[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]




 
                    EXAMINING THE FEDERAL RESERVE'S


                    MANDATE AND GOVERNANCE STRUCTURE

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

                                HEARING

                               BEFORE THE

                        SUBCOMMITTEE ON MONETARY

                            POLICY AND TRADE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 4, 2017

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-13
                           
                           
                           
                           
                           
                           
                           
                           
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PETER T. KING, New York              MAXINE WATERS, California, Ranking 
EDWARD R. ROYCE, California              Member
FRANK D. LUCAS, Oklahoma             CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   NYDIA M. VELAZQUEZ, New York
STEVAN PEARCE, New Mexico            BRAD SHERMAN, California
BILL POSEY, Florida                  GREGORY W. MEEKS, New York
BLAINE LUETKEMEYER, Missouri         MICHAEL E. CAPUANO, Massachusetts
BILL HUIZENGA, Michigan              WM. LACY CLAY, Missouri
SEAN P. DUFFY, Wisconsin             STEPHEN F. LYNCH, Massachusetts
STEVE STIVERS, Ohio                  DAVID SCOTT, Georgia
RANDY HULTGREN, Illinois             AL GREEN, Texas
DENNIS A. ROSS, Florida              EMANUEL CLEAVER, Missouri
ROBERT PITTENGER, North Carolina     GWEN MOORE, Wisconsin
ANN WAGNER, Missouri                 KEITH ELLISON, Minnesota
ANDY BARR, Kentucky                  ED PERLMUTTER, Colorado
KEITH J. ROTHFUS, Pennsylvania       JAMES A. HIMES, Connecticut
LUKE MESSER, Indiana                 BILL FOSTER, Illinois
SCOTT TIPTON, Colorado               DANIEL T. KILDEE, Michigan
ROGER WILLIAMS, Texas                JOHN K. DELANEY, Maryland
BRUCE POLIQUIN, Maine                KYRSTEN SINEMA, Arizona
MIA LOVE, Utah                       JOYCE BEATTY, Ohio
FRENCH HILL, Arkansas                DENNY HECK, Washington
TOM EMMER, Minnesota                 JUAN VARGAS, California
LEE M. ZELDIN, New York              JOSH GOTTHEIMER, New Jersey
DAVID A. TROTT, Michigan             VICENTE GONZALEZ, Texas
BARRY LOUDERMILK, Georgia            CHARLIE CRIST, Florida
ALEXANDER X. MOONEY, West Virginia   RUBEN KIHUEN, Nevada
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana

                  Kirsten Sutton Mork, Staff Director
               Subcommittee on Monetary Policy and Trade

                     ANDY BARR, Kentucky, Chairman

ROGER WILLIAMS, Texas, Vice          GWEN MOORE, Wisconsin, Ranking 
    Chairman                             Member
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan              BILL FOSTER, Illinois
ROBERT PITTENGER, North Carolina     BRAD SHERMAN, California
MIA LOVE, Utah                       AL GREEN, Texas
FRENCH HILL, Arkansas                DENNY HECK, Washington
TOM EMMER, Minnesota                 DANIEL T. KILDEE, Michigan
ALEXANDER X. MOONEY, West Virginia   JUAN VARGAS, California
WARREN DAVIDSON, Ohio                CHARLIE CRIST, Florida
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 4, 2017................................................     1
Appendix:
    April 4, 2017................................................    29

                               WITNESSES
                         Tuesday, April 4, 2017

Calomiris, Charles W., Henry Kaufman Professor of Financial 
  Institutions, Columbia University..............................     5
Levy, Mickey D., Chief Economist for the Americas and Asia, 
  Berenberg Capital Markets, LLC.................................     9
Spriggs, Hon. William E., Chief Economist, AFL-CIO, and 
  Professor, Department of Economics, Howard University..........     7

                                APPENDIX

Prepared statements:
    Calomiris, Charles W.........................................    30
    Levy, Mickey D...............................................    68
    Spriggs, Hon. William E......................................    84

              Additional Material Submitted for the Record

Davidson, Hon. Warren:
    Chart entitled, ``Federal Debt as % of GDP''.................    99
Hill, Hon. French:
    Editorial entitled, ``A 21st-Century Federal Reserve,'' dated 
      March 15, 2017.............................................   100


                    EXAMINING THE FEDERAL RESERVE'S



                    MANDATE AND GOVERNANCE STRUCTURE

                              ----------                              


                         Tuesday, April 4, 2017

             U.S. House of Representatives,
                           Subcommittee on Monetary
                                  Policy and Trade,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:04 a.m., in 
room 2128, Rayburn House Office Building, Hon. Andy Barr 
[chairman of the subcommittee] presiding.
    Members present: Representatives Barr, Williams, Huizenga, 
Pittenger, Love, Hill, Emmer, Mooney, Davidson, Tenney, 
Hollingsworth; Moore, Foster, Sherman, Green, Heck, Kildee, and 
Vargas.
    Ex officio present: Representative Hensarling.
    Chairman Barr. 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 the Federal 
Reserve's Mandate and Governance Structure.''
    I now recognize myself for 3 minutes to give an opening 
statement. Last month, we hosted a hearing on sound monetary 
policy. One witness testified that unconventional policies will 
work, but they need more time. After a decade of unconventional 
monetary policies, we are tired of waiting. Well before the 
Great Recession and to this day, the Fed has chased a Keynesian 
nirvana. We were told the economy would speed up; instead, it 
slowed down. We were sold a reliable solution; now we are left 
with a persistent problem. American households are right to 
demand a more reliable governance structure for our Federal 
Reserve.
    Today, we will carefully consider what this structure 
should look like. To be sure, my colleagues on the other side 
of the aisle have an answer for why their central planning went 
awry. They blame Republicans for fiscal austerity, but the 
truth is inconvenient. There was no fiscal austerity. The 
previous Administration recklessly spent beyond our means, and 
instead of preserving monetary policy independence, it cajoled 
the Fed into fueling a Keynesian stimulus that promised more 
than it could ever deliver.
    A lot of fingerprints were left at this economic crime 
scene; none of them belonged to austerity. Eye-popping fiscal 
stimulus and monetary accommodations were supposed to promote a 
robust economy. Instead, they infected every nook and cranny of 
what was a resilient economy. Washington elites pretended to 
know how they should spend your paycheck. They pretended to 
know what jobs employers should create and how much those jobs 
should pay. They pretended to know what businesses should 
produce, because they also pretended to know what you should 
consume. Pretending to know is the problem. Budget blowouts and 
unconventional monetary policies promised something better, and 
when better did not materialize, we got even more of the same.
    The first step to ending this Keynesian goose chase is a 
more disciplined and transparent monetary policy. We need to 
stop asking for policy miracles and start returning to the 
simple objective of stabilizing prices. Doing so will give 
households and businesses the information they need to make 
productive economic decisions. A Reason Foundation author put 
it this way: ``Wealth is what we humans produce, while money is 
but a measure that speeds our exchange of the goods and 
services we create. Money by itself has no value. Instead, it 
fuels value creation by facilitating commerce wherever it shows 
promise.''
    The record is clear. Unsustainable spending of other 
people's money, coupled with the most interventionist and 
improvisational monetary policies left us with a persistent 
economic funk. The answer cannot lie with doing even more of 
the same. Monetary policy can and should serve as a reliable 
foundation for growing economic opportunities, but it cannot do 
so without a more productive governance structure, a structure 
that holds the Fed to account for only what it can do, and 
insulates monetary policy from political pressures to do what 
it can't.
    The Chair now recognizes the ranking member of the 
subcommittee, the gentlelady from Wisconsin, Gwen Moore, for 5 
minutes for an opening statement.
    Ms. Moore. Thank you so much, Mr. Chairman. And let me join 
you in thanking our witnesses for taking time out of their busy 
schedules to be with us today.
    I would just like to say that I was here when Henry Paulson 
walked in and said, ``I need $700 billion to keep our economy 
from going into free-fall.'' I was here when Barak Obama raised 
his hand and was sworn in, and we were losing 700,000 jobs a 
month and our economy was in free-fall. I was here when you say 
that there was no such thing as austerity. I was here for the 
sequester, the massive cuts in food stamps. And I was here last 
week when we just dodged a bullet of having $1 trillion pulled 
out of health care in the United States of America. So I am 
just scratching my head here wondering whatever are we talking 
about.
    Regarding the dual mandate of the Fed, I am on record 
opposing eliminating considerations of employment from the dual 
mandate. And it is an odd notion to think that labor and 
inflation are not linked. So it strikes me as counterproductive 
that the Fed should turn a blind eye to employment in its 
policy consideration. It just doesn't make sense economically 
for the American people.
    As for limited authority of the Fed, we made some targeted 
changes to the Fed in the Dodd-Frank Act, including ending 
bailouts. I think those were timely and provide additional 
accountability and stability to the financial system. I also 
think that expanding representation at the Fed so that it is 
more authentic and realistic in how it reflects society as a 
whole is good, but I grow increasingly anxious with the 
committee's preoccupation with infusing politics into the Fed, 
constraining the Fed from executing its mission by further 
limiting its open market activities, adding unworkable formula 
rules to monetary policy, and restructuring the Fed to give 
banking interests even more weight on decisions, a decision 
that would only make policy more myopic and not better.
    Academic studies inform us that making the Fed look more 
like America will lead to better economic outcomes. Industry is 
moving to diversify, and so should the Fed. If anywhere on 
Earth anyone should use economic research, it is the Fed. So I 
believe that the future of the Fed will look more authentic, 
more like this vast, diverse country. The Fed will need to 
normalize its monetary policy in the future, but I applaud the 
steps the Fed has taken to harmonize its growth policies with 
early steps that Democrats took to stabilize the economy after 
the Bush-GOP deregulation and induced Great Recession, lack of 
accountability, lack of--just drunken sailor financial 
activity.
    And I just don't get it. How do bread lines and austerity 
serve our constituents? And so I will not be apologetic for my 
votes for pro-growth policies like the stimulus, which could 
have been better targeted, but I certainly have no regrets 
about Dodd-Frank, and have worked on a bipartisan basis for 
tweaks and fixes. I think that the Fed's moves, while 
unconventional, have been largely helpful, and certainly more 
helpful than the GOP austerity agenda.
    And with that, I yield back my time, Mr. Chairman.
    Chairman Barr. Thank you. The gentlelady yields back.
    The Chair now recognizes the gentlelady from Utah, Mia 
Love, for 1 minute for an opening statement.
    Mrs. Love. Thank you, Mr. Chairman, for holding this 
important hearing.
    When the Federal Reserve was created in 1913, Congress set 
price stability as the Fed's principal objective with regards 
to monetary policy. It wasn't until 65 years later, in 1978, 
that Congress amended the Act to redefine the goals of monetary 
policy to include maximum employment. And the late 1970s, of 
course, was a period of stagflation, slow economic growth, and 
high inflation, and Congress was reacting to a serious, but 
ultimately temporary, circumstance.
    Last month at a previous hearing of this subcommittee 
regarding sound monetary policy, we heard several witnesses 
contend that the only thing the Federal Reserve can control 
over the longer run is the rate of inflation. The purchasing 
power of currency, giving the Fed multiple, at times 
conflicting, objectives, on the other hand, merely creates 
unsatisfactory outcomes.
    Proponents of the dual mandate contend that the Fed can and 
should work to achieve both employment and inflation goals. 
Federal Reserve Chair Yellen herself, in explaining her strong 
support of the dual mandate, has said that she believes that 
both inflation and employment matter greatly to the American 
people and that they both impact the welfare of households and 
individuals in this economy. There is no question that 
inflation and employment both matter to the American people 
greatly.
    The question is whether the Federal Reserve is 
appropriately tasked with actively pursuing both objectives and 
is capable of achieving them. I would also note that most 
economists would agree, and I would confidently wager that 
Chair Yellen agrees, that the economy performs best and 
therefore creates jobs the most effectively under circumstances 
of price stability.
    I look forward to exploring the question today of whether 
we should stick with price stability. Thank you.
    Chairman Barr. The gentlelady's time has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman, for 1 minute for an opening statement.
    Mr. Sherman. First, I was surprised to hear the chairman 
say that we shouldn't be cajoling the Fed. I have seen his 
party do it in this room hundreds of times.
    But I want to focus on democracy, because people who are 
dedicated to constitutional values don't spend a lot of time 
reading FMOC notes and people in economics tend not to focus a 
lot of their time on the U.S. Constitution. We believe in this 
country in one person, one vote, but when it comes to the Fed, 
which is a governmental institution, we have one bank, one 
vote, in selecting various regional Governors. And then when it 
comes to the FMOC, the region that I am from, California, has 
21 percent of the people, and it is in the lowest of 3 
categories to have a seat on the FMOC. It is treated exactly 
the same as a region that has 3 percent.
    So I look forward to democracy reining in the structure of 
the Fed. It was in the 1960s that we got the ruling one person, 
one vote, when it came to State senate districts. Maybe this 
last bastion of King George will be liberated.
    I yield back.
    Chairman Barr. The gentleman yields back.
    And the Chair now recognizes the gentleman from Minnesota, 
Mr. Emmer, for 1 minute.
    Mr. Emmer. I want to thank Chairman Barr for calling this 
important hearing this morning, and I want to thank all of our 
witnesses for agreeing to be here to testify.
    We are only a few months into the 115th Congress, however, 
this is already the second subcommittee hearing we have had to 
review the policies of the Federal Reserve, and the third 
hearing if we consider the committee as a whole. I am pleased 
to see the chairman's dedication to ensuring proper oversight 
of the Fed, and I share his commitment to make the Federal 
Reserve a more transparent and market-friendly institution.
    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 
discretion to reduce interest rates to historical lows by 
trillions of dollars of toxic assets and bailouts of numerous 
financial institutions. However, the consistently inconsistent 
nature of the Fed's forecast to raise interest rates, as well 
as the flawed nature of its dual mandate, have led to confusion 
in the markets, anemic growth, and lack of confidence in our 
economy.
    I look forward to today's hearing as well as the 
opportunities provided to this chamber in the 115th Congress to 
chart a new course for the Fed and provide stability and 
opportunity to businesses and families across this country.
    And I yield back.
    Chairman Barr. The gentleman yields back.
    And finally, the Chair recognizes the gentleman from 
Illinois, Mr. Foster, for a 1-minute opening statement.
    Mr. Foster. First off, I would like to second a few 
comments that were made. I was there during the TARP scenario, 
and it was ugly. And I think that Members on both sides of the 
aisle who were not there would do themselves well to look over 
the tapes of the hearings and the congressional Floor vote and 
remember what it was that got us into this and what we had to 
do to get out, because it wasn't pretty.
    I think the discussion that just happened having to do with 
the tradeoff between maintaining price stability and employment 
stability is fundamental to your attitude. There was a very 
interesting paper out of the Federal Reserve research arm 
having to do with--I think the title of it was, ``Doves for the 
Poor, Hawks for the Rich,'' or vice versa--that had to do with 
the fact that over the course of a business downturn, you 
actually do less damage to your economy by maintaining 
employment stability, and there are substantial redistributive 
effects if you decide that you are going to maintain employment 
stability at the expense of price stability. And I think this 
is a tradeoff that we have to understand, and not duck from the 
fact that it is a fundamental tradeoff that will always be with 
us.
    Thank you. I yield back.
    Chairman Barr. The gentleman's time has expired.
    Today, we welcome the testimony of Dr. Charles Calomiris, 
who currently serves as the Henry Kaufman Professor of 
Financial Institutions at Columbia University; Dr. William 
Spriggs, who serves as the AFL-CIO's chief economist, and is 
also a professor of economics at Howard University; and Dr. 
Mickey Levy, who is the chief economist for the Americas and 
Asia at Berenberg Capital Markets, LLC.
    Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony. And without objection, 
each of your written statements will be made a part of the 
record.
    Dr. Calomiris, you are now recognized for 5 minutes.

 STATEMENT OF CHARLES W. CALOMIRIS, HENRY KAUFMAN PROFESSOR OF 
          FINANCIAL INSTITUTIONS, COLUMBIA UNIVERSITY

    Mr. Calomiris. Chairman Barr, Ranking Member Moore, 
subcommittee members, it is a pleasure to be with you today to 
share my thoughts on how to improve the governance structure of 
the Federal Reserve System.
    The Fed has failed to achieve its central objectives, price 
stability and financial stability, during about three-quarters 
of its 100 years of operation. Although the Fed was founded 
primarily to stabilize the panic-plagued U.S. banking system, 
since the Fed's founding and, largely, as the result of errors 
in Fed monetary and other policies, the United States has 
continued to suffer an unusually high frequency of severe 
banking crises, including during the 1920s, the 1930s, the 
1980s, and the 2000s. The two major U.S. banking crises since 
1980 place our country within the top quintile of risky banking 
systems in the world, a distinction it shares with countries 
such as Argentina, Chad, and Democratic Republic of Congo.
    It is high time to address deficiencies in our financial 
system that have produced these subpar results, and one of the 
key areas where reform is needed is in the governance of the 
Fed. The Fed has played an active role in producing most of 
those crises, and its failure to maintain financial stability 
has often been related to its failure to maintain price 
stability.
    In his review of Fed history, Allan Meltzer points to two 
types of deficiencies that have been primarily responsible for 
the Fed's falling short of its objectives: adherence to bad 
ideas; and politicization. Failures to achieve price stability 
and financial stability reflected a combination of those two 
deficiencies.
    Unfortunately, the failures of the Fed are not nearly a 
matter of history. Since the crisis of 2007 to 2009, a feckless 
Fed has displayed an opaque and discretionary approach to 
monetary policy in which its stated objectives are redefined 
without reference to any systematic framework that could 
explain those changes; has utilized untested and questionable 
policy tools with uncertain effect; has been willing to pursue 
protracted fiscal, as distinct from monetary, policy actions; 
has grown and maintains an unprecedentedly large balance sheet 
that now includes a substantial fraction of the U.S. mortgage 
market; has been making highly inaccurate near-term economic 
growth forecasts for many years; and has become more subject to 
political influence than it has been at any time since the 
1970s.
    The same problems that Mr. Meltzer pointed to, bad ideas 
and politicization, now as before, are driving Fed policy 
errors. I am very concerned that these Fed errors may result 
once again in departures from price stability and financial 
stability. In my written testimony, I show that the continuing 
susceptibility of the Fed to bad thinking and politicization 
reflects deeper structural problems that need to be addressed. 
Reforms are needed in the Fed's internal governance, in its 
process for formulating and communicating its policies, and in 
delineating the range of activities in which it is involved.
    My testimony focuses on reforms that address those 
problems: one, internal governance reforms that focus on the 
structure and operation of the Fed, which would decentralize 
power within the Fed and promote diversity of thinking; two, 
policy process reforms that narrow the Fed's primary mandate to 
price stability and that require the Fed to adopt and to 
disclose a systematic approach to monetary policy; and three, 
other reforms that would constrain the Fed asset holdings and 
activities to avoid Fed involvement in actions that conflict 
with its monetary policy mission.
    Table 1 summarizes the reforms proposed here and Figure 1 
outlines the primary channels through which reforms would 
improve monetary policy.
    In my remaining time, I would like to point to some of the 
most important elements in my testimony. Improving the Fed's 
primary mandate to focus on price stability is a reform that is 
long overdue. Price stability is an achievable long-run 
objective, and thus, the Fed can be held accountable for 
achieving it. Indeed, long-run inflation is completely under 
its control. Inflation matters for growth. High levels of 
inflation or volatile inflation result in low output and high 
unemployment in the long run.
    As Milton Friedman and many others have correctly argued 
for years, the reason to target price stability is not because 
we care about price stability per se, no one should, but rather 
because we care about employment and output. By making price 
stability the primary long-run objective of the Fed, we ensure 
that the average levels of employment and output will be 
maximized in the long run.
    Paradoxically, the point of narrowing the Fed's long-term 
mandates to inflation is to boost average employment. Narrowing 
the Fed's primary mandate makes the Fed more accountable, while 
protecting it from myopic political pressures that are inherent 
in a democracy.
    Holding the Fed primarily to account for price stability 
does not preclude it from supporting the economy during slumps 
with countercyclical policy over the short or medium terms as a 
secondary objective. Indeed, a host of possible monetary policy 
strategies are consistent with both meeting a long-run 
inflation target and providing countercyclical influence.
    There is no doubt that a Fed with a single inflation 
mandate would continue to execute countercyclical policy 
aggressively. By making that countercyclical process 
systematic, we would further ensure the appropriate 
accountability of monetary policy, while further insulating it 
from myopic political pressures or from seat-of-the-pants 
biases that cause monetary policy to fall short of its 
objectives.
    Much of my testimony is devoted to the need to improve the 
deliberative process at the Fed by making it more democratic 
and by ensuring true diversity of thinking. The Fed has lost 
the diversity of experience and perspective that used to 
animate and inform its debates.
    Chairman Barr. The time of the gentleman has expired. We 
will continue to explore these topics--
    Mr. Calomiris. Okay.
    Chairman Barr. --in Q and A. Thank you, sir.
    Mr. Calomiris. Thank you.
    [The prepared statement of Dr. Calomiris can be found on 
page 30 of the appendix.]
    Chairman Barr. Dr. Spriggs, you are now recognized for 5 
minutes.

STATEMENT OF THE HONORABLE WILLIAM E. SPRIGGS, CHIEF ECONOMIST, 
    AFL-CIO, AND PROFESSOR, DEPARTMENT OF ECONOMICS, HOWARD 
                           UNIVERSITY

    Mr. Spriggs. Thank you, Chairman Barr, and thank you, 
Ranking Member Moore, for inviting me today.
    I think we should once again be reminded of, as was 
mentioned earlier, the Humphrey-Hawkins Full Employment Act. It 
was an act of democracy. Congress did give instructions to the 
Federal Reserve. And it is clear from the instructions that 
Congress gave and the fact-finding that went into the 
legislation, that Congress' mandate was full employment, full 
employment with common sense. And included in that common sense 
was full employment with price stability.
    Economists all agree that the economy can overheat, and you 
could try and attempt to get full employment and end up with 
accelerating inflation. Economists must agree, because we now 
have experienced it, that you can have another problem, which 
is deflation. And ignoring the threat of deflation, a real 
threat, is as dangerous as ignoring accelerating inflation. 
This is the lesson of the Bank of Japan, which has still not 
figured out how to get out of its deflation. So we should be 
reminded that our Federal Reserve, by having a dual mandate, is 
also cautionary in thinking about that.
    One of the problems with the Fed is that it is made up of 
and owned by banks. This gives it a very one-sided view of the 
economy. And when you look at the transcripts of the Federal 
Reserve minutes for the Federal Open Market Committee, you see 
a very other worldly view of unemployment at the peak of this 
downturn.
    Can the Fed itself and by itself achieve full employment? 
The Humphrey-Hawkins Act did not anticipate that the Fed could 
do that. It placed clear responsibility on the fiscal authority 
of Congress to make that happen. So no one thinks the Fed can 
do that by itself. And the austerity that was pursued 
immediately after the initial stimulus is why this recovery is 
unique compared to all other recoveries before this. When you 
look at what happened under George W. Bush, when you look at 
what happened under Ronald Reagan, when you look at the 
downturn under George H.W. Bush, you see a different response 
from fiscal stimulus.
    This downturn had the biggest downturn in public 
investment, the Federal Reserve did not step in to shore up 
public investment, and State and local governments have still 
not recovered their level of investment in roads, in education, 
and in the infrastructure of our cities and societies. That is 
not the Federal Reserve's fault. Those things come under fiscal 
authority. And we continue to starve and cut the budgets that 
would have allowed public investment to return. In fact, the 
current President is saying we need infrastructure, because 
even he recognizes that we have starved public investment.
    The Federal Reserve did take some unusual steps, but steps 
which have been proven in the light of the reality of 
deflation. The Federal Reserve is looking at the lessons 
learned in Japan and has understood that quantitative easing 
was a tool that they could use. Many economists have blinded 
themselves to this reality. There is a zero lower bound, there 
is a point at which typical traditional policy is not going to 
lead to stability.
    Now, this century, the Federal Reserve has kept the price 
level at an average of 1.9 percent. Its target for inflation is 
2 percent. So one can say they have pretty well hit the target 
over this long period, with a very small standard deviation. 
The claim that price stability alone leads to job gains and 
income growth just is contradicted by the simple facts. Before 
the great moderation, before the deliberate downturn of the 
1980s, we had an average unemployment rate in the United States 
of 5.2 percent, which allowed us to have a greater and more 
rapid growth of income. Since then, we have had price 
stability, far greater price stability, but unemployment has 
averaged 6.2 percent, and we have had very short periods in 
which unemployment was sufficient to drive up the wages of 
American workers and stimulate the growth of new 
establishments.
    It is the growth of wages and broad income growth that 
leads to new firm establishment. It is not the other way 
around. The causal factor is by generating broad-based income 
growth, you create new customers, and that allows for new 
establishments.
    I look forward to being able to answer questions.
    [The prepared statement of Dr. Spriggs can be found on page 
84 of the appendix.]
    Chairman Barr. Thank you, sir. The gentleman's time has 
expired.
    Dr. Levy, you are now recognized for 5 minutes.

 STATEMENT OF MICKEY D. LEVY, CHIEF ECONOMIST FOR THE AMERICAS 
            AND ASIA, BERENBERG CAPITAL MARKETS, LLC

    Mr. Levy. Chairman Barr, Ranking Member Moore, and members 
of the subcommittee, I appreciate this opportunity to present 
my views on monetary policy. My focus is specifically on the 
Federal Reserve's balance sheet.
    In summary, my assessment is that while the Fed's asset 
purchases during the financial crisis of 2008-2009 were 
emergency measures that did help lift the financial crisis and 
end the recession, the subsequent quantitative easing asset 
purchases, particularly the Fed's Large Scale Asset Purchases 
under QE3, and maintaining a $4\1/2\ trillion balance sheet, 
even though the economy is growing normally and financial 
markets are behaving normally, has served no economic purpose 
and are very risky.
    The Fed's balance sheet of $1.8 trillion of mortgage-backed 
securities (MBS) inappropriately involves the Fed in credit 
policy and credit allocation. The Fed's overall balance sheet 
of $4\1/2\ trillion gives the false impression to Congress that 
it is reducing the budget deficit in a riskless way, when in 
fact it exposes the government, as well as current and future 
taxpayers, to very large losses. In addition, it blurs the role 
between monetary and fiscal policies, and jeopardizes the Fed's 
credibility and maybe even its independence.
    I recommend that the Fed embark immediately on a strategy 
that would gradually and predictably unwind the excesses in its 
portfolio as part of normalizing monetary policy. Once again, 
reflecting the Fed's current $4\1/2\ trillion portfolio, there 
are over $2 trillion in excess reserves in the banking system. 
By gradually and predictably unwinding these excess reserves, 
this would enhance economic performance and provide for a 
healthier banking system.
    The financial crisis was scary and required emergency 
unprecedented Fed policy, but the Fed's continuation of crisis 
management quantitative easing that has bloated its balance 
sheet has been a mistake. Along with maintaining extremely low 
interest rates, there is no question that it has stimulated 
financial markets, boosted stock prices and housing values, and 
encouraged risk-taking. However, strikingly, it has failed to 
stimulate nominal GDP. Nominal GDP growth has actually 
decelerated despite all the Fed's efforts. So it is 
inappropriate for the Fed to say that it has stimulated the 
economy. Meanwhile, through its quantitative easing and 
artificially low rates, the Fed has increased wealth inequality 
and it has added financial burdens to poorer Americans and 
older Americans. The economy would have continued growing along 
its modest pace and jobs would have been created even without 
QE, the Fed's Operation Twist (which involved selling shorter-
term securities and buying longer-duration securities), and the 
Fed's reinvestment of maturing assets.
    Unfortunately, potential growth has been slowed 
significantly by higher taxes and a growing web of government 
regulations that have deterred businesses from expanding, 
investing, and hiring. These economic and job-dampening factors 
are way beyond the scope of the Fed's monetary policy. All of 
the Fed's excessive easing cannot help.
    In Fiscal Year 2017, reflecting the Fed's positive carry 
from its excessive balance sheet, the Fed will remit over $100 
billion of net profits to the Treasury, but this comes at a 
very high risk. The CBO estimates that if interest rates were 
to rise by one percentage point from its baseline, it would add 
$1.6 trillion to the deficit over 10 years. Based on the Fed's 
own forecast of what it thinks is appropriate for the Fed funds 
rate and its forecast of economic growth and inflation, the 
unfavorable deficit risks are even higher. Where is the Fed's 
transparency on this important fiscal exposure?
    I encourage the Fed to establish this strategy for 
unwinding the excesses in its portfolio. It is important that 
the Fed establishes a strategy and then sticks with it, and not 
waiver back and forth and be pushed around by financial 
markets.
    I recommend two steps, and they are pretty easy and pretty 
passive. First, the Fed should announce it will halt 
reinvesting the maturing assets in its portfolio, which would 
lead to a sizeable runoff in its holdings of the Treasuries, 
and then after a couple of years, announce a Treasury for MBS 
swap that would move the Fed toward an all Treasuries 
portfolio. Even this fairly aggressive unwinding of the Fed's 
portfolio would leave plentiful excess reserves in the system. 
It would help the health of the banking system and be positive 
for economic performance. Thank you.
    [The prepared statement of Dr. Levy can be found on page 68 
of the appendix.]
    Chairman Barr. Thank you, Dr. Levy. Your time has expired, 
and we can get to your second point in the Q and A there.
    The Chair now recognizes himself for 5 minutes. Dr. 
Calomiris, monetary policy is not easy, but could our monetary 
policy and thus our economy benefit from greater diversity of 
thought in the Federal Open Market Committee (FOMC)?
    Mr. Calomiris. Thank you for that question, Mr. Chairman. 
Yes, I believe that this is a major problem right now. The lack 
of diversity reflects excessive centralization of power, and we 
see it in a lack of diversity in the models the Fed is using 
and we also see it in the lack of dissent. And, in fact, this 
has been a very troubling pattern over the past 20 years, that 
the Federal Reserve Board has moved away from the dissent 
patterns that we observed in the past, and I think this 
reflects the fact that the power within the Fed system is 
overly centralized. You can't have diverse thinking if you have 
monopolistic power.
    Chairman Barr. And with that greater diversity of thought 
in mind, Dr. Calomiris, should we expand the voting rights on 
the Fed's monetary policy committee? And as you know, only 5 of 
12 district bank presidents presently vote at each FOMC 
meeting. Wouldn't broadening those voting rights to include all 
of the district bank presidents at every FOMC meeting provide 
for a monetary policy that directly benefits from all of the 
information that all of the committee members would bring to 
bear?
    Mr. Calomiris. Very much so. There are two obvious reasons 
to believe so. First, note that the dissents that are still 
happening within the Federal Reserve System are coming entirely 
from Federal Reserve bank presidents. In terms of diversity of 
opinion, they are the whole show right now. So I think 
expanding their role by having all of them vote at every 
meeting would definitely improve the diversity.
    The second point is they are the ones who, other than the 
Chair, control research departments. The Governors don't. The 
Governors only get the information that the Chair of the Fed is 
willing to give them. The bank presidents actually have staffs, 
and they can and do, therefore, research independently to some 
extent.
    Chairman Barr. I agree with you. And I would just note that 
Dallas Fed president Richard Fisher advocated for just such a 
governance reform. And Mr. Fisher was among the first to sound 
the housing crisis alarm actually more than a year before other 
committee members acknowledged the smoke that they smelled was 
actually evidence of fire. So I would agree with that.
    One final question to you, Dr. Calomiris, related to the 
directors and the regional district banks. The 12 district 
presidents are nominated by their boards of directors, who, in 
considerable part, represent the economic interests of their 
region. Each board, as you know, is composed of class A, B, and 
C directors, the latter two being nonbankers, and the class A 
directors being bankers. The Dodd-Frank Act took away the power 
of the bankers or the class A directors to vote for their 
district presidents. Is this a power that we should restore to 
class A directors?
    Mr. Calomiris. I think it is a good idea. Again, we want 
diversity of views, but bankers have a particular expertise 
that is very valuable in this system. And if you go back to the 
Federal Reserve Act, the 12 banks were actually given power so 
that they would reflect bankers' knowledge and interest. So I 
think it makes sense to include them. And if you think about 
who some of the most successful presidents have been, they have 
been people who have benefited from that kind of real-world 
financial experience.
    Chairman Barr. Dr. Levy, in my time remaining, as you know, 
the Fed continues to reinvest proceeds from maturing assets, 
effectively maintaining its QE policy. You testified about 
this. In addition, the Fed is still using interest on excess 
reserves and repos to set the Federal funds rate as opposed to 
conventional open market operations. The Fed still owns more 
than $1.8 trillion in mortgage-backed securities, the Fed's 
balance sheet remains 4\1/2\ times the size of the pre-crisis 
balance sheet, yet we are 8 years beyond the Great Recession.
    How would empowering every district president to fully 
participate in each FOMC meeting, and how would a single 
mandate of price stability or at least creating, or placing a 
priority on price stability, how would those reforms improve 
monetary policy, especially with reference to the balance 
sheet?
    Mr. Levy. I think an even-handed balance of power in the 
Federal Reserve System between the Federal Reserve presidents 
and the Board of Governors would lead the Fed to make the right 
decision and stop reinvesting the maturing assets on its 
portfolio and let them run off.
    As Dr. Calomiris said, we definitely need a balance. And 
the bank presidents, who have a keen understanding of banking, 
would contribute a lot to monetary policy deliberations.
    With regard to inflation and the dual mandate, the Fed 
would be much more precise about its inflation target, and like 
the ECB, identify 2 percent as its definitive target and not 
waiver and give the impression that inflation above 2 percent 
for a while would be acceptable. By pursuing absolutely 
discretionary policies and frequently changing its mind creates 
more uncertainties in financial markets and--
    Chairman Barr. Thank you, sir.
    The Chair's time has expired. So thank you for your answer.
    And the Chair now recognizes the ranking member, Ms. Moore, 
for 5 minutes.
    Ms. Moore. Thank you so much, Mr. Chairman. And here I am 
adding on to my free MBA that I get whenever we have such a 
distinguished panel here.
    I don't want to seem naive, but I just want to start out 
with you, Dr. Calomiris. In your testimony, on page 17 at the 
bottom, you state that, ``A policy rule must be a specific 
algebraic formula that can be used to determine how monetary 
policy should respond to changes in macroeconomic conditions.''
    And I guess, since we are debating whether or not the QE 
was a good policy, I want you to share with us, if we had used 
this sort of algebraic formula, we would have been below zero 
interest rates when QE was first adopted. So this seems to be a 
contradiction that we ought to have a policy that meets the 
algebraic formula, and in reality the Fed saved the economy by 
doing QE.
    Can you just justify those two things?
    Mr. Calomiris. Sure. Thanks for your question. No, there is 
no contradiction. The formula can change. And, of course, I 
agree, and have written about it for many years, that when you 
hit the zero lower bound, the formula has to potentially 
include some quantitative easing, but that doesn't mean that 
you can't still be systematic, that you can't explain to people 
what you are doing.
    So, yes, as I talk about at length in my testimony, there 
is going to be a need for the formula to adapt, and the Fed 
should be in charge of deciding from time to time--
    Ms. Moore. It isn't a formula if you change it.
    Okay. So, Dr. Spriggs, we have heard my colleagues here 
agree that we need more diversity on the Fed, but when they do 
it, they just talk about more white men from the other banking 
regions having a vote. So when you talk about diversifying the 
committee, are you talking about just other white men having an 
opportunity to vote, or how would you explain diversity?
    Mr. Spriggs. No. I think it means diversity of experiences 
and diversity of communities that have been served. So I am 
very happy that the Fed can celebrate that they have chosen an 
African American to be the president of the Atlanta Regional 
Bank. This is historic, as he is the first one. But more 
important than his skin color is that he is a housing expert. 
And having someone who understands the housing market and the 
need of finance to sustain a middle-class country is an 
important voice to be at the table.
    What was missing during the housing crisis was someone who 
actually understood, what did this mean for the American 
household to have that much wealth disappear. So it is that 
kind of diversity.
    Now, of course, economists, unfortunately, are of a similar 
mind. We are a discipline which is far more orthodox than any 
other social science. People have studied this. If you compare 
the Ph.D. comprehensive exam at Howard to the Ph.D. 
comprehensive exam at any other university, you will find that 
there are maybe two questions that are different. We all do 
think alike.
    So part of the diversity is at least achieving having 
different voices at the table and people who understand--
    Ms. Moore. Thank you so much.
    Mr. Spriggs. --that the responsibility is beyond bankers.
    Ms. Moore. Thank you, Dr. Spriggs. I want you to comment on 
the dual mandate, which is continually being challenged in this 
committee. As a matter of fact, Mr. Brady offered a bill to end 
the dual mandate. How do you think that might compromise, in 
fact, price stability, so how they might work together or how 
that might affect it?
    Mr. Spriggs. I think we see--and as you mentioned before, 
the problem with a Taylor-like rule, an algebraic rule that 
runs into the zero lower bound means that the Fed would have to 
do something different, and that something different is a 
reality that comes about if the Fed isn't paying attention to 
the real economy and paying attention to what is happening to 
wages. You can't get price stability if you have high 
unemployment, because high unemployment means that you are far 
away from the production possibilities curve.
    If you run an economy that only touches that curve, that 
only pushes us to the peak, and not think about it in the long 
run, then every time we reach that peak, you keep shrinking the 
economy, and that is the problem we have run into.
    Ms. Moore. All right. Thank you so much.
    Dr. Levy, let me let you finish this out. You said that you 
want more clarity on Fed goals. Well, the Fed mandate is 2 
percent inflation. Could it be more clear?
    Mr. Levy. It could be much clearer. The Fed identifies 2 
percent, but then after the fact, it modifies its view and 
states that 2 percent is just a long-run average. It proceeds 
with saying that exceeding 2 percent for a while is just fine 
if the overheating is helpful. So it is totally discretionary.
    In contrast, the European Central Bank has a mandate up to 
but not exceeding 2 percent, period.
    Ms. Moore. Thank you.
    Chairman Barr. The gentlelady's time has expired.
    The Chair now recognizes the distinguished gentleman from 
Texas, the Vice Chair of the subcommittee, Mr. Williams, for 5 
minutes.
    Mr. Williams. Thank you, Chairman Barr, and to all our 
witnesses today. I wanted to begin by talking about the Fed's 
balance sheet. We have heard that today. Pre-crisis, $900 
billion; today, $4.2 trillion. Let's first explore how we got 
there. The required reserves provide $110 billion of funding, 
less than 3 percent of the balance sheet, while the value of 
currency in circulation stands at about $1.5 trillion today, an 
amount that is less than 15 percent of the balance sheet. More 
importantly, and maybe more troubling, is the spike in excess 
reserves held at the bank, currently $2 trillion. Large 
domestic and foreign banks who are privileged to receive higher 
rates on these excess funds have taken advantage of the 
policies put in place by the Federal Reserve. In turn, that is 
money that is just sitting there and not being lent out, not 
serving an economic purpose. The Fed funds rate at the end of 
February was 66 basis points, while the interest on reserves 
and interest on excess reserves was 75 basis points.
    Clearly, the Fed has stepped well outside the bounds of the 
conventional balance sheet in both funding sources and size. 
The bottom line is the Fed governance can be improved to get 
out of these distortionary rates.
    Question, Dr. Levy: In your testimony, you noted that the 
Fed's excessive large balance sheet does not serve any positive 
economic purpose but has many downside aspects to it. In terms 
of economic opportunity, how damaging is it to leave the 
balance sheet too big for too long?
    Mr. Levy. It is damaging and very, very risky. I mentioned 
the risk that if interest rates rise, it could generate very 
large losses. Presently the Fed, through its large balance 
sheet, generates a little over $100 billion in profits annually 
that it remits to the Treasury. If interest rates go up, then 
not only does the amount it remits dissipate, but the 
portfolio, which includes largely longer-duration securities, 
could incur large losses. In particular, the Fed's large 
holdings of longer-maturity MBS are of major concern.
    Think about it the following way: Fannie Mae and Freddie 
Mac failed because they took excess risk involving excess 
leverage, and after failing, they are now under conservatorship 
of the Treasury. Some large too-big-to-fail banks ran very 
risky leveraged portfolios and precipitated the financial 
crisis and faced failure. Their forced recapitalization 
involved the government's TARP program and subsequently the Fed 
has played a critical role in forcing banks to raise more 
capital, deliver their balance sheets, and reduce the risk in 
their portfolios and behavior.
    Now, the Fed is borrowing short and has a $4\1/2\ trillion 
portfolio, playing the positive carry game that involves large 
risks, but it does not talk about the risks. It should be more 
transparent.
    Mr. Williams. Okay. Another question: The Fed's balance 
sheet stands as a monument to numerous discretionary decisions, 
including the decision to step well outside the bound of simple 
monetary policy and dive headfirst into the credit markets. 
Does the Fed that now favors some borrowers over others not 
only create economic distortions, but also compromise the very 
independence of monetary policy?
    Mr. Levy. Yes. The Fed--through its balance sheet and 
quantitative easing--has expanded the role of monetary policy 
over the boundaries into fiscal policy. This definitely risks 
the credibility of the Fed and could effectively harm its 
independence.
    In addition, the Fed's holdings of $1.8 trillion of 
mortgage-backed securities directly involves monetary policy in 
credit allocation policy. That is beyond the role of monetary 
policy. It is inappropriate for the Fed to influence credit 
conditions in one sector over another. The Fed should unwind 
its portfolio over a lengthy period of time and move to an all 
Treasuries portfolio and reduce the scope of monetary policy 
back to what is normal.
    Mr. Williams. Now, Dr. Calomiris, as we know, the Fed sets 
interest rates on reserves. In your testimony, you talk about 
how setting very high interest rates tends to dissuade banks 
from lending. Can you explain briefly to the committee why it 
is inappropriate for the Fed to pay above market rates on bank 
reserves?
    Mr. Calomiris. First of all, because it is a subsidy. If 
you are paying above market rates, you are trying to pay 
someone to do something, and in this case, paying them not to 
lend. So it is obviously a fiscal policy.
    It also clearly contradicts the statute that authorized the 
payment of interest on reserves, which said that they would be 
at market rates, not above market rates. So I find that 
strange.
    But I want to emphasize a point that Dr. Levy also made. 
The reason the Fed has gotten itself all tangled up in these 
fiscal policies, including interest payment on reserves, is 
because it is worried about having to recognize capital losses, 
like the ones that Dr. Levy is talking about, and it is the 
political risks from that for the Fed that is driving the Fed 
to do these fiscal interventions.
    Chairman Barr. The gentleman's time has expired.
    The Chair recognizes the gentleman from California, Mr. 
Vargas.
    Mr. Vargas. Thank you very much, Mr. Chairman. And thank 
you again to the witnesses for being here.
    Going back, then, to the issue of the effectiveness of the 
Fed's large scale asset purchases I heard from Dr. Levy, and, 
again, thank you for those comments.
    Mr. Spriggs, would you like to comment on those? Because I 
thought, in fact, it was just the opposite; it did create 
stability as opposed to become a problem or a bubble.
    Mr. Spriggs. Thank you, Congressman. It created stability 
in one of the most important areas. The sector that was hurt 
the most by the downturn, the household sector, was in great 
need of having its balance sheet stabilized. Without that 
stabilization, we would have continued the downward collapse of 
consumption. So when there was a tremendous spike in mortgage 
interest rates and spread of the mortgage interest rates, this 
was going to lead to huge ramifications in the housing market.
    The Fed's intervention in this market was important to 
restoring the historic spread so that interest rates looked 
normal. And if you will see from the way that the markets have 
responded since, whether it is looking at Treasuries or looking 
at mortgage rates, we have seen that stability. And that is 
important, because only with that stability has the household 
sector been able to figure out how it can rebalance after the 
huge losses taken in savings. Because of the foreclosure 
crisis, because of the collapse of pensions, because of the 
loss of jobs, the household balance sheet was shaken very 
greatly. This has to be part of what the Fed takes into 
consideration if we are going to have a stable financial 
sector.
    Mr. Vargas. Dr. Levy, would you like to comment on that? 
Because it does seem to me that the balance sheet stabilization 
did work in exactly the way that Mr. Spriggs was talking about, 
but you don't agree with--oh, wait. Dr. Calomiris, you wanted 
to comment on it. Please do.
    Mr. Calomiris. Yes. So I think that there is a lot of 
evidence about this, and it depends on which interventions you 
are talking about and what time you are talking about.
    The most recent detailed study of this by Marco Di Maggio, 
who is now at Harvard Business School, shows that QE1 actually 
seems to have had an effect. QE2 and QE3, the only parts of 
those interventions that had an effect were their relative 
price effects through their mortgage-backed securities 
purchases, which is a fiscal policy. If you want to subsidize 
mortgage-backed securities by making their yields lower, then 
you can do that, that is a fiscal policy of Congress, but the 
Fed has actually done that. And I would say beyond the period 
where there was any need to stabilize the markets, it is simply 
a giveaway.
    Mr. Vargas. Dr. Levy?
    Mr. Levy. Yes. I agree with Dr. Spriggs regarding 2008-
2009. As I mentioned several times in my testimony, there is no 
question that the Fed's asset purchases during the financial 
crisis in an emergency situation did help stabilize financial 
markets and help lift the economy out of recession. But if we 
look at the subsequent quantitative easing programs, the Fed's 
Operation Twist and its reinvestments of all the maturing 
assets, the economy has not been stimulated; rather it has 
merely continued to grow very close to its potential growth 
path. Nominal GDP, which is the broadest measure of current 
dollar spending in the economy, actually decelerated. That is 
contrary to what the Fed had predicted would happen and also 
contrary to what its models predicted. The actual economic 
performance and particularly the persistent disappointment of 
capital spending suggest strongly that the Fed's monetary 
policy had very, very little impact.
    So when we talk about the expansion years following the 
financial crisis and recession and particularly the period 
since 2012, households' balance sheets had already stabilized 
and consumption was growing. The housing market was growing. 
Financial markets were behaving normally. Does that require an 
emergency quantitative easing?
    When you ask them whether the quantitative easing helped, 
it is instructive to emphasize that it helped during the 
crisis, but we haven't been in crisis for 8 years, and it has 
done little to stimulate faster growth during the expansion.
    Mr. Vargas. My time is about up. But it seems to me, then, 
that in the first instance, you would agree that the 
flexibility that the Fed had was almost necessary, then, for 
this stability?
    Mr. Levy. Yes.
    Mr. Vargas. It seems there would be agreement, I imagine. 
Dr. Spriggs, if you--
    Mr. Levy. And I think the legislation that is pending 
provides that flexibility.
    Mr. Vargas. Thank you, Mr. Chairman.
    Chairman Barr. The gentleman's time has expired.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. Pittenger.
    Mr. Pittenger. Thank you, Mr. Chairman. Thank you for your 
fine leadership in the important work of this committee. And 
thank you, each one of you, for coming, for your service to our 
country, for being here today.
    I would like to say that the Fed's extraordinary policy 
stance over the last decade, one that Governor Walsh called 
such--it was financial engineering, why has it not produced the 
results that have been so consistent since World War II? We 
haven't had robust economic growth, and many Americans have 
been left underemployed or are really barely making it. So I 
just really would like to get your take on that. Dr. Calomiris?
    By the way, Dr. Calomiris, my daughter went to Columbia 
Business School, and she knows of you. She did not have you for 
a class, but you have a great reputation there.
    Mr. Calomiris. Thank you, Congressman.
    Monetary policy can temporarily, over the business cycle, 
stimulate employment and growth, but it can't over any long 
period of time. Beyond a couple of years, it can't. So when you 
are looking at a sort of protracted under-performance of the 
economy, you have to look elsewhere.
    And I think the answer to your question, it is a long 
answer, but it has to do with needs to improve the supply side 
of the economy. There is a long list of things. It could be tax 
policy, it could be regulatory policy, it could be job 
training, but it is not going to be monetary policy.
    Mr. Pittenger. Thank you.
    Mr. Spriggs, do you want to give a comment?
    Mr. Spriggs. Thank you, Congressman. I would reemphasize 
that this is a unique recovery, because we didn't have a fiscal 
response. Public sector investment went down by historic levels 
and has not recovered. We are still down several hundred 
thousand public schoolteachers compared to where we were 
before.
    Mr. Pittenger. You wouldn't say--
    Mr. Spriggs. And that is--
    Mr. Pittenger. Excuse me, sir.
    Mr. Spriggs. And that is not per pupil.
    Mr. Pittenger. Let me reclaim my time.
    Mr. Spriggs. We are down several hundred thousand public 
schoolteachers.
    Mr. Pittenger. You don't believe that had to do with any 
restrictions on the market itself and the regulatory 
environment?
    Mr. Spriggs. No, that is not regulation of that. That is 
Congress--
    Mr. Pittenger. In terms of the--
    Mr. Spriggs. That is Congress failing to learn the lesson 
of the Great Depression. Fortunately, the Federal Reserve 
learned the monetary lesson of the Great Depression, but we 
have not seen the fiscal response commensurate with what took 
place. And this--
    Mr. Pittenger. Dr. Levy?
    Mr. Spriggs. --lack of investment--
    Mr. Pittenger. I am short on time, sir, with all due 
respect. I do thank you.
    Dr. Levy, what are your comments? Dr. Levy, would you like 
to respond?
    Mr. Levy. Yes. In December of last year, I testified before 
this committee and argued that monetary policy affects 
aggregate demand in the economy. What has happened so far in 
this elongated expansion is there is not insufficient demand in 
the economy, but there are various factors that have 
constrained economic growth, including tax policy, a growing 
web of regulations and government-mandated expenses, not just 
on the Federal level, but the State and local levels, that have 
inhibited businesses from hiring and investing. And then there 
is this broad issue of educational attainment and skill levels 
of our population. There is demographics. Obviously, you could 
identify these factors one by one, and each is way beyond the 
scope of monetary policy.
    So I agree with both Dr. Calomiris and Dr. Spriggs. There 
are a lot of factors that are affecting economic activity, 
particularly tax and regulatory policies. It is absolutely 
incorrect and can lead to undesired economic performance if we 
continue to rely on the wrong policy tool.
    Mr. Pittenger. What would you say that we need to be doing 
now to free ourselves from this trap that we appear to be in, 
this low-growth trap? What could the Fed be doing right now?
    Mr. Levy. I like the idea of well-thought-out tax reform, 
particularly on corporate tax policy, that affects the pass-
through businesses that employ half of all workers and generate 
roughly half of all profits in businesses. We do need more 
infrastructure spending, but wise infrastructure spending that 
is really needed, rather than just throwing money at the 
economy.
    And we definitely, by every way possible, need to improve 
our educational system and retrain working-age people who are 
out of work.
    Mr. Pittenger. Thank you. Dr. Calomiris?
    Mr. Calomiris. I think what is interesting is that this is 
an area where economists are very broadly in agreement. Exactly 
how to do it is another matter. But the areas of deficiency 
that matter for long-term growth, I can think of the four most 
obvious ones. First, regulatory policy has been a major drag on 
growth.
    Mr. Pittenger. You have a few seconds left, sir.
    Mr. Calomiris. Yes. Second, tax policy. Third, I agree with 
Dr. Levy about the right kind of infrastructure. And, fourth, 
educational policies. And I think that is where you are going 
to get growth.
    Mr. Pittenger. Thank you. My time has expired.
    Chairman Barr. The gentleman's time has expired. The Chair 
recognizes the gentleman from Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. I thank the ranking 
member as well. And I thank the witnesses for appearing today.
    Mr. Chairman, I want to talk about an acceptability factor. 
There seems to be an acceptability factor with reference to a 
good many things that are happening at the Fed. It seems that 
it is acceptable in society--maybe more so than the Fed, but I 
will relate it to the Fed--that women earn 80 cents for every 
dollar a man earns. Why would I say it is acceptable? Because 
we don't focus on it to do something about that, the fact that 
women earn 80 cents for every dollar a man earns, and by the 
way, it seems to be an improvement because at one time it was 
76 cents for every dollar a man earned.
    The certain sort of acceptability factor that we have to 
work with that is a mindset: African Americans nearly always--
there are exceptions--have unemployment rates that are twice 
that of white Americans. There is a sort of acceptability 
associated with that. It seems that we should be able to do 
something about these things if we focus on them.
    And I was honored that when Chair Yellen was here last, she 
agreed that she would examine this relationship between white 
Americans and African Americans and the notion that the 
African-American unemployment rate is nearly always twice that 
of white Americans.
    Now, if there is someone on the panel who differs with what 
I have said in terms of the empirical evidence, kindly extend a 
hand into the air so that you may be recognized? Anyone?
    Kindly allow the record to show that no one has extended a 
hand into the air.
    This acceptability factor goes into the Fed itself--there 
have been 134 Federal Reserve Bank presidents in the history of 
the Fed, and we find that Dr. Bostic is the first African 
American. We live in a world where it is not enough for things 
to be right. They must also look right. It doesn't look right 
for the Fed to not have diversity, not only in the opinions, 
but diversity with reference to the people who serve. It ought 
to be diverse.
    Does anybody differ? If you differ, kindly extend a hand 
into the air. Let the record reflect that no one differs.
    The Fed ought to have diversity of opinions that can be 
reflected through capable, competent, and qualified women as 
well as men. One of the reasons Dr. Spriggs is here today is 
because he is capable, competent, and qualified; and that sends 
a message to the rest of the world about what African Americans 
are capable of doing.
    Does anybody differ? Raise your hand. Let the record 
reflect that no one differs.
    So now, let's move a little bit further into this and look 
at interest rates in terms of their being increased and how 
they may have a harmful impact on some demographics. Dr. 
Spriggs, do interest rate increases have an adverse impact or a 
different impact on some demographic groups as opposed to 
others?
    Mr. Spriggs. Thank you, Congressman, and thank you for the 
kind words. Yes, they can. In the current setting, a large part 
of the recovery has been through the automobile sector.
    It was mentioned before that the Fed causes calamities, but 
what the Fed did was not regulate properly. It didn't believe 
it should. In the instance of the mortgages, it was that they 
didn't properly police discrimination in mortgage. In the case 
of automobiles, a disproportionate share of growth in auto 
sales have been through subprime loans, which probably should 
have been regular auto loans. That delinquency rate on payment 
is beginning to rise because those are not good instruments. 
The risk is in the instrument, not in the purchaser.
    Unfortunately, because African Americans and Latinos are 
the most vulnerable in the economy to any slowdown, there is a 
real risk here in the real economy because we currently 
generate enough jobs to keep the unemployment rate flat. If we 
slow down, if the purpose of raising interest rates is to slow 
the rate of growth, that means the algebra is you will generate 
not enough jobs to keep the unemployment rate down, and people 
will have a higher unemployment rate.
    The first people who will have a higher unemployment rate 
are Latinos and African Americans, the ones who are currently 
trying to outrun these loans. And a collapse in the auto market 
would lead to a recession. That is a real risk.
    Mr. Green. Mr. Chairman, before you proceed, I have a 
letter that is being sent to Chair Yellen that I would like to 
add to the record.
    And I would also like to add to the record, Mr. Chairman, 
if I may, the reason we want to see diversity of ethnicity is 
because it is expected that if you are there and you are 
African American, it is expected that you are going to raise 
some of these issues that impact African Americans. That is 
kind of expected of you. I yield back.
    Chairman Barr. Without objection, the gentleman's 
submission will be included in the record.
    And the gentleman's time has expired. The Chair now 
recognizes the gentlelady from Utah, Mrs. Love.
    Mrs. Love. Thank you. Thank you, Mr. Chairman, and thank 
you all for being here today. This is obviously a very 
important issue.
    The last election, I believe, was a testament to the 
frustration that the American people had about their economic 
circumstances, but I think that frustration is more properly 
directed at Congress instead of the Fed. I believe that we put 
too many mandates on the Fed while Congress has failed to meet 
its own responsibilities regarding the economy. Congress, after 
all, has a lot more levers, or should have many more levers, 
than the Fed does to address employment, policies towards tax, 
trade, regulation, and spending, and the Fed by contrast is 
uniquely qualified to address price stability.
    So, Dr. Calomiris, in order for consumers, households, and 
businesses to plan for the future and save, consume, save, and 
invest most effectively, do they need to be confident that 
prices will remain relatively constant over a period of time?
    Mr. Calomiris. Yes. We have a lot of clear evidence about 
that. So two pieces of evidence, because I know we are short on 
time.
    Number one, when inflation is more variable, contracting 
periods shorten. People aren't willing to enter into contracts, 
labor contracts, or debt contracts, over long periods of time.
    Number two, when inflation is more volatile, holding 
everything else constant, employment and output decline.
    Mrs. Love. Okay. So for both consumers and businesses to 
allocate capital to the highest valued uses, they need a sense 
of price stability. So contracts, for instance, when you were 
talking about sending out contracts, they can't have a long 
period of contract which affects the economy?
    Mr. Calomiris. Correct.
    Mrs. Love. So price instability on the other hand in the 
form of either deflation or rapid inflation can have drastic 
consequences on economic decision-making and, therefore, 
economic growth and job creation. That also is a major factor 
in how our economy is--
    Mr. Calomiris. Agreed.
    Mrs. Love. Okay. So would it be reasonable to argue that 
the Fed would be pursuing maximum employment, in fact, pursuing 
maximum employment if they most effectively focus their efforts 
on ensuring price stability?
    Mr. Calomiris. Exactly. That is the argument for making 
price stability the sole primary objective. And I just want to 
emphasize, that doesn't mean the sole objective; you can still 
have a secondary objective of stabilizing unemployment that is 
subject to your primary objective of price stability. You want 
to hold the Fed accountable for something we know how to hold 
it accountable for, but you also want to encourage it to 
stabilize over the business cycle in addition to that. There is 
no conflict between those.
    Mrs. Love. Okay. Thank you.
    Isn't it also widely accepted that the Fed's monetary 
policy changes impact the economy with substantial lag, perhaps 
as much as several quarters or even more than a year, after 
changes in policies are announced?
    Mr. Calomiris. Correct. And as you pointed out, variable 
lags that are often hard to predict.
    Mrs. Love. Okay. And lastly--I am actually happy I am able 
to get through all of this--isn't it also broadly accepted that 
by the time policy changes are fully incorporated, economic 
circumstances very often have changed so that change in policy 
made in quarters or even a year before are no longer 
appropriate?
    Mr. Calomiris. Yes. We even have words for that in 
economics. We have the words ``recognition lag'' and 
``implementation lag'' to point out exactly the problems that 
you are addressing.
    Mrs. Love. Okay. And given that reality, isn't it 
reasonable to argue that in trying to meet the mandate of 
maximum employment, the Fed might do, and perhaps even more 
often than not, does do more harm than good?
    Mr. Calomiris. It depends on exactly how the Fed approaches 
this. We know that there are seat-of-the-pants biases that if 
you don't have a commitment to price stability, the answer is 
yes. But if you do have a commitment to price stability, the 
answer is not necessarily yes. That is, you can stabilize 
employment and should stabilize employment subject to having 
that commitment to price stability.
    I have an article I cite in my paper which is written by 
two Federal Reserve Board economists in 2004, that talks about 
that, that if you have that commitment to price stability as 
your primary objective--I am not putting words in their mouth, 
but I am interpreting their results--that then you avoid these 
biases that allow you to be able to target over the cycle.
    Mrs. Love. So in all, what I am trying to say is that I 
believe that the Fed can be pursuing maximum employment more 
effectively if they really focus on ensuring price stability, 
and Congress needs to take its responsibility back in using its 
levers to focus on maximum employment.
    Mr. Calomiris. I couldn't agree more.
    Mrs. Love. Thank you.
    Chairman Barr. The gentlelady's time has expired, and now 
the Chair recognizes the gentleman from Arkansas, Mr. Hill.
    Mr. Hill. I thank the chairman.
    And I thank the distinguished panel.
    Mr. Chairman, I would like to ask unanimous consent that an 
article be put in the record. It is by Dr. Todd Buchholz, who 
was my deputy when I ran the Economic Policy Council in the 
White House. He has written a very thoughtful piece on 
restructuring the Fed.
    Chairman Barr. Without objection, it is so ordered.
    Mr. Hill. Thanks, Mr. Chairman.
    Dr. Calomiris, you talked about the concentration of power 
in the Fed and governance, and I found that very interesting 
considering you talked about the lack of dissent in the Open 
Market Committee, and yet when we include the district bank 
presidents, we get more discretion, more discussion, more 
dissents.
    And I find that so curious that they are reluctant to these 
kinds of structural governance changes when that is the 
absolute call for corporate America, to have more dissent, more 
discussion, more independent directors, more demonstrating that 
by votes. As a former banker, I saw it in bank examinations. 
Where are the dissents in your loan committee? Why does 
everybody vote yes? So I really enjoyed that part of your 
testimony, and we do want directors of our regulatory 
commission, just like we look for directors in corporate 
America, we want saber-toothed tigers as directors and 
Governors, not tabby cats. So thanks for that comment.
    And in that regard, the concentration of the Board of 
Governors, it seems to me sometimes is disconnected with 
reality. And I cite for example, you talk about rent seeking 
between interest groups and the Board of Governors, and so I 
have some draft legislation that would try to shift power back 
in Fed policy to the district banks for things like M&A 
approvals or CRA issues, and let the expertise be held 
primarily at the district bank instead of coming to Washington. 
Could you comment on that, Dr. Calomiris?
    Mr. Calomiris. I can see the argument that that would be an 
improvement, but I would like to see that get out of the 
Federal Reserve System entirely. I think it conflicts, as I 
argue in my report, with monetary policy.
    And I would also point out that this is not a partisan 
issue. I think it is very important to mention, I cite the 
Governors who were Democratic appointees who have been the most 
vocal complainers about the concentration of power at the 
Federal Reserve Board, Larry Meyer and Alan Blinder.
    So this need of both to create more independence in the 
bank presence, but also to empower the Governors. Give them 
staff. Let them have the ability to actually think in an 
organized way.
    Mr. Hill. Because we do have that at the SEC, for example. 
Commissioners have their own counsel; isn't that right, sir?
    Mr. Calomiris. Exactly. I think this is exactly the right 
comparison, yes.
    Mr. Hill. Good. Thank you for that.
    Dr. Levy, let me turn to you and talk a bit about your 
concerns about the Fed balance sheet, which, again, I found 
your testimony important. I am concerned that we are running, 
the Fed is now running the largest hedge fund in the world and 
that they, in fact, are at potential systemic risk as they 
attempt to unwind this balance sheet, and I enjoyed your 
comments about the transparency of that.
    Again, legislation I am considering would in the emergency 
lending powers under Section 13(3), require that those have 
some congressional oversight to do that, and I would be 
interested in you talking about that topic.
    And then also on 14(2), limiting the Fed to only borrowing 
Treasury securities. And I remain concerned that other central 
banks are now buying corporate stocks, for example, which I 
find very concerning. It is concerning enough that the Fed now 
has a major interest in the mortgage-backed securities market, 
which I think puts it in a severe conflict.
    So could you reflect a little bit about your philosophy of 
Treasury-only purchases in the open market operations and then 
also swapping out if they take other assets as well?
    Mr. Levy. In all but emergency situations, the Fed's 
purchase should be Treasuries only, and I strongly recommend 
that the Fed take the appropriate steps that over a reasonable 
period of time it unwinds its current mortgage-backed security 
portfolio. Right now, it is at $1.8 trillion.
    That would take a while. To begin, I recommend allowing the 
Fed's holdings of Treasuries to passively roll off. Next, it 
should involve a measured and preannounced swap of Treasuries 
for mortgage-backed securities. Regarding your point about 
other securities, the Fed should not be involved at all in what 
other central banks are doing, such as purchasing stocks and 
corporate bonds.
    Mr. Hill. Thank you, Dr. Levy. I yield back, Mr. Chairman, 
thank you.
    Chairman Barr. Thank you. The gentleman yields back.
    The Chair recognizes the gentleman from Minnesota, Mr. 
Emmer.
    Mr. Emmer. Thank you, Mr. Chairman, and thanks again to the 
witnesses for being here today.
    In the short time that we have, I would love to talk with 
all three of you, and I am sure we are going to get an 
opportunity at some subsequent date, but I just want to go 
back. I thought Congresswoman Love did a fantastic job 
addressing this dual-mandate issue.
    Dr. Calomiris, the question is this. I am looking at your 
testimony. In your testimony you write, you provide some 
internal governance reforms for the Federal Reserve, and then 
you talk about the fact that they need to be supplemented. 
These reforms you are talking about, diversity of opinion, the 
rest, experience, needs to be supplemented with some policy 
reforms as well.
    And in the quote that I think is very important, you say, 
``These reforms that ensure the right kind of accountability 
for the Fed by improving policy transparency, constraining 
unaccountable discretion, and discouraging politicization of 
monetary policy.'' And then you go on and you say, ``The most 
obvious policy process improvement would be to repeal the dual 
mandate imposed on the Fed in the 1970s and replace it with a 
single primary price stability mandate.''
    And you continue, ``The reason to target price stability is 
because we care about employment and output. By making price 
stability the primary long-run objective of the Fed, we ensure 
that the average levels of output in employment will be 
maximized in the long run.''
    Short question, was it a mistake to put in the 1970s to 
establish this full employment as part of the dual mandate when 
you already had a mandate for price stability?
    Mr. Calomiris. I guess I would say that it was an 
insufficiently clear formulation. Congress said, do these two 
things, but it didn't really explain how to do them.
    So my criticism would be, as I testify, that what Congress 
should tell the Fed to do is to have a single primary mandate, 
and then subject to achieving that mandate, also stabilize over 
the cycle. There is no conflict between those. There are many 
algebraic formulas that explain that. And by the way, through 
the Fed's successful years of the 1990s, the Fed was doing 
that, so we know that it can be done.
    Mr. Emmer. Right. But here is the problem. You might be 
surprised to know that I think the dual mandate is the problem, 
one of the greatest problems that we have with the Fed, because 
of politicization, politicization--I can't even say the word 
today--because the decisions are political, right? And that is 
what you are talking about, more accountability with the 
discretion that you have given.
    By putting this in there, and I was going back to your 
words, with price stability, it is already there, if we would 
have just focused on price stability, rather than adding this 
nebulous full employment. That is part of price stability. If 
you just focus on that and target on that, correct?
    Mr. Calomiris. Correct, but I would want to correct one 
thing, which is the Fed didn't really have a clear price 
stability mandate. And even now, the Fed has picked a 2 percent 
inflation target, but if you have been following the news, you 
know that currently Fed leaders are talking about increasing it 
maybe to 4 percent.
    The point is, there needs to be, in my view, a legislative 
definition of price stability, too. That would be something 
new.
    Mr. Emmer. But this is where we are going. Some would argue 
that that is theft, 2 percent, 4 percent, this is what we are 
trying to do. It is all the different tools that they don't 
seem to run out of, and yet none of them seem to accomplish the 
ends.
    Just briefly, in the time we have left, could you point out 
some of the political pressures that have impacted the Fed in 
the last 8 years, that you are referring to?
    Mr. Calomiris. I have worked with the Federal Reserve 
banks, many of them, as a consultant, and so I have been privy 
to being part of the Federal Reserve System as a sort of semi-
outsider. I also served on the Fed's Centennial Advisory 
Committee which was advising Fed officials, and was cochaired 
by Mr. Greenspan and Mr. Volcker.
    I guess I would say that there are many examples, but that 
many of these are hard to put your finger on. I will give you 
one example, though. If the Fed Chair has a meeting where she 
brings individuals who are unemployed to express the Fed's 
sympathy for individuals who are unemployed, I think that is a 
symptom of a very politicized central bank. It doesn't mean you 
don't care about people who are unemployed, but it shows a 
certain level of political pressure on the short term.
    So the point is, yes, the Fed needs to think about long-
term policy but not be exhibiting this kind of sympathy about 
the near term, about the short term, and that I think was a 
symptom of it. But I guess I would say that in private 
discussions with Fed officials, that this is not in my 
experience, not something that is highly disputed; that there 
has been a trend recently. Some of it has to do with Fed 
leadership changes that have politicized the Fed very much.
    Mr. Emmer. Thank you. My time has expired.
    Chairman Barr. The gentleman's time has expired. The Chair 
now recognizes the gentleman from Ohio, Mr. Davidson.
    Mr. Davidson. Thank you, Mr. Chairman.
    My context as we speak about monetary policy, I just want 
to highlight what some of my colleagues have referred to as an 
austere time with fiscal policy. As highlighted by the chart 
that we see on the screen, I think it is hard to support that 
this is austerity. When we talk about monetary policy, we 
clearly haven't been austere as we have seen the interest rates 
held low, and we have seen the balance sheet at the Fed grow 
high.
    Dr. Calomiris, an expansive mandate gives the Fed a lot of 
room to hide from accountability and a lack of diverse thought 
mutes dissent. Combined with the lack of either external or 
internal checks, we saw the Fed's balance sheet run far out of 
bounds. Doesn't this demonstrate how important it is for us to 
focus the Fed's mandate and develop governance guardrails, so 
we don't drive an economy off the road again?
    Mr. Calomiris. Yes. I think it is very important because 
making the Fed have to be systematic means that the Fed can be 
held to account by you. It means that the Fed tells you in 
advance how it is thinking, and then you can actually hold the 
Fed to a consistency with its own announcements. That is what 
is lacking right now.
    The Fed has changed its targets. It says, we are chasing 
this employment indicator. Then when they meet that, they say, 
no, we don't like that one. We are chasing another one. It 
makes you think. In answer to the prior question, when somebody 
tells you that they are constantly changing what their target 
is, it makes you think that their goal might be something that 
is driven by some other objective.
    Mr. Davidson. Correct. Thank you. And I think the other 
part is, we mention all these multiple mandates. Does that mean 
that the Fed really only looks at two things to make their 
formulation?
    So, Dr. Levy, for example, currency clearly matters at some 
level in what is going on. Does that mean that people don't 
care how the dollar is valued as part of monetary policy?
    Mr. Levy. The Fed cares about the dollar, but it is not its 
primary concern.
    Mr. Davidson. Just to pick a couple of other things, for 
example, price inherent, labor market participation is inherent 
in inflation. Any number of inputs go into that consideration. 
Does that mean without a mandate that the Fed doesn't care 
about the topic?
    Mr. Levy. Great question. The Fed cares. We all care, and 
we all want healthy, sustained, rapid economic growth. And we 
all want low unemployment for everybody, including minorities 
and uneducated or semi-skilled workers. So we all want strong 
economic performance. The question is, what is the proper role 
of the Fed in achieving these objectives? And what we have 
discussed today is that many of these goals we want for society 
and for economic performance are quite simply beyond the scope 
of the Fed to achieve.
    All of the quantitative easing in the world and the Fed's 
expanding footprint in financial markets and mortgage-backed 
securities do not help us achieve our goals. Those goals have 
to be addressed by other policy tools, including some of the 
points that Charlie and I made, on skills training, and 
education, and infrastructure, and tax policy.
    Mr. Davidson. Thank you. So in short, fiscal policy has to 
play its role. And in passing this dual mandate, just to 
highlight whether it is working or not, for example, we would 
desire that this would work, but at some point you have to say 
what is it?
    And when it was passed, it promised this Keynesian nirvana 
that with a dual mandate. It promised that unemployment would 
not rise above 3 percent. It promised that we would have no 
inflation by now, in other words, real price stability, which 
may not even be a good objective. So we look at many of these 
things, and we go down the path to say, is it working? And at 
some point when it isn't, you have to reassess and say, can't 
we take that into account with a single mandate? I think you 
all have made a very good case for that.
    A lot of Americans continue to go missing from our 
workforce or remain underemployed. Do they deserve something 
better than a dual mandate that has so far not worked?
    Dr. Calomiris?
    Mr. Calomiris. Yes. I just want to say that I think that is 
quite right, and I think that if you look at what the Fed is 
doing right now, you see why we need to clarify this. The Wall 
Street Journal article I just read says the Fed is talking 
about shrinking its balance sheet, and it is going to try a 
little and see what the market thinks and actually is 
soliciting comments from self-interested parties in the market 
about whether they like what the Fed is doing. That would only 
happen with a central bank that is completely adrift.
    Mr. Davidson. Thank you. My time has expired. Thanks for 
your answer.
    Chairman Barr. The gentleman's time has expired.
    The Chair now recognizes the chairman of our Capital 
Markets Subcommittee, Mr. Huizenga.
    Mr. Huizenga. Thank you, Mr. Chairman.
    And this is just stunning. The hubris that central bank has 
is just amazing, as you were describing, Dr. Calomiris, the 
direction of basically soliciting input about whether they 
should or shouldn't unravel the mess that they have helped 
create.
    As a courtesy, I am going to recognize my friend, whom I 
know had a clarification for you, for 30 seconds.
    Mr. Green. Thank you. I greatly appreciate it. Mr. 
Calomiris, you indicated, in my opinion, that you thought the 
CRA should not be associated with the Federal banking system. 
Would you care to give any clarity on that?
    Mr. Calomiris. I said that I would prefer, as my testimony 
says, I would prefer enforcement of CRA and bank mergers and 
other kinds of regulatory policies, particularly those that are 
very politically charged, to be removed from the Federal 
Reserve consistent with the Treasury's 2008 blueprint to have 
other regulatory agencies do that and to create a consolidated 
bank regulatory agency that does that.
    I think there is a conflict of interest by combining 
monetary policy with those, and I think it would better serve 
monetary policy for those to happen outside the Fed. That is my 
testimony.
    Mr. Huizenga. All right. And reclaiming my time. I 
appreciate that. Hopefully, that answered the gentleman's 
question.
    Mr. Green. Thank you for the time.
    Mr. Huizenga. As you were starting to lead in here--this 
pretense of knowledge about what monetary policy can and can't 
do that is just pervasive really is frustrating to me. And as I 
think Dr. Levy was just pointing out, buying MBSs and a bunch 
of other instruments doesn't necessarily achieve our goals, and 
our goal is to provide an environment for all to have an 
opportunity to go be successful. And I believe that what the 
Fed has done has not done that.
    Now we know that Wall Street is doing just fine and Main 
Street is not. And a few years ago the Wall Street Journal 
published a commentary entitled, ``Confessions of a 
Quantitative Easer,'' which was Andrew Huszar, and that was in 
November of 2013. And he was the guy that did the trading. And 
he said that you would think the Fed would have finally stopped 
to question the wisdom of QE.
    And only a few months later after QE won, after a 14 
percent drop in the stock market, renewed weakening in the 
banking sector, the Fed announced a new round of bond buying, 
QE2. It had never bought a mortgage bond previously, and now he 
says, ``Now my program was buying so many each day through 
active unscripted trading that we consistently risked driving 
bond prices too high and crashing global confidence in key 
financial markets. We were working feverishly to preserve the 
impression that the Fed knew what it was doing.''
    And he goes on, ``Despite the Fed's rhetoric, my program 
wasn't helping make credit any more accessible for the average 
American. The banks were only issuing fewer and fewer loans. 
More insidiously, whatever credit they were extending wasn't 
getting much cheaper.''
    QE may have been drying down the wholesale cost for banks 
to make loans, but Wall Street was pocketing most of the extra 
cash. And who was getting pinched? It was the average American 
worker. It was the person on the lower end.
    I see Mr. Spriggs is shaking his head on that, but how do 
you deny that? It seems to me that we need to narrow the Fed's 
mandate on this when we know that we have a common goal, but 
when the average American is paying a price for a hubris act 
that has done nothing but beef up the bottom line for those 
that have already had a beefed-up bottom line, it seems we are 
doing a disservice.
    So, Dr. Calomiris, I would like you to address that.
    Mr. Calomiris. I think there are a lot of pieces to what 
you are saying. One is, is it a good public policy--this is the 
question--to subsidize risk in the mortgage market? That is 
what the Fed's MBS purchases are doing, and of course that is 
what Fannie and Freddie purchases do, and that is what Federal 
Home Loan Banks do, and that is what the FHA does. They are 
subsidizing risk.
    And we know from the last crisis the answer. It is not a 
good idea. It tends to get more risk. It tends to boost housing 
prices to unsustainable levels, and it is not a good affordable 
housing policy.
    In my testimony, I refer to some other work I have done, 
talking about what would be better affordable housing policies. 
Subsidizing mortgage risk doesn't work. Subsidizing 
downpayments might work a lot better, especially on a means-
tested basis.
    So I think the bigger question is not just, do we want the 
Fed to be doing this? Obviously, we don't. But what we have 
also learned is that we don't want to be doing this.
    Mr. Huizenga. My time has expired. Thank you.
    Chairman Barr. The gentleman's time has expired.
    And I would like to thank our witnesses for their testimony 
today.
    We have no further Members of Congress with questions.
    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.
    This hearing is now adjourned.
    [Whereupon, at 11:38 a.m., the hearing was adjourned.]

                            A P P E N D I X



                             April 4, 2017
                             

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