    [House Hearing, 114 Congress]
    [From the U.S. Government Publishing Office]

                         UNCONVENTIONAL MONETARY POLICY

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

                                    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

                                   __________

                                DECEMBER 7, 2016

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 114-112

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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:
        December 7, 2016.............................................     1
    Appendix:
        December 7, 2016.............................................    41

                                   WITNESSES
                          Wednesday, December 7, 2016

    Johnson, Simon, Ronald A. Kurtz Professor of Entrepreneurship,
      Professor of Global Economics and Management, Sloan School of
      Management, Massachusetts Institute of Technology..............     9
    Levy, Mickey D., Managing Director and Chief Economist, Berenberg
      Capital........................................................     7
    Plosser, Charles, Visiting Fellow at the Hoover Institution,
      Stanford University, and former President and CEO, Federal
      Reserve Bank of Philadelphia (2001-2015).......................     5
    Taylor, John, Professor of Economics, Stanford University........     4

                                    APPENDIX

    Prepared statements:
        Johnson, Simon...............................................    42
        Levy, Mickey D...............................................    47
        Plosser, Charles.............................................    54
        Taylor, John.................................................    75

                  Additional Material Submitted for the Record

    Mulvaney, Hon. Mick:
        Written responses to questions for the record submitted to
          Mickey D. Levy.............................................    79
        Written responses to questions for the record submitted to
          Charles Plosser............................................    81
        Written responses from Chair Yellen from a September 28, 2016
          hearing....................................................    83

                         UNCONVENTIONAL MONETARY POLICY

                                  ----------

                          Wednesday, December 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 10:08 a.m., in
    room 2128, Rayburn House Office Building, Hon. Bill Huizenga
    [chairman of the subcommittee] presiding.
        Members present: Representatives Huizenga, Mulvaney,
    Pearce, Stutzman, Schweikert, Love; Moore, Foster, Sewell,
    Kildee, and Heck.
        Ex officio present: Representative Hensarling.
        Also present: Representative Hill.
        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.Also, without objection, I ask unanimous consent that any
    member of the full Financial Services Committee who doesn't sit
    on this particular subcommittee be able to participate and ask
    questions during today's hearing.
        Today's hearing is entitled, ``Unconventional Monetary
    Policy.''
        I now will recognize myself for probably the better part of
    that 5 minutes. So lacking logic or evidence, today's macro
    economic oracles endorse unsustainable deficits and
    unconventional monetary policies. The oracles say the economy
    would be booming except for fiscal austerity. However, as the
    debt clock in this hearing room clearly shows that is often up,
    not unfortunately right now, but as often is displaying fiscal
    policy is anything but austere.
        Denying that their prescriptions created a heavy drag on
    our economy, the oracles point to ever-changing head winds. For
    example, they tell us that an aging population is causing labor
    force participation to plumb bottoms last seen in the 1970s.
    Their hypothesis is short on facts, however. For example,
    median age in the 1970s is a decade lower than today's. So if
    aging is a problematic, then the oracles would predict strong
    labor participation in the 1970s, even though it is the same
    disappointing level as today.
        The 1970s is also similar to the 2010s on another important
    dimension. Separated by four decades, they both suffered from
    distortionary economic and monetary policies. Refusing to let
    facts get in the way of fantasy, the oracles tell us that the
    American households would even be worse off except for these
    unsustainable deficits and unconventional monetary policies.
    The evidence. Well, we are doing better than the likes of Japan
    or the European Union. That story might fly in the faculty
    lounge, but it certainly doesn't around dinner table. The star
    pupil in the class of central banks gone wild has nothing to
    brag about.
        The American dream is at a risk. Pre-recession productivity
    meant that living standards could double every generation.
    Under today's opaque and distortionary monetary policies,
    however, productivity has been cut in half. The oracles call
    this the new normal.
        Well, I believe they are wrong. This is neither normal nor
    acceptable. Not too long ago our children could reliably look
    forward to the doubling of their living standards. Under
    today's monetary and economic policies, a doubling of living
    standard might instead wait for our children's children. With
    logic and evidence having left their side, perhaps the oracle
    should embrace the strategy from Seinfeld's George Costanza.
        Now, Mr. Chairman, I am not sure if we have ever quoted
    George Costanza in this committee, but here we go. ``If every
    instinct you have is wrong, then the opposite would have to be
    right.''
        The oracles tell us that without their seat-of-the-pants
    response to the Great Recession, our economy would be even
    further below potential almost 8 years post recession. The
    opposite would have had a hard time doing worse. Today's macro
    economics aim policies at highly aggregated variables that have
    little if anything to do with what drives our economy.
        Their answer for economic fluctuations is to further
    distort spending on consumption, investment, or government. But
    just as businesses cannot hide mismanagement for long behind
    the income statement manipulations, governments cannot mask
    malaise by diverting money into politically favored national
    income accounts. This pretense of knowledgehas grown from a
    macroeconomic orthodoxy where repeated failures of
    unconventional monetary and economic polices count as evidence
    that we didn't do enough.
        Economic opportunity reliably increases when monetary
    policy adheres to its vital duty, that is, facilitating
    commerce wherever it shows promise. Throughout our current
    economic malaise, monetary policy has not only ignored this
    duty, it continues to ignore the consequences of ignoring this
    duty. Annually, since 2007, the Fed's monetary policy committee
    predicted that its principle-free decisions would trigger a
    more resilient economy. Each year, reality fell further from
    prediction, and according to the Fed's own researchers, the
    FOMC, quote, did not anticipate the great recession,
    underestimated the severity of the downturn, and consistently
    overpredicted the speed of the recovery.
        A decade of economics-free monetary policy is not working
    because it cannot work. Returning to a robust economy requires
    a more firmly grounded and transparent policy. That transition
    cannot happen until the Fed shrinks its balance sheet, brings
    interest rate and credit risks out of the bureaucratic shadows.
    In the same vein, policy distortions will remain elevated until
    the Fed also returns to a monetary policy that does not only
    what it can, produce an efficient exchange medium so that goods
    and services, which includes labor, can easily find their most
    promising opportunities.
        The Chair now recognizes the ranking member of the
    subcommittee, the gentlelady from Wisconsin, Ms. Moore, for 5
    minutes as well for an opening statement.
        Ms. Moore. Well, thank you so much, Mr. Chairman, and let
    me thank this distinguished panel for yet an opportunity to
    talk about our economy, our monetary policy, and to really sort
    of dig down deep into the theoretical and the what will really
    work in the real world and the practical application.
        I want to make a couple of observations about this, our
    what is it, Mr. Chairman, our fourth or fifth hearing on
    unconventional monetary policy. Which one? I yield. Is that 4th
    or 5th? Anyway--
        Chairman Huizenga. Pretty much any time we have been
    discussing monetary policy, it's been about--
        Ms. Moore. Great. And we have had a great discussion,
    particularly, Dr. Taylor, on your Taylor rule, so we have
    examined this in the abstract, I must admit. And speaking of
    dinner table conversation, this is great dinner table
    conversation, it is great economic journalism, but how would it
    have really worked in the real world? And we are having this
    conversation, of course, Mr. Chairman and witnesses, because we
    have faced an unprecedented financial crisis. So the Fed has
    done its job, and they have been forced into unconventional
    solutions.
        We know, from past conversations, that had we had a Taylor
    rule, the Fed, with its responsibility, would have had to have
    deviated from it at exactly this kind of--because of this kind
    of economic crisis. And I believe, Dr. Taylor, you will get a
    chance to talk to us some more in your testimony, but you
    yourself indicated to us that it was merely a guidepost. It was
    not something that was locked down.
        So it is not like we have had wild unruly monetary policy
    pre-crisis. I commend Dr. Taylor's work, recognize his utility
    and intellectual circles, but I don't see, Mr. Chairman, any
    reason for this committee to endorse the idea for real world
    application.
        Secondly, this hearing is admission by the majority that
    the real problem all these years has been Republicans' refusal
    to seek, demand side fiscal solutions to help the economy.
    Seventy percent of our economy is actually based on consumers
    having money in their pockets and being able to support a
    fledgling economy. The austerity measures supported by our
    Republican friends hurt the economy, hurt people, and force the
    Fed's hand on monetary policy.
        Now, you know, Republicans want us to buy the fact that tax
    cuts for the rich are the cure for this disease. Shareholders
    of the rich have been the ones helped by monetary policies by
    way of stock prices.
        Now, Mr. Chairman, if you want us to unwind the
    unconventional monetary policy, we need to look at ways to help
    the poor and the middle class, things like strengthening the
    safety net, like helping mothers, like investing in public
    education, how about public infrastructure? These are the kinds
    of things that stimulate the economy, the very things you will
    find in my bill called, ``The Rise Out of Poverty Act,''
    helping everyday Americans still hurting in the housing
    downturn by robo foreclosures by men like our proposed Treasury
    Secretary who has helped himself by this government in crisis.
        Thank you, and I would yield back the balance of my time.
        Chairman Huizenga. The gentlelady yields back. Well, today,
    we welcome the testimony of four distinguished folks: Dr. John
    Taylor, professor of economics at Stanford University; Dr.
    Charles Plosser, visiting fellow at the Hoover Institution,
    Stanford University, and former president and CEO of the
    Federal Reserve Bank of Philadelphia from 2006 to 2015; Dr.
    Mickey Levy, managing director and chief economist, Berenberg
    Capital; and Dr. Simon Johnson, who is the Ronald A. Kurtz
    professor of entrepreneurship, professor of global economics
    and management, the Sloan School of Management at MIT.
        So 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.
        With that, Dr. Taylor, you are now recognized for 5
    minutes.

      STATEMENTS OF JOHN TAYLOR, PROFESSOR OF ECONOMICS, STANFORD
                               UNIVERSITY

        Mr. Taylor. Thank you Mr. Chairman, Ranking Member Moore,
    other members of the committee, and Chairman Hensarling for
    inviting me here to speak about unconventional monetary policy.
        I think the Federal Reserve's move toward unconventional
    monetary policy can be traced back a dozen years to so-called
    ``too low for too long period'' of 2003-2005. During this
    period, the Fed held its policy rate, the Federal funds rate
    well below what was indicated by the experiences of the
    previous two decades of good economic performance. During this
    2003-2005 period, the Fed also started giving forward guidance
    that its policy rate would remain very low for a considerable
    period and that it would be raised only at a measured pace.
        These actions were a departure from the policy strategy
    that had worked well in the 1980s and 1990s. Regardless of the
    reasons, the results were not good. The excessively low rates
    along with promises that they would remain low brought on a
    risk-taking search for yield and excesses in the housing
    market. Along with a breakdown in the regulatory process, these
    policies were a key factor in the financial crisis and the
    great recession.
        During the panic in the fall of 2008, the Fed did a good
    job in its lender-of-last-resort capacity by providing
    liquidity to the financial markets and by cutting its policy
    interest rate. But then Fed policy moved sharply in an
    unconventional direction. The Fed purchased large amounts of
    U.S. Treasury and mortgage-backed securities in 2009, financed
    by equally large increases in reserve balances, which enlarged
    the Fed's balance sheet. And long after the recession ended,
    these large-scale asset purchases continued and the Fed held
    its policy interest rate near zero when indicators used in
    1980s and 1990s suggested higher rates were in order. The Fed
    also utilized forward guidance in this period would change the
    methodology several times, which increased uncertainty.
        My research and that of others over the years shows that
    these policies were not effective and may have been
    counterproductive. There is now a growing consensus that the
    extra low interest rates and unconventional monetary policy
    have reached diminishing or even negative returns.
        The unconventional policies have also raised public policy
    concerns that the Fed is being transformed into a multipurpose
    institution, intervening in particular markets, and allocating
    credit, areas where Congress may have a role but not a limited
    purpose independent agency of government.
        In many ways, this recent period can be characterized as a
    deviation from our rule-like systematic, predictable,
    strategic, and limited monetary policy that worked well in the
    1980s and 1990s. The policy implication of this experience is
    clear. Monetary policy should be normalized. The Fed should
    transition to a sound rule-based monetary policy like the one
    that worked in the past while recognizing, of course, that the
    economy and markets have evolved.
        As part of the normalization process, the size of the Fed's
    balance sheet should be gradually reduced. For reasons I gave
    when I testified at this committee last May, reserve balances
    should be reduced to the size where the interest rate is market
    determined rather than administered by the Fed as it sets the
    rate on excess reserves.
        Normalization is easier if there is an understanding of the
    basic monetary strategy. This and recent experience point to
    the need for monetary reform. A good reform is now part of the
    format. It would require the Fed to describe the strategy or
    rule of the Federal Open Market Committee for the systematic
    quantitative adjustment of its policy instruments.
        I think monetary normalization and reform have important
    implications for the international monetary system as well.
    Unconventional monetary policies with near zero policy rates
    have spread internationally to other central banks. Because a
    key foundation of a transparent rules-based international
    monetary system is a rules-based policy in each country,
    normalization and reform by the Fed is a key part of
    international monetary reform, and I think international
    monetary reform will in turn benefit the United States.
        In conclusion, let me emphasize that monetary reform, tax
    reform, regulatory reform, and budget reform often go together.
    They reinforce each other. All are crucial to a prosperous
    economy. I think the opportunity for monetary reform is now
    better than it has been in years.
        Thank you, Mr. Chairman.
        [The prepared statement of Dr. Taylor can be found on page
    75 of the appendix.]
        Chairman Huizenga. Thank you. And with that, Dr. Charles
    Plosser, you have 5 minutes for your presentation.

      STATEMENT OF CHARLES PLOSSER, VISITING FELLOW AT THE HOOVER
    INSTITUTION, STANFORD UNIVERSITY, AND FORMER PRESIDENT AND CEO,
            FEDERAL RESERVE BANK OF PHILADELPHIA (2001-2015)

        Mr. Plosser. Thank you, Chairman Huizenga, and members of
    the subcommittee, I appreciate this opportunity to come share
    with you some thoughts on the Federal Reserve.
        Let me begin with two important points that illustrate the
    challenges as we think about central bank reforms. Central
    banks, for the most part, are given the responsibility to
    preserve the purchasing power of a nation's fiat currency. One
    way the Fed does this is by buying and selling securities in
    the open market to control the growth of credit and money. This
    gives the Fed extraordinary powers to intervene in financial
    markets, not only through the quantity of it purchases but also
    of the types of assets it can buy.
        The second point is that history teaches us that economic
    stability and prosperity are far more likely when there is a
    healthy degree of separation between government officials who
    are responsible for tax and spending policy and those in charge
    of printing money. Otherwise, printing money seems to become an
    easy substitute for tough fiscal choices.
        Argentina is an example that has been stagnant and rife
    with periods of inflation and financial turmoil over the last
    three decades, at least. In large part, this is due to a lack
    of effective separation between the central bank and the fiscal
    authorities.
        These two points highlight a major tension in the
    discussions of central bank reform. How, in a democratic
    society, do you preserve a central bank's independence while
    ensuring that it has adequate tools for success and can be held
    accountable to the public?
        I believe there are three responsible ways to address this
    tension: Simplify the goals, constrain the tools, and make
    decisions more systematic and predictable. All three steps can
    lead to clear communications and a better understanding of
    monetary policy on the part of the public without undermining
    independence. In my brief time, let me just touch on two of
    these strategies.
        The Fed is said to have a dual mandate, price stability and
    maximum employment, yet the broader the mandate, the more
    opportunity there is for discretion, and the more discretion
    means there is more scope for political interference and
    uncertainty over the direction of policy. Policymakers can find
    themselves futilely chasing one goal after another.
        Unfortunately, over the last decade, the Fed's mandate
    seems to have experienced mission creep, expanding the scope
    for discretionary action, and the opportunity for political
    interference. The public and the Fed have talked as if monetary
    policy should be responsible for stock market valuations,
    income inequality, labor force participation rates, real wage
    growth, and an expanding list of other dubious objectives.
        Indeed, around the world, it seems that central banks are
    being asked to solve all manner of economic ills from fiscal
    crisis in Europe to low productivity and structural challenges
    in Japan and the United States. I think this is a mistake and
    potentially dangerous for the institution and the economy.
        Moreover, these broad mandates make it extremely difficult
    to hold a central bank accountable. I am reminded of the old
    saying: Responsible for everything but accountable for nothing.
    Institutions are guaranteed to fail when they are assigned
    responsibility for outcomes that they cannot substantially
    influence. The hubris of central bankers and the unrealistic
    expectations of the public and governments are out of line with
    what we can realistically expect for monetary policy.
        As the Nobel Laureate Milton Friedman warned us almost 50
    years ago, ``We are in danger of assigning to monetary policy a
    larger role than it can perform, in danger of asking it to
    accomplish tasks it cannot achieve, and as a result, in danger
    of preventing it from making the contribution that it is
    capable of making.''
        One way to address these concerns and to help reset
    expectations is to narrow the monetary policy mandate to focus
    solely or at least predominantly on price stability. Many major
    central banks around the world already have such a more narrow
    mandate or hierarchal mandate of this kind. It would focus the
    Fed's attention, reduce the opportunity for discretion, and
    make it easier to hold the Fed accountable for its actions. It
    would also provide some protection to the Fed from demands
    arising inside and outside central banks to pursue other mostly
    unachievable objectives.
        A second way to restrict central bank interventions is to
    limit the types of assets that can be purchased, thus
    constraining the composition of the Fed's balance sheet. For
    the U.S., I suggest that the Fed be restricted to an all-
    treasury portfolio. During the crisis and recession, the Fed
    engaged in large scale purchases of mortgage backed securities
    in an effort to help the housing sector. It also purchased
    distressed securities during the rescue of Bear Stearns and
    AIG. Such actions are a form of credit allocation and thus a
    type of fiscal policy. Fed independence should not include
    making fiscal policy decisions as it undermines the separation
    of authorities and thus independence. Fiscal authority should
    take responsibility for fiscal actions.
        If the Fed is to engage in the purchase of private sector
    securities or credit allocation, it should do so at the request
    of the fiscal authorities. The Treasury should then take
    possession of those assets in exchange for Treasury securities
    so the central bank can resume its task of conducting monetary
    policy, and maintain the separation of fiscal and monetary
    policy remains intact. Thank you very much for your attention.
        [The prepared statement of Dr. Plosser can be found on page
    54 of the appendix.]
        Chairman Huizenga. Thank you, Dr. Plosser, and I have a
    sneaking suspicion that your Milton Friedman quote just beat my
    George Costanza quote.
        With that, Dr. Levy, we would like to welcome you here as
    well, and you have 5 minutes for your presentation.

       STATEMENT OF MICKEY D. LEVY, MANAGING DIRECTOR AND CHIEF
                      ECONOMIST, BERENBERG CAPITAL

        Mr. Levy. Mr. Chairman and members of the committee, I
    really appreciate this opportunity not just to speak about
    monetary policy but also economic policies in general.
        The Fed's unconventional policies do deserve credit for
    lifting the economy and financial markets from crisis in 2008
    and 2009. However, it is quite striking that since then, Fed's
    sustained negative real interest rates, quantitative easing and
    forward guidance, while they successfully stimulated financial
    markets, pushed bond yields lower, pushed up asset prices,
    encouraged risk taking, they failed to stimulate the economy.
    Nominal GDP growth, that is, current dollar spending in the
    economy is actually decelerated. Real economies languished.
        In recent years, the Fed's unconventional policies have not
    had their intended impact but instead have created mounting
    distortion and have been inconsistent with the Fed's long-run
    objectives and its objective of macroprudential risk.
        Why have the Fed's policies been ineffective? Because the
    constraints on growth are nonmonetary in nature. Along with
    many factors, government policies have been a key source of the
    weakness. The adverse impacts are particularly apparent in
    business investment. Consumption and housing have been growing
    fine, but business investment has been notably weak, and this
    has not only been the weak link in the economy, it has been the
    source of the weak productivity and estimates of lower
    potential growth.
        Beyond the mounting government debt and expectations of
    higher taxes, there has been just this growing web of
    government regulations, mandated expenses, and higher tax
    burdens not just on the Federal level but on the State and
    local levels that have weighed very heavily not just on the
    banking and financial sectors but also in business investment
    and the broader economic environment.
        The burdensome micro regulations imposed by Dodd-Frank have
    deterred bank lending, particularly of medium- and small-sized
    banks, and they are at cross-currents with the Fed's easy
    monetary policy. In nonfinancial sectors, an array of
    regulations and government mandated expenses and taxes have
    reduced efficiencies of production, inhibited labor mobility,
    and lowered risk adjusted after tax rates of return on
    investment, and they have added a tremendous layer of
    uncertainty in business decisionmaking.
        So while the Fed has very effectively lowered the real cost
    of capital, these government policies have forced businesses to
    raise their hurdle rates required for capital spending and
    expansions. So potentially productive expansion plans have been
    sidelined, businesses are taking advantage of the low interest
    rates environment provided by the Fed to issue bonds, but they
    are buying back stock rather than expanding, corporate
    indebtedness rises, and it doesn't add to productive capacity,
    and also, there are a lot of distortions in labor markets.
        The critical point here is these policies are beyond the
    Fed's monetary policy scope, and trying to offset these
    negative impacts with excessive monetary eases, generated
    mounting financial distortions, and unfortunately, I think just
    now we are just beginning to feel the negative effects of the
    Fed having been too easy too long. The next couple of years may
    be kind of tough.
        So the Fed has recently come to acknowledge that its
    monetary policies have lost their punch and has recommended a
    shift toward fiscal stimulus. So before I outline some
    suggestions for monetary policy, I have a critical point to
    make on fiscal policy.
        It is critically important to distinguish between fiscal
    reform and fiscal stimulus that simply involves more deficit
    spending. The economy is in its eighth consecutive year of
    expansion, the unemployment rate is 4.6 percent, and the
    economy is growing at a pace consistent with the Fed's
    potential. What is not needed is countercyclical fiscal
    stimulus in the form of more deficit spending.
        The focus of fiscal reform should be tax and spending
    reforms that raise potential growth, corporate tax reform which
    involves lower rates and a broader base through reducing
    deductions, deferrals, credits, exemptions, these and lower
    rates and simplification, this would encourage business
    investment and expansion.
        Infrastructure spending initiatives, we have to focus on
    projects that add to productive capacity and provide benefits
    that exceed cost while avoiding quick-spend projects aimed at
    temporarily boosting growth and jobs. I mean, it is critically
    important. Reform, fiscal reform does not just mean more
    deficit spending, and that is going to be critically important
    as we enter 2017.
        Now, on monetary policy and--
        Chairman Huizenga. Dr. Levy, I am going to have to ask you
    to wrap it up here quickly.
        Mr. Levy. Quickly. Raise rates, cease reinvesting--cease
    reinvesting maturing assets, de-emphasize the short run and
    fine tuning, change policy statements accordingly, and move
    toward more rules-based policies that provide flexibility.
        [The prepared statement of Dr. Levy can be found on page 47
    of the appendix.]
        Chairman Huizenga. I will yield some of my time to allow
    you to expand on that when we come back to questioning.
        So with that, Dr. Johnson, you have 5 minutes.

       STATEMENT OF SIMON JOHNSON, RONALD A. KURTZ PROFESSOR OF
    ENTREPRENEURSHIP, PROFESSOR OF GLOBAL ECONOMICS AND MANAGEMENT,
        SLOAN SCHOOL OF MANAGEMENT, MASSACHUSETTS INSTITUTE OF
                               TECHNOLOGY

        Mr. Johnson. Thank you, Mr. Chairman. I agree with you
    completely, Mr. Chairman, with regards to your initial
    statement on the fact that this is not normal, what we have
    now, and it is not acceptable. I think you and I may have a
    slightly different reading of recent economic history, but
    maybe it is not that different.
        We had an enormous financial crisis and collapse. I was the
    chief economist of the International Monetary Fund in 2007
    through August 2008. We were worried about how bad it was
    getting in the United States, and we encouraged preventive
    measures. None of that was effective, and the crisis turned out
    to be much bigger than what we anticipated and much bigger than
    what we had seen and what I had worked on over the past 30
    years.
        Now, I agree with Chairman Hensarling that an
    undercapitalized financial system was the core of what went
    wrong. I think we disagree on some of the ancillary related
    measures, but capital, lack of capital in our financial system,
    and funding it with way too much short-term debt was the core
    problem. Massive financial crisis result in anemic recoveries.
    I am afraid that is not--that is not just astatement about the
    United States. That is a general statement about what we have
    learned over the past 200 years of finance and economics.
        The second point on which I share, I think--I certainly
    agree with most of my fellow panelists is that monetary policy
    is a limited tool that cannot do very much. And I think it is--
    and I agree with Dr. Plosser, you shouldn't overreach with
    monetary policy. I would say, and I think I have seen this in
    some of the other testimony, including Dr. Levy's, that QE1
    done at the end of 2008, 2009, absolutely unconventional
    monetary policy, yes. Specifically targeted supporting
    mortgage-backed securities and a piece of the key pipeline for
    credit and securities markets that are broken completely, that
    is what they did. I think it was a good idea. The fog of war
    applies in finance as well as in war, you don't know exactly
    what is happening at the time, but I fully support what the Fed
    did in that instance.
        Subsequent iterations and attempts to continue with that
    policy, we can discuss. I think much less effective would be a
    fair way to say it, and that is also what Mr. Bernanke says.
        Rules can help monetary policy, and if, hypothetically, Dr.
    Taylor or Dr. Plosser end up back on the FOMC, I will be fully
    supporting their rights and ability as members of that
    committee to determine rules. I really don't think you want to
    micromanage the Federal Reserve. It is not what we have been
    historically. You can set the objectives, and I commend you,
    Mr. Chairman, for focusing our attention on that. I think you
    should continue with the existing objectives personally, but I
    think we are going to discuss that a lot more.
        The third part of what went wrong in the economic history,
    which is a piece I am sure we absolutely disagree on
    completely, which is fiscal policy. Again, former chief
    economist at the IMF. I don't run around the world telling
    people to stimulate their economies, and I am not in favor,
    generally speaking, of using fiscal policy for any, any short-
    term response to anything, all right. That is more a job of
    monetary policy if, you know, subject to Taylor rule type
    considerations.
        However, again, largest financial crisis since the great
    depression, limited ability of monetary policy to respond, QE1,
    but perhaps we are not convinced of anything beyond that, what
    else do we have? We have a massive crisis. You said--actually,
    I liked your formulation of monetary policy, was one of my
    favorites ever, I wrote it down: Monetary policy should be to
    facilitate commerce. Absolutely. Completely correct.
        The private sector economy was broken, and 99 percent of
    people in the private sector economy had no responsibility for
    what went wrong. They were completely innocent bystanders, and
    that includes all the people in finance, by the way. They were
    just doing their jobs. Devastating impact, limited ability of
    the government to respond with monetary policy, what else are
    you going to do?
        In those circumstances, and only in those circumstances, I
    think, and I testified before other committees of Congress to
    this effect at the time, some fiscal stimulus, including large
    tax cuts, I argued for bigger tax cuts than were actually put
    through by this Congress, by the way, as well as other measures
    on the spending side.
        We are out of that phase. Now the issue for fiscal policy
    is medium term, how do we get away from this for normal,
    ``normal,'' how do we get to higher rates of growth? And here I
    am completely siding with Congresswoman Moore. I work a lot
    with the private sector. My job at MIT is to help companies
    grow in the United States and around the world. What do they
    need? They need people. They need human capital. They need
    infrastructure.
        I am not saying that this is the miracle cure. I am not
    saying you do it on a 1- or 2-year time horizon, but I think
    over a 10- to 20-year period, when you look at productivity
    prospects in the United States, when you look at our ability to
    compete, when you look at the ability of our companies to stand
    up and to do better than other companies with regard to
    innovation and employment, people, really good people. And of
    course, that is about opportunity. It is about who gets the
    education and who can climb up the social ladder, which we used
    to be good at in this country, but unfortunately, the past
    three decades, we have lost that.
        Thank you.
        [The prepared statement of Dr. Johnson can be found on page
    42 of the appendix.]
        Chairman Huizenga. I appreciate that. Thank you very much.
    At this point, I will recognize myself for 5 minutes, and I
    would like to go back to Dr. Levy because I think we have
    stumbled into something, and we did this in another hearing
    previously with the ranking member and myself that we agree
    that, frankly, the rich on Wall Street have gotten richer,
    while most others have been left behind. And kind of getting to
    where Dr. Johnson was going, you know, the question is, is why
    and how.
        And is this because we have not borrowed enough money to do
    more stimulus spending, as some would seem to argue, or--and
    Dr. Levy, when you were talking about this, I had written this
    out on my notepad of a recent example. I sat down with a CEO of
    a publicly traded company, large influential, sort of in the
    financial services space, and he walked me through the
    pressures that he is feeling from his shareholders, including
    institutional investors like CalPERS and others to take
    advantage of the artificially low interest rate environment, to
    borrow money, to then buy back his own stock, and as he said,
    or the stock of a publicly traded company, as he said, I have
    become fabulously wealthy. In fact, I looked it up. He has just
    cashed in a seven figure amount of stock again. He said: I have
    become fabulously wealthy, but it is not the right thing for
    the economy overall.
        And it was in stark terms, and he is like, but if I don't
    do this, so you know, I have one small little corner of this,
    but I have CalPERS, and I have a number of other institutional
    investors who literally could take me to court for not
    fulfilling my requirement of maximizing the return for them.
    And that was rather stark for me, and I just wanted you to
    maybe comment on that a little bit, and I would love to hear
    from all four of you quickly.
        My original question, has the Fed become more political,
    and I kind of maybe altered this, changing it slightly, has the
    Fed been politicized is really what I want to know. And so Dr.
    Levy, I want to start with you and give you a brief opportunity
    as well to touch on, and if you had any of those other points
    that you wanted to make towards the end when I had to cut you
    off, so--
        Mr. Levy. Has the Fed become politicized? Yes, on the
    inside the way it operates and on pressures from the outside,
    and I think it is a real concern because we all benefit from a
    central bank that pursues its long run objectives, and so I--
    there is a laundry list of ways that the Fed has become much
    more politicized.
        Back to your point on Wall Street, and I am an economist
    and not an investment banker that has benefitted by all the
    Wall Street largesse. Wall Street makes a lot of money through
    leverage, okay, and so, you know, when they have had low
    capital positions and a lot of leverage and they have played
    the positive carry game and taking advantage of their leverage,
    this generates very large profit. So I would be very much in
    favor of legislation that requires higher capital adequacy
    while at the same time reducing a lot of the micromanagement
    from the Fed, the OCC, and the like. And so I think this would
    be--that would lead to better balance of people on Wall Street.
        Chairman Huizenga. And isn't it true that--I mean,
    companies, whether they are in the financial services space or
    whether they are, frankly, in manufacturing or any other space,
    they are not just looking at tax rates. They are looking at the
    regulatory environment that is causing uncertainty, correct? I
    mean, when they are going in, I think that is why we have
    seen--at least some would argue that we have seen some
    rebounds, in the overall optimism, is that there is going to be
    some stability, hopefully, and some predictability in the
    regulatory space, not just in that tax space.
        Mr. Levy. I completely agree. Surveys of businesses, they
    are big--business' biggest concern, of course, is product
    demand, but right behind that are concerns about taxes and
    regulation. So once again, while the Fed has been very
    successful lowering the real cost of capital, businesses, when
    they think about expanding and investing, their hurdle rate is
    pushed up by taxes and by regulations not just on the Federal
    level but the State and local levels where they operate, and it
    adds a huge layer of uncertainty, and they have to put that in
    their calculation.
        And so unwinding that, the build up in regulations, I
    think, would really lift a great cloud off of business
    investment, and expansion, and employment. And I think what I
    think the other panelists would totally agree with me on is if
    you could put in place policies that would lift productivity
    and potential growth, that would lift real wages.
        Chairman Huizenga. All right. And unfortunately, my time
    has expired. I wanted to get to a comment from Jeffrey Lacker
    about markets being better judges of creditworthiness than
    central authorities, but maybe we will have a round two or one
    of my colleagues can pick up on that as well.
        So with that, I would like to recognize the ranking member
    for 5 minutes.
        Ms. Moore. Thank you so much, gentlemen, and of course it
    is a pleasure to have you all here. I just want to start with,
    I think, Dr. Levy. This is very sound testimony from you, and I
    got really, really interested in your comments on page 1, 2, 3,
    4, where you talked about household behavior, and dim
    expectations of disposable income and so on, people--household
    spending more money on health care, tight mortgage credit
    standards, and so I guess where I am leading to this is some
    comment or observation on your part about the lack of income,
    of the policies, the austerity policies that were put in place
    here while simultaneously experiencing this downturn.
        Do you see that there is any nexus between the tightening--
    because you say here monetary policy can only do so much, so do
    you see any nexus between the lack of income that people have
    and the inability for our economy to grow?
        Mr. Levy. So real, or inflation just as disposable income,
    has been growing at a moderate pace, and the data show that
    people are basically spending it, so consumption is growing,
    once again, at a moderate but not a robust pace, and you know,
    at the same time, some government regulations and government
    mandated expenses, particularly in health care, have forced
    households to allocate more of their out-of-pocket spending
    toward healthcare insurance premiums and the like.
        Ms. Moore. So just to be clear, you don't necessarily see
    $7.50 an hour as the minimum wage as contributing to the slow
    growth. You see it all being caused by, of course, the downturn
    in the market, the lack of regulation--I think somebody
    testified to the lack of regulation being one of the causes, so
    you don't see the lack of income on people's part as
    contributing to this?
        Mr. Levy. My honest assessment is the biggest factor that
    is inhibiting stronger wage growth is productivity, and I
    think--
        Ms. Moore. People are more productive than they have been.
    Maybe, Dr. Johnson, maybe you can help me out here.
        Mr. Johnson. So I think the--where you are going with this,
    Congresswoman Moore, is absolutely correct, that the impact of
    fiscal policy and austerity has been disproportionately at the
    lower end of the income scale. Obviously, income inequality has
    been a issue with us for a long time, and the big question we
    have, and also to the point the chairman raises, if
    productivity increases, that is good, it creates potential for
    wages to rise, but wages at the lower end, incomes at the lower
    end of the income scale have not risenvery much over the past
    three decades, actually, so there is a bigger problem there,
    and I think that is one reason why raising the minimum wage to
    an appropriate degree would be part of a response that would
    make some sense.
        Ms. Moore. And you know, lack of providing adequate monies
    for infrastructure, educational funding and so on.
        Dr. Taylor, I just want to--since you are our distinguished
    guest here, I do want to give you a chance to answer a couple
    of questions.
        You think QE1 was okay, right, but not the other monetary
    policy? Is that--did I hear your testimony correctly?
        Mr. Taylor. There is sometimes confusion of what QE1 means.
    To me that was the purchases of securities--
        Ms. Moore. Right.
        Mr. Taylor. --in 2009. There was also a big intervention in
    2008, and that is the one, that is the lender of last resort,
    to firms in distress, liquidity operations, and those actually
    phased out very early 2009. It is really after that that I
    think there was questions about the effect.
        Ms. Moore. Okay. Thank you. I just want to ask, in my last
    25 seconds, back to you, Dr. Levy, fiscal reform versus fiscal
    stimulus. So is it your testimony really that fiscal stimulus
    would not be an effective tool? And this, of course, would be
    done in Congress, not as a monetary policy.
        Mr. Levy. I would love to see fiscal stimulus, but I think
    that involves more--not just increasing deficit spending that
    provides income support and gooses up jobs in the near term,
    but increase spending, reallocating spending in a way that
    helps out the economy in less productive capacity. And once
    again, if you look at the whole size of the government's
    budget, there is certainly enough ways to reallocate, to spend
    a lot more on things like infrastructure, education, and
    training.
        Ms. Moore. Thank you. Thank you, Mr. Chairman, for your
    indulgence, and I yield back.
        Chairman Huizenga. You are very welcome. And with that, I
    would like to recognize the vice Chair of the committee, Mr.
    Mulvaney for 5 minutes.
        Mr. Mulvaney. Thank you, Mr. Chairman. The last time that
    Janet Yellen was here, she and I had a chance to talk very
    briefly about another type of unconventional monetary policy
    that we haven't discussed yet today, and that is the purchase
    by central banks of actual equities.
        She had given a speech, I asked her a couple of questions,
    and I had a chance to follow up and ask her some questions,
    written questions for the record, and I want to read you,
    gentlemen, very quickly, the three paragraphs in that letter,
    and also, I would like to add the record to the--the letter to
    the record.
        Chairman Huizenga. Without objection, it is so ordered.
        Mr. Mulvaney. This is her response. It says: In my remarks
    at this year's economic symposium in Jackson Hole, I noted the
    challenges for monetary policy posed by the effective lower
    bound on interest rates and the possibility that when they face
    these challenges more frequently in the future, given the
    apparent decline in the so-called equilibrium real interest
    rate. To address such challenges, I noted that monetary
    policymakers may again need to rely upon unconventional tools
    such as forward guidance and asset purchases to promote
    statutory goals such as maximum employment and stable rates.
        On the subject of asset purchases, it is important to note
    that the Federal Reserve Act provides authority for the Federal
    Reserve to purchase only a relatively narrow risk--excuse me--a
    narrow range of low risk assets such as Treasury and agency
    securities. The Federal Reserve does not have the statutory
    authority to purchase a broad range of private sector
    obligations such as corporate bonds, equities, asset-backed
    securities, or household debt.
        In contrast, other central banks such as the European
    Central Bank, the Bank of England, the Bank of Japan, and the
    Swiss National Bank have the authority to purchase a relatively
    wide range of financial assets. Moreover, these central banks
    have utilized their authority in recent years in different ways
    to address severe economic shock.
        And she and I went on to talk about the fact that I think
    the Bank of Japan and then I think Swiss bank had actually
    started buying equities. The Bank of Japan, I think was buying
    ETFs. I can't remember what the Swiss were buying.
        So let's talk about this other unconventional type of
    monetary policy. We will start with you, Dr. Taylor. Your
    thoughts on that generally. Have you given any specific
    consideration to this topic?
        Mr. Taylor. Well, I think the Fed should stay away from
    buying equity.
        Mr. Mulvaney. Why is that?
        Mr. Taylor. Simple as that. Because first of all, it is a
    form of quantitative easing, and it is other things to do with
    respect to monitoring. Monetary policy can adjust its balance
    sheet to make the interest rate move in a desired way without
    touching equity. There is plenty of securities to buy.
        So I think it also goes in the direction of potentially
    helping certain firms and not others. It is a form of
    intervention, which is, seems to me, not broad based or limited
    as monetary policy should be. You can choose one firm versus
    another. There is also some things that can happen and it is
    not necessary.
        Mr. Mulvaney. And in fairness to her, she went on through a
    list of advantages and disadvantages, so I couldn't read the
    whole letter. But when she comes back and if she were sitting
    here and you are having a conversation, and she says: Yes,
    John, but we are out of bullets, we need something else. What
    would your response be?
        Mr. Taylor. I don't think you need anything else. I think
    we, have had a lot of history, we even had ideas about what to
    do at the so-called Zero Bound, which doesn't require that. It
    is some indication of what is going to happen after the Zero
    Bound. There has been lots of work on that. There is plenty of
    other securities to buy to set monetary policy.
        Mr. Mulvaney. Dr. Plosser, Dr. Levy, I would curious to
    know your thoughts. As I am not going to get a chance to ask
    you questions, I would do it in writing, because I enjoy my
    back and forth with Dr. Johnson so much, because he is a really
    good participant in these hearings.
        So Dr. Johnson, I give you the last minute-and-a-half of my
    time. What are your thoughts on this particular unconventional
    monetary policy?
        Mr. Johnson. Well, I think I am going to surprise you, Mr.
    Mulvaney. I think you are asking a very good question, and this
    is the right time to ask it, in a time of peace not-- and I
    agree with you. I don't think--I agree with Mr. Taylor.
        Mr. Mulvaney. I yield back the balance--no, I am sorry.
        Chairman Huizenga. The Chair will suspend the clock here
    because I am not sure we have ever seen a compliment like that
    paid to the vice chair, so--
        Mr. Johnson. I am happy to make your day. So I think that,
    in the United States, I would stick with the authority that the
    Fed has, and I think that is what I heard Dr. Taylor said. I
    can't imagine circumstances in the United States in which
    buying equities would be appropriate. Other central banks do
    different things because different market structures, sometimes
    they feel they don't have enough bonds and so on. I am not
    going to comment on that, you know.
        I don't think that--you know, what Dr. Taylor--you don't
    want the central bank to be directing credit, you don't want to
    be playing favorites, you don't want to be--you know, I think
    the Fed is politicized from the outside, as Dr. Levy said. I
    think they have actually retained an impressive degree of
    nonpoliticalization on the inside. If you they get into
    allocating credit more than they have, that will be a problem.
        So just on QE1, if I might. What they did was a specific
    purchase of mortgage-backed securities that were underwritten
    by or issued by Fannie Mae and Freddie Mac, which have been
    taken over by the government. So they have to buy government-
    backed securities, no credit risk, that included those housing
    securities at that moment. I think actually we are agreed--so
    that is a slightly uncomfortable we should discuss also, but I
    think what you heard from all of us is at that moment, not a
    bad call given the fog of war that they faced, but you know, I
    think you should push us on that.
        Mr. Mulvaney. Thank you, diligent gentlemen. Dr. Plosser,
    Dr. Levy, again, my apologies, in the limited time I didn't get
    a chance to ask you, but I do hope to have a chance to follow
    up in writing. Thank you. Thank you, Mr. Chairman.
        Chairman Huizenga. The gentleman yields back. And with
    that, we will recognize Mr. Foster of Illinois for 5 minutes.
        Mr. Foster. Thank you, Mr. Chairman, and thank you to our
    witnesses here. You know, one of the most important inputs to
    monetary policy is inflation, and there is a strand of debate
    going on in economics right now about whether we are
    significantly mismeasuring inflation in large part by
    underestimating the technological price reductions and quality
    improvements or just the existence of products that were not
    previously available.
        I mean, examples of this are medical care, for example. If
    you give the average person the choice of having today's
    medical care at today's prices versus 1970s medical care at
    1970s prices, most people would choose today's medical care,
    which tells you mathematically that healthcare inflation has
    been negative; whereas, in fact, we carry it on our books at 6
    percent a year, and that's, I don't know, 17 percent of the
    economy, so it is not a small error, if this is true.
        There are other things. You know, we carry in our pockets a
    super computer that has a value of tens of millions of dollars
    in 1970 dollars and somehow we are not scoring it in a naive
    way.
        And you know, this drives the debate in a number of things
    when you ask the question is the median family better off than
    it was a generation ago? You know, if you look at the basket of
    goods by the median family a generation ago versus today, you
    know, I think most people would agree it is better off, despite
    the fact that if you look at, you know, the wealth or income of
    the median family, it is not so good. So that so my questions
    are this.
        First, you know, do you agree with this narrative that we
    are actually making a significant error in how we are measuring
    inflation? And secondly, what are the implications for monetary
    policy if in fact we are not measuring inflation properly?
    Anyone who is up for fielding any part of that.
        Mr. Johnson. I think, Mr. Foster, it is a very good point
    and a rather broad and subtle point which affects both how we
    think about inflation and obviously purchasing power, and you
    are right, that where we have--some parts in our consumption
    basket didn't exist or where it would have been--would have
    cost a fortune previously, and we don't take that into account
    very well.
        I think to the point about monetary policy, which is
    obviously the focus today, this is heuristic that central banks
    have. There is nothing that says that inflation should actually
    be 2 percent. I mean, there is no law of economics or physics.
    That is a heuristic that was developed over a very long period
    of time where central banks feel that at that rate of
    inflation, you can facilitate commerce, you can have growth, it
    is consistent with high levels of productivity growth in the
    past.
        Now, that heuristic may change. I mean, I think this is
    why--I like what John Taylor has said in his testimony, which
    is the Taylor rule is not a hard and fast this is the law. It
    is guidance which Doc Taylor spotted and helped us understand
    in terms of what the Fed did in the past.
        So a good reason not to micromanage the Fed going forward
    is we want to have very smart people there on the board of
    governors, and I am confident that Congress will put smart
    people--the President will put smart people in there in the
    next iteration, and they need to be thinking about all these
    issues, including this one, Mr. Foster, and think about, okay,
    how do we continue to operate monetary policy, is it the 2
    percent implicit inflation target with the dual mandate, which
    I think works, and other people on the panel don't think it
    works, but that is a decision I--I mean, Congress sets the
    mandate.
        I think you want the Fed, the board of governors, and the
    FOMC to have the ability to think deeply about these issues. A
    lot of very smart people there, a lot of engagement with the
    private sector, and think about do we have the right way of
    managing monetary policy, do we have the right implementation
    of monetary policy given the kinds of concerns you are raising.
        Mr. Foster. Anyone else have--I mean, it was--specifically,
    if we conclude that we are mismeasuring inflation by say 1
    percent, what implication would that have for monetary policy?
    I am just, I guess, from a straight mathematical point of
    view--
        Mr. Taylor. So I would say, first of all, our measures of
    inflation are--they are different. There is different measures,
    and it is a constant decision for central bank, the Fed to
    decide which one, and so they have gone through it, and we also
    have statistical agencies that worry about the problems you are
    saying. I am not saying they do it effectively, but they try to
    take into account.
        Given all that, it seems to me monetary policy should take
    the indicators that are there and stick with those. If there is
    a lot of evidence that there is something wrong because of the
    computer technology you are mentioning, then we need to know
    that. It is actually, to me, almost more important a problem
    for measuring productivity. I think productivity growth is very
    low now. It is distressing. That is why I think we need to
    actually reform regulatory reform.
        Some of my colleagues in Silicon Valley say, no, we are
    just fine. We are doing great in productivity. I don't think
    so, but that is really, I think, where the productivity issue
    really comes to be most important.
        Mr. Foster. Also, the divergence of labor factor,
    productivity, and you know, machine factor productivity is, I
    think, accelerating and will become very significant in our
    thinking in the coming decades. Any other comments on the
    inflation issue?
        Mr. Plosser. I would just reiterate what both the other
    panelists said. For monetary policy purposes, it is, yes, you
    need to be aware of the mismeasurement, but it is a heuristic,
    it is a way to commit to something, and it doesn't mean it is
    the optimal or the best rate of inflation. A lot of people
    would have argued the inflation rate target should have been
    lower, some think they should have been higher, but it is a
    guide to policy, not so much as an objective way.
        I would also point out that if inflation, true inflation is
    really much lower than we think it is, then it means things
    that we do to calculate, for example, real wage growth over the
    last 30 years, would suggest that actually real wages are
    higher than we think they are because inflation has been lower
    than what we made.
        Mr. Foster. Which would change the narrative we see in our
    politics tremendously.
        Mr. Plosser. Exactly. Exactly. So you know, I think there
    are lots of--I think we need to distinguish that issue from the
    issue of what is useful for monetary policy purposes, and I
    think that is what John was getting at.
        Mr. Foster. Yes. So what you are saying is essentially it
    is--as long as you have a stable definition and you are using
    it as your feedback loop, you know, your--
        Mr. Plosser. For monetary policy purposes, that is the
    critical.
        Mr. Foster. But it is still a useful thing to make a stable
    feedback group. All right. Well, I guess that was my main
    question.
        Mr. Mulvaney [presiding]. The gentleman's time has expired.
    I thank the gentleman. I now recognize the gentleman from New
    Mexico, Mr. Pearce for 5 minutes.
        Mr. Pearce. Thank you, Mr. Chairman. I appreciate each one
    of you being here today. John Taylor mentions in his paper, his
    presentation that maybe the Fed should start selling assets.
        So Dr. Plosser, I think you might be the one who is closest
    to the process. What would happen if the Federal Reserve
    started selling mortgage-backed securities that they purchased
    back at a time when you were in the system?
        Mr. Plosser. Well, I think the committee and the Fed was
    terribly worried about the effect of selling securities into
    the open market. They certainly expressed concern about that.
    But I think that the first step the Fed ought to be taking is
    not selling, necessarily. I think what they could stop
    reinvesting would be a good practice because, in effect, they
    are still buying securities in the open--buying mortgage-backed
    security to replace the ones that run off just naturally. So I
    think they wouldn't have to start selling securities
    immediately. They could just stop reinvesting.
        I would also note that the process of selling securities,
    now that the financial crisis and the functioning of the
    markets is highly--has returned to more normal activities, one
    of the concerns during the purchase of securities was that the
    markets weren't functioning very well. There was sort of lots
    of gaps, there were lots of concerns about where buyers and
    sellers were, and some of the trading and information in
    arriving at prices.
        That is no longer the problem anymore.
        Mr. Pearce. Have all of the valueless MBS' been choked out
    of the system?
        Mr. Plosser. Right. So I think--
        Mr. Pearce. The ones with no value are gone. They are not--
    they don't exist anymore?
        Mr. Plosser. Well, not many of them, no, but we are still--
    but the Fed is still buying them. So I think there is less of a
    problem now to disrupt--
        Mr. Pearce. What happened to the ones with no value? I
    mean, I think we--that was at the basis of what caused the
    collapse.
        Mr. Plosser. Right.
        Mr. Pearce. Valueless loans that were made across the
    country--
        Mr. Plosser. The Fed was buying--
        Mr. Pearce. Secured by and put in--so what happened to
    them? They just vaporized? What, I mean--
        Mr. Plosser. Well, some of them restored some of their
    value. The Fed was busy trying to make a market.
        Mr. Pearce. So they have achieved some value.
        Mr. Plosser. So they have achieved--
        Mr. Pearce. Dr. Levy--I mean, Dr. Levy, I was interested in
    what your perception is on the answer to Mr. Mulvaney's
    question. I looked back several years ago, and the State of
    Ohio started buying assets. They got into buying coins, chasing
    yield, trying to find anything they could do, and so this idea
    of buying assets is one that is concerning, and then when you
    look at the CalPERS, I think the Chairman Huizenga mentioned
    them, all of the pensions are going to be chasing yield because
    they are promising payouts based on totally false assumptions
    that they can make 6 to 7 percent in the market, so they are
    paying out to the recipients.
        So I would like your observation on what chairman--or what
    Vice Chairman Mulvaney asked about the process of buying assets
    and stocks.
        Mr. Levy. Well, let me just address your first point.
        Okay. So the Fed has, through its QE programs increased
    excess reserves in the banking system up to about 2-1/2
    trillion and the Fed's balance sheet is nearly 4-1/2 trillion,
    and it has kept rates artificially low. And this has create the
    distortions. And now as I think the Fed begins to normalize,
    particularly, I believe, there is an economic regime shift
    underway and rates are going to rise, there is going to be
    pain.
        But during the period of low rates, it has forced insurance
    companies, pension funds, and the like to, you know, reach for
    yield, take on more risk than they would otherwise. And there
    is a downside of that that we are going to face now.
        Now, with regard to QE, should the Fed be buying stocks?
    Absolutely not. For what purpose? Do you want the stock market
    to go higher? And as Dr. Johnson said, do you want the FOMC
    members to deliberate on which companies to boost? It makes no
    sense.
        And all of the excess reserves and low rates have not
    stimulated aggregate to manning the economy the last 5 years.
    So for what purpose?
        Mr. Pearce. Isn't that a process they have moved into in
    Japan and isn't that one of the causes of trouble? Again, I
    will just yield to you, Dr. Levy.
        Mr. Levy. When we look at Japan, let's call a spade a
    spade.
        The central government runs a very large budget deficit,
    very large, and primarily to finance retiree pensions, and they
    don't want it to show up in their general--as an increase in
    the outstanding debt, publicly held debt, and so they use the
    Bank of Japan, and they stuff--the BOJ, through its QE, buys
    more than 100 percent of the increase in the debt. And so the
    BOJ buys JGBs and it buys corporate bonds and it buys ETFs. It
    is all a financial shell game. And it is the poster boy for
    what we should avoid.
        Mr. Pearce. Which, again, gets towards my concern that some
    of what we are doing appears to be a shell game in a lot of
    ways.
        I yield back, Mr. Chairman.
        Chairman Huizenga. The gentleman yields back, with that,
    the Chair recognizes Mr. Heck of Washington for 5 minutes.
        Mr. Heck. Thank you, Mr. Chair. I have question for Dr.
    Johnson, before I ask it, with all due respect, sir, I just
    thought I might point out you referred to Congressman Foster as
    Mr. Foster. He, in fact, has a Ph.D. In theoretical physics
    from--I grant you it is only Harvard, sir, but he likes to
    remind people that he is the sole remaining actually scientist
    in the United States House of Representatives. Point of future
    reference is all, Dr. Johnson.
        Mr. Johnson. It says Mr. Foster in his name tag, so you
    should see if you can have that changed.
        Mr. Heck. Point well taken.
        So, Dr. Johnson, I have been on this committee and in this
    body for almost 4 years now, and I have tried to be an
    unwavering advocate for increased spending on infrastructure to
    not just stimulate the economy but to stimulate growth over a
    long period of time, a little bit lay foundation for increased
    productivity. I have even gone so far as to encourage then
    Chairman Bernanke to consider using their tools to help with
    infrastructure spending by municipalities. He said they didn't
    have the authority. That, despite the fact, by the way, that
    they actually did exactly that when metro was built here
    several decades ago. I also suggested to him that is what they
    were doing with QE in the housing market. He denied that. I
    take a different conclusion out of the net effect of that
    particular activity on the part of the Fed.
        But here is what I am struck by: I try to get Chairman
    Bernanke to do it. I have had this conversation with
    Chairperson Yellen. And I have encouraged all of my colleagues
    to step up to an increased infrastructure spending bill. We did
    the FAST Act, which was very modest, frankly, very modest
    compared to what I think the need is.
        But that was when unemployment was 8 percent. And
    unemployment now is 4.6 percent. And an awful lot of the same
    people that resisted aggressively, increased expenditures on
    infrastructure are--have now come around to be an advocate for
    it.
        And so my question to you, Dr. Johnson is, why would
    increased spending on infrastructure be a bad thing when the
    unemployment rate was 8 percent but a good thing when it is 4.6
    percent? I do not understand that.
        Mr. Johnson. Well, Congressman, I think the main case for
    infrastructure, which I think is physical infrastructure,
    transportation, schools, and the human capital infrastructure,
    which is everything else around the way we train people, I
    think it is hugely important for productivity growth. You know,
    in the parlance of the IMF, you know, it is medium term
    objectives that you should have fiscal policy. I think that is
    exactly what you have been saying.
        Now, there is an additional argument for fiscal policy if
    you think that monetary policy is limited in its effectiveness
    and the economy, the private commercial part of the economy,
    needs some additional help. And I think that was a good
    argument at 10 percent or 8 percent unemployment. That piece of
    the argument, is I think, weaker now. But the medium term
    argument is incredibly strong. In fact, we are, I think,
    agreeing that there are big medium-term issues, and I would
    certainly get at them in this way.
        Now, if the question is alluding, as I think it may be, to
    what President-elect Trump has said about infrastructure and
    what appear to be the plan to materializing, I am not
    confident, Mr. Heck, that that actually is infrastructure
    spending of the kind that you are invisioning and that I just
    stated. I think it may be some different form of tax breaks of
    some kind either for existing infrastructure projects or for
    some other projects that will end up being more expensive and
    will get less effectiveness out of them compared with doing it
    through Congress.
        I would emphasize, though, and I think we are all agreeing
    on this, that fiscal policy infrastructure is responsibility of
    the fiscal authority, which is the Congress in the United
    States acting through the executive branch. It is not the
    responsibility and should not become the responsibility of the
    Federal Reserve.
        I take your point about the metro. I wasn't--I don't know
    how they did that one, but--
        Mr. Heck. What about my--what about my QE?
        Mr. Johnson. So what they do in QE, and this goes back to
    the point--
        Mr. Heck. Was is it not in effect a stimulus of the housing
    market indirectly?
        Mr. Johnson. Yes, Mr. Heck, it was. But this is back to our
    point of violent agreement among ourselves and with Mr.
    Mulvaney. QE1 was targeted at a specific breakdown in the
    mortgage-backed security market. That was hugely important to
    housing, to house prices, and for reasons you all understand,
    the financial sector and the economy. So in that fog of war
    moment, it was a good call. And, yes, it was a specific
    target--
        Mr. Heck. Okay. My point isn't--my point isn't that they
    should embark upon this journey, although I have made that
    point in the past. My point was--and I take from your remarks,
    it was a good idea to increase our investment in infrastructure
    at 8 percent unemployment, it is a good idea to do it at 4.6
    percent if it is done the right way--
        Mr. Johnson. Yes.
        Mr. Heck. --especially with an eye toward long-term growth
    and increased productivity where he can gauge it?
        Mr. Johnson. Absolutely.
        Mr. Heck. Fair enough?
        Mr. Johnson. Yes.
        Mr. Heck. I see I am close to being out of time. I am given
    to believe that we may have a second round. So maybe I will
    have another chance to get into auction here with you all.
    Thank you all for being here very much.
        With that I yield back, Mr. Chair.
        Chairman Huizenga. The gentleman yields back.
        With that, I will recognize Mr. Schweikert of Arizona for 5
    minutes.
        Mr. Schweikert. Thank you, Mr. Chairman.
        One of the problems is a lot of the really interesting
    questions have already been part of the exchange. Can we all
    have an agreement, though, that expansive monetary policy does
    enable those of us who are responsible for fiscal policy, it
    sort of indemnifies us from doing things that are hard, are
    controversial, are sometimes ideologically hard to explain. So
    I am not even asking that. I am just sort of saying it.
        Can I walk through a handful of things? And There is one
    just because Mulvaney and I have talked about. And I am just
    curious. So this one, Dr. Johnson, if we were to talk about
    sort of nonconforming monetary policy that would be within the
    rules of the U.S. Federal Reserve, let's say we will talk
    about, like during the type of QE1, could they have bought the
    lost piece of an MBF securitization instead of buying the
    entire securitization? It is just a quirky idea I have often
    wondered about. Would that have also been a way to change the
    bandwidth of the exposure for investors?
        Mr. Johnson. They are not allowed to take credit risk. And
    then they are only allowed presumably to buy government
    guaranteed securities, which in normal times means treasuries,
    but after Fannie and Freddie were nationalized, that included
    the agency securities. So I think the answer would be if you
    are just talking about, you know, picking and choosing within
    the Fannie and Freddie securitites--
        Mr. Schweikert. Let's say, if Fannie, you know--a
    nationalized Fannie Mae selling--
        Mr. Johnson. Perhaps. But what they did was much smarter
    than that, Congressman. What they did was they bought new
    issues. That was the pipeline that had broken down. And they
    targeted the QE1 on enabling that process to restart. So think
    of it like a kick start or cranking the engine. Right? And that
    I think was a good use. And to do that, you would really be
    buying the entire issue, not picking and choosing within the
    issues--
        Mr. Schweikert. Okay. So one side it would be an approach
    for what is collapsing, the other side would be keeping the
    channel healthy? Or at least keeping it healthy?
        Mr. Johnson. Yes. Ongoing or restarting it.
        Mr. Schweikert. And this may be more for Dr.--is it Levy or
    Levy? If I came to you right now and said, what is our greatest
    exposure for a difficulty that could happen in our markets
    right now? If interest rates start to move upward, simple
    example I can give you is, just the other day I was looking at
    a number of nonpublicly traded REIT's that were paying some
    fairly healthy rates of return. But if you looked at the
    underlying asset, they were varied interest and sensitive,
    tenant sensitive, those things. Are we headed towards a moment
    where the next economic difficulty we see is as interest rates
    are moving away from us, that the cap rate compression that we
    have had now starts to move against them and all of a sudden we
    once again have another great difficulty in parts, whether it
    be commercial real estate market, these nonpublicly traded REIT
    markets, what is our next rate exposure you see on the horizon?
        Mr. Levy. Well, there is certainly a risk, because after
    keeping, rates really, too low for too long and pumping so much
    liquidity into financial markets and encouraging risk taking,
    global portfolio managers base their investments on that
    framework, and now things are going to change and there are
    going to be some losses along the way.
        Now, I would point out that the interest rates have
    increased rather significantly in the last couple of months,
    particularly post election. I would say that is healthy,
    because you actually want rising real interest rates reflecting
    healthier expectations for the future.
        Mr. Schweikert. I guess my concern was just being--our
    brothers and sisters being sort of emotionally prepared that we
    do have a lot of misallocation in the capital, you know, yield
    chasing and some of that is going to have some difficulties as
    the rates move.
        Mr. Levy. And I would say the answer to that is yes. You
    just cannot do what the Fed has done the last 7 years and
    expect there to be no eventual unwind. I think the offset to
    that is if, in fact, we do get economic reforms, raised--not
    just temporarily, but raised potential growth, then there is a
    very, very positive offset.
        Mr. Schweikert. Let's--and we won't have time for this, but
    I am hoping if we get to a second round, we have a discussion
    sort of that is one off from sort of the monetary and those are
    of us who are fixated that there has been a massive
    misallocation of capital not going through its most productive
    allocation.
        But what would you have us do from a fiscal policy that
    would maximize productivity gain? Because I think that is
    something we all agree there is something wrong out there for
    the last decade and our productivity numbers.
        And with that, I yield back, Mr. Chairman.
        Chairman Huizenga. The gentleman yields back.
        With that, we will recognize Mrs. Love of Utah for 5
    minutes.
        Mrs. Love. Thank you. Thank you, Mr. Chairman.
        Thank you, the panel, for being here.
        This has been really just a great, a great panel, and it's
    been--given me quite a bit of insight. So I guess I am just
    going to explain what I have heard and then get your comments
    on what you think, whether you think that this is--if I am
    getting it correctly.
        So one of the comments that was made by Dr. Levy, which I
    think is right on, is a clear explanation, by the Fed, of the
    monetary policies and the factors that have contributed to the
    lower potential growth, weak capital spending, and
    productivity, and structural unemployment would help steer the
    economic policy debate towards the issues that really matter
    for performance. I think that that hits the nail on the head.
        So if I look at where we were at the beginning, 1913,
    versus where we are today, where the Fed was involved in dollar
    stability, low inflation, bank oversight, to 2016 where its
    inflation, full employment, expanded bank holding companies
    oversight, FSOC, you name it, a whole host of responsibilities
    that have been put on the Fed's table responsibilities. We talk
    about the CFPB, we talk about all of these other arms that
    really start to effect the economy and how everything is run. I
    start thinking about what is happening today. And the
    frustrations of the American people today is not really the
    responsibility or--should be reflected towards the Federal
    Reserve. It should be towards Congress.
        If you think about the whole--when we think about what the
    panel is saying and a whole host of things that the Federal
    Reserve is dealing with right now, the fact that this body
    today is made up of mainly Republican--of mostly Republicans,
    also the Senate, and the White House is a reflection upon the
    frustration of the American--that the American people have
    today.
        So I believe that it is not about what the Federal Reserve
    is doing, but it is about what the House of Representatives,
    what Congress is doing altogether. And that we have literally
    said we are not going to take the responsibilities of the
    economy, but we are going to put it on the table in the hands
    of the Federal Reserve. And I think that it is time for us to
    decide what the Federal Reserve is responsible for and what we
    are willing to take responsibility for.
        I am going to give a short example, and then I want you to
    explain, to tell me if I have it right. So if I look at my
    home, and I have a child, for instance, that is sick, that has
    a fever. My job is to go into the cupboard. I grab Tylenol, and
    I decide what the best dosage is for the right age of that
    child and give that child the right dosage. And when I look at
    what the policies of Dodd-Frank and all of these other things,
    the responsibilities the Fed have, I feel at this time right
    now we have literally taken the entire bottle of Tylenol and
    given it to the child, where now we have all sorts of problems
    that we are trying to adjust and we are trying to fix, and it
    is not working.
        So I just want to get your thoughts on that and tell me if
    we are on the right track and what we need to do as a body to
    make sure that we are gaining--we are taking back the reins, to
    what happens, our responsibility to what happens in this
    economy.
        I did quote you, so Dr. Levy, I was wondering if you could
    comment on that?
        Mr. Levy. All I can say is great comments. And I really
    appreciate that. Because I think what is needed when we look at
    the challenges facing the economy--and let me just point out
    that 2007, both the Congressional Budget Office and the Fed
    estimated potential growth to be 2.6. And now the Fed is down
    to 1.8 and the CBO is at 2.0. That is dramatic change.
        Mrs. Love. Right.
        Mr. Levy. So what policymakers need to do is think about
    the challenges and what are the true sources of the economic
    weakness and address them with the correct policy tools and not
    just rely, as it has recently, on the Federal Reserve.
        Mrs. Love. You have a comment--I just wanted to make sure I
    got a comment on both sides.
        Dr. Johnson, do you have a comment on that?
        Mr. Johnson. I think, Mrs. Love, you put the problem well.
    And I agree with Mr. Levy, productivity growth is lower in
    these estimates, and that is not acceptable. You know, I guess
    the good news for your side is you get--you are in charge.
    Right? You have all the branches of government, and you are
    going to make the policies. I am skeptical that you are going
    to have the sorts of positive effects on growth that Mr. Levy
    thinks, but go ahead, do it, and we will be measuring it
    carefully and be evaluating it on that basis.
        I do think, though, you want to be very careful with
    financial stability, because it has been a good question for
    our economy for a long time. You talk about the formation of
    the Federal Reserve, and you should think very carefully what
    you want Congress to be responsible for. I would not--maybe you
    don't want the Fed to do it, fine. You need some responsible
    body--
        Mrs. Love. But there is a balance. There is a right--it is
    getting the right balance?
        Mr. Johnson. Absolutely correct. Yes.
        Mrs. Love. Thank you.
        Chairman Huizenga. The gentlelady's time has expired.
        And at this point, we would like to welcome Congressman
    Hill from Arizona, who is not a regular member of the
    committee, but I am sure--I am sorry. Yes, sorry. I believe I
    said Arizona, but Arkansas. But I would like to thank Mr. Hill.
    It was a conversation that he and I had had that really
    prompted us to put together the panel in this hearing.
        With that in mind, I would welcome you to the subcommittee
    and recognize you for 5 minutes.
        Mr. Hill. I thank the chairman. I appreciate the
    opportunity to be a guest today for the hearing. I appreciate
    the panelists being here.
        And despite my affection for Mr. Schweikert, I am
    completely delighted that I don't live in Arizona.
        Mr. Schweikert. Hey.
        Mr. Hill. I knew that would get your attention.
        I want to start out and ask about--we have had a lot of
    discussion--I appreciate Mr. Mulvaney bringing up the subject
    of nontreasury purchases, the limitations in section 14 on open
    market operations.
        Would it be beneficial for the Congress to amend section 14
    and explicitly restrict the Fed from buying corporate
    securities? It is left open, and in this world of chevron
    deference and lawyers in Washington, I have concerns that open
    market operations could be expanded just by clever lawyering at
    the Fed.
        Dr. Taylor, what is your view on that?
        Mr. Taylor. I think it would be a good idea to clarify.
    There seems to be an opinion that they would find it difficult
    to do now, but I think it would be better to clarify it for the
    reasons you said.
        Mr. Hill. Well, in her testimony, Chair Yellen dodged the
    question here, but then a week later, on September 29, gave a
    speech to the Kansas City Fed where she said, there could be
    benefits to ability to buy either equities or corporate bonds.
    They would have to be weighed carefully. And she said in her
    view, that the Fed does not have the authority to do that
    without Congress changing the law. But if you read a lot of
    legal precedent around the city, I think that could be argued.
    And so that gives me great concern that we would follow these
    other central banks.
        Dr. Plosser, you want to add to that comment?
        Mr. Plosser. I would agree. I think it would be beneficial.
    The Fed, by its nature and history, you know, always prefers to
    have the option and the discretion to do what they think is the
    right thing at the right time, and those intentions are often
    good. But what discretion also does is allow you to do the
    wrong things at the wrong time. And so I agree with Dr. Taylor.
    I believe it would be useful to be more explicit about what the
    Fed can and can't do than leave it to discretion.
        I think the discussion of the Fed buying equities is a
    dangerous one. There are other central banks around the world
    that do it, do it for different reasons, there are
    institutional reasons. The ECB, for example, has to respond to
    17 different governments. So if you confine them to only
    government securities, there is a whole big political debate on
    which country you prefer and which one you don't, and so it
    gets them out of a different set of institutional problems. So
    I think it would be beneficial. I agree.
        Mr. Hill. You have also--in your testimony, you talk about
    during the crisis and the recession, the Fed purchased
    distressed securities under 13(3) and that such actions were a
    form of credit allocation, fiscal policy.
        Dodd-Frank partially addressed the issue of discretionary
    lending under 13(3), but you said you would go further. Could
    you talk about how you would go further?
        Mr. Plosser. Yes. Back in 2009, I first started talking
    about this, is that I think that 13(3), again, was a loophole,
    if you will, or it is a thing you can drive a truck through. It
    is a form of fiscal policy. I don't think the Fed's role is to
    buy distressed securities and bail out individual organizations
    and, yet, 13(3) allowed that.
        Congress did address that by restricting 13(3) to be broad-
    based programs that didn't--weren't targeted at any one
    company. But I think that, again, all of us know that there are
    ways to write an action that sort of really is targeting, even
    though it doesn't sound like it is targeted.
        My preference, though is that we really do need what I have
    called a new accord about financial crises and about the role
    that the Fed plays in them, and particularly when it comes to
    purchasing private sector securities, whether it be equities or
    whether it be under 13(3). And that accord, from my mind, is to
    sort of keep the Fed--and I alluded to this in my remarks, keep
    the Fed from engaging in discretionary fiscal policy actions,
    that there needs to be expanding, that is up front, an
    agreement about how such a circumstance would work. And I call
    that a new accord.
        And what that does is, it would work something like the
    following: Suppose there really was a crisis--and we did have
    one. We had a crisis with AIG; and we had a crisis with Bear
    Stearns. In those types of environments, things do happen, and
    you have to make tough decisions. So what I would recommend is
    that the Fed not be given the authority to buy those,
    particularly, distressed securities in a crisis. That is not
    monetary policy.
        What should happen in my view is that there should be an
    agreement in advance that under those circumstances, under a
    crisis like that, it is the fiscal authorities, in this case
    would be the Treasury, let's say, make that decision and
    determine, perhaps in conjunction with the Fed's consultation,
    about what to do. And if that was decided that was appropriate,
    from a fiscal and financial stability point of view, that the
    Fed certainly could be instructed by the Treasury to actually
    conduct an operation on very short notice, but, and here is the
    key, but those securities that were acquired during such an
    emergency would then be swapped by the Treasury for U.S.
    Treasury securities that would be given to the Fed in exchange
    for the private sector securities or distressed securities that
    were actually purchased. That way it becomes clear that that
    action has the responsibility of the fiscal authorities in
    making a fiscal decision, and the Fed would be given the
    treasuries in exchange, and they could go about conducting
    monetary policy as they saw fit.
        Mr. Hill. Thank you. Mr. Chairman.
        Chairman Huizenga. The gentleman's time has expired, and
    let that go for the salient point.
        With that, I would like to recognize the vice chair--I am
    sorry--the ranking member of the committee, Ms. Moore, for 5
    minutes.
        If it is okay with you all, we would be entering into a
    second--second round here.
        Ms. Moore. Thank you for your generosity of your time,
    gentlemen.
        I wanted to ask this during the first round, but my time
    didn't allow it.
        Dr. Taylor, you--in your testimony on page 3, you talk
    about the importance of monetary normalization, and you talked
    about it in the context of the international community. You
    said that unconventional monetary policy, so the near zero
    policy rates have spread internationally. And so you say that
    if United States--if we normalize and have a rules-based
    approach, that this would spread as well. I have a couple of
    questions.
        Number one, do you think it would be a greater possibility
    of kind of gaming the system if people sort of knew that we had
    this rigid policy that wasn't flexible with changes, and what
    makes you think that we can, you know, what evidence do you
    have that if we were to, you know, given that we sort of
    poisoned the well with our monetary policy, should Europe and
    other central banks not have done what we did?
        Mr. Taylor. So I think there is lots of evidence that the
    unusual policies spread, and there is various reasons for that.
    The low interest rates, other central banks are worried about
    their exchange rate, and so they will tend to--
        Ms. Moore. I mean, should they have done that?
        Mr. Taylor. Well, one of the questions is whether they
    overdid it or not. But if we had had, in my view, a more normal
    rules-based predictable policy, the likelihood of that
    diminishes a lot. In a way, the United States is being more
    transparent about its policy, and that leads other countries to
    do the same. So that is what the research says. I talked to
    many of these heads of central banks about it. That is my
    sense, and it would be conducive to a more rules-based
    international monetary system if we had a more rules-based
    monetary policy.
        And so I think there is discussion about that. It is not
    clear how it would work, but that is how I--from my research
    and from talking to many people in central banks around the
    world, that is my sense about--
        Ms. Moore. Your comment on that, Dr. Johnson?
        Mr. Johnson. Well, again, if FOMC decided to follow a rule
    of the kind being proposed, that is fine with me. I don't think
    Congress should be micromanaging, that is the bottom line. In
    terms of--I mean, the U.S. is clearly a leader, thought leader
    among central banks, with whom I have also worked extensively.
    You know, the Europeans have a very difficult set of problems.
    I don't think--and Dr. Plosser talked about, you know, how that
    impacts what we can do and can't do in terms of monetary
    policy.
        I don't think that us changing--going to a more rules-based
    approach would have a big impact. Japan has a long very, very
    deep structural issues. Dr. Levy has talked about those. Again,
    I don't see exact parallels.
        The British have trapped themselves in an extremely bizarre
    and difficult situation, again, very different. So I wouldn't--
    I think the discussion which we are having is a very good one
    about the U.S.--what is good for the U.S. economy. I think the
    impact on the rest of the world would be pretty second or third
    order.
        Ms. Moore. I agree.
        Dr. Taylor, I want to ask you another question. You have
    been an--you have been a critic of intervening in markets. So I
    am curious as to what your thoughts are about President-elect
    Trump's intervention in Carrier and now threatening Boeing. Do
    you think that that is--what would your advice to President-
    elect Trump be?
        Mr. Taylor. Well, I don't know the details of either of
    those cases. What I would say is that with respect to making
    the U.S. an attractive place to invest and stay here, that is
    the key. And to me, there are opportunities for that, and that
    is regulatory reform and tax reform.
        We talked a few minutes ago of where monetary policy would
    play. I think there is a sense in which if the Fed is viewed as
    some--an organization which will take care of all of our
    problems, interventionists perhaps, and that reduces the chance
    for these reforms, like the regulatory reform and the tax
    reform. So I am quite optimistic now, that especially if you
    get some monetary reform, will move in that direction. And that
    is really what I would argue we should do in these cases.
        Ms. Moore. Versus interfering in that way?
        Your thought on that, Dr. Johnson?
        Mr. Johnson. Well, if we apply Dr. Levy's sensible
    principles that, you know, generating uncertainty and if you
    confuse about what is going happen is a problem, then you
    shouldn't, up should not absolutely use presidential authority
    to mess around with individual companies.
        Ms. Moore. And so, Dr. Taylor, I do want you to be on the
    record saying that you don't think we should do that.
        Mr. Taylor. Well, I say what we should do is make this
    country an attractive place to invest. That is what we should
    do. How you do that is a question. I think it is regulatory
    reform. I think it is tax reform. I think it is a lot of
    reforms. You mentioned education, there are a lot of things in
    education to do. All those things make our country more
    attractive place to invest, more attractive place for job
    creation and for higher incomes and productivity. I think it is
    pretty straightforward. Hard to do, but that is what we should
    do.
        Ms. Moore. Thank you.
        Chairman Huizenga. The gentlelady's time has expired. So at
    this point I will recognize myself for 5 minutes, and I do--if
    I have time let, I want to come back to Dr. Johnson's
    discussion of the Fed rule.
        Dr. Levy, I want to start with you and also hit Dr. Taylor.
    Your statement notes that, ``The Fed's fully discretionary
    approach in conducting policy highlighted by its ever-changing
    explanations for delaying rate increases adds confusion, and it
    has created a very unhealthy relationship with the financial
    markets.''
        In light of your statement, Dr. Levy, can you please share
    your opinion about whether the Fed could do a better job by
    referencing a more principled policy strategy and providing a
    more accessible explanation of how the FOMC decisions depend on
    data rather telling us in plain English what data matter, and
    why they, and how they matter, and would measures like these
    help us safeguard monetary policy independence and help goods
    and services, which obviously includes labor as well, find
    their most productive employment?
        Mr. Levy. The Fed has created an extremely unhealthy
    relationship with financial markets. It not only bases its
    actions but also bases what it says on how it thinks the market
    is going to respond. And the markets respond and think about
    what the Fed is going to say. And when you get to the point
    about data dependence, you come in and you see another Fed
    member gave a speech on something, and they said they are data
    dependent. You say, what is that? And the honest answer is it
    is anything they want it to mean. And that is not the right way
    to conduct policy.
        So I think what the Fed should do is move towards a
    flexible rules-based monetary policy framework and, in
    particular, de-emphasize short-term financial fluctuations and
    economic fluctuations. That comes. That comes with the
    territory. Stay away from that, and move--and look to the long
    run and base policies on the long run. And absolutely change
    its communications and its official policy statements toward
    achieving its long-run objectives and away from day-to-day
    fluctuations in the markets that it can't do anything about and
    has no impact on the economy at all.
        Chairman Huizenga. Dr. Taylor, you care to comment on that?
        Mr. Taylor. Well, basically, I agree. I couldn't put it any
    better than what--he says it is flexible rules-based. I think
    rules-based should be flexible, just to clarify.
        Chairman Huizenga. Well, I do too, which means maybe we
    weren't as clear in format as we would have liked. But I at one
    point in the hearing dubbed it the Yellen rule. They can set
    whatever, you know, guideline that they would like. It is just
    having some sort of guidepost to reflect upon. And I guess that
    is--Dr. Johnson, your quote that I wrote down here, roughly
    is--I guess it wouldn't be a quote--roughly I wrote down, if
    the Fed cares to adopt a rule, fine, but Congress should not
    mandate a rigid rule. And I don't think I would disagree with
    that. I don't think that the rest of the panel would disagree
    with that, but I just want to give you a moment to address that
    if you would like to.
        And then I do want to very quickly, in my remaining time,
    Dr. Levy had answered this, but I would like to hear about the
    politicization of the Fed, and he is addressed that a couple of
    times. So go ahead.
        Mr. Johnson. So I like what Dr. Plosser is saying on this
    issue, and he has been a member of the FOMC, and I haven't.
    Flexible rules-based is a little bit of an oxymoron but not
    really. And the Fed has actually improved its communication in
    transparency a lot since, for example, 1990. The second half of
    the 1990s Ben Bernanke did a lot when he was also chairman. I
    think it is really hard to legislate that, Mr. Chairman. And I
    worry that it goes with all the best intentions, it will become
    micromanagement and too much control.
        I think you want to have this kind of discussion. This is
    very helpful. Put good people on the board of the Fed and the
    FOMC and let them figure out how to improve communication and
    transparency, which is what--
        Chairman Huizenga. Will they do that without a legislative
    nudge? That is the question that I have, and I haven't been
    convinced of that.
        Mr. Johnson. I think--you get--I think the Republican
    administration and Congress will appoint most of the members of
    the board of governors, and we will see what happens to the
    FOMC over the next number of years. But I expect you will--
        Chairman Huizenga. As we have learned, elections are not
    predictable, and there are changes. And I want to make sure
    that what is belt and suspenders in one administration is belt
    and suspenders on another. And that is really the purpose.
        So, Dr. Taylor, real quickly, and Dr. Plosser, you haven't
    had a chance to discuss the politicization of the Fed.
        Mr. Taylor. You know, I think this idea that the Fed sets
    its strategy, its rule, that is its job. It communicates what
    it is explicitly. If it deviates from it, it says why. Is it
    done through hearings, it creates a much better process. And,
    you know, individuals can make a difference, but this is beyond
    individuals. We have had over 100 years of experience, and it
    would be a great value in terms of how the Fed operates, how
    the Fed operates with its staff, with its researchers and the
    decisionmakers and how it discusses, not just to you but the
    American people generally about what it is doing. It would be
    far better to have a description of what it does, and I don't
    think it is as hard as people think it will be.
        Chairman Huizenga. Okay.
        And my time has expired.
        With that, I recognize the gentleman from Washington, Mr.
    Heck, for 5 minutes.
        Mr. Heck. Thank you, Mr. Chairman.
        This is for any of you. It seems as though most, if not all
    of you argued against using unconventional monetary policy in
    the future, presumably to rely more on the traditional means,
    the overnight lending rate or whatever.
        And I am wondering if you believe as well that that implies
    that the Fed ought to have a higher inflation target? And the
    reason that I ask that is that the Fed's current inflation
    target is about 3 percent and, yet, in fact, in past
    recessions--and we should all acknowledge that God has not
    outlawed the business cycle. We are going to have another
    recession at some point. The Fed has typically cut by more than
    4 percent.
        So do you believe we should have a higher inflation target
    so that the Fed has a bigger buffer so that they can avoid
    using QE, which you seem to say is a bad thing to do? Anybody.
        Mr. Taylor. Well, I just--I don't think the Fed should
    raise the inflation target. There is something there to be said
    for keeping it.
        One thing it would probably prolong these unusual policies,
    but it is fine. Sometimes we--since this was instituted, it is
    sometimes taken as a reason to gun things just because the
    inflation rate is 1.7 rather than 2, so that should be looked
    at to some extent. These are--inflation rates that are measured
    with some error. But I see no reason to be raising the
    inflation rate target.
        Mr. Heck. So what leads you to conclude that they won't
    need the same latitude for reduction in interest rates that
    they have typically utilized to combat the recession?
        Mr. Taylor. So one of the rationales for raising--that
    people make, for raising the inflation rate is that for some
    reason the equilibrium low interest rate has changed, declined,
    and so there is less room for policy to move it down. I think
    that is quite questionable. I know there are a lot of people
    who think that. If you look at the Fed's forecast, they have
    ratcheted that down by a percentage point over the last 3
    years.
        When I look at the U.S. and the world, I don't see evidence
    for that. And, in fact, I think to some extent the backup in
    long-term rates over the last month or so is some evidence
    there is not just simply a low equilibrium interest rate as the
    Fed describes it. So I don't think there are reasons for that.
    And also, we have had much experience about how to manage
    monetary policy at this 2 percent inflation target. There is
    also an international aspect. Most of the countries are in that
    same region. And so with respect to stability of the overall
    exchange rate system, it is a subvalue to have a common
    inflation target. If anything, maybe in the future when we get
    better measures, it should be lower. But I think it is fine
    right now.
        Mr. Heck. Dr. Johnson?
        Mr. Johnson. Mr. Heck, I agree we shouldn't lower the
    inflation target. I think it is 2 percent, roughly speaking.
        But, I think you hit a really important nail on the head.
    It goes to what Mr. Huizenga was saying, which is about, you
    know, what should Congress decide and what should be in
    legislation? So if monetary policy is gong to run out of
    bullets or conventional monetary policy is going to hit this
    zero interest bound on a regular basis, which is what you are
    saying, and I agree, and if we agree that unconventional
    monetary policy is only appealing in very, very specific
    circumstances and probably isn't much use over a regular
    business cycle, then what should we be doing when the economy
    turns down by that much? Well, I think--thinking about the
    legitimate--and so Dr. Plosser is calling for a new accord. I
    think a new accord broadly constructed would include Congress
    thinking about the use of fiscal policy for countercyclical
    purposes.
        And I would remind you, Mr. Chairman, that in early 2008,
    President George W. Bush proposed, and there was a lot of
    Republican support for and Congress passed, a tax cut for
    countercyclical purposes. Early 2008 right? So before Bear
    Stearns. That was a good idea. Well done.
        That was a good idea, use of countercyclical fiscal policy,
    in a relatively moderate way. Yes, in retrospect, perhaps too
    small. But it was a good idea--I mean, we have somehow
    developed or you developed this aversion to any countercyclical
    use of fiscal policy. I don't think that is a good idea. I
    think that there is a measured use for it, and that is where
    Mr. Heck is going with his question. Don't rely on the central
    bank to save the day, because they will not be able to,
    necessarily, next time.
        Mr. Heck. So my favorite personal characteristic is
    humility. I don't have much time left. But I am wondering if
    any of you would be willing to put yours on display by
    acknowledging that you argued in advance of the use of
    quantitative easing, or during it, that it would lead to
    inflation, which we have not yet experienced. And if so, if you
    are willing to admit it, if you would also tell me why you were
    wrong.
        Dr. Levy, are you admitting you are wrong, sir?
        Mr. Levy. Yes. And--so, typically, when you move to QE and
    there is tremendous liquidity and you leave rates too low too
    long, it generates excess demand in the economy, and that has
    not happened. Where I was wrong is the Fed's excessive ease did
    not translate into excessive bank lending and acceleration of
    nominal GDP relative to productive capacity that would have
    boosted wages and inflation.
        Having said that, beginning with QE3 in the summer of 2012,
    this just was clear to me, even if inflation didn't rise, that
    the distortions created by the Fed's QE and forward guidance
    were going to be very costly, and I think we are going to bear
    out those costs.
        Back to your earlier point on the flexibility of monetary
    policy, should there be a recession I don't--
        Mr. Heck. Should there be? Sir, don't you mean when there
    is?
        Mr. Levy. There will be. I don't think you would be having
    those same concerns now if, over the last couple of years, as
    the economyis growing along its potential path, that the Fed
    would have normalized rates. And so as Dr. Taylor said, if the
    Fed had normalized, history suggests it would have had no
    negative impact on the economy, and real interest rates would
    be higher and the Fed would be having that much more
    flexibility than it is now perceived to have from the vantage
    point of where our rates are now.
        Mr. Heck. I would acknowledge hindsight is a wonderful
    thing in this regard and all regards including our forecast
    about the net impact of quantitative easing.
        Chairman Huizenga. The gentleman's time has expired.
        I would love to hear how regulation might have hampered
    that excess lending with that equation, but I do need to move
    on to Mr. Schweikert from Arizona, who is recognized for 5
    minutes.
        Mr. Schweikert. Thank you, Mr. Chairman.
        You know, it is a complex ecosystem, but let's stay a
    little bit on this theme.
        And, Mr. Chairman, thank you for tolerating. Sometimes my
    questions get a little off track, but I am trying to sort of
    understand some things.
        If I was sitting in your lecture halls 10 years ago, and
    during that lecture the discussion was we are going to
    substantially, dramatically, increase monetary supply,
    liquidity in the United States but all over the world, what
    would you have put up on the board as saying, and this is our
    prediction of what will happen to productivity gains because of
    new equipment, new--and why has not--what I would have assumed
    would have been obvious, why hasn't it happened? What has
    happened--and if we had had this discussion 10 years ago, what
    did we get right in our predictions and what have we gotten
    wrong, and what is the solution to productivity? Is it purely
    on the fiscal side and monetary should not even--even put it
    into its calculus? Anyone willing to play on this subject?
        Mr. Plosser. So let me offer at least one reaction. And
    that is, the first thing to recognize is that monetary policy
    is not a solution to any form of productivity problem.
        Mr. Schweikert. Okay. And you actually beat me to my punch
    line, but I was going to wait to the 5-minute mark for that.
        Mr. Plosser. I am sorry.
        Chairman Huizenga. Can you pull your mike a little closer?
        Mr. Plosser. Yes. And I think it is a mistake for the
    public or Congress or anyone else to believe that putting that
    in the hands of central bank is the right thing to do.
        Now, economists really don't understand a whole lot about
    the evolution of productivity. It is not something that we know
    much about. We don't predict it very well. We know some of its
    determinants, but at the end of the day, the long run health of
    the economy, and our ability to gradually continually increase
    our standards of living, is all about productivity. But nothing
    else really matters very much at the end of the day.
        Mr. Schweikert. And, look, this one should be nonpartisan,
    but there is something wrong in the formulas we all went to
    school under. If I put this much money into education; if I put
    this much money into tools and equipment; if I put this much
    money in lending capital for business, plants and equipment,
    you will get this type of productivity gain. And now we are
    living in a world for several years now where lots of
    liquidity, lots of money has actually gone into those, and I am
    not seeing it. So what did we get wrong?
        Mr. Plosser. Putting money through a central bank doesn't
    solve the problem. The productivity is generated by how that
    money gets used at the end of the day.
        Mr. Schweikert. Okay. So is the formula and the amount of
    liquidity that central bank expansionary policy that cash ended
    up on money center banks' books buying--
        Mr. Plosser. So this--
        Mr. Schweikert. I am sorry.
        Mr. Plosser. I am sorry. So this goes back to the previous
    question about why we haven't had inflation. I think what many
    economists, myself included, were wrong about, in part, had to
    do with a lot of the money--I will call it money, but that is
    not really what it is. A lot of the reserves that were created
    through quantitative easing are still in the banking system.
        Dr. Levy said they haven't been spread out in the economy,
    which is actually turn them into money and then turn them into
    inflation.
        Mr. Schweikert. So if I were even to look at banking
    sectors and a couple of other sectors and take a look at what
    we would all around here refer to as sort of this tier one, or
    Boswell compliant capital, a lot of that you might have, if you
    could do the formula backwards, may have come from the
    quantitative easing?
        Mr. Plosser. Right. So I think quantity easing and low
    interest rates did two things that were not terribly helpful.
    One is they led to what I would describe as a lot of financial
    re-engineering, companies buying back debt, or buying back
    stocks, or taking a form of leverage. It didn't get used in the
    usual form of lending and productive capacity.
        Mr. Schweikert. Solicitation of the entire panel. So if I
    came to you and said, all right, productivity gain is important
    for my friends on the left, for particularly those on the
    right, whether we are going to be able to afford our social
    contracts, all the other bells and whistles that society wants,
    but it is going to come from fiscal policy or from types of
    fiscal policy where we create barriers for growth and we need
    to stop doing it, more rational, everything from taxes, from
    regulatory system, and the interplay between those, and we have
    to stop thinking somehow the Federal Reserve is going to bail
    out our failure to act, am I speaking heresy, or do we sort of
    from all sides, do we agree that it is fair?
        Mr. Taylor. So we teach, I think all of us, the
    productivity growth comes from investment and from technology.
    You know, as a famous formula tells us that.
        And right now, if you look at our low productivity growth,
    it is, you know, less than half a percent for the last 5 years.
    We also see very low capital accumulation, and we also see very
    low so-called total factor productivity. So those are the
    reasons. And how do you get more private investment? I think it
    is just regulatory reform. It is the tax reform.
        Mr. Schweikert. Okay. If the chairman would allow me, I
    want to hear--
        Chairman Huizenga. Very quickly.
        Mr. Levy. So as I pointed out, the Fed has very
    successfully lowered bond yields and the real cost to capital.
    Why hasn't that stimulated more capital spending that has been
    the weak link in the economic expansion and productivity? Why
    haven't businesses responded to the lower cost to capital? And
    survey suggests businesses' biggest concerns is taxes,
    regulation, and the like.
        And once again, I think it gets to the point where we need
    to address those concerns with the right policy tools rather
    than more monetary ease, which the Fed's model tells us it
    should do.
        Mr. Schweikert. Mr. Chairman, thank you for your patience.
    I guess the theme I was working on in many ways we can build a
    model that demonstrates that there is a massive, massive
    misallocation of capital, and it was arrogant of us to somehow
    think it was going to go where we all wanted it to go, and that
    at some point those of us who do fiscal policy need to do the
    hard things.
        We need to do the tax reform. We need to do the regulatory
    reform. And some of us, I think--I believe technology, whether
    it be the super computer we carry in our pocket, we could have
    a revolution on how we regulate in a more dramatically
    effective, less expensive, rational model, and I am terrified I
    don't hear enough discussion about it.
        So with that, I yield back.
        Chairman Huizenga. The gentleman's time has expired.
        With that, the Chair will recognize Mrs. Love, of Utah, for
    5 minutes.
        Mrs. Love. Thank you. What I failed to mention in my
    Tylenol analogy is that, you know, when you give your child way
    too much, you end up hurting parts of the body that had nothing
    to do with the fever to begin with.
        So I would actually say, in other words, that when the
    Federal Reserve ventures out of monetary policy, and they
    expand into regulatory policies and practices, they actually
    hurt parts of the financial world that had nothing to do with
    financial crisis, which is some of the examples that we have
    seen.
        I actually wanted to go and expand upon what I was talking
    about earlier in the Federal ReserveAct and the amended
    Humphrey-Hawkins to include full employment.
        What, in your opinion, have we gained from that amendment?
        I haven't spoken to--I haven't asked your opinion, Dr.
    Plosser, if you wouldn't mind.
        Mr. Plosser. I am not sure we have gained a whole lot. I
    think there is no other central bank in the world that has a
    mandate like that. Many of them have inflation targeting
    mandates. Many of them have article mandates where it puts
    inflation first then says, well, if inflation is okay, you can
    sort of do some other things that help the economy. I think
    what we have done, unfortunately, is opened the door for asking
    the Fed or expecting the Fed to do all sorts of things that it
    is not particularly suitable to do.
        And my comments, remarks, I made--and they seem to sort of
    want to take responsibility for everything from real wage
    growth to participation rates, to how many part-time workers we
    have, all sorts of things that monetary policy just really
    can't do. And so the whole thrust of my argument is that by
    narrowing the things we asked them to do, the easier it is to
    hold them accountable for whether they are successful or not.
        Mrs. Love. And I would think--
        Mr. Plosser. --it has to be you don't ask them to do the
    things they can't do.
        Mrs. Love. Yes. And it would also be easier for us not to
    have look at every aspect and manage the thing that they do
    also.
        Do you have a comment with that, Dr. Johnson?
        Mr. Johnson. Congresswoman--
        Mrs. Love. In terms of what we have gained. In your opinion
    what we have gained from that.
        Mr. Johnson. Sure. Sure. Look, I think the legitimacy of
    our government institutions is really important, for whom does
    the Fed work and how do you communicate that? I think we
    mustn't lose track of that. It has taken a beating probably
    through their own, I think, inattention to financial regulatory
    issue, precrisis, pre-2007, 2008.
        And, you know, I think if you remove the employment
    mandate, it would be misunderstood--that would be--you know, I
    agree other central banks formulate this somewhat differently,
    but I think it would be misunderstood by the American people,
    and that would not be my recommendation. But, you know, that is
    your business.
        You know, what is the problem you were trying to fix? On
    Monday, I was with Chairman Volcker at an event that was
    organized by the Volcker alliance. And I was reminded by his
    leadership and his ability with his colleagues to bring down
    inflation. It was a very bad problem when he came in. And
    Chairman Volcker, with others of the Federal Reserve, really
    put the country on the path to what was then an impressive
    economic recovery. And I don't think it was anything in his
    ability to do that job, which is an incredibly hard job with a
    lot of political pressure.
        I don't think the Humphrey-Hawkins amendment made it harder
    for him to do that job. So I don't think--I think the problem
    is, actually, what you said, you know, what is the nature of a
    financial system, how unstable is it, and what we are going to
    go about that? That is a good question. Should the Fed be on
    the job for that? Mr. Volcker, actually, has some other ideas.
    You might want to look at those. I really recommend the work
    done by the Volcker alliance. That is a really good question,
    the financial stability part.
        The Humphrey-Hawkins part, I really would not recommend
    that you repeal that. But, you know, again, you are in charge,
    and if you want to do that--
        Mrs. Love. I just asked what we gained from it, and I
    haven't heard any real--
        Mr. Johnson. Legitimacy. Legitimacy.
        Mrs. Love. --yes, legitimacy on what we have actually gain
    from that. I mean, we can sit there and say, hey, well, I
    wouldn't remove it for fear that we would something happen. But
    I haven't heard any example of what we have actually gained
    from that--from that amended to include full employment.
        Anyway, I just have one more--well, I don't know if I have
    enough time to ask one more question.
        But some of you mentioned that the Fed continued to expand
    its role in systemic regulation and credit allocation. In your
    opinion, Dr. Levy, very quickly, do you think that should make
    us worry about its ability to produce sound monetary policy?
        Mr. Levy. Yes, in general, because this is just an--by
    getting into credit allocation and expanding its scope, it is
    just move monetary policy beyond where it becomes capable, and
    it only generates, you know, distortions in economic and
    financial behavior.
        Mrs. Love. Thank you. Great panel today. Thank you. Thank
    you.
        Chairman Huizenga. And, certainly--well, last but certainly
    not least, we have Mr. Hill from Arkansas who will be
    recognized for 5 minutes.
        Mr. Hill. I thank the chairman. Thanks again to the panel.
    Good discussion about the fact that we have $4 trillion on the
    Fed's balance sheet up from 8- or 900 billion before the crisis
    and yet we don't seem to show much for it. As I have said to
    Chair Yellen before, with deficit spending, with a $4 trillion
    Fed balance sheet, shouldn't we be in some sort of Keynesian
    Nirvana of economic, which we are obviously not.
        In my view, it is the fundamental issue is that not since
    the 1930s have we seen a money multiplier rate at 4, at this
    low, low level, and I think it speaks to--I mean Eccles in the
    1930s called it ``pushing on a string,'' and everybody
    understands that, but it hasn't been lower since say 1935 than
    it is today, period, full stop.
        And so, Dr. Levy, I loved your testimony, and it seems to
    me that the reason is nonmonetary policy structural
    impediments, which we never get an answer to when the
    administration come and testifies. Secretary Lu, zero; Chair
    Yellen, zero on this topic. They will not admit explicitly that
    there are major nonmonetary policy structural impediments such
    as the fact that operational and credit risk has been
    completely mangled by Dodd-Frank, that there is just plain fear
    on the part of market participants, whether they are small
    business people trying to comply with Department of Labor new
    rules or implementing the Affordable Care Act or maintaining
    limits on their employee to comply with avoiding the Affordable
    Care Act, that their staff, in my judgment, is misdirected from
    productive functions to compliance oriented functions.
        And finally, that Dodd-Frank, I think, has made all the
    institutions sort of aligned in a pro-cyclical sort of way
    instead of allowing diversity in risk parameters among the
    activities of our banking institution. So what, in your view,
    and be specific, would get our multiplier up?
        It took 30 years or more for the multiplier to rebound from
    the 1930 depression, a long time, but it fell off a cliff from
    8 or 9 in 2007, straight to the bottom. It has never moved
    since we started all this stimulus.
        So Dr. Johnson, what, in your view, what is the single
    biggest thing we can do in the government to stimulate a faster
    expansion of the multiplier?
        Mr. Johnson. Great question, Mr. Hill, and you know, and I
    don't disagree with the formulation, although it is not exactly
    the standard economic version. I think we focus on the
    productivity growth and the money multiplier, the monetary
    policy will adapt to be consistent with that. Look, I am a
    skeptic with regard to the regulatory impediments, but you
    know--
        Mr. Hill. Why? Why? Give me one reason why.
        Mr. Johnson. Because I spent a long time studying that
    question, that issue, and those measures around the world, and
    I don't see that--
        Mr. Hill. So you believe that banks are lending more and
    have higher productivity, and credit is getting to consumer and
    businesses better today--
        Mr. Johnson. No, sir.
        Mr. Hill. --than it was in 2005?
        Mr. Johnson. No, sir. Can I finish answering the question?
        Mr. Hill. Of course.
        Mr. Johnson. No. Look, we had a huge financial crisis, Mr.
    Hill, and I think if we are looking at medium term, longer term
    growth, the most important thing is avoid having another crisis
    like that, right. So that was the goal of Dodd-Frank, you don't
    like it, I understand that, you are going to repeal and replace
    it, I understand that. Let's see what happens. I am very
    worried. I am very worried about that. But on the regulatory
    pieces, it is going to be fascinating. I am just watching this
    from the side, and I--you know, I wish you well because I want
    good things for the American economy, but I think the story
    that you have, that narrative that you are going to remove
    those regulatory impediments and very good things will happen
    because the impediments were the problem, I am skeptical. I am
    not disagreeing with--
        Mr. Hill. Okay. I will put you down as--
        Mr. Johnson. Sorry.
        Mr. Hill. Excuse me, it is my time. I will put you down as
    a doubter on regulatory. How about tax reform?
        Mr. Johnson. I have testified to this Congress a number of
    occasions in favor of various forms of tax reform, and I think
    if you can find ways to simplify the corporate tax code, remove
    a lot of the special treatments and so on, that could be
    extremely helpful. I am in favor of lowering taxes, absolutely,
    on the lowest paid Americans. I don't see why anybody earning
    under $50,000 a years pays any tax, and I am including Social
    Security contribution.
        So yes, I am all in favor of that, but be careful with
    those projections, the dynamic scoring that says it won't
    impact the budget deficit, because it will, and I think you
    want to be cognizant of the impact on the budget deficit, which
    I know you talk about a lot, and so please really take that
    seriously because otherwise the debt numbers the next time we
    come back here are going to be a lot higher.
        Mr. Hill. Ten seconds, somebody else want to tackle that?
    Dr. Levy.
        Mr. Levy. Yes. Okay. I think if you were to get rid of a
    lot of the micro-regulations in Dodd-Frank, banks are sitting
    on trillions in excess reserves that would increase banks'
    willingness to lend, and you would see the biggest increases
    among small- and medium-sized banks and a lot of their lending
    is to medium- and small-sized businesses that generate a lot of
    jobs.
        Okay. But that is on the financial side. On the
    nonfinancial side, tax reform, and I emphasize reform and not
    just increase deficit spending, corporate tax reform that lifts
    the gray cloud off of corporations, simplification, individual
    income tax cuts, but don't go overboard, and the third point is
    normalize interest rates. You raise interest rates that reduces
    the demand for money that increases velocity, so what you--what
    I am really talking about here is resetting monetary policy but
    also resetting fiscal and regulatory policies in a way that I
    think what has happened over the last, I don't know how many
    years, these inhibitions to growth have constrained both
    aggregate supply and aggregate demand.
        Let's reduce those inhibitions through wise policies, both
    within the financial system so that banks are putting to work
    the excess reserves and on the nonfinancial system so that
    businesses--and once again, if you look at economic performance
    so far this expansion, consumption has grown at a fine pace, so
    has housing. The weakness is capital spending, as Dr. Taylor
    said, the capital stock net of depreciation has been declining,
    this means not just lower capital ratios relative to labor but
    there is less training of labor of new capital. You really need
    this kind of regime change, and then you are going to get the
    multipliers moving back up.
        Maybe the reason why monetary policy has worked is because
    it hasn't worked. I would love to see the regime changes that
    really force monetary policy to normalize.
        Chairman Huizenga. I think therein lies our--we have done
    one thing here. We have successfully bent time; therefore, the
    last 10 seconds. So I do deeply appreciate the time invested by
    our panel and by our members on this very important issue, and
    I would look forward to continuing the conversation.
        The Chair notes that some Members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        And with that, the hearing is adjourned.
        [Whereupon, at 12:13 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                December 7, 2016

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