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

                           EXAMINING FEDERAL RESERVE
                                REFORM PROPOSALS

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

                                    HEARING

                                   BEFORE THE

                            SUBCOMMITTEE ON MONETARY

                                POLICY AND TRADE

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 JULY 22, 2015

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 114-43

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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:
        July 22, 2015................................................     1
    Appendix:
        July 22, 2015................................................    37

                                   WITNESSES
                            Wednesday, July 22, 2015

    Cochrane, John H., Senior Fellow, Hoover Institution, Stanford
      University.....................................................     6
    Kohn, Donald, Senior Fellow, Economic Studies Program, Brookings
      Institution....................................................     8
    Kupiec, Paul H., Resident Scholar, American Enterprise Institute.     9
    Taylor, John B., Mary and Robert Raymond Professor of Economics,
      Stanford University............................................     5

                                    APPENDIX

    Prepared statements:
        King, Hon. Peter.............................................    38
        Brady, Hon. Kevin............................................    39
        Cochrane, John H.............................................    42
        Kohn, Donald.................................................    47
        Kupiec, Paul H...............................................    52
        Taylor, John B...............................................    65

                  Additional Material Submitted for the Record

    Huizenga, Hon. Bill:
        Written statement of the Property Casualty Insurers
          Association of America.....................................    70
        Wall Street Journal article entitled, ``Taylor on Bernanke:
          Monetary Rules Work Better Than `Constrained Discretion,'''
          dated May 2, 2015..........................................    71

                           EXAMINING FEDERAL RESERVE
                                REFORM PROPOSALS

                                  ----------

                            Wednesday, July 22, 2015

                 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, Lucas,
    Pearce, Stutzman, Pittenger, Messer, Schweikert, Guinta, Love,
    Emmer; Moore, Foster, Himes, Carney, Murphy, Kildee, and Heck.
        Ex officio present: Representative Hensarling.
        Also present: Representatives King and Green.
        Chairman Huizenga. The Subcommittee on Monetary Policy and
    Trade will come to order.
        Without objection, the Chair is authorized to declare a
    recess of the subcommittee at any time.
        Today's hearing is entitled, ``Examining Federal Reserve
    Reform Proposals.''
        I now recognize myself for 2 minutes to give an opening
    statement.
        The Federal Reserve System was created in 1913 with a
    mission of establishing three key objectives for monetary
    policy: maximum employment; price stability; and moderate long-
    term interest rates. However, last Congress, as we examined the
    Fed's actions over the last 100 years, through the Federal
    Reserve Centennial Oversight Project, it became clear that the
    Federal Reserve has gone above and beyond its original mission
    statement.
        In fact, since the enactment of the Dodd-Frank Act, the
    Federal Reserve has gained unprecedented power, influence, and
    control over the financial system while remaining shrouded in
    mystery to the American people. This hearing provides us with
    another opportunity to examine how the Federal Reserve conducts
    monetary policy and why the development of these policies is in
    desperate need of transparency, in my opinion.
        The Fed's recent high degree of discretion and its lack of
    transparency in how it conducts monetary policy demonstrates
    that not only are reforms needed but, more importantly, that
    reforms are necessary. Today, the Fed's balance sheet is almost
    5 times the size of its pre-crisis level and represents one-
    quarter of the size of the entire U.S. economy. That is a
    tremendous amount of money.
        The Fed's balance sheet demonstrates attempts to push
    monetary policy past its most basic mandate: price stability.
    Absent a monetary policy that dutifully promotes price
    stability, economic opportunity will continue to fall short of
    its potential. I have continued to encourage the Federal
    Reserve, both publicly and privately, to adopt a rules-based
    approach to monetary policy and communicate that rule to the
    public.
        As anyone who has been paying attention to it knows, the
    Fed has not seen a clear path to go in that direction, so we
    are here to help nudge them along. The Fed also, I believe,
    most importantly, must be accountable to the people's
    representatives as well as the hard-working taxpayers
    themselves.
        With that, I yield back the balance of my time.
        I recognize the gentlelady from Wisconsin, Ms. Moore, for 3
    minutes.
        Ms. Moore. Thank you so much, Mr. Chairman.
        Today, we are here examining two proposals: the first would
    create a partisan commission to review the Fed's dual mandate;
    and the second would permit policy audits of the Federal
    Reserve and establish a computer model to govern monetary
    policy.
        I think there may be some legitimacy to some of the
    concerns my Republican colleagues have raised regarding the
    Fed, but these two bills are answers to problems that really
    don't exist. If we are worried about the Fed's growth policies,
    why don't we meet the Fed halfway, and stop the misguided
    obsession with austerity and trying to trick the economy to
    grow the economy?
        If you want the Fed to feel comfortable going to a more
    traditional monetary policy, you don't need all these bills.
    Why don't my colleagues join Democrats in supporting proven
    growth policies like extension of the Ex-Im Bank, providing a
    living wage for workers, a long-term highway bill that used to
    be bipartisan, equal pay for women, sick leave, or training a
    21st Century workforce by improving public education?
        I strongly support the dual mandate. It reflects the
    reality of monetary policy. I don't know how anyone can be
    against weighting employment as the consideration of economic
    growth goals.
        As for auditing the Fed and establishing a computer model-
    based monetary policy, I can tell you, I am so certainly unsure
    about the level of concern for the U.S. credit rating agencies
    anymore after some of our colleagues have called for a default
    on U.S. debt. However, our central bank's independence is a
    consideration of credit rating agencies. These are established
    benefits of independent central banks. Injecting politics into
    monetary policy would be a disaster.
        I see this computer model as extremely dangerous. Both Fed
    Chair Yellen and former Fed Chair Bernanke feel that this would
    be flawed, and tell us that it would impede the Fed's ability
    to act in a crisis. Banks and Wall Street investors would all
    set their trading and projections to whatever the so-called
    Taylor Rule computer model we adopt would be, and the potential
    disruption of any deviation from the model would cause all kind
    of market disruption and thus effectively take away any
    discretion from the Fed. I would oppose both bills in their
    current form.
        I look forward to our distinguished panel, and I yield back
    the length, the balance of this long time I have.
        Chairman Huizenga. The gentlelady's time has expired.
        With that, the Chair recognizes the gentleman from New
    Hampshire, Mr. Guinta, for 1 minute for an opening statement.
        Mr. Guinta. Thank you, Mr. Chairman.
        I welcome the panel. And thank you for being here today for
    this very important hearing.
        From 2007 to 2012, we saw the average median income
    decrease in 5 consecutive years, and since then, we have
    arguably the slowest economic recovery since World War II. Last
    month's Investor's Business Daily report reported that overall
    growth in the last 23 quarters of the Obama recovery has been
    at about 13.3 percent. The average growth rate achieved since
    World War II is 26.7 percent. Obama's recovery is half the
    average.
        If our growth rate under President Obama was simply
    average, it has been reported that our GDP would be $1.9
    trillion larger today. That is roughly $16,000 more per
    household. On top of our sluggish economy, we have Americans
    who are seeing near zero interest rates on their savings
    accounts while median incomes are not increasing as quickly as
    they should be.
        Millions of Americans are dealing with fluctuating gas
    prices, higher food and electricity prices, and increasing
    healthcare costs. And this is why we need transparency within
    the Federal Reserve. It is time to open up the books and take a
    look at what the Fed is doing.
        I yield back.
        Chairman Huizenga. The gentleman's time has expired.
        The Chair recognizes Mr. Himes of Connecticut for 2 minutes
    for an opening statement.
        Mr. Himes. Thank you, Mr. Chairman.
        And thank you to the panel for being here.
        I wanted to be in this hearing because I find the idea of
    examining the Federal Reserve reform proposals both ironic and,
    to some extent, profoundly concerning. It is ironic because, of
    course, the bad actors since 2006, 2007, 2008--Fannie Mae,
    Freddie Mac, the GSEs--generally remain unreformed. Shame on
    both parties for that. The banking industry and all of its
    associated people have been reformed. And, of course, my
    friends on the other side of the aisle would like to do away
    with that reform.
        And, of course, history will not treat this institution
    kindly with respect to the way we responded in fiscal policy
    over the last several years. And yet, it is the Federal
    Reserve, the one entity that I think can be called probably the
    hero of the last 6 years, through their expansionary monetary
    policy, through their use of extraordinary and, yes, somewhat
    concerning authorities to yank us out of a recession--some say
    not rapidly enough--but unquestionably yanked us out of a
    recession. And yet, it is they that we are talking about
    reforming.
        We have interesting debates in this room, including the
    role of the government in flood insurance and mortgage
    insurance. And these are really interesting debates that we
    ought to have.
        This is different. And this is where I am profoundly
    concerned. An independent Federal Reserve, a monetary authority
    that is not subject to the tender mercies of this institution
    is a cornerstone of our economy. And, frankly, that is true
    across time and across geographies.
        Many of the proposals being entertained today would erode
    that independence. This is not a question subject to debate.
    There is plenty of academic research, most notably that
    undertaken by Larry Summers and Alberto Alesina in 1993, which
    shows that there is a very strong correlation between monetary
    policy independence and inflation. Independent institutions run
    better economies than those that are not.
        The objection is made that it should be transparent. It
    should be transparent. The Federal Reserve, of course, in the
    last 50 years has become much more transparent. But above all
    else, we need to be very, very careful that we do not damage
    the monetary independence in the Federal Reserve through any
    efforts to improve the transparency of that institution.
        Thank you, Mr. Chairman. I yield back the balance of my
    time.
        Chairman Huizenga. The gentleman's time has expired.
        With that, the Chair recognizes the gentleman from
    Minnesota, Mr. Emmer, for 1 minute for an opening statement.
        Mr. Emmer. First, I want to thank the chairman for calling
    this hearing and to thank the witnesses for being here today.
        Despite the differences of opinion that we know are in this
    room, it is my hope that we can work together to make the
    Federal Reserve even more transparent and a market-friendly
    institution.
        As you know, the Fed has immense influence over capital
    markets, financial institutions, and the American economy.
    Since the Great Recession, the Fed has used its nearly
    unlimited, broad, and assumed powers to push interest rates to
    historical lows by trillions of dollars of toxic assets and
    bail out numerous financial institutions. That is why I have
    joined many of my colleagues and my constituents with grave
    concerns that short-term solutions enacted by the Fed have
    harmed future prosperity and the people's faith in their
    institutions.
        For these reasons, I am more than pleased that Chair
    Huizenga's Federal Reserve Reform Act and Mr. Brady's
    Centennial Monetary Commission Act have been proposed. I see
    these bills as important steps towards responsible oversight
    and a pro-growth economy.
        And with that, Mr. Chairman, I yield back.
        Chairman Huizenga. The gentleman's time has expired.
        Before we proceed, without objection, members of the full
    Financial Services Committee who are not members of the
    subcommittee may participate in today's hearing.
        Without objection, it is so ordered.
        With that, we would like to welcome some very esteemed
    colleagues and doctors who are going to be here with us today
    examining these various proposals. We are going to welcome the
    testimony of Dr. John Taylor, professor of economics at
    Stanford University; Dr. John Cochrane, senior fellow with the
    Hoover Institution; Dr. Donald Kohn, senior fellow in economic
    studies at the Brookings Institution; and rounding us out, Dr.
    Paul Kupiec, resident scholar at the American Enterprise
    Institute.
        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.
        And, with that, Dr. Taylor, you are now recognized for 5
    minutes for your opening statement.

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

        Mr. Taylor. Thank you, Mr. Chairman, and Ranking Member
    Moore, for inviting me to this subcommittee hearing.
        I would like to focus on Section 2 of the Federal Reserve
    Reform Act in these opening remarks. That section requires that
    the Fed describe the strategy or rule of the Federal Open
    Market Committee (FOMC) for the systemic quantitative
    adjustment of its policy instruments. The Fed would choose the
    strategy. The Fed could change its strategy or deviate from the
    strategy, but it would have to explain why.
        In discussing the bill, I would like to emphasize the word
    ``strategy'' because the word ``rule,'' though frequently used
    by economists, may convey the false idea that a rules-based
    monetary strategy is mechanical or mathematical. Practical
    experience and economic research over many years shows that a
    clear monetary strategy is essential for good economic
    performance. My own research, going back more than 4 decades,
    supports this view, yet many agree that during the past decade,
    the Fed has either moved away from a strategy or has not been
    clear about the strategy.
        It is, of course, possible, technically, for the Fed to get
    back to and adhere to such a strategy, but it is difficult in
    practice. And for this reason, I think the Federal Reserve
    Reform Act of 2015 is needed.
        Congress has responsibility for oversight of policy in the
    strategic sense, and there is precedent. From 1977 to 2000,
    Congress required the Fed to report money growth ranges. The
    requirement was repealed but not replaced. The proposed policy
    strategy requirement is an excellent replacement.
        During the past year, there has been extensive discussion
    about the bill. A similar bill was voted out of the Senate
    Banking Committee, and new economic research has begun. The
    proposed Centennial Monetary Commission would be a constructive
    way to bring this discussion together in a bipartisan context.
    It would be useful to constructively address the concerns
    raised during the past year.
        Fed Chair Janet Yellen, for example, testified that she did
    not believe the Fed should chain itself to any mechanical rule.
    But the bill does not chain the Fed to any such rule. The Fed
    would choose and describe its own strategy. It could deviate
    from the strategy in a crisis if it explained why.
        Another stated concern with policy rules legislation is
    that the Fed would lose its independence. In my view, based on
    my own experience in government, the opposite is more likely. A
    clear, public strategy helps prevent policymakers from bending
    under pressure and sacrificing their institution's
    independence.
        Some say the bill would require the Fed to follow a
    particular rule, but this isn't the case. The bill simply
    requires that the Fed compare its strategy with a reference
    rule. Many at the Fed already make such comparisons.
        That false claim that the bill would chain the Fed leads to
    other questions. Last week, Ranking Member Moore asked Chair
    Yellen whether the Fed would be able to react to the Greek
    crisis if it were required to follow the so-called Taylor Rule.
    Leaving aside whether the Fed should have reacted to the
    crisis, the legislation would in no way have prevented it from
    doing so.
        Another critique is that the zero bound on the interest
    rate means you have to abandon rules-based strategy. Wasn't
    that why the Fed deviated from rules-based policy in recent
    years? Not in 2003, 2005, and not now because the zero bound is
    not binding. It appears that there was a period in 2009 when
    the zero was binding, but that is not a new thing. Policy
    research design has looked into that issue on the go. One
    approach would simply be to keep money growth steady.
        Some recent objections revive old debates. Larry Summers,
    for example, makes an analogy with medicine, saying he would
    prefer a doctor who just gave him good medicine rather than one
    who is predictable or follows the strategy. But this ignores
    progress in medicine due to doctors using checklists.
    Experience shows that checklists are invaluable for preventing
    mistakes, getting good diagnoses, and appropriate treatments.
    Checklists-free medicine is as wrought with as many dangers as
    rules-free monetary policy.
        Some say you don't really need a rule or a strategy for the
    instruments of policy as long as you have an inflation target
    or an employment target. In fact, Ben Bernanke has called this
    approach ``constrained discretion.'' But having a specific
    numerical goal is not a strategy for the instruments of policy.
    It ends up being all tactics. Relying on constrained discretion
    rather than a strategy for the instruments of monetary policy
    just hasn't worked.
        Thank you very much. I would be happy to answer any of your
    questions.
        [The prepared statement of Dr. Taylor can be found on page
    65 of the appendix.]
        Chairman Huizenga. Thank you, Dr. Taylor.
        And, with that, Dr. John Cochrane, you have 5 minutes as
    well for your opening statement.

         STATEMENT OF JOHN H. COCHRANE, SENIOR FELLOW, HOOVER
                    INSTITUTION, STANFORD UNIVERSITY

        Mr. Cochrane. Chairman Huizenga and Ranking Member Moore,
    thanks very much for the opportunity to testify.
        I think it is wise for Congress to rethink the fundamental
    structures under which the Federal Reserve operates from time
    to time, and I think the Fed wants guidance as much as you want
    clarity. The Fed enjoys great independence, and that is widely
    viewed as a good thing. But in our democracy, independence must
    be paired with limited powers. The Fed cannot and should not
    print money and hand it out. That is your job, even if that
    would be very stimulative.
        Independent agencies should also, as much as possible,
    implement laws and rules. The more an agency operates with wide
    discretion and sweeping powers, the more it must be supervised
    by the imperfect but accountable political process. So your
    hard task in these bills and beyond is to rethink the limits,
    rules, and consequent independence versus accountability of the
    Federal Reserve.
        Now, conventional monetary policy consists of setting
    short-term interest rates, looking at inflation and
    unemployment. But the Federal Reserve has taken on a wide range
    of new powers and responsibilities and more are being
    contemplated. I encourage you to look beyond conventional
    monetary policy and consider these newly expanded activities as
    these bills begin to do.
        Interest rate policy now goes beyond inflation and
    unemployment. For example, should the Fed raise interest rates
    to offset perceived bubbles in stock, bond, or home prices, or
    to move exchange rates? I think not, but I come to stress the
    question, not to offer my answers.
        A rule implies a list of things that the Fed should not
    respond to, should not try to control, and for which you will
    not blame the Fed in the event of trouble. A rule based on
    inflation and unemployment says implicitly, ``Don't manipulate
    stock prices.'' This may be a useful interpretation for you to
    emphasize in the future.
        But the Fed now goes beyond setting short-term interest
    rates. To address the financial crisis in the deep recession,
    the Fed bought long-term treasuries, mortgage-backed
    securities, commercial paper, in order to raise their prices
    directly. Well, should the Fed continue to try to directly
    manipulate asset prices? If so, under what rules or with what
    supervision and consequent loss of independence?
        Since 2008, the Fed's regulatory role has expanded
    enormously as well. Two small examples: The Fed invented the
    stress tests in the financial crisis, and these have now become
    a ritual. The Fed makes up new scenarios to test banks each
    time. The Fed exercises enhanced supervision of these
    systemically designated banks, exchanges, and insurance
    companies. Dozens of Fed staff live full-time at these
    institutions, reviewing the details of their operations.
        Now, these powers follow very few rules. They involve great
    discretion and little reporting or supervision from you, and
    billions and billions of dollars hang on the results. The Fed
    now contemplates macroprudential policy, combining regulatory
    and monetary policy tools and objectives. The Fed will vary
    capital ratios, loan-to-value ratios, or other regulatory tools
    over time, along with interest rates, if it sees bubbles or
    imbalances or in order to stimulate.
        Well, the Fed's bubble is the homebuilders' boom, and the
    builders will be calling you if the Fed decides to restrict
    credit. Do you want the Fed to follow these policies? And if
    so, with what kind of rules, what kind of limits, and what
    accountability?
        The bill's requirements for stress-test transparency,
    language simplicity, and cost-benefit analysis, I think, are an
    important step in managing this regulatory explosion. The
    bill's authorization for the Fed to exempt all persons from
    even congressionally mandated rules, which prove unwise, is, I
    think, a landmark. But beware that filling out mountains of
    paper won't mechanically improve the process.
        These are just a few examples. The Federal Reserve's scope
    and powers have expanded dramatically since the financial
    crisis, and as they always do when there is extraordinary
    events. New powers and policies always involve great
    experimentation and discretion. Now is the time to reconsider
    the limits, rules, mandates, goals, and accountability for all
    these new policies. And these bills are an important first
    step.
        [The prepared statement of Dr. Cochrane can be found on
    page 42 of the appendix.]
        Chairman Huizenga. Thank you, Dr. Cochrane.
        And, with that, we will recognize Dr. Kohn for 5 minutes
    for your opening statement.

       STATEMENT OF DONALD KOHN, SENIOR FELLOW, ECONOMIC STUDIES
                     PROGRAM, BROOKINGS INSTITUTION

        Mr. Kohn. Thank you, Mr. Chairman.
        No institution is perfect. Circumstances change. Lessons
    are learned. All policy institutions must adapt if they are to
    continue to serve the public interest. In my view, however,
    many of the suggestions in the proposed legislation, as I weigh
    their costs and benefits, are not likely to improve the Federal
    Reserve's performance and enhance the public interest, and they
    could harm it.
        Being as systemic, predictable, and transparent as possible
    about what the Federal Reserve is doing in monetary policy
    increases the effectiveness of policy because it helps private
    market participants accurately anticipate Federal Reserve
    actions. It enhances your ability to assess the policy's
    strategies of the FOMC. But the key phrase in that sentence was
    ``as possible.''
        The U.S. economy is complex and ever-changing, and cannot
    be comprehensibly summarized in a few variables and empirical
    relationships. Requiring the Fed to send you a rule would be at
    best a useless exercise and could prove counterproductive. If
    it is adhered to, it will produce inferior results. If not, as
    I would hope and expect, it would be misleading. In the latter
    case, the GAO would be frequently second-guessing the FOMC's
    decisions. Indeed, under another section of the legislation,
    the exemption for monetary policy from GAO audit would be
    repealed.
        In my view, Congress was wise to differentiate monetary
    policy from other functions of the Federal Reserve in 1978 when
    it authorized GAO audits. It recognized that the GAO audits
    could become an avenue for bringing political pressure on the
    FOMC's decisions. It recognized that, over time and across
    countries, experience suggested that when monetary policy is
    subject to short-term political pressures, outcomes are
    inferior; inflation tends to be higher and more variable. In
    that context, the extra pressure of GAO audits moves the needle
    in the wrong direction.
        Supplying liquidity to financial institutions by lending
    against possibly illiquid collateral is a key function of
    central banks. When confidence in financial institutions erodes
    and uncertainty about whether they can repay the funds they
    borrowed increases, they experience runs. Without a back-up
    source of funding, lenders are forced to stop making loans and
    to sell assets in the market at any price. That harms the
    abilities of households and businesses to borrow and spend.
        Borrowing from a central bank under such circumstances
    helps lenders continue to meet the credit needs of households
    and businesses. It is an essential way for the central bank to
    cushion Main Street from the loss of confidence in the
    financial sector. For most of the 20th Century, the Fed could
    do that by lending to commercial banks and other depositories.
    But in 2008, the Fed found that lending to nonbanks--investment
    banks, money market funds, buyers of securitizations--was
    required to stem the panic and limit the damage to Main Street.
        The Fed supported giving the FDIC an alternative method of
    dealing with troubled financial institutions and limiting the
    use of discount window for nonbanks, the facilities that would
    be widely available to institutions caught up in the panic.
    Congress made those changes on lending to nonbanks in the Dodd-
    Frank Act. In my view, going further would limit the
    effectiveness of the Fed's lender of last resort function for a
    21st Century financial market and raise the risk to households
    and businesses.
        The Fed has been adapting its monetary policy strategy and
    communications. The Fed, other regulators, and Congress have
    addressed many of the deficiencies in regulation and
    supervision that allowed the circumstances that led to the
    crisis to build. So I don't think there are major changes that
    need to be made in the Fed, but I cannot rule out that a group
    of thoughtful policy experts might be able to suggest some
    further improvements to goals, structures, and decision-making
    processes.
        But the proposal before us has a panel rooted in partisan
    politics, not expertise, and its makeup is strongly tilted to
    one side. It has, in effect, prejudged one aspect of the
    conclusions by mandating that a reserve bank president be
    included but not a member of the Board of Governors. Shifting
    authority from the Board to the presidents is a general theme
    of many of the proposals before us, and as a citizen, I find it
    troubling.
        The reserve banks and their presidents make valuable
    contributions to the policy process, but they are selected by
    private boards of directors, to be sure with the approval of
    the Board of Governors, and giving them greater authority
    would, in my view, threaten the perceived democratic legitimacy
    of the Federal Reserve over time.
        Thank you, Mr. Chairman.
        [The prepared statement of Dr. Kohn can be found on page 47
    of the appendix.]
        Chairman Huizenga. Thank you for your testimony.
        And last, but certainly not least, we have Dr. Paul Kupiec
    from the American Enterprise Institute.
        And, sir, you are recognized for 5 minutes as well.

        STATEMENT OF PAUL H. KUPIEC, RESIDENT SCHOLAR, AMERICAN
                          ENTERPRISE INSTITUTE

        Mr. Kupiec. Chairman Huizenga, Ranking Member Moore, and
    distinguished members of the subcommittee, thank you for
    holding today's hearing and for inviting me to testify.
        My oral remarks will summarize my written testimony and
    discuss some additional issues related to these proposals.
        Today's Federal Reserve would not be recognized by its 1913
    founding fathers. Congress has amended the Federal Reserve
    powers and responsibilities many times in the Fed's 100-year
    history. For the most part, Fed changes have been triggered by
    unfavorable economic developments: the Depression in the 1930s;
    post-war inflation in the 1950s; stagflation in the 1970s; and
    most recently, the housing bubble and financial crisis. The
    financial crisis forced the Fed to reinvent its approach to
    monetary policy. And even with massive Fed stimulus, the
    recovery is among the weakest on record.
        Congress has Federal Reserve oversight responsibility, and
    from time to time, that duty may require a reexamination of the
    mandate powers and functions of the Federal Reserve System. The
    Centennial Monetary Commission Act of 2015 is a mechanism for
    exercising congressional oversight. The bipartisan commission
    would assemble experts to analyze the Fed and report
    recommendations for legislative changes to modernize and
    improve Federal Reserve operations.
        This proposal would be even better if the commission's
    scope were expanded to examine the Federal Reserve's regulatory
    function. The commission should have sufficient time to
    complete a thorough analysis and formulate its representations.
    Unrealistic deadlines increase the risk of a rush to premature
    conclusions.
        Should this bill pass, I can predict with near certainty
    that the Fed will be eager to loan the commission its large and
    talented staff. Lead this horse outside the city gates.
        The Federal Reserve Act, the second bill discussed today,
    includes 13 sections. Many are simple, common-sense updates.
    Among the controversial parts, Section 2 requires the FOMC to
    publicly disclose its directive policy rule for monetary
    policy, compare it to a specific reference policy rule, and
    inform the Congress when its monetary policy differs from the
    Fed's directive policy rule and explain why.
        Basically, the FOMC must provide the Congress and the
    public with a transparent statement of the methodology the Fed
    uses to short-run monetary policy. The proposal puts no
    restriction on the Fed's monetary policy rule, and the Fed may
    change its rule at any time. Disclosure of a reference monetary
    policy will enhance the quality of the policy debate.
    Differences between the policy prescribed by the reference rule
    and the Fed's chosen policy rule will undoubtedly generate
    lively discussion and the Fed will be required to defend its
    policy actions to the Congress and to the public. This will
    significantly improve Fed oversight.
        Section 4 of the Act changes FOMC voting so that the
    Federal Reserve Bank presidents all have an equal say on
    monetary policy. That is a welcome change. The change at voting
    may impact the FOMC's vice chairman selection, but I did not
    see that issue addressed in the current proposal.
        Section 5 requires the Federal Reserve Board to disclose
    the model it uses to estimate CCAR stress test losses. Greater
    transparency is badly needed. The disclosure should apply to
    all asset classes modeled in the stress test.
        Section 8 requires the Fed to conduct cost-benefit analysis
    before it issues a new regulation and undertake a follow-up
    study to verify that the regulation is working as planned. This
    proposal fills a big loophole in existing regulatory law.
    Perhaps language could be added on compliance mechanisms.
        Section 10 of the Act requires the Federal Reserve Board,
    the FDIC, and the U.S. Treasury to notify the public and the
    Congress when these agency staff enter into negotiations,
    consultations, or agreements with international standard-
    setting bodies like the Financial Stability Board (FSB). This
    timely requirement should be expanded to include the SEC and
    the CFTC.
        Section 11 would amend the Federal Reserve Section 13-3,
    special lending powers. The proposals would reform Section 13-3
    lending powers given in the Dodd-Frank Act to prevent the Fed
    from lending to an individual distressed and potentially
    insolvent financial firm to keep it from failing in the next
    financial crisis. The language in this proposal should apply to
    any Federal Reserve lending and not just to the Federal Reserve
    Board.
        Thank you, and I look forward to your questions.
        [The prepared statement of Dr. Kupiec can be found on page
    52 of the appendix.]
        Chairman Huizenga. Thank you for that.
        And at this time, I will recognize myself for 5 minutes for
    questioning.
        Dr. Kupiec, you just got done talking about this.
        Dr. Taylor, I know that you have talked about this as well.
    And it is oftentimes referred to as the Taylor Rule. We have
    heard gold-structured policy, reference-based strategies. I had
    suggested when Chair Yellen was here that she could change it
    however she wanted, and we will dub it the Yellen Rule of how
    to move forward. I think that was a pretty good idea, by the
    way.
        What exactly do you view this, as far as support within the
    Federal Reserve System, the notion of having this strategy-
    based approach or rule-based strategy, however you want to
    title that? As I pointed out to Chair Yellen, she had expressed
    support for a rules-based policy. Dr. Charles Plosser has gone
    pretty extensively on that. So just give me a sense of where
    economists within the Fed System already have sympathy for that
    approach.
        Mr. Taylor. I think, if you look over the longer span of
    time of monetary policy, you can see periods where a more
    rules-based strategic--whatever you want--policy has been at
    least correlated or associated with better economic
    performance. And one of the periods I mention frequently is the
    very beginning, early in the 1980s and 1990s and until
    recently. If you look at the period before that, it was quite
    chaotic, very ad hoc, with a lot of stop-go policy. And I
    think, since then, you see a lot of deviations from a strategy
    that worked.
        There is also research with models or with just ideas that
    tends to show the same thing, an advantage to having a clear,
    laid-out, predictable strategy. Actually, Don Kohn mentioned
    some of those things. It gives the markets a sense of what is
    going on. It just works better all around, and it is actually
    not unusual. Many policies--
        Chairman Huizenga. Let me expand on that a little bit,
    because we have seen markets respond rather forcefully at two
    FRC--FOMC meeting releases and press conferences. Does it
    suggest that guidance would be improved so it wouldn't be as
    volatile?
        Mr. Taylor. Well, yes. I think if there are fewer
    surprises, there are fewer adverse reactions. There are fewer
    sharp movements in the market. There is always going to be an
    effort to predict or anticipate what a big player like the Fed
    will do. But to the extent that their strategy is there, it
    will be laid out and be less of a surprise.
        Chairman Huizenga. Okay. And having the Fed clearly explain
    differences between actual policy choices and a standard
    reference strategy could increase the transparencies in this
    regard?
        Mr. Taylor. I think so. I think, in a sense, they do that
    internally a lot anyway and have for years. So it would be
    bringing it out for other people to see and debate, I think, in
    a constructive way.
        Chairman Huizenga. Dr. Cochrane, do we threaten the Fed's
    independence with what we are try to do here?
        Mr. Cochrane. I think you establish the Fed's independence.
    Independence comes with limited powers and a clear
    understanding of what Congress wants them to do and doesn't
    want them to do. So I think without a deal, we are in even more
    trouble. The Fed worries a lot about Congress looking over its
    shoulder. So I think by establishing a structure, a set of
    rules, what you expect from the Fed and what you want them to
    do, what you don't expect them to do, that is the kind of deal
    that allows them to exercise the needed independence on some
    things and limits them from going onto other things.
        Chairman Huizenga. I have 1 minute left here. I want to
    move on to Section 13-3. In a recent speech, Federal Reserve
    Bank President Jeffrey Lacker argued that because it promotes
    creditor expectations of future bailouts, Section 13-3 is
    antithetical to the goal of achieving financial stability. And
    I will dispose of the reading of this whole quote here, but I
    am curious, how would you respond to President Lacker's
    suggestion that the Federal Reserve's Section 13-3 authorities
    undermine financial stability and that Dodd-Frank did not go
    nearly far enough in constraining those authorities? Dr.
    Cochrane or Dr. Kupiec, if you care to--
        Mr. Kupiec. I think Jeff is very thoughtful on these
    topics, and I think the changes that are proposed in this
    legislation would put tougher restrictions on Fed 13-3 lending.
    I think the danger is that the Fed wouldn't be able to do any
    lending under Section 13-3 ever, and I think this proposal does
    not go that far. It just puts more criteria on it, and in a
    reasonable way, such that the nine other presidents would have
    to agree that the special lending was appropriate.
        I am a little unsure about who certifies that the firm is
    solvent. That part of the law I didn't quite see where the
    certification would come from, but it is very much a move in
    the direction of fixing the things that Jeff Lacker has
    pointed--the problems Jeff has pointed out.
        Chairman Huizenga. Thank you.
        And with that, my time has expired.
        I recognize the gentlelady from Wisconsin for 5 minutes.
        Ms. Moore. Thank you so much, distinguished panel, for
    taking the time. We always learn a great deal through these
    hearings.
        I guess, I want to start out with much trepidation with
    you, Dr. Taylor. God forbid that I should ever have to argue or
    debate the Taylor Rule or any other kind of rule with you. I
    was looking at Ben Bernanke's blog, and we had--the Federal
    funds rate is equal to the rate of the inflation plus half the
    percent deviation and real GDP from a target, plus--and so on,
    and then times your Taylor Rule.
        So I guess what I have heard you say here today is that you
    are not being as prescriptive as some of your critics have
    indicated that you have been. You have contended that today
    here in your testimony. But as I look at the criticism,
    specifically from Dr. Bernanke, who has some models and you
    probably have seen these papers--God forbid I would have to
    read your Taylor Rule myself--but he is indicating that the
    Fed, during the 2008 debacle, that they kept the funds rate
    close to zero, about as low as you can go.
        And when he looked at the Taylor Rule model, it would have
    had to go, of course, below a zero rate. So they really
    couldn't follow your model. They had to look for other tools,
    like the purchasing of security, to further do monetary ease.
    So what Dr. Bernanke said essentially in his criticism, if I am
    reading it correctly, is that just simply using a construct
    like that would not have ultimately been a useful tool. They
    would have had to find some other model, other than the so-
    called Taylor Rule.
        And then you go on to say that you want them to be
    independent, but then they should have a GAO report on monetary
    policy put together when they have to deviate from your
    strategy. Explain to us how a GAO report put together in 7 days
    would substitute for the actions of the Fed?
        Mr. Taylor. So the first part of your question, regarding
    when a formula takes you below zero in the interest rate, it
    has been discussed for decades what would happen. And my
    proposal was then you would keep money growth constant, or you
    would leave it at zero or .125 for a while and keep money
    growth constant. It is pretty standard. We worked that out long
    ago. It doesn't mean you do all sorts of other things. There
    are other reasons to do that, quantitative easing, et cetera.
        With respect to your question of the GAO, I understand the
    GAO would help determine whether the rule--or I should say the
    Fed's decision was changing from one period to another. So the
    Fed has an opportunity to describe a change in the strategy or
    in the rule. And the GAO would assist in determining whether
    there was a change or not. I think that is the way the
    legislation currently works. The GAO would come in and make an
    assessment of what has the Fed changed and perhaps as a result
    should be reporting the reason for the change.
        Ms. Moore. Thank you so much for that.
        Dr. Kohn, let me ask you whether or not it is common for
    banks and traders to set up strategies and projections based on
    Fed policy and that, what would adoption of something like a
    Taylor strategy or rule construct--would that increase the
    dependency and create a situation where banks and traders will
    rely on these computer model assumptions, and what might be the
    impact of them following these constructs?
        Mr. Kohn. Of course, all participants in financial markets
    try to anticipate what the Federal Reserve is doing. It is an
    important player in the market. It controls very short-term
    interest rates. So, yes, banks and other financial institutions
    and other investors base their decisions in part on expected
    monetary policy and how that interacts with the economy.
        Giving them a rule to rely on would give them perhaps more
    certainty about what was going to happen or give them the
    perception that they would be more certain what was going to
    happen and have them pile into the investments on that basis.
    My concern would be that would not be justified. The economy
    changes. Things happen. The Fed would not be able to follow the
    rule. And so having markets count on something that wasn't
    going to happen, I think, could cause undue turmoil and
    volatility in markets.
        Chairman Huizenga. The gentlelady's time has expired.
        With that, the Chair recognizes the vice chairman of the
    subcommittee, Mr. Mulvaney of South Carolina, for 5 minutes.
        Mr. Mulvaney. I thank the chairman.
        Dr. Taylor, I don't know if you had a chance to watch Chair
    Yellen's presentation to the committee last week, but on
    several different occasions, folks asked her about a rules-
    based system. Sometimes they mentioned the Taylor Rule by name;
    other times they did not. Her response seemed to be fairly
    consistent.
        On a couple of occasions, I recall her saying that she
    worried about the efficacy of a rule that had only two
    variables. I assume this is a slight intended at the Taylor
    Rule. If it is, it is a reservation that she didn't have when
    she recommended the Taylor Rule 20 years ago. But I thought I
    would give you the opportunity to respond to that apparent
    criticism of the Taylor Rule that it cannot be efficacious
    because it only has two variables.
        Mr. Taylor. Actually, one of the most amazing things that
    people discovered years after that was proposed is that two
    variables were quite successful in explaining a lot of the good
    aspects of the decisions. I remember Chairman Greenspan talking
    about that way back when. But the truth is it can't explain
    everything with the two variables. Anybody would know that. And
    there are times when you have to deviate from it.
        When I first wrote about this, I talked about the 1987
    stock market crash and the Fed's intervention at that time. But
    that is an intervention or a deviation relative to this
    benchmark, relative to this strategy. It just doesn't throw
    everything out at the same time and make fresh decisions. It is
    relative to a strategy.
        So I think focusing on the only two variables can be quite
    misleading. That is why I mentioned Ranking Member Moore's
    question to Janet Yellen about the Greek crisis. Would you have
    been able to react to the Greek crisis, Chair Yellen, with only
    these two variables? Well, no, there are only two variables.
    But I think that is not correct.
        If the Fed had wanted to, we could debate whether or not
    that is appropriate or not anyway. It would have said we are
    going to do it for these reasons, just like it did in 1987. So
    I think that is to me a sensible way to make policy. You have a
    strategy. It basically works, whatever you want to say, 80
    percent, 90 percent of the time, and you deviate from it in a
    clear, transparent way when you need to.
        Mr. Mulvaney. Thank you, Dr. Taylor.
        Gentlemen, I want to switch gears on you and talk about a
    new topic that just came up in the last 48 hours. It comes out
    of the Senate. I don't know if you followed it this morning or
    not. The Senate has a proposal on its transportation bill, a
    pay-for on the transportation bill that would change the
    dividend that Fed member banks receive on essentially the stock
    that they hold. They are required, I think, to keep 6 percent
    of their capital at the Treasury. They are not allowed to earn
    reserve on that. It is essentially their shareholdings in the
    Fed.
        And the Senate proposal is to lower the statutory dividend
    on that amount of money, on that capital, on that reserve, from
    6 percent to a point-and-a-half. I have no idea what that has
    to do with transportation, but then, again, I don't pretend to
    understand everything about the Senate anyway. I would be
    curious to know--if anybody wants to chime in on whether or not
    you think this is a good idea? A bad idea? Is it the type of
    thing that maybe we should look at before we throw it in as a
    pay-for for a Senate bill we will probably vote on in the next
    couple of days up here? Does anybody have an opinion on that?
    Dr. Kupiec?
        Mr. Kupiec. Yes, the 6-percent yield on Federal Reserve
    stock is a feature of the original Act. And so the stock pays a
    6-percent dividend and it doesn't matter what the earnings of
    the system are. Some bankers have joked with me in the past
    that their best earning asset through the crisis has been their
    Federal Reserve stock at 6 percent when every other rate is
    near zero.
        And so adjusting the rate does not seem out of line,
    considering the rates that any of us can earn on our savings.
    The banks, of course, would not be very happy about it because
    their revenue would be less. The Federal Reserve would have, in
    a sense, higher operating earnings and return more to the
    Treasury at the end of the year, so that is the sense at which
    it would help pay for transportation.
        Mr. Mulvaney. Is there a reason we set a dividend by
    statute? I am not aware of that happening in many other places.
        Mr. Kohn. I think it was set as part of establishing the
    Federal Reserve Act, and it was because they wanted banks to
    join the Federal Reserve, and they recognized that forcing them
    to buy equity, and equity that wasn't tradeable, wasn't
    salable, couldn't be used explicitly, couldn't be used as
    collateral for anything. So you have an asset that is basically
    frozen and you can't do anything with it. And if you didn't
    earn anything on it, that is equivalent to a tax. So,
    basically, you are holding this asset instead of making a loan
    to a household or a business.
        Mr. Mulvaney. Is there any advantage--
        Mr. Kohn. And the 6 percent was to compensate and offset,
    in effect, the tax on banks.
        Mr. Mulvaney. Instead of setting a statutory rate, is there
    any advantage to allowing it to float with the market? What is
    the justification for paying somebody 6 percent right now when
    markets are paying--
        Mr. Kohn. It is not really an asset like other assets, so I
    wouldn't know how to set it. I am not sure 6 percent is the
    right rate, but let's recognize that by lowering it to, say,
    1.5 percent on the proposal, in effect, you are placing a tax
    on banks over $1 billion.
        Mr. Mulvaney. Thank you, gentlemen.
        Chairman Huizenga. The gentleman's time has expired.
        The Chair recognizes Mr. Foster of Illinois for 5 minutes.
        Mr. Foster. Thank you, Mr. Chairman.
        We are living through the aftermath of a disaster caused by
    the complete failure of Republican monetary, fiscal, and
    regulatory policy.
        You guys have been around business schools a lot. And so I
    was wondering, normally if you had a disaster and then you
    appoint a commission to make recommendations as to how to
    prevent that disaster from recurring, would you normally have a
    majority in that commission from the group that caused the
    disaster or the group that fixed the disaster?
        I will just go down the line. If anyone--let's just raise
    hands. Who believes that those who fix the disaster should hold
    the majority on the committee?
        Mr. Cochrane. I will take it. As an academic, I think there
    is enough blame to go around of both parties, Wall Street, and
    everybody in the debacle. And as academics, I think we would
    say make the commission all academics, and then we will give
    you the right answer.
        Mr. Kohn. I do think I agree with Dr. Cochrane's first
    comment; there is enough blame to go around. I would prefer a
    bipartisan or, frankly, a nonpartisan group of experts.
        Mr. Foster. Right. As opposed to one where there is two to
    one the majority party as is being proposed.
        But I am a little bit confused actually by your statement
    that there is enough blame to go around, that this was an act
    of God. Which party had control of monetary, fiscal, and
    regulatory policy in the years preceding the crisis? Was there
    equal control of monetary, fiscal, and regulatory policy in
    those years?
        Mr. Cochrane. I have written about sources of the crisis.
    And if you look at the structure of the financial system and
    financial regulation that fell apart, it goes back hundreds of
    years. It goes back to the structures set up in the New Deal.
    So both parties constructed this thing, and it fell apart.
        Mr. Foster. Okay. Let's just return to monetary policy,
    which is the main subject here. I think that most people would
    agree that the greatest sin of the Fed in terms of monetary
    policy, and certainly in the last few decades, has been the
    decision to maintain very accommodative monetary policy and
    help inflate the housing bubble in the 2003 to 2004 time scale.
        And so there is by necessity, on these proposals, a get-
    out-of-jail-free card for the Fed to say: Well, you know, we
    have this rule, but this is a special case this time.
        And so what in that would have prevented Alan Greenspan and
    the Republicans' appointees of that time from simply having
    said, ``Oh, I am sorry, it is 2002, 2003,'' or, play the 9/11
    card, whatever they have done, and simply done what they did
    and inflated the housing bubble, which, of course, has driven
    most of the pain that we are having a long time recovering
    from?
        Mr. Taylor. So the 2003, 2004, 2005 period I have written
    about, written books about, I think it was, as you say, an
    effort that resulted in excesses and housing bubble. It
    ultimately was a factor in the severity of the Great Recession.
        Mr. Foster. Unquestionably.
        Mr. Taylor. There is no question, in my view.
        That is, in fact, why I think this legislation is
    potentially so important, because that period is when there was
    a clear deviation from a strategy, like I have been advocating,
    like a strategy that worked in the 1980s and 1990s.
        I don't think it is fruitful to talk about Republicans and
    Democrats in this context. The important thing is to get going
    and fix this problem. And you can look over the last 50 years
    and you can see a Republican Administration imposing wage and
    price controls on this entire economy. And you can see
    Democratic Administrations which didn't do the best either. The
    important thing is to look forward. And I think a commission,
    however you constitute it, is a way to look forward.
        Mr. Foster. Dr. Kohn?
        Mr. Kohn. As one of the policymakers at that time and an
    appointee of President Bush to be sure, I disagree with John.
    He and I have had this discussion many times. I don't think
    that the monetary policy of the mid-2000s was the major reason
    for the housing bubble. I think it was the private sector and
    the public sector both being too complacent about what was
    going on, too much reliance on the private sector to make these
    decisions, not enough oversight by the public sector, failure
    by the credit rating agencies. I think this was a regulatory
    failure, not a monetary policy failure. And a good deal of
    those failures have already been addressed in Dodd-Frank.
        Mr. Foster. Okay. And I am guessing, there is a lot of
    emphasis in the discussion here about more transparency for
    stress tests. It seems to me that if you publish the stress
    tests, the stress factors that banks will be subject to, they
    will simply hedge out that specific set of risks, and it will
    be completely meaningless. Is there any reason to believe they
    wouldn't do that?
        Mr. Kupiec. Well--
        Chairman Huizenga. Very quickly, gentlemen.
        Mr. Kupiec. --if they actually did hedge out the risk, that
    would be fine. They would be protected. So that wouldn't be a
    problem.
        Chairman Huizenga. The gentleman's time has expired.
        With that, the Chair recognizes the gentleman from North
    Carolina, Mr. Pittenger, for 5 minutes.
        Mr. Pittenger. Thank you, Mr. Chairman.
        And I thank each of you for being with us today.
        As I assess our current status, we are at a very anemic
    economic growth by any standard. We have unemployment and real
    unemployment. Some estimates come in that 12 percent are
    considered to be underemployed and those who have quit looking.
        What role do you believe the monetary policy is playing?
    The demographic group who has suffered the worst has been the
    low-income minority people in this country, yet we know the
    rulemaking has an impact on regulatory taxes and on consumers,
    on investors, including low-income and middle-income people.
        Do you believe that a statutory economic analysis would be
    helpful to help mitigate this problem in assessing the role
    this has had?
        Dr. Cochrane, we will start with you.
        Mr. Cochrane. I think it is important to recognize the
    limits of monetary policy, which is in part why it can and
    should be an independent agency. Monetary policy is like oil in
    the car: If there is not enough, the car stops. But once the
    car is going, pouring more oil in doesn't do any good. There
    are limits to what monetary policy can do.
        Like everyone else here, I am disappointed at the slow
    growth rate of the U.S. economy. I am disappointed by how few
    Americans are working. But I think we all agree that is not
    something primarily that monetary policy can help with, and we
    need to recognize those limits.
        Mr. Pittenger. Dr. Taylor?
        Mr. Taylor. I think the slow growth is largely due to
    policies, but I would add regulatory policy. I would add issues
    about budgetary uncertainty. And to the extent that monetary
    policy can be a drag, it can, especially if you include the
    regulatory parts of it. So I wouldn't exclude that.
        Over time, there tends to be a relationship between, I
    guess, the interventionist discretionary approach in monetary
    policy and some of these other policies. So I think it goes
    hand in hand. I think kind of a restoration of a clear strategy
    for monetary policy would be beneficial all around.
        Mr. Pittenger. Dr. Kupiec?
        Mr. Kupiec. I think the regulations that have been imposed
    since the crisis are in large part causing slow growth. I think
    the issues today about monetary policy, this really isn't about
    requiring the Fed to change monetary policy; it is really about
    a disclosure of what their monetary policy is in a way that
    facilitates a discussion.
        So I don't think that the questions about would the Fed
    react differently at this time or that time when Mr. Greenspan
    was in there, this bill is not intended to make them react in
    any particular way. They can write the rule however they want
    and react however they want. They just have to explain it
    clearly so the public and the Congress can understand what they
    are doing and then understand if they want to comment on it or
    offer opinions on it, whether it is appropriate or not.
        So I will stop there.
        Mr. Pittenger. Dr. Kohn?
        Mr. Kohn. In my view, the unemployment rate would be
    higher. More people would be unemployed if the Federal Reserve
    hadn't engaged in the aggressive and unconventional policies
    that they did. If they had followed the Taylor Rule and
    interest rates were a couple of points higher, the stock market
    would be lower, the dollar would be stronger, the cost of the
    capital would be higher, demand would be even weaker. So I
    think the Fed can take some credit for the progress that we
    have made. The underlying problem is productivity growth, and
    this is a global problem.
        Mr. Pittenger. Thank you.
        Dr. Cochrane, help me understand the benefit of the cost-
    benefit analysis and what we can achieve through that.
        Mr. Cochrane. I don't want to--regulations should think
    about that this language in the bill is pretty clear. Do they
    actually do what they are supposed to do, and do they impose
    costs greater than in benefits? So the regulation should do
    that. Now--
        Mr. Pittenger. Is there a downside to that? Is there any--
        Mr. Cochrane. Absolutely. The downside to that is
    potentially just filling up mountains of paperwork because we
    all know how easy it is to get numbers to come out the way they
    want to. But at least thinking about the question and having to
    come up with a, ``here are what we think the costs are, here
    are what we think the benefits are,'' that seems like an
    important structure for regulation.
        And an important part of this bill is if the Fed--even if
    the Dodd-Frank Act has put in a regulation, if the Fed says,
    ``Look, we have looked at it, it is not going to work,'' the
    cost is greater than the regulation, then they don't have to do
    it. That is an important escape hatch.
        Mr. Pittenger. Thank you.
        I yield back.
        Chairman Huizenga. The gentleman yields back.
        With that, the Chair recognizes the gentleman from
    Connecticut, Mr. Himes, for 5 minutes.
        Mr. Himes. Thank you, Mr. Chairman.
        I am still trying to figure out what problem exactly it is
    we are trying to solve here, particularly given the general
    consensus that independent monetary authority independent of
    political meddling is so important. I am trying to see what the
    problem is. I hear, as I always do from the other side, that
    the economic recovery hasn't been fast enough.
        My time here has corresponded, of course, with the depth of
    the meltdown and the recovery. And, of course, 6 years ago, we
    were treated to the--everything was job-killing. Everything.
    The ACA, the Dodd-Frank, fiscal monetary policy was going to
    kill jobs. That, of course, is a little harder argument to make
    in the face of 12 million jobs created and the unemployment
    rate down around where it was pre-crisis.
        So now we hear something that, frankly, I think is junk
    science and junk economics, that it could have been better.
    This from an institution that thought the sequester was a good
    idea, that thought that an 18-day government shutdown was a
    good idea, that thought that threatening default on U.S.
    sovereign obligations was a good idea.
        So I guess my question, just to start here, outside of this
    room, most people acknowledge that proposals to ``audit the
    Fed'' will over time chip away at its independence. And you
    just read the proposal where the GAO is authorized to audit the
    conduct, not the numbers but the conduct of monetary policy,
    that any committee requested by the House Financial Services
    Committee or the Senate Banking Committee can haul the Chair of
    the Federal Reserve in front of us to testify for 7 days. That
    sounds like it points in the direction of meddling.
        So I guess I have a couple of questions for the panel: One,
    does anybody really want to make an argument--Dr. Kupiec, you
    said that the economy has not recovered--does anybody really
    want to make an argument that the conduct of the Fed's monetary
    policy has been a material drag on the recovery since 2008?
        Mr. Kupiec. Congressman, I don't think this bill is about
    that. I think this bill is about the oversight responsibilities
    of the Congress. The Congress--
        Mr. Himes. No, no. I am asking a very specific question. I
    have read the bill. My question is, does anybody want to make
    an argument that the FOMC contributed materially to a slower
    recovery than otherwise might have occurred? That is my
    question.
        Okay. Nobody here is saying that the FOMC or monetary
    policy actually slowed the recovery. Dr. Taylor?
        Mr. Taylor. I think you have to look at the period of the
    recovery and the period before the crisis. We just got through
    saying that the policy, in my view, and I am not the only one,
    felt that those excessively low rates compared to the 1980s and
    1990s were part of the problem, and, therefore, part of the--so
    please admit, that is part of the issue we are trying to
    address. That is a big part for me.
        I think the post-panic part, there is a real question about
    what the contribution of monetary policy was. And Don Kohn
    mentions low interest rates were simulative. I see all the
    uncertainty and the fears of the taper and all those things as
    a drag. So we don't know, but I feel it has been a drag.
        Mr. Himes. And actually, you and Dr. Kohn had an
    interesting back and forth. This is an ongoing debate, but
    let's frame this in longer term, let's think about what Paul
    Volcker did in the early 1980s, where he cranked up interest
    rates, crushed inflation, something, by the way, I would
    suggest would have absolutely gotten him dragged in front of
    the committees of this Congress and may not have happened, and
    as a result, we actually got a period of prosperity for which
    Ronald Reagan was able to take credit, because of some,
    frankly, very courageous and very difficult actions that Paul
    Volcker took.
        So, two questions. First, do you really think that under
    the mechanisms of GAO audits and our right to call a Federal
    Reserve Chair in front of us under those circumstances, is
    there a possibility that Paul Volcker might not have been able
    to take those actions in the early 1980s?
        And second, a larger question, looking back over the last
    50 years, is the current operation of the FOMC, and let me
    just--Robert Samuelson sort of talked about all the checks on
    the FOMC, policy statements after FOMC meetings, 4 times a
    year, FOMC members release their economic forecasts, including
    predictions of interest rates, minutes of FOMC meetings
    providing more details, and then reviews are published soon
    after the meeting, the Fed's Chair conducts fewer news
    conferences a year.
        Is that really not enough? Is there compelling evidence
    that there really should be more transparency and possible
    political injection into that process?
        Mr. Taylor. So Paul Volcker, his contribution, which was
    tremendous to the economy, really took the Fed from a very
    really chaotic, un-rules-like policy in the 1970s, and kind of
    restored a more systematic policy, and that Chairman Greenspan
    took on a lot for a long time.
        With respect to the data on transparency, yes, those are
    all positive, but I would add the inflation target to that. But
    in the meantime, when Mr. Volcker was Chair, the Fed was
    required to report its money growth, forecast for the year
    ahead. That was removed in the year 2000.
        Again, as I said before, in some sense, this legislation
    really just puts something like that--puts that back in but in
    a more modern context.
        Mr. Volcker used that in describing his policy change. It
    was useful to him. It didn't take away his independence. He
    restored independence to the Federal Reserve.
        Mr. Himes. Thank you.
        Chairman Huizenga. The gentleman's time has expired.
        With that, the Chair recognizes the gentleman from Arizona,
    Mr. Schweikert, for 5 minutes.
        Mr. Schweikert. Thank you, Mr. Chairman. Have you ever had
    that moment you are so engrossed with both the conversation and
    the attempt to try to turn it into a partisan one, that you sit
    there and try to understand why? This is an interesting
    conversation of what ultimately produces stability and economic
    growth.
        Dr. Taylor, first, just because it is a question I have
    wanted to ask, why not a peg, almost the Milton Freidman-type
    articles from the 1970s of create a peg and let the public
    markets also know what monetary growth would be?
        Mr. Taylor. Milton Freidman, as you say, proposed a
    constant growth rate rule for the money supply. And what
    happened over time, I believe, is the money growth statistics
    became harder to assess. And in a way, things like these
    interest rate rules were a replacement for that, so things that
    Milton Freidman and I discussed many, many times. So it is kind
    of a replacement for something that I think reflected more
    modern times. And as I say, things like that worked pretty
    well. It is not always--you don't always have to use--
        Mr. Schweikert. So in a modern time, as the legislation is
    written is at least telegraphing policy, does that telegraph
    the message to ultimately markets in the world and accomplish
    some of that same goal?
        Mr. Taylor. Yes, I believe it does. The purpose is very
    much the same. And if you could do it with the money growth
    thing in a simple way, it would probably be better, but we
    found that is difficult.
        Mr. Schweikert. Dr. Kohn, I actually had one, and I want to
    make sure I am not adding something in a previous statement you
    had, but I wanted to try to touch on sort of the mechanics of--
    the regulatory mechanics versus a rules mechanics, and when
    those policies ultimately clash. You had sort of--you touched
    on that. I wanted to see if there was more meat there.
        Mr. Kohn. I am not sure I follow the questions about the
    rules clashing for the regulatory mechanics. My concern is that
    the rules will not really be useful for monetary policy, and
    that John Taylor made a useful distinction between strategy and
    rules in his statement. And I think the Fed has a strategy, and
    it has stated a strategy, and Chair Yellen and other members of
    the committee have talked about what they are looking at--
        Mr. Schweikert. But that--
        Mr. Kohn. --and that is different from a rule. And your
    proposal asked for models of the interactive relationship--a
    function that comprehensively models the interactive
    relationship between intermediate policy variables and the
    coefficients of a directed policy rule. So that is a rule and--
        Mr. Schweikert. But it is a rule with the level of
    flexibility that they--from my reading of the legislation, that
    they could come back and adjust to it.
        Mr. Kohn. Yes, but I think they do that every time. And I--
        Mr. Schweikert. But Dr. Kohn, if they do that already, then
    you don't mind this legislation?
        Mr. Kohn. Oh, I do mind it, because it creates a
    presumption and it, I think--as I said, at best, it would be
    useless.
        So the money rules that John was talking about from
    September 1982 didn't have much effect on monetary policy, and
    so it was a discretionary policy from the end of 1982.
        Mr. Schweikert. I think we are talking around each other.
        Dr. Cochrane?
        Mr. Cochrane. You mentioned regulation, which may be where
    the question is going. And I think bringing the Fed's
    regulatory activities under the same roof is important, and
    this goes to the previous comments about independence.
        Beyond what they do with interest rates, the Fed buys
    securities; the Fed tells banks to raise their loan-to-value
    ratios because they are worried about a bubble; the Fed comes
    up with a stress test that has various results. Do you want the
    Fed to make these actions, which have macroeconomic as well as
    regulatory impacts, with complete impunity? Do you want them to
    make them up as they go along, or do you want to them to state
    a strategy, and communicate those the same way they are stating
    a strategy for--
        Mr. Schweikert. But Dr. Cochrane, in that particular
    scenario, how often am I--am I ever going to run into a
    situation where the rules that I am expecting my regulated
    entities, my credential regulation, to engage in, will they
    ever conflict with what the Fed is actually doing? We want you
    to abide--be making sure you are holding this type of capital
    or that your buckets are full of this, while they are actually
    engaging in other activities. Is it almost too much
    concentration on both sides of the see-saw, where we are doing
    monetary policy here and regulatory policy over here?
        Mr. Cochrane. I think you have to think about them as a
    unified thing. The Fed uses regulatory policy, it uses asset
    purchases as part of its direction of the macro economy.
        Mr. Schweikert. Dr. Taylor?
        Chairman Huizenga. The gentleman's time has expired.
        Mr. Schweikert. Oh, I'm sorry. I yield back.
        Chairman Huizenga. With that, the Chair recognizes the
    gentleman from Delaware, Mr. Carney, for 5 minutes.
        Mr. Carney. Thank you, Mr. Chairman. And thank you to the
    panelists today. It is an interesting, if a little confusing
    conversation for a non-economist over here, and a non-nuclear
    Ph.D. scientist, as we have on our side.
        So we have two bills before us, and there seems to be
    interest, obviously, in--it is always helpful from time to time
    to put together a bipartisan commission that would look at how
    we are operating. But I have heard everybody say that this
    should be nonpartisan. I see people shaking their heads. This
    bill would require that 8 of the 12 members be Republicans,
    effectively, because they would be appointed by the Speaker and
    by the Majority Leader in the Senate. Does that sound like a
    good idea, a nonpartisan idea, Dr. Cochrane?
        Mr. Cochrane. I would just like to answer that we are
    economists, and you are politicians, a noble profession, and
    you shouldn't ask us for political advice about how to put
    together a commission.
        Mr. Carney. Well, you--
        Mr. Cochrane. Re-thinking these issues is important, and
    maybe you need more Republicans to get it through a Republican
    Congress.
        Mr. Carney. A minute ago, you said that it should be
    nonpartisan. That sounded like a political comment to me.
        Mr. Cochrane. These are nonpartisan issues.
        Mr. Carney. Would you admit that having a commission with
    eight members who are Republicans and four members who are
    Democrats is stacked one way or the other? You don't have to be
    an economist to figure that out, right?
        Mr. Cochrane. What I just want to--these are nonpartisan
    issues, these are issues that are important to the country as a
    whole, and that you find people lining up on in ways unrelated
    their party affiliations.
        Mr. Carney. So it would be better if it was more balanced?
        Let's go to the--let's go--
        Mr. Cochrane. Other--
        Mr. Carney. Let's go to the second piece of legislation,
    since everybody else is frowning and doesn't want to really
    touch that, but that is troubling to me. I think having a
    commission that has balanced representation may make some
    sense.
        So the rule-based approach, Dr. Taylor, and thanks for
    coming, you have come back, you have provided great expertise
    to the committee, I think the question really is, you have
    admitted yourself, and Dr. Kohn has said that the Fed uses a
    strategy, and you, yourself, have said that they ought to use a
    rule, and they probably do, but they shouldn't apply it all the
    time, they ought to deviate from it from time to time. Is that
    what you said?
        Mr. Taylor. Yes. I do--there is an issue about strategy.
    The Federal Reserve has a statement about goals and strategy.
    If you look--and it is mostly goals. I can't really see a
    strategy there. It basically says what they want to achieve.
    But for me, a strategy is what you are going to do, what you
    think you are going to do with your instruments that you have--
        Mr. Carney. Right.
        Mr. Taylor. --the tools that you have, but it is not there.
        Mr. Carney. So this mechanism would establish that, oh, on
    pages 3 through 6 or 7, a pretty rigid approach and then
    require the Fed to report back on whether they are deviating
    from that pretty rigid approach. Am I reading it correctly
    there? You mentioned flexibility, that they are not required to
    use this, but it sounds--it feels pretty tight to me.
        Mr. Taylor. A lot of people don't think it is tight enough.
    I think it has a balance. Again, the idea here is the Fed
    chooses the strategy. The Congress is not micromanaging. The
    Fed is--the oversight is on its strategy. The Fed chooses it,
    the Fed can change it, the Fed can deviate from it as long as
    it reports the reasons why.
        Mr. Carney. Right.
        Mr. Taylor. It seems to me to be minimal in terms of
    oversight that you would want to exercise.
        Mr. Carney. They do that to an extent right now under the
    requirements to report to us and before the committee under
    Humphrey-Hawkins. Is that not adequate, the dual mandate of
    inflation and employment? You obviously would want them to
    report on something relative to this pretty hard-and-fast rule,
    which is what the bill would require.
        Mr. Taylor. The bill has this reference rule in it so that
    the Fed would compare its strategy to this reference rule. And
    I don't think that is a burden, because the Fed already does--
    they already have these reference rules. They have a lot of
    them, as far as I know, although you can only look at it later.
        I was surprised, for example, during the financial crisis,
    Don Kohn came to a meeting we had out at Stanford, and out of
    that discussion came the idea that one of their rules that
    interest rates should be minus 6 percent. I had never heard
    that before. I couldn't understand how they could get that. If
    this was external, we could have had a good debate on that and
    perhaps that would have been the outcome, but we don't know.
        Mr. Carney. Yes. I guess the question really is, how can
    Congress best do its oversight role in this regard, right? I
    don't feel really equipped to be able to do that. I read the
    stuff, I pay attention, I listen to experts like you. We are
    given that responsibility, but it is a hard thing to do.
        Thank you again, all of you, for coming.
        Mr. Taylor. Let me just answer that. I think that is a very
    good point about ability to interact. In fact, one of the first
    responses to this proposal came from Don Kohn. He may not
    remember. He was saying that, well, the Congress just has to
    ask better questions.
        Sorry, Don, but that is what you said.
        And to some extent this legislation--
        Mr. Carney. Exactly my point.
        Mr. Kohn. I stand by my previous response.
        Chairman Huizenga. And the Chair will remain mute on that
    issue, because his question time is done.
        So with that, the Chair recognizes the gentleman from New
    Hampshire, Mr. Guinta, for hopefully 5 very good minutes of
    questioning.
        Mr. Guinta. Thank you very much, Mr. Chairman. As I
    indicated in my opening statement, I do believe that the first
    step to reform is transparency. I am not sure why we would be
    concerned about being transparent, why there would be an
    objection to being transparent.
        Mr. Cochrane, we see the Fed continuing to expand its role
    in systemic regulation and credit allocation. Should we worry
    about its ability to produce sound monetary policy?
        Mr. Cochrane. Yes.
        Mr. Guinta. I would love for you to expand a little bit
    more on that.
        Mr. Cochrane. I think the monetary policy and regulation
    are becoming one, and this is kind of the trend going forward.
    International organizations are encouraging more of this
    macroprudential approach. It is also something that is natural
    to happen. I view monetary policy as actually much less
    effective than we all think it is, and yet we all want the Fed
    to do great things, so there is going to be more and more of a
    temptation for the Fed, if the interest rate lever isn't
    working a whole lot, well, let's just go tell the banks to do
    what we want to do, and they have that authority and they--and
    it is not really constrained by rules, by tradition, by
    reporting in the kind of transparency we have here.
        So I think that is the big question for you and for the
    Federal Reserve. I think they are anxious for your guidance on
    how they should approach these questions.
        Mr. Guinta. Thank you. That brings me to my next point.
    Chair Yellen has recently repeated her strong objection, or
    opposition, to audit the Fed, and she has stated that she
    believes it will add political pressure on the central bank and
    potentially weaken the independence of the Federal Reserve.
    Again, I take a very, very different view. I don't agree with
    her assessment. I respect it. We have a difference of opinion.
    I think transparency, again, is something that the American
    people and the public want.
        But I wanted to ask Mr. Kupiec this question: Would a full
    Fed audit, in your opinion, bring more transparency to not only
    the monetary process, but also the conflicts that these
    overlapping roles may be creating?
        Mr. Kupiec. I think this whole notion of a GAO audit of the
    Fed is very overblown. That is not really what this is about.
    GAO has the authority to audit everything about the Federal
    Reserve except for monetary policy. It is very explicit in the
    law. I assume when that law was passed, the Fed was the one
    that got that in the law, probably.
        Now the only thing the GAO is going to do, if the Federal
    Reserve has to explain these two policies, is to look at the
    numbers and see if the Fed is doing what it says it is doing.
    Did they do the calculation right? Are they following the same
    rule? They are not second-guessing the rule. They are not
    really auditing--they are just telling the Congress so you guys
    don't have to get out your calculators and figure out if the
    rule actually says what the Fed's telling you. The GAO will do
    it for you. That is really all the GAO audit part of the second
    rule does, in my view.
        Why the GAO was prohibited from having anything to do with
    monetary policy, I wasn't around in 1978, I think, when they
    did that, so I am not really sure, but the GAO's role here is
    really fairly minor. The audit is whatever Congress--you can
    create a study group and not involve the GAO and look at the
    monetary policy any time you want, according to the law.
        Mr. Guinta. Okay. I appreciate that.
        Dr. Taylor, first of all, I think having the GAO do this
    would--if we don't want to be political or viewed as
    political--some would argue if Members of Congress were doing
    this, it would be political, so I think it would make it a
    reasonable argument to ask the GAO to do it, but, Dr. Taylor, I
    would like to get your thoughts on that.
        Mr. Taylor. I would distinguish the role of the GAO in
    assessing whether or not the strategy has changed. I think that
    is part of the legislation. Someone has to do it. I don't
    really see the problem with that.
        The full audit issue, I think you have to ask what would
    you get out of that, and maybe this is similar to Dr. Kupiec's
    answer, what would you get out of that compared to this
    legislation, which would actually be substantive: Here is what
    the Fed is supposed to be doing, here is what they said they
    are doing, if they don't do that, you can ask about it. A GAO
    audit doesn't bring you in that direction necessarily. So this,
    it seems to me, gets more at the transparency issue than the
    full audit would.
        Mr. Guinta. Okay. Thank you very much.
        I yield back.
        Chairman Huizenga. The gentleman yields back.
        With that, the Chair recognizes the gentleman from
    Washington, Mr. Heck, for 5 minutes.
        Mr. Heck. Thank you, Mr. Chairman.
        Dr. Kohn, I kind of have this foundational belief that all
    legislative proposals ought to begin with a cogent problem
    statement, kind of subscribing to the political parallel of the
    Hippocratic Oath: First, do no harm. So while on the one hand,
    after 100 years, I am personally more than open to a discussion
    about how the Fed is organized. On the other hand, I am curious
    as to what you might think is a cogent problem statement for
    the specific proposal to strip the New York Fed from its
    permanent position of vice chair. It is not clear to me what
    that specific proposal problem statement is predicated upon,
    again, while being open to a discussion about organization. And
    as a part of that, especially given the New York Fed's
    particular role occasionally in interfacing with international
    counterparts, because they have so much responsibility for the
    implementation, I am curious as to whether or not you think it
    would cause a problem to strip the New York Fed from its role
    as vice chair. Yes, sir?
        Mr. Kohn. I don't know what the problem is that is trying
    to be addressed. In my view, the New York Fed has a special
    role in the Federal Reserve System. It has been designated as
    the institution that carries out the directions of the Open
    Market Committee, it has quite a bit of expertise in markets,
    and carrying that out and analyzing markets. And I think there
    was a good reason for--I think, in 1940, for Congress to say
    the Federal Reserve Bank--the president of the Federal Reserve
    Bank of New York ought to be a Vice Chairman of the System. It
    is a bit of a special role, but it is not that special compared
    to other Reserve Bank presidents, but I think having that
    person able to vote and having that person--and recognizing
    that New York is the financial center of the United States, and
    one of the big global financial centers, benefits the Open
    Market Committee. So I don't know what problem that is trying
    to solve.
        Mr. Heck. Are you concerned about any unintended
    consequences or problems, especially as it relates to their
    particular global role?
        Mr. Kohn. I think it would be--there might be unintended
    consequences of undermining the voice of the New York Fed as it
    talks about implementing policy and how it is overseeing the
    markets on behalf of the Fed and the Treasury and the FSOC and
    others.
        Mr. Heck. A follow-up on an unrelated question: H.R. 2912
    seems to place emphasis on price stability over employment, if
    you translate out how the bill would actually work. In fact, if
    you did the math, I think you could actually come to a specific
    conclusion that its intent is to place a higher priority on
    price stability.
        I have always kind of viewed price stability and employment
    as two ends of a teeter-totter. We are in this constant search
    for the right balance. There are times, however, that for
    whatever reason, business cycles, external factors beyond our
    control, one of the sides of that teeter-totter gets out of
    hand. Unfortunately, I am old enough to remember when we had to
    purge inflation out by charging 5 jillion percent interest
    rates.
        Does it strike you that structurally placing a priority of
    one over the other really constrains the Fed's ability to
    respond situationally when it is the other side of the teeter-
    totter that has problems?
        Mr. Kohn. I think most of the time, the two are in sync.
    Pursuing one will help pursue the other. And this is a very
    good example today of raising employment and boosting demand
    will help get inflation up to the 2 percent target.
        I think, number two, the Federal Reserve has recognized in
    the statement that John Taylor talked about on its objectives
    that over the long run, it must keep its eye on that 2 percent
    inflation target. There are times, rare, but there are times
    when there are conflicts and you have to decide how rapidly to
    go back to your 2 percent inflation target, and taking account
    of what is happening to employment at the time is a helpful way
    of balancing those objectives in pursuit of the long-run
    objective of price stability.
        Chairman Huizenga. The gentleman's time has expired.
        The Chair recognizes the gentleman from Minnesota, Mr.
    Emmer, for 5 minutes.
        Mr. Emmer. Thank you, Mr. Chairman, and thanks to the panel
    for all your time today.
        As I indicated in my opening statement, I am supportive of
    the Chair's proposed reforms for the Federal Reserve. Requiring
    the Fed to articulate a ``rules-based monetary policy'' so the
    public can reasonably predict how the Fed might react to a
    given set of circumstances is an important reform advocated by
    a wide variety of experts. Requiring the Fed to articulate a
    rules-based approach will inject some predictability in the
    marketplace, and to some of us, that would seem to be a good
    thing. In fact, according to testimony presented today, ``a
    predictable rules-based monetary policy is essential for good
    economic performance.''
        Dr. Cochrane, I think you testified that the Fed's
    discretionary monetary policy is, in fact, damaging. Is that
    correct?
        Mr. Cochrane. I think several of us echoed the view that by
    taking discretionary decisions, the Fed injects volatility to
    the financial markets, and you have seen financial markets
    sneeze on every decision.
        To the extent that you are following a rule, there is just
    no surprise, because everyone knows what you are going to do
    ahead of time.
        Mr. Emmer. Right. And one of the regular complaints we hear
    from families, entrepreneurs, and existing businesses is the
    uncertainty created by government actors with great
    independence and power that is not clearly limited.
        Requiring the Federal Reserve to propose--again, this would
    support the proposed reform. Requiring the Federal Reserve to
    propose a cost-benefit analysis before adopting new rules is
    not only a good idea, but Dr. Kupiec, I think you testified
    that this proposed reform actually fills a loophole in existing
    regulatory law, is that right?
        Mr. Kupiec. Most Federal Government agencies, before they
    propose a rule, have to do a cost-benefit analysis. The
    financial agencies, regulatory agencies, have been exempt from
    that requirement, and typically haven't done formal cost-
    benefit analysis in the past. So the financial regulatory
    agencies are exceptional in that regard.
        Mr. Emmer. And it seems to work well for them?
        Mr. Kupiec. It works well for them.
        Mr. Emmer. With the time I have left, I want to go into a
    little different area. The Federal Reserve Act's mandate is to
    ``promote effectively the goals of maximum employment, stable
    prices, and moderate long-term interest rates.''
        I hear the statement that unemployment in this country is
    down to pre-2008 levels all the time. In fact, I heard one of
    our friends on the other side of the aisle make a similar
    statement during his questioning earlier today. Now, the Chair
    of the Fed was before our full committee last week, and at that
    time Chair Yellen testified that, ``Our economy has made
    progress towards the Fed's objective of maximum employment.''
        Frankly, this claim raises concerns for people like me and
    my constituents rather than answers questions or solves issues,
    especially since CNBC just reported only a few weeks ago that
    8.5 million Americans still don't have jobs, and some 40
    percent have given up even looking. According to the CNBC
    report, this revelation comes at a time when the labor force
    participation in this country remains near 37-year lows.
        Chair Yellen testified further that other measures of job
    market health are also trending in the right direction, with
    noticeable declines over the past year in the number of people
    suffering long-term unemployment, and in the numbers working
    part-time who prefer to work full-time. She continued,
    ``However, these measures, as well as the unemployment rate,
    continue to indicate that there is still some slack in the
    labor markets.''
        That seems to be a bit of an understatement, when our labor
    participation rate remains near 37-year lows. I question how my
    colleagues can suggest the Fed's monetary policy in the last 6
    years has had a positive impact on our economy.
        According to an article in the Investor's Business Daily
    last month, the overall growth in the 23 quarters of the Obama
    recovery has been 13.3 percent. That is less than half the
    average 26.7 percent growth rate achieved at this point in the
    previous 10 recoveries since World War II.
        Sticking with Chair Yellen's testimony for a second, she
    also provided some testimony on the issue of the Fed's
    transparency and accountability. According to Chair Yellen,
    being transparent, the Fed is committed to being transparent
    and accountable.
        Dr. Kupiec, do you agree that an audit of the Fed would
    help the Fed be more transparent and accountable?
        Mr. Kupiec. I think the policy proposal to require the Fed
    to explicitly state the rules that govern its policy on average
    and compare it to a reference rule would clear up many of these
    problems that you have just discussed. It would--they would
    have to specify exactly what unemployment rate they are
    targeting, it could be many of them, but they would have to be
    explicit about it, where they got about it, and you could have
    the discussion in an honest way.
        As we all know, with statistics, it is really easy to make
    misleading claims when you have so many statistics to choose
    from. And the Fed has a very talented staff at crunching
    statistics, as we all know.
        Mr. Emmer. Thank you.
        Chairman Huizenga. The gentleman's time has expired.
        For what purpose does the gentlelady seek recognition?
        Ms. Moore. I am just seeking recognition to put something
    into the record; I ask unanimous consent to place something in
    the record.
        Chairman Huizenga. Without objection, it is so ordered.
        Ms. Moore. I would like to put something printed from the
    Brookings Institution, Ben Bernanke's blog, The Taylor Rule:
    The Benchmark for Monetary Policy. I referred to it in my
    testimony and would like it to be available.
        Chairman Huizenga. Without objection, it is so ordered.
        With that, the Chair recognizes the gentleman from New
    Mexico, Mr. Pearce, for 5 minutes.
        Mr. Pearce. Thank you, Mr. Chairman.
        Following along with the gentleman from Arizona's comments,
    I have been fascinated by the attempt to make a partisan
    statement out of this, the problems that we faced. Given that
    line of reasoning, it would be--you would come to the
    conclusion that President Obama will have no downstream
    responsibility for the deal he is working with Iran; that
    instead, it is everyone beyond that who is in office at the
    time that the problems will arise who bear the brunt of the
    blame, according to a couple of our friends on the other side
    of the aisle. I found that to be amusing and disingenuous to
    say the least. Because when I look at the problem, trying to
    explain it to people in New Mexico, basically you had people
    loaning money to folks who really couldn't pay for the houses
    they were getting, and eventually the house of cards collapsed.
        Now, it wasn't the only problem, but definitely a key part
    of this was the ability to get rid of those loans so that you
    didn't have them when the music stopped, and the GSE's, Fannie
    and Freddie, played a significant impact in that. And James A.
    Johnson, who was the head of Fannie starting in 1991, that was
    under President Clinton, began to accelerate that process, and
    Franklin Raines, who continued, was nominated and came into
    power under--for Fannie during President Clinton's terms, both
    of them really accelerated the removing of loans from
    institutions, and then the derivatives on top of those and all
    of the other instruments, simply have nothing to stand on, and
    so the whole system did collapse.
        Mr. Kupiec, is that a fair assessment of, just if you are
    trying to explain it in 2 minutes to the people of New Mexico,
    of what happened?
        Mr. Kupiec. The housing policies of the U.S. Government had
    a lot to do with the--
        Mr. Pearce. Originating here?
        Mr. Kupiec. Yes, sir.
        Mr. Pearce. And the idea that everybody should have a house
    even if they can't afford it. And, again, I think it is far
    more complex than what our friends would say.
        Dr. Kohn, you had said that interest rates had helped in
    the recovery. Is there a downside? And I accept that premise,
    that they have helped somewhat. Is there a downside to the
    interest rate that has hurt the economy?
        Mr. Kohn. It certainly has hurt savers.
        Mr. Pearce. Yes.
        Mr. Kohn. And in some sense the whole--the idea of the low
    interest rate is to incent people to spend, to bring spending
    from the future to the present--
        Mr. Pearce. And present--
        Mr. Kohn. --in order to increase employment, but people who
    are saving are hurt.
        Mr. Pearce. Yes. So if we could capture the tension, it has
    helped a little bit on one side in lowering the cost of getting
    into business, but on the other side, it has hurt consumption.
    Now we are at--
        Mr. Kohn. I think it has helped consumption by lowering the
    cost of borrowing, but it certainly has--
        Mr. Pearce. I would say your cost to seniors has far
    outweighed that. In other words, we are a 70 percent retail
    economy, and every dollar you took away from seniors in
    interest that they did not get on the savings account--and
    seniors tell me, we lived our life right, we bought our houses,
    paid for them, have money in the bank, and now we get zero, 1
    quarter of 1 percent. And so that removal from the purchasing
    stream has been a definite downside on the economy, and since
    we are 70 percent retail, I could argue, you could argue, but
    there is a tension in the system that it has been as punitive
    as helpful.
        Now, Dr. Kupiec, you had had a fascinating view that the
    audit of the Fed was simply to see if the numbers have been
    worked correctly, that the GAO would take the calculator and we
    could oversee it. Now, if you use--and I would say that is a
    fairly good and easy way to explain it.
        If you were to look at the Fed and their policy regarding
    interest rates, is it your opinion that they have implemented
    their policy correctly and fairly?
        Mr. Kupiec. I think the Fed was at a loss what to do after
    the financial crisis, and most of what they did was emergency
    reactions to the financial crisis. Once interest rates got
    close to zero, they didn't know what else to do, they bought
    securities and they kept buying securities, and any time Wall
    Street wanted to have a hiccup, they kept on buying securities.
        I think they were reacting the only way they knew what to
    do, and I don't think they have come out of that yet. They are
    not sure how to get out of this problem to get back to normal.
    And the requirement to have them write down a strategy would
    allow you to have a better discussion of exactly how they are
    going to exit this very--
        Mr. Pearce. My time has run out. I appreciate that
    observation.
        Dr. Kohn, again, not picking on you, but trying to get you
    to--the chance to speak on things that you and I might not
    approach the same. I don't know. So in business and in
    recovery, to me the biggest deal is not the interest rates. I
    had business equipment during President Clinton's--or President
    Carter's drive to 21 percent. It was devastating. I think,
    though, even though that was a very hard time, that the most
    powerful thing in the market is certainty, even more than the
    interest rate. And so the argument here of whether or not to
    audit, whether or not to take a deeper look, and you have heard
    Dr. Kupiec, I will give you the final 13 seconds, is certainty
    better or is the low interest rate better?
        Mr. Kohn. It is better to be as certain as possible. And my
    concern is that more to force something that looks like it is
    going to be a rule, and be more certain than the world will
    allow would be counterproductive. The amount of volatility and
    uncertainty in the markets, I think, is pretty low these days.
    There are occasional jolts of volatility. I don't think there
    is any empirical evidence that markets are more uncertain about
    policy today than they have been in the past or they have been
    more uncertain over the last few years, except perhaps for
    fiscal policy.
        Mr. Pearce. Thank you. I appreciate that.
        Mr. Kohn. I don't think uncertainty is high and I think we
    have to be worry--worry about trying to create more certainty
    than is warranted by the underlying structure of the economy.
        Mr. Pearce. Thank you, sir.
        I yield back my time, Mr. Chairman.
        Chairman Huizenga. Thank you. The gentleman's time has
    expired.
        Seeing no other Members on the other side, we will continue
    on the Republican side with Mr. Messer of Indiana for 5
    minutes.
        Mr. Messer. Thank you, Mr. Chairman. And thank you to the
    members of the panel.
        Of course, it is Congress' responsibility to respond to the
    American people, the people who sent us here. I think when the
    American people look at the financial crisis and the response
    to the financial crisis, frankly, they are mad. And I think
    these are really complex issues, but I think the American
    people see it something like ``Caveman Lawyer.'' I don't know
    how many of you have ever heard of ``Caveman Lawyer,'' but he
    is a Saturday Night Live character and he was a Neanderthal who
    was frozen out of ice and now he is a plaintiff's attorney, and
    he gives closing arguments that go something like this: He
    says, I know nothing of your talking boxes and your flying
    machines, but I do know this, if a man slips and falls coming
    out of a Wal-Mart, he is entitled to $200,000 plus punitives.
        And I think the American people look at all of what
    happened, and they understand they don't know all the
    complexities, but from their perspective, it looks something
    like this: There were a whole lot of rich people who were a
    part of creating this crisis; the crisis happened and all those
    rich people are still rich, and the average working family is
    struggling. Their savings haven't improved, their wages are
    flat, and they see a process that seems not very transparent,
    and they want to know who is accountable and responsible for
    it.
        So as several of you have identified, obviously Congress
    has a responsibility to oversee the Fed, the Fed should be
    independent and it ought to make independent monetary policy
    decisions, particularly in the short term, but the Fed was
    created by Congress. Over time, we have shown an ability to
    change the way we provide regulatory oversight there, and the
    American people are demanding it.
        So I was sort of fascinated. Let's start with Mr. Kupiec
    and Mr. Cochrane. You both mentioned that this is not your
    grandfather's Fed. Of course the regulatory structure of the
    Fed has changed, but its role in setting monetary policy has
    changed dramatically. I was fascinated, for example, by Mr.
    Kupiec's observation that the Fed is, in many ways, the world's
    reserve bank, and so there is potential pressure for the Fed to
    be asked to set policy that may not be in America's best near-
    term interest, because it is important for the global economy.
    So I would invite both of to maybe just highlight a way or a
    couple of ways in which, in English that the Caveman Lawyer
    could understand, the Federal Reserve's role is different than
    it has been in the past.
        Mr. Kupiec. The Federal Reserve's role has changed
    dramatically. In 1913, it was under a gold standard. It only
    accepted 90-day bills, commercial, paper, and agricultural
    bills, because they were self-liquidating. It wasn't supposed
    to have a big balance sheet. The gold standard constrained its
    creation of the money stock and Federal Reserve notes, and now
    the Federal Reserve has a huge balance sheet. It buys only
    long-dated securities. It has no short-term paper on its July
    15th Open Market Committee statement. It has drastically
    changed.
        In 1977, the Humphrey-Hawkins bill put in a dual mandate.
    Before that, the Fed had really no mandate, no mandated price
    stability or full employment.
        Shortly after the 1977 bill, though, when Paul Volcker
    actually did take over, he was dragged before the Congress
    many, many times, and he argued--and when the Congress tried to
    beat up on him and say you have all these high interest rates,
    it is killing employment, you can go back and read the record,
    Paul Volcker said essentially, well, right now I have to get
    inflation under control before I can work towards the full
    employment requirement. So, in fact, it was discussed earlier.
        Could Paul Volcker do what did he under this rule? Yes, he
    could. He would face the same scrutiny. Congress was not happy
    with him back then.
        So I think the Federal Reserve has changed. Now it has a
    role where it lends to many foreign banks, it does currency
    swaps, it does all kinds of things that the Founders in 1913
    never even thought of. And this is why something like a very
    thoughtful monetary commission, a centennial monetary
    commission to study all of these aspects and how the Fed
    actually fits into the world economy and how the Fed's mandate
    and tools and powers should evolve with its new place in the
    world, I think it is very timely.
        Mr. Messer. Thank you.
        And Mr. Cochrane, in the limited 30 seconds left.
        Mr. Cochrane. The big difference is we have now financial
    markets that didn't exist back then. And when you think of the
    Fed, it is the world's biggest financial regulator and director
    of financial markets. We are criticizing here the Fed's
    interest rates for its effect on housing prices; not inflation,
    so much inflation, and unemployment.
        The failure in 2008 was a failure of finance. Yes, people
    bought houses they shouldn't have bought, and yes, there was
    housing policy, but that killed the economy because it was
    funneled through ridiculously over-leveraged financial
    institutions that then went bust. The tech bust of the early
    2000s didn't have any such effect, because it was just held in
    stocks. So these are the big issues for the Fed going forward.
    That was the big failure. Think of the Fed as the great
    financial regulator going forward as you do your good work.
        Mr. Messer. Thank you.
        Chairman Huizenga. The gentleman's time has expired.
        And seeing no other Members on the other side, we will
    proceed to Mrs. Love of Utah for 5 minutes.
        Mrs. Love. Thank you, Mr. Chairman.
        I would like to actually focus on the structure of the
    Federal Reserve System and the FOMC Board, and whether an
    argument can be made that reform of this structure is necessary
    to modernize the Fed for the 21st Century.
        So just for a little bit of background, obviously not for
    your benefit, but for the benefit of the hardworking Americans
    who are listening, the Congress set up a decentralized system
    of 12 regional reserve banks with a system of seven members of
    the Board of Governors. The FOMC, in turn, is comprised of
    seven Washington-based Governors, the president of the New York
    Fed, and four of the presidents of the remaining 11 reserve
    banks on a rotating basis.
        So with all of that and thinking about where that
    representation is, given that 8 of the 12 regional reserve
    banks are either on or the east side of the Mississippi, and
    six are within 600 miles of Washington, the question I would
    like to ask is, given the structure of the Federal Reserve
    System coupled with the FOMC structure, are the interests of
    the economic priorities of Americans in western States like
    Utah underrepresented in the monetary policy meetings?
        And that is a question for everyone. We can start with you,
    Mr. Kupiec.
        Mr. Kupiec. I think it is timely that the structure of the
    system, people think about the structure of the system. It was
    the way it is because in 1913, politically, that is what it
    took to get the Federal Reserve Act passed. And some of the
    banks vote twice as often as the other banks. And it is even
    more complicated than your comments about the FOMC. Some of the
    banks vote twice as often as other reserve banks.
        Mrs. Love. Right.
        Mr. Kupiec. So I think all this needs to be looked at. I
    think it is going to be politically very charged. Federal
    Reserve banks are politically very connected. Removing one
    from, pick your city, would be difficult.
        Mrs. Love. Okay. I understand, politically charged,
    everybody wants to keep their power, but it is pretty much
    about whether--and this is something that should be concerning
    for both sides of the aisle, seeing how we are represented from
    all over the United States.
        Do you have any thoughts about that?
        Mr. Kohn. I think that there could be a rethinking of the
    geography of the Federal Reserve System and the reserve banks.
    And if there were a commission created, I would put that as
    part of its remit, given, as you say, things have changed so
    much.
        I think there are two things to keep in mind, however. One
    is that every reserve bank participates equally in the
    discussions. And there have been many times in which if you
    didn't have a list in front of you of who were the voters and
    who weren't the voters, you wouldn't have been able to
    determine from the discussion which presidents had the vote and
    which didn't. All of the presidents have an equal say in the
    discussion. It is only at the very end when the roll is called
    that the presidents vote, so it is not a black-and-white
    situation.
        The second point, I think, is that in this era of the
    Internet, et cetera, you can get information about anything
    from anywhere, and having--
        Mrs. Love. But you are talking about people who actually
    represent--what I am trying to do is trying to diversify the
    thoughts. You are talking about people who are from and live in
    a certain geographical area. Utah has a growing banking
    presence, and I think, again, all over the United States, we
    have big, growing banking presences, and it is my opinion that
    those decisions shouldn't be made in groups that are just from
    one area, or heavily populated in one area.
        What do you think can be done, Dr. Taylor, if you can add a
    little bit to this, to rebalance the FOMC to ensure that all
    Americans are equally represented in monetary policy
    discussions?
        Mr. Taylor. Actually, I think the proposal in the
    legislation goes in that direction, because it equalizes the
    votes across the presidents. Of course, that means the New York
    Fed president is voting less and participating less. I think
    the votes do matter. But I think that is fine. I think there
    is--probably underlying this is a concern, well, maybe the New
    York Fed is just too high in this hierarchy, and this kind of
    equalizes that so it makes--
        Mrs. Love. So you are actually saying that Congress does
    have something to offer when it comes to representing the
    people of the United States, and that it is actually good that
    we get involved in some of these discussions and find out ways
    that we can actually get the decision-making back into the
    hands of people all over the United States?
        Mr. Taylor. [no verbal response.]
        Mrs. Love. Thank you. I yield.
        Chairman Huizenga. The gentlelady's time has expired.
        And with that, we have reached the end of our period of
    time with our witnesses. And I would like to say thank you for
    your time and effort. This is, I think, very helpful as we are
    having this discussion.
        Without objection, we do have a couple of things. I would
    like to submit the following statements for the record. We did
    get a statement from Representative Kevin Brady, who is the
    author of one of the pieces of legislation, and a letter from
    the Property Casualty Insurers Association of America. So
    without objection, those will be submitted.
        I would also like to submit for the record a slightly
    different perspective on the charts. We will have dueling
    charts as to whether or not the Taylor Rule would bring us into
    negative interest rates. The chart that I am going to submit is
    produced by the St. Louis Fed and shows that actually doesn't
    happen based on the assumptions within the legislation as it is
    written. So without objection, that chart will also be
    included.
        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, this hearing is adjourned.
        [Whereupon, at 11:59 a.m., the hearing was adjourned.]

                                A P P E N D I X

                                 July 22, 2015

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