[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
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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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