[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
FEDERAL RESERVE DISTRICTS: GOVERNANCE,
MONETARY POLICY, AND ECONOMIC PERFORMANCE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON MONETARY
POLICY AND TRADE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 7, 2016
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-99
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas
BILL POSEY, Florida WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota
ROBERT HURT, Virginia ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina BILL FOSTER, Illinois
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington
LUKE MESSER, Indiana JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Monetary Policy and Trade
BILL HUIZENGA, Michigan, Chairman
MICK MULVANEY, South Carolina, Vice GWEN MOORE, Wisconsin, Ranking
Chairman Member
FRANK D. LUCAS, Oklahoma BILL FOSTER, Illinois
STEVAN PEARCE, New Mexico ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut
MARLIN A. STUTZMAN, Indiana JOHN C. CARNEY, Jr., Delaware
ROBERT PITTENGER, North Carolina TERRI A. SEWELL, Alabama
LUKE MESSER, Indiana PATRICK MURPHY, Florida
DAVID SCHWEIKERT, Arizona DANIEL T. KILDEE, Michigan
FRANK GUINTA, New Hampshire DENNY HECK, Washington
MIA LOVE, Utah
TOM EMMER, Minnesota
C O N T E N T S
----------
Page
Hearing held on:
September 7, 2016............................................ 1
Appendix:
September 7, 2016............................................ 41
WITNESSES
Wednesday, September 7, 2016
George, Esther L., President and Chief Executive Officer, Federal
Reserve Bank of Kansas City.................................... 6
Jones, Robert G., Chairman and Chief Executive Officer, Old
National Bancorp............................................... 8
Lacker, Jeffrey M., President and Chief Executive Officer,
Federal Reserve Bank of Richmond............................... 4
Spriggs, Hon. William E., Chief Economist, AFL-CIO, and
Professor, Department of Economics, Howard University.......... 9
APPENDIX
Prepared statements:
George, Esther L............................................. 42
Jones, Robert G.............................................. 75
Lacker, Jeffrey M............................................ 78
Spriggs, Hon. William E...................................... 106
FEDERAL RESERVE DISTRICTS:
GOVERNANCE, MONETARY POLICY,
AND ECONOMIC PERFORMANCE
----------
Wednesday, September 7, 2016
U.S. House of Representatives,
Subcommittee on Monetary
Policy and Trade,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:04 a.m., in
room 2128, Rayburn House Office Building, Hon. Bill Huizenga
[chairman of the subcommittee] presiding.
Members present: Representatives Huizenga, Mulvaney, Lucas,
Pearce, Stutzman, Pittenger, Messer, Schweikert, Guinta, Love,
Emmer; Moore, Foster, Perlmutter, Himes, Sewell, Murphy,
Kildee, and Heck.
Ex officio present: Representatives Hensarling and Waters.
Chairman Huizenga. The Subcommittee on Monetary Policy and
Trade will come to order. Without objection, the Chair is
authorized to declare a recess of the subcommittee at any time.
Today's hearing is entitled, ``Federal Reserve Districts:
Governance, Monetary Policy, and Economic Performance.''
I will now recognize myself for 5 minutes to give an
opening statement.
Economic performance couldn't be stronger, especially in
light of the deep hole that President Obama inherited. Well,
that is the story that you are going to hear from my colleagues
on the other side of the aisle, and they have been telling it
for years, but the facts clearly contradict this situation.
The fact of the matter is that we are mired in the slowest
recovery since at least World War II.
Historically, our Nation's economy has grown at a 3 percent
clip. The Obama Administration now pretends that a new normal
of 2 percent counts as a success. Small on its face, the
difference between 3 and 2 percent is 50 percent.
Unfortunately, economic opportunities are now disappearing
even faster. And while my friends on the other side have been
crowing about this recovery for years, Republicans have been
calling out for what it really is: completely unacceptable
situation.
But today it will be different in at least one important
respect. Our colleagues on the other side of the aisle will
finally join us in acknowledging that our economy is
underperforming. And together we will examine the important
role that the Federal Reserve's districts play in expanding
economic opportunity--a role that is, unfortunately, under
heavy attack.
This attack has been brewing beneath the surface for
several years.
In late July, the Democrat Party finally made their true
objective clear. The party platform adopted at the convention
in Philadelphia promises to increase opportunity for all.
Instead, it has taken aim at the very foundation of
opportunity, in my opinion--that is the governance of monetary
policy and the subject of today's hearing.
Democrats have constantly resisted reforms that would
modernize the Federal Reserve, bringing much-needed
transparency to what most Americans consider an impossibly
opaque institution. While such reforms promise increased
accountability, Democrats falsely claim that a better
disciplined, more predictable, and clearly communicated
monetary policy with Congress and the public would somehow
jeopardize the Fed's independence.
Reforms such as these included in the FORM Act and the
Draft Financial Choice Act would help insulate the Fed from any
opportunity-killing political pressures. However, my friends on
the other side of the aisle would like to double down on what
Dodd-Frank started, co-opting the Federal Reserve district
banks by subjecting them to the same politics that has kicked
economic opportunity to the sidelines in the name of re-
inflating asset prices. Their platform promises to press the
pedal to the metal in a drag race to printing money for the
politics of those in office.
They now have launched a hostile takeover of the Federal
Reserve itself.
And I will note that this is a dual-edged sword that some
might benefit now and will rue the day if this were to go
through later.
Real economic opportunity cannot return until Washington
puts an end to the pretense of knowledge. We cannot promote
economic opportunity for all through a monetary policy that
targets assets that benefit only some. Oracles from the Eccles
Building have been promising to do so for a decade, but where
are the results?
I am as fed up as anybody. We are fed up as anybody.
Where is the promised opportunity? How could the Fed have
created trillions upon trillions of dollars from thin air in
the name of buying questionable assets that they have left us
with with not only the slowest economic recovery in our
lifetimes, but increased inequality to boot?
I know that a better way is available, one that reverses
the increased centralization of monetary policy in Washington's
politicized Board of Governors and restores the historic role
of district banks as a critical source of local economic
information and an institutional source of support for sound
monetary policy.
I believe my House-passed FORM Act and the Financial
Services Committee CHOICE Act offer a much better way. Instead
of doubling down on Dodd-Frank, these legislative solutions
bring monetary policy out of the political shadows and into the
sunlight of market accountability, and strengthen monetary
policy independence by restoring the voice of the district bank
presidents on monetary policy matters while subjecting
regulatory and supervisory services to congressional
appropriations and oversight, where they properly belong.
I look forward to hearing from our witnesses today.
And the Chair now recognizes the ranking member of the
subcommittee, the gentlelady from Wisconsin, Ms. Moore, for 5
minutes for an opening statement.
Ms. Moore. Thank you and good morning, Mr. Chairman.
And good morning to my colleagues and to this distinguished
panel.
I so look forward to the tremendous assets that we have
here in front of us, Mr. Chairman. And I especially welcome the
Honorable Spriggs, who is a very well-educated gentleman from
the University of Wisconsin-Madison.
I think that your perspectives are going to be extremely
valuable and we thank you for giving us the time here.
The Federal Reserve, as the central bank of the United
States, plays an extremely important role in our financial
markets and economy, and I think we have seen this post our
recession.
It is also very misunderstood. So I actually think that it
may be helpful to have had this hearing to discuss the Federal
Reserve and the Federal Reserve System.
I will have to admit to you, Mr. Chairman, that I was
initially extremely suspicious of this hearing, due to some
proposals that I think would disastrously inject partisan
politics into monetary policy. And we have heard some of them.
So I think it is interesting, Mr. Chairman, you talked
about not wanting to inject politics into the Federal Reserve,
since we have heard these cries to audit the Feds, and
balancing the transportation budget with Federal Reserve
monies, and just your statement today wanting to bring the
Federal Reserve into more of congressional compliance.
But short of undermining the independence of the Fed with
policy audits or appropriating the budget, I have been open,
Mr. Chairman, to you and others about improving the diversity
of thought at the Fed.
The Fed was created and established to be independent, and
I think that independence has fueled a lot of these
misconceptions and misgivings about the Fed. And I think that
we ought to and should explore smart reforms that balance
maintaining the Fed's independence but that also bolsters
public confidence and faith in the Fed.
We have made some tweaks in Dodd-Frank, including having
the GAO study--conduct a study and make recommendations on
reform. And I think that that is appropriate. And I think the
GAO recommendations are a good place to start any conversation
on reform. And I also signed onto a letter with some of my
Democratic colleagues encouraging the Fed to seek greater
diversity.
And with that, I yield back the balance of my time and I
look forward to this hearing, Mr. Chairman. Thank you.
Chairman Huizenga. The gentlelady yields back. Thank you
for that.
Today, we welcome the testimony of Esther George, president
and chief executive officer of the Federal Reserve Bank of
Kansas City.
And I know you are coming off of a busy August, with the
Jackson Hole conclave that was put together. And I know that
you met with a number of folks who are represented here today
in the audience.
Jeffrey Lacker, president and chief executive officer of
the Federal Reserve Bank of Richmond.
Robert Jones, chairman and chief executive officer of Old
National Bancorp, and former Board director for the Federal
Reserve Bank of St. Louis.
Mr. William Spriggs, chief economist for the AFL-CIO, and
professor, Department of Economics at Howard University.
Chairman Huizenga. Yes, Dr. Spriggs.
Each of you will be recognized for 5 minutes to give an
oral presentation of your testimony. And without objection,
each of your written statements will be made a part of the
record.
Dr. Lacker, you are now recognized for 5 minutes.
STATEMENT OF JEFFREY M. LACKER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, FEDERAL RESERVE BANK OF RICHMOND
Mr. Lacker. Thank you.
Good morning, Chairman Huizenga, Ranking Member Moore, and
Chairman Hensarling. I am honored to speak to the subcommittee
about the governance structure of the Fed's regional reserve
banks.
To understand the Fed's structure it is essential to
understand the Fed's purpose. Prior to the founding of the Fed,
the banking system was often unable to adjust the supply of
monetary assets flexibly enough in response to the changing
needs of commerce. The Fed was founded to furnish an elastic
currency, in the words of the preamble to the Federal Reserve
Act.
Clearinghouses, bank-owned cooperatives in larger cities,
played an important role in how periodic crises were resolved
before the Fed, including the issuance of currency substitutes.
But clearinghouses were widely viewed as favoring the interests
of large money-center banks.
Reserve banks were modeled after clearinghouses, but with
note-issue powers and universal eligibility for membership, the
aim being to improve upon the role of clearinghouses in a way
that served broader public interests.
A plan for a centralized institution was rejected out of
concern about excessive Wall Street influence at the expense of
diverse regional interests. Proposals for a government-
controlled central bank were rejected as well, for fear the
Federal Government would use control of the money supply to
resort to inflationary deficit finance.
At the same time, a measure of public oversight was viewed
as essential, consistent with Progressive Era thinking. And so
the act included a Federal Reserve Board whose leaders were
politically appointed.
Thus, the final Federal Reserve Act reflected a balance of
competing considerations: a federated set of institutions to
provide for representation of a diverse range of geographic and
commercial interests with a hybrid public-private governance
structure to provide for public oversight but contain potential
misuse of monetary authority.
The governance structure of the Federal Reserve is still
effective, in my view, because the considerations the founders
wrestled with are all relevant today.
The federated structure has benefited policymaking by
ensuring that a diversity of perspectives on policy and
economic conditions are brought to the table. Reserve banks
historically have shown intellectual leadership on topics that
initially went against the grain of mainstream thinking but
later became broadly accepted. And Reserve bank presidents have
a record of challenging conventional views.
In addition, the federated structure has promoted broad
regional engagement of the institution across the country,
deepening the Fed's understanding of the diverse economic
challenges facing American communities.
To be sure, our country's understanding of diversity has
expanded since 1913. And it is in keeping with the spirit of
our founding that the Federal Reserve has taken the importance
of diversity seriously as we have sought to ensure broad
representation of views in the formulation of monetary policy,
including those associated with disadvantaged communities. I
believe our record in this regard, like that of many other
organizations in the United States, shows a combination of
substantial progress and areas where more can be done.
In addition to bringing diverse viewpoints to bear, the
Fed's public-private governance helps our policymaking focus on
longer-term objectives.
At times there is a temptation to provide excessive
economic stimulus in the short run, and leave the subsequent
inflationary costs for future policymakers to deal with.
Evidence from around the world, along with our own history in
the United States, amply demonstrates that the temptation of
shortsighted monetary policies is a bipartisan vulnerability,
just as the Fed's founders feared.
For central banks, this implies that meeting-to-meeting
monetary policy decisions need to be insulated from short-term
political pressures driven by electoral considerations.
But independence with regard to the choice of monetary
policy interest rate settings must be paired with strong
accountability for the economic results of policymaking over
time. And accountability rests on transparent communications,
which help Congress and the public evaluate the Fed's
performance against its mandate.
The Fed's public-private structure supports monetary policy
independence by ensuring a measure of apolitical leadership.
The reserve banks' autonomous balance sheets, protected
appropriation status, and independent capital stocks all play a
role as well by limiting high-frequency interference that might
diminish instrument independence.
The presence of bankers on reserve bank Boards is said to
represent a conflict of interest since reserve bank staff
supervise banks. But strict rules limit bankers' roles; they
simply have no avenue through which they can influence
supervisory matters.
Moreover, best practice for any Board is to seek members
with expertise relevant to the organization's activities.
The Fed's large payment processing operations, for example,
make the original rationale for having bankers serve on reserve
bank Boards still valid, in my view. And in addition, bankers
are particularly well-positioned to report on economic
conditions in their footprints.
In conclusion, while some claim that the Federal Reserve's
governance structure is a historical anachronism, the continued
relevance of the trade-offs taken into account by the authors
of the Federal Reserve Act argues for the continued utility of
this finely balanced arrangement that they crafted.
Thank you.
[The prepared statement of Dr. Lacker can be found on page
78 of the appendix.]
Chairman Huizenga. Thank you, Dr. Lacker.
Ms. George, you are recognized for 5 minutes as well.
STATEMENT OF ESTHER L. GEORGE, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, FEDERAL RESERVE BANK OF KANSAS CITY
Ms. George. Chairmen Hensarling and Huizenga, Ranking
Member Moore, and members of the subcommittee, thank you for
this opportunity to share my views on the role of regional
Federal reserve banks as part of the Federal Reserve System.
Because the Federal Reserve is an institution that makes
decisions of consequence to the broad public, a discussion of
these matters is worthwhile. If changes are to be considered,
the public should understand not only the congressional intent
for its current design, but also the strong safeguards that
assure its accountability.
Central banks are unique institutions. They have important
responsibilities for a Nation's financial system and economy.
Congress, as it contemplated a central bank for the United
States more than 100 years ago, took note of central bank
models for the United States from other countries while keeping
in mind two earlier attempts at central banking in the United
States. Ultimately, it opted for a different approach--one that
recognized the public's distrust of concentrated power and
greater confidence in decentralized institutions.
The Federal Reserve's unique public-private structure
reflects these strongly held views and is designed to provide a
system of checks and balances.
Challenges to this public-private design have surfaced
throughout the Federal Reserve's history, not unlike they have
today. But in the end, our country has remained most confident
in this decentralized governance structure.
Criticism of the quasi-private nature of the regional
reserve banks was anticipated from the start. Indeed, the
Federal Reserve Act leaves no unchecked power in reserve banks.
The politically appointed members of the Board of Governors
have oversight authority of the most important governance
aspects of reserve banks. For example, they appoint the Chair
and deputy Chair of a reserve bank's Board, they vote to
approve the selection of the bank's president as well as its
chief operating officer, and they approve the reserve bank's
budget and salaries.
The Board of Governors also meets with each bank's Chair
and deputy Chair annually to review the bank's performance and
that of its president.
Finally, the reserve bank's operations are reviewed by the
Board of Governors as well as an outside independent auditor.
Notwithstanding this strong public oversight, some question
the role of commercial banks within the Fed's structure. Here,
too, important safeguards exist.
The supervision and regulation of the Federal Reserve's
member banks is a statutory responsibility of the
congressionally confirmed Board of Governors.
Bankers who serve on reserve bank Boards are prohibited by
law from participating in the selection of the bank president,
and no director can participate in bank supervisory matters.
Finally, all directors are required to adhere to high ethical
standards of conduct and avoid actions that might impair the
effectiveness of the Federal Reserve's operations or in any way
discredit the reputation of the system.
The capital stock supplied by these member banks serves as
the foundation for the decentralized structure, allowing for
separate corporate entities. Through the regional reserve
banks, private citizens from diverse backgrounds and from the
largest to the smallest communities have input into national
economic policy. Strong and varied independent perspectives
more easily emerge to engage in difficult monetary policy
discussions, and the central bank is provided insulation from
short-term political pressures.
Altering this public-private structure in favor of a fully
public construct diminishes these defining characteristics, in
my view. It also risks putting more distance between Main
Street and the Nation's central bank.
Former Fed Chairman Paul Volcker understood this well. He
experienced firsthand how public pressure can be exerted on a
central bank when it must make unpopular decisions that he and
the FOMC judged to be in the long-run best interests of the
economy.
In a 1984 speech he noted the important role of the
structure of the Federal Reserve System in supporting the
central bank's decision-making. And he said, ``It was all quite
deliberately done by men of political imagination, designed to
assure a certain independence of judgment, a continuity in
professionalism in staff, a close contact with economic
developments and opinion throughout our great land, and a large
degree of insulation from partisan or passing political
concerns.''
To that end, I extend a personal invitation for any of you
to visit the Federal Reserve Bank of Kansas City to see what a
regional Federal Reserve bank provides in support of the
central bank's objectives for economic stability.
Thank you. I look forward to taking your questions.
[The prepared statement of Ms. George can be found on page
42 of the appendix.]
Chairman Huizenga. Thank you, Ms. George.
Mr. Jones, you are now recognized for 5 minutes.
STATEMENT OF ROBERT G. JONES, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, OLD NATIONAL BANCORP
Mr. Jones. Great. Thank you.
Chairman Huizenga and Ranking Member Moore, good morning.
It is my honor to speak with the distinguished members of this
committee today about the role of community bankers on our
reserve bank Boards.
In my belief, it is critically important that bankers
continue to serve in this capacity.
I sit before you as the chairman and CEO of Old National
Bancorp, a 182-year-old community bank headquartered in
Evansville, Indiana, serving Indiana, southwest Michigan,
Wisconsin, and Kentucky. I am also a proud former Board
director of the Federal Reserve Bank of St. Louis as well as a
former member of the Federal Advisory Committee of the Federal
Reserve Board.
I would like to begin my remarks by touching on a
partnership that has changed the lives for the better. At its
center are two individuals: Roslyn Jackson, a former substance
abuse counselor in western Kentucky penal system; and Ben
Joergens, Old National Bancorp's financial empowerment officer.
With insights and guidance from Roslyn, Ben designed a
financial education program that provides nonviolent offenders
in our region with the tools to gain financial independence
once they have completed their debt to society. Launched in
2014, this program led the American Bankers Association to
recognize Ben with its George Bailey Distinguished Service
Award.
More importantly, it has led the nearly 2,000 individuals
out of a cycle of despair and dependence that was fueled by
their inability to manage their finances. One graduate of the
program summed it up this way: ``I learned that you can always
cleanup the wreckage of your past and take control of your
destiny.''
This is just one illustration of the many ways that banks
big and small work to strengthen the communities that we serve.
Old National is a fairly typical community bank. With $14.4
billion in assets, we are literally headquartered on Main
Street in Evansville, Indiana. Our clients are small and mid-
size business owners, farmers, young families, retirees, labor
and community leaders. Each year we invest millions in support
of community causes, and our nearly 3,000 associates are known
for their volunteerism, having donated more than 100,000
volunteer hours in 2015.
In 2016 our company was named to the Ethisphere Institute's
World's Most Ethical Companies list for this fifth consecutive
year. And recently the American Bankers Association named us as
one the best banks to work for in the country.
The strong connection that banks like ours enjoys with
their communities we serve gives us a unique and valuable
perspective. Not only do bankers serve as community catalysts,
we are on the front lines every day assisting our clients, who
represent a broad cross-section of industries and
neighborhoods.
Over time we gain vital instincts to how they view the
economy and how those views shape their decision-making.
Conversely, the bankers who sit on the Nation's reserve
Boards gain incredibly valuable information that they can take
back to their communities. I experienced this reciprocal
relationship firsthand during my tenure.
Fueled by the knowledge I gained from my Board experience,
Old National spearheaded the creation of the first Bank On
program in the Midwest back in 2009.
In the nearly 8 years since we adopted this program we have
added another 16 programs in our footprint, helping the
unbanked and underbanked individuals take greater control of
their finances.
Again, all this dates back to the knowledge I gained
serving under Federal Reserve. In my time as a director, I and
other bankers on our Board not only brought valuable insights
from our communities into our discussions, we frequently
reached out to a diverse set of community leaders to gather
specific feedback that help drive policy decisions.
Over time these trusted voices from Main Street began
seeking us out to offer their views on issues of the day. These
candid regional perspectives were invaluable to our discussions
on the drivers of our local economies. That is why I feel so
strongly that bankers are a vital asset.
I recognize the concerns that have surfaced over whether
bank directors might somehow attempt to control or manipulate
decisions for the betterment of their own institutions. While
no system is perfect, I do believe this issue is effectively
addressed through the current policies and procedures of the
Federal Reserve System.
As this committee knows, the banking industry is highly
regulated and bankers fully understand the consequences if we
violate these regulations. These same consequences apply to the
regulations and policies that govern the Federal Reserve
System. The existing governance model is strong and I applaud
the controls currently in place.
I can assure you that during my tenure I never felt that my
integrity or ethical center were in any way challenged or
compromised.
As banker, our role in the Federal Reserve Board is
limited, yet crucial. We serve as managers, budgeters,
auditors, and strategic planners. And we supply a vibrant and
important regional voice on issues that affect small and
medium-sized towns all across our great Nation.
I encourage this committee to retain this vital link to the
views, perceptions, and attitudes of mainstream America.
Thank you for your time.
[The prepared statement of Mr. Jones can be found on page
75 of the appendix.]
Chairman Huizenga. Thank you, Mr. Jones.
With that, the Honorable William Spriggs is recognized for
5 minutes.
STATEMENT OF THE HONORABLE WILLIAM E. SPRIGGS, CHIEF ECONOMIST,
AFL-CIO, AND PROFESSOR, DEPARTMENT OF ECONOMICS, HOWARD
UNIVERSITY
Mr. Spriggs. Good morning, and thank you, Chair Huizenga
and Ranking Member Gwen Moore, for this invitation to speak
today.
I want to start with a clear statement that I don't
disagree with the current set of policies that the Fed is
pursuing. In fact, we are in uncharted waters when it comes to
this recovery because, unlike in the past, the Fed has not had
the help of fiscal policy to stimulate the economy. On all
previous occasions when we have had downturns Congress has held
up its half of the Humphrey-Hawkins Act--to fully address full
employment.
When we look at the deficit spending under President Reagan
and the deficits that were run up under President George W.
Bush we see the Congress clearly understood the need to act and
to respond to the downturn. So this is unprecedented for the
Fed to have to act on its own, and I would think, as was the
case with Chairman Volcker, it has led to a lot of public
criticism that is very hard for the Fed. And but for its
independence, Chair Yellen could not be steering us in these
uncharted waters.
I also want to say that it is fully possible--possible--
under the current standards to have regional bank presidents
who are quite open to public participation and truly do think
that they have to represent and listen to all the voices from
their region.
You have President George here on the panel, who has let
the doors of her bank open, has left the doors of her bank to
engage her community and to talk to all the citizens in her
region and hear from those who are affected by Fed policy, and
to respect their voices. So it is possible.
I want to give my statements with regard to your theme,
which is policy outcomes, and to look back because, of course,
we cannot ignore the Great Recession and what led up to it. So
that is going to be the tone of what I would like to speak
about.
You see the chart that is up now? This shows the record of
inflation pre-1978. You already heard about Chairman Volcker
and his war on inflation; and then post-1984, what economists
call the Great Moderation.
And when you see the chart you can clearly see that
inflation averaged a much higher level before 1984; since 1984
inflation has run at a significantly lower amount. But more
importantly, the variance in inflation has greatly reduced. So
there is great stability that has occurred in terms of price
stability.
You can see the green line shows current average inflation
post-1984. The red line shows inflation in the period before.
The next slide, however, shows you the performance of the
labor market. And here you see a clear difference.
Before 1978 the average monthly unemployment rate in the
United States was 5.1 percent. During the Great Moderation it
has been 6.1 percent. That 1 percentage point difference means
a lot. In the Great Moderation only 25 percent of the time have
American workers been below 5.1 percent.
This lack of voice on the part of workers affects the way
that the Fed looks at things. And it is not guaranteed into the
system.
Class B members often do have influence. The current
president of the Philadelphia bank was a class B member,
chaired the search committee, stepped down from the search
committee and then became president of the bank. There are at
least 12 instances in which class B members chosen by the banks
have ended up being class C members--those who then govern the
regional banks.
The voices of others needs to be put into the mix so that
we can have, guaranteed, the voice of everyone.
When the banks were established in 1914 we had a much
different banking system. Today the level of concentration in
our banking system is at record high levels and that means that
we can't think that the regional banks really represent
regional views. We need to have a way to assure that that will
be the case.
[The prepared statement of Mr. Spriggs can be found on page
106 of the appendix.]
Chairman Huizenga. Thank you. I appreciate that testimony.
The Chair now recognizes himself for 5 minutes.
And I would like to point out next week marks the eighth
anniversary of Lehman Brothers' collapse. Prominent scholars
who studied the financial crisis point to a monetary policy
that was too loose for too long as a significant contributor.
Scholars have also shown that the unique institutional
structure of district banks can guard against such policy
mistakes. That is, district presidents tend to be more
concerned about overly accommodative policy than are their
politically appointed colleagues on the Board of Governors,
while this tendency has been criticized by advocates for
extending what is already the greatest monetary accommodation
in American history, under the theory that doing so will
increase wages and employment at lower income levels.
Research also suggests that we need to do just the
opposite. For example, Dr. Christina Romer, a Berkeley
economics professor and the first person to Chair President
Obama's Council of Economic Advisors, observed that,
``Compassionate monetary policy is sound monetary policy.''
Monetary policy that aims at low inflation and stable aggregate
demand is the most likely to ``permanently improve conditions
for the poor.''
President George, do you agree with President Obama's first
CEA Chair that sound monetary policy is most likely to
permanently improve conditions for the poor? And I am going to
asking everybody for just a yes or no.
Ms. George. Yes.
Chairman Huizenga. Yes.
How about you, Mr. Spriggs--Honorable Spriggs? Do you
agree?
Mr. Spriggs. I think that sound monetary policy includes
making sure that the wages of workers rise with productivity,
that we are at full employment so that the Nation can have the
highest level productivity possible.
Chairman Huizenga. Is that a yes or a no?
Mr. Spriggs. That is my definition of sound monetary
policy.
Chairman Huizenga. Okay.
How about you Dr. Lacker?
Mr. Lacker. I agree with Christina Romer's sentence.
Chairman Huizenga. Okay.
Mr. Jones?
Mr. Jones. I agree, yes.
Chairman Huizenga. Okay.
I do too, and it seems to me that we share a common
interest, which is the widening wage gap--the
underrepresentation that has occurred for those in low and
moderate income who have not seen their wages in increase.
We all know, and if you have watched my subcommittee at all
or watched me in committee I have said this many many many many
times, Wall Street is doing just fine. I am concerned about
Main Street and what is going on. And you literally, Mr. Jones,
are at the corner of Main Street in Evanston, Indiana.
This is something that we have to tackle. And I think that
there really is something that the right and the left share,
which is a suspicious view of the Federal Reserve and want to
make sure that there is a proper check on the Federal Reserve.
I believe these district bank presidents do that.
I also want to do a quick--quickly ask, do you agree that
the Federal Reserve district presidents bring important
regional and local knowledge to the FOMC deliberations?
And, Dr. Lacker and Ms. George, if you don't mind touching
on that briefly? You are at the table.
Mr. Lacker. Yes I do. It is an intense focus of every
regional reserve bank to understand economic conditions in
their district in way that complements the national economic
statistics and is more granular and more thoughtful than the
statistics that the national level can reveal, so yes.
Chairman Huizenga. Ms. George?
Ms. George. And the transcripts show that a significant
portion of the discussion about the economy does come from
talking about regional aspects of the national economy.
Chairman Huizenga. Actually, I have had my own little
experience in that.
My family is involved in construction in Michigan. I own a
small third-generation sand and gravel operation. Family has
been involved in construction for decades. And that when I went
to visit the president of the Chicago Reserve Bank the first 15
minutes of that was an interview of me--what was happening in
the local economy in West Michigan.
Given those changes in populations and demographics, does
the current rotation of who votes in each FOMC meeting fully
leverage the benefits of that regional and local perspectives
that can bring to monetary policy?
Again, Ms. George, why don't we start with you?
Ms. George. Certainly,
So the importance of those regional connections come
through access that we have in those district lines through our
branch offices, through our Boards of directors on those branch
offices. And so I think the country has been covered in terms
of--despite demographic changes that span--that each regional
reserve bank takes seriously, which is to make sure they
understand, within the confines of their district, how that
economy is performing.
Chairman Huizenga. Dr. Lacker, I will let you have the--
Mr. Lacker. Yes, I think you asked about voting rotation,
as well.
So all the participants in a meeting, whether they voter or
not, have a voice and do bring their characterization of
regional economic conditions to the discussion, and it is part
of the discussion. Where voting comes into play is just where
is the center of gravity of the committee and where does the
Chair finds it useful to find a consensus?
The current rotation was crafted decades ago and altering
it would alter the--sort of the balance of forces within the
committee. And I will leave it at that.
Chairman Huizenga. My time has expired, but I will just end
quickly and I will have a light gavel with my ranking member,
as well.
That is one of the reasons why I felt it important to
include in the FORM Act provisions that would bring a more
balanced set of district-level views into the FOMC voting
process. And we have had such a weighted view towards New York
and that permanent seat, I wanted to make sure all those voices
are being heard.
So with that, my time has expired.
And I recognize the ranking member for 5 minutes.
Ms. Moore. Thank you so much Mr. Chairman.
And I do want to thank you all for your testimony.
I think I heard correctly from all of you that you think
that the independence of the Fed is really critical toward your
being able to do your jobs. Did I hear correctly from all of
you?
Ms. George. Yes.
Ms. Moore. Yes. So you all agree on that.
That being said, I guess I am concerned about--I guess I
want to hear from each of you of what you think of the
importance of having a more diverse representation on the
Federal Reserve Board. Do you think or do you not think that
that would interfere with independence or would that enhance
the decision-making process?
I was on a letter with about 100 lawmakers, which asked the
Federal Reserve to look at greater diversities, so I guess I
would like to hear from each of you just very briefly about
whether or not you think that efforts to diversify the Board
would interfere with independence.
Mr. Lacker. So we take diversity very seriously. I know
that that is a commonplace cliche almost.
But diversity, as I noted in my statement, is built into
the structure of the system. And the idea bringing diversities
to the table, the value of diverse perspectives in
strengthening a decision-making process, is something that
predates the concerns of this decade or the previous decade in
diversity of access to economic resources and opportunities.
We have been focusing on at the Board--our Board of
directors level diversity for several decades now. And I know
that we and others have had minority representation, women
representation on their Boards going back several decades. It
is something that is a regular part of the discussion and
regularly reported on within the system.
Ms. Moore. Thank you, Dr. Lacker. I want to give others a
chance to answer this question, as well.
Mr. Spriggs. I would say that a problem with having it
owned by banks is, regrettably, the Board of directors looked
like banks. So they look like the executives of banks: 83
percent of the directors are white; 75 percent are men. These
are people who look like bank directors. They are trained and
they talk like bank directors.
So it is not necessarily a capture in the usual sense of
regulatory capture, but clearly in a cultural capture.
Ms. Moore. Gotcha.
Mr. Spriggs. In the transcripts that you see going up to
the crisis, even regional bank presidents who were in regions
where the epicenter of the subprime crisis hit hardest had no
comments about what was going on in terms of the effect of the
subprime crisis on the African-American and Latino community--
Ms. Moore. With that--
Mr. Spriggs. --or an understanding of it--
Ms. Moore. Dr. Spriggs, my time is limited so let me take
you here: There is often a lot of resistance to the bank doing
their dual mandate to look at unemployment. And unemployment in
the African-American community--African-Americans are not
experiencing the recovery as other communities are.
So what do you think about reforms that might--or
activities of the bank--that focus on reducing unemployment,
especially among African-Americans? Is that something that
would interfere with the other mandate to control inflation?
Mr. Spriggs. The mandate of the bank actually comes from
the Humphrey-Hawkins Act and the clear mandate is full
employment. Full employment benefits everyone, and that means
full employment for everyone.
Actually, African-Americans employment-to-population ratio
has been rising faster than for anyone else. It has gone up 10
percent. The problem is that often the Fed ignores the
importance--
Ms. Moore. Exactly.
Mr. Spriggs. --of that trend continuing and often thinks
that it can stop recoveries before full employment is actually
reached.
When full employment comes we know that workers are better
allocated, we get the efficiencies of the labor market at full
employment, and discrimination falls. Currently, that is what
is taking place. Currently, the gap in the unemployment
experience of better-educated African-Americans to less-
educated whites is closing, and that is because the labor
market is beginning to heal.
But it is not at full employment. Wages are not rise with
productivity. We do not see quit rates to show that workers are
being reallocated, and we do not see the level discrimination
dropping.
Ms. Moore. And do you think reformation of the Board and,
moving from class D to C or some sort of programming would
enable--would inform the Board about the importance of focusing
on the full employment part of their mandate if we were to
diversify the Fed more?
Mr. Spriggs. Yes, because finally the worker's voice would
be at the table and the worker's voice from communities that
really are hurt the most would be at the table.
In 2010, when the African-American unemployment rate was
always above 15 percent, no one mentioned in the transcripts
anything about the African-American unemployment rate at the
FOMC.
Ms. Moore. All right.
Thank you for your indulgences, Mr. Chairman. I yield back.
Chairman Huizenga. The gentlelady yields back.
With that, the Chair recognizes the vice chairman of the
subcommittee, Mr. Mulvaney of South Carolina, for 5 minutes.
Mr. Mulvaney. I thank the chairman.
I am going to try and talk about three apparently different
things and see if I can weave them together, if you would give
me a second to try and do that.
I heard each of the three of you who have been presidents
of the regional feds talk about the importance of knowing your
district. I admire and respect that and believe that you are
doing that. In fact, I have talked to Dr. Lacker about the
district he lives in and he and I share, and I know that he is
doing that.
And then I weigh that against my personal experience. I can
never forget being at a homebuilder's conference in California
in 2006 or 2007, and the keynote speaker one night at dinner
was some high-ranking member of the San Francisco Fed. It was
not Janet Yellen at the time.
And the subject of his speech that night was that it was
the studied opinion of the San Francisco Fed, after having done
intensive research, that on a national basis the homebuilding
business would never go into recession again, that the
restrictions on supply of new housing was such at the local
level that we would never see a housing recession again in the
country.
So I weigh your efforts to try and know your district with
just the human weaknesses of being wrong from time to time and
occasionally being wrong on a monumental scale.
Secondly, I would draw to each of the panelists' attention
not only a recent article in the Economist magazine, but a
scholarly piece of work that was referenced in there. I wish I
could read the names. I think it is Professors Cieslak, Morse,
and Vissing-Jorgensen--one from Duke and two from Cal-Berkeley.
It goes into a very interesting analysis of what market
returns have been in the weeks after the private FOMC meetings,
that if you invested a dollar in the stock markets in the week
after the meetings your return on that dollar over the--since
1994 would be about 12 times--1,200 percent--versus almost zero
if you had weighed it in on every other week, the obvious
application being, as the article mentions, that the--and I
will read from the article very briefly--that the scholars
speculate that there is a causal connection, selective
disclosure, which they say is unfair.
Those who attend the meetings have informal contact with
the media, consultancies, and financial firms, and eventually
the content of those meetings makes its way into the stock
market.
Again, I would commend the study to you folks and be
curious to know your opinion about it at another time.
It reminded me, by the way, that there is an investigation
going on into the leak involving a company, Medley Global
Advisors, from several years that is still ongoing, where we
know information was leaked out of the FOMC meetings.
Again two things not apparently similar, but I am trying to
get there.
Lastly, Dr. Lacker, you mentioned in your testimony
something that we have talked about in this committee several
times, which is--and I will read from it now--at times there is
temptation to provide excessive economic stimulus in the short
run and leave the subsequent inflationary cost for future
policymakers to deal with.
Evidence from around the world along with our own history
amply demonstrates a temptation of shortsighted monetary
policies is a bipartisan vulnerability, just as the Fed's
founders feared.
For central banks this implies that meeting-to-meeting
monetary policy decisions need to be insulated from short-term
political pressures driven by electoral consideration.
And certainly my party is experiencing that now. We have a
Fed chairman who was appointed by someone of another party,
different political philosophy than we then we share. And my
guess is my Democrat colleagues may in the future sometime
share that same concern if a Republican nominee holds that
chair.
What do these three things have in common? It seems like
the current system makes it very difficult--that our record of
predicting the future at the Fed is fairly poor.
It also seems that there is a risk of market distortions
just from us doing things. The scholarly piece doesn't suggest
that there is any nefarious activity; it is just a casual
connections.
Lastly, you have the risk of political pressure from either
side on the Fed. Why? Because they are people and they are
appointed by other people, and there are human tendencies here.
So my question to all of you is this: Doesn't a rules-based
approach to monetary policy lessen the possible distortions to
each of those weaknesses? Doesn't it take away and make it less
important if we make big mistakes in terms of our
predictability? Doesn't it lessen the likelihood that
information is selectively distributed to the market so that
some people can benefit and others do not? And doesn't it
lessen the likelihood of political pressure?
Doesn't a rules-based system, whether you are conservative,
liberal, Republican, Democrat, solve a lot of the problems that
we face at the Fed?
I will asked Dr. Lacker and then Mr. Spriggs.
Mr. Lacker. Sure. We consult rules very regularly. I think
having a sense of the pattern of past behavior of your own
institution that gave rise to good outcomes is an important
benchmark, and I gave a speech about this last Friday.
I would caution on--I draw the parallel between the search
for the right rule and the San Francisco Fed study you cited,
which was clearly obviously well-meaning. They believed their
results sincerely, but there was some measure of uncertainty to
the conclusion they drew, nd I think you would have to attach
some measure of uncertainty to what you chose as the optimal
rule.
And for that reason I think it is useful to sort of back
away from a rule, consult it as a guide to good policy, but not
follow it mechanically or slavishly. But I do think it is
important to give prominent attention to rules that encapsulate
good past behavior in our conduct of monetary policy, and we do
that.
Mr. Mulvaney. Professor Spriggs?
Mr. Spriggs. I am sympathetic to your point. However, the
Fed has limited tools to influence the economy. The problem is
that many of the problems are more complex and can have
counterbalancing effects. So I don't think in all situations
you would want them to adhere to the rule. The rule, in fact,
may be not the best policy.
For farmers right now the problem is an oversupply of
commodities and this hurts them. The value of the dollar hurts
our manufacturing sector.
So there are many things that are moving at the same time,
and I think you wouldn't want a rule that would bind the Fed in
dealing with how those different--
Mr. Mulvaney. I thank you, gentlemen.
I thank the chairman for the indulgence.
It sounds like the two gentlemen may not be that far apart,
but I appreciate the time.
Chairman Huizenga. Thank you.
The Chair will note again, I have a light gavel. But 4-
minute-and-40-second questions might not leave a whole lot of
time for answers.
Ms. Moore. It took him a long time to ask the question. Let
me defend my colleague.
Chairman Huizenga. With that, the Chair recognizes Mr.
Foster of Illinois, for 5 minutes.
Mr. Foster. Thank you Mr. Chairman.
And thank you, to our witnesses here.
It seems to me that a big part of the diversity challenges
of the Fed System are driven by the fact that the geographical
regions of the Fed districts are very far from representative
of today's population distribution or, in fact, the GDP
distribution, or however you might assign the regions.
This, to my mind, is a huge problem in the distribution of
legislative power in our country. Just the fact that the Senate
is grossly unrepresentative of the actual population
distribution of the States results in about $.5 trillion per
year wealth transfer from the high-population States, which are
underrepresented in the Senate, to the low-population States,
which are overrepresented in their power in the Senate, and the
huge economic distortion to our country that costs us a lot. I
know it costs my home state of Illinois about $40 billion a
year and is the primary driver of our fiscal difficulties.
So I was wondering what your reaction would be to a
proposal, which has been floated from time to time, to
periodically redistrict the Fed System perhaps once a century,
and with enough decades of the time that you would actually
have time to plan and it wouldn't be disruptive?
How big a problem do you think the male distribution of
political power inside the Fed is to its current operation? And
do you think it would net out positively to redistrict the Fed
every century or so?
Ms. George. I don't think that we are handicapped by the
current district lines, notwithstanding the changes in
demographics that you have described over the last 100 years.
And the reason I say that is because each region, regardless of
how its boundary is defined, is focused through its operations
on making sure that it understands every part of that region.
And so the Federal Reserve works carefully--as we do in
Kansas City--to make sure that all parts of that region are not
only represented, but we understand the economic issues there.
Mr. Foster. That would be true with or without
redistricting. That is a separate issue than presumably if you
redistricted things every district would represent the
interests of whoever--whatever people and banks were in its
district.
Ms. George. I agree.
Mr. Spriggs. And I would offer that it appears that way,
but over time some of the district lines have been redrawn. So
Detroit once was represented by Cleveland and now Detroit is
with Chicago, as the whole state of Michigan is. So fine-
tuning--
Mr. Foster. At present I think there is still something
like a factor of six difference in the number of people in
different Fed districts, which is a big number.
Mr. Spriggs. Yes, but I think more important would be an
assurance that the people of the district actually were
represented. The issue now is that the banks are represented.
So I think an issue is, how can we make sure that the
people themselves are represented? How do we make sure that an
actual farmer in Illinois is represented, not some giant
agricultural chairman of some huge corporation? How do we make
sure that the workers on the south side of Chicago are
represented? Because these policies affect them and their voice
needs to be integral to it.
Currently this is at the whim of the banking community
whether those voices really factor into the decision-making
because those people aren't on their Board--aren't on the
Boards of the regional banks.
Mr. Foster. Yes. I was very struck by a study paper from I
think one of the Federal Reserve study groups talking about
fiscal hawks and doves. And if you look at the course of a
cyclical downturn and the choice that the Fed faces of
maintaining constant inflation or constant employment, that if
you focus on constant employment it has real distributional
advantages to those at the bottom. And conversely, if you
choose to optimize the other way.
And so I think this is a fundamental reason--fundamental
argument for diversity, that there are real distributional
effects because of the intrinsic trade-offs that the Fed has to
make.
Just a final comment or a question on rules-based system.
If you did go to a rules-based system it seems like the sort of
rule you would need to realistically represent our--today's
economy would include GDP growth in China and every major
country in the world as a fundamental input to that. So you are
not talking about a simple Taylor Rule; you are talking about a
very involved macroeconomic model, which I take it exists, but
really sort of hard to specify in legislation.
Wondering if you had comments on that complexity trade-off?
Mr. Lacker. Sure. In the models we have that capture
economic--the economic economy--economic activity pretty well,
implementing a Taylor Rule gets very close to the optimal rule
that would be dependent on a broader range of things. So, it is
an empirical matter whether that is true or not, but in the
models we have it looks as if the Taylor rule does--gets you
fairly close.
Mr. Foster. Prior to the Taylor Rule there was another
economist whose name I forget who actually had a more complete
and general version of the Taylor Rule that obviously, because
it had more parameters, did a better job. It is not an argument
that started with the Taylor Rule.
Mr. Lacker. Right.
Mr. Foster. Okay.
Well, I will be a rarity and only be a little bit over time
here and yield back.
Chairman Huizenga. Thank you, Mr. Foster. I appreciate
that.
The Chair recognizes Mr. Lucas of Oklahoma for 5 minutes.
Mr. Lucas. Thank you, Mr. Chairman.
And for my time, since I am a resident of the Kansas City
Fed, I would like to turn to President George.
And my colleague just a moment ago, with his observations
about realigning the districts, touches on a subject that to
you as a historian as well as a CEO know goes back not just the
beginning of the Fed but to the very beginning of this
country--about where the concentration of capital should be and
control over the economy and how that capital flows.
From the very beginning the great battle was should the
money centers--New York, Chicago--should they be the dominant
force? I suspect that is why my predecessors in this Congress a
century ago demanded the 12 districts and the lines be laid out
the way they were, to protect the entire country from a
handful.
Now, that said, this is an issue that is not just
theoretical; it is a real subject. In 2009, when I was the
ranking member of another committee with jurisdiction over the
derivatives markets, in a meeting one night a senior
Administration official brought up the topic of realigning Feds
as we were preparing to launch in the Dodd-Frank.
Taking the 12 districts, did we need that many? Shouldn't
the districts reflect the economic strength of a particular
region? Now, rather quickly both Republicans and Democrats,
House and Senate members in that meeting, made it clear to the
senior official that that was not a topic that was acceptable
at the time of the Congress.
But even as recently as 2009 it was a subject of real
debate, apparently at the highest levels of the Administration.
Now, that said, from my perspective I like not only the 12
Feds, but I like the sub-Feds. I like the groups in our
district in Denver and Oklahoma City and in Omaha who act as
consultants, advisors. Could you expand for a moment on the
involvement in those communities within the Kansas City Fed,
President George, how they add to the process?
Ms. George. So the branch offices for each of the head
offices play very important roles. And in the case of the
Kansas City Fed, I rely heavily on the input from those branch
Boards--for example, in the state of Oklahoma to help me
understand what is happening in energy markets, and our Omaha
Board to understand what is happening in agriculture.
And the diversity of input that comes onto those Boards
serves us well in the head office. So that sort of regional
input is essential, in my view, to make sure that all parts of
that district are well-understood.
The regional economists who head each of those offices are
out in those communities engaging on a daily basis with those
that affect that economy and are affected by it. So that
structure has served us well.
Mr. Lucas. So even though you don't clear checks anymore
and those regional banks aren't big currency repositories and
you don't grind up wore-out paper money they still serve a
purpose, correct, Madam President?
Ms. George. Absolutely. The Federal Reserve has changed
dramatically in its operations, but its commitment to those
regions remained constant over that time.
Mr. Lucas. Side question deviating just a little bit from
the subject matter, but your district is manufacturing, of
course; it is agriculture and energy.
We seem to be under pressure these days in the Kansas City
district in all three areas. How much concern do you have as an
economist and as a banker with the circumstances right now in
your district?
Ms. George. So we have seen over the last 6 years, a clear
shift in the economies of that region based on commodity price
falls. So the drop in oil prices, the fall in agricultural
product prices, and the strong dollar on our manufacturing have
affected that region significantly.
So today we do see more unemployment; we are seeing flatter
growth, although some sectors are still growing. So those are
important inputs as we look at that region relative to the
performance of the national economy.
Mr. Lucas. So it does matter having eyes and ears all of
the country. Thank you, President George.
I yield back, Mr. Chairman.
Chairman Huizenga. The gentleman yields back.
With that, the Chair recognizes Mr. Perlmutter of Colorado
for 5 minutes.
Mr. Perlmutter. Thank you.
And, President George, you are going to get some questions
from me too, although Mr. Lucas stole a few my questions.
Let's just go back to basics. How many directors are there
for each of the regional banks?
Ms. George. There are nine directors.
Mr. Perlmutter. Nine. And what are the basic requirements
of those nine directors?
Ms. George. The first requirement is integrity.
And, of course, beyond that there are three bankers, there
are three businesses, and there are three that are selected by
the Board of Governors. So six of those nine represent labor,
represent community, represent generally what is reflective of
the region in that district as well as the three bankers on our
Boards.
And in the case of the Kansas City Fed, those three bankers
are community banks. They are individuals who connect tightly
with many aspects of meeting the credit needs of our region as
well as community leaders that we have in our class B category
and on our class C directors.
Mr. Perlmutter. Okay. And this applies to all of the
regional banks?
Ms. George. The--
Mr. Perlmutter. Nine directors for every one of the
regional banks?
Ms. George. Yes, yes.
Mr. Perlmutter. And similar kind of criteria--I was looking
and it seem like it was agricultural, industrial, commercial,
and financial seem to be the basic core principles and noticed,
looking at your website, you have these regional kind of Boards
within your regional bank. So you have a head office, a Denver
office, an Oklahoma City office, and an Omaha office.
And Dr. Lacker used the terms, ``everybody is looking for
diversity.'' So to the two of you I would say, ``Okay, what the
heck does that mean to you?''
I'll start with you, President George, and then to you, Dr.
Lacker. What you mean by diversity?
Ms. George. So diversity is built into an institution like
the Federal Reserve, who is serving a broad public. And it is
essential to the public's trust in this institution that the
public sees themselves around those that are making decisions
and have input to policy.
Mr. Perlmutter. So do you mean--and this really applies to
both of you--and, Mr. Jones and Mr. Spriggs, jump in if you
wish--does diversity mean ethnic backgrounds? Does it mean
level of income? Does it mean regional diversity? What does it
mean?
Ms. George. It means all of that.
We will not be successful without having ethnic diversity
on our Boards, without having the interest of labor represented
on our Boards, as well as the multifaceted contributors to that
economy, whether they are business, ag, energy. So we look
broadly at all aspects of that.
Mr. Perlmutter. All right. Dr. Lacker?
Mr. Lacker. Yes. I agree with how President George
characterized it.
There are multiple dimensions on which when we are looking
at rounding out a Board we look at. Ethnic diversity is
certainly one of them, gender.
But we are also looking at diversity within our region. Our
region goes from South Carolina to Maryland out to West
Virginia. Very diverse economies. We want representation from
around the region.
We want coverage across different industries. We want some
representatives of someone in touch with consumers and consumer
groups, labor. All of those perspectives are valuable to us and
we try and balance that when putting together a slate.
Mr. Perlmutter. Mr. Jones?
Mr. Jones. If I could just add, I think that is one of the
key roles that commercial bankers play towards diversity
because diversity is race, it is religion, it is--but it is
also neighborhoods, it is also communities.
And if you think about the Bank On program that was
started, it was really driven through the Fed to say, how do we
better serve the underbanked and unbanked? And that is really
the key role that bankers play because we have a moral
obligation to ensure that all of our communities are served.
And as we sit on the Fed Boards, our primary focus is to
make sure those voices are heard. So as you prepare for
meetings you talk to folks from the underbanked and the
unbanked all away to the GM running Toyota, and you bring those
voices to the Fed and say, ``Here is what we see and what is
going on in our markets.''
And that is what is so critical for us as a commercial
banker because we are one of the few industries that see
everything, and that is the value we bring--
Mr. Perlmutter. Let me ask Mr. Spriggs the same thing.
Mr. Spriggs. Regrettably, there are only three labor
members among the 12 regional banks. So considering the
importance of workers and workers as consumers, I don't think
the current system gets us the kind of diversity that we need.
In the entire history of the Fed, no--zero--African-
American or Latino as ever been chosen to be president of a
regional bank. So I don't think the system is designed--it
looks like bankers, it talks like bankers, it is people bankers
are comfortable with.
Mr. Perlmutter. Okay.
Mr. Spriggs. But it doesn't have a built-in way to assure
it.
Currently, we do applaud the Fed for paying attention to
this and trying to address it, but there--
Mr. Perlmutter. All right. My time has expired. I got it,
and I thank you for your answer.
And I thank the panel for appearing today.
Chairman Huizenga. The gentleman's time has expired.
The Chair recognizes Mr. Schweikert of Arizona for 5
minutes.
Mr. Schweikert. Thank you, Mr. Chairman.
This is one of those occasions that there is just so many
things to ask and we will try to do this with a little caffeine
in our soul and go quickly.
Doctor, I want to make sure I got my head around something
you said before. It was a comment of fiscal policy, meaning
stuff we do here. And the overtone I was picking up saying,
hey, you know, there is all this monetary liquidity out in the
system but you guys on fiscal side, you need to put more cash
into the system. Was I misunderstanding that? Because was it--
Mr. Lacker. It was Dr. Spriggs.
Mr. Schweikert. Dr. Spriggs.
And my reason for that is even in this year we are going to
push up close to $600 billion of deficit spending in a year
where just a couple years ago our projections were, ``Hey, we
are only to be about $245 billion to $265 billion this year.''
So somewhere here we are deficit spending like crazy, which
functionally is a type of liquidity in the system. We are
borrowing money, putting out the door--plus the accommodative.
Can you really make an argument that there is not enough
liquidity put out in the society in a world with almost zero
interest rates? Was I mishearing what you were saying here?
Mr. Spriggs. No, you weren't mishearing, but it is not
putting liquidity; it is actually putting demand into the
system.
Mr. Schweikert. Okay, so--
Mr. Spriggs. So at the current rate that we are going we
are not getting the level of investment that we should, and
that is because we have not had our state and local governments
in a position to take advantage of the current low interest
rates. They have--
Mr. Schweikert. So let's backup because--okay, demand in
the system. Does demand in the system come from more--saying,
``Let's go borrow more money and go build something,'' or does
demand in the system ultimately come from the regulatory--the
environment we have created here?
And a good example would be when we look at some of our
environmental rules, I can come to you with a way saying, ``You
know if we crowd-sourced much of this data we could clean up
the air, do it cheaper, do it faster.'' But instead we still
engage in this regulatory model, which is a command and control
put in paper and file cabinets, and say that is good
environmental policy. It doesn't have anything to do with
cleaning the air; it has to do with office buildings full of
people shoving paper in file cabinets.
Some of our labor policies--some of these things--if you
wanted fiscal policy to increase demand, don't we need to be
doing a series of things where we rationalize some of the crazy
regs we are in--whether it be labor, whether environmental--all
the way down to some the creative destruction aspects that
actually create new lines of economic growth--that we have
created barriers of entry?
Is demand available out there not from a bastardized
helicopter money, which all of those are sort of involved in,
and actually it is a regulatory arbitrage that we need to move
through?
Mr. Spriggs. The demand is the drop in investment that we
have seen, and it is not picking up in the private residential
sector, and it is not picking up in the public sector.
Mr. Schweikert. But how can you--
Mr. Spriggs. So we know we are down in terms of pupil-
teacher ratios. We have let go hundreds of thousands of
teachers--
Mr. Schweikert. No, no, no, hold it--
Mr. Spriggs. --and that investment is necessary both for
our long-term--
Chairman Huizenga. The gentleman from Arizona controls the
time.
Mr. Schweikert. Hold on for one second. That doesn't--in a
line where I have gone a decade now with falls in productivity,
how do you equate, just in those couple of statements of
teacher-pupil ratios, with the fact of the matter is capital
isn't moving into acquisition of things that make us more
productive?
Mr. Spriggs. Education does make us more productive. It is
a foundation because workers have to be trained and have to be
trainable. And so de-investing, as we have done, because our
public sector had to live through not having the lender of last
resort. They have downsized their operations to a smaller size.
Mr. Schweikert. That is not even--
Mr. Spriggs. And so we have to invest in our people. We
have to invest into higher education, which we have de-invested
in, and we have to invest in their K to 12.
Mr. Schweikert. But that is not what the data actually
says. The data says, ``Hey, embrace online learning, embrace
apprenticeship programs, embrace these things.'' And yet, we
have a regulatory barrier right now saying we can't do that
because it is not collectivized, it is not unionized, it is not
those things.
I hope there is a second round because in many ways we have
to be willing to tear down many of the very bureaucratic
structures right now that have been built that actually stop
the very thing you and I want to see, which is more demand,
more productivity.
And you can't say that I want to support the very
institutional bureaucratic structures that have been there for
years that are dysfunctional in a modern, data-driven--where
this is the driver of the economy, not a mechanism that was
designed in the 1930s.
And with that I am way over time. Thank you, Mr. Chairman.
Chairman Huizenga. The gentleman's time has expired.
The Chair recognizes the gentleman from Washington, Mr.
Heck, for 5 minutes.
Mr. Heck. Thank you, Mr. Chairman.
I also want to express my appreciation to the panel for
your presence here today.
I want to go back to briefly a line of questioning the Dr.
Foster pursued, which was population maldistribution, and
preface my remarks by calling up one of my favorite adages,
namely the two most powerful forces on the face of the earth
are compound interest and the status quo. And the latter point
certainly seems to be at operation here.
What I heard said in answer to the question of whether or
not we ought to reexamine the population distribution among Fed
districts was it would make a difference. Things are fine as
is, i.e., let's not dink with the status quo.
But I guess I want to pose a question in a slightly
different way, which is does anybody on the panel genuinely
believe that if you were starting from scratch to design the
Federal Reserve system and you had any X number of Federal
Reserve districts in mind--let's use an arbitrary number, 12--
would it look anything--can you honestly say it would look
anything like it currently does?
Ms. George. I think it is fair to say that if you were
starting today it may not look like that. It may be that every
state would want its own regional reserve bank and you would
have more.
Mr. Heck. Well--
Ms. George. Your point I take, which is the world looks
different today than it did 100 years ago.
Mr. Heck. --103 years ago.
And with all due respect, the largest Federal Reserve
district now by population is more than six times larger than
the smallest. And I dare say that its GDP is probably 10 times
greater than that smallest one.
I actually like what Mr. Jones said very much, which is
diversity includes reflecting the neighborhoods and the
communities. I don't know how you can achieve that without some
semblance of a more balanced population distribution.
Dr. Spriggs, I want to ask you about this underlying issue,
the elephant in the room, if you will, the hawk-dove issue. It
is my reading of history that if you look back over the last 25
years the Fed has actually been involved in the achievement of
its full employment goal exactly 60 months out of 25 years.
They have generally had more tangible targets in that
regard than on the inflation side, but I think it is fair to
say that they have been more effective on the inflation side. I
think it is, therefore, fair to say that they have been much
more willing to put their foot on the brake on inflation than
their foot on the gas pedal to achieve full employment, as
evidenced by the data. Would you agree, sir?
Mr. Spriggs. Yes, I would, and I--my third slide emphasizes
one good product of full employment. A condition for wages to
rise with productivity is we have to be at full employment so
that we get the allocative efficiencies of the labor market so
that workers quit low productivity firms and move to higher
productivity firms. That really can only happen once we have
full employment.
We have other institutional factors that help to make that
happen. But when you look at that third slide that I had you
see that productivity continued to grow but wages don't.
And when you don't have full employment you don't have the
competitive forces that the labor market can bring to bear on
making sure that we get as much out of workers but they also
make something that reflects it. And so we all benefit.
The best policy--and the reason Congress passed the Full
Employment Act in the 1940s and reemphasized it under the
Humphrey-Hawkins Act--the best policy is for Americans to be at
work. That means all Americans need to be at work.
The workforce is greatly diversifying. In a few years the
majority of new entrants to the labor market, beginning in--
beginning at 2021--
Mr. Heck. Dr. Spriggs, I have 13 seconds.
Mr. Spriggs. Yes, so--
Mr. Heck. And I want to get another point in here--
Mr. Spriggs. --will be workers of color. And so it is
important that we--
Mr. Heck. I still want to get another point in here, which
is I think--and have said so on this committee at hearing after
hearing--that it is time to reexamine how we measure full
employment, that the continued use of the U-3 measure is
inadequate in the wake of the Great Recession, that U-6, which
takes into account part-time workers who want to be full-time
and some more discouraged workers, is still stubbornly at just
under 10 percent, and that if we are measuring achievement of
our goal of full employment as we traditionally have in U-3
then we are missing the boat and, in fact, not achieving what
it is we should.
And I appreciate the chair's indulgence very much. Thank
you, sir.
Chairman Huizenga. No problem.
With that, the Chair recognizes the gentleman from New
Mexico, Mr. Pearce, for 5 minutes.
Mr. Pearce. Thank you, Mr. Chairman.
Thanks, each of you, for being here today. Fascinating
discussion.
So I am going to follow up a little bit on what the
gentleman from Washington was just talking about. You just got
back from Jackson Hole, and if you are looking at the full
employment mandate, what is the sense of all the members? Are
they pretty satisfied with the 5 percent unemployment? Are they
concerned?
Mr. Jones, I will just take you out on--you got an opinion
about how--what the outlook was about the employment--the full
employment mandate?
Mr. Jones. I can only speak to the regions that we serve.
Again, Indiana--
Mr. Pearce. You didn't go to Jackson Hole?
Mr. Jones. No. I didn't get invited.
Mr. Pearce. Anybody on the panel go to Jackson Hole?
Ms. George. Yes.
Mr. Spriggs. Yes.
Mr. Lacker. Yes.
Ms. George. So the focus of Jackson--
Mr. Jones. So I was the only one that didn't get invited.
Mr. Pearce. You didn't read the online comments or
anything?
Ms. George. The focus of Jackson Hole was on looking at
monetary policy frameworks for the future across global central
banks.
The issue that you raise, though, is one that is routinely
discussed at the FOMC meetings to understand how are the labor
markets performing in the economy today, and judgments about
how close we are to full employment--
Mr. Pearce. So what is the judgment? Fairly close--5
percent is okay?
Ms. George. I believe we are at or near full employment.
Mr. Pearce. Okay. So when you reverse that mirror then you
look the other direction then we see a labor participation rate
of 62.8 percent.
So we are saying, in your words, we are near full
employment, so 62.8 percent, which is back--you have to go back
to the 1970s to get a labor force participation rate at that
level. You and the Federal Reserve are saying that this is as
good as it gets.
That is alarming because I see the difficulty of spreading
the cost of the government between fewer working participants,
and it is alarming that this is as good as it is going to get.
You put that up against the 1.1 percent rate of growth and
then you get into the monetary policies.
And so, Dr. Lacker, you mentioned in your more expanded
paper that the Fed was created to furnish an elastic currency.
And so when I go to my town halls my seniors tell me, ``We
lived our life correctly. We paid for our house. We put money
into secure investments. We saved. And now, then, you are
making our savings worth nothing because we get nothing, and
the value of our house is down to 50 percent what it was before
2008. Your policies are killing us.''
And so this this function of creating this elastic
currency, as you are talking about--do you all ever sit behind
closed doors and ask yourselves quietly what the hell are we
doing this for?
Mr. Lacker. That hasn't happened in my experience.
Monetary policy is a blunt instrument. Its capacity to
influence real economic activities is quite limited. I think it
was true at our founding, I think it is true now. I think we
are all painfully aware of that.
When I look at the graph that Dr. Spriggs put up of the
unemployment rate going back over the last 50 years, several of
those recessions were not recessions we could have prevented
but we were left to cope with. Some of those recessions we did
cause.
Mr. Pearce. Yes. I was asking more about the effect of the
elastic currency on the lives of seniors especially, but on the
lives of people in the poorer States. My district is one of the
poorest in the Nation.
Mr. Lacker. I understand.
Mr. Pearce. So when the price of food goes up because of
this elastic currency it hurts our constituents--my
constituents--worse than any other. And I was just trying to
get--I didn't want all the history. I just was trying to get,
do you ever talk about the effects on the poor and the effects
on the seniors of these policies? That was my question, if you
want to try it again. I am running out of time so I really do
want to ask one more--
Mr. Lacker. I apologize.
Mr. Pearce. The--
Mr. Lacker. The answer is yes, we do, so.
Mr. Pearce. Okay. Thank you.
So the idea that you have information on local economies--I
met with the Federal Reserve branch in El Paso just last week
or the week before. They have the correct information.
In other words, the thing that troubles most employers in
our district is they cannot find workers who will show up for
work. Yet, when I asked Janet Yellen personally about this she
said she had no knowledge.
So if the information is not going to be transmitted from
those branches who are out there tracking the specific problems
of the economy, what difference does this all make anyway?
Ms. George. We do bring forward that information. And I
think the anecdote that you described is one that I hear
regularly in the region, and it gets to understanding what is
it that monetary policy can affect and what are more structural
issues that will require other sorts of policies to affect?
The one you described, I would argue, is one that will have
to have other remedies brought to it, as opposed to low
interest rates.
Mr. Pearce. Thank you. I see my time is exhausted. I
appreciate the answers.
Chairman Huizenga. The Chair now recognizes the ranking
member of the full Financial Services Committee, Ms. Waters
from California, for 5 minutes.
Ms. Waters. Thank you very much.
I would like to address a question to Dr. Spriggs.
Dr. Spriggs, in your testimony you discuss how African-
Americans continue to suffer from overt employment
discrimination. As concrete evidence of this fact you point to
evidence that the unemployment experience for better-educated
African-Americans is worse than the unemployment rates for
less-educated whites.
To what extent can and should the Fed take such
discrimination into account as it sets monetary policy?
Mr. Spriggs. First, thank you, as the ranking member of the
full committee, for joining us.
When we look before the Great Moderation the unemployment
experience of blacks with more education looked like the
unemployment experience of whites with more education. And
there was a significant closing of the gap that occurred
between the passage of the Civil Rights Act and as we came into
the late 1970s, so much so that if you looked at young men who
were college-educated there was virtually no difference between
being black or white. And that gap was shrinking for other
African-Americans with less education.
Once we went into our high unemployment of the 1980s when
the black unemployment rate never fell below 11 percent for the
entire decade, that gap grew for all levels of education and
has remained. And so that gap can close. We saw in the late
1990s as we did push towards full employment and the Fed
allowed the unemployment rate to the fall and did not
intervene, despite a lot of people thinking that they needed to
be more worried about inflation.
By letting the labor market tighten we saw once again the
power of competition in the labor market to reduce those
disparities.
So if we are at full employment--and the Humphrey-Hawkins
Act clearly anticipated that market forces could address
discrimination. It is one of the findings in the act itself.
And you knew Congressman Hawkins as well as I did, and he meant
full employment.
His language, the preamble, talks about full employment,
full opportunity for useful paid employment at fair rates of
compensation. It is way down at the bottom that there is a
sentence about reasonable price stability. These aren't on
equal footing.
The preamble of that act says full employment and then
these other things should be considered. And full employment
gets us a lower rate of discrimination.
Ms. Waters. That is very interesting. Thank you.
And I think that we on this committee who are concerned
about full employment should pay attention and engage the
bank--the Feds on this. And you are absolutely right. I knew
Gus Hawkins and he was very serious about it.
As a matter fact, when I was first elected to office here
it was in the seat that he held. With reapportionment that has
changed somewhat, but I have an appreciation for how you have
helped us to understand what we need to encourage the Feds to
also set some priorities for and take into consideration.
But let me thank the Feds for something that may not mean a
lot to a lot of folks--the recent meeting in Jackson Hole,
where FYDP was invited to participate, was extremely
significant and I have a great appreciation for that. Thank you
so very much.
With that, I yield back the balance of my time.
Chairman Huizenga. The gentlelady yields back.
The Chair recognizes the gentlelady from Utah, Mrs. Love,
for 5 minutes.
Mrs. Love. Thank you.
I believe that the United States House of Representatives
is the branch of government that is closest to people. And
hearing the concerns on both sides of the aisle on the
structure of the Federal Reserve System is a concern of mine,
also.
And if you couple that with the FOMC structure and the
interests and the economic priorities of Americans, especially
in western States like Utah, with the answers that have been
given I am still not convinced that the western States are
represented as well as the eastern States.
So with that thought and knowing that concern, I don't
think it is enough to just say, ``Well, we believe that it is
working well,'' because you do have members on both sides of
the aisle that are expressing concerns. And I happen to agree
with those concerns that they are expressing.
So I guess I would like to know what you think might be
done to rebalance the Federal Reserve System to make sure that
all Americans are equally representative--represented in
monetary policy discussions?
President--do I call you President George? Is that okay?
Ms. George. So your question is an important one for the
Federal Reserve. And as I have listened to this discussion I
remain convinced it is a question of accountability and not of
the structure of the Federal Reserve.
So in the case of the western States, I happen to have a
few of those in my region--Wyoming and Colorado, the northern
part of New Mexico--we are intentional in picking up
information. In fact, today you will see coming out of the
beige book, which is released by the Federal Reserve, a sense
of each region, which directly includes those kinds of--
Mrs. Love. Okay, so I guess the question I am asking is
that I know that you are convinced that it is working. But,
like, the reason why I mentioned the House of Representatives
being closest to people is that every single one of us are
talking to our people. We are talking to our bankers, and they
share those concerns also.
So again, I know that you feel as if it is representative,
but I am trying to look for different ideas where that
thought--they may feel like they are being more represented.
Yes?
Mr. Lacker. So an important thing to keep in mind is that,
although the Federal Reserve, as we have described, is deeply
engaged in understanding the entire country, we have just one
monetary policy for the whole country. The set of interest
rates we set at the FOMC apply to--in financial markets and
they set monetary conditions for the whole country.
So while President George or President Williams from San
Francisco or myself can go and explain what conditions are like
in our district, it is still--as in this body, we have to make
the case that it is good for the country as a whole, one policy
change or another.
So there is a matter of understanding and then there is a
matter of what tools do we have?
Now, here in this body you have tools that can address
things in one particular district or another. We do not have
that. We do not have a way to target monetary policy to a
particular region.
Mrs. Love. Okay. So if all else were equal, why--what
difference would it make, then, if there were--not to say
whether I agree or disagree with this--but if there were more
representation on the western side then that shouldn't change
things either then?
Mr. Lacker. Well--
Mrs. Love. If that is the argument that--
Mr. Lacker. So in my view, the question was asked earlier,
if we would--what our prediction would be fore how the
districts would be drawn were they to be drawn again today, and
I think it is a fair prediction that they would be different.
Would we be worse or better off in terms of how the Fed
engages? I think we would be about the same, and I think this
goes to the way Esther George framed it, which is that the
structure doesn't impede us. We would probably be as good as we
are now, perhaps better. But it wouldn't make a big difference,
in my mind, for the degree to which we are connected.
Mrs. Love. Of course I end up with about 30 seconds.
But, President Lacker, just to switch gears very quickly,
you--in one of your speeches, Investing in People as Economic
Growth Strategy, I just want you to give a brief description on
why district bank presidents would be interested in workforce
development and why that would be a good thing.
Mr. Lacker. So when I look around my district Carolina is
deeply affected by manufacturing and the like and what has gone
on in the last couple of years. It is hard to think about
economic conditions without thinking about workforce and labor
markets.
And when you think about how labor markets work and what
kind of transformation the Carolinas have gone through, for
example, it is hard not to think hard about skills, and then
you are thinking about, well, how do people acquire skills? How
does the changing demand for skills affect people's choices?
What can we do to enhance the rapidity with which our labor
force adapts to the changing mix of skills that our economy
seems to need?
Mrs. Love. I am out of time. Thank you.
Chairman Huizenga. The gentlelady's time has expired.
And speaking of the Carolinas, the Chair recognizes Mr.
Pittenger of North Carolina for 5 minutes.
Mr. Pittenger. Thank you, Mr. Chairman.
President Lacker, thank you all for your attention and
participation with us today.
But, President Lacker, I would like to ask you in your
testimony you spoke about the Federal banks and the
representation they have supplied from various interests in
diverse regions of the country. I happen to be from Charlotte.
We are certainly in your district.
Can you walk me through how the Fed, as a fully public
institution, would affect the American public and the economy?
Mr. Lacker. How we affect the American public and the
economy?
So it is paramount to keep inflation low and stable. I
understand that maximum employment is part of our mandate, but
keeping inflation low and stable is our best way of achieving
that.
The recessions of the 1970s and the early 1980s were
deliberately engineered by the Fed, essentially, in response to
spikes in inflation. We are very concerned about that when we
are thinking about, are we at full employment? Is there a
chance that we have gone beyond it? Is there a chance that we
are approaching going beyond it?
Because the risk of overstimulating the economy is the risk
that inflation--expectations and inflation get out of control.
It may be an unpopular notion these days, but if that were to
happen it would be hard for us to calibrate a response without
risking causing a recession. And I would point out that in
recessions minority groups tend to do very badly.
Mr. Pittenger. With that in mind, I guess I would ask you,
with the Fed's extraordinary policy stance that has been in
place now for a full decade, what--has it produced the robust
economic growth that we have since--seen since post-World War
II? That has been the norm in the country. Give me an
explanation for why you believe that is true.
And I will go down the line. I would like all your
perspectives on that.
Mr. Lacker. So there was a discussion of labor force
participation earlier.
The fraction of the working-age population that is looking
for work or is employed has fallen. We are no longer
benefitting, as we did in the second half of the 20th century,
from the increasing engagement in women in the labor force.
The rate of growth of productivity has fallen, as well.
This is the byproduct of a confluence of forces, including
capital formation. Neither of those is under the direct control
of the Federal Reserve, I would point out.
So while we can achieve price stability with low growth or
high growth, we have limited ability to shift to a high-growth
economy.
Mr. Pittenger. President George?
Ms. George. I would simply say that the Fed's accommodative
policies I think have been important to the progress and the
recovery.
But I think to see where the economy is at this stage after
this many years suggests that there are other economic policies
that should be considered and come to bear on further progress
that the economy needs.
Mr. Pittenger. And could you elaborate on that, just
specifically?
Ms. George. So, for example, I absolutely agree with Dr.
Spriggs. It will be important in the United States that any
individual that is willing and wants to work is able to find a
job.
A healthy labor market will be important, but we must
address issues that were raised earlier about businesses that
aren't able to find the kind of workers they need, whether that
comes from training, education, and other things.
We should seriously look at all policies at our disposal to
make sure that that workforce can continue to contribute to the
economy.
Mr. Pittenger. Mr. Jones?
Mr. Jones. I would just elaborate on what President George
said.
The single biggest issues I hear from our clients is the
inability to attract workers. I think, as Dr. Spriggs said,
workforce development is critical. Full employment needs to go
beyond what we normally realize full employment to be, and to
do that, we need to have more workforce development and
training programs to assist with the growth.
Mr. Pittenger. I would like to ask you as well, do you
agree that the Federal Reserve district presidents brings
important regional and local knowledge to the FOMC
deliberations?
Mr. Jones. I absolutely do. As sitting 6 years in St. Louis
and speaking for southern Indiana and western Kentucky, and
listening to the voices from agriculture to community leaders
to, as I said, the head of Toyota, I can tell you Dr. Bullard
and his team took those input very seriously and passed it on.
I think it is critical.
We represent diversity. I understand the need for more
diverse in terms of race and all, but we represent a diverse
economy. And I have clients who sell on the corner of Main and
High, and I have Toyota as a client. Those voices are all
critical to the process.
Mr. Pittenger. President Lacker, do you agree with that?
Mr. Lacker. Yes, I do.
Mr. Pittenger. Thank you. My time has expired. Thank you
very much.
Mr. Spriggs. Excuse me, Mr. Chair. I apologize. I do need
to leave, and I am sorry that I won't be able to stay for the
second round of questioning.
Chairman Huizenga. Yes.
Mr. Spriggs. But I do appreciate you extending me the
invitation, and thank the ranking member, as well, for the
invitation. And I apologize.
Chairman Huizenga. Not a problem. And we appreciate you,
Dr. Spriggs, sharing some time with us here today.
We are hoping to do a quick second round, but first we
still have a first-round questioner here, the gentleman from
Indiana, Mr. Stutzman, who is recognized for 5 minutes.
Mr. Stutzman. Thank you, Mr. Chairman. And I apologize for
being a little late. I just came from a Budget Committee
meeting.
But it is good to see Mr. Jones, a fellow Hoosier, and
would like to ask Mr. Jones a question.
But first I would like to address President George. In a
recent article you observed how Carter Glass, the House sponsor
of the Federal Reserve Act and the legislations key author,
explained the challenges of establishing the Federal Reserve
System in a report to the 63rd Congress. Your article quotes
Congressman Glass' observation that, ``In the United States,
with its immense area, numerous natural divisions, still more
competing divisions, and abundant outlets to foreign countries,
there is no argument either of banking theory or expediency
which dictates the creation of a single central banking
institution, no matter how skillfully managed, how carefully
controlled, or how patriotically conducted.''
My question is this: Are observations like those of the
Democratic leader Carter Glass--does the decentralization
nature of our Federal Reserve System bring with it a
considerable level of integrity under which we can conduct the
most basic economic policies--monetary policy? Could you
address--
Ms. George. So I think from the start these issues were
debated a long time in coming to the conclusion that a
decentralized structure would best serve the country. I think
that remains true today.
And I think its value comes from drawing from many parts of
the country--not just Washington, not just New York--in
bringing those views to bear on something that is very
important to the lives of every American, and that are
decisions about money.
Mr. Stutzman. I think that Mr. Jones can probably attest to
this, what is going on in Indiana, because I see this
frequently. I mean, I believe that our economy--it is pent up
right now, and that it is ready to go but it needs certainty
and it needs to know the rules. And if we don't get our
monetary policy right, can our economy grow?
Ms. George. So as I said earlier, I think monetary policy
has played an important role, but it is not the only factor in
what can stimulate an economy. And as I listen to voices in my
region there are questions about other kinds of economic
policies that come to bear on their decisions. So I would not
want to overburden monetary policy as being the answer to all
the issues that can be affecting our economy's performance
today.
Mr. Stutzman. Sure. And I agree with that, but we are
focusing specifically here on decentralization or
centralization. Again, sound monetary policy is really a
foundation for an economy that is going to be strong.
Mr. Jones, it is great to see you, and I know that your
work in Indiana has been recognized not only in Indiana but
across the country.
Could you talk just a little bit--just for the benefit, I
guess, of others. But in Indiana we have seen--Indiana is
pretty strong. The economy is strong in Indiana.
Can you talk maybe a little bit about the differences
between some of the state regulation that is encouraging
growth, but also I feel like there is this conflict with
Washington policy where they are kind of butting heads against
each other? And I think not only could Indiana be doing better,
but the country as a whole could be doing better. Would you be
willing to touch on that?
Mr. Jones. I would.
First, thank you for your service to Indiana, as well.
I mentioned earlier workforce development is a critical
issue we hear from our clients. The other issue we hear, and
often, is regulation. And it is both current and pending
regulation that is challenging businesses to know the roadmap
to success.
And you think about coal, which is critical to our state;
you think about agriculture and some the changes in
agriculture--and clearly, Congressman, you know that as well as
anyone. But businesses need a clear path to success, and part
of that is understand the regulatory environment they operate
in.
Access to capital is a critical element to all of our
customers and our clients. So you think about just banking
regulation--and I will make an observation--and you have seen
Flat Tony. I spoke to our head of compliance yesterday, and
getting ready for our first CFPB exam, which is going to be--is
very, very important--we submitted 7.5 feet of paper. If you
stack it from the ground up it is 7.5 feet.
My head of compliance is five-foot-nine. I am sure there is
a lot of good information in there, but it requires a lot of
people to review who could be out giving access to capital.
We are symbolic of other industries as well, whether it be
coal, agriculture, manufacturing; regulation is a real
challenge for clients.
Mr. Stutzman. Mr. Chairman, I saw Flat Tony and he was
about my height when I first visited him, but now he is much,
much taller. It is unbelievable to see the amount of regulation
that our institutions have to deal with, so--not only flat but
he is tall now.
Chairman Huizenga. All right. With that the gentleman's
time has expired.
We would like to quickly move into a brief round two of
some questioning, if that is all right with our witnesses? And
I will start by yielding myself 5 minutes.
And, Mr. Jones, while you were chatting a little bit this
struck me as we were talking about your business and what you
do. Obviously we have had conversation, not just here but other
places, that the Federal Reserve System is lacking diversity
and not doing enough to serve their communities.
I used to be a licensed realtor when I got out of school.
And as I said, my family has been in construction and those
kinds of things. And one of the fundamental cornerstones of my
licensure as a realtor was to recognize that people aren't
black, people aren't white, people aren't yellow, people aren't
brown, people aren't red, people aren't any color other than
green--meaning they can either afford it or they can't afford
it.
And that is how you had to treat customers. And that is how
you had to deal with people. And it was an equitable way of
looking at that.
And it seems to me that there is a similar translation,
that we need to make sure that there is an equal opportunity.
And what I am really concerned about--and I just saw our
friends--our FYDP friends just left, unfortunately. I would
have loved for them to hear this.
My goal is to make sure that we have an equality of
opportunity for everybody no matter where they live, no matter
what their income is. And we have seen time and time again that
being thwarted, sometimes for maybe a good goal, but certainly
the ways that it has gone about hasn't gotten it there.
And I noticed in your testimony that your organization is
remarkably diverse and heavily involved in various communities.
And I know that you have a business to run, as well, as part of
that.
And so my question is, do feel a conflict between, say,
reaching out to literally tens of thousands of people? I know
you did--I think it was 900-plus sort of seminars on how to
better manage financial affairs on one hand and making money
and having an ongoing business with employees and for your
investors on the other hand. Do you feel any conflict in that?
Mr. Jones. Not at all. Just the opposite. It is good
business.
If you think about what we do as community bankers, our
moral obligation is to strengthen our communities. And that
means dealing from the underbanked and unbanked all away up to
the large corporations.
In doing so, we strengthen the markets that we serve. And
there is no real conflict there because that is what a
community banker does every day. There is 8,000 of us
throughout the country that every day wake up and worry about
what we can do to make this a better place for everyone. And
those are the voices that we also bring to the Fed as we think
about what we do as members of the Federal Reserve Board is to
talk about all those voices.
So clearly, Mr. Chairman, there is no conflict. It is just
good business.
Chairman Huizenga. And what I am very concerned about--
because I, too, like one of my colleagues, I can't remember who
it was--as they sit down and talk to employers a couple of
things that they expressed is they said, ``We have a hard time
finding somebody who will show up every day be able to pass a
drug test.''
Those are those are two basic thresholds that they need to
meet. And they say, you know what, we will take care of so much
of the rest of it. We need to have people who will show up, and
who can show up clean, and who are willing to work.
And that is a struggle that we have had in Michigan. And I
saw a chart earlier today, Michigan is doing different or
better than other States in the region of Chicago.
Interestingly enough, Illinois is the lowest performing and
Michigan is the highest performing. I would say that it is not
just about regulation and taxation; it is about the environment
that has been created in. And we in Michigan know that we have
very much attempted to create a accommodative, growth-oriented
atmosphere, and Illinois has gone the opposite direction. That
is why you see billBoards at that at the intersection of
Illinois and Indiana saying, ``Welcome. We are in Michigan.''
Mr. Jones. ``Illinnoyed'' is what it says. ``Move across
the border.''
Mr. Chairman, I would just say you just took the Hoosier
handbook and just took it to Michigan. So it is--
Chairman Huizenga. Yes. We did, because Indiana tried that
on us for a number of years with those welcome home billBoards.
But we--
Mr. Jones. It worked for a while, too.
Chairman Huizenga. It did work for a while. We got that
turned around.
But I want to make sure that we are moving forward on this,
we are not losing sight of Main Street. And Wall Street is
doing just fine.
We have to make sure that this economic recovery, as slow
and as long and as sluggish as it has been, reaches down and
goes to all levels. And we are seeing that. Because of that
upward pressure we are seeing wages come up in Michigan. We are
seeing some of that--some of those things restored, but not
fast enough.
Mr. Jones. Right.
Chairman Huizenga. And ultimately that is about demand.
I filibustered myself. My time is up. I was going to ask a
quick question of the--of our bankers, but I appreciate your
time.
And with that, I will recognize the ranking member for 5
minutes.
Ms. Moore. Thank you so much, Mr. Chairman.
And thank you all for agreeing to stick around for a little
bit longer.
And I, too, Mr. Chairman, am sorry that Mr.--Dr. Spriggs
left and some of the other folks who were observing left.
But having said that, I do want to engage the panel on some
things that I heard Dr. Spriggs say, and he got a lot of
pushback for this in the context of other things that I have
heard here today.
There has been a--we have put a lot of pressure on the Fed
to grow our economy. There is a lot of criticism or praise on
both sides of the aisle regarding your fixes--what you have
done.
But that being said--I am--I think it was Mr. Jones that
said that you guys have a blunt instrument with monetary
policy. I think it was Dr. Lacker responding to the gentlelady
from Utah, saying that monetary policy has to fit for the whole
country. We can't have a monetary policy for New York and then
another one for Montana. So you are limited in terms of what
you can do.
That being said, I guess I am wondering what you think
about the slow growth, the lack of a recovery in certain parts
of the country among folks like African-Americans with regard
to what, number one, what Congress is doing?
We focus a lot on austerity and we believe that that has
hurt growth. For example, there is a gap of $1.7 trillion in
infrastructure spending, something that used to be bipartisan,
and it is predicting that could put 20 million people to work
if we were to do that versus giving tax cuts.
And so I guess I am wondering--and Dr. Spriggs said that
there is a lack of demand. So as we talk about regulation being
too great, the debt being too great--he made the point that 70
percent of our economy depends of people having money so they
can spend it.
I know in the African-American community they spend every
dime that they get. So if shops are closing down an African-
American communities it is because they don't have any money.
So I am wondering what you all think about what we do with
regard to hurting growth this country. What is your opinion on
sequester, and austerity, and cutting Pell Grants, and so on?
And I will yield to maybe Dr. Lacker?
Mr. Lacker. You have asked a difficult and troubling set of
questions. You asked me to stray outside of the bounds of
Federal Reserve policy.
I can tell you, though, that we do think about that and it
is hard not to in our country. Baltimore, for example--inner-
city Baltimore is part of my district--and in thinking about
the events that have transpired there in the last couple of
years it is hard not to think about why it is that African-
American communities have lagged so far behind despite the last
50 years of efforts, despite the vast array of interventions we
have made, despite the vast array of policy initiatives that
have brought to bear on that.
Dr. Spriggs is right that Federal Reserve policy can
influence the broad sweep of demand in our country. But there
is nothing we can do to guarantee where it is going to show up.
Is it going to show up in Silicon Valley? Is it going to
show up in the Carolinas? Is it going to show up in inner-city
Baltimore?
Ms. Moore. Just specifically, though, is the time to be
doing austerity with slow growth?
Mr. Lacker. I would think you would want to evaluate
programs on their merits, not for what they add to total
aggregate demand.
Ms. Moore. Okay, just, a transportation bill or
infrastructure bill that was adequate--do you think that that
would help your efforts to--
Mr. Lacker. I think you should evaluate a transportation
bill based on what our transportation infrastructure needs, not
on whether it adds--
Ms. Moore. I think we have like 80,000 bridges that could
collapse just like in Minnesota at any point.
Mr. Lacker. That is a legitimate--
Ms. Moore. It is not like we don't need--we don't have to
go out and do a survey to see if we need to fix the roads and
bridges.
Mr. Lacker. That sounds like a legitimate reason. I have no
reason to disagree with it.
Ms. Moore. Would that or would that not spur our economy,
Mr. Jones? You are chomping at the bit.
Mr. Jones. Well, chomping at the bit is a strong thing.
But clearly, creating jobs, creating demand will help all
of our markets. And the economy is just not one subsection; the
economy is a multitude of policies and procedures and inputs.
One of the biggest one we see his confidence. And if we
could get a consistent message that said, ``It is okay,'' then
I think you will see more and more people respond to the
economy. But it is awfully difficult when all the negativity
that surrounds our economy creates challenges.
Ms. Moore. Thank you.
I yield back. Thank you for your indulgences, Mr. Chairman.
Chairman Huizenga. You are welcome.
With that, the Chair recognizes the gentleman from Arizona,
Mr. Schweikert, for--
Mr. Schweikert. Thank you, Mr. Chairman.
And to my friend the ranking member, we partially agree
here but it is--like on infrastructure, if the left would be
willing to work with some of those who want to stack--adjust
the capital stack and how you pay for it, there is a way to get
there.
As the discussion we had earlier with Mr. Stutzman, when
you have seven feet tall of regulatory paperwork for a bank
examination, how does that improve productivity in our society?
Because functionally you have paperwork, it goes into file
cabinets. So that is what they said earlier. That was the
testimony just about 20 minutes ago.
So for many of us we are fixated that we believe monetary
policy probably has gone as far as it can and now it is our
responsibility here, but we need to get creative, instead of
just trying to do more of we are going to throw a bunch of cash
at something. We see how well that crashed and burned in 2010
and 2011, the years where we--all these models said this was
going to happen and it didn't.
So can I go off--this is just a different discussion. But,
Ms. George, you are someone I wanted to sort of ask because--
walk me through first the services your Federal Reserve branch
provides. Just sort of, from someone who was on one of the old
check 21 committees and those things many years ago--yes, I am
that old. Walk me through the services you provide.
Ms. George. So the regional banks are involved in the
payment system, and we still have--
Mr. Schweikert. So payment--ACH?
Ms. George. ACH. We are still clearing checks, believe it
or not. We distribute cash to financial institutions in our
region, and we are involved now in an effort to look at how to
modernize the payment system by working with the private sector
on how that might happen.
Mr. Schweikert. Okay. So you already know where I am going.
I see now, fascinating discussions coming out of Silicon
Valley of using a distributive ledger model to basically--it is
a functioning debit-credit ledger with sort of an airtight
mechanics to move money and dramatically cut down the costs.
Where if I am--let's use PayPal just because they are in my
neighborhood or a substantial portion of them are--they have
landed--what--a Utah industrial Bank to move money. They pick
up those regulatory costs, where if I use a block chain, put it
into a cryptic currency or whatever you want, some designation
of value and clear it on this side, all of a sudden I have
moved money for fractions of a penny. But that is outside your
mechanics.
From your discussion--because you have lots of really smart
people around you--are you ready for what you and I would call
the creative destruction that will help us bring dramatically
more efficiencies in the movement of money, the distribution of
those resources? And are you looking at these alternative
transmission networks and how to lower the cost?
Ms. George. So our responsibilities in this area are to
make sure that the payment system is efficient, that it is
accessible, and that it is safe.
And so the nature of this technology holds some interesting
promises, and as part of our work with the private sector to
think about how this will affect the payment system going
forward, we are very much engaged in learning from them and
trying to see where this intersects.
Mr. Schweikert. But you already know--we already have a
handful of our large money center institutions--two of them--
that are actually already engaging in the movement of money
using a distributive ledger.
Ms. George. Yes.
Mr. Schweikert. And why this is so important is for a lot
of us who really care about economic vitality, but also
optionality for things like millennials, is you are the Uber
driver, and you decide you are going to put $0.50 into your
retirement account or into your savings account every time you
drive someone, and you hit--we just do a smart contract in the
back so the payment hits, the $0.50 goes over.
Except on some of the networks that just cost $.18, $0.27
to move that $0.50. You cannot do the sort of micromanagement
of small dollars.
I need a network, a--I need a backbone that is dramatically
less expensive--safe because this is soon going to be our
banking institution.
And my great fear is, as we have had the conversation of
efficiencies in our society, productivity--I desperately hope
that the Federal Reserve doesn't become one of the barriers to
the adoption of the dramatically more efficient society that we
desperately need for that productivity.
And my fear is Silicon Valley is about to run around you
and build optionality that says the Federal Reserve is my
barrier not my partner.
And with that, I am out of time. Thank you, Mr. Chairman.
Chairman Huizenga. Thank you.
And for our last question of the day we will go back to the
gentleman from Indiana, Mr. Stutzman, for 5 minutes.
Mr. Stutzman. Thanks again, Mr. Chairman.
And thank you to all for your testimony and thoughts and
advice today. It is really helpful. This is a--it has been a
fascinating discussion and I--Ms. George, you made a comment
about disturbing cash and things like that and then, of course,
Mr. Schweikert holds up his smart phone. And I guess that is
where I wanted to go, and I think it kind of falls under maybe
governance? And maybe you could just--all of you could share
with us--online banking, security, access?
I just found products just recently that are extremely easy
and almost feel like they are--they are very easy, which is
nice, but the security of them--can we trust the technology
that is coming along?
And I know this has--I don't know if it has been talked
about at all today, but if some of you could kind of address
that and what is your role? And then, Mr. Jones, if you could
talk--maybe you could lead off, Mr. Jones, about what you all
are doing is a banking institution in online banking and how
much of it is being done on smart phones?
Websites are being adapted to fit smart phones because that
is where most of the banking is being done. If you talk that;
then, Ms. George and Dr. Lacker, if you could talk about what
the Fed's role is in all that?
Mr. Jones. Sure.
Great question. And clearly as you think about our industry
and the dramatic changes, fintech and mobile banking are going
to be at the forefront over the next few years, if not already.
Your question really revolves around cybersecurity. And I
would offer, as a commercial banker, this is an area where
great cooperation between our regulatory agencies and the
commercial banks has made a significant difference.
Both the Federal Reserve, and the OCC, and now the CFPB
have come together, and we are working to make sure that those
systems are safe and secure.
Richmond, where Dr. Lacker is, is the head of I.T. for the
Federal Reserve. And when I was the audit Chair in St. Louis we
were able to experience the great controls they have in place.
So take that knowledge of the commercial banks--8,000
commercial banks can't work separately on things like
cybersecurity. It takes a collaborative approach.
And again, as I said, the ability for the Fed to convene
commercial banks--the OCC the CFPB--to really combat that has
made a significant difference. And it has made large,
significant improvements for us.
Ms. George. So there are rapid changes going on in our
payment system, as you note.
And the initiatives that we currently have underway is to
carry on a tradition we have had for most of our history, and
that is to work with the private sector as they come up with
different ways to conduct payments to make sure at the end of
the day safety, accessibility, and efficiency is part of that.
And so the effort we have undertaken right now is in the
process of looking at those issues around new technologies to
see how that can be best managed on behalf of the public.
Mr. Lacker. We do, as Mr. Jones noted, invest a tremendous
amount of the Federal Reserve System to a secure our systems to
make sure they are safe and effective, but that we keep up with
the latest cybersecurity threats. And cooperation from agencies
based around here in D.C. have been very important to that.
For the banking system as a whole, we cooperate with
sharing what we know and can share. And it certainly led us to
focus on the extent to which the cyber risks are being managed
effectively in the banking sector, as well. So it is a
supervisory focus for the teams that oversee these large
organizations and small, as well.
So it is something we take seriously. It is an evolving
landscape, and so it is one where we are going to have to
continually keep keeping up, in essence.
Mr. Stutzman. How do you do that? Do you hire teams of
experts who know their industry that are on your side that are
working together but also making sure that there are safeguards
in place? Do you have to invest more down the road or are you
already making an initial investment focusing on banking?
Mr. Lacker. Our investments have increased substantially
over the last 10 years in information security. And yes, talent
is something we look at. The particular skill sets you need are
highly valuable in the marketplace and we work very hard to
find the skills that we need.
Mr. Stutzman. Thank you, thank you. Anybody--I don't know--
any further comments? There is 20 seconds left if anybody wants
to say anything.
If not, I will yield back to the chairman.
Chairman Huizenga. Gentleman yields back.
And I would like to thank our witnesses for taking the time
and coming. Deeply, deeply appreciated by all of us. I think I
have had a number of colleagues as they have been going giving
me thumbs up. And we thought this was a very informative, very
helpful hearing as we are looking at what the future of this
monetary system is and the effects of it.
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.
I ask the witnesses to please respond as promptly as you
are able.
And that with that, our hearing is adjourned.
[Whereupon, at 12:10 p.m., the hearing was adjourned.]
A P P E N D I X
September 7, 2016
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