everybody wants to be a seller, I worry that this 
contributes to fire sales and can cause, actually, shocks that 
would not be systemic to become systemic.
    So I am very concerned about the direction of the stress 
tests. In my opinion, a robust financial system would be one 
with a greater diversity of asset holdings, business models, 
and funding sources. I would prefer that the Federal Reserve 
reduce its reliance on stress tests and instead focus on 
simple, verifiable measures of bank safety, such as actual 
unweighted levels of common equity that actually can absorb 
loss.
    I will note as an aside, we were doing stress tests for 
Fannie Mae and Freddie Mac long before we were doing them for 
banks, and we saw how well that turned out.
    Let me quickly say on Section 5, the shift from a minimum 
2-year appearance by the Federal Reserve to a quarterly 
appearance I think would really help improve communications 
between this committee and the Federal Reserve.
    Particularly, I think it would help a lot of junior 
Members. Obviously, the Chair and the ranking member have a 
tremendous amount of access, maybe not as much as they would 
like, but a tremendous amount of access to the Federal Reserve 
Chair. That does not hold true for Members across the 
committee. So I think having the Fed up here--and it is 
certainly worth saying that the Fed Chair is usually up here 
about 4 times a year anyhow.
    The additional reporting requirements in Section 6, to me, 
are fairly reasonable and welcomed, certainly on the rulemaking 
side.
    One of the things that has gotten the most controversy is 
Section 7's requirement for cost-benefit analysis. I feel that 
this would nudge the Fed to be more explicit about the 
assumptions that go into rules, which would encourage clearer 
thinking about the impact of those rules.
    Of course, some would object that subjecting the Fed to the 
cost-benefit analysis would stifle the regulatory process. I 
will note that if you go back and look at the legislative 
history in the 1940s of the Administrative Procedure Act, the 
same things were said about notice and comment, that if you had 
to put rules out for notice and comment and public input, it 
would slow the process. Obviously, it does slow the process. It 
takes a minimum of almost a year to really do a rulemaking 
seriously. But I think our objective should be not speed but 
quality. And just as notice-and-comment has improved the 
regulatory process, I believe cost-benefit analysis would 
improve the regulatory process. I certainly, however, don't see 
it as a panacea.
    One of the things that I want to emphasize that I actually 
think hasn't gotten much discussion but I actually think is one 
of the more important parts of the bill is that Section 8 of 
the bill allows individual Fed Board Members to have their own 
staff. This is the case at the SEC; this is the case at the 
CFTC. The Fed Board Members are far too dependent on the Chair, 
and they are far too dependent on the Fed staff. I would ask 
the Members of Congress here today to imagine what their lives 
would be like if they had no staff and they were dependent on 
the staff of the chairman of the committee. As much as I am 
fond of this chairman's staff, you know that you would be at a 
disadvantage. The Members of the Fed Board are the same thing. 
So, again, this is a very small thing, but I think it actually 
would have a very big impact in the long run.
    Let me also emphasize, while several provisions of the bill 
address transparency in Federal Reserve rulemaking in the area 
of financial regulation, I believe our ultimate objective 
should be to get the Fed out of financial regulation. To me, 
that would increase the independence of monetary policy, but, 
just as importantly, and I think it is beyond dispute, the Fed 
has a lousy record at financial regulation. Despite its own 
problems, I would rather transfer those responsibilities to the 
FDIC. They have had their own problems, certainly, but I think 
they would do a far better job at it.
    I will also note that I have a few suggestions for 
qualifications of Fed Board Members in my written testimony 
which I believe would increase the Federal Reserve's 
independence and reduce the degree of groupthink that so 
dominates the Board most of the time.
    I also want to end with saying, a lot of the conversations 
are about independence from Congress. I think the far more 
pressing concern in my mind is that we have to increase the 
degree--and this is not a partisan thing. I want the Fed to be 
independent of every Executive Branch President. We all know 
the history of Arthur Burns and the Nixon Administration; they 
were far too close, by any measure. I think this Fed and I 
think the previous Feds have acted as adjuncts of the Executive 
Branch, and I find that far more problematic than any insights 
and any influences that this body might have.
    Thank you.
    [The prepared statement of Dr. Calabria can be found on 
page 61 of the appendix.]
    Chairman Hensarling. Ms. Peirce, you are now recognized for 
a summary of your testimony.

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

    Ms. Peirce. Chairman Hensarling, Ranking Member Waters, and 
members of the committee, thank you for the opportunity to be 
here today.
    I will focus my remarks on regulatory as opposed to 
monetary policy. Regulatory and supervisory practice are areas 
where the Fed does need greater transparency, accountability, 
and more rigor in their processes.
    Before we look at these issues, we should think about some 
basic questions. Do we think that the Fed should be supplanting 
the private market in allocating capital and in designing the 
financial system? And do we think that it should be doing those 
things behind closed doors?
    Dodd-Frank expanded the Fed's regulatory mandate over banks 
and non-banks, and the Fed has been aggressively pursuing that 
mandate. And as a consequence of that, the Fed has been 
changing the way it approaches regulation and using a macro-
prudential approach, which allows it to intervene in private 
decision-making and direct private financial institutions in a 
way that it thinks will enhance financial stability.
    But, as Dr. Calabria alluded to, that sort of push from the 
government towards the private sector has not always worked 
very well in the past. And to make matters more complicated and 
more troubling, the Fed has a penchant for nontransparency. 
What that means is that it is making these major decisions 
without the input from outside the Fed that might say, you are 
making a mistake, or you are taking an action that might 
actually be destabilizing the financial system.
    We can take steps to improve the situation. One would be to 
enhance the Fed's accountability to Congress. And that could be 
done by having the Fed Chair appear more frequently before 
Congress. Another approach is to make sure that their 
regulatory agenda is being made clear and transparent to 
Congress so that Congress knows what regulations are in the 
pipeline.
    Another step that we can take is that the Fed's rulemaking 
can be more rigorous, transparent, and accountable and afford 
more opportunities for public input. One way to do this is to 
have economic analysis. The Fed is an independent regulatory 
agency, and so, unlike Executive Branch agencies, it is not 
subject to Executive Orders that require economic analysis.
    And so, in asking the Fed to do economic analysis, what you 
are really asking them to do is identify the problem they are 
trying to solve, identify some solutions to those problems, and 
then do a cost-benefit analysis to figure out what are the 
costs and benefits of each solution. And then, once you are 
ready to adopt a rule, you establish metrics so that you can go 
back several years later and see if your rule is actually 
working the way you intended it to work.
    It is important for this process to be done transparently 
and in the public eye so that the public can weigh in and 
sharpen the Fed's analysis. Public input is also important in 
international discussions that the Fed is having. Of course, 
the Fed needs to be in constant communication with its 
international counterparts, but there is a concern that, 
internationally, decisions are being made and then they are 
being imported here without an opportunity for people here to 
weigh in.
    And, aside from external accountability, the Fed should 
have some more vigorous internal dialogue, which Dr. Calabria 
alluded to. I think that is very important. And one way to do 
that is to enable each Governor to have a small staff of his or 
her own who can work on issues that are important to him or her 
and not be responsible to the Chair.
    The Fed is turning 100, and it is an important time for us 
to think about reforms. I think we need to frame those by 
asking some fundamental questions. Do we feel comfortable with 
having the Fed supplant and override market decision-making? 
And if we do feel comfortable with that, what is the proper 
level of accountability and transparency and oversight?
    Thank you very much.
    [The prepared statement of Ms. Peirce can be found on page 
84 of the appendix.]
    Chairman Hensarling. Dr. Johnson, you are now recognized 
for your testimony.

     STATEMENT OF SIMON JOHNSON, RONALD KURTZ PROFESSOR OF 
  ENTREPRENEURSHIP, SLOAN SCHOOL OF MANAGEMENT, MASSACHUSETTS 
                    INSTITUTE OF TECHNOLOGY

    Mr. Johnson. Thank you, Mr. Chairman. I would like to 
emphasize three points that I expand on in my written 
testimony.
    First, I liked a couple of the statements that you made in 
a recent speech, I guess it was published in the Cato Journal. 
The first was that the Fed must maintain its independence with 
respect to monetary policy. And the second was the Fed must 
always be led by experts trained in the science of economics, 
including, you mentioned, the Austrian and Chicago schools of 
economics. I know quite a few of these people, and they 
certainly have plenty of that training.
    I think those are laudable objectives and exactly the right 
goalposts to set. I think there is a tension, Mr. Chairman, 
between those goals and what you have in this legislation.
    As Professor Taylor has said, and as he and many colleagues 
have established with a lot of research, there are some 
advantages to rules with regard to monetary policy, 
particularly the predictability that you hope the central bank 
will bring to the economy and bring to its communications. 
Central banks have moved a great deal in the direction that Mr. 
Taylor and others have urged over recent decades.
    But what you have in this legislation is not going to make 
things predictable. This is worse than monetary policy by 
Congress; this is monetary policy by some sort of Spanish 
Inquisition. You are going to have the GAO come in and order 
these monetary policy decisions on a decision-by-decision basis 
on a fast timeframe subject to terms of reference drawn up by 
either the House or the Senate committee.
    I am just guessing that control of the House and the Senate 
will pass back and forth between the two parties in coming 
decades, based on recent history. So someone else will control 
one of these committees, someone not aligned with the current 
Republican majority on this committee. What pressure are they 
going to be putting on the central bank? Is that what you want?
    I think, as Ms. Waters said, you want an independent 
central bank with experts making the decisions. You need, 
certainly, to have accountability, absolutely. I think that is 
a very important goal. But the experts have to have the ability 
to make these decisions.
    What you are going to get from this is a massive amount of 
volatility in financial markets. Imagine the research reports 
that people are going to be putting out. Remember when TARP was 
turned down the first time of asking in the House? Remember the 
volatility that came out of that? That is what you will be 
getting on a week-by-week basis under this legislation. Why 
would anyone who is pro-business, who is pro-private-sector-
investment want that? I don't understand.
    The second set of points are with regards to the cost-
benefit analysis, the stress test, and the points about 
international negotiations. These are just designed to hamper 
effective regulation of any kind.
    The Federal Reserve does already go for extensive public 
comments on any major rule. Take, for example, the Volcker 
Rule, about which I testified before this committee not too 
long ago. There was a very detailed, extensive period, there 
was a lot of oversight. And when there was a particular part of 
the Volcker Rule that was not satisfactory to both Republicans 
and Democrats--you had the hearing in January--they fixed it. 
That is how the system is supposed to work. That is how it 
works.
    What you have with a cost-benefit analysis is a set of 
traps and snares that are designed to trip the regulators in 
front of the courts--procedural traps. The cost-benefit 
analysis doesn't even consider the major costs of excessive 
risk-taking in the financial system. It never has--the CFTC 
version, the SEC version, the versions put forward for the Fed. 
Massive financial crisis, loss of 1 year's GDP at least, damage 
across the American economy, from which we are still struggling 
to recover, doesn't figure in any of those tests.
    The stress-test proposal would simply allow the banks to 
game the system more effectively. The details, the 
specifications, the scenarios are given out by the Fed in 
advance. What they don't tell you is the details of their 
models. Why do the banks want to know the models? So they can 
game the models.
    Go back and read the documents that came out in the 
``London Whale'' case. Look at the very detailed micro way in 
which the JPMorgan executive was telling a trader how to game 
the reporting in order to pass the various Fed requirements. 
Look at that language. That is what they would be doing on a 
regular basis.
    And the international negotiations, you are putting a 
requirement in here that would completely prevent any attempt 
by the Fed to deal with an international crisis. Mr. Taylor 
says we should be able to do that, and I think he is absolutely 
right. You can't agree on a swap line without all this 
notification period. You can't have any of the regular daily 
conversations that I used to participate in when I was chief 
economist at the International Monetary Fund, at least as 
witnessing those negotiations. The Fed wouldn't be able to do 
any of that.
    I do think the points about a Vice Chair for Supervision in 
the legislation make sense. I do agree that Governors having 
their own staff is sensible.
    But I would say, particularly to Mr. Garrett, on these 
points about accountability and transparency, which are very 
good points and which were also in the earlier version of your 
legislation, you should be focusing more on the Reserve Banks. 
That is where there is an anachronism in the system. The 
Reserve Banks, the Presidents of which are sitting on the FOMC, 
are separate from, and not accountable to, Congress. Their 
Presidents are not appointed by anyone who is--not appointed in 
a direct fashion that is accountable to Congress. It is quite 
an anomaly which is left over from the 1913 Act.
    And, particularly, I would emphasize the New York Fed. The 
New York Fed is a terrible problem, Mr. Garrett, from your 
perspective. And the head of the New York Fed is the Vice Chair 
of the FOMC. He has a quasi-fiscal responsibility. He is not 
appointed by the President of the United States. He is not 
subject to confirmation by the U.S. Senate. He doesn't come and 
testify to you on a regular basis. That job, President of the 
New York Fed, should become a Presidential appointment, like 
the Board of Governors of the Federal Reserve System.
    Thank you.
    [The prepared statement of Dr. Johnson can be found on page 
75 of the appendix.]
    Chairman Hensarling. I thank each of the panelists for 
their testimony.
    The Chair now recognizes himself for 5 minutes for 
questions.
    Dr. Taylor, what are the risks to our economy if we do not 
pass Section 2 of this bill?
    Mr. Taylor. I think, in many respects, you can look at the 
last few years to see the risks. It would be a period where we 
could again have the kind of bad economic performance we had.
    Remember, we had a serious financial crisis, we had a Great 
Recession, and we have had, unfortunately, a slow recovery. And 
that is during this period where people have assessed the 
policies have not been predictable and rule-like. And I would 
go back to 2003, 2004, and 2005, where the rates were held very 
low for too long. It is a period where people are saying, is 
that happening now?
    So I think the most likely risk is we would continue with 
this subpar economic performance, which no one wants to have 
again. I can't believe we would like to go through that again, 
but we run that risk very greatly.
    Chairman Hensarling. Dr. Calabria, a portion of your 
written testimony that you did not deliver orally since you did 
not focus on Section 2 says, ``Section 2 does not require a 
specific model. In no way does it limit the Fed's choice of 
model. It simply requires the Fed to publicly share the model. 
All of the Fed's actions in recent years would have still been 
possible had Section 2 been in place. There is nothing in 
Section 2 that is inconsistent with the Fed's dual mandate, nor 
is there anything in Section 2 that would require the Fed to 
raise or lower rates. There is no compromise of the Fed's 
operational independence.''
    Dr. Taylor, do you agree with Dr. Calabria's assessment?
    Mr. Taylor. Yes, very much so. I think the idea here is to 
exercise oversight that is the responsibility of the Congress 
but to continue to allow this independent agency to conduct 
monetary policy.
    The difference from current law is that the central bank 
would be required to describe its strategy for setting its 
interest rate, for example, in a manner that can be understood 
and be analyzed. And that is frequently called a policy rule, 
which is simply a way to describe how the interest rate changes 
under certain circumstances. It is used all the time. The Fed 
is always looking at policy rules right now, but they just 
don't articulate it or talk about it very much.
    So I agree very much with this. This doesn't really change 
the independence of the Fed. It has the ability to set its 
policy.
    Those at the Fed who may disagree with this but are 
sympathetic to policy rules say, well, we will just do this on 
our own. But I think the truth is, if you look at the history, 
they have gone back and forth, and that has not been enough. So 
I think the experience is that we have to do something more. We 
have to--you have to hold them accountable to follow the kind 
of policy that works.
    Chairman Hensarling. In my opening statement, I quoted 
Chair Yellen from an earlier point in her career, where I 
believe she said rules-based monetary policy--I think she was 
actually speaking specifically of your rule--is ``what sensible 
central bankers do.''
    I questioned her about this in her last Humphrey-Hawkins 
testimony. I don't have her testimony right in front of me. I 
hope I can do it justice. I think the essence of her answer was 
that she does not disagree with herself, but I think she 
believes that the timing is wrong.
    Do you have a comment on that? And when might the timing be 
right if it is wrong today?
    Mr. Taylor. I have talked to Chair Yellen for many, many 
years, decades probably, about this issue, and she has always 
been supportive of this kind of approach.
    What she says now is the time is not quite right; we are 
still not in a normal situation, we are still too close to that 
financial crisis. And I just disagree with that. I think it is 
time to get back to the kind of policy that worked well in the 
1980s and 1990s until recently. And, in a way, that is, to me, 
promising, because if the disagreement is about when, not if, 
then we are making progress.
    This legislation goes further, in thinking not just about 
the current Chair but about the future of the Federal Reserve 
and how it operates. So I think it is very important to put in 
place something that provides the continuity in this very 
sensible way with which she has had so much experience.
    Chairman Hensarling. Dr. Calabria, in your written 
testimony, again, that you did not deliver orally, with respect 
to Section 2, you also said, ``Why is it important to reveal 
the Fed's current operating model? So that it can be examined 
and tested by those outside the Fed. Only under such 
examination can we learn how accurately that model captures the 
real world.''
    Would you please elaborate?
    Mr. Calabria. Let's start out with the observation that all 
policy choices entail some rule. It is either implicit or 
explicit. You have a model of how you believe the world works 
when you decide that A is going to result in B. So, certainly, 
the Fed is operating by a rule today.
    The question is whether or not that rule is effective. I am 
sure that if Chair Yellen was here, she would probably express 
some concern that the last few years have not exactly worked 
out how the Fed anticipated it would. And I certainly think 
that is evidenced by how far off their forecasts have regularly 
been.
    So if we are going to try to figure out exactly why have 
they been off--and my suspicion is certainly, within the 
Federal Reserve Board, they are asking themselves this question 
every day, why have our forecasts wildly been off every time--
it is because they have to rethink the model.
    So we could either rely on a small number of people across 
town to evaluate that model or we can try to incorporate all of 
the rest of us to try to figure out why that model works or 
does not work.
    My point would be that we really don't know ahead of time. 
Economists have spent a lot of time--I think, with all modesty, 
we should probably, all economists, admit we don't 100 percent, 
maybe not even 50 percent know how the economy works. And you 
are not going to figure that out unless you put models out 
there, unless you test them, unless you disprove them and move 
on to other models.
    And, again, I would emphasize, the Fed is operating under a 
model. It is time they shared it with the rest of us. I think 
it is, again, fairly clear that model has not successfully 
predicted the responses of the economy and that we all try to 
figure out what actually would work.
    Chairman Hensarling. The Chair now recognizes the ranking 
member.
    Ms. Waters. Thank you very much, Mr. Chairman.
    Dr. Johnson, you expressed a number of concerns with the 
impact of requiring the Fed's monetary policymakers to 
prescribe a detailed rule for setting monetary policy which 
would then be subject to audits by the Government 
Accountability Office.
    First of all, I am absolutely intrigued by the fact that we 
have our witnesses here today talking about why the Feds should 
have independence and how it should not have interference by 
the Congress of the United States. On the other hand, the 
testimony here by Dr. Taylor and others is basically a 
prescription for interference by prescribing a rule.
    But I would like you at this time, Dr. Johnson, to 
elaborate a bit on why the imposition of GAO audits on a 
monetary policy rule would have a chilling effect, creating 
obstacles to productive work and bringing more partisan 
pressure to bear, as you put it in your testimony, and at the 
same time our witnesses have said, oh, the Feds will have all 
the flexibility that they want and they need. So, there are 
some contradictions here.
    Could you comment on these GAO audits?
    Mr. Johnson. Certainly, Congresswoman.
    What we have learned over 100 years and what has also been 
learned in other industrial democracies is that you can and 
should have specification of the objectives of monetary policy 
coming from the legislature, in our case, coming from 
governments in other different kinds of democracies. So you 
tell the central bank what objectives you want. In our case, we 
have a so-called dual mandate. And then the central bank 
decides how to achieve those objectives, using the expert 
analysis that Mr. Hensarling accurately described in his 
article.
    What you are doing with this GAO structure is you are 
putting in a set of people, as I read the law, who have this 
sort of prosecutorial power. They are auditing; they are going 
through everyone's emails. They are reconstructing exactly the 
base on what has happened. They are understanding the models 
that were used or were not used. They are doing this on a very 
rapid basis, according to the timeline in this legislation.
    The exact terms of reference of those audits actually will 
be specified on a case-by-case basis, according to the 
legislation, so you don't know exactly what is happening on 
this fishing expedition. What are they going after? What are 
they looking for? What is the issue?
    And it would introduce a huge amount of uncertainty for the 
individuals. Do individual Federal staffers need to obtain the 
advice of legal counsel, for example, which is what happens 
when GAO goes in or Inspectors General look at actions at the 
SEC and other places.
    All of this has to affect how these experts interact. Are 
they just arguing about the substance, or are they thinking, 
okay, how is this going to look to the GAO? What is the 
pressure that is coming to us from different people in 
Congress, from the House committee and presumably from the 
Senate committee?
    I really don't see how that is going to help you get the 
best expert analysis and decision-making to obtain the 
objectives that you, Congress, have set for the central bank.
    Ms. Waters. Ms. Peirce, do you believe that the individuals 
on the Open Market Committee of the Fed, whether they rotate or 
not, have the expertise that is necessary to do the job? Or do 
you think that the confirmation that they have been given is 
sufficient for them to be able to have good judgment?
    Ms. Peirce. I certainly wouldn't question the judgment of 
the members of the FOMC. I would say that I think we all 
benefit from getting input from other people. And so putting 
out a rule to say what you do and getting other people to give 
you feedback on that is generally helpful for any expert in 
making a decision.
    Ms. Waters. So what you are basically saying is that in 
addition to their expertise and their backgrounds, perhaps 
those of you in academia should have more input and more advice 
and more influence on the Feds?
    Ms. Peirce. I certainly wouldn't weigh in on monetary 
policy since I am a lawyer, and I think I would get killed by 
my co-panelists if I said that I would. So I would stay out of 
that.
    Ms. Waters. I will let Mr. Johnson weigh in on this, too.
    Mr. Johnson. I think it is good to discuss Members of the 
FOMC. There is a range of opinions, and that is how Congress 
has decided, I think correctly, that monetary policy should be 
resolved, through this process of deliberation on the Open 
Market Committee.
    These people communicate all the time. They are always 
giving speeches, they are always interacting. If you talk about 
the regional Feds, they have various kinds of advisory 
committees with which they are engaged. The same thing is true 
at the Board.
    Perhaps we might wish for more openness, certainly at the 
regional Fed level. That is a fair question. But they are 
absolutely engaged in communicating, and people are pressing 
them all the time with these opinions. That is a very healthy 
part of our democracy.
    Ms. Waters. Thank you.
    I yield back the balance of my time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from California, Mr. Campbell, the chairman of our Monetary 
Policy and Trade Subcommittee.
    Mr. Campbell. Thank you, Mr. Chairman.
    And thank all of you.
    Rather than me really asking some questions here, Dr. 
Johnson, you have given your very spirited opposition. While 
ostensibly agreeing with Dr. Taylor on lots of things, you have 
a very emotional and spirited disagreement with the elements of 
this bill, particularly Section 2, I guess. There are some 
elements that you agree with.
    So Dr. Taylor, can you respond to some of his objections, 
please?
    Mr. Taylor. Yes. I think that, as I hear Simon Johnson 
talk, his focus is not so much on whether we should have a 
rules-based policy; it sounds like there is agreement there. 
But it is just on how the accountability is brought into play. 
Now, I think you--
    Mr. Campbell. Can I stop you a second, Dr. Taylor?
    Dr. Johnson, would you agree with that?
    Mr. Johnson. If the Federal Reserve, the Board of Governors 
and the FOMC, were to decide to have a rule or to move closer 
towards Mr. Taylor, I am not going to raise objections to that, 
and I don't think that will be particularly a politically 
contentious question. You are decentralizing the decision-
making to the experts. That is the principle under which we are 
operating.
    It is the imposition from the outside of the rule with this 
GAO--
    Mr. Campbell. But, Dr. Johnson, if I can, we are not 
telling them what the rule should be. How is that any 
different, then--the Federal Reserve is chartered by Congress. 
It is the elected body here and the President who have to set 
these things up, and we have to provide some accountability. 
That is the way the Constitution works.
    So we are not telling them what the rule should be. We are 
just saying, do a rule, because history shows that is more 
effective and also provides more accountability in the market.
    Mr. Johnson. Well, Mr.--
    Mr. Campbell. One of the things that frustrates me, I will 
just say, is that I see today, out in the real world, it seems 
like we used to, when rules were in play, sit around and ask, 
what is going to happen to the economy, what is happening in 
the markets, what are my customers saying, what are my 
suppliers saying, et cetera, et cetera. Now all anybody cares 
about is, what is the Fed going to do? It is like the Fed is 
running the whole show. And to me, that is a distortion of the 
way the economy and the private sector should work.
    So we are not telling them what the rule should be. We are 
not even telling them they have to follow it. But we are 
saying, please give the market some stability here, please give 
people--so that there is some basis upon which you are 
operating other than tomorrow morning the Fed wakes up and 
decides: let's do more quantitative easing; let's suck it back; 
let's put more in; let's do this and that; and throws everybody 
for a loop.
    Mr. Johnson. Mr. Campbell, if you know, given the rule, why 
are you specifying in this detail the reference policy rule 
that has these specific ingredients?
    And then why are you putting all this pressure on them to 
have this directed policy rule that needs to be in alignment 
with or close to or you have to come and explain on a regular 
basis why it deviates and then you send the GAO in to check, 
why this deviation? It is like a police state for the central 
bank.
    Mr. Campbell. The GAO? Having the GAO audit a government 
agency is a police--come on. The police state is the government 
they are auditing. That is the police state.
    Mr. Johnson. So is the Department of Justice. That's a 
government agency.
    Mr. Campbell. The police state is the IRS. The police state 
is the EPA. The police state is all that. That is the police 
state.
    Auditing is not a police state. Now you are really ticking 
me off. But I am going to go to Dr. Taylor here, who is itching 
to respond to your comments.
    Mr. Taylor. This idea of the reference rule--as you 
remember, the reference rule is the Taylor Rule. In fact, I 
kind of like the idea of ``reference rule'' rather than 
``Taylor Rule'' because it allows me to sound more objective 
when I talk about it.
    But it doesn't require them to be following the reference 
rule by any means. It simply says, hey, there is this reference 
rule out there that there have been thousands of papers written 
about. And it appears--if you go to any market discussion that 
is out there being discussed, anybody who talks about a policy 
rule compares it to this reference rule.
    So what is so harmful in just saying, as a reference, the 
Fed ought to do that? It is not required to follow it. It is 
just required to have a discussion like everybody else is 
having a discussion. And so I think it is a good idea to have 
it in there, but it doesn't really say the Fed should follow 
it.
    Actually, if I could just add, the current Chair of the Fed 
recently gave a speech comparing what she thinks the policy 
should be with the reference rule. And so it is just a 
continuation of that thing, which I think is a healthy way to 
do it, and they would have to do that as part of their 
analysis.
    Mr. Johnson. If the central bank--I think it is the central 
bank. And if the Chair of the Fed can persuade the Congress to 
move in the direction of having this rule or making these 
comparisons, I am in favor.
    I am in favor of delegation to the experts, as Chairman 
Hensarling said in his article. That is what has served us 
better over the past 100 years than some other arrangement that 
we have tried and other countries have tried.
    Mr. Campbell. All right. Thank you both for that.
    And in my last 10 seconds, I will just reiterate what I 
said before. I am in support of this legislation, but it can be 
modified. That is why we are having this hearing. Maybe it 
needs some tweaks. Maybe there are some other things.
    But we really need--it will be best if we can get the 
economy out of operating only on Fed action and, instead, 
operating on the action of the real economy, and that is what I 
hope this can move us to do.
    I yield back
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from New York, Mrs. Maloney, the ranking member of 
our Capital Markets Subcommittee.
    Mrs. Maloney. Thank you.
    Dr. Johnson, I would like to ask you about the restrictions 
that the bill places on U.S. regulators'--the Fed and 
otherwise--ability to negotiate with their international 
counterparts, having to inform Congress and so forth.
    As someone who used to work at the IMF, can you give us 
some insights on whether these kinds of international 
negotiations are important, especially in a globally integrated 
market such as finance.
    And would the restrictions in the bill put the United 
States at a competitive disadvantage in finance and being part 
of these negotiations?
    Thank you.
    Mr. Johnson. Thank you, Congresswoman. I think it is a very 
important issue.
    It depends, of course, on what you mean by ``negotiation.'' 
The legislation is somewhat vague on that. But if you mean 
entering into discussions of substance about policy and about 
what we are going to do, what you are going to do, and how 
there might be some quid pro quo, this happens all the time.
    Particularly if you are talking about financial regulation, 
you are talking about large, complex banks and other kinds of 
financial institutions operating across borders.
    For example, to the extent to which they comply with 
capital requirements in different places, to the extent that 
they are generating or not generating systemic risk in various 
places, to the extent that you are providing support or not 
providing support to various aspects of the system, these are 
things that central banks talk about all the time.
    Now, this is a delegation to experts again. There should be 
accountability. When there was a financial crisis, they were up 
here a lot; I think they testified before Congress 37 to 39 
times in 2009. Those are the numbers that I have seen.
    But this would tie their hands. This says you have to give 
90 days' notice to Congress and in various other ways and 
getting public comment before you have any kind of negotiation 
with other--anyone, including central banks. That is going to 
make it much harder to operate central banking in any 
reasonable fashion.
    And your point about competitive disadvantages is a good 
one. I think, if other central banks are able to operate in a 
better, more functional way, for example, within Europe between 
the Bank of England and the European Central Bank, for example, 
and the Swiss National Bank, and were excluded from that--at 
the moment we are in that inner core of the most credible, 
well-run central banks in the world.
    If we had to step back from that, if our central bank can't 
go there or has to be mute in all of those meetings, that is a 
serious disadvantage to the broader competitors, not just of 
our financial sector, but much more broadly of our economy.
    Mrs. Maloney. All right. Could you elaborate more? How do 
you see that would hurt our economy and our jobs and our 
country?
    Mr. Johnson. I think the most important issue that comes up 
on a daily basis is with regard to capital, for example, and 
there is a lot of agreement across the political spectrum that 
we need high, strong capital requirements or whether they 
should be Tier 1 common equity so it is fully loss-absorbing 
and so on.
    Now, these financial institutions that we have allowed to 
operate across borders are very complicated. They have 
different capital requirements in different places. They are, 
frankly, gaming the system on an hour-by-hour basis, if not 
more frequently than that.
    And the central bankers and other regulators need to be in 
constant communication with regards to, is there sufficient 
underlying capital protecting the taxpayer against the risks 
that have been generated by these various financial 
institutions?
    If you run your capital requirements in a sensible way and 
recognize all the cross-border dimensions, then you get a safer 
system, not, I am afraid to say, a completely safe system, but 
a safer system.
    If you have to exist in isolation, if you can only look at 
that part of JPMorgan Chase or that part of the BNP Paribas in 
your jurisdiction--because you are not allowed to talk to 
anyone else because that would be considered a negotiation--
that is going to be a much less effective regulatory system.
    And everyone across the political spectrum agrees we should 
regulate capital. There has to be minimum levels of equity 
capital in this business.
    Mrs. Maloney. Okay. Do you think that the cost-benefit 
requirements that this bill would impose on the Fed and the 
FSOC would just slow the rulemaking process down by suing in 
court? And, in your opinion, would this lead to better 
regulatory outcomes from a systemic risk perspective?
    Mr. Johnson. I think that the cost-benefit analysis, as 
formulated here, is designed to trip up the regulator to--the 
courts, as you know, only test on procedural grounds, whether 
you checked every single box. If you didn't respond to a single 
report that was put at the behest of a single lobbyist on the 
industry side, you have trouble with that.
    There is no standing for the public in these cost-benefit 
analyses. If the public thinks that the regulation is too weak, 
you don't have standing to sue.
    The people who have standing to sue are the industry who 
filed a thousand comment letters and another thousand technical 
reports and you didn't get to the 999th one of them. Then the 
whole thing is going to get thrown back to you.
    Of course, regulation becomes less effective and you are 
going to have, over the medium term, more systemic risk, more 
danger, more risk of a massive financial crisis and another 
deep global recession.
    Mrs. Maloney. Thank you.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Michigan, Mr. 
Huizenga, vice chairman of our Monetary Policy Subcommittee, 
and coauthor of the legislation.
    Mr. Huizenga. Thank you, Mr. Chairman.
    Man, there is a lot to cover. So first of all, I am going 
to talk a little bit about oversight. And I, like Mr. Campbell, 
was finding myself getting more and more steamed.
    I cannot figure out, Mr. Chairman, why so many of my 
colleagues are willing to hand over their constitutional 
standing, I would argue their constitutional duty to fulfill 
oversight responsibility. All right?
    So I started Googling ``oversight.'' A CRS report popped 
up. CRS says, ``Congressional--oh, but this is Wikipedia; so, 
we are not going really deep here--we can go even further--
oversight refers to oversight by the United States Congress on 
the Executive Branch, including the numerous Federal agencies--
U.S. Federal agencies. Congressional oversight refers to the 
review, monitoring, and supervision of Federal agencies, 
programs, activities, and policy implementation. Congress 
exercises this power largely through its Congressional 
committee system.''
    I then went even deeper. My son Garrett, who we have 
referred to and talked about, just got done with AP Government. 
So, guess what, I went to the AP Government flash cards on 
oversight. They say roughly the same thing.
    What I can't figure out is why colleagues here are willing 
day in and day out to hand that responsibility over to an 
Administration, regardless of whether there is a ``D'' or an 
``R'' behind it. What happened to the people who are going to 
go and fight for their legislative standing, constitutional 
standing? I don't understand this.
    Second, let's get specific about my bill and Mr. Garrett's 
bill. Section 2(c)--all right?--page 5, for those of you 
following in the program. All right? Page 5 through page 8 is 
where we talk about this stuff. All right? We clearly lay out 
that--submitting a directed policy, requirements for the 
directed policy rule, and then going into what that GAO report 
is.
    It says, when a rule is materially changed--that means 
significant--right, Ms. Peirce, the attorney?--significantly 
changed, then and only then will they go in. And, oh, by the 
way, that is after the open rules market submits--next page, on 
page 8--GAO approval of the update.
    The Federal Open Market Committee shall submit an 
explanation for that determination that it either, A, cannot or 
should not be achieved.
    They submit an explanation for that determination and an 
updated version of the directed policy to the Comptroller of 
the Currency of the United States and the appropriate 
Congressional committees. Oh, yes. By the way, that is us doing 
our oversight.
    I think we have to look at this, and it seems to me that it 
is clear. If the Fed complies with the law and submits a real 
rule, none of what Dr. Johnson is describing can happen.
    Submit a rule and then explain it. That is all we are 
saying. We are not saying what the rule is. We are not saying 
what the final goal is. Explain yourself.
    Now, having gotten that out of my system, Dr. Taylor, I am 
curious who and what other central banks around the world use a 
rules-based policy and what has been their experience.
    Mr. Taylor. I would say many have, during particular 
periods, and when they have, things have worked quite well. I 
would put it this way: they sometimes deviate, some more than 
others.
    But there are quite a lot of studies that, as best we can, 
determine when a central bank is coming close to a rule or 
their policies are described by a rule like this or others 
and--
    Mr. Huizenga. And have they experienced a Spanish 
Inquisition within their own oversights, structures?
    Mr. Taylor. There are different approaches. Some countries 
require that the central bank follow a particular inflation 
target. Others, the banks adopt that themselves. But, no, I 
don't know of this inquisition problem occurring at all.
    Mr. Huizenga. Let the record note that he is smirking while 
he is saying that.
    I am curious, Dr. Taylor, and Dr. Calabria, do other 
central banks do the regulatory function to the level that we 
are seeing under this change with the Federal Reserve because 
of Dodd-Frank?
    Mr. Calabria. It is certainly mixed. Some central banks 
around the world have no bank regulatory function. Some do not. 
There--
    Mr. Huizenga. How about the ones that are more successful 
than others? They are not--
    Mr. Calabria. There is actually a recent study by Barry 
Eichengreen at UC Berkeley--certainly no free-market radical--
who came to the conclusion that those central banks that do not 
do bank regulation have less inflation and more economic 
stability.
    So I go back to an earlier point I made, which is that I 
think we need to rethink whether the Federal Reserve should be 
the primary bank regulator here.
    I do want to make a point before we end, though.
    A lot of the conversation has painted the GAO--let me say, 
as someone who has often disagreed with the GAO, but as someone 
who has requested GAO reports as a staffer, someone who in the 
Executive Branch has been on the receiving end of GAO audits, I 
know of few parts of the Federal Government that are less 
political than the GAO.
    They are a very unbiased organization. They are not like 
Inspectors General. They do not have subpoena power. They don't 
go around carrying guns. As you know, lots of agencies ignore 
them all the time. But I think that they are a very apolitical 
organization, as apolitical as you get in the Federal 
Government.
    Mr. Huizenga. All right. And, unfortunately, my time has 
expired. But thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Ms. 
Velazquez, for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Dr. Johnson, at the height of the financial crisis, small 
businesses were severely impacted by a lack of access to 
capital.
    There wasn't a day when this committee held a hearing where 
we didn't hear Members from both sides of the aisle talking 
about the fact that small businesses in their districts were 
having trouble accessing capital.
    So I would like to hear from you, how could this bill 
impact the supply of credit for small businesses during periods 
of economic instability?
    Mr. Johnson. Congresswoman, I think it is an important 
question and, obviously, not a hypothetical one. We have 
recently had this experience.
    The point of delegating to experts is so that they can, at 
various points, decide that you need to take some actions 
different from what would be standard.
    And in the case of a financial crisis, I think all the 
experts I know would argue in favor of extraordinary measures 
to try and preserve exactly the kind of thing you are talking 
about, which is credit available to small business, small 
business which has probably not been a big part of causing the 
crisis and which is a big part of getting the economic 
recovery.
    Ms. Velazquez. Correct.
    Mr. Johnson. So this is where we come to the issue of the 
chilling effect. I am completely in favor of oversight by 
Congress, and that, of course, was the point of all the 
hearings that you had not just with small business, but also 
with the Federal Reserve. That is why they were here so often 
explaining what they were doing.
    We have a lot of very effective oversight built into the 
American system. But when does that oversight shade over and 
become a chilling effect? When do the experts feel that they 
can't make the decision on the basis of that apolitical expert 
knowledge? When do they feel that there is some sort of 
political agenda hanging over them?
    I agree that the GAO, in some instances, is apolitical. But 
here in this legislation they would get specific instructions 
on the terms of each audit from this committee or its Senate 
counterpart. That has to have a chilling effect.
    Ms. Velazquez. Thank you.
    Ms. Peirce, Section 7 imposes cost-benefit provisions 
similar to those that were being imposed on the Securities and 
Exchange Commission, and it will require conducting cost-
benefit analysis.
    This unfairly ignores the extensive analysis that 
economists and experts of the Federal Reserve already do. They 
have to comply with the Paperwork Reduction Act, the 
Congressional Review Act, and the Regulatory Flexibility Act.
    So although cost analysis is a similarly common-sense 
requirement, in practice, this provision will be highly 
unworkable.
    And I would like for you to explain to me, how should the 
Federal Reserve value the benefits of preventing a financial 
crisis or averting a market failure associated with the absence 
of a particular regulation?
    How would the Federal Reserve prove in court that the 
estimated benefits are reasonable if the crisis the Federal 
Reserve seeks to prevent through its regulation has never 
occurred? Will you explain that?
    Ms. Peirce. Yes. I think that you raised a really important 
question, which is tying a particular rule to a crisis. We 
often try to justify rules by pointing to a financial crisis 
and saying, ``Well, surely we want to prevent another crisis.'' 
And we can all agree on that.
    But I think that the discipline of an economic analysis 
requires the Fed to look at a particular rule and say this is 
the role that it would play in preventing another financial 
crisis, and it can make predictions about what the costs would 
be of a crisis and what benefits you would get.
    And so then having that very rigorous and clear, you make 
your assumptions clear so that other people can challenge your 
assumptions. And you make the data clear that you are using, 
and then people can provide you additional data to challenge 
that.
    And then, if that does get challenged in court, then the 
court can look and they can--it is more of a procedural thing 
to see what the Fed actually did.
    Ms. Velazquez. So, Ms. Peirce, you don't feel--and, Dr. 
Johnson, if you would like to answer--that this type of 
regulatory requirement will prevent the Federal Reserve from 
acting accordingly when we are facing an economic crisis?
    Ms. Peirce. Not at all. And it gives the Fed--it may take 
the Fed a little bit longer to adopt a rule, but these rules 
are in place for years and years.
    And so what we will end up with is we will end up with 
higher quality rules that enable--that stand the test of time 
better because it will have gone through a rigorous process.
    Ms. Velazquez. So you don't feel that it will be an attempt 
to bring the Federal financial regulatory oversight to a halt?
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentlelady from West Virginia, 
Mrs. Capito, chairwoman of our Financial Institutions 
Subcommittee.
    Mrs. Capito. Thank you, Mr. Chairman.
    I want to thank the panel, too.
    One of the issues that I have discussed with current and 
former Federal Reserve Chairs is the effect that this low-
interest-rate environment has had on our savers, and 
particularly our seniors.
    I represent West Virginia. We have an elderly population. 
And a lot of our folks are trying to live within the boundaries 
of what they had planned for and those fixed-income products 
like CDs and everything to support their income.
    So my question is: Would a rule-based monetary policy 
produce a more balanced approach that doesn't overly penalize a 
saver, particularly those in their senior years who have 
actually saved and planned for the future? Do you see this 
rules-based monetary policy having any effect on that?
    And, Dr. Calabria, I see you shaking your head. So I will 
give you a shot first.
    Mr. Calabria. First, let's start out--because I think it 
has been implied that a rules-based policy would necessarily 
always result in higher rates. That is not necessarily the 
case. There are certainly times in the past when a rules-based 
policy would have suggested lower rates.
    But I would be the first to say that certainly my read of 
the evidence--and I will defer to Dr. Taylor on this--seems to 
suggest that a rules-based policy would, on average, have 
suggested higher rates over the last decade and certainly over 
the last few years.
    Mrs. Capito. Would it--Dr. Taylor, go ahead, and then I 
will ask a follow-up.
    Mr. Taylor. First of all, it is very important to realize 
that a policy rule doesn't necessarily mean higher rates or 
lower rates. It means that the rates are adjusted in accordance 
with the state of the economy--
    Mrs. Capito. Right.
    Mr. Taylor. --the way this works.
    Right now, I would say most policy rules that are out there 
would suggest rates would be not zero, but positive--at least 
slightly positive.
    I never would say we go there instantly, but it would be--
should have been something that we could have been prepared 
for. So, in that sense, the zero rates would not still be 
there.
    Mrs. Capito. I would say--
    Mr. Taylor. I believe, to some extent, that would be 
because the economy is doing better.
    Mrs. Capito. Right.
    Mr. Taylor. It is a different policy, a better economy, 
and, therefore, higher rates. But even without that, they would 
be higher. And the zero rates cause other problems besides the 
ones you are mentioning.
    The money market doesn't operate very well at that point. 
To the extent that quantitative easing is part of that policy, 
it is a massive intervention into the capital markets. Price 
discovery is affected.
    And so there are a lot of unintended consequences as well 
as the fact that it is affecting frequently older people, 
causing them to take extra risks, et cetera.
    Mrs. Capito. One of the things I think that--correct me if 
I am wrong here--would provide for would be the predictability 
of where to go.
    So if you are looking for buying short term, long term, or 
somebody is helping you with financial planning, you may be 
able to plan slightly better. That is one of the advantages I 
see.
    Dr. Johnson?
    Mr. Johnson. I think, though, the reason interest rates are 
so low and the reason that your constituents are having so much 
trouble, the elderly ones, is because we had this massive 
financial crisis.
    And we should be addressing that through other measures, 
including much higher capital requirements that would be 
complementary.
    Mrs. Capito. Which I think they are. Correct?
    Mr. Johnson. So I just--and I like to quote John Allison, 
who is the head of the Cato Institute and a former BB&T 
executive, who was arguing recently for a 20 percent capital 
ratio.
    I think that is something you can agree on across the 
political divide here that would exactly address your problem, 
Mrs. Capito, which is to make the world safer for people who 
rely on those fixed-income products to finance their 
requirement.
    Mr. Calabria. Mrs. Capito, if I can make a point?
    Mrs. Capito. Yes.
    Mr. Calabria. Because I do agree with this, but I do want--
this ties back to an earlier point because Professor Johnson 
has repeatedly told us that we need to rely on the expertise of 
experts.
    I would remind him that a decade ago, the Federal Reserve 
was arguing for eliminating any sort of leverage ratio in the 
Basel Capital Standards.
    And certainly, when I was a staffer on the committee--and I 
am going to applaud the efforts then of Senator Shelby and 
Senator Sarbanes to push back on the Fed--we would have not 
have heard that if it weren't for the FDIC telling on them, 
basically.
    So, having this advance notice of what is going on 
internationally delayed the implementation of Basel II, which 
meant that American banks actually had--as little capital as 
they had, they had more capital than they would have had they 
implemented Basel II.
    Mr. Johnson. There is no question--
    Mrs. Capito. I am going to--I will let you guys debate when 
you--
    Mr. Calabria. My point is that--
    Mrs. Capito. I want to ask one more question on the cost-
benefit analysis because this is something that I think is 
being held out as some sort of villain here when I really 
think--we have heard repeatedly in this committee in testimony 
from all kinds of employers and financial institutions, et 
cetera, on the--not so much one--the burden of one additional 
regulation, but the cumulative burden.
    And I think if you are looking at a cost-benefit analysis 
of adding a new regulation rule, that is where the value could 
really be, not looking so much at one singular rule or 
regulation, but looking at how it is reacting and interacting 
with all the other ones that are already in place.
    And, with that, I see I have lost the rest of my time. But 
thank you.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Missouri, Mr. Cleaver, for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    And I thank the witnesses for being here.
    I just have one question, but I want to preface it by 
expressing a personal opinion, which is that after 6 years 
during which our economy teetered on the very edge of collapse, 
our country is moving forward.
    And I think most of the economic news that we are seeing 
and reading about is positive, and we seem to have climbed out 
of the depths of the Great Recession.
    We are increasing our GDP, lowering the rate of 
unemployment, although the unemployment numbers seem to be a 
bit stingy. I think there are some socioeconomic reasons for 
that, but we can see that we are improving the state of an 
almost-devastated housing market.
    Now housing sales, at least based on what I am hearing from 
my REALTORS--the REALTORS in my district, are the strongest 
they have been since 2006.
    And so I am applauding the economic growth, and I believe 
that the Fed has taken many proactive and, yes, unconventional 
steps to resuscitate our economy.
    And so, Dr. Johnson, I am wondering whether or not you 
think--and, frankly, all of the members of the panel--that, had 
the proposed reform been effective during the beginning of the 
2008 financial crisis--do you think the Federal Reserve would 
have been able to do what they have done in the midst of being 
constrained from taking proactive measures to get us back on 
track?
    Mr. Johnson. I think that is a very good question, 
Congressman, exactly on target.
    Now, I understand that, hypothetically, you could read the 
legislation to say there wouldn't be a constraint, that they 
could just say, ``It is a crisis. We are going to do these 
dramatic things.''
    But if you think back to 2007, 2008, as the crisis began to 
develop, how much controversy there was about what the Fed 
should be doing, how it should be doing it, the pressures that 
they faced, you could add this on top of all of that--and there 
was appropriate oversight. Right? So there were plenty of times 
that Mr. Bernanke and his colleagues appeared before this 
committee and other committees to explain what they were 
doing--but you would add another layer on top of here, which 
could potentially have been about multiple audits and creating 
this uncertainty, for example, for financial markets, is this 
or that Fed decision going to be second-guessed or is there 
going to be pressure to overturn it from a particular House or 
Senate committee.
    I don't think having Congress involved in this kind of 
micromanagement, which is what it is, of the Federal Reserve is 
a good idea, in general. I am particularly worried about what 
would happen at times of national emergency, including 
financial crisis.
    Mr. Cleaver. Yes. I would like for you to respond. I just 
need to say before you, sir, my thought was, because I was here 
during that time--I think everybody on this committee is 
reasonably sharp. Some of us have degrees in geography and 
physical education.
    I am just wondering how impactful and positive 
Congressional interference would have been.
    Mr. Taylor. Congressman, I think it is very important to go 
back in time to before the crisis hit to answer your question.
    There was a period, especially 2003, 2004, and 2005, where 
the interest rate was very low and then was raised very slowly. 
By most analyses--and there is disagreement--that was a period 
where the Fed deviated from the kind of rule that worked well 
in the 1980s and 1990s until that time.
    I believe that was one of the reasons for the search for 
yield, the excesses in the housing market, not everything, but 
which ultimately led to the bust and, therefore, to this 
terrible situation we had in the crisis, in the recession, and 
the slow recovery now.
    So, to me, if this kind of legislation had been in place 
then--and, remember, in the year 2000, the legislation is 
reformed to take out reporting requirements.
    But if in 2000 say, for example, this kind of legislation 
was put in place instead, at least the Fed would have been up 
here explaining and being questioned about why it deviated from 
its policy.
    And I think, ultimately, it would have deviated less and we 
would have been in a much better situation. The economy would 
have performed much better in the last decade than it has.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from New Jersey, Mr. 
Garrett, chairman of our Capital Markets Subcommittee, and 
coauthor of the legislation.
    Mr. Garrett. Thanks, Mr. Chairman.
    So let's look to see where we all agree. And it sounds 
like, actually, there are a number of points on which the 
entire panel agrees on the underlying legislation.
    Mr. Campbell from California raised a point. He said that 
businesses should not be so focused on what the Fed is doing 
every day. They should be focused on what the markets are 
doing, what consumer demand is, what is the volatility of the 
markets, what suppliers are, and that sort of thing, and not so 
much on the Fed.
    And I think, if I looked at the panel, you would all agree 
with Mr. Campbell's assessment that we are too focused on the 
Fed's activity daily as opposed to--do I get a nod sort of like 
that? Sort of.
    So then the question is: How do we turn that around? Now, 
one piece in the bill simply asks that the Fed Chair, instead 
of coming up to Congress twice a year, that he or she comes up 
here 4 times a year, quarterly.
    Does anybody disagree about having the Fed Chair come up 
here quarterly as opposed to twice a year? Is that a bad thing 
as far as--just say yes. Does anybody disagree with that?
    Mr. Johnson. Yes. I disagree with that.
    Mr. Garrett. Oh. Okay. See, here I thought we could get 
over saying that we agree.
    Because my next question was going to be: Does anybody 
disagree with the next provision, Section 6, which says, on the 
supervisory and regulatory side, we have that the Fed Vice 
Chair of Supervision should also--it is their responsibility to 
come up semi-annually to testify as far as regulations?
    Does anybody disagree that he or she should be coming up 
and testifying semi-annually on what they are doing? Does 
anybody disagree with that one?
    Mr. Johnson. I do more than agree, Mr. Garrett. I think you 
have very good language in there about who should testify when 
there isn't a Vice Chairman of Supervision.
    Mr. Garrett. Yes. All right.
    Mr. Johnson. In terms of implementing Dodd-Frank, that is 
essential.
    Mr. Garrett. So there is some disagreement as to how often 
the Fed Chair should be coming here. And the question there is: 
What good does it do actually when the Fed Chair does come 
here?
    Because, as you know, the Fed Chair was here--when was it, 
Mr. Chairman?--about 4 months ago. And, at that time, we had 
some specific questions as to what she was doing, and we asked 
them and said, ``Would you get back to us?'' Four months later, 
we just get our answers now.
    Would anybody say that a 4-month response from the Fed is a 
timely and responsive and responsible response from the Fed? 
Does anybody say that is timely, responsive, and responsible?
    Mr. Johnson. Mr. Garrett, what exactly were the questions? 
Were they detailed, technical, hard questions--
    Mr. Garrett. Well, we got the answers back.
    Mr. Johnson. --or were they straightforward questions? We 
don't know those details.
    Mr. Garrett. Then, I guess the American public doesn't know 
the answers either. And that goes to the overarching question 
of--to my first question, if we can't have certainty in the 
marketplace, then the market is continually going to be looking 
on a daily basis to what the Fed is doing.
    All the underlying legislation is trying to do, is to 
provide certainty in the marketplace. We are not telling the 
Fed what to do. We are just saying, ``Please, please let us 
know what you are doing and give it to us in a timely manner.''
    One way to do that is to help us out with an economic 
analysis. Now, this wasn't my idea. We crafted our language 
from President Clinton's and President Obama's Executive 
Orders.
    Apparently, those two gentlemen thought it was prudent that 
the American public have, from their Federal agencies, an 
economic cost-benefit analysis before agencies take actions to 
see whether the cost of something is greater than the benefit.
    So does anybody disagree with President Clinton and 
President Obama when they signed Executive Orders saying that 
there should be cost-benefit analysis for the agencies that 
they did? I guess there is always one.
    Mr. Johnson. Can you take the Executive Order cost-benefit 
formulation to the courts in the same way that you could take 
your legislative cost-benefit analysis to the courts, Mr. 
Garrett?
    Mr. Garrett. Actually, we can, because the courts have been 
able to do that, and the district court was quite able to do 
that.
    As a matter of fact, the district court overturned a 
decision of the SEC, saying that the SEC did not follow the 
proper cost-benefit procedure.
    Mr. Johnson. In that case, I think President Obama and 
President Clinton got it wrong along the terms that you 
specified. I don't think the court should have that ability to 
trip you up on these technical details.
    Mr. Garrett. It is interesting that, once again, I have to 
be here and to be a defender of President Clinton and a 
defender of President Obama.
    But if that is my role, then I am willing to do it in this 
one regard, because I think the American public does have a 
right to have a balance done on the benefits of the cost and 
the analysis.
    Let's get to the issue of transparency in only 36 seconds.
    Dr. Calabria, in your testimony, you write that the 
independence of the Fed has been greatly eroded by the 
revolving door between the Federal Reserve and economic 
policymakers in the Executive Branch.
    All of our discussion so far has been about how much overt 
influence that we are going to have, as Members of Congress? 
Could you talk about how much overt influence the Executive 
Branch has?
    Mr. Calabria. Let's start for--either--so look at the 
current Board. Three out of five members of the current Board 
worked at the Clinton White House, not the Clinton 
Administration, the Clinton White House. So if you want an 
apolitical Fed, this is not it.
    As I suggest in my testimony--and I think this is applied 
across any Administration--no one should be eligible to be a 
Fed Board Member for at least 4 years after they have left an 
Executive Branch appointment. There is really just too much of 
a revolving door between Wall Street, Treasury, and the Fed.
    Mr. Garrett. Thank you.
    I see my time has expired. Thank you, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Illinois, Mr. 
Foster, for 5 minutes.
    Mr. Foster. Thank you.
    Dr. Taylor, 3\1/2\ years ago you were a coauthor of an open 
letter to Chairman Bernanke, basically criticizing his decision 
to do the large-scale assert purchases and predicting, among 
other things, currency debasement and inflation.
    We have been hearing that consistently over the last 3\1/2\ 
years from Members across the aisle--my colleagues across the 
aisle.
    And I was wondering if each of you could, in one or two 
sentences, explain why those predictions have been so wrong for 
so long. And try to limit it to two sentences so we can--
    Mr. Taylor. My criticism of the quantitative easing and 
related activities had two risks.
    One, it was a downside risk, the uncertainty that it 
caused, the fact it could--unwinding would be uncertain, which 
was a negative, and the other is the other side, that it could 
be inflationary.
    What I think we have seen is the first risk. The economy 
has not performed very well. It has been disappointing by every 
measure until very recently, and that is not good.
    Mr. Foster. That is not--
    Mr. Taylor. That is the reason why the inflation rate has 
been so tame. It is a very weak economy.
    But we still--just to finish the answer, we still risk 
inflation if the Fed is unable to unwind. Lots of people out 
there are saying they are behind the curve already. It is still 
a risk.
    And I say that letter, which I signed onto, raised a lot of 
issues about the dangers of these kinds of policies, and I 
think, to some--to a great deal, that those dangers have been 
realized.
    Mr. Foster. But not inflation, you would agree.
    Mr. Taylor. Well, look. You have an unusual policy which 
creates many kinds of risks. Probably the greatest concern is 
the slow economy and the fact that unemployment took so long to 
get down.
    That is, to me, a tragedy. We not only had a deep 
recession, we have had an abysmally slow recovery. I don't 
think that is a good reflection on that policy.
    Mr. Foster. It is a question of what the alternatives are. 
If you believe that doing something that would increase the 
output cap would actually have made the economy healthier, then 
that is a discussion that probably is also worth having.
    Next, Dr. Calabria?
    Mr. Calabria. First of all, I would say I am not only 
concerned about certainly headline inflation, I am concerned 
about asset prices. It is very unusual to have a financial 
crisis without some sort of run-up in asset prices.
    We could have had--you and I would have had the same 
conversation 10 years ago, and we would missed the financial 
crisis, we would have missed the housing bubble. So, quite 
frankly, I do think we need to be worried about asset prices.
    I also think we need to be worried about the Fed paying 
interest on reserves for years has been contractionary. Why are 
we paying banks to have trillions of dollars sitting on the 
sidelines doing nothing?
    So I do think that sometimes the conversations sound like 
the Fed is either purely expansionary or purely contractionary. 
I think the Fed is a bit schizophrenic right now, quite 
frankly.
    I think they are doing things that are contractionary. I 
think they are doing things that are expansionary. And the net 
effect has been a mixed one. So, certainly, I just don't think 
they have had a consistent set of policies and certainly I am--
    Mr. Foster. I am trying to count sentences here.
    Mr. Calabria. Okay. Well--
    Mr. Foster. No. I understand.
    Mr. Calabria. As you know, the two-hand economist bit with 
Truman. So that is the same here, one hand or the other.
    Mr. Foster. Okay.
    Ms. Peirce?
    Ms. Peirce. Just with the caveat that I am not an 
economist, I am concerned about the Fed's policies, buying 
mortgage-backed securities, for example--they are having a big 
impact on the market--and then something that Mr. Campbell 
alluded to earlier, which is that watching the markets react to 
whatever the Fed says is pretty disturbing. I think it would be 
much better if the market were reacting to the market.
    Mr. Foster. All right.
    Dr. Johnson?
    Mr. Johnson. Mr. Foster, good question.
    I think this quantitative easing was risky. It certainly 
has not produced inflation. There were legitimate concerns 
about that, but it hasn't.
    It also hasn't miraculously pulled us out of this hole 
created by the massive financial crisis. I think there is a 
limit to the magic that central banks can work in this kind of 
situation.
    I do think, though, the question is a good one because, 
imagine, under the proposed legislation, you are going to be 
having hearings on a weekly or at least monthly basis all along 
exactly these lines with teams of experts like this all 
disagreeing. You all are going to be disagreeing. Some of you 
are expert. Some of you are perhaps less expert.
    This is not particularly going to be helpful to the Federal 
Reserve trying to do its job. You should be asking questions 
about who gets appointed to the Federal Reserve, what are their 
qualifications.
    I don't have a problem with Mr. Calabria's suggestion that 
you can't put people on the Fed who have been working in the 
Executive Branch. I think that would rule out McChesney, 
Martin, Burns, Volcker, and Greenspan, but, of the current 
Board, only Lael Brainard, I think. So those are legitimate 
questions.
    Mr. Foster. In my 25 seconds left, if I could just have a 
quick ``yes'' or ``no?''
    Do you think that the Federal Reserve should have a larger 
role and a larger part of its thought process in trying to 
limit asset price bubbles, in particular, real estate?
    You can see other countries have done this with some 
success. And do you think that should be an increased part of 
their portfolio or not, which is--I know.
    Mr. Taylor. I think that the first thing the Fed can do 
about asset bubbles is to have a policy of interest rates, a 
monetary policy that doesn't bring them on. I really mean that.
    Mr. Foster. Okay.
    Mr. Taylor. A lot of the actions that have been taken 
recently by countries on--that have focused, say, on bubbles 
and housing have been because their interest rates are low.
    Take Switzerland. If they have a low interest rate, they 
attack the housing market with other mechanisms. Take 
Singapore. They have the zero rate because the Fed has a zero 
rate. They have to take special actions to contain the bubble 
in their housing and automobile markets.
    So, they are kind of responding to the fact that monetary 
policy is stuck and not doing its usual thing. And I think the 
first thing to do is to make sure the central banks, our 
central bank in particular, don't cause the bubbles and then 
worry about what to do with it.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Neugebauer, chairman of our Housing and Insurance Subcommittee.
    Mr. Neugebauer. Thank you, Mr. Chairman. Thank you for 
holding this hearing.
    And I thank our panelists for being here.
    I really want to talk about Section 9 of the FRAT Act, 
which talks about international negotiations. One of the things 
that--this committee has had a number of oversight hearings 
basically on the negotiations that are going on at FSOC and 
then, also, the discussions that are going on with the 
Financial Stability Board.
    As you know, in 2008, the G20 tasked the Financial 
Stability Board to come up with reforms for the financial 
system across the Board internationally. And since then, it has 
been kind of interesting.
    Initially, the Financial Stability Board put a number of 
insurance companies and financial institutions, SIFIs, and 
subsequent to that, the FSOC made AIG and then Prudential as 
SIFIs.
    And so the question that arises is because of the fact that 
the SEC and the Fed and the Treasury are all participants in 
the Financial Stability Board.
    And so, if they are over there in those negotiations and 
they vote then in those discussions to make these financial 
institutions financially significant institutions and then they 
come back, can they have a fresh--do they have a fresh start 
then to determine from an FSOC standpoint whether they are 
going to be determined to be SIFIs?
    And my question is--Scholar Peter Wallison with AEI said 
something that is inconceivable, that these designations of 
these three insurers would have gotten through a Financial 
Stability Board without express approval of the Fed and the 
Treasury.
    So is that distorting the procedure that they are over 
there voting at the Financial Stability Board and then they are 
coming back and saying, ``Okay. We are going to start over with 
a fresh piece of paper here and make our own determination'' or 
is the Financial Stability Board basically making these 
decisions and are the Fed and the Treasury complicit to that?
    Dr. Taylor, do you have an opinion on that?
    Mr. Taylor. I don't know the specifics of your question, 
but I do know quite a bit about negotiating because I was the 
Under Secretary of the Treasury for International Affairs for 
4-plus years.
    My sense is there is frequently negotiating within the 
government and then there is negotiating between governments. 
And the within government, I think as much as possible, should 
take the Congress into account. It doesn't always do that.
    I remember having former Chairman Barney Frank out to lunch 
at the Treasury to explain various things that we were working 
on at the time. I think that was essential.
    And so I think, when you think about this legislation, the 
word ``negotiation,'' you have to think about what that means 
and, I think, try to explain it more. But I think, in the case 
you are talking about, it would be one where there should be 
better consultation in the first place.
    But you are always going to have different opinions at 
different agencies. Some may be more worried about the 
economics. Some may be more worried about the security. Some 
may be more worried about U.S. competition, the 
competitiveness.
    And they are going to figure out the best way and then 
approach the other government, which also has the different 
agencies. So, it is a complicated process.
    I think the intent of the proposed legislation is fine. But 
I think the word ``negotiation'' needs some more specificity.
    Mr. Neugebauer. And I think one of the things that a lot of 
people feel like and the reason to have more transparency and 
disclosure here about what is going in these negotiations is 
because, basically, it appears that those negotiations are 
ending up setting policy in our own country, and I think that 
there is a concern about that.
    And so, much like if we are negotiating treaties between 
other countries, basically, we are in some ways negotiating 
treaties between financial institutions.
    Dr. Calabria, do you want to--you seem to want to engage in 
this.
    Mr. Calabria. I certainly share that concern. Let me make a 
broader point about much of this, and this applies to the cost-
benefit, this applies to the negotiation.
    Congress can decide all this stuff if it wants. Remember, 
within Dodd-Frank, we decided that bank holding companies--
there is no negotiation there. Boom. You are in. You could have 
decided that. The Congress could have set up other parameters.
    So any of these efforts--to me, part of the problem is that 
Dodd-Frank has 400-some rulemakings. There is just so much 
delegation, so much discretion in the regulatory process, that 
I think some of these hard choices actually have to be made up 
here rather than by the regulators. But I certainly do agree.
    I worry that the FSOC, the SIFI process, that--in my 
opinion, we are essentially signaling to the market that the 
entities are too-big-to-fail. I worry that is committing the 
Fed to assisting those entities. So I certainly think that 
needs to be a more transparent process.
    Mr. Neugebauer. I see my time has expired
    Chairman Hensarling. The Chair now recognizes the gentleman 
from California, Mr. Sherman, for 5 minutes.
    Mr. Sherman. I agree with Dr. Calabria that Dodd-Frank 
basically just transferred all this power to the Executive 
Branch. It took us 2,000 pages to just say, ``Executive Branch, 
don't let it happen again, and here are all the hammers to use 
to make that happen. Hit whoever ought to be hit.'' But all too 
often we either do nothing or we can't agree on what to do. So 
we just empower the Executive Branch.
    I don't always agree with the Fed. They haven't focused on 
the trade deficit. Of course, virtually no one in Washington 
talks about the trade deficit. And they haven't agreed with 
Bernie Sanders and I that too-big-to-fail is too-big-to-exist. 
But very few people in Washington agree with Bernie Sanders and 
I on that point.
    But the Fed has done more than any other institution to 
pull us out of the Great Recession. They have not debased our 
currency. It is, if anything, as shown by the inflation rate, 
the Cost of Living Index, as valuable as anyone would have 
predicted that it would be in 2014.
    We have had a slow recovery, but we had a national 
financial meltdown. And when that happens, you expect a slow 
recovery, but I don't think you blame the slow recovery on Fed 
policy. Their low interest rates are the only thing of any 
policy that I can point to in the last several years that have 
pulled us out of this recession.
    And we should approach things with a degree of humility 
because I don't think there is anybody in this room who can 
wave around a brokerage receipt showing that they were selling 
Countrywide short in early 2008.
    If anybody really knew and was ready to bet the farm that 
2008 would have happened, the least they could do is give me a 
ride on their private jet, subject to Ethics Committee 
approval.
    The gentleman from New Jersey says that cost-benefit 
analysis was endorsed by President Clinton and President Obama.
    I do think I need to point out for the record that they 
never supported a cost-benefit analysis for Fed monetary policy 
decisions because everything they do is a cost-benefit 
analysis.
    It isn't trying to weigh debts from pollution to effects on 
the economy. Everything they do is to focus on the national 
economy. There are various cosponsors of the FRAT Act. 
Presidents Clinton and Obama should not be listed.
    Dr. Calabria, you have suggested that we not allow people 
who have served in the Executive Branch within the last 5 years 
to serve on the Fed.
    Mr. Calabria. Four years. That's--
    Mr. Sherman. Should we have the same rule for those who 
have worked on Wall Street?
    Mr. Calabria. In terms of people from Wall Street working 
at the Fed?
    Mr. Sherman. Yes.
    Mr. Calabria. Yes. I would be fine with a 4-year 
restriction. I think that is a reasonable span.
    Let me say just as an aside--
    Mr. Sherman. So we would have just academics on the Fed--
    Mr. Calabria. No. Because--
    Mr. Sherman. --having excluded--and former Members of 
Congress.
    Mr. Calabria. If I could channel Section 10--
    Mr. Sherman. Two of the least--
    Mr. Calabria. If I can channel Section 10 of the Federal 
Reserve Act for a second, it does say, ``due representation to 
agriculture, commerce, and industry.''
    So it actually--the Federal Reserve Act, as structured, 
suggests that we should have people--not just academics, not 
just bankers.
    Mr. Sherman. I would point out there are two major problems 
with the structure of the Fed.
    First, it is undemocratic. You have governmental power in 
the hands of those elected by bankers. And second, it 
discriminates against the western half of the country.
    Certainly, if you have the San Francisco Fed representing 3 
or 4 times as many people as the New York Fed, the least you 
could do is give the San Francisco Fed a permanent seat on the 
Open Market Committee, but--and perhaps I could work with the 
gentleman from New Jersey to correct those two problems.
    Mr. Calabria?
    Mr. Calabria. I suggest in my testimony that Section 10 of 
the Federal Reserve Act also requires that no two Members of 
the Board can be from the same Federal Reserve district.
    We have repeatedly violated that. I would go as far to say 
that, with the current makeup of the Board and you count the 
New York, that the New York district has 6 votes on the FMO--
    Mr. Sherman. And the Board that represents 3 or 4 times as 
many people as any other Board has either one or zero and no 
assurance of even one.
    Finally, there is this idea, Dr. Johnson, that we could 
write a rule and then put monetary policy on automatic pilot if 
we just wrote a good rule. Is that possible?
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair will now recognize the gentleman from Missouri, 
Mr. Luetkemeyer, the vice chairman of our Housing and Insurance 
Subcommittee, for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    I want to go to the section that deals with the stress 
tests of the banks, and this really concerns me. I know that 
Sheila Bair wrote an op-ed back in April 2013, and the headline 
was, ``Regulators Let Big Banks Look Safer Than They Are.''
    And in there she makes the comment that, ``The ease with 
which models can be manipulated results in wildly divergent 
risk-weightings among banks with similar portfolios. 
Ironically, the government permits a bank to use its own 
internal models to help determine the riskiness of assets, such 
as securities derivatives, which are held for trading--but not 
to determine the riskiness of good old-fashioned loans. The 
risk weights of loans are determined by regulation and are 
generally subject to tougher capital treatment. As a result, 
financial institutions with large trading books can have less 
capital and still report higher capital ratios than traditional 
banks whose portfolios consist primarily of loans.''
    And she goes on to give an example of a big bank that has 
14 percent capital, yet, if you take the risk-weighting out, it 
goes down to 7 percent, and then a big regional bank that is 
risk-weighted at 9 percent, and if you take the risk-weighting 
out, it stays almost the same.
    So we are playing on two different fields here. And I think 
this part of the bill is extremely important from the 
standpoint of how you begin to, I think, get some of these big 
banks under control.
    If you let them write their own stress test, if you let 
them write their own rules for how they exist, how in the world 
can we actually find a way to regulate those?
    And, Dr. Calabria, I know you mention this in your 
testimony. Can you--
    Mr. Calabria. I want to repeat something that Professor 
Johnson said, which is that the stress tests are gamed. And 
maybe we will agree or disagree on this, but I think they are 
always going to be gamed.
    I think the Basel Capital Accords have been gamed. I think 
you see these herding into low-risk assets. Let's not forget 
the experts told us that Greek debt was risk-free ahead of the 
crisis. I think that was obviously not the case.
    I really think we should abandon the stress test, abandon 
the Basel Capital Accords, and go to a flat, clear leverage 
ratio. And I think that is far more simplistic and far more 
transparent.
    Mr. Luetkemeyer. Okay. You don't believe that the weighting 
of the riskiness of the assets is something--
    Mr. Calabria. There is always--
    Mr. Luetkemeyer. --that should be taken into consideration 
here?
    Mr. Calabria. There is always going to be that issue. But I 
have yet to know of a financial crisis caused by small-business 
lending.
    Yet, we know that small business is risky. We also know 
that the Basel Capital Accords and the stress test dissuade 
banks from doing small-business lending.
    I think it is far more important to have a diversity of 
portfolios, which, to me, the stress test and the capital 
accords encourage homogeneity in a way that, to me, becomes 
systemic.
    Mr. Luetkemeyer. Okay. Along that line, what this bill 
does, though, is increase the transparency of those tests so at 
least the general public--
    Mr. Calabria. It is a small step in the right direction.
    Mr. Luetkemeyer. Okay. That is where I was trying to go.
    Yes, Dr. Johnson?
    Mr. Johnson. Unless--
    Mr. Luetkemeyer. You talk faster than I think. So, can you 
slow down?
    Mr. Johnson. Okay. I am sensitive that you have limited 
time.
    I and Mr. Calabria agree on the capital part, and I think 
we are agreeing with you. And I think you are making a very 
important point, which is we should be putting more emphasis on 
leverage ratio, which is assessment of capital without these 
funky risk weights and less emphasis on the risk-weighted--I am 
not saying zero, but less emphasis.
    Mr. Luetkemeyer. Right.
    Mr. Johnson. I think we completely agree on that.
    I think you are also right and Sheila Bair is right to have 
concerns about anything that allows the banks to use their own 
models because they put all kinds of crazy stuff in that and it 
is not subject to very good supervision.
    On the stress test proposal in this legislation, I am 
afraid I disagree with Mr. Calabria. I think it is a small step 
in the wrong direction. I think you are making it easier for 
the banks to game the stress test.
    I agree the stress tests are not--
    Mr. Luetkemeyer. You don't believe the transparency helps 
in this regard? That is basically what this does here.
    Mr. Johnson. What you have right now, Congressman, is you 
have transparency on the criteria of the stress test, how 
stressed, what is going to go wrong in the stress scenario.
    What the banks want to see is the details of the models the 
Fed is using. Once they have those models and they run those 
models in their own computers, they can game them just like 
they game their own models. That is what you don't want.
    We are agreeing on the capital, though, and I agree with 
what you said in the beginning: Capital is the most important 
thing. Capital should be front and center. And capital, without 
the funky risks weights, is the way to go.
    Mr. Luetkemeyer. Okay. So how would you structure that, 
then?
    Dr. Calabria, you just indicated you just have a--
    Mr. Calabria. I was going to say we do agree that it is a 
small step. The direction we might disagree on.
    But again, I do think that getting more of the assumptions 
out there and the parameters--and I would agree. I think 
internal risk models are fine for the banks, but you can't use 
them for regulatory purposes. And I think that has to be the 
question here.
    Mr. Luetkemeyer. This really concerns me because I think 
what we are doing is we are giving the general public a level 
of safety here--
    Mr. Calabria. False confidence, a level of confidence that 
the system is going fine, everything is good.
    But when you look at what is really happening here, they 
are gaming the system, and I think it is really unfortunate 
because I don't think the American public has the true picture.
    Mr. Luetkemeyer. With that, I yield back. Thank you, Mr. 
Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    I now recognize the gentleman from California briefly for a 
unanimous consent request.
    Mr. Sherman. I ask unanimous consent to put in the record 
Executive Order 12866 and Section 10 thereof--
    Chairman Hensarling. Without objection.
    Mr. Sherman. --which states that--
    Chairman Hensarling. Without--
    Mr. Sherman. --no judicial--
    Chairman Hensarling. Without objection.
    Mr. Sherman. --no judicial review is allowed--
    Chairman Hensarling. The--
    Mr. Sherman. --with this Executive Order.
    Chairman Hensarling. For the unanimous consent decree, not 
for the pontification.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Washington, Mr. Heck, for 5 minutes.
    Mr. Heck. Thank you, Mr. Chairman.
    And thanks to all the witnesses for giving of your time 
today.
    Dr. Johnson, I note with some interest that the proposed 
legislation effectively reasserts the dual mission of the Fed--
namely, bringing about price stability and optimal employment 
levels. I am wondering, frankly, if that would be its practical 
effect.
    I am looking back over the last 4 years as an example and 
have seen where, inarguably, the Fed's policies have 
contributed to a decline in the unemployment rate from 9 to 6 
percent, and noted with interest, as revealed I think in 
Congresswoman Capito's question, application of this 
legislation would have inarguably increased interest rates over 
that same 4-year period of time.
    What is your analysis as to what would have occurred, 
unemployment-level-wise, had there been higher interest rates?
    Mr. Johnson. If the Fed hadn't taken the broad set of 
extraordinary measures that they embarked on in 2008, including 
lowering interest rates and also buying assets in a way that 
was at that point considered unconventional and affecting 
different kinds of interest rates, other than the short-term 
traditional policy rate, then the recession would have been 
deeper and unemployment would have stayed higher for longer and 
the recovery would have been slower.
    I think that is, unfortunately, what would have happened 
and what would happen in a future crisis if it is the case, as 
I believe it is, that this legislation would effectively limit 
the ability of the Fed to respond fully.
    Mr. Heck. So, confirming my worst fear and suspicion that 
it would have increased unemployment, notwithstanding the fact 
that it reasserts that dual mission.
    There are actually other bills before the Congress that 
have been proposed that would have eliminated the secondary 
mission of optimal employment levels, which is something like a 
40-year-old law on the books passed by the then-House Banking 
Committee overwhelmingly, with 3 dissenting votes in the United 
States House of Representatives. It was a bipartisan bill to 
set the second mission of optimal employment.
    If we were to remove the optimal-employment mission from 
the Fed and if they were, in fact--if it were, in fact, to 
focus exclusively on price stability, what is your opinion and 
analysis as to how that would play out, if they were, in 
effect, not allowed to consider unemployment levels but only 
price stability?
    Mr. Johnson. It depends on how they would interpret that. 
And there are some central banks around the world, for example, 
the European Central Bank, that does focus, by law, exclusively 
on price stability.
    I think you would have less response in the case of these 
big downturns, certainly the financial-crisis-type situations. 
I don't think the Fed would embark on the same sort of 
creative, unconventional policies. I don't think you would have 
the same kind of interest rate cuts. And I think you would have 
higher unemployment in those situations.
    Mr. Heck. So last question, if I may: Various members of 
this committee tend to focus on those two issues and economic 
indicators: price stability; and employment levels. I like 
them, too. But for the last couple of years, I have frankly 
been kind of fascinated by the output gap as an indicator. In 
fact, while I clearly have a problem with how it is applied in 
this instance, I think the fact that the output gap is a part 
of this formula is interesting.
    And I am wondering, from your perspective, as somebody who 
doesn't like the approach taken in this bill, is there a way--
are there policy approaches that we could take that would 
utilize to a greater degree the output gap as a means of 
driving policy?
    And just to remind everybody, that is the difference 
between actual and potential, which is essentially a no-cost 
deficit to be made up in terms of the strength of the economic 
output, if I can use lay terms to describe it.
    Mr. Johnson. It is a good question and a completely 
accurate formulation.
    Look, the experts disagree a lot about this, about 
precisely how big is the output gap. You have to take a view on 
what has happened to labor force participation, as I am sure 
you are well aware, Congressman.
    And I think this is a perfect example of why you need to 
delegate decision-making to the Federal Reserve. I don't think 
a legislative body or a committee hearing like this produces an 
operational answer that stands up over time. I think you need 
to put the right people on your decision-making Board--the 
FOMC, in this case.
    They need to have this argument. They need to have a large 
staff of experts, as Chairman Hensarling has said, who need to 
be well-trained in a wide range of economic methodologies. And 
they need to hammer it out. And then they need to be held 
accountable, as they are in their regular hearings with you. 
That is the way to get at a question like that.
    Mr. Heck. Thank you, sir.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Ohio, Mr. 
Stivers.
    Mr. Stivers. Thank you, Mr. Chairman. I appreciate your 
time.
    I want to thank the witnesses for being here and for your 
testimony.
    And, first, I want to give Dr. Taylor a chance to correct 
the record on the comments of the gentleman from California, 
who, I believe, a few minutes ago said that Section 7 of the 
bill, the cost-benefit analysis section, would require the 
Federal Open Market Committee to perform cost-benefit analysis 
on monetary policy.
    And I would direct Dr. Taylor to page 15, line 8, which 
says, ``Before issuing any regulation,''. Does that mean they 
would have to consider a cost-benefit analysis on monetary 
policy?
    Mr. Taylor. This is pretty clearly addressed to regulatory 
policy, in my view.
    And, quite frankly, this discussion about cost-benefit 
analysis is amazing to me. It is sort of the basic thing you 
teach students about government policy. You have to pass a 
cost-benefit test. And, yes, it is hard; yes, it is difficult; 
but why would you just abandon it? It makes no sense to me, 
really.
    Mr. Stivers. Thank you. And that is the way I read it, too. 
But the way I read Obamacare, it was bad, too, so maybe 
different people read it differently.
    But I appreciate that clarification, because I think that 
is really important to note. It is about the regulatory 
authority, and the Federal Reserve is a giant regulator in 
addition to the monetary policy that they pass. So I think that 
is really important on the cost-benefit analysis.
    And, in fact, the President has an Executive Order on cost-
benefit analysis that he signed; it just can't apply to 
independent agencies like the Federal Reserve. Therefore, an 
Act like this is very important. So I want to thank Mr. 
Huizenga and the gentleman from New Jersey for their work on 
it.
    Second, I guess, on Section 5--and I will open this up to 
the entire panel--is there anyone who believes that a quarterly 
testimony of the Federal Reserve before Congress is overly 
burdensome on the Federal Reserve?
    So there is one--I will take that as three people do not 
think it is overly burdensome and one person does.
    I would just say, if we are going to have transparency in 
this country, having somebody be here for a few minutes every 
90 days is not too much to ask. Transparency is really 
important, and I think this can really help.
    I think there has been a lot of conversation already from 
previous questions on Section 2 of the bill that deals with 
moving to a more rule-based system.
    I think I would like to ask Dr. Taylor if he remembers or 
wants to talk about the day when Chairman Bernanke said we 
might just stop quantitative easing and what happened to the 
markets? Do you remember what happened that morning?
    Mr. Taylor. Yes. It was in the Joint Economic Committee, I 
believe. He said, maybe in the next few meetings there will be 
a decision and that they--sometimes called a ``taper tantrum.'' 
And it did cause a lot of volatility, to be sure.
    In fact, Quantitative Easing 3, it started when the long-
term Treasury, 10-year Treasury was 1.7, and when he stopped 
talking, it was 2.7. So it is hard to see how that had a 
positive effect on lower rates.
    Mr. Stivers. Right.
    Mr. Taylor. There are a lot of mistaken views about this. 
For one, I would just say the notion that unemployment would be 
higher if this legislation was passed, I believe that is 
completely wrong. You wouldn't have had nearly the crisis that 
you had, I believe, or the recession.
    And that is what is, to me, a tragedy, that we went through 
all this and it has been a slow recovery. And, there isn't any 
data that say recoveries have to be slow after deep recessions. 
That is not American history. We have faster recoveries after 
deep recessions in this country. This is the most unusual slow 
recovery from a deep recession that we have ever had in our 
history that we can record.
    So, those are the facts.
    Mr. Stivers. Thank you.
    I would like to give Dr. Calabria and Ms. Peirce a chance 
to talk about Section 9, really quickly. Section 9 deals with 
transparency on international negotiations.
    And as international harmonization becomes a bigger issue, 
don't you think the American public deserves to know the 
positions that their regulators are taking on their behalf in 
these international negotiations?
    Either one of you?
    Ms. Peirce. I certainly think that is important, given the 
role that the international negotiations are playing in 
determining what is happening here domestically. Obviously, you 
can define negotiations so that normal conversations can happen 
between regulators, but for the major issues, there should be 
some input from the public here before positions are taken 
abroad.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from South Carolina, 
Mr. Mulvaney.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    A couple of different things: Mr. Johnson, before I get on 
to the questions that I wanted to ask, you mentioned something 
that caught my attention, several questioners back, regarding 
some comments that Mr. John Allison at the Cato Institute, 
formerly of BB&T, had made regarding suggestions he had on 
raising capital requirements to roughly 20 percent.
    In my conversations with him on the same topic, he 
mentioned the same thing to me. But were you aware or was it 
your understanding, as it was mine in my conversations with Mr. 
Allison, that was part of a larger proposal, that it would 
allow an alternative system, that banks could opt out of Dodd-
Frank, opt out of the oversight that they have today, the 
regulatory climate that they have, and opt into a new parallel 
system, where the primary, if not the only, requirement was 
this 20-percent capital requirement?
    Was that your understanding, sir?
    Mr. Johnson. I think I should let Mr. Calabria answer that. 
I just read one article. I didn't get that impression from the 
article. I would defer to Mr. Calabria.
    Mr. Calabria. That is correct. It is not an add-on to the 
existing system. It is a much newer, simpler, and what I 
believe would be a safer system.
    Mr. Mulvaney. Yes.
    And I won't ask you, Mr. Johnson, if you are not that 
familiar with it, what your opinion is of it, but it might be 
interesting to have that conversation at some future hearing, 
about whether or not the idea of a parallel system--you can 
either maintain your lower capital requirements and operate 
within the existing system or opt into a parallel system that 
has a much more limited regulatory climate but a much larger 
capital requirement. We will deal with that another time.
    Dr. Taylor, over the course of the last 2 years here, I 
have had a chance to talk to both Chairman Bernanke and then 
subsequently his successor, Chair Yellen, regarding the 
monetary tools that might be available and might not be 
available to the Fed as they go forward in an era of rising-
interest-rates environments. And the conversation we have 
usually focuses on the difficulties they might have in 
absorbing huge balance sheet losses if they have to sell 
securities.
    And the answer I got in response to that inquiry from both 
Chairman Bernanke and Chair Yellen was that the Fed could avoid 
having to book these losses by participating in the repo 
market. Subsequent to the first conversations we had in this 
committee about that, the Fed actually did it, or at least 
started that. Last September, they created the overnight 
reverse repurchase facility.
    This committee received a letter last week, on June 30th, 
from Ms. Sheila Bair, the former head of the FDIC. I ask 
unanimous consent to place it in the record.
    Chairman Hensarling. Without objection, it is so ordered.
    Mr. Mulvaney. And she has concerns about it, a lot of 
different concerns about it, not the least of which is whether 
or not it would essentially force short-term investors to 
reallocate their investment dollars given the presence of this 
new super safe investment. Would the Fed go from essentially 
being the lender of last resort to the borrower of first 
resort?
    The size of this market has grown very dramatically, very 
quickly. And in the 2 minutes I have left, Dr. Taylor, I would 
ask you if you have an opinion on whether or not the Fed should 
be doing this and whether the Fed should be coming to Congress 
to ask for the ability to do this?
    Mr. Taylor. My view is, as long as its balance sheet is so 
large that they have to do something when they want to raise 
interest rates, they are perfectly capable of raising interest 
on reserves for this interval, and I think that would be fine.
    They are doing these other things because during the panic, 
they saw that the Federal funds rate actually went below the 
interest on reserves. And so, they are concerned that they need 
to do both of these things, reverse repos and interest on 
reserves.
    But my main concern about either of these is it leads to a 
situation where the balance sheet may be permanently high, 
basically forever, call it ``QE Forever,'' and the interest 
rate will be moved around either by reverse repo or interest on 
reserves. I think that is quite problematic.
    I would like to see the Fed return to a situation where the 
supply and demand for reserves determines that short-term 
interest rate. Then, you wouldn't have all the quantitative-
easing possibilities that you have currently. And, of course, 
to move there more quickly, it would mean they may have to sell 
off some of this large balance sheet. And I think if they do 
that in a strategic, clear way, like the second part of 
tapering has been, I think it wouldn't be a problem for the 
markets.
    So I have a lot of concerns with this policy, where they 
are going to go, because frequently in policy, in my 
experience, you start out with something temporary, like 
temporary, 3 or 4 or 5 years, with this balance sheet so big, 
and it becomes a permanent one. And it is a real concern to me 
that the future will be ``QE Forever.''
    Mr. Mulvaney. Dr. Calabria, you look like you have some 
thoughts.
    Mr. Calabria. I was just going to say that I very much 
agree. I think the Fed is going to have to look at some ways to 
get out of this, and I think they need some flexibility in 
that.
    And the broader point should have been they--I think they 
need to remember why central banks generally stay out of the 
long end of the yield curve to begin with. But you are in this 
mess now.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. Pittenger, for 5 minutes.
    Would the gentleman yield to the Chair briefly?
    Mr. Pittenger. Yes, sir.
    Chairman Hensarling. It has come up a couple of times--I 
believe one member of the panel has said it is overly 
burdensome for the Fed Chair to meet with Congress on a 
quarterly basis. It has been well-established in the press that 
the Fed Chair meets with the Secretary of the Treasury on a 
weekly basis.
    Is there any member of the panel who believes it is more 
burdensome to meet with Congress on a quarterly basis than with 
the Executive Branch on a weekly basis? Please raise your hand.
    I see one.
    I yield back to the gentleman from North Carolina.
    Mr. Pittenger. Thank you, Mr. Chairman.
    Dr. Taylor, it often seems that anytime the Congress is 
contemplating an amendment to the Federal Reserve Act regarding 
the Fed's monetary policy requirements, we get a knee-jerk 
response that it will threaten the Fed's independence.
    Do you feel that this is the case at this time?
    Mr. Taylor. I think the legislation is crafted very well to 
prevent that. And, indeed, the Fed chooses its own policy role, 
and so it has the operational independence that it needs. I 
think that you need to go beyond the independence, and that is 
why I think this legislation is so valuable.
    Mr. Pittenger. Thank you.
    Ms. Peirce, do you believe that putting the economic 
analysis requirement into the statute, like we have at the SEC 
and the CFTC, can have a beneficial effect on the rulemaking 
process and result in sounder regulatory outcomes?
    Ms. Peirce. Absolutely. I think that the SEC has been 
through its own process of first ignoring its requirement, then 
being reminded that it should adhere to that, and then starting 
to employ that. And I think we are gradually seeing improved 
rules as a result and more deliberate rulemaking. And that is 
definitely needed at the Fed.
    Mr. Pittenger. Thank you.
    The SEC has rules in place to ensure its employees and 
officials do not trade on information they learn on the job and 
requires them to disclose their financial investments.
    Do you believe that the Federal Reserve should be exempt 
from these requirements, despite the fact that the Fed 
employees have access to sensitive, potentially market-moving 
information?
    We will start with you, Mr. Johnson.
    Mr. Johnson. Congressman, I had a chance to review the 
rules, the detailed rules, and I think the Fed circulated them 
more broadly, comparing the restrictions on their staff with 
the restrictions on the SEC. The wording is slightly different 
because they have, obviously, different jurisdictions, but it 
seemed to me to be almost exactly parallel in terms of what 
they can and cannot do.
    And so I didn't understand that part of the legislation. I 
don't understand the problem that you are trying to fix there, 
because it seems like the Fed does have exactly the right kind 
of rules already. But tell me what I am missing.
    Mr. Pittenger. Mr. Calabria, would you like to respond to 
that?
    Mr. Calabria. It seems like what you are simply doing is 
putting current Fed practice into statute. And that is great 
that they are doing it now, but there is no guarantee they will 
continue to do it. So I don't see much harm--again, maybe I 
should use the phrase ``small step'' here, because, again, it 
is a small step in the right direction.
    Mr. Pittenger. Sure.
    Dr. Taylor?
    Mr. Taylor. I would agree with that.
    Mr. Pittenger. Ms. Peirce, did you want to respond?
    Ms. Peirce. Yes. I just wanted to note that part of the 
problem is the Fed's lack of transparency. And I think this 
illustrates that if they have great procedures they could tell 
Congress about them and get them baked into the bill.
    Mr. Johnson. They did tell you about them. I think those 
details have been available for a long time. I don't understand 
what is the lack of transparency around these restrictions, 
these practices. I think they are available to Congress. I 
think they are available to the Chair of the committee any 
moment of any day that he wants to pick up the phone and call 
them.
    Ms. Peirce. Yes, I think the problem is that the Fed's 
practice has been--and perhaps this is grounded in the fact 
that it was primarily established for monetary policy--to not 
be transparent. And so that is the pushback that Congress needs 
to give, because the Fed can't--it is now a massive regulator, 
and it can't hide behind the traditions it has built up in its 
monetary policy realm.
    Mr. Pittenger. Thank you.
    Ms. Peirce, I would like to ask, the FRAT Act requires the 
Fed to provide metrics by which to gauge the success of a 
proposed rule, and requires the Fed to subsequently use those 
metrics to judge whether the rule has achieved its purpose.
    Do you believe that will help to ensure new rules 
accomplish their intended purpose?
    Ms. Peirce. I think that is a very important thing to do. 
It is important for the agency to set forth the metrics by 
which it will measure its own success and then a few years 
later to go back. Otherwise, what it will do is, when it does 
the retrospective review, it will just pick metrics that work 
well for it. So it facilitates an honest review.
    Mr. Pittenger. Dr. Calabria, did you want to--you seem like 
you have something on your mind.
    Mr. Calabria. I do think that is helpful. I would also add 
that I think that applies across-the-board. So my general 
suggestion would be that everything within this committee's 
jurisdiction should be subject to a regular sunset so that you 
are forced to reevaluate it.
    Mr. Pittenger. Thank you.
    I yield back my time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Pennsylvania, Mr. Rothfus.
    Mr. Rothfus. Thank you, Mr. Chairman.
    Dr. Taylor, markets responded forcefully to one of the 
first FOMC meeting releases to be accompanied by a press 
conference last summer. This panicked response occurred despite 
Chairman Bernanke's characterization of his comments as not 
substantially altering the FOMC's policy stance.
    A recent survey of 55 economists by The Wall Street Journal 
gave the Fed a grade of D-minus for its guidance.
    Don't these facts show that the Fed's monetary policy 
guidance function needs more work?
    Mr. Taylor. I think so. I think the forward guidance as 
practiced has changed quite a bit; it has been erratic.
    I would go back to the point, if they had a policy rule, 
like this legislation is asking, that the forward guidance 
would just fall out automatically. There would not be much of a 
question about it.
    Mr. Rothfus. Yes.
    I would like to follow up on this distinction we have been 
talking a little bit about between the Fed's role in setting 
monetary policy and the Fed's separate role as a financial 
regulator.
    Dr. Calabria, we hear many times about the importance of 
the Fed's independence. Does this argument about the Fed's 
independence apply to the Fed's regulatory responsibilities as 
well as its monetary policy responsibilities?
    Mr. Calabria. I don't think it does. And as I alluded to in 
my testimony, I think the fact that the Fed does bank 
regulation undermines its ability to conduct independent 
monetary policy and certainly represents some conflicts of 
interest.
    The ``Greenspan Put,'' the ``Bernanke Put,'' and maybe 
pretty soon we will call it the ``Yellen Put'' came about 
because of the responsibility of the Fed feeling like they 
needed to rescue financial institutions every time there was a 
market hiccup. And I would certainly argue that some of the 
rescues, particularly of AIG, were done partly to cover up 
mistakes on the regulatory side that the New York Fed made.
    So, to me, I just think there is a real tension here in 
having this entity be a central bank and a financial regulator.
    Mr. Rothfus. As a financial regulator, should the Federal 
Reserve be any more independent of Congressional oversight than 
other financial regulators, such as the OCC or the FDIC?
    Mr. Calabria. No.
    Mr. Rothfus. Do any of the accountability and transparency 
provisions in this legislation threaten the Fed's independence 
to set monetary policy?
    Mr. Calabria. In my view, no.
    Mr. Rothfus. Okay.
    Mr. Calabria. Let me add, it is often--I think the 
traditional view has felt that if we give a regulator 
discretion, that entails independence. And I can certainly say, 
as having been a regulator for a short amount of time, you get 
all sorts of pressure, and it is much easier to be independent 
if you have a set of rules to hide behind so you can sit here 
and say, ``Well, we would love to do that for you, but this is 
what the law actually says.''
    And so, we have certainly seen this. One of the reasons 
that the Volcker Rule has becomes so convoluted is because it 
wasn't very clear to begin with. And so if you have a clear set 
of rules in statute, it is much easier for the regulator to 
defend that and stick with that than it is to compromise along 
the way.
    Mr. Rothfus. Ms. Peirce, does Fed independence in setting 
monetary policy mean the Fed's financial regulations are above 
the law?
    Ms. Peirce. Absolutely not. I think it is very important 
that if the Fed is going to be a regulator, and I would agree 
with Dr. Calabria that it should not be, but if it is going to 
be a big regulator, it needs to be subject to the same 
accountability as other regulators.
    Mr. Rothfus. I would like to talk a little bit about the 
Fed's stress-test program, Ms. Peirce. The Fed's stress-test 
program attempts to gauge how bank balance sheets hold up in 
worst-case scenarios to ensure banks are prepared for periods 
of extended financial stress.
    But wouldn't it be appropriate to also require the Fed to 
stress-test its own accommodative monetary policy? 
Specifically, shouldn't the Fed be required to stress-test its 
exit strategy to its quantitative easing program to estimate 
the effect on the Fed's ability to fulfill its mandate, the 
impact on the Fed's balance sheet, the upper ranges of interest 
on excess reserves the Fed might be required to pay, and how 
increases in the Federal funds rate might impact the 
relationship between the government's interest payments on 
Treasury obligations and the deficit?
    Ms. Peirce. I am going to defer to Dr. Taylor on that since 
I think he has a better sense of--
    Mr. Taylor. I think that the Fed should do all of those 
things.
    And the evidence that they put out now that quantitative 
easing worked, I think, is based on studies that just looked at 
the announcement effect. They are not that great; they are 
wrong, in my view. So I think, in some sense, the answer to 
your question is to have these studies be done, make them 
public, so we can question them and analyze them and have a 
better debate about it.
    I think when you say require them to do a specific kind of 
study or a specific kind of analysis, I would say that should 
come out of--
    Mr. Rothfus. I guess that leads to my other question. 
Should the Fed be subject to transparency requirements for its 
own stress-test models and results?
    Mr. Taylor. No, I think if this legislation is to work 
well, the Fed is going to make those things clear. That will be 
an example of a deviation from a policy rule, and so they are 
going to have to explain why they did that. So I think it would 
come out of the testimony.
    I would hope that they would say, well, we are going to 
deviate because of X, and they will make it clear, their 
analysis. And you, being informed about it, will be able to 
question that, and it will be a public debate.
    So I very much feel that a lot of the things that they have 
done recently have not been productive. They have gone ahead 
with them, but they have been deviations from the kind of 
policy for which this legislation would ask.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Kentucky, Mr. 
Barr.
    Mr. Barr. Thank you, Mr. Chairman, for holding this very 
important hearing.
    And thank you to the panelists.
    It has been argued that there could not have been a housing 
bubble or the massive misinvestment in the housing market in 
the run-up to the financial crisis had the Fed not made the 
decision to expand the money supply to the extent that it did 
to finance the bubble in the run-up to the crisis.
    The proponents of this argument make the case that the 
fundamental cause of the crisis was mistakes by the Fed--in 
other words, that it would have been impossible for a 
misallocation or a misinvestment of this scale to have occurred 
without the monetary policies pursued by the Fed before 2008.
    Do the panelists agree that the Federal Reserve had a role 
to play in causing the financial crisis? And we will just go 
down the row.
    Mr. Taylor. Yes, I do. I think that was--I would 
characterize it as they held interest rates too low for too 
long in that period, and that caused excesses in the housing 
market, search for yield.
    I would say there are regulatory issues, as well. Rules on 
safety and soundness were not adhered to enough. So it is kind 
of breaking two kinds of rules that I think led to the crisis.
    Mr. Barr. Okay.
    Mr. Calabria. I would say, as well, that I absolutely think 
that monetary policy conducted about a decade ago, if you will, 
was a contributor of many. And to repeat what Dr. Taylor said, 
there certainly were other regulatory failings, some of those 
by the Federal Reserve, as well. For instance, to me, I think 
the Basel Capital Accords were a very big contributor to the 
crisis.
    But again, there is not a mono-causal definition of the 
crisis. To me, a dozen different explanations all had some 
bearing. But I absolutely do believe monetary policy was a very 
big contributor, that if we had followed something like the 
Taylor Rule, the boom size of the housing market would have 
been a lot smaller.
    Ms. Peirce. And just coming from my perspective, I would 
say that the Fed's regulatory policy did play a role. And that 
is why it is so surprising that their regulatory powers were 
expanded in Dodd-Frank.
    Mr. Johnson. To answer your question, Congressman, monetary 
policy did contribute but in a relatively small way. The 
regulatory failures were much more profound. They were not just 
at the Federal Reserve; they were throughout the regulatory 
system. They were also on Capitol Hill.
    And to the point that has been made previously, central 
banks that did not have regulatory functions also struggled, 
and those economies also struggled, as in Britain, as in 
Europe, with similar problems.
    So the regulatory failure was not because of the 
regulations of the central bank. They were a much broader 
misunderstanding of what the system needed.
    Mr. Barr. Okay.
    And I think, Dr. Calabria, you answered this question in 
your initial--but the follow-up here is that to the extent 
monetary policy, not the regulatory side but monetary policy, 
was a contributing factor, was the Federal Reserve following a 
rule-based approach in conducting monetary policy in the years 
leading up to the financial crisis or following a more 
unpredictable model and an ad-hoc monetary policy?
    Mr. Calabria. I certainly think in the years 2003 to about 
2005, 2002 to 2005, there were large deviations from what would 
have been a rule, and monetary policy was certainly looser than 
it would have been otherwise.
    But, I do want to repeat what Professor Johnson said. 
Certainly, there were regulatory failings across the system, as 
well as, I spent my time up here, and I can certainly say there 
were failings up here.
    Mr. Barr. Professor Johnson made the argument that the 
legislation before this committee is monetary policy by Spanish 
Inquisition, that the legislation would produce volatility as 
opposed to prevent volatility.
    I would just ask what produces a greater risk of 
volatility, a GAO audit of the Fed's conduct of monetary policy 
that deviates from a reference rule or the opaque process that 
led up to the financial crisis, which was characterized by a 
monetary policy untethered to any predictable rule day-by-day, 
based on the whims of the Open Market Committee?
    That is a hypothetical question. Let me just take the 
remaining time to ask a question to Ms. Peirce really quickly 
on the regulatory policies of the Federal Reserve.
    When we talk about applying cost-benefit analysis to the 
Federal Reserve, does it create a problem when the cost-benefit 
analysis requirements are applied to Executive Branch or 
independent agencies like the SEC or the CFTC but do not apply 
to another prudential regulator in the form of the Fed?
    Ms. Peirce. It does create a problem. I think we saw that 
with the Volcker Rule, where the Fed didn't have to do an 
economic analysis and so we got the Volcker Rule without an 
analysis. And I think that across-the-board, the Fed is a very 
powerful regulator and needs to be contributing its analysis 
also.
    Mr. Barr. I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Florida, Mr. 
Ross.
    Mr. Ross. Thank you, Mr. Chairman.
    Dr. Johnson, I appreciate the passion of your opening 
statement. And in your written opening, you indicate that 
everyone involved in designing and implementing monetary policy 
and financial regulation should ultimately be accountable, at 
least indirectly, to the electorate.
    My question to you, first of all, is, how do you manage 
that? How do you make them even indirectly accountable to the 
electorate? Because I believe we all agree that accountability 
is important.
    Mr. Johnson. Congressman, the system, as you know far 
better than I, that has worked well for 200 years in the 
American public is that you have the President nominate people, 
subject to Senate confirmation, and then you have regular 
oversight hearings of various kinds. And that is what we do for 
the Board of Governors of the Federal Reserve System.
    It is not what we do for the Presidents of the Reserve 
Banks. Now, that is the result of a very strange compromise 
that was negotiated for the 1913 Act, and it has become, I 
think, increasingly problematic.
    You are making some very good points about oversight and 
the need for oversight--
    Mr. Ross. But there should be oversight.
    Mr. Johnson. --and there is no oversight in the New York 
Fed.
    Mr. Ross. It is created by Congressional empowerment; it 
should have Congressional oversight, period. Would you agree 
with that?
    Mr. Johnson. Yes, it should, but it doesn't. I am telling 
you, the Reserve Banks are not subject to the same 
accountability as the Board of Governors.
    Mr. Ross. But all that we are--
    Mr. Johnson. It is a big disconnect.
    Mr. Ross. All that we are proposing here is just greater 
transparency. We are not saying substantively these are the 
rules--
    Mr. Johnson. No, here you are not addressing the main 
problem in the Federal Reserve System, which is the Reserve 
Banks.
    Mr. Ross. Let me ask you this, because they do have an 
independent budget. They operate with what they are able to 
sustain off of their investments and whatnot. But how would 
requiring the Fed to publish the salaries of employees who are 
paid at GS-15, which is $124,000 and higher, hinder that budget 
independence? Wouldn't it just be good transparency to know 
that?
    Ultimately, if there is any excess in the Fed, that money 
has to go back to the Treasury. So I think, again, being 
accountable and making sure that we are accounting for all 
those dollars so that the Treasury gets what they are entitled 
to, posting something like that wouldn't be a bad thing.
    Mr. Johnson. It is an interesting question. Are you going 
to require this also of the Reserve Banks? Are you going to 
require the salary disclosure of the executives of the New York 
Fed?
    Mr. Ross. What is wrong with--
    Mr. Johnson. Because they are not paid on the same scale.
    Mr. Ross. What is wrong with requiring--sir, I only have 
5--
    Mr. Johnson. Congressman, I am answering the question.
    Mr. Ross. --minutes. I don't suffer blank air that well. It 
makes me a little bit impatient.
    All I am saying is, in this particular situation, why not 
have it disclosed?
    Mr. Johnson. I am asking--
    Mr. Ross. And you are answering with a question.
    Mr. Johnson. I am asking--
    Mr. Ross. If you can't give me an answer, that is fine.
    Mr. Johnson. I am asking in order to understand what you 
are proposing.
    Mr. Ross. Dr. Calabria, what--
    Mr. Johnson. If you are going to include the Reserve 
Banks--
    Mr. Ross. This is my time, please, sir.
    Chairman Hensarling. The time belongs to the gentleman from 
Florida.
    Mr. Calabria. I am going to try to answer Professor 
Johnson's question, which is, in my read of the Act, where it 
says, ``the Board of Governors of the Federal Reserve System,'' 
so I think you should broaden that. To me, I think it is 
certainly fair to have that disclosure for the Reserve Banks. 
So, I am agreeing with you that they should add that, the 
tweak.
    Mr. Ross. Thank you.
    Mr. Calabria. That seems a reasonable approach, to me.
    Mr. Ross. Ms. Peirce, it seems that Dr. Johnson believes 
that oversight, accountability, and independence are mutually 
exclusive. Do you agree with that?
    Ms. Peirce. No. I think that the framework is set up where 
you let the folks at the Federal Reserve do their jobs but they 
have to explain what they are doing to the Congress and the 
public and get feedback--
    Mr. Ross. And explain how they are doing and why they are 
doing it.
    And, Dr. Johnson, am I mischaracterizing your testimony, 
that accountability and independence are mutually exclusive?
    Mr. Johnson. No, that is what I said in my first paragraph.
    Mr. Ross. But let me ask you this question.
    Mr. Johnson. No, Congressman. You mischaracterized my 
testimony completely.
    Mr. Ross. Again, and let me ask you this question.
    Mr. Johnson. Can I please answer the question?
    Mr. Ross. If they have a policy for setting monetary policy 
that includes such things as the rate of inflation, GDP, and 
other factors, and that is good to have as a criteria, what is 
wrong with disclosing all criteria used in developing and 
implementing monetary policy?
    Mr. Johnson. Congressman, what has worked with regard to 
central banking for the past 100 years in this country and in 
other countries is to have the government--in this case, 
Congress--stipulate what the objectives are; it is up to you to 
determine the objectives.
    Mr. Ross. Yes, it is.
    Mr. Johnson. If you don't like the--
    Mr. Ross. And that is what we are trying to do. We are just 
trying to make sure--
    Mr. Johnson. No.
    Mr. Ross. --that we know what those objectives are that 
are--
    Mr. Johnson. No.
    Mr. Ross. --being relied upon.
    Mr. Johnson. No. Sorry, Congressman, you are going way 
beyond--you are going way beyond what Congress has done in the 
past 100 years.
    Mr. Ross. Again, I appreciate--
    Mr. Johnson. That is your prerogative, of course, but this 
is radical, new--
    Mr. Ross. Dr. Taylor, quickly, I just have 40 seconds left. 
While I understand that international coordination is 
necessary--we live in a different environment than we did 5 or 
10 years ago, in a global economy. But are you worried that the 
Federal Reserve may be prioritizing international stability 
over the domestic stability and regulation, with their 
involvement with FSOC, with their involvement with the 
international regulatory environment? Are we discounting our 
domestic regulatory environment in lieu of trying to maintain 
or at least gain some international control or influence?
    Mr. Taylor. I think, to answer your question, Congressman, 
that the best thing the Fed can do is have a monetary policy 
that is good for the United States, and that is basically going 
to help the globe.
    I think, to some extent, right now, the policy it has, has 
been disturbing globally. It is basically--even this so-called 
``taper tantrum'' had impacts all over the world, and that 
comes back and hurts the United States.
    So it does make sense to think about U.S. monetary policy 
as having effects abroad and worrying about those because they 
feed back onto the United States. I think it is very important.
    Mr. Ross. Thank you, Dr. Taylor.
    I see my time has expired.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Illinois, Mr. 
Hultgren.
    Mr. Hultgren. Thank you, Mr. Chairman.
    And thank you all for being there.
    As we all know, in the wake of recent financial crises, the 
Federal Reserve has absolutely accumulated a vast amount of 
unprecedented power to oversee our economy. Its balance sheet 
alone has grown to a staggering $4.3 trillion, one-fifth of the 
economy, and it has also grappled with an expanded array of 
regulatory duties.
    My constituents demand that the Fed account for its 
handling of these important issues. That is just common sense. 
After all, Fed policy affects every aspect of our Main Street 
economy, from the price of daily essentials like gas, milk, and 
bread, to the cost of a home and the strength of seniors' 
retirement savings.
    The Federal Reserve must remain an independent agency that 
can withstand political threats to that independence, but this 
bill does not tell the Fed when or how to do its job. It just 
requires that the Fed take a transparent, measured approach to 
doing so. An independent Fed shouldn't equal an opaque Fed.
    These sensible reforms could bring the accountability to 
the Federal Reserve that the American people demand. And I 
thank the committee for taking up this legislation.
    I want to focus, in my question time, on the stress-test 
provision in the bill. Stress tests can be a very important way 
to show that large financial institutions can, in fact, 
withstand an economic downturn. This reduces the likelihood of 
future bailouts because they encourage companies to follow safe 
and sound business practices. They also convince our Nation's 
policymakers that the proverbial sky will not fall during an 
economic downturn.
    However, I am also deeply concerned about the highly 
secretive and unpredictable nature of the stress-testing 
process. The Fed doesn't have to follow the notice-and-comment 
process, too often focuses on unpredictable qualitative 
factors, and doesn't provide banks with a detailed accounting 
of the stress-test methodology. In practice, banks respond by 
constraining their lending, which hinders the economic recovery 
that my constituents desperately need. This legislation 
addresses those concerns.
    Some, such as our distinguished panelist, Dr. Johnson, 
worry that this legislation undermines the efficacy of the 
stress test. He believes it will make it easier for other 
companies to tailor their balance sheets to Fed methodologies, 
gaming the system.
    I wonder, can the remaining panelists explain why companies 
won't improperly game the system? For example, if the Fed 
believes in its stress-test model and that passing banks are 
safe and sound, why shouldn't there be transparency? I would 
ask the other three if you have a response?
    Mr. Taylor. I think the reforms improve the ability of the 
stress test to work.
    I do think that it needs to be supplemented with these 
leverage ratios or with a combination of the risk-weighted 
capital requirements. And, in fact, the more I think about 
these issues that you are raising--``too-big-to-fail'' 
resolution, Title 2 of Dodd-Frank, Chapter 14--the more I 
realize that a simpler way would be to just get these capital 
requirements at a more satisfactory level.
    Mr. Calabria. So let me parse out where I think I very much 
agree with the questions and then maybe where I have some 
concerns.
    Where I very much agree is that our system is very 
procyclical, in my opinion. I think we let booms get out of 
control, and I think during the busts we clamp down too hard 
and end up--I think our current regulatory system ends up 
being, again, exacerbating the swings. That needs to be 
addressed.
    I don't necessarily think the biggest problem in that is 
the stress tests. As I mentioned earlier, I am very skeptical 
of the stress tests. I would abandon them altogether, quite 
frankly. I don't think they are very informative, in my 
opinion. Then again, I don't actually think they are very 
stressful.
    So that point is, again, I would just drop the stress tests 
altogether and focus on simpler, more transparent ratios, like 
a leverage ratio.
    Mr. Hultgren. Ms. Peirce, a quick thought?
    Ms. Peirce. You could enhance the credibility of the stress 
tests by making them more open so people knew what the models 
were, what the assumptions were, and then people could comment 
on whether they thought those were strong enough or not. We saw 
in Europe that people didn't believe the stress tests were very 
credible there. And so you could have stronger ones.
    But I also worry that the banks are spending so much time 
worrying about what assumptions, what data the Fed is using in 
its models that they are not worrying about the real business 
realities that they are facing as a bank. And if we don't 
believe that bankers can manage their own banks without the Fed 
walking them through it, I think we are in a really bad place. 
We can't rely on regulators to run our banks.
    Mr. Hultgren. I just have about 30 seconds left. I wanted 
to talk quickly about the cost-benefit analysis on all 
regulation that I believe is necessary.
    I wonder, Dr. Taylor, does the Fed's independence require 
that the Fed be exempt from a review of its rules by the 
courts? Does Fed independence in setting monetary policy mean 
that the Fed's financial regulations are above the law?
    Mr. Taylor. I think cost-benefit analysis applied to the 
regulatory doesn't sacrifice the Fed's independence. Other 
agencies do that. I think it makes sense.
    Mr. Hultgren. Thank you very much.
    My time has expired. I yield back, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    There are no other Members in the queue. Thus, I would like 
to thank each one of our witnesses for their testimony today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing stands adjourned.
    
    [Whereupon, at 12:43 p.m., the hearing was adjourned.]
    
                            A P P E N D I X



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