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






                    THE FEDERAL RESERVE'S IMPACT ON
                   MAIN STREET, RETIREES, AND SAVINGS

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

                                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

                               __________

                             JUNE 28, 2017

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-25






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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  AL GREEN, Texas
RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
MIA LOVE, Utah                       DENNY HECK, Washington
FRENCH HILL, Arkansas                JUAN VARGAS, California
TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
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:
    June 28, 2017................................................     1
Appendix:
    June 28, 2017................................................    41

                               WITNESSES
                        Wednesday, June 28, 2017

Dynan, Karen, Nonresident Senior Fellow, Peterson Institute for 
  International Economics........................................     9
Kupiec, Paul H., Resident Scholar, American Enterprise Institute.     7
Michel, Norbert J., Senior Research Fellow, the Heritage 
  Foundation.....................................................     5
Pollock, Alex J., Distinguished Senior Fellow, R Street Institute    10

                                APPENDIX

Prepared statements:
    Dynan, Karen.................................................    42
    Kupiec, Paul H...............................................    49
    Michel, Norbert J............................................    74
    Pollock, Alex J..............................................    93

 
                    THE FEDERAL RESERVE'S IMPACT ON
                   MAIN STREET, RETIREES, AND SAVINGS

                              ----------                              


                        Wednesday, June 28, 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 10:06 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, Davidson, Tenney, Hollingworth; 
Moore, Foster, Sherman, Kildee, and Vargas.
    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, ``The Federal Reserve's Impact 
on Main Street, Retirees, and Savings.''
    Before I get any further, I would like to take a moment of 
moment of personal privilege to talk about the tragic shooting 
that happened at the Republican Congressional baseball practice 
exactly 2 weeks ago today. Our thoughts and prayers remain with 
our friend and colleague, Steve Scalise, and his family, 
especially his wife Jennifer. Zach Barth, who is a good friend 
of Roger Williams' aide, was shot in the calf and is recovering 
well. We are happy to report he will be throwing out the first 
pitch at the Houston Astro's baseball game on July 4th, 
Independence Day, against the Yankees. I think Representative 
Williams had a lot to do with that.
    Matt Mika, the Tyson's Foods employee, was shot multiple 
times. We are happy to say that he has been discharged from the 
hospital. And we commend the heroic actions of Crystal Griner, 
the Capitol Hill Police officer who was shot in the leg, and 
David Bailey, a special agent for the Capitol Police, who was 
also injured. And then our good friend, Roger Williams, the 
Vice Chair of this subcommittee, was injured. We are just so 
grateful for his recovery, and we are so glad to have him with 
us here today, 2 weeks after that incident.
    I will now recognize myself for 3 minutes to give an 
opening statement.
    Measured in terms of length, the Great Recession is hardly 
remarkable. At 18 months, it ties 5 others as our 8th longest 
recession. So what is remarkable about the Great Recession? In 
a word: severity. The Los Angeles Times documented how more 
than half of adults lost a job or had a cut in pay or hours, 
and almost everybody's wealth fell.
    Unfortunately, our recovery has not been great. Out of 
recession for 8 years, households and businesses continue to 
fall short of their potential. Every other postwar recession 
saw a considerably faster rebound.
    Our questions for today's hearing are motivated by this 
disappointing economic performance. Why did the resilience of 
hard-working Americans go missing this time around? Did 
monetary policies contribute to or mitigate this disappointing 
recovery? And how did these policies affect our economy for 
savers, retirees, and Main Street?
    Monetary policy was, at best, late to react. The New York 
Times reported that, ``Federal Reserve officials were unaware 
in January 2008 that the economy had already entered a 
recession.''
    If monetary policy does not work, then our economy cannot 
work. This concern is more than academic. The Federal Reserve 
looked past monetary policy's fundamental service to our 
economy, that is providing clear price signals so the goods and 
services can easily find their most promising opportunities. 
Instead of strengthening fundamentals to rebuild our economy 
from the ground up, the Fed engineered a financial reflation 
from the top down. But the promised Keynesian nirvana never 
came. Households and businesses saw through the Fed's 
artificial economic sweeteners and focused, instead, on 
mitigating a new normal of rapidly mounting policy distortions.
    America's hallmark confidence that tomorrow will be better 
than today went into retreat, cracking the very foundation of 
what was a reliably resilient economy.
    Households and businesses watched almost $14 trillion of 
potential income go down the drain since our recovery started 
in 2009.
    Had we enjoyed a more resilient recovery, American 
households could have earned $100,000 more income over the last 
8 years. A decade of artificial monetary support put retirees 
at risk of seeing interest earnings fall short of expenses. And 
younger savers face the opposite problem of paying higher 
prices for their retirement savings. Returning to a monetary 
policy that simply eases the trade of goods and services 
wherever it shows promise would improve our economy for 
retirees, savers, and Main Street households and businesses. A 
better way is available, and we should act on it.
    At this time, the Chair 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 I want to 
associate myself with your comments with regard to those 
injured 2 weeks ago. I have used every opportunity to keep them 
in my thoughts and prayers. And it is good to be here. It is 
good to see our witnesses.
    I know that retirement security is an extremely important 
issue facing Americans. We have baby boomers who are retiring 
every day. Every day, 10,000 people turn 65, and it creates 
real challenges for the country.
    The Boomers, of course, are retiring with grossly 
insufficient savings. But you know what doesn't keep my up all 
night? The impact of the Fed's crisis policy on retirement 
savings. I am not sure how it would have served retirees for 
the Fed to not have acted in the face of the Great Recession 
and to have allowed bread lines to come back or to further the 
Republican austerity agenda that all of our experience shows 
would have been disastrous for the economy.
    You know what retirees need? They need the fiduciary rule 
that helps them save by making advisers put their clients' 
interests ahead of their own.
    They need Medicaid, because they might find themselves in a 
nursing home. The massive Medicaid cuts that the Republican 
House, passed and the Republican Senate has right now under 
their jurisdiction, will absolutely devastate retirees. That is 
what keeps me up at night, not what the Fed did.
    Savers need a robust CFPB making sure financial hucksters 
and fraudsters are not draining the hard-earned money of 
consumers. Savers need a strong Dodd-Frank Act that safeguards 
the financial market. The growth is not despite Dodd-Frank, it 
is because we have not had booms and busts, and markets are 
free from fraud. I am 100 percent confident that my Democratic 
colleagues and I are 100 percent on the side of savers.
    I want to yield the balance of my time to Representative 
Foster.
    Mr. Foster. Thank you, Mr. Chairman, and Ranking Member 
Moore.
    I think one of the reasons that we have a lot of--both 
parties talking past each other in a lot of these things and 
often coming up with imaginary scenarios of what might have 
happen. It is one of the realities of politics that you don't 
get controlled experiments the way you do in science.
    You can't restart and set up a parallel universe and find 
out what would have happened without the aggressive monetary 
actions by the Fed during a crisis. It would be a very 
interesting experiment. We don't have it, so we are stuck with 
imagined alternate scenarios.
    But I think when I look at the debate over monetary policy, 
the big problem is that we are not looking enough at the 
distributional consequences of this. There was what was, to me, 
a very influential paper on MIP actually from the Federal 
Reserve entitled, ``Doves for the Rich, Hawks for the Poor, 
Distributional Consequences of Monetary Policy,'' that came out 
in 2016. And it makes the point that, over the course of a 
business cycle, if you decide which one of the two elements of 
the dual mandate you are going to emphasize, it has real 
distributional consequences.
    And the other side of the coin is that even if you are 
focusing only on aggregate numbers like total GDP growth or 
household net worth, the distributional elements of that are 
very important in how fast our economy grows.
    To put it sort of bluntly, the reaction of our economy in a 
macro sense is very different if you give additional dollars to 
someone with higher net worth than someone who is part of a 
working family, that the working family is much more likely to 
let the money circulate in the local economy; the high net 
worth person is much likely to turn the money over to their 
funds manager and send a big fraction of it offshore under the 
standard advice of diversifying and risk.
    And so I think that we have to more and more in our debate 
look at distributional effects. I would very much like to see 
the Federal Reserve every quarter come out with not just the 
aggregate household net worth but by quintiles or even 
percentiles, because I think that would very much illuminate 
the debate and, I think, yield a higher level of understanding 
of what the real constraints are on economic growth in this 
country.
    Thank you. I look forward to the hearing.
    I yield back.
    Chairman Barr. The gentleman yields back. And the 
gentlelady yields back.
    And as I said before, we are so grateful for the well-being 
and recovery of our good friend, Roger Williams, the Vice Chair 
of the subcommittee. And the Chair now recognizes the gentleman 
from Texas, Roger Williams himself, a Main Street businessman 
who suggested the topic of this hearing, for 2 minutes for an 
opening statement.
    Mr. Williams. Thank you, Chairman Barr, and Ranking Member 
Moore.
    As a point of privilege, I would like to echo the remarks 
you made about the tragic events that unfolded 2 weeks ago. I 
would also like to thank Chairman Hensarling, and the members 
of this committee and their staff, for the support my office 
has received during these difficult times.
    As I have said many times, events like this might slow us 
down, but we cannot let them deter us from doing the important 
work our constituents sent us here to do. So I want to, again, 
say thank you, Mr. Chairman, for your kind words.
    The economy of the United States is the largest in the 
world. At $18 trillion, it represents a quarter share of the 
global economy. Since 1854, Americans have seen their economy 
fall under recession 33 times. And as Chairman Barr noted 
earlier, the most recent recovery has been slow with sluggish 
growth and policies that have hurt Main Street America.
    Consequently, one of those policies requires the Federal 
Reserve to pay higher rates to banks that have excess reserves. 
Required reserves alone provide $110 billion in funding, less 
than 3 percent of the current $4.5 trillion Federal balance 
sheet. The troubling spike in excess reserves held at the bank 
has ballooned to over $2 trillion. According to former Fed 
Chairman Bernanke, banks are not going to lend out the reserves 
at a rate lower than they could earn at the Fed. Essentially, 
Mr. Bernanke is admitting that the Fed is paying above market 
interest.
    The excess money being held in reserve is just sitting 
there, not being let out, not serving an economic purpose. 
Clearly, the Fed has stepped far outside of the bounds of a 
conventional balance sheet in terms of both funding sources and 
size.
    So, Mr. Chairman, I look forward to discussing this further 
with the witnesses today, and I yield back the balance of my 
time.
    Chairman Barr. The gentleman yields back.
    Today, we welcome the testimony of Dr. Norbert Michel, a 
research fellow at the Heritage Foundation. His research 
focuses on financial markets, financial regulations, and 
monetary policy. He previously taught finance, economics, and 
statistics at Nicholls State University's College of Business. 
Dr. Michel earned his bachelor's degree from Loyola University, 
and his Ph.D. in economics from the University of New Orleans.
    Dr. Paul Kupiec is a resident scholar at the American 
Enterprise Institute, where he specializes in systemic risk 
management, and regulation of banks and financial markets. 
Previously, he was the Director of the Center for Financial 
Research at the FDIC and has also worked at the International 
Monetary Fund, Freddie Mac, JPMorgan, and the Board of 
Governors of the Federal Reserve System. Dr. Kupiec earned his 
bachelor's degree from George Washington University, and a 
doctorate in economics from the University of Pennsylvania.
    Dr. Karen Dynan is currently a nonresident senior fellow at 
the Peterson Institute for International Economics. Her 
research focuses on fiscal and other types of macroeconomic 
policy, consumer behavior, and household finances.
    She previously served as Assistant Secretary for Economic 
Policy and Chief Economist at the U.S. Department of the 
Treasury. She also will be a professor of economics at Harvard 
starting in July. Dr. Dynan received her Ph.D. in economics 
from Harvard, and her bachelor's degree from Brown.
    Alex Pollock is a distinguished senior fellow at the R 
Street Institute, where he specializes in financial systems and 
central banking, economic cycles, financial crises, and the 
politics of finance. He previously was a resident fellow at the 
American Enterprise Institute, and was also President and CEO 
of the Federal Home Loan Bank of Chicago. Mr. Pollock earned 
his bachelor's degree from Williams College, his master's of 
philosophy from the University of Chicago, and his master's of 
public administration from Princeton University.
    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. Michel, you are now recognized for 5 minutes.

  STATEMENT OF NORBERT J. MICHEL, SENIOR RESEARCH FELLOW, THE 
                      HERITAGE FOUNDATION

    Mr. Michel. Chairman Barr, Ranking Member Moore, and 
members of the subcommittee, thank you for the opportunity to 
testify today.
    I am a senior research fellow in financial regulations and 
monetary policy at the Heritage Foundation, but the views that 
I express in this testimony are my own, and they should not be 
construed as representing any official position of the Heritage 
Foundation.
    The Federal Reserve has a much better reputation among 
economists than with the general public. And even though I am 
an economist, I have to side with the public on this one. 
Monetary policy is not working for Main Street America. And my 
remarks will provide four specific examples of why Americans 
need Congress to fix monetary policy.
    First, the Fed has not tamed the business cycle. When the 
Fed is no longer given a free pass on the Great Depression, and 
the entire Fed era is compared to the entire pre-Fed era, 
neither the frequency nor severity of recessions has decreased. 
Even when the period between the two World Wars is excluded, 
updated data suggests that the average length of recessions, as 
well as the average time to recover from recessions, has been 
slightly longer during the postwar period than during the pre-
Fed period. In many cases, the apparent decline in postwar 
volatility is literally a figment of the data.
    Second, the Fed has not tamed inflation unless one defines 
price stability in a way that is extremely favorable to what 
the Fed has done. For instance, the variability in inflation 
has declined in the postwar period, but the average rate of 
inflation is much higher than it was before the Fed was 
founded.
    Estimates of the annual CPI show that the average inflation 
rate prior to the Fed was only about 0.2 percent, whereas the 
average rate since the Fed has been more than 3 percent, and 
the variability has only dropped one percentage point. Perhaps 
more importantly, the Fed has been actively trying to stamp out 
the good type of deflation that a growing productive economy 
normally produces. The Fed simply doesn't want to let prices 
fall, even when they should.
    Main Street Americans understands that when the Fed 
constantly fights the Walmart business model, it makes it 
harder for them to earn a living.
    Third, an inflated opinion of the Fed's ability to control 
every aspect of the economy is what contributed to our recent 
housing boom and the consequent bust, likely worsening massive 
job losses, millions of home foreclosures, and billions of 
dollars in lost wealth.
    In the early 2000s, the Fed actively and openly tried to 
keep its Fed funds target rate below what it viewed as the 
natural Fed funds rate. The Fed thought that it could use the 
higher productivity to further boost employment without 
increasing inflation, so that is what it tried to do. And 
residential construction grew from supporting about 5\1/2\ 
million jobs at the end of the 1990s to almost 7\1/2\ million 
jobs at the peak of the cycle in 2005.
    When the crash hit, housing-related employment fell 
substantially down to 4\1/2\ million by 2008. This means that 
roughly 75 percent of the drop in total U.S. employment was 
housing related, and the Fed simply shares some of this blame.
    Several measures suggest that the Fed's policy stance was 
excessively tight at exactly the wrong period, thus worsening 
the downturn. And the Fed openly admits that starting in 2008, 
it sterilized emergency lending and large-scale asset purchases 
with the explicit intent of ensuring that those purchases would 
not spill over into increased private lending, and did so out 
of concern for its Fed funds target and inflation target, but 
it should have been worried about preventing aggregate demand 
from collapsing, and it completely failed on this front.
    Fourth, as a result of the Fed's extraordinary efforts, 
taxpayers are left shouldering the risk of more than $4 
trillion in long-term securities sitting on the Fed's balance 
sheet with very little to show for it, all while a select group 
of financial firms received more than $16 trillion in credit at 
subsidized rates. The Fed's policies have helped drive demand 
for safe assets through the roof, thus contributing to 
historically low interest rates. They have also crowded out 
private investment and contributed to less affordable housing.
    And I have left out of my oral remarks any critique of the 
Fed's regulatory failures, particularly those that blessed 
Fannie Mae and Freddie Mac mortgage-backed securities with a 
preferred position in bank's required capital framework.
    Congress would not be fulfilling its responsibility if it 
allows the Fed to continue operating under its existing ill-
defined mandates where it has essentially become a broker, 
allocating credit to preferred sectors of the economy.
    And I look forward to answering your questions.
    [The prepared statement of Dr. Michel can be found on page 
74 of the appendix.]
    Chairman Barr. Dr. Kupiec, you are now recognized for 5 
minutes.

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

    Mr. Kupiec. Chairman Barr, Ranking Member Moore, and 
distinguished members of the subcommittee, thank you for 
convening today's hearing. It is an honor for me to testify 
before the committee today.
    I am a resident scholar at the American Enterprise 
Institute, but this testimony represents my personal views. 
There is little doubt that the Federal Reserve is the most 
powerful agency in government. The Fed's decisions have 
important impacts on the lives of every American, and yet, the 
Fed's decisions are made by unelected officials with only 
limited oversight by Congress.
    Few Members of Congress are deeply schooled in the arcane 
details of monetary theory, and those who are schooled face a 
full-time job just keeping abreast of the ever-changing 
fashions in central banking. Economists and central bank 
officials are continually refining the thinking that guides 
their policy prescriptions.
    In addition, Congressional Members who dare to question the 
propriety of the Fed's monetary policy decisions know full well 
that they will be charged with the mythical crime of attacking 
the Fed's independence.
    Countercyclical monetary policy is, at its core, a 
redistribution mechanism. To stimulate the economy, the Fed 
lowers interest rates, thereby reducing the income of savers 
with the hope of encouraging other groups to borrow and 
increase their spending. The monetary policy works as planned. 
It generates growth benefits that more than offset the 
redistribution. But in the current recovery, the theory did not 
work out as planned.
    The economy has continually performed below Fed growth 
targets. Moreover, the income and wealth redistributions caused 
by the Fed's post-crisis monetary policies have been 
exceptionally large and unusually prolonged.
    There is little doubt that unconventional monetary policies 
like near zero interest rates, interest on bank reserves, and 
quantitating operations have had important impacts on the 
distribution of income and wealth in America.
    My written testimony includes analysis that shows that 
those on the less well-heeled side of Main Street, of which 
there are many in America, have seen fewer gains and a weaker 
recovery compared to the benefits that policies have generated 
for a wealthy minority of Americans.
    Under post-crisis monetary policies, households near the 
top of the income distribution have received most of the wage 
gains as well as the QE-generated gains in stock and home 
values. At the same time, households outside of the top income 
bracket saw their wages stagnate, and those living off fixed 
income retirement savings saw their incomes decline.
    Households trying to save have had to accept near zero 
returns on prudent investments or gamble by investing in equity 
markets inflated by Fed QE programs. Fed policies benefited 
banks by sharply reducing their funding costs. At the same 
time, bank customers saw the markup they pay on bank loans and 
services increase. And few seem to realize that the largest 
banks are now more reliant on cheap, taxpayer-guaranteed 
deposit funding than they were at the start of the crisis.
    Had unorthodoxed generated the income growth that was 
anticipated, the Fed's policy experiments would have been 
suspended years ago without generating the public dismay that 
has sparked today's audit-the-Fed movement. To be clear, the 
Fed's mandate to maintain price stability and maximum 
sustainable employment does not include any explicit obligation 
to consider wealth or income redistribution when formulating 
policy. And the current mandate is probably sensible given the 
fact that monetary policy is truly a blunt instrument. But the 
Fed is mistaken if it assumes that it will be insulated from 
Congressional intervention when a large share of the electorate 
becomes disillusioned with the Fed's performance.
    The need for a more comprehensive Congressional discussion 
on the impacts of the Fed's monetary policy decisions is long 
overdue. But thus far, Congress has been unable to catalyze 
this discussion. The modest size of Congressional staff 
provides Members with limited resources to gauge the Fed on 
technical discussions on monetary policy, nor is it clear that 
proposed legislation such as the Federal Reserve Transparency 
Act of 2017 will adequately address these issues. When engaged 
to investigate controversial financial issues, GAO studies are 
rarely conclusive. Congress needs a new approach.
    My recommendation is that Congress consider a simple 
procedural change that could, without any new legislation, help 
to level the playing field. After the Fed delivers its written 
Humphrey-Hawkins testimony, but before scheduling the Fed 
Chair's testimony, the Congress could hold hearings in which 
outside experts evaluate the Fed's written testimony.
    After such hearings, they would allow the Congress 
additional time and expert resources to prepare oversight 
questions for the Fed Chair subsequent to the Humphrey-Hawkins 
hearing. My guess is there is at least an even chance that once 
the Fed's written testimony is subjected to expert opinion and 
outside review before the Fed Chair testifies, that the Fed 
will find it preferable to anticipate and address controversial 
issues in its written testimony. Especially if the Congress 
encourages nonaligned experts to focus on issues with which 
they are concerned.
    Thank you for the opportunity to testify today, and I look 
forward to your questions.
    Thank you.
    [The prepared statement of Dr. Kupiec can be found on page 
49 of the appendix.]
    Chairman Barr. Thank you. .
    Dr. Dynan is now recognized for 5 minutes.

 STATEMENT OF KAREN DYNAN, NONRESIDENT SENIOR FELLOW, PETERSON 
             INSTITUTE FOR INTERNATIONAL ECONOMICS

    Ms. Dynan. Thank you.
    Mr. Chairman, Ranking Member Moore, and members of the 
subcommittee, thank you for the opportunity to testify today. I 
will make five points on how the Federal Reserve's policies 
have affected Main Street retirees and savers.
    First, accommodative monetary policy since the recession 
has produced a strong economic recovery in the United States. 
The lower interest rates resulting in the Fed's actions reduced 
borrowing costs for households and businesses. They also 
enabled homeowners to refinance their mortgages, leaving them 
with more money for other things. This spurred additional 
spending, leading to yet more hiring and more income.
    Real GDP is now 17 percent above its recession low point, 
and the unemployment rate is at its lowest level since 2001. 
Indeed, as noted in a recent OECD report, our economic recovery 
has been stronger than in most other countries, with the report 
attributing our better performance partly to the best monetary 
policy support.
    My second point is that while the employment effects of the 
Fed's actions have differed across people, everyone has 
benefited from more job growth. Someone who found a new job 
after being laid off during the recession undoubtedly benefited 
more from the Fed's efforts to restore a healthy labor market 
than a neighbor who had a stable job.
    That said, the effects of a stronger labor market were not 
limited to unemployed people who found jobs. Employed people 
were more likely to see wage increases and to find better 
opportunities with other firms. The additional income generated 
by new and better jobs boosted household spending, helping 
businesses do more hiring and expand in other ways.
    I want to particularly emphasize the importance of 
restoring a healthy labor market to small businesses, because 
they account for so much employment, and they were hit hard 
during the recession. I think small businesses would have faced 
far greater struggles in recent years if demands for their 
products had been weaker because monetary policy was not 
sufficiently supportive.
    Third, the effects of monetary policy on savers have 
differed across people. Lower interest rates have hurt some 
savers by reducing their interest income, but have helped some 
savers by boosting stock and home prices.
    Increases in stock and home prices in recent years have 
added tens of trillions of dollars to household wealth.
    Overall, a relatively small amount of wealth, around 5 
percent, is in interest-paying accounts, but there are 
differences across the income distribution. For retirement-age 
households, middle- and upper-middle income income households 
are the most exposed to interest income losses. While we should 
not minimize the hardship suffered by some in this group, 
research has shown that the financial losses of the group from 
2007 to 2011 amounted to less than 10 percent of its income.
    In addition, many savers, among them many retirees, are 
also borrowers, which meant they benefited directly from lower 
interest rates.
    Furthermore, the strong labor market fostered by monetary 
policy enhanced retirement security by reducing forced early 
retirements.
    My fourth point is that while the Federal Reserve should be 
accountable to Congress for its actions, some of the provisions 
in the CHOICE Act would impair its ability to support a strong 
economy and low and stable inflation. Studies have demonstrated 
that economies perform best when monetary policies are 
insulated from short-term political pressures. But regular GAO 
audits of monetary policy might discourage the FOMC from taking 
the actions needed to create maximum employment and stable 
prices particularly on unpopular actions.
    Furthermore, closely tying the FOMC's actions to strict 
predetermined rules would hinder its ability to appropriately 
react to adverse developments given the complexity of our 
economy.
    My fifth and final point is that too many Americans have 
not saved enough for retirement, and various aspects of Federal 
policy apart from monetary policy should be used to enhance 
financial security.
    One way to raise retirement saving is to increase access to 
tax-deferred workplace retirement savings accounts. For 
example, Congress could adopt a proposal developed by the 
Brookings Institution and the Heritage Foundation under which 
firms would automatically enroll workers without a plan in an 
individual retirement account with an option, of course, to opt 
out of that plan.
    We should also protect the Labor Department's new fiduciary 
rule to help savers, large and small, get a fair shake in 
financial markets. It is common sense to require financial 
advice to be in the best interest of savers.
    And we need to protect savers from investment fraud, 
including older households who seem particularly vulnerable to 
such abuses. To do so, among other things, we should preserve 
the powers of the Consumer Financial Protection Bureau.
    Thank you very much, and I look forward to your questions.
    [The prepared statement of Dr. Dynan can be found on page 
42 of the appendix.]
    Chairman Barr. Thank you. And now, Mr. Pollock, you are 
recognized for 5 minutes.

 STATEMENT OF ALEX J. POLLOCK, DISTINGUISHED SENIOR FELLOW, R 
                        STREET INSTITUTE

    Mr. Pollock. Thank you, Mr. Chairman, Ranking Member Moore, 
and members of the subcommittee.
    I couldn't agree more with Dr. Dynan that the Fed needs to 
be accountable to the Congress. I am going to discuss one 
particular way in which that accountability should take place: 
relative to savings.
    There is no doubt at all that among the important effects 
of the Federal Reserve's actions since 2008, up to now, has 
been expropriation of American savers, and that makes things 
especially difficult for many retirees. This, of course, has 
been done through the imposition of negative real interest 
rates on savings through a remarkably long period of 9 years. 
Negative interest rates would be expected from the central bank 
in the crisis mode. This morning, we talked a lot about the 
crisis, but the crisis ended 8 years ago. After that, the Fed 
wanted to inflate asset prices to achieve a so-called wealth 
effect.
    Well, house prices bottomed 5 years ago, and they are back 
up over their bubble peak. The stock market is at all-time 
highs. So what is the Fed doing, still forcing negative 
interest rates on savers at this point? The Fed should be 
required to explain that to Congress.
    I recommend that Congress require a formal savers impact 
analysis from the Federal Reserve at each discussion of its 
policies and plans with the committees of jurisdiction.
    Under the CHOICE Act, this would be quarterly. This 
analysis would discuss, quantify, and talk about the plans of 
the Fed as they relate to savings and savers so that these can 
be balanced with other relevant factors.
    The Fed endlessly announces to the world its intention to 
create perpetual inflation at 2 percent, which is equivalent to 
a plan to depreciate savings at the rate of 2 percent a year.
    Against that plan, what are savers getting? The FDIC's June 
2017 report shows the average interest rate on savings accounts 
is 0.06 percent. The average Money Market deposit account rate 
is 0.12 percent, and in no case can savers get their real yield 
anywhere near zero, that is to say, near the inflation rate.
    In other words, thrift, prudence, and self-reliance, which 
is what we should be encouraging, instead are being strongly 
discouraged.
    As Congressman Foster said a minute ago, we have to think 
about distributional consequences of the Fed's actions--I agree 
with that. Overall, speaking of distribution, the Fed has been 
taking money from savers in order to give it to borrowers. This 
benefits borrowers in general, but in particular, it benefits 
highly leveraged speculators in financial markets and 
speculators in real estate.
    More importantly, it benefits the biggest borrower of all, 
the government itself. Expropriating savers through the Federal 
Reserve is a way of achieving unlegislated taxation. One term 
for this is financial repression, and financial repression is 
what we have.
    By my estimate, the Federal Reserve has taken since 2008 
about $2.4 trillion from savers. The specific calculation is 
shown in the table, which is included in my written testimony, 
which compares normal, based on the 50-year average of real 
interest rates, to those that we have had since 2008. We 
multiply by the savings base, and to repeat the answer, it is 
$2.4 trillion.
    Now, there can be no doubt that taking $2.4 trillion from 
some people and giving it to other people is a political act. 
As a political act, it should be openly and clearly discussed 
with the elected Representatives of the People who have the 
constitutional responsibility for the nature of money.
    In this context, it is an obvious fact that the Fed is just 
as bad at economic and financial forecasting as everybody else. 
It has no special insight into the future, and since it can't 
see the future, it must be rely on theories.
    Dr. Kupiec said they are refining their thinking on 
theories. I say they keep changing the theories. Grown-up 
substantive discussions with the Congress about which theories 
the Fed is supplying, what the alternatives are, who the 
winners and losers may be, and what the implications for 
political economy and political finance are, just as the CHOICE 
Act suggests, would be a big step forward in the accountability 
of the Federal Reserve. And a key part of these discussions, I 
again suggest, should be a formal savers' impact analysis.
    Thank you very much for the chance to share these views.
    [The prepared statement of Mr. Pollock can be found on page 
93 of the appendix.]
    Chairman Barr. Thank you, Mr. Pollock, and your time has 
expired.
    And the Chair now recognizes himself for 5 minutes.
    Mr. Pollock, your testimony that Federal Reserve policies, 
and near zero interest rate policy since 2008 have deprived the 
American people savings to the tune of $2.4 trillion is 
certainly a depressing analysis of the failure of Fed policies 
post-recession. And I think even Dr. Dynan acknowledged that 
Fed policies have punished at least certain savers or certain 
Americans in the economy.
    But I want to focus on, for a moment, the comments from my 
colleague, Mr. Williams, who talked about interest on excess 
reserves and the policy of the Fed paying interest on excess 
reserves.
    As you know, the FOMC's primary monetary policy tools are 
now interest on excess reserves and reverse repos, not open 
market operations.
    Interestingly, in 2013, former Fed Chairman Ben Bernanke 
said, ``Banks are not going to lend out the reserves at a rate 
lower than they could earn at the Fed.'' So essentially, in 
effect, Mr. Bernanke is admitting that the Fed is paying above 
market rates through interest on excess reserves (IOER).
    Do you agree with Chairman Bernanke that paying IOER is 
effectively paying banks to not deploy capital into the real 
economy? And if so, what are the consequences for Main Street 
Americans?
    We will start with Dr. Michel.
    Mr. Michel. Thank you. I do agree. You have a large pile of 
money sitting there, and anyone who has a large pile of money 
has choices in what to do with it. So if you have given them an 
above-market rate, they are going to probably go to that spot. 
Right? And that is all that is going on here.
    You have essentially diverted money from the real economy 
for a very small number of very large banks, and that does not 
help Main Street America. It does not help anybody but those 
large banks.
    Chairman Barr. Dr. Kupiec, in my discussions with the 
members of FOMC, both Governors and district bank presidents, 
some have defended Fed policies by arguing that IOER is not 
diverting access to capital in the real economy in a material 
way. What would you say in response to that?
    Mr. Kupiec. It is not just excess reserves. It is all bank 
reserves they pay interest on, which is problematic. It is 
problematic because without paying interest on excess reserves, 
the Federal fund rate, which is the rate that banks trade 
excess reserves at, would be zero. And it would be zero for the 
foreseeable future, because there are so many excess reserves 
that the Fed has generated through QE operations.
    So until excess reserves come down to a level far, far 
smaller than they are, the Fed has to do something to control 
the short-term interest rate. And how it does that is it puts a 
floor over it by setting the IOER, which is now at 1 percent. 
It is not 25 basis points anymore. It is a real number.
    Those benefits do not pass on to depositors and banks, 
because banks have excess liquidity in deposits. They don't 
have to pay to raise new deposits. So deposit rates haven't 
risen, and they are unlikely to rise for a long time. This 
whole mechanism distorts the way the market works.
    The Federal funds market is not working the way it worked 
before the crisis, and the Fed is still targeting the Federal 
funds rate to set monetary policy. So there is kind of a 
disconnect here in how the whole system is operating.
    Chairman Barr. Mr. Pollock, in addition to the zero low 
interest rate policies punishing savers, do you concur with the 
argument that the Fed policy of paying interest on reserves, 
paying interest on excess reserves, is diverting capital away 
from the real economy?
    Mr. Pollock. I do, Mr. Chairman. I think we have to look at 
the classic theory of reserves, which is they were supposed to, 
by definition, be zero interest bearing and, therefore, banks 
tried to get out of holding them by lending out their money. 
That is the classic theory of the bank multiplier through high-
powered money.
    Chairman Bernanke, in a brilliant political move, got the 
act changed to be able to pay interest rates on reserves.
    My interpretation is that is because the Fed itself wanted 
to act as the financial intermediary where it could draw the 
resources into itself and allocate the credit, which it did, to 
mortgages and to financing the government.
    Chairman Barr. Dr. Kupiec, really quickly, we know that the 
balance sheet is now $4.5 trillion. Do the American people have 
anything to be concerned about, with this oversized balance 
sheet?
    Mr. Kupiec. The Fed has to decide what to do with its 
balance sheet. One of the reasons it has to control the Federal 
funds rate is that it doesn't want to sell off Treasury 
securities. If that were to spook the long-term rate, then the 
long-term rates would jump, the stock market could risk 
calamity, and that kind of policy decision really isn't in 
their playbook right now.
    So they are stuck looking at long-term interest rates. As 
long as they do that, they are going to have to pay banks to 
keep the interest rates up. Banks are going to be low to pass 
these benefits on to savers. And so I think it is a problem.
    Chairman Barr. My time has expired.
    And the Chair now recognizes the distinguished ranking 
member, Congresswoman Moore, for 5 minutes.
    Ms. Moore. And thank you so much, Mr. Chairman.
    Again, these are always extraordinary opportunities for the 
committee to hear from the best and brightest in the financial 
services industry, and I appreciate your appearance here today.
    I would like to direct my question to you, Dr. Dynan. This 
committee is often very critical of the Fed for its dual 
mandate, and there is a constant cry for us to eliminate the 
mandate that talks about increasing employment.
    So I am wondering if you can elaborate a little bit on the 
accommodative monetary policy of lowering those interest rates 
in order to avoid the employment versus the Fed doing nothing 
or doing something else.
    Ms. Dynan. Thank you, Congresswoman Moore.
    With regard to the dual mandate, I think the two sides of 
the mandate really go hand in hand. The soft employment 
conditions that we have had in recent years are mirrored by 
disinflationary or deflationary forces, which contribute to the 
softer economy.
    In general, if you expect prices to fall in the future, you 
are going to defer spending today. So ignoring these forces is 
not the way to address an economy where a demand is falling 
short of where it should be.
    I should say, in this particular case, low inflation has 
been a particular problem, because we had a debt crisis where 
people were overleveraged. Traditionally, one way in which debt 
burdens are reduced is that inflation erodes them because they 
are usually defined in nominal terms.
    So I think the Fed's efforts to both support employment, 
produce maximum employment, and to raise inflation to their 
targeted 2 percent--
    Ms. Moore. Ms. Dynan, I am really specifically interested 
in the comments you made in your written testimony about the 86 
consecutive months of private sector job growth, and is that a 
worthwhile tradeoff with regard to whatever interests, income 
may have been enjoyed by savings?
    Ms. Dynan. As I noted in my testimony, you don't want to 
minimize the hardship of anyone who has suffered as a result of 
lower interest income. But I will say that the Fed needs to act 
in the interest of the economy as a whole, and the effects of 
strong job creation have been really enormous for the American 
public as a whole. And as I explained in my testimony, really, 
that strong job growth benefits everyone in the economy.
    Ms. Moore. Thank you so much.
    The name of this hearing talks about the suffering the 
seniors have felt with regard to monetary policy of the Fed.
    I am wondering if you can comment, or elaborate a little 
bit more on the fiduciary rule and the impact that may have on 
protecting seniors?
    You mentioned in your testimony that $17 billion has been 
lost as a result of--and the advice not being given 
appropriately to seniors. And you also mentioned provisions of 
the CHOICE Act that you think would materially impair the Fed's 
ability to support a strong economy and stable inflation. Would 
you comment on that?
    Ms. Dynan. Yes. I worked on the fiduciary rule when I was 
in the Administration. I think it is very important to make 
sure that savers both large and small get a fair shake in 
financial markets.
    It is just common sense that we should require financial 
advice to be in the best interest of the saver. There are some 
very big opportunities for abuses, particularly when someone is 
coming out of a job and they have a 401(k), and they have been 
given advice under one standard in which the financial advisers 
need to adhere to stringent rules and, suddenly, they are being 
approached by people who want them to roll this money over to 
IRAs, and those people have conflicts of interests. And that is 
where, really, the $17 billion number comes from.
    So I think it is very important that we protect the 
fiduciary rule, and it is very important that we fight off 
attempts to weaken it, because I think it would harm savers.
    With regard to the CHOICE Act, as I mentioned in my 
testimony, the main concerns I have are about the provisions 
that require regular GAO audits of the Fed as well as the 
provision that ties monetary policy decisions closely to a pre-
determined Taylor Rule. I think that both would undermine the 
Fed's ability to support a strong economy.
    Ms. Moore. Thank you so much. My time has expired.
    Chairman Barr. The gentlelady's time has expired.
    The Chair now recognizes the Vice Chair of the 
subcommittee, Mr. Williams from Texas.
    Mr. Williams. Thank you, Mr. Chairman.
    I want to thank all of you for your testimony today. I 
appreciate that.
    I am a Main Street guy, a small business owner back in 
Texas. I go so far back, that I borrowed money at 20 percent 
interest. And I can tell you, today, it is tough on Main 
Street.
    Dr. Michel, on page 14 of your testimony, you talk about 
how the central bank's policy stance was excessively tight at 
exactly the wrong time. You go on to say that the Fed's 
policies prolonged the recession. You said, paying interest on 
excess reserves is bizarre. And can you go into more detail on 
why the 2008 policy was wrong then and why it is still wrong 
today?
    Mr. Michel. Sure. It was wrong then, because the whole idea 
behind expanding monetary policy during the crisis is that 
there would be more lending and more economic activity. The Fed 
acknowledged that they were using interest on excess reserves 
to prevent that money from getting out there. I'm not making 
this up. They have told us this. That doesn't make any sense.
    If you have a crisis and you want to expand the economy, 
and you want to stop a downturn, you don't do anything to stop 
that money from getting out there. You do everything you can to 
get it out there. So that was exactly the wrong time to do 
that.
    As far as now, what you have is, essentially, $2 trillion 
in excess reserves by the largest banks, and we have nothing to 
show for what we have done, but we have that money sitting 
there. And we are paying--the Fed projects that they will pay 
almost $30 billion of interest this year to those banks, and 
that will rise up to, under their projections, almost $50 
billion, $50 billion by 2019.
    That is not community banks getting that money. That is not 
Main Street Americans and average wage workers getting that 
money. That is money that is not being productively used. It is 
almost an overt bailout. And if it was the Treasury doling that 
money out, it would be an overt bailout.
    Mr. Williams. Let me follow through on that. You just said 
the Fed projects that it would pay $27 billion in interest on 
these excess reserves reaching nearly $50 billion by 2019, 
mostly going to large domestic and foreign banks. So now that 
the balance sheet has grown from the $900 billion pre-crisis to 
$4.5 trillion today, we see this money basically being diverted 
from the private sector to the Federal Government.
    So how does this hurt Main Street America, when someone 
wants to start a new business or get a loan? Because, frankly, 
when you combine these Fed policies with the heightened new 
regulatory standards under Dodd-Frank, I can see why we haven't 
had sustained economic growth of 3 percent.
    Mr. Michel. No, this represents credit that has been 
allocated to someone outside of the productive sector of the 
economy. So it represents an opportunity lost. It represents 
money that they don't have to start their new businesses or to 
finance their existing businesses.
    It is very hard to quantify the exact number of jobs and 
things like that, but what we know that it is a diversion from 
the real sector of the economy.
    Mr. Williams. The American Dream, and who gets hurt, at the 
end, is the consumer.
    Mr. Kupiec, as the Fed raises target interest rates, it 
must make increasingly large interest payments to banks, 
correct?
    Mr. Kupiec. That is correct.
    Mr. Williams. So can you go into more depth quickly on how 
dealing with the excess reserves has the potential to increase 
our national debt?
    Mr. Kupiec. Yes. As long as excess reserves are large and 
the Fed needs to raise short-term interest rates, the only way 
they can do it--they could do it in two ways.
    They could raise rates by selling off the Treasuries they 
have in their $4.5 trillion portfolio, but that would be such a 
change to financial markets that it would spook long-term rates 
in the stock market, and it would risk causing another 
financial problem there, another crisis.
    So they are kind of stuck with that and letting that roll 
off slowly, which means the reserves stay in the banking 
system. Banks are willing to keep the reserves in the system 
and not lend them out as long as they are being paid on that 
money. And the higher the interest the Fed wants to set the 
short-term Federal funds rate, the higher the rate it has to 
pay banks on their reserves. It is just as simple as that.
    So as they go through the cycle and raise rates, what is 
going to happen is they are going to pay banks more and more 
money, and it is going to impact the Federal Government 
deficit. Because the money that the Fed earns on its Treasury 
portfolio, it uses for operations. Part of the expense of the 
operations is now paying banks interest on their reserves. And 
so the Fed will give back to the Treasury smaller and smaller 
surpluses until it would directly impact the Federal deficit.
    And as the Fed raises rates, if excess reserves don't 
decline, it is going to have a bigger and bigger impact on the 
deficit. And we are going to be talking about it in this 
committee, but you are going to be talking about it in the 
Budget Committees too. It is going to be an issue. It is there.
    Mr. Williams. Thank you for your testimony.
    I yield back.
    Chairman Barr. The gentleman yields back.
    The Chair now recognizes the gentleman from Michigan, Mr. 
Kildee, for 5 minutes.
    Mr. Kildee. Thank you, Mr. Chairman. And thanks for holding 
this hearing, and to the ranking member as well for helping to 
lead this.
    And thank you to the members of the panel. It is a very 
important discussion.
    Dr. Kupiec, I want to return to a point that you made in 
your opening testimony that had, I think, addressed in part 
what Ranking Member Moore was raising, and that is this issue 
of what is happening in the employment sector relating directly 
to the Fed's dual mandate.
    And I think it was your testimony that while there has been 
positive job growth, most of the wage gains, in terms of 
household income, have been concentrated by people at the upper 
end of the economic spectrum. And I wonder if you might explore 
for a moment how Fed policy would impact that particular aspect 
of income distribution?
    Mr. Kupiec. Yes. First of all, let me say, I don't think 
any of the distributional effects of the monetary policy that 
have come about have ever been intended. I think the Fed did 
what it thought it had to do to spark a recovery. And I think 
the income distributional impacts are all unintended 
consequences. And again, they probably wouldn't have shown up 
if monetary policy worked and sparked growth quickly.
    The problem is it didn't work the way they thought it 
might. The recession was way worse, and these policies have 
continued on for many, many years now. And so they have had big 
and noticeable effects on income distribution.
    The wage gains come from the Fed's own 2013 survey of 
consumer finance, which shows that the household income of the 
very highest deciles of the income distribution are the ones 
that receive the biggest gains.
    And through 2013, the middle of the distribution actually 
had 5 percent losses in household income.
    Mr. Kildee. Yes. And I think we--obviously, the data speaks 
for itself, and we clearly would agree on that.
    I guess the question that I have is, because this 
discussion has to do specifically with Fed policy, to what 
extent is that phenomena attributable--and I ask the other 
panelists to maybe weigh in on this as well--to Fed policy as 
opposed to other drivers: globalization; technology; the 
relatively low rate of unionization in private sector 
employment--
    Mr. Kupiec. You can attribute it to lots of things, but 
what you need to add on top of that is it is not just what 
happened to wages. It is what happened to the--when the Fed 
started QE policies to actually bid up asset and home prices, 
and those benefits also go to the highest income earners, 
because they are the ones that have the houses and the 
financial assets.
    And, again, I don't think any of this was designed to help 
the wealthy, but I am saying, if you look back over the last 9 
years, it is pretty clear in the data that the wealthy did a 
lot better from these policies than the poor, or even the very 
middle-class, the vast majority.
    Mr. Kildee. Maybe if the others could answer and then fold 
into that question about the extent to which low- and moderate-
income households benefit from interest-based income or asset 
sources as opposed to other assets, other income sources?
    Dr. Dynan, if we could start with you?
    Ms. Dynan. Thank you very much. I want to build on what Dr. 
Kupiec was saying. His analysis of the 2013 survey of consumer 
finances is correct, but it has been 4 years since that survey 
data was collected.
    If you look at more recent data on the distribution of 
wages, you can see that wage gains are now concentrated at the 
lower end of the distribution as would be expected given that 
we are at the tail end of an economic recovery.
    I also want to say, first of all, with regard to asset 
holdings, housing is a really important part of the nest egg of 
middle-class households. So they did, in fact, benefit 
tremendously from the $7 trillion of wealth, of housing wealth, 
that has been created since house prices hit their low point 
during the recession.
    I also want to say that recent research on the effects of 
expansionary monetary policy on the income distribution coming 
out of the Brookings Institution has shown that it does not 
raise inequality. That, in fact, the effects through job 
creation are really dominant and that offsets some of the other 
aspects that Dr. Kupiec was talking about.
    Mr. Kupiec. I want to make a factual point. The U.S. Census 
Bureau says that the income distribution got more unequal in 
2014, 2015, the last one out. According to the U.S. Census 
Bureau, there was no reversal in the income distribution.
    Ms. Dynan. If I can just make a point on that point.
    Income inequality--the wealthier households were hit harder 
during the recession, because they held so many assets.
    Mr. Kildee. My time has expired.
    Ms. Dynan. So just as a rebound from that.
    Mr. Kildee. I certainly appreciate any documentation you 
might supply to support your arguments. Thank you.
    Chairman Barr. The gentlemen's time has expired.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. Pittenger, for 5 minutes.
    Mr. Pittenger. Thank you, Mr. Chairman. And I thank each of 
you for being with us today, for your great expert witness and 
counsel to us in Congress as we walk through the many ways that 
we can help address these issues.
    We have been out of this recession now for the last 8 
years. We certainly have not seen the rebound for households, 
for small businesses. They have clearly fallen short of their 
potential. Every other post-war recession has certainly seen a 
greater and faster rebound. I would like to take a look at why 
this has occurred, particularly related to compliance issues 
and regulations and how they have had an effect in these 
policies and impacted Main Street, impacted the access to 
capital. It impacted the access to the capability of growth.
    Dr. Michel, we will start with you and go down the row.
    Dr. Michel. Sure. Regulatory? On the regulatory side?
    Mr. Pittenger. Yes, sir.
    Dr. Michel. If you look at the timing of Dodd-Frank and 
Basel III, it couldn't have been any worse. You have an economy 
trying to recover and a banking sector trying to recover, and 
you impose stricter liquidity requirements, stricter capital 
requirements. You require them to hold onto more money as 
opposed to using it. There is only one way that is going to go 
when you look at the macro effect, and it is not up.
    Mr. Pittenger. Yes, sir Dr. Kupiec, would you like to 
comment?
    Dr. Kupiec. When you look at the data, and it is in my 
written testimony, as are the sources for the income and 
equality, there are cited there too, the data pretty clearly 
show that small business lending by banks is down. It is not 
up, it is down. It hadn't recovered at all.
    Now, there is always an issue if whether that means that 
small businesses have no demand for loans, they just don't want 
money anymore, or is it a supply issue. Are the banks 
constrained? And, quite frankly, economists, no matter how we 
go--we could be at Harvard, we could be at Brookings, we could 
be at Heritage, we can't really figure out totally whether it 
is supply or demand. But I bet your hunch that regulation is 
playing a part is probably true. Was there a time when small 
businesses weren't very optimistic and conditions weren't good 
and they didn't have a strong demand for money, that was 
probably true at stages of the cycle too.
    But you would think, in 9 years by now, small business 
lending at banks would have recovered and exceeded its levels 
prior to the crisis. And so that is a pretty good sign that 
something unhealthy is going on here in the financial system.
    Mr. Pittenger. In North Carolina, since 2010, we have lost 
50 percent of our banks. And just in the last 2 months, we have 
had 3 additional banks which have had to merge because of the 
compliance and regulatory requirements. And certainly that has 
a direct effect on the access to capital and credit in the 
market. Mr. Pollock, would you like to comment?
    Mr. Pollock. Thank you, Congressman. I think you are right 
about the regulatory burden. We know that expansions in 
regulatory bureaucracy always fall disproportionally hard on 
smaller organizations and on smaller banks.
    We mentioned who benefited in terms of labor. We know some 
labor segments it benefited: its examiners who check on 
compliance officers who check on external auditors who check on 
internal auditors, all of whom are checking on somebody who is 
actually doing some work.
    In the meantime, in the Federal Reserve's own balance 
sheet, we have a huge, very conscious, very intended by the 
Fed, huge resource allocation to take the funds and divert them 
to making house prices go up, securities prices go up, and to 
financing the government expenditures. That takes money away 
from the kinds of productive enterprises of which you are 
speaking.
    Mr. Pittenger. Yes, sir. To that end, extrapolate some more 
on what the Fed could be doing in its role in all of this, how 
it could effect a positive change?
    Mr. Pollock. Congressman, in my opinion, the Fed has gotten 
itself in a tough situation with its big investment portfolios. 
It consciously set out to move the market up by creating huge 
market moving positions and now it wants to sell without 
putting the market down, and they can't do it. So they have a 
dilemma. But in my judgment, what they ought to be doing now, 8 
years after the end of the recession, 5 years after the bottom 
of housing, is trying to get back to actual functioning of a 
market economy in the financial sector with market-set interest 
rates.
    Mr. Pittenger. Thank you. My time has expired. I appreciate 
your comments.
    Chairman Barr. The gentleman's time has expired. And the 
Chair now recognizes the gentleman from California, Mr. 
Sherman, for 5 minutes.
    Mr. Sherman. Take a minute to deal with the supposed war on 
savers, the war on seniors. First, most Americans have a lot 
more debt than they have invested in interest. So for most 
Americans, low interest rates work out pretty well. Seniors get 
only get 10 percent of their income from interest income. They 
get a lot more in terms of wealth increases when the stock 
market goes up, when real housing and other real estate prices 
go up.
    So, in fact, the policies of the Fed have been beneficial 
to seniors, but there is a harkening for the good old days. 
Make American interest rates great again. I remember the good 
old days. You had 6 percent interest. If you had a million 
bucks in the bank, you were getting $60,000, you felt good, you 
weren't invading your principal, and you were spending $60,000, 
we had a 5 percent inflation rate, you were invading your 
principal. But it was hidden.
    So the good old days basically were a way for people to 
feel good even while they were invading their principal by 
saying, well, you are only doing that in real terms. Nominally, 
you are keeping your nest egg intact. So the idea that taking 
out $60,000 in interest and seeing the value of your nest egg 
decline by $50,000 is somehow better than making $10,000 in 
income and then having to invade your nest egg by $40,000 or 
$50,000 in order to support your standard of living is 
psychologically true but not economically true.
    But what we have here--the mandate of the Fed is not to 
bring psychological benefits to savers. The mandate of the Fed 
is full employment and stable prices. Full employment means 
economic growth. And I would point out that, for example, the 
S&P Global found that, without--and this is just the third 
round of quantitative easing--1.9 million fewer jobs would have 
been created, implying an unemployment rate 1.3 percent higher. 
That is real economic growth just from that round.
    But I am concerned about the interest on excess balances, 
because I don't want to encourage excess balances. Why should 
banks put their money in the Fed when there are so many 
deserving business in the 30th Congressional district. Dr. 
Dynan, we are paying banks 1\1/4\ percent absolutely risk free 
for excess reserves. What do we do to get them to loan that 
money to deserving businesses, in the 30 seconds I have left?
    Dr. Dynan. Thank you. I appreciate your comments. And I 
will say I very much appreciate what you said at the beginning 
of your comments about perceptions. I think behavioral 
economists are looking into that and also about the fact that 
so many seniors do benefit directly from lower rates.
    On the excess reserves, I think there are good questions to 
be asking about why banks aren't passing on those savings to 
the depositors.
    Mr. Sherman. Why don't we tell them to we are not going to 
pay them interest on their excess balances, make them take that 
money and invest it in the private sector economy?
    Dr. Dynan. I am not enough of an expert on the technical 
issues involving excess reserves and interest on excess 
reserves to be able to explain why the Fed needs--
    Mr. Sherman. I will go with the doctor sitting next to you 
on your right.
    Dr. Kupiec. I can tell you exactly why. Because if they 
stop paying any interest on excess reserves, banks would pay 
absolutely nothing and raise their rates on their deposits, 
charge for deposits, because they would have to make it the 
income source. Everybody would take deposits out of banks and 
put them in money market mutual funds, and the banking system 
would collapse. They have to keep the reserves in the banking 
system, because if the rate outside the bank--if they didn't 
pay anything at all, depositors would start getting charged 
through the roof to keep deposits at the banks. Banks are 
getting paid right now to hold people's deposits--
    Mr. Sherman. You are saying the banks can't find another 
place to make 1\1/4\ percent on their money?
    Dr. Michel. Could I? I think Paul is--
    Mr. Sherman. Mr. Pollock, I was going to call on you 
earlier.
    Mr. Pollock. Thank you, Congressman. My answer is you take 
the interest on reserves to zero, where it always was, and thus 
you encourage loans. Now, why the Fed doesn't want to do that 
is because that will generate the inflation set up by their big 
QE investments, which is what they are trying to avoid.
    Dr. Dynan. If I may just add one more thing, I don't think 
that there is evidence that those excess reserves being held at 
the Fed are actually holding back the banks from making loans.
    Chairman Barr. The gentlemen's time has expired. The Chair 
recognizes the gentleman from Arkansas, Mr. Hill, for 5 
minutes.
    Mr. Hill. Thank you, Mr. Chairman. I appreciate the 
opportunity to have this hearing. I want to echo some comments 
that, when it comes to the economic expansion, certainly in the 
2nd Congressional district of Arkansas, which is Central 
Arkansas, Little Rock, there are only 4,400 more people 
employed since July of 2007--4,400 more people employed since 
July of 2007.
    So the economic growth over the last 90-plus months has 
been not only subpart anemic, it has been certainly not shared 
by most of the country. In fact, many studies show that more 
than 50 percent of businesses and jobs are limited to just 20 
counties in this country, all of which have an NFL franchise, 
except for Austin, Texas. So I call it kind of the ``NFL 
effect.''
    And I agree with Dr. Michel that nonmonetary policy 
structural impediments have been a real drag on productivity, 
business formation, and labor-force, participation. And those 
nonmonetary policies, structural impediments include all the 
comments you made about the capital and liquidity rules that 
have been impacted by Dodd-Frank on top of the economic 
conditions that we have had.
    So I really think that the QE that we have talked so much 
about this morning, the multiple unconventional monetary policy 
that we have had, I don't think the added GDP growth we have 
had, and the statistics have been thrown around here are 
measurably better. I think if we look with hindsight now, QE1 
QE2, will not be proven to have been worth ballooning the 
balance sheet from $900 billion to $4.5 trillion.
    So with that, I am interested in the panelist's views on 
the preferred course now to shrink this balance sheet. As we 
have risen rates--actually, 10-year rates have backed up a 
little bit in the marketplace, which makes me think because of 
the dollar and the strength of the American economy, there is a 
high demand for Treasuries in the world, which would make me 
think that market conditions are actually right for shrinking 
the balance sheet.
    And I am also concerned with the fact that we have seen the 
Fed become allocator of credit by buying 40 percent of the new 
issue mortgage-backed securities in this country. That is 
unheard of, has never been done before, and, I think, has 
terrible possibilities for GSE reform, the Federal budget 
deficit, the impact on credit markets. And I think there is--I 
read a story by one of the traders who was so shocked by the 
willy-nilly impact of buying mortgage-backed securities during 
the recovery period to the point that he wanted to apologize to 
taxpayers.
    TARP was not the biggest bailout. Maybe QE1 and QE2 were 
the biggest bailouts to Wall Street through particularly the 
mortgage-backed securities market. So Dr. Michel, what would 
you suggest is the right way to shrink this balance sheet, if 
you were advising Chair Yellen and Governor Powell and others?
    Dr. Michel. This may be where Paul and I differ a little 
bit. And I think that if you look at how QE was put into place, 
you have a roadmap for how to undo it. It was done in terms of 
the relative market--size to the relative overall market. It 
was done in a small fashion per month. And you remove interest 
on excess reserves. That does have an inflationary tendency. 
But as you sell assets, that has offsetting contractionary 
effect.
    So the thing to do is both of those at the same time, and 
do it in a slow, gradual manner. Pre-announce it and start 
auctioning them off. And I don't know that the number is as 
important as the announcement and the timing and the slow 
graded sort of manner in which you do it.
    If you want to do it in exactly the amount that you 
purchased them, fine. Do it, $50-, $75 billion a month. But you 
have to make the announcement, you have to start doing it 
slowly over time. And both at the same time have the offsetting 
interest on reserves being pared back so that you have the 
contractionary and expansionary effect going against each other 
so that don't see the high inflation and that you dont' see the 
large contraction.
    Mr. Hill. Do you think the Fed should limit its purchases 
in the future to Treasuries as opposed to other asset classes?
    Dr. Michel. Possibly. It depends on the framework that we 
were talking about. But in general, I think that you still have 
the risk of saying that what we are doing by Treasuries only is 
allocating credit to the government in a preferred position 
over everybody else. So there is a question there that I would 
say it depends.
    Mr. Hill. I yield back.
    Chairman Barr. The gentleman's time has expired. The Chair 
recognizes the gentleman from Minnesota, Mr. Emmer.
    Mr. Emmer. Thank you, Mr. Chairman, and thanks to the 
panel. You know, as I sit here, it is my second term in this 
place, and I listen to people who are brilliant, like you 
folks, come in and talk about the economy and numbers. And I 
wonder sometimes, have you ever been to Main Street? Because I 
will tell you what, the topic is about what the Fed has done to 
Main Street. And I think my colleague Mr. Williams was getting 
at it, because that is where he comes from. I think some people 
have been touching on it. But we have too many people who want 
to play with particular fact. And I don't have your degrees. I 
think you could say I graduated from the School of Hard Knocks. 
I am somebody who actually was a consumer and still am a 
consumer.
    I think about the fact that my colleague French Hill just 
commented that we have some of the lowest employment 
participation in decades, that we are not producing the jobs 
that we should be producing. But everybody wants to say we got 
this incredible recovery. And it goes on and on.
    Dr. Michel, can you tell me one good thing the Federal 
Reserve has done in the last decade?
    Dr. Michel. In the last decade?
    Mr. Emmer. Well, maybe that is not fair. Let's go back to 
1913. Can you tell me one good thing they have done since 1913?
    Dr. Michel. I am sure they have done something right 
somewhere. Maybe if we focused on the great moderation period, 
Volcker's second term, maybe up in there, something like that, 
I guess. That would be the highlight for me.
    Mr. Emmer. Here is another thing you have to help me with 
is that up here I keep hearing about how studies have shown you 
have to insulate financial or monetary decisions from the 
political process. And yet somewhere in our genius somebody in 
a previous Congress decided that we were going to add maximum 
employment to this price stability thing when, in fact--again, 
I am just a simple guy from the Midwest--my understanding is 
that price stability will drive maximum employment. Isn't that 
correct, Dr. Kupiec?
    Dr. Kupiec. That used to be the theory, but theories change 
all the time. But I think Congress created the Fed. Congress is 
in charge of the Fed. And I think the whole issue is Congress 
needs to have these kinds of discussions with the Fed and have 
the Fed explain clearly how they are going to unwind their 
portfolio.
    Why paying interest on reserves is a good idea, not a bad 
idea, you are asking us, but this is the kind of thing that the 
Fed should be really having a discussion about. That is what is 
missing.
    Mr. Emmer. It is interesting. Again, I'm just a simple guy. 
We have gone from an economy that is based on wealth creation 
to an economy that is based on debt leverage. So an economy 
based on wealth creation is for everybody. Even the little guy 
or gal who goes down to the community bank or the credit union 
and gets a loan to start the next great idea. We are not 
starting new businesses like we used to. And yet I come here 
and I hear it is great.
    They are doing wonderful things. In the time I have left, 
there is something that I want to talk to Mr. Pollock about, 
because you hit on it, and I think the chairman and/or his 
staff probably knew when you submitted your written testimony 
that this would get me all fired up. I don't know any other way 
to put it other than theft. But this 2 percent annual inflation 
rate, this target, Mr. Pollock, that is purely arbitrary, 
correct?
    Mr. Pollock. It is Congressman, and it is a pure theory.
    Mr. Emmer. And call it a hidden tax. Call it what you want. 
But you are stealing from my parents. You are stealing from all 
the Boomers who have saved and planned. And then I hear 
testimony that, you know what, people haven't saved enough. 
Where is the incentive? What are we doing?
    Mr. Pollock. Congressman, you are absolutely right. And I 
will add that the Federal Reserve Act, as amended in 1977 with 
the so-called dual mandate, doesn't talk about steady 
inflation. It talks about price stability. The Fed itself made 
up the idea that it was going to redefine price stability to 
mean perpetual inflation.
    Mr. Emmer. And isn't that somewhat subject to political 
pressure?
    Mr. Pollock. Absolutely. That is why I said in my 
testimony, if I may repeat myself, that the nature of money is 
a political decision to be made by the Congress.
    Mr. Emmer. And I appreciate you repeating yourself, because 
it is interesting to me that this is not more widely discussed 
outside of Washington, D.C., that the average person who is out 
there working hard, trying to play by the rules saving for 
their retirement, they have these insidious policies that are 
literally stealing the money from them while they are sleeping. 
And I think more people need to talk about it. And, frankly, 
the Administration, I think, needs to take a bigger a role in 
this.
    Dr. Kupiec. Some of the Fed Governors or presidents of the 
banks are arguing they need a higher inflation target to meet 
their high employment price stability bill.
    Mr. Emmer. And some are also arguing we should make banks 
utilities which would completely frustrate the process. Thank 
you for your patience, Mr. Chairman.
    Chairman Barr. I wish the gentleman's time had not expired, 
but it has expired. And now we move to the gentleman from Ohio, 
Mr. Davidson.
    Mr. Davidson. Thank you, Mr. Chairman. Thank you to our 
panel. I really appreciate your written testimony and what you 
have shared with us here. It's very tempting to pick right up 
where Mr. Emmer left off, but I do have a couple of other 
questions, so maybe we can get back to that.
    Dr. Michel, your testimony highlights a sense of humility 
and perspective about what is the proper scope of monetary 
policy. And you also highlighted--we didn't really see an 
incredibly good track record for the Fed. If you look at the 
decision to have the Federal Reserve in the system that we have 
today, is it a structural problem or is it a strategic problem?
    Dr. Michel. I think it is a structural problem in the sense 
that we have way too much faith in our ability to sort of turn 
dials on the economy through monetary policy. And I think that 
the evidence bears out that this just doesn't work when we had 
almost exactly 100 years to experiment with this type of thing.
    And recessions have not gotten shorter, recoveries have not 
gotten quicker, as we have just talked about what happens with 
inflation. So the idea--I will go quickly--that you can have 
this trade off between inflation and employment, that was an 
idea that started and I believe came to its peak in the 1960s. 
And I thought it was dead. Somehow it keeps coming back.
    So, I don't think that there should be an employment 
mandate anywhere in there with the Fed. And I think they need 
to be more accountable for what they are doing, and in that 
sense it is a structural problem for sure. So maybe that 
answers your question. Yes, I think it is a structural issue in 
terms of, we have not properly defined what they should be 
doing and held them to account.
    Mr. Davidson. We have a lot of debate about this strategy 
or that strategy. But in a way, we have put in place a system. 
And to pick up where Dr. Pollock, you left off, a system that 
has a structure in place that preserves the status quo of 
inflationary which deflates the value of savings. It destroys 
the value of our money. If the purpose of money is to be a 
store of value, everything about the current structure erodes 
it.
    And I might add that we are not doing ourselves any favors 
with fiscal policy. And if you could comment about the 
intersection, Dr. Kupiec, if you could talk about the 
intersection of fiscal policy and the fact that we borrow so 
much and the Fed's role in that?
    Dr. Kupiec. If you look at what has happened since the 
financial crisis, the whole idea of stimulative monetary policy 
is to get consumers to borrow and spend more and increase 
growth that way, and businesses to invest and spend more and 
increase growth that way, borrow and spend. But, really, who 
borrowed since the crisis is the Federal Government.
    And there are some nice graphs in the back of my written 
testimony which show that the government borrowings are up 
almost 300 percent since the crisis, while the private sector 
level of borrowing is nowhere near that. And some parts of it 
it are pretty flat.
    So, the whole monetary expansion has very much benefited 
the government in terms of keeping the cost of government 
borrowing exceptionally low for an exceptionally long period of 
time, and the Fed owns a lot of that. And without a doubt, that 
has been one of the big impacts. And now, as we move into a 
period where we want to raise rates, it is going to have an 
impact on the deficit in two ways. One, because we are going to 
have to pay banks more to keep these excess reserves.
    And, two, if they were to sell off their bond portfolio and 
raise long-term interest rates, the Federal Government would 
have to refund those bonds, the ones that mature at much higher 
interest rates. And that is going to cause you guys headaches 
in the Budget Committee hearings. So that is kind of where we 
are right now, that these things are going to impact--they are 
going to feed back on the budget, and it is going to happen.
    Mr. Davidson. Thank you. And I will close with Dr. Pollock, 
just a question. But when we talk about this, what is the 
impact on the household? What is the impact on Main Street? 
Destroying the store of value in our money is a huge problem. 
And our fiscal path of bankrupting our country is a big 
problem.
    Mr. Pollock. Congressman, I agree with your thoughts here. 
The longest-serving Federal Reserve Chairman, William McChesney 
Martin, called inflation, ``a thief in the night.'' The Fed has 
changed its ideas since then. And if I could--could I have 20 
seconds, Mr. Chairman?
    Chairman Barr. Well, the gentleman's time has expired.
    Mr. Pollock. All right. I don't get 20 seconds, 
Congressman. I will tell you later.
    Chairman Barr. We will have an opportunity for a second 
round.
    Mr. Davidson. My time has expired. I yield back.
    Chairman Barr. I am sure you will have an opportunity, Mr. 
Pollock. And now the Chair recognizes the gentleman from 
Indiana, Mr. Hollingsworth.
    Mr. Hollingsworth. Mr. Pollock, I will give you 20 seconds.
    Mr. Pollock. Thank you very much. In ancient Greece, 
Dionysius, the tyrant of Syracuse, couldn't pay his debt. So he 
expropriated all the silver coins from his citizens on pain of 
death and took the One Drachma coins and restamped them two 
Drachmas and gave them back to pay off the debt--thereby 
setting the pattern for inflation by governments in all future 
times.
    Mr. Hollingsworth. Before we delve into a couple of 
questions, I wanted to reiterate something my colleagues have 
said. I found the use of the word ``strong'' in recovery almost 
an insult. And I think Hoosiers across the district would feel 
the same way back home. Certainly, this recovery hasn't been 
strong. And to say it has been strong relative to the nadir of 
the recession is a misnomer. And to say it has been strong 
relative to other countries is just measuring who is the 
tallest dwarf in the room rather than a measure of real 
strength in the economy.
    Dr. Kupiec, in reading your testimony, I really appreciated 
that you walked through kind of a lifetime consumption model 
and how lowering interest rates theoretically should move 
savers--or move down the preference line between saving and 
consumption and create more consumption. But have we really 
seen before what happens when interest rates are very low for a 
very long period of time and, rather, instead of allowing for 
the tradeoff consumption and saving, whether we are permanently 
altering the preferences themselves and expectations for rates 
in the future.
    Dr. Kupiec. Congressman, that is a great question, and the 
answer is, ``no.'' Back in December, we had an event at AEI 
where we had a noted historian, Dick Sylla, come in, who has 
actually written the book on the history of interest rates all 
the way back to the Roman times. And in Dick's book, he did 
remark that he had never seen in history anywhere a period 
where interest rates were 0 or negative for such a long period.
    So it is extraordinary, and it has a number of 
implications, because if you really think about it, the 
financial services industry is built on a model where interest 
rates are positive. They make investments at some higher rate 
to provide a service to consumers and take some spread. When 
interest rates get to 0 or below, there is no spread anymore.
    So things like life insurance--all those things become 
problematic. They either have to directly charge more for it. 
And so this is an experiment that has far-reaching implications 
for the whole financial sector in how we move forward.
    Mr. Hollingsworth. I think, if I could speak anecdotally, 
certainly millennials don't know what it is like to see 
interest rates at 7, 8, 9, 6, 5 percent. They think of 
mortgages. And when they hear 3\1/2\ percent, they think that 
is outrageously high. That must be usury, right? And the second 
question I really wanted to talk about, and it has been touched 
on before, but have we really started to see the cost of 
unwinding this balance sheet? Because one of the things that I 
really worry about is not just, as French Hill said, the 
mechanics, but also the crowding out of investment. As we start 
to unwind the investment in those Treasuries, it has to come 
from somewhere. It is going to come from the private sector, 
maybe some of it coming from abroad. But it is not going to be 
invested in the private sector. And I worry that we have not 
begun to see the significant costs.
    We have seen very little benefit. Now we are going to start 
to see the significant cost in the future, and I wonder whether 
Dr. Michel might touch on that and Dr. Kupiec, and Mr. Pollock 
as well?
    Dr. Kupiec. I would say I agree with you. I think we are 
treading water at this point in time. And the Fed is starting 
slowly to try to engineer the old way they used to raise rates, 
the Federal funds rate, and they have to do it in a different 
mechanism. They don't want to sell off their long-term Treasury 
portfolio. They have not figured out how to do that yet, 
because it would spook, I think, longer-term rates if they did 
it in a big way. And if they announced a long-term program to 
sell it off, if it was slow enough that the economy could 
absorb it, maybe. But I think they are treading water, hoping 
there is no inflation now, things don't look so bad. But I 
really don't think the whole process of unwinding all this has 
been thought through. And I don't think the costs have actually 
shown up yet.
    Mr. Hollingsworth. I will go to Mr. Pollock, because I want 
to ask Dr. Michel a question at the very end. Go ahead?
    Mr. Pollock. Congressman, on the 0 interest rate question, 
I think the answer is long periods of negative real rates are a 
narcotic for financial markets, and it usually doesn't end 
well. You are absolutely right on the Fed's balance sheet. We 
are not seeing the cost on the unwinding, because they are not 
unwinding. They are still buying every month.
    Mr. Hollingsworth. Right. And Dr. Michel, the last thing I 
want to talk about is, is it universally agreed upon by 
economists that inflation is a positive thing? Deflation 
exists, right? If price levels were the same and productivity 
were increasing, we would see deflation, right?
    Dr. Michel. Right. It is not universally agreed upon. So it 
is not universally agreed upon that it is a good thing. It is 
not universally agreed upon in that group, what rate it should 
be. And both of the those groups ignore something that we knew 
a very long time ago and somehow or another, as a profession, 
seemed to have forgotten, which is that you need less less 
money if the economy is more productive, not more. So you 
should have--there is a difference between a massive deflation 
in asset prices and a good deflation as the economy grows. We 
shouldn't be stamping that one out.
    Mr. Hollingsworth. Perfect. Thank you so much. I yield 
back, Mr. Chairman.
    Chairman Barr. The gentleman's time has expired. The Chair 
recognizes the gentlelady from Utah, Mrs. Love.
    Mrs. Love. Thank you so much for being here today. I just 
have a couple of questions. Dr. Michel, you state in your 
testimony that we should hold the Fed accountable for 
maintaining a stable inflation rate where the target rate is 
conditional on the rate of productivity growth so that 
inflation rises above its long-run rate only when there are 
productivity setbacks and it falls below its long-run rate only 
when there are exceptional productivity gains. Would you expand 
on that for me?
    Dr. Michel. Sure. Think of something like, stable inflation 
under the Fed's current interpretation of it means you should 
have constant inflation all the time at 2 percent. That is the 
idea. And, of course, we don't really get 2 percent over the 
long-term. We get more like 4 percent. But leaving that aside, 
think of something like a supply shock that we had, say, in the 
1970's with an oil embargo.
    What happens is you have less oil, so everybody is hurting, 
and prices go up, and you see inflation across-the-board. It 
makes absolutely no sense to try to stick to an inflation 
target by taking more money out of the economy and, therefore, 
killing the people who don't have the fuel they need, right.
    Mrs. Love. Right.
    Dr. Michel. But that is what this constant low, ``positive 
inflation'' does in that environment. So you cannot let the Fed 
interpret price stability the way that they have, otherwise you 
get into that problem. And it is the same on the other side 
when you have productivity and prices should be declining.
    Mrs. Love. Okay. Mr. Pollock, you say in your testimony 
that the Fed is just as bad as everyone else at economic and 
financial forecasting, despite having an army of Ph.D. 
economists who can run computer models as complicated as they 
choose. So why do you think the Fed is so bad at forecasting? 
And I want to get back to that, because you have a brilliant 
quote in your testimony that I want to get back to. But why do 
you think the Fed is so bad at forecasting?
    Mr. Pollock. Thank you very much for liking my quote, 
Congresswoman. It is bad at forecasting because forecasting is 
about the financial and economic future, which is fundamentally 
uncertain. It is not like a physicist calculating the path of a 
planet using Newton's laws. This is about forecasting the 
interacting behavior, interacting strategies of governments, 
investors, consumers, entrepreneurs. And no one, including the 
Fed, knows what is going to happen. And that is why they should 
not pretend to be philosopher-kings who know this, and why they 
should not be granted independence from the elected 
Representatives of the People.
    Mrs. Love. Okay. So you have said that in our current 
national policy it is not one of savings and loans but one of 
loan and loan. And I want to know what that means for the 
average American. In other words, what does that mean for the 
young person who is still dealing with the high cost of 
education and paying off their student loan debts or the 
trucker who is trying to make ends meet and he is realizing 
that the cost of healthcare has continued to go up? What does 
that mean for the single mother who is just busting her chops 
every day to provide for her children?
    Mr. Pollock. Congresswoman, without savings, there are no 
loans, in the end, or any investment or any growth, in the long 
run. Savings should be encouraged, and we have forgotten how to 
do that. Now, in certain circumstances, of course, it is more 
difficult to save than others. I mentioned in my testimony the 
old theory of the savings and loans, I am talking in the 1920s 
and 1930s, which were focused on low-income people and inducing 
them to save; it was a wonderful and right idea, in order to 
get control of their lives.
    It is harder sometimes than others. But I used to have the 
historical savings contracts from the savings and loan I ran in 
which people promised to save $2 a week, $1 a week, $5 a week. 
It was to establish the pattern and practice of savings which 
will stand you in good stead over time.
    Mrs. Love. It is really interesting because as I speak to 
people in my district, I ask them if it is a lot easier or a 
lot more difficult to save for the future. And over and over 
and over again they tell me that it is absolutely impossible to 
have any savings, because every time they turn around and save 
something, there is something else that is coming out of it, 
and they can't keep up. I know my time has expired. But I just 
want to say this. You said that the notion of philosopher-kings 
is distinctly contradictory to the genius of the American 
constitutional design. That is a great quote. I yield back.
    Mr. Pollock. Thank you very much.
    Chairman Barr. Thank you. And the gentlelady's time has 
expired. The Chair now recognizes the chairman of our Capital 
Markets Subcommittee, the gentleman from Michigan, Mr. 
Huizenga.
    Mr. Huizenga. Thank you, Mr. Chairman. And I am attempting 
to go back into Plato's Republic on this, again, as a Brown's 
child, approaching how we are going to deal with what lies in 
front of us. There are so many different directions to go. And 
I think I am going to need to lay out a couple of things. 
Something that I am very concerned about, and I know other 
members on this committee are, on both sides of the aisle, is 
income disparity. You look at where we are as a Nation. It is a 
real issue. And we have pockets of economic activity. My home 
county has a 2\1/2\ percent unemployment rate. Within my 
district, I house that county. I also house the poorest county 
in the State of Michigan, like one of the top 50 counties in 
the Nation when it comes to poverty. I house, just literally 25 
miles north of where I live, the county that butts up to this 
county with 2\1/2\ percent unemployment has double that, triple 
that. Quadruple that in the African-American community. We have 
a significant pocket of minorities that are there.
    We are seeing older workforce participation and, really, 
frankly, underemployment among youth. So the workforce is 
getting older. Why? Because they are having to work longer. And 
this notion that seniors are doing great because the stock 
market's doing great, I just do not buy it. We are seeing IPOs 
at modern era lows. We are seeing a select few groups of 
people, whether they are Wall Street folks, whether they are 
qualified investors, folks who have a million dollars in value 
or net incomes of $250,000. They are doing great. It is the 
other folks. It is the folks that we represent who are 
struggling, who are really kind of bumping along. And as we 
look, we have seen the other side others have thrown up a chart 
about. Loan activity is up. Oh, but if you dive into it, 
industrial loan activity is up. Small business loans are down.
    And so we are losing the engine of economic activity on 
that grassroots micro basis for this larger scheme that has 
been painted out there. And it seems to me for--why would we 
keep trying this, certainly, at a minimum, underperforming 
system, if not failing system of stimulus, that is not reaching 
the people that it is intended to reach? Why do we keep doing 
it? Read Keynes. You all have, right? You probably are not on 
this committee if you have not read John Maynard Keynes at some 
point or another. He talks about short stimulus. Not 10 years. 
Not bumping up on the 10 years of this. And if monetary policy 
is not doing what it can to facilitate investments wherever 
they show this promise, lone American households and American 
businesses and American entrepreneurs just keep bumping up 
against this wall as they are trying to fulfill their 
potential.
    That really, I think, ought to be concerning to all of us. 
And how do we unwind--getting back to my colleague from 
Arkansas--this? Because I am concerned. Just yesterday we had a 
phenomenal hearing. Two panels on market structure and where 
the market is going. And ultimately, it doesn't matter if we 
are not allowing the system to work for those who need it the 
most, which is our constituents, hardworking taxpayers who have 
felt like they have had nothing but headwinds coming at them 
from their own government with a monetary policy and a whole 
raft of other things, like tax policy and regulatory policy. 
And I am just very concerned about that. And I don't know, Dr. 
Kupiec, if you care to comment quickly?
    Dr. Kupiec. I think your concerns are well-founded. And I 
would say first that monetary policy is a blunt instrument. I 
don't think the Fed ever had the intention of causing the 
income redistribution that I think it has caused. I think it 
tried to do what it thought was right to resuscitate growth. 
And it had these unintended consequences. And at this point, I 
am not sure we all have answers on how you get out of this in 
the long run. I think there are going to be costs involved. But 
I think the point is--
    Mr. Huizenga. As Keynes said, we are dead in the long run 
anyway, right?
    Dr. Kupiec. Well, no. I didn't say that exactly.
    Mr. Huizenga. No. No. I know you didn't. Keynes did.
    Dr. Kupiec. Yes, he did. But I think the whole point is to 
encourage and not discourage better dialogue with the Fed on 
all these other issues that aren't just the top number GDP 
numbers, inflation numbers that tend to hide all that is going 
on underneath.
    Mr. Huizenga. Thank you.
    Chairman Barr. The gentleman's time has expired, and the 
Members have requested a second round of questioning for the 
witnesses. So with your indulgence, we will proceed with that 
second round. And the Chair recognizes himself now for an 
additional 5 minutes.
    I wanted to follow up on the question related to the 
oversized balance sheet. Mr. Hollingsworth asked a series of 
very good questions about that. And he asked about the cost of 
unwinding and the potential of crowding out private investment. 
What other risks does an oversized balance sheet pose to Main 
Street America? What are those risks? And is there any way that 
the Fed can, as it unwinds, avoid those risks? We will just go 
down the line here. Dr. Michel?
    Dr. Michel. One of the risks is that you are paying--
literally paying these people on these assets. So if you look 
at what is going on with interest and excess reserves on the 
extra balances, under the Fed's projections, you are going to 
be seeing--taxpayers, rather, are going to be seeing that they 
are going to be paying large banks $50 billion a year. That is 
a direct cost to people, and it is going to be a political 
nightmare when you have the Fed set up to continue paying these 
banks literally billions of dollars a year.
    I will concede that we don't know exactly what is going to 
happen here. But I think when we talk about the recovery, the 
anemic recovery, you have to put it in context of, oh, and then 
there is some more to come, because we haven't unwound all this 
stuff.
    Chairman Barr. And, Dr. Kupiec, as you answer this 
question, please amplify your testimony when you basically 
described a dilemma between, on the one hand, a need to 
normalize, and on the other hand, the economic downside of the 
Fed's only policy tool that it is using right now of increasing 
interest on excess reserves.
    Dr. Kupiec. That is the dilemma. They have this problem, in 
part--not in part, in total, because of the QE. And they bought 
enormous--billions of dollars--well trillions, actually, in 
assets, right, and they turned those into reserves. And for the 
bank to make that tradeoff, they paid the bank on reserves to 
keep reserves in the Fed. And now their only policy tool--they 
have two policy tools. They could start selling their 
Treasuries. If they sold their Treasuries, the market would 
react in a fairly big way, I think. They have such a large part 
of the Treasury in GSC market that long-run rates would react 
to any kind of unwinding announcement or something like that. 
And they don't want long-run rates to rise. We haven't 
recovered. We need a recovery still.
    And so now they are sticking with their old instrument to 
keep--to tighten or to look--do whatever they are doing which 
raising the Federal funds rate, and it is not clear that that 
works the same way it used to work with all these excess 
reserves in the banking system. But that is the only other 
technique they have. Now, they could do repo operations and not 
pay on bank reserves, but then that would--repos, mutual funds 
can participate in, and that would move money out of the 
banking system into the mutual fund system. And the Federal 
Reserve wouldn't want to do that. So they wouldn't want to do 
anything that disadvantaged the banking system relative to what 
they would call the so-called shadow banking system. So they 
are kind of stuck. If short-term market rates were to change 
anywhere else in the economy, they are going to have to pay 
banks to keep the money in the banking system and not migrate 
out. So I am sorry this--I know this sounds confusing, and I 
don't have an answer to the question. But it is sort of a 
quandary we have gotten ourselves into that--
    Chairman Barr. My time is about ready to expire. So I have 
another question for Mr. Pollock, really quickly. Obviously, 
the loose monetary policy that has been pursued by the Fed was 
supposed so boost asset prices.
    The idea was to goose these asset prices to make people 
feel wealthier, and the synthetic wealth was, in turn, supposed 
to cause households to spend more and, therefore, jump start 
the economy. That is, in effect, Dr. Dynan's testimony. 
Clearly, the results haven't been as projected. In the previous 
Administration, we didn't see a single year of GDP growth of 3 
percent or greater. That is the first time that has happened 
since the Administration of Herbert Hoover. So clearly, the 
Fed's policies have not produced the result that they 
predicted. Can you respond to that analysis?
    Mr. Pollock. Mr. Chairman, it has produced the result of 
goosing asset prices, just as you say. So we have had a huge 
boom in house prices, stock prices, and bond prices. The 
problem with an eternal monetary policy of that sort, which we 
could better call a market distortion, is those prices will not 
go up forever. Let's talk about house prices for just a second. 
High house prices may feel good if you own a house. It is 
terrible if you are a new family trying to buy a house. And 
when the overinflated house prices then go down, everybody will 
feel terrible.
    Chairman Barr. My time has expired, and the Chair 
recognizes the gentleman from California, Mr. Sherman.
    Mr. Sherman. Thank you, Mr. Chairman. I am glad you are 
doing a second round, but no Democrat can stay here past 
another 5 minutes. So I hope the second round is as nonpartisan 
as possible. We won't be here to inject our words of wisdom 
should that not be the case. The policies we have had over the 
last 5 or 7 years have given us the longest if not the fastest 
recovery.
    House prices for the buyer are not the stated price. They 
are the mortgage payment that comes with that house. Can you 
afford the mortgage payment? So housing prices are not at an 
all-time high until we get normal interest rates, and then they 
will be. And then I think, as Mr. Pollock points out, some 
people are going to get hurt.
    The gentleman from Michigan talks about the need to lend 
money to small business. We have a lot of money in capital. And 
it is all going to T bonds and highly safe instruments. And 
that is perhaps the responsibility of this committee, because 
we have this very efficient banking system that is told raise 
all this money, and it is insured by the Federal Government. 
And then we are telling them only lend it at prime, maybe prime 
plus 1, prime plus 2. The businesses in our district and your 
district that you want to get the loan, you wouldn't loan the 
money at prime plus 1. The pizzeria in my district has a chance 
of going bankrupt. That is why we need prime plus 4, prime plus 
5 loans. But we have a very efficient system that takes all the 
money and prohibits them from putting it in prime plus 5 loans. 
And instead, that money has to be given--it has to be loaned to 
a small business or a private equity or a venture capital. And 
then maybe it can get to a business that is doing something 
that is risky or different or small. We have a low--great 
target. It ought to be higher.
    In my first statement, I pointed out the psychological 
benefit for seniors of living in a world with a 6 percent 
interest rate and a 5 percent inflation rate. Economists can 
tell them that they are eating into their capital. They don't 
think they are, and the mistake that they are making is 
wonderful. It makes them feel better. And that is very helpful. 
Also, we see that rents, salaries, and other things stick. But 
in inflation, you don't have to lower things. You can just keep 
them the way they are. And that is your method of lowering 
them. So it actually adds some ability to move prices up or 
down as the economy calls for. But the main reason we should 
have lower interest rates, which will lead to somewhat higher 
inflation rate, is we need the labor shortage that will give us 
rapidly expanding wages. IPOs are down. I don't know whether 
that is because our system for initial public offerings is 
worse or a private equity system is better.
    But everything we can do to make initial public offerings 
work better, we ought to do in this committee. One of the 
witnesses said savings should be encouraged at all times. I 
disagree. You can't have too much savings, too little 
consumption. If you have that, then you have no--then demand is 
flat. You have unused capital resources. Nobody wants to borrow 
to build those capital resources. But the phrase savings should 
always be encouraged at least meets a particular political 
plan, which is lower taxes on the savers, those people who get 
a substantial portion of their income from savings, when the 
vast majority of Americans can't get a--don't have that 
savings. So it is only a small segment of the economy that gets 
a substantial portion of their income from savings. I would 
also point out that the after-tax inflation adjusted return in 
our current economy is 0 for those who don't want to take a 
credit risk. The yield on tips is a little bit over the 
inflation rate.
    But then you pay taxes not only on the part that is a 
little bit on the inflation rate but also the part that just 
reimburses you for inflation. We have a lot of savings as 
evidenced by the fact that nobody is--that saver's reward after 
tax is roughly 0, and people are still willing to save. We 
ought to, perhaps, provide an inflation justified APR to 
lenders and to depositors. The information we calculate now is 
very exact and very complicated and very wrong in an economy in 
which there is inflation. Democracy versus bureaucracy, there 
is a lot of support in the elites in our society, for 
philosophers kings and Federal Reserve members and others to 
make the important decisions. And I will point out to this 
committee, if that bridge in Alaska had been a bureaucrat's 
decision, nobody here would have ever heard of it. The media 
focuses on attacks on decisions made by elected officials. And 
I am going to have to ask for a written response to this 
question, and that is how much capital gain or loss has the Fed 
incurred through QE? We know they have made a lot of money on 
interest rate spread. But I assume if you bought long-term 
bonds in 2010 and 2011, you lost some money. So, Mr. Pollock, 
perhaps--is there just a number that you have, or should you 
answer for the record?
    Mr. Pollock. I have written on that recently, Congressman. 
I will be glad to send you my article on the interest rate risk 
of the Fed, which I describe as the biggest savings and loan in 
the world.
    Chairman Barr. The gentleman's time has expired. Thank you, 
Mr. Sherman. And now the Chair recognizes the gentleman from 
Arkansas again, Mr. Hill.
    Mr. Hill. Thank you, Mr. Chairman. So continuing our 
discussion, I was looking at the value of QE1 and QE2 and 
PIMCO, for example, estimated that for spending $4 trillion, we 
got $40 billion in additional economic output, not a very good 
tradeoff. And I can remember being in banking back during QE1 
and QE2 wondering what are we getting for this, as a banker, 
just as a private sector participant, when we--the first thing 
you learn when you have a losing position in an investment 
portfolio or a losing bond loan--a loan in a loan portfolio is, 
when in a hole, stop digging. And the Fed double-downed on 
digging as it went beyond QE1, QE2.
    So now that we are here and we are talking about the impact 
on Main Street, I would say that, to your comment, Mr. Pollock, 
that, with a 6-year duration at the Fed now, you have set up, 
not a savings and loan, but one of the biggest hedge funds in 
the world. We have monetized the debt of the United States, we 
have inflated speculatively stock prices. We, in turn, with 
public policy, have moved people into index funds instead of 
making individual decisions about the individual quality of 
equities. And we have 0 interest rates and yet we have extended 
car lending from--when I started in banking, it was a 3-year 
loan. Now it is 72 months--at these low rates. And 40 percent 
of new cars are in a lease program, which is even higher than 
you can borrow at the bank and you don't own anything at the 
end of the term.
    We have done commercial real estate lending, basically 
underwritten to a 125 debt service coverage ratio at 3 or 4 
percent. And if rates normalize, think of the equity 
contribution those investors are going to have to make to 
maintain that 125 debt service covered ratio. We have hidden 
the budget deficit, the real impact on the budget deficient by 
the Fed's actions, and that will get worse as rates go up. So 
the impact on Main Street of the Fed's actions of the last 
decade are going to be immense. And they are essentially, in my 
view, all negative. And any benefit that occurred from them is 
modest. As evidenced by PIMCO's suggestion that, for $4 
trillion, we got $40 billion of extra economic output. So when 
we try to reform the GSCs, Mr. Pollock, could you reflect on--
since you have written on this subject, we have a 6-year 
duration, we own 40 percent of the government-issued, mortgage-
backed securities, how is that going to impact our ability to 
reform the broken secondary mortgage market in this country, 
the Federal Government owning 40 percent of those securities?
    Mr. Pollock. Congressman, I think that is an excellent 
point, and it gets in the way of reform, since we have the 
Federal Reserve owning the biggest position in Fannie and 
Freddie's mortgage-backed securities. We have the U.S. Treasury 
owning most of the equity of Fannie and Freddie. And it gives 
us what I call the ``government combine'' in the housing 
finance business.
    My subtitle is: who is the socialist? Between Fannie Mae, 
Freddie Mac, and the Federal Reserve, and the U.S. Treasury, 
there is a very tight and complex financial set of 
intercommitments and relationships, and it gets in the way of 
reform. But in my opinion, that shouldn't stop us from 
reforming housing finance and Fannie and Freddie toward 
extracting the government from being the dominant and 
distortionary mortgage finance player and moving toward more 
private, more competitive market.
    Mr. Hill. I appreciate that.
    Dr. Kupiec, I think Governor Powell did lay out a very good 
long-term speech not long ago about the unwinding and set out 
some expectations and, really, in the market rates have 
improved, even anticipating this shrinkage.
    So I do think, to Dr. Michel's point, that if the Fed 
outlines a plan, that maybe the market would be more resilient 
than we think, and we should get on with it.
    But Chair Yellen said something that she said that she felt 
that the balance sheet reduction should be delayed until we get 
the Fed funds rate up to a number that she would not say.
    I would be interested in your view. Is there a range of Fed 
funds rate that would make it better for shrinking the balance 
sheet more directly?
    Mr. Kupiec. I wonder why the Fed funds rate means anything 
if it is the rate that the Fed pays on bank deposits, if that 
is the floor. So I don't know what it reflects. It is an 
administered rate. So I am not entirely sure I understand why--
they could set it at whatever rate they want it to tomorrow. 
Would the economy change any differently, immediately? I don't 
think so.
    Mr. Hill. Thank you very much.
    I yield back.
    Chairman Barr. The gentleman's time has expired.
    The Chair recognizes the gentleman from Texas, Mr. 
Williams.
    Mr. Williams. Thank you, Mr. Chairman.
    And with all due respect to my colleague from Arkansas, Mr. 
Hill, we have gone from 72 months to 84 months. So does anybody 
want to buy a car?
    Dr. Michel, as Mr. Sherman suggested, if we stopped paying 
IOERs, would we be able to return to the Fed fund's policy 
rate, do you think?
    Mr. Michel. Oh, if we do?
    Mr. Williams. Yes.
    Mr. Michel. I would say yes at some point. I don't know how 
quickly this happens. I don't know how quickly they can fix it. 
I think you have to unwind the balance sheet and stop the 
interest on the excess reserve program and the overnight 
repurchase program, which is effectively very close to the same 
thing.
    I think all of those things have to happen to get back to 
where you have a competitive--or anything like a competitive 
Federal funds rate market.
    So, yes. I just don't know how quickly you can do that. And 
I don't know that they do either. If you go back and look at 
what happened, initially, when they said they were going to pay 
interest on excess reserves, they said we are going to set this 
rate so that it is a floor on the Fed funds rate, as Paul 
mentioned. And what happened? It went straight past the floor. 
And then they said, oh, no, it is going to be a ceiling on the 
Federal funds rate, and now we are going to have a Federal 
funds target range instead of just a target.
    So they have lost control of it because of what they did. 
And I don't think they fully understand or anybody fully 
understands exactly how and when that could be put back 
together.
    Mr. Williams. Mr. Pollock, would you have a response to 
that?
    Mr. Pollock. I think that if you could get away from the 
interest on reserves, it would help get back to the previous 
system of Fed funds targeting. But we have to remember, when it 
comes to the Fed setting interest rates, that just like the Fed 
doesn't know the future, the Fed doesn't know what the right 
interest rate is either, because no one knows that. That is why 
you have a market.
    Mr. Williams. I remember when 16 percent was a good rate, 
so--
    Mr. Chairman, I yield my time back.
    Chairman Barr. The gentleman yields back.
    The Chair recognizes the gentleman from Minnesota, Mr. 
Emmer.
    Mr. Emmer. Thank you, Mr. Chairman. And thanks for 
submitting to another round of questions.
    I want to talk about reform, believe it or not, if it is 
possible. Obviously, I am not a fan of what the Federal Reserve 
has been doing, but I do agree with Dr. Kupiec. I think well-
intentioned people are trying to do the right thing.
    You talked about procedural change in your initial 
testimony after the Humphrey-Hawkins, once you get the written 
testimony, have experts review it. I am just wondering if any 
of your colleagues--and, again, put it in this context: I do 
come from Main Street. And I think one or more of you in your 
testimony said earlier, there is a breakdown between those who 
are inside the Fed or actively working with the Fed and those 
who are on Main Street wondering what in God's name are they 
doing, and why can't we see what they are doing, and there must 
be something going on that isn't quite right, because we aren't 
feeling this great recovery that everybody tells us is there or 
at least it is hollow.
    Are there other reforms? And maybe since, Dr. Kupiec, you 
gave one, how about Dr. Michel? Is there some other reform?
    Mr. Michel. I have a list, several papers that have--I 
don't know, maybe 15 different ones.
    But I think basically what you have to do is start one on 
the balance sheet, getting back to having a minimal footprint 
on the market, having them only do monetary policy in a very 
accountable way. I think that the approach and the format is 
the right way to go and that you make them benchmark against 
the rule.
    Everybody says--well, they are all gone, but everybody says 
that the format would tie the Fed to a mechanical rule, and 
that is not true.
    It would make them benchmark against a mechanical rule.
    Mr. Emmer. Right, it wouldn't have--
    Mr. Michel. So they could explain what they are doing and 
why they are doing it. And those are all positive approaches 
and improvements.
    Mr. Emmer. Dr. Dynan, we probably don't see this exactly 
the same way. But in this context, I would think there has to 
be something that you have looked at that would be a helpful 
reform.
    Ms. Dynan. So, first of all, I think that Dr. Kupiec's idea 
is an interesting one. I certainly support giving Congress more 
time to review the monetary policy report written document 
before going to testimony. I think that could lead to a more 
constructive conversation.
    I think moving to a quarterly frequency for the testimony 
is also a good idea. My main concern is, I do not support more 
aggressive measures that would undermine the Fed's--
    Mr. Emmer. What about winding down the balance sheet? You 
would agree with that. We should be doing that at some point, 
right?
    Ms. Dynan. Oh, yes. And with that, I should say I agree 
with Dr. Michel's earlier comments that it is really, really 
important that it is done gradually, and it is done 
predictively and transparently. Because I think--I was not 
asked what I thought the dangers were, but I do think the 
biggest dangers of a surprise--and even what the Fed does and 
even what it says, if the market suddenly says, hey, I didn't 
understand what they are doing and now my view is totally 
different. I think that, too, would be very disruptive to 
financial conditions.
    Mr. Emmer. Mr. Pollock, same question, but I also want to 
add for you, is it time, at the very least, to eliminate the 
dual mandate?
    Mr. Pollock. Congressman, could I preface this by saying, I 
grew up in the City of Detroit near Schoolcraft Avenue. I think 
that could count as Main Street.
    I think we need to understand the Fed actually has at least 
six different mandates, and they can't possibly do them all. 
They can't perform what those with great faith in the Fed have 
faith that they will perform. That is why I think the 
accountability issue is so important, and what I call a grown-
up discussion with the Congress, not a media event, but a 
grown-up discussion of the true uncertainties, the true 
alternatives, of how much of what is going on is debatable 
theory. That is essential in my view, including as you know 
from my testimony, that I think we should require the Fed to 
focus on the impact on savers and savings, as well as on all 
the other important things.
    Mr. Emmer. So if I am--if I go based on that, there are at 
least six different mandates. If we were going to give you the 
task of advising us, how would you rewrite the mandate for the 
21st Century Fed? How would you rewrite it?
    Mr. Pollock. I would take them very much back to the 
original idea--what the founders of the Fed did in 1913, which 
was the overwhelming mandate was to help deal with crises and 
then other than that be mostly out of the way and let the 
market work.
    Mr. Emmer. Thank you.
    Chairman Barr. The gentleman's time has expired.
    The Chair recognizes the gentleman from Ohio, Mr. Davidson.
    Mr. Davidson. Thank you, Mr. Chairman.
    Thank you all for taking some additional questions. To get 
near term and potentially practical, using conventional or 
unconventional means, is there anything the Fed could do to 
prevent a yield curve inversion? And if they could do it, 
should they? Anyone?
    Mr. Michel. I believe that everyone shows overall that the 
Fed can do very little to ultimately make interest rates do 
whatever they want. So I would have to say no, I don't think 
that should be the goal. I think the goal should be getting 
back to a minimal footprint so that there is--so that there are 
as minimal distortions as possible from what they do. That is 
where I would come down on that.
    Mr. Davidson. Thank you.
    Dr. Pollock?
    Mr. Pollock. Congressman, they could start selling their 
mortgage-backed securities and long-term Treasury bonds, and 
that would push up the long end of the curve and prevent an 
inversion. They won't like it. That will cause big capital 
losses in the Federal Reserve itself, probably a large market-
to-market insolvency. It would be interesting to see what would 
happen then.
    Mr. Davidson. Any other comments on that?
    Mr. Kupiec. What we have right now, I think, is very much a 
situation where the Fed really does control a lot of the term 
structure by its long-term holdings and its trying to control 
the short-term rate. So these are pretty much administered 
interest rates.
    And if an inversion were to come and the problem there is 
normally, we think that reflects a looming recession. Why would 
you want them to hide the evidence? I am not sure that setting 
the rates would--if the rest--if the world were really tanking, 
I don't know that raising the long-term interest rate would 
help anybody.
    Mr. Davidson. That gets to the next question. So you just 
picked the next question is, so if they could manipulate the 
rates in this way and prevent the yield curve inversion, one 
way Dr. Pollock highlighted, dump assets in the long term, at 
least they certainly have plenty of them. It could be very 
market distorting, particularly if they are done rapidly, would 
that do what would be indicated? Would it avert a recession? 
This goes back to the whole limits of monetary policy. And so 
would it really do what it presumably be targeted at?
    Mr. Kupiec. Some medicines treat symptoms but they don't 
fix the underlying problem. They just mask them. So to the 
extent that you think the long-term interest rate is reflecting 
the real economy and something that is going on, manipulating 
long-term interest rate I don't think is going to fix the real 
economy. And if we were heading for a recession, I don't know 
why raising the long rate would do anything but make things 
worse. It might cosmetically hide the fact for a while, but I 
don't know why that would be in the Fed's interest to do that.
    Mr. Davidson. Okay.
    Mr. Michel. And this is why they shouldn't be in this 
position in the first place.
    Mr. Davidson. Thank you.
    Okay. And they are in this position, I think summing up, 
because you go back to the scorpion and the fox, an analogy. 
The Fed is in this position because that is what they do. They 
exist, therefore, they must do something. And they can't resist 
the item passion to.
    How do we get the structure in place that the things they 
do aren't inherently market distorting?
    Mr. Michel. So no more emergency lending. Open market and 
no more primary dealer system, flexible system that lets 
everybody who is eligible for a current discount window come. 
So it is marketwide liquidity. That is the only thing they do, 
period. And a flexible inflation mandate, a flexible price 
stability mandate and that is it. That is all you let them do.
    Mr. Davidson. Thank you.
    Mr. Chairman, I yield back.
    Chairman Barr. The gentleman yields back.
    The Chair recognizes our final questioner, the gentlelady 
from Utah, Mrs. Love.
    Mrs. Love. Thank you. I just wanted to finish up some of 
the questioning that I was asking previously, so I appreciate 
the second round.
    But I wanted to get back to, Mr. Pollock, what you were 
talking about in your statement in terms of if you believe that 
the Federal Reserve had superior knowledge and insight into the 
economic and financial future, you would possibly conclude that 
it should act as a group of philosopher kings and certainly, 
enjoyed the independent power over the country. You also 
mentioned that it is unable, as we have all seen, consistently 
predict the result of its tone actions, and there is no 
evidence that they have any special insight.
    It is almost as if they are trying--it is worse than trying 
to predict the weather, because you are predicting interaction 
between private consumers, interaction between government and 
people. It is just the--it is incredibly monstrous.
    And you also mentioned that not only--it is not really a 
dual mandate. It is literally six different mandates. And to be 
fair to the Federal Reserve, they cannot do it all. And it is 
irresponsible for us to say that they can do right by the 
American people by giving them, literally, an impossible task.
    So here is what I wanted to ask: In order for consumers, 
households, and businesses to plan for the future and consume, 
save, invest most effectively, do they need to be confident 
that the prices will remain relatively constant over time? And 
do you believe that the Fed should spend more time on monetary 
policy and price stability as opposed to all of these other 
responsibilities that they have been given?
    Mr. Pollock. Thank you, Congresswoman. I do. Again, that 
they have the policy of acting in a crisis, which is useful, 
which was their original 1913 mandate. They called it in those 
days, ``to create an elastic currency.''
    But when you put on top of that the notion that they are 
going to, as people say, manage the economy, and manage 
interest rates, now long as well as short term, and know what 
the right inflation rate is, all of these things, they can't, 
in my judgment, possibly do it all, just as you suggest.
    It is my belief that the Congress was right--and this was a 
Democratic Congress in 1977--with the Federal Reserve Reform 
Act, to try to exert the control of Congress over the Fed. They 
wrote, ``price stability.'' Now, we need to understand what 
price stability means. In my opinion, that is a long-term 
concept--
    Mrs. Love. Right.
    Mr. Pollock. --of price stability, which is, I think, best 
for consumers, investors, and economic growth.
    That means in any short term, prices may be going up, or 
they may be going down. But on average, over the long term, 
they are something close to flat. That is where I believe we 
ought to go. Of course, there are great debates about all these 
things among economists, Congresswoman, proving once again, 
that economics is not a science, but a set of competing 
theories.
    Mrs. Love. Okay. I know you want to add to that, so I am 
going to actually have you answer this question: If people 
understood everything that we were talking about, would you say 
that, in effect, the Fed would be doing more for maximum 
employment if they actually focused on price stability?
    And I am going to have you answer that, Dr. Michel.
    Mr. Michel. Yes. So yes, they would be. And what I was 
going to say is the great irony is that what Alex is talking 
about is exactly what used to take place before we had a 
Federal Reserve. The short-term price fluctuations were 
literally 1 percentage point greater than they had been since 
we had the Fed, but it would always come back to zero, the 
price level, more quickly. That is what we have gotten rid of. 
And the truth of the matter is that the Fed can do very little 
for long-term structural employment. The Fed has nothing to do 
with us having the lowest participation, labor-force 
participation rate that we have had since the 1970s. That is 
not the Fed's fault. They can't do anything other than stay out 
of the distortionary business by not messing around with so 
many things so that we don't have a worsening employment 
situation. They should not be focused on trying to change 
something that they can't change.
    Mrs. Love. And I would be so bold as to conclude that this 
is a result of Members of Congress not being willing to take on 
the responsibilities that they have and pushing it over to the 
Fed so that if something happens, we are not the ones who are 
accountable. And we need to take that accountability back. We 
are the ones who are accountable to the American people, and so 
I am going to conclude with that.
    Thank you.
    Chairman Barr. The gentlelady yields back.
    And I would like to thank all of our witnesses for their 
testimony today.
    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. Thank you.
    [Whereupon, at 12:19 p.m., the hearing was adjourned.]

                            A P P E N D I X



                             June 28, 2017



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