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






                       EXAMINING FEDERAL RESERVE
                            REFORM PROPOSALS

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

                                HEARING

                               BEFORE THE

                        SUBCOMMITTEE ON MONETARY

                            POLICY AND TRADE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 22, 2015

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-43



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
               Subcommittee on Monetary Policy and Trade

                   BILL HUIZENGA, Michigan, Chairman

MICK MULVANEY, South Carolina, Vice  GWEN MOORE, Wisconsin, Ranking 
    Chairman                             Member
FRANK D. LUCAS, Oklahoma             BILL FOSTER, Illinois
STEVAN PEARCE, New Mexico            ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
MARLIN A. STUTZMAN, Indiana          JOHN C. CARNEY, Jr., Delaware
ROBERT PITTENGER, North Carolina     TERRI A. SEWELL, Alabama
LUKE MESSER, Indiana                 PATRICK MURPHY, Florida
DAVID SCHWEIKERT, Arizona            DANIEL T. KILDEE, Michigan
FRANK GUINTA, New Hampshire          DENNY HECK, Washington
MIA LOVE, Utah
TOM EMMER, Minnesota

















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 22, 2015................................................     1
Appendix:
    July 22, 2015................................................    37

                               WITNESSES
                        Wednesday, July 22, 2015

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

                                APPENDIX

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

              Additional Material Submitted for the Record

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

                              ----------                              


                        Wednesday, July 22, 2015

             U.S. House of Representatives,
                           Subcommittee on Monetary
                                  Policy and Trade,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:08 a.m., in 
room 2128, Rayburn House Office Building, Hon. Bill Huizenga 
[chairman of the subcommittee] presiding.
    Members present: Representatives Huizenga, Mulvaney, Lucas, 
Pearce, Stutzman, Pittenger, Messer, Schweikert, Guinta, Love, 
Emmer; Moore, Foster, Himes, Carney, Murphy, Kildee, and Heck.
    Ex officio present: Representative Hensarling.
    Also present: Representatives King and Green.
    Chairman Huizenga. The Subcommittee on Monetary Policy and 
Trade will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Today's hearing is entitled, ``Examining Federal Reserve 
Reform Proposals.''
    I now recognize myself for 2 minutes to give an opening 
statement.
    The Federal Reserve System was created in 1913 with a 
mission of establishing three key objectives for monetary 
policy: maximum employment; price stability; and moderate long-
term interest rates. However, last Congress, as we examined the 
Fed's actions over the last 100 years, through the Federal 
Reserve Centennial Oversight Project, it became clear that the 
Federal Reserve has gone above and beyond its original mission 
statement.
    In fact, since the enactment of the Dodd-Frank Act, the 
Federal Reserve has gained unprecedented power, influence, and 
control over the financial system while remaining shrouded in 
mystery to the American people. This hearing provides us with 
another opportunity to examine how the Federal Reserve conducts 
monetary policy and why the development of these policies is in 
desperate need of transparency, in my opinion.
    The Fed's recent high degree of discretion and its lack of 
transparency in how it conducts monetary policy demonstrates 
that not only are reforms needed but, more importantly, that 
reforms are necessary. Today, the Fed's balance sheet is almost 
5 times the size of its pre-crisis level and represents one-
quarter of the size of the entire U.S. economy. That is a 
tremendous amount of money.
    The Fed's balance sheet demonstrates attempts to push 
monetary policy past its most basic mandate: price stability. 
Absent a monetary policy that dutifully promotes price 
stability, economic opportunity will continue to fall short of 
its potential. I have continued to encourage the Federal 
Reserve, both publicly and privately, to adopt a rules-based 
approach to monetary policy and communicate that rule to the 
public.
    As anyone who has been paying attention to it knows, the 
Fed has not seen a clear path to go in that direction, so we 
are here to help nudge them along. The Fed also, I believe, 
most importantly, must be accountable to the people's 
representatives as well as the hard-working taxpayers 
themselves.
    With that, I yield back the balance of my time.
    I recognize the gentlelady from Wisconsin, Ms. Moore, for 3 
minutes.
    Ms. Moore. Thank you so much, Mr. Chairman.
    Today, we are here examining two proposals: the first would 
create a partisan commission to review the Fed's dual mandate; 
and the second would permit policy audits of the Federal 
Reserve and establish a computer model to govern monetary 
policy.
    I think there may be some legitimacy to some of the 
concerns my Republican colleagues have raised regarding the 
Fed, but these two bills are answers to problems that really 
don't exist. If we are worried about the Fed's growth policies, 
why don't we meet the Fed halfway, and stop the misguided 
obsession with austerity and trying to trick the economy to 
grow the economy?
    If you want the Fed to feel comfortable going to a more 
traditional monetary policy, you don't need all these bills. 
Why don't my colleagues join Democrats in supporting proven 
growth policies like extension of the Ex-Im Bank, providing a 
living wage for workers, a long-term highway bill that used to 
be bipartisan, equal pay for women, sick leave, or training a 
21st Century workforce by improving public education?
    I strongly support the dual mandate. It reflects the 
reality of monetary policy. I don't know how anyone can be 
against weighting employment as the consideration of economic 
growth goals.
    As for auditing the Fed and establishing a computer model-
based monetary policy, I can tell you, I am so certainly unsure 
about the level of concern for the U.S. credit rating agencies 
anymore after some of our colleagues have called for a default 
on U.S. debt. However, our central bank's independence is a 
consideration of credit rating agencies. These are established 
benefits of independent central banks. Injecting politics into 
monetary policy would be a disaster.
    I see this computer model as extremely dangerous. Both Fed 
Chair Yellen and former Fed Chair Bernanke feel that this would 
be flawed, and tell us that it would impede the Fed's ability 
to act in a crisis. Banks and Wall Street investors would all 
set their trading and projections to whatever the so-called 
Taylor Rule computer model we adopt would be, and the potential 
disruption of any deviation from the model would cause all kind 
of market disruption and thus effectively take away any 
discretion from the Fed. I would oppose both bills in their 
current form.
    I look forward to our distinguished panel, and I yield back 
the length, the balance of this long time I have.
    Chairman Huizenga. The gentlelady's time has expired.
    With that, the Chair recognizes the gentleman from New 
Hampshire, Mr. Guinta, for 1 minute for an opening statement.
    Mr. Guinta. Thank you, Mr. Chairman.
    I welcome the panel. And thank you for being here today for 
this very important hearing.
    From 2007 to 2012, we saw the average median income 
decrease in 5 consecutive years, and since then, we have 
arguably the slowest economic recovery since World War II. Last 
month's Investor's Business Daily report reported that overall 
growth in the last 23 quarters of the Obama recovery has been 
at about 13.3 percent. The average growth rate achieved since 
World War II is 26.7 percent. Obama's recovery is half the 
average.
    If our growth rate under President Obama was simply 
average, it has been reported that our GDP would be $1.9 
trillion larger today. That is roughly $16,000 more per 
household. On top of our sluggish economy, we have Americans 
who are seeing near zero interest rates on their savings 
accounts while median incomes are not increasing as quickly as 
they should be.
    Millions of Americans are dealing with fluctuating gas 
prices, higher food and electricity prices, and increasing 
healthcare costs. And this is why we need transparency within 
the Federal Reserve. It is time to open up the books and take a 
look at what the Fed is doing.
    I yield back.
    Chairman Huizenga. The gentleman's time has expired.
    The Chair recognizes Mr. Himes of Connecticut for 2 minutes 
for an opening statement.
    Mr. Himes. Thank you, Mr. Chairman.
    And thank you to the panel for being here.
    I wanted to be in this hearing because I find the idea of 
examining the Federal Reserve reform proposals both ironic and, 
to some extent, profoundly concerning. It is ironic because, of 
course, the bad actors since 2006, 2007, 2008--Fannie Mae, 
Freddie Mac, the GSEs--generally remain unreformed. Shame on 
both parties for that. The banking industry and all of its 
associated people have been reformed. And, of course, my 
friends on the other side of the aisle would like to do away 
with that reform.
    And, of course, history will not treat this institution 
kindly with respect to the way we responded in fiscal policy 
over the last several years. And yet, it is the Federal 
Reserve, the one entity that I think can be called probably the 
hero of the last 6 years, through their expansionary monetary 
policy, through their use of extraordinary and, yes, somewhat 
concerning authorities to yank us out of a recession--some say 
not rapidly enough--but unquestionably yanked us out of a 
recession. And yet, it is they that we are talking about 
reforming.
    We have interesting debates in this room, including the 
role of the government in flood insurance and mortgage 
insurance. And these are really interesting debates that we 
ought to have.
    This is different. And this is where I am profoundly 
concerned. An independent Federal Reserve, a monetary authority 
that is not subject to the tender mercies of this institution 
is a cornerstone of our economy. And, frankly, that is true 
across time and across geographies.
    Many of the proposals being entertained today would erode 
that independence. This is not a question subject to debate. 
There is plenty of academic research, most notably that 
undertaken by Larry Summers and Alberto Alesina in 1993, which 
shows that there is a very strong correlation between monetary 
policy independence and inflation. Independent institutions run 
better economies than those that are not.
    The objection is made that it should be transparent. It 
should be transparent. The Federal Reserve, of course, in the 
last 50 years has become much more transparent. But above all 
else, we need to be very, very careful that we do not damage 
the monetary independence in the Federal Reserve through any 
efforts to improve the transparency of that institution.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    Chairman Huizenga. The gentleman's time has expired.
    With that, the Chair recognizes the gentleman from 
Minnesota, Mr. Emmer, for 1 minute for an opening statement.
    Mr. Emmer. First, I want to thank the chairman for calling 
this hearing and to thank the witnesses for being here today.
    Despite the differences of opinion that we know are in this 
room, it is my hope that we can work together to make the 
Federal Reserve even more transparent and a market-friendly 
institution.
    As you know, the Fed has immense influence over capital 
markets, financial institutions, and the American economy. 
Since the Great Recession, the Fed has used its nearly 
unlimited, broad, and assumed powers to push interest rates to 
historical lows by trillions of dollars of toxic assets and 
bail out numerous financial institutions. That is why I have 
joined many of my colleagues and my constituents with grave 
concerns that short-term solutions enacted by the Fed have 
harmed future prosperity and the people's faith in their 
institutions.
    For these reasons, I am more than pleased that Chair 
Huizenga's Federal Reserve Reform Act and Mr. Brady's 
Centennial Monetary Commission Act have been proposed. I see 
these bills as important steps towards responsible oversight 
and a pro-growth economy.
    And with that, Mr. Chairman, I yield back.
    Chairman Huizenga. The gentleman's time has expired.
    Before we proceed, without objection, members of the full 
Financial Services Committee who are not members of the 
subcommittee may participate in today's hearing.
    Without objection, it is so ordered.
    With that, we would like to welcome some very esteemed 
colleagues and doctors who are going to be here with us today 
examining these various proposals. We are going to welcome the 
testimony of Dr. John Taylor, professor of economics at 
Stanford University; Dr. John Cochrane, senior fellow with the 
Hoover Institution; Dr. Donald Kohn, senior fellow in economic 
studies at the Brookings Institution; and rounding us out, Dr. 
Paul Kupiec, resident scholar at the American Enterprise 
Institute.
    Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony.
    And without objection, each of your written statements will 
be made a part of the record.
    And, with that, Dr. Taylor, you are now recognized for 5 
minutes for your opening statement.

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

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

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

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

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

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

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

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

                            A P P E N D I X



                             July 22, 2015
                             
                             
                             
                             
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